flowchart TB
CTP[Corporate Tax Planning] --> P[Concept<br/>Plan ≠ Avoid ≠ Evade]
CTP --> R[Rates<br/>30/25/22/15 + Surcharge + Cess]
CTP --> T[Techniques<br/>Form · Location · Capex · Lease · Loss c/f · 115BAA/BAB]
CTP --> D[Decisions<br/>Make-Buy · Own-Lease · Replace · Shut down]
CTP --> SR[Special<br/>SEZ · M&A · ESOP · Buy-back]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
92 Corporate Tax Planning: Concepts and significance of corporate tax planning; Tax avoidance versus tax evasion; Techniques of corporate tax planning; Tax considerations in specific business situations: Make or buy decisions; Own or lease an asset; Retain; Renewal or replacement of asset; Shut down or continue operations
92.1 Concept of Corporate Tax Planning
Corporate Tax Planning (CTP) is “the arrangement of a company’s financial and business affairs to legally minimise tax liability while staying within the four corners of the law”. CTP is not tax evasion: it uses statutory deductions, exemptions, rebates, and structural choices (depreciation, depreciation methods, financing mix, location, form of organisation, timing of transactions) to optimise post-tax cash flows. It is one of the principal tools in strategic financial management of a company.
92.2 Tax Planning vs Tax Avoidance vs Tax Evasion vs Tax Management
TipFour Concepts Compared
| Concept | Meaning | Legality |
|---|---|---|
| Tax Planning | Using statutory provisions to reduce tax liability | Legal & moral |
| Tax Avoidance | Exploiting loopholes — not in spirit of law | Legal but not moral; vulnerable to GAAR |
| Tax Evasion | Concealing income / inflating expense | Illegal, punishable |
| Tax Management | Compliance, return filing, TDS, advance tax, audits | Legal |
92.3 Significance of CTP
TipWhy CTP Matters
- Maximises post-tax cash flow — higher NPV.
- Optimises capital structure — debt-equity, interest deductibility.
- Cost of capital reduction — depreciation, tax shield.
- Funds for growth & R&D.
- Competitive advantage (lower tax → lower price).
- Compliance & risk reduction — penalties, GAAR.
- Investor confidence — predictable post-tax earnings.
92.4 Types of Tax Planning
TipTypes of Tax Planning
- Short-range — for the year (instalment of advance tax, last-minute investments).
- Long-range — multi-year (capex, location, NPS, retirement).
- Permissive — within explicit provisions (§ 80 deductions, depreciation).
- Purposive — choosing the most beneficial alternative.
92.5 Techniques of CTP
TipCommon Techniques
- Choice of form of organisation — Pvt Ltd vs LLP vs Sole Proprietor.
- Choice of location — SEZ (§ 10AA), backward area (§ 80-IB, IBA), NE States.
- Capital structure — debt-equity (interest deductible).
- Depreciation: WDV method usually; additional depreciation § 32(1)(iia) for new plant & machinery.
- Lease vs Buy decision — tax shield via lease rent vs depreciation.
- Holding period of investments — STCG vs LTCG rate differential.
- Inter-company transactions — TP compliance.
- Use of MAT credit.
- Carry-forward of losses — §§ 70-80.
- Concessional regime — § 115BAA (22 %) / § 115BAB (15 %) for new manufacturing co (chosen by 2024).
- Section 80-IAC for eligible start-ups (DPIIT-recognised; 100 % deduction for any 3 consecutive years of first 10).
92.6 Corporate Tax Rates in India
TipIndian Corporate Tax Snapshot (FY 2024-25)
| Category | Rate | Notes |
|---|---|---|
| Domestic co — turnover ≤ ₹400 cr (previous PY) | 25 % | + surcharge & cess |
| Other domestic co (default) | 30 % | + surcharge & cess |
| § 115BAA — opting concessional | 22 % (no exemptions) | + 10 % surcharge + 4 % cess → eff 25.17 % |
| § 115BAB — new manufacturing co (incorporated by 31 Mar 2024) | 15 % | + 10 % SC + 4 % cess → eff 17.16 % |
| Foreign company | 35 % (Budget 2024 reduced from 40 %) | + surcharge & cess |
| MAT (§115JB) | 15 % of book profit | not applicable if § 115BAA/BAB opted |
| Buy-back tax (§115QA) | 23.30 % effective (until 1 Oct 2024); post Oct’24 — taxed in shareholder’s hand | |
| DDT | abolished from FY 2020-21 (dividend taxable in shareholder hands) |
92.6.1 Surcharge (Companies)
7 % if income > ₹1 cr ≤ ₹10 cr; 12 % if > ₹10 cr. For § 115BAA/BAB: flat 10 %.
92.7 Tax Considerations in Business Decisions
92.7.1 1. Make or Buy
TipMake-or-Buy — Tax Angle
- Make — additional plant: depreciation (incl. additional §32(iia) — 20 % first year), interest on borrowings, ITC under GST.
- Buy — input cost expensed; GST ITC on purchase; preserves capital.
- Compare net cash flow after tax.
- Backward area / SEZ make — additional incentives § 10AA / § 80-IB.
92.7.2 2. Own vs Lease
TipOwn vs Lease — Tax Angle
- Own: depreciation tax shield + interest on loan; residual value belongs to firm.
- Lease: lease rent fully deductible; no capital lock-up; but no salvage.
- Operating vs Finance lease (Ind AS 116) — accounting treatment differs.
- Decision: compare NPV of post-tax cash outflow under each.
92.7.3 3. Retain / Replace / Renew Asset
TipReplace vs Retain — Tax Angle
- Replacement cost vs retain cost (after-tax).
- Sale of old asset — block of asset concept (§ 32); STCG/LTCG only if block exhausted (§ 50).
- Depreciation continuity — new asset added to block; old asset removed.
- Trade-in / scrap.
- Subsidy / Govt grant — netted from cost (§ 43(1)).
92.7.4 4. Shut Down vs Continue
TipShut Down or Continue — Tax Angle
- Loss can be set off — intra-head, inter-head, c/f business loss 8 yrs; unabsorbed depreciation indefinite.
- Fixed costs (rent, salary) continue if shut.
- Closure costs: VRS (§ 35DDA — 5 yrs amortisation), retrenchment, statutory dues.
- Block of assets — short-term capital loss / gain on dismantling.
- Tax write-off of unsold inventory.
- Compute post-tax differential cash flow; if positive — continue.
92.7.5 5. Other Specific Decisions
TipOther Tax-Aware Decisions
- Merger & amalgamation — § 72A carry-forward of losses on prescribed conditions.
- De-merger — § 2(19AA); pro-rata loss transfer.
- Slump sale (§ 50B).
- Conversion of co into LLP (§ 47(xiiib)) — tax-neutral subject to conditions.
- Foreign currency hedging — tax timing.
- Buy-back vs dividend (changed Oct 2024).
- Employee compensation — ESOP taxation (§ 17(2)(vi)).
NoteDistractor warning
PYQ trap: Tax planning = legal & moral; tax avoidance = legal but exploits loopholes; tax evasion = illegal. §115BAA = 22 %, §115BAB = 15 % new manufacturing. MAT 15 %. DDT abolished FY 2020-21.
92.8 Practice Questions
Q 01DefinitionEasy
Tax planning is:
View solution
Correct Option: B
**Legal & within statute**.
Q 02EvasionEasy
Tax evasion is:
View solution
Correct Option: B
**Illegal**; attracts penalties & prosecution.
Q 03AvoidanceMedium
Tax avoidance:
View solution
Correct Option: B
**Avoidance** = within letter but against spirit; GAAR can re-characterise.
Q 04115BAAMedium
Concessional corporate tax rate under §115BAA:
View solution
Correct Option: C
**22 %** plus surcharge & cess → ~ 25.17 %.
Q 05115BABMedium
Rate under §115BAB for new manufacturing companies:
View solution
Correct Option: A
**15 %**; effective ~ 17.16 %.
Q 06MATMedium
MAT rate (book profit):
View solution
Correct Option: B
**15 %** under §115JB (since 2019).
Q 07DDTMedium
DDT was abolished from:
View solution
Correct Option: B
**DDT abolished FY 2020-21**; dividend taxable in shareholder hands.
Q 08SEZMedium
SEZ deduction is under:
View solution
Correct Option: B
**§ 10AA** — SEZ unit profits.
Q 0972AHard
Carry-forward of accumulated losses in amalgamation is under:
View solution
Correct Option: B
**§ 72A**.
Q 10ConversionHard
Conversion of company into LLP is tax-neutral under:
View solution
Correct Option: A
**§ 47(xiiib)** — exempt subject to conditions.
Q 11BlockHard
Block of assets concept for depreciation is under:
View solution
Correct Option: B
**§ 32 — WDV on block of assets**.
Q 12Start-upMedium
Tax holiday for eligible start-up:
View solution
Correct Option: B
**§ 80-IAC** — 100 % deduction for any 3 consecutive yrs in first 10 yrs.
Q 13DomesticMedium
Domestic co with turnover ≤ ₹400 cr in preceding PY:
View solution
Correct Option: C
**25 %** (default for small/medium domestic cos).
Q 14Foreign coMedium
Foreign company tax rate (Budget 2024):
View solution
Correct Option: B
**35 %** (reduced from 40 % in Budget 2024).
Q 15Make-BuyHard
Make-or-Buy decision is mainly compared on:
View solution
Correct Option: B
**Post-tax cash flow NPV**.
Q 16LeaseMedium
Lease rent is deductible under:
View solution
Correct Option: A
**PGBP head — §30/37**.
Q 17VRSHard
VRS payments to employees are amortised under:
View solution
Correct Option: B
**§ 35DDA** — 5 equal instalments.
Q 18Add DepHard
Additional depreciation on new plant & machinery:
View solution
Correct Option: C
**§ 32(1)(iia) — 20 %** in first year (manufacturing).
Q 19Shut downHard
In shut-down decision, relevant costs are:
View solution
Correct Option: B
**Differential post-tax cash flow**.
Q 20MatchMedium
Match provision with concept:
| Provision | Concept | ||
| (i) | § 115BAA | (a) | Start-up |
| (ii) | § 115BAB | (b) | 22 % concessional |
| (iii) | § 80-IAC | (c) | 15 % new manufacturing |
| (iv) | § 35DDA | (d) | VRS amortisation |
View solution
Correct Option: A
Direct mapping.
92.9 Quick Recall
ImportantQuick recall
- Tax planning vs avoidance vs evasion vs management.
- Indian corporate rates: 30 % default; 25 % (TO ≤ ₹400 cr); §115BAA 22 %; §115BAB 15 % new mfg; MAT 15 %; foreign co 35 % (post Budget 2024).
- DDT abolished FY 2020-21; dividend taxed in shareholder hands; buy-back tax shifted to shareholder from 1 Oct 2024.
- Techniques: form of org, location (SEZ §10AA, backward area), capex with depreciation (§32 + 20 % additional §32(iia)), capital structure, MAT credit, loss c/f (§§70-80, §72A merger), § 47(xiiib) co → LLP.
- Decisions: Make-buy, Own vs Lease, Replace, Shut down — compare post-tax differential cash flow / NPV.
- Start-up §80-IAC: 100 % deduction any 3 of first 10 yrs.
- VRS amortisation §35DDA — 5 yrs.