Tax planning

And
Mergers and acquisitions

FROM

PRIYANKA JOHAR
INTRODUCTION

Tax Planning in India is an application to reduce tax liability through the finest use of all

accessible allowances, exclusions, deductions, exemptions, etc, to trim down income or capital

profits It is arrangement of one’s financial affairs so that legal provisions won’t violate. It carried

out the full enjoyment of Tax Rebates, Tax Exemptions, and Tax Deductions. It is within the four

corners of LAW and regarded as fully legitimate. A charge or a sum of money levied on person

or property for the benefit of state. It is a payment to Government. It is a kind or charge imposed

by the state upon the citizens.

Profit = Revenue – Expenses.

Tax planning basically deals with:

 How tax is calculated

 How tax can be evaded

 How tax can be properly planned.

 How various situations affect the tax planning and management?

 What all persons or committees are involved in the management and planning of Tax and

Liability?
Income tax

Income Tax is all income other than agricultural income levied and collected by the central

government and shared with the states. According to Income Tax Act 1961, every person, who

is an assessee and whose total income exceeds the maximum exemption limit, shall be

chargeable to the income tax at the rate or rates prescribed in the finance act. Such income tax

shall be paid on the total income of the previous year in the relevant assessment year.

In the Income Tax any income earned by a person is broadly categorised into five heads of

income. Any income earned to be taxed must come under any of the five heads of income. The

five heads of income are:

 Income under Head Salaries

This head taxes the income earned by an individual as salary from any firm or

organisation.

 Income from House Property

This head taxes rental income received by any person from way of renting of any

immoveable property.

 Profits and Gains of Business or Profession

This head of income broadly covers income earned by a person as a result of some

business or professional set-up by him.

  Capital Gains:

This head of income taxes the income earned on sale of any investment in form of gold,

precious ornaments, shares, etc or immoveable property.

 Income from other Sources

This head of income covers any income which is not chargeable to tax under any of the

above heads of income. Any income including gambling or profit/loss on running of race

horses, camels, interest income , etc are chargeable to tax under this head of income.

Assessment Year

The period of time in which the tax liability is assessed and the payment of Tax is made upon the

income earned in previous year is known as Assessment Year

Previous Year

It is the year in which income is earned.

Financial Year

It is the year in which new tax laws are prepared in the Finance Act are implemented
Assessee

Assessee means a person by whom any tax or any other sum of money is payable under Income

tax Act. It includes deemed assessee [section 2(7) of Income Tax

Types of assessee:

 Sole proprietor

 Hindu Undivided Family.

 Partnership Firm

 Company

Sole Proprietor

Merits :

 Pay tax as per slab defined by Finance Act.

 Deductions that can be claimed by individual.

 Sec 80 CCC-: Contribution to Pension Fund.

 Sec 80 D-: Medical health insurance for family members.

 Sec 80 DD-: Expenditure on Medical Treatment for disabledependant.

 Sec 80 E-: Interest paid on loan of higher studies.

 Sec 80 G-: Donation to approve funds.

 Sec 80 GGA-: Payments for scientific research.

 Sec 80-: Income of a disable person.

  Sec 80JJA-: Profit from business collecting and processing biodegradable waistes.

Demerits:

 Unlimited liability.

 Don’t get deduction against payment of salaries.

 Cannot raise additional capital by way of shares and debentures issue.

 No money received as interest on capital.

 May have to liquidate assets for discharging liability of companies.

Hindu undivided

It is similar to individual or sole proprietor. It allowed as many deductions as allowed to Sole

Proprietor and the salary of KARTA is fully tax deductible.

Partnership

 Firm is registered under Partnership Act.

 It is limited to 20 person only.

 If limit of person exceed then firm adopt company form of business organization.

Tax liability

 Pay tax @30% + 10% surcharge + 3% Education cess.

 Tax deducted under Sec 80G, 80GGA and 80JJA.

 Allowed deduction similar to individuals and HUF.

  Interest o capital is allowed as deduction.

 Probability of raising additional capital can be solved by admitting a new partner.

 Remuneration paid is allowed as deduction.

Demerits:

 Tax liability is similar to company form of organization but cannot raise capital by issue

of share.

 Liability of partners is limited to the extent capital contributed.

 If Provident Fund wont comply with 184 Section of Income Tax it is treated as AOP

(Association of Persons).

 It comes to closure if lunacy of partners is found.

Company

It is as per Indian’s Company’s Act 1956 and an artificial person or entity.

Tax liability

 Pay tax @30% + 10% surcharge + 3% Education cess.

 Maximum amount of tax as no tax slab is available.

 To pay FBT and DDT and Wealth Tax.

 Indirect taxes like custom duty, excise duty, service tax, VAT.

 Deduction on interest paid on debentures and borrowings.

 Salary paid is fully deductible.

  Depreciation on assets is fully deductible

Income Tax Exemption limit- 2009-10

Basic Slabs for Individuals

Exemption limit raised from Rs. 1, 50,000 to Rs. 1, 60,000

Exemption limit raised from Rs. 1, 50,000 to Rs. 1, 60,000

Up to Rs.1, 60,000 ……………… …………………………………. NIL

Rs. 1, 60,000 to Rs.3, 00,000 ………………………………………….10 %

Rs. 3, 00,000 to Rs. 5, 00,000 .. ……………………………………….. 20 %

Above Rs. 5, 00,000…………………………………………………... 30 %

Basic Slabs for Women under the age of 65 years old

Exemption limit raised from Rs. 1, 80,000 to 1, 90,000

Up to Rs. 1, 90, 00…………………………………………………… NIL

Rs. 1, 90,000 to Rs. 3, 00,000 …………………………………………10 %

Rs. 3, 00,000 to Rs. 5, 00,000 ………………………………………….20 %

Above Rs. 5, 00,000 …………………………………………………. 30 %

Basic Slabs for Senior Citizen (Over 65 years):

Exemption limit raised from Rs. 2, 25,000 to Rs. 2, 40,000

Up to Rs. 2, 40,000 ………………………………………………… NIL

Rs. 2, 40,000 to Rs.3, 00,000 ………………………………………… 10 %

Rs. 3, 00,000 to Rs. 5, 00,000 ………………………………………. 20%

Above Rs. 5, 00,000…………………………………………………… 30%

Taxes in India are of two types,

 Direct Tax

 Indirect Tax.

Direct taxes

These are those whose burden falls directly on the taxpayer like

 Income Tax

 Wealth Tax

 Corporate Tax

 Fringe Benefit Tax

 Dividend Decision Tax

It is levied on Income and Assets. Tax Payer is tax Bearer. In it burden of tax cannot be

shifted. Slabs are applicable. Tax planning avenues are available. It is regulated under Income

Tax, Companies Act, and Partnership act. It is collected and monitored by CBDT. It is levied

upon goods and services.

Indirect taxes
Tax payer is tax Bearer. Burden of tax can be shifted. There is no system of slabs No such

avenues is available. Regulated under Sales Tax and Excise Duty. It is collected by Board of

Excise and Customs

The burden of indirect taxes can be passed on to a third party like

 Sales/ CST/ VAT

 Excise

 Customs Duty

 Service Tax

 Entertainment Tax

Total income of an individual

 The total income of an individual is determined on the basis of his residential status in

India.

Residence Rules

An individual is treated as resident in a year if present in India

 for 182 days during the year or

  For 60 days during the year and 365 days during the preceding four years. Individuals

fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal

for Indian citizens residing abroad or leaving India for employment abroad.)

A resident who was not present in India for 730 days during the preceding seven years or who

was nonresident in nine out of ten preceding years I treated as not ordinarily resident. In effect, a

newcomer to India remains not ordinarily resident.

For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

Non-Residents and Non-Resident Indians

Residents are on worldwide income. Nonresidents are taxed only on income that is received in

India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a

nonresident but is also liable to tax on income accruing abroad if it is from a business controlled

in or a profession set up in India. Capital gains on transfer of assets acquired in foreign exchange

is not taxable in certain cases. Non-resident Indians are not required to file a tax return

if their income consists of only interest and dividends, provided taxes due on such income are

deducted at source.

It is possible for non-resident Indians to avail of these special provisions even after becoming

residents by following certain procedures laid down by the Income Tax act.
Status Indian Income Foreign Income
Resident and ordinarily Taxable Taxable
resident
Resident but not ordinary Taxable Not Taxable
resident
Non-Resident Taxable Not Taxable

Needs and Objectives of Tax planning

 It is done for the reduction of Tax Burden.

 To avoid any sort of litigation.

 To avoid any type of raid and penalty.

 To avail the benefit of concessions and exemptions given under law.

 The tax planning avenues provide a financial cushion or backup for the use of

contingencies in future.

 For preparation and maintenance of systematic records.

 To discharge the responsibility of a good citizen.

Perquisites of Tax planning

 To have full usage of tax planning.

 To evaluate fully tax planning avenues.

 To consider all direct and indirect taxes.

 It should be done as guided by Tax

Advantage of Tax Planning

 It helps in conceiving of and implementing various strategies in order to minimize the

amount of taxes paid for a given period

 The advantage of tax planning is that it will give you a time to choose the products that

suits your requirements as per defined goal

 It provides the systematic way which gives you greater advantage of rupee cost

averaging as well as liquidity (low burden on wallet)like

Instead of investing Rs.12000 as a lump sum amount it is always better to make a

systematic investment of Rs.1000 for 12 months and lowering the burden on wallet.

 It provides the benefits like rupee cost averaging, power of compounding and have a

room to study the various products available in market to better utilize your hard earned

money with purpose of savings

Disadvantages of Tax Planning

 The first and the most disadvantages of tax planning is at the end of year is you do not have

enough time to search the products that matches your requirement.

 Buying without proper research sometimes you end up paying higher charges on the product

that you buy. Some products that come with 100% charge for the first year, if this is the case

then the whole amount invested will be gone for that investment.

 If the people are investing in the NSC or Fixed Deposit for Tax planning as considering the

secured products that will erode the investment against the inflation. Investing lump sum

amount in products that offer equity exposure will also be on risk as during such times

markets may be on the higher side or moving towards downward direction. So you can not

invest systematically and hence loosing the power of rupee

Tax avoidance

It is an art of dodging out i.e. actually breaking law. It is a method of reducing tax incidence

by finding out loopholes of law. It can be defined as adevice which technically satisfies

requirement of law but not in legal accordance. It includes attempt to prevent or reduce tax

liability. The term tax mitigation is a synonym for tax avoidance. I Tax avoidance is the legal

utilization of the tax regime to one's own advantage, to reduce the amount of tax that is

payable by means that are within the law Some of those attempting not to pay tax believe that

they have discovered interpretations of the law that show that they are not subject to being

taxed: these individuals and groups are sometimes called tax protesters. Tax resistance is the
 declared refusal to pay a tax for conscientious reasons (because the resister does not want to

support the government or some of its activities) tax avoidance is the legal utilization of the

tax regime to one's own advantage, to reduce the amount of tax that is payable by means that

are within the law

Examples:

Double taxation

Most countries impose taxes on income earned or gains realized within that country regardless of

the country of residence of the person or firm. Most countries have entered into bilateral double

taxation treaties with many other countries to avoid taxing nonresidents twice—once where the

income is earned and again in the country of residence (and perhaps, for US citizens, taxed yet

again in the country of citizenship) -- however, there are relatively few double-taxation treaties

with countries regarded as tax havens.[2] To avoid tax, it is usually not enough to simply move

one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S.

nationals, renounce one's citizenship) to avoid tax.

Tax Evasion

Tax evasion is the general term for efforts to not pay taxes by illegal means An unsuccessful tax

protestor has been attempting openly to evade tax, while a successful one avoids tax. tax evasion

is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by

illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing

the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in
particular, dishonest tax reporting (such as declaring less income, profits or gains than actually

earned; or overstating deductions).

Difference between tax avoidance and tax evasion

Tax avoidance may be considered as either the amoral dodging of one's duties to society, part of

a strategy of not supporting violent government activities or just the right of every citizen to find

all the legal ways to avoid paying too much tax .Tax evasion, on the other hand, is a crime in

almost all countries and subjects the guilty party to fines or even imprisonment.

So this is the basic difference between tax avoidance and tax evasion
Assignment no 2

Mergers
And
Acquisitions
MERGERS

A merger occurs when two or more companies combines and the resulting firm maintains

the identity of one of the firms. One or more companies may merger with an existing

company or they may merge to form a new company. Usually the assets and liabilities of the

smaller firms are merged into those of larger firms. Merger may take two forms

 Merger through absorption

 Merger through consolidation.

Absorption

Absorption is a combination of two or more companies into an existing company. All

companies except one lose their identify in a merger through absorption.

Consolidation

A consolidation is a combination if two or more combines into a new company. In this

form of merger all companies are legally dissolved and a new entity is created. In

consolidation the acquired company transfers its assets, liabilities and share of the
acquiring company for cash or exchange of assets.

Types Of Mergers

Mergers are of many types. Mergers may be differentiated on the basis of activities, which are

added in the process of the existing product or service lines. Mergers can be a distinguished into

the following four types:

 Horizontal Merger

 vertical Merger

 Conglomerate Merger

 Concentric Merger

Horizontal merger

Horizontal merger is a combination of two or more corporate firms dealing in same lines of

business activity. Horizontal merger is a co centric merger, which involves combination of two

or more business units related to technology, production process, marketing research and

development and management.

Vertical Merger

Vertical merger is the joining of two or more firms in different stages of production or

distribution that are usually separate. The vertical Mergers chief gains are identified as the lower

buying cost of material. Minimization of distribution costs, assured supplies and market
increasing or creating barriers to entry for potential competition or placing, them at a cost

disadvantage.

Conglomerate Merger

Conglomerate merger is the combination of two or more unrelated business units in respect of

technology, production process or market and management. In other words, firms engaged in the

different or unrelated activities are combined together. Diversification of risk constitutes the

rational for such merger moves.

Concentric Merger

Concentric merger are based on specific management functions where as the conglomerate

mergers are based on general management functions. If the activities of the segments brought

together are so related that there is carry over on specific management functions. Such as

marketing research, marketing, financing, manufacturing and personnel.

ACQUISITION

A fundamental characteristic of merger is that the acquiring company takes over the ownership

of other companies and combines their operations with its own operations. An acquisition may

be defined as an act of acquiring effective control by one company over the assets or

management of another company without any combination of companies.

TAKEOVER
A takeover may also be defined as obtaining control over management of a company by

another company

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous,

the terms merger and acquisition mean slightly different things. When one company takes over

another and clearly established itself as the new owner, the purchase is called an acquisition.

From a legal point of view, the target company ceases to exist, the buyer "swallows" the business

and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens

when two firms, often of about the same size, agree to go forward as a single new company

rather than remain separately owned and operated. This kind of action is more precisely referred

to as a "merger of equals." Both companies' stocks are surrendered and new company stock is

issued in its place.

For example

Both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new

company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't

happen very often. Usually, one company will buy another and, as part of the deal's terms, simply

allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically

an acquisition. Being bought out often carries negative connotations, therefore, by describing the

deal as a merger, deal makers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the

best interest of both of their companies. But when the deal is unfriendly - that is, when the target

company does not want to be purchased – it is always regarded as an acquisition. Whether a

purchase is considered a merger or an acquisition really depends on whether the purchase is

friendly or hostile and how it is announced.

Benefits of mergers

Growth or diversification:

Companies that desire rapid growth in size or market share or diversification in the range of

their products may find that a merger can be used to fulfill the objective instead of going through

the tome consuming process of internal growth or diversification. The firm may achieve the same

objective in a short period of time by merging with an existing firm. In addition such a strategy is

often less costly than the alternative of developing the necessary production capability and

capacity. If a firm that wants to expand operations in existing or new product area can find a

suitable going concern.

Synergism:

The nature of synergism is very simple. Synergism exists when never the value of the

combination is greater than the sum of the values of its parts. In other words, synergism is

“2+2=5”. But identifying synergy on evaluating it may be difficult; in fact sometimes its

implementations may be very subtle. As broadly defined to include any incremental value

resulting from business combination, synergism in the basic economic justification of merger.

The incremental value may derive from increase in either operational or financial efficiency.

 Operating Synergism

Operating synergism may result from economies of scale, some degree of monopoly

power or increased managerial efficiency. The value may be achieved by increasing the
 sales volume in relation to assts employed increasing profit margins or decreasing

operating risks. Although operating synergy usually is the result of either

vertical/horizontal integration some synergistic also may result from conglomerate

growth. In addition, some times a firm may acquire another to obtain patents, copyrights,

technical proficiency, marketing skills, specific fixes assets, customer relationship or

managerial personnel. Operating synergism occurs when these assets, which are

intangible, may be combined with the existing assets and organization of the acquiring

firm to produce an incremental value. Although that value may be difficult to appraise it

may be the primary motive behind the acquisition.

 Financial synergism

Among these are incremental values resulting from complementary internal funds flows

more efficient use of financial leverage, increase external financial capability and income

tax advantages.

• Complementary internal funds flows

Seasonal or cyclical fluctuations in funds flows sometimes may be reduced or

eliminated by merger. If so, financial synergism results in reduction of working capital

requirements of the combination compared to those of the firms standing alone.

• More efficient use of Financial Leverage

Financial synergy may result from more efficient use of financial leverage. The

acquisition firm may have little debt and wish to use the high debt of the acquired firm to

lever earning of the combination or the acquiring firm may borrow to finance and

acquisition for cash of a low debt firm thus providing additional leverage to the
 combination. The financial leverage advantage must be weighed against the increased

financial risk.

• Increased External Financial Capabilities

Many mergers, particular those of relatively small firms into large ones, occur when the

acquired firm simply cannot finance its operation. Typical of this is the situations are the

small growing firm with expending financial requirements. The firm has exhausted its

bank credit and has virtually no access to long term debt or equity markets. Sometimes

the small firm has encountered operating difficulty, and the bank has served notice that its

loan will not be renewed? In this type of situation a large firms with sufficient cash and

credit to finance the requirements of smaller one probably can obtain a good buy bee.

• The Income Tax Advantages

In some cases, income tax consideration may provide the financial synergy motivating a

merger, e.g. assume that a firm A has earnings before taxes of about rupees ten crores per

year and firm B now break even, has a loss carry forward of rupees twenty crores

accumulated from profitable operations of previous years. The merger of A and B will

allow the surviving corporation to utility the loss carries forward, thereby eliminating

income taxes in future periods.

 Counter Synergism

Certain factors may oppose the synergistic effect contemplating from a merger. Often

another layer of overhead cost and bureaucracy is added.

Benefits of merger and acquisition

Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate cost

efficiency through economies of scale, can enhance the revenue through gain in market share and

can even generate tax gains. Benefits of Mergers and Acquisitions are the main reasons for

which the companies enter into these deals. The main benefits of Mergers and Acquisitions are

the following

Greater Value Generation

Companies go for Mergers and Acquisition from the idea that, the joint company will be able to

generate more value than the separate firms. When a company buys out another, it expects that

the newly generated shareholder value will be higher than the value of the sum of the shares of

the two separate companies. Mergers and Acquisitions can prove to be really beneficial to the

companies when they are weathering through the tough times. If the company which is suffering

from various problems in the market and is not able to overcome the difficulties, it can go for an

acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then

a more competitive and cost efficient company can be generated.

Gaining Cost Efficiency

When two companies come together by merger or acquisition, the joint company benefits in

terms of cost efficiency. A merger or acquisition is able to create economies of scale which in
turn generates cost efficiency. As the two firms form a new and bigger company, the production

is done on a much larger scale and when the output production increases, there are strong

chances that the cost of production per unit of output gets reduced.

Mergers and Acquisitions are also beneficial

 when a firm wants to enter a new market

 when a firm wants to introduce new products through research and development

 when a forms wants achieve administrative benefits

Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce

the cost of capital.

Need for merger and acquisition

The task of evaluating what a company is worth, as well as drawing up specific details of merger

and acquisition deals, can be daunting. There are many pitfalls that must be overcome by

companies attempting to merge or acquire other companies. Approximately two thirds of all

mergers fail to produce profitable outcomes. That is why there are merger and acquisition

companies who specialize in helping corporations through the entire process.

 Common Problems

A stock market that is booming often leads to mergers that play out poorly. This is

because mergers that are done using high rated stock are easy to complete. This ease lures

some companies into mergers that are not in the best interests of the company or its
 shareholders. The egos of top level managers or CEOs can contribute to mergers that are

not well considered. Upper level management is usually promised large bonuses for top

level mergers or acquisitions, regardless of their final outcomes. These top level decision

makers can also be negatively influenced by banks, lawyers, and financial advisors who

stand to make large profits if a merger or acquisition is completed. This makes it ever

more important to find advisors who have a good reputation.

 Economy of scale

This refers to the fact that the combined company can often reduce its fixed costs by

removing duplicate departments or operations, lowering the costs of the company relative

to the same revenue stream, thus increasing profit margins.

 Economy of scope

This refers to the efficiencies primarily associated with demand-side changes, such as

increasing or decreasing the scope of marketing and distribution, of different types of

products.
MERGERS OF CENTURIAN BANK AND BANK OF PUNJAB

Bank of Punjab:

 It was incorporated on may27, 1994 under the companies act, 1956. The registered office

of the bank was situated at SCO 46-47, sector 9-D, Madhya Marg, Chandigarh- 160017.

 It is banking company under the provisions of regulation act, 1949.

 The objects of bank are banking business as set out in its memorandum and articles of

association.

 The bank is a new private sector bank in operating for more than 10 years, with a national

network of 136 branches( including extension counters) having a significant presence in

the most of the major banking sectors of the country.

 The transferor bank offers a host of banking products catering to various classes of

customers ranging from small and medium enterprises to large cooperates.

Centurion Bank

 It was incorporated on june30, 1994 under the companies act, 1956.

 It is a banking company under the provisions of banking regulation act, 1949.

 The objectives of transferee bank are banking business as set out in its memorandum and

articles of association.
  The bank is a profitable and well capitalized new private sector bank having a national

presence of over 99 branches( including extension counter)

 It has a significant presence in the retail segment offering a range of products across

various categories.

Highlights of the Merger- Centurion Bank and Bank of Punjab

 Bank of Punjab is merged into Centurion Bank.

 New entity is named as “Centurion Bank of Punjab”.

 Centurion Bank’s chairman Rana Talwar has taken over as the chairman of the merged

entity.

 Centurion bank’s MD Shailendra Bhandari is the MD of the merged entity.

 KPMG India pvt. ltd and NM Raiji & Co are the independent values and ambit corporate

finance was the sole investment banker to the transaction.

 Swap ratio has been fixed at 4:9 that is for every four shares of Rs 10 of Bank of Punjab,

its shareholders would receive 9 shares of Centurion Bank.

 There has been no cash transaction in the course of the merger; it has been settled through

the swap of shares.

 There is no downsizing via the voluntary retirement scheme.