TAX PLANNING WITH

REFERENCE TO NEW
BUSINESS FORM OF
ORGANISATION
Introduction
Business: An organization or economic system where goods and
services are exchanged for one another or for money.
Every business requires some form of investment and enough
customers to whom its output can be sold on a consistent basis
in order to make a profit.
The most important forms of business organisation are as follows
Sole Proprietorship
Joint Hindu Family Business
Partnership
Joint Stock Company
Co-operative Society

http://www.businessdictionary.com/definition/business.html
Factors Influencing Form of
Company
Requirement of finance
Requirement of resources
Personal liability of owner
Level of operation
Quantum of profit
Specified requirement of technical expertise
Tax incentives

One can take a decision while comparing tax liability under

different organization forms.
Aggregate amount of tax liability on firm and
partners is generally higher than that of the case
when the same amount of income is generated
through sole proprietorship. One should, therefore,
consider the possibility of converting firms into sole
proprietorships. The same is evident from the case
studies given below:
Particular Case 1 Case 2 Case 3
Number of partners 3 4 8
Profit-sharing ratio Equal Equal Equal

Total capital contribution of partners 10,00,00 15,00,00

(each contributing identical amount) 0 0 80,00,000
12,00,00
Profit of the previous year 2016-17 6,00,000 0 60,00,000
Tax on firm
12,00,00
Income 6,00,000 0 60,00,000
Less: salary 3,78,000 7,02,000 31,14,000
LESS: INTEREST @12% 1,20,000 1,80,000 9,60,000
NET INCOME 1,02,000 3,18,000 19,26,000
TAX @ 30.9% 31,518 98,262 5,95,134
Tax liability of each partner 10,506 24,566 74,392
 tax incidence on partnership fi rm
100% 80,000

90%
70,000
80%
60,000
70%
50,000
60%

50% 40,000

40%
30,000
30%
20,000
20%
10,000
10%

0% 0
1 2 3
 Tax on partner : Firm
Particular Case 1 Case 2 Case 3
Number of partners 3 4 8
Salary 1,26,000 1,75,500 3,89,250
Interest 40,000 60,000 3,20,000
Income 1,66,000 2,35,500 7,09,250
Income after 80C DEDUCTIONS 16,000 85,500 5,59,250
Tax on net income 0 0 36850

Total tax 10,506 24,566 1,11,242

Tax on partner : Sole Case 1 Case 2 Case 3

Proprietor
Particular
No of Partners 3 4 8
6,00,00 12,00,0
Profit of the previous year 2016-17 0 00 60,00,000
2,00,00 3,00,00
Income by each individual 0 0 7,50,000
1,50,00
Net Income after 80C deductions 50,000 0 6,00,000
Taxable Income 0 0 45,000
120,000

100,000

80,000

60,000

40,000

20,000

0
3 4 8
Total tax liability of each partner Tax as Sole Proprieter

To avoid high tax incidence on firms, firms may be converted into sole
proprietorship.
Partnership firm
The following basic assumptions have been made
a. There are two partners X and Y with an equal share
of profit.
b. They want to draw the maximum permissible
amount as salary. Both the partners will draw equal
salary.
c. Income is from business (not from profession)
d. They are entitled to simple interest at the rate of 12
per cent on the capital contribution of RS.10,00,000.
e. Partners do not have any income.
 Taxable
income Taxable Total tax as
before Interest on Salary income of Tax liability percentage
Tax liability
deduction capital to payable to firm after of the of income
of the firm
of salary partners X and Y salary and partners (5+6) as %
and interest of (1)
interest

1 2 3 4 5 6 7

Rs. Rs. Rs. Rs. Rs. Rs.

5,00,000 1,20,000 3,18,000 62,000 19,160 0 3.83%

10,00,000 1,20,000 6,18,000 2,62,000 80,960 14,210 9.52%

15,00,000 1,20,000 9,18,000 4,62,000 1,42,760 59,320 13.47%

20,00,000 1,20,000 12,18,000 6,62,000 2,04,560 1,21,120 16.28%

25,00,000 1,20,000 15,18,000 8,62,000 2,66,360 1,82,920 17.97%

30,00,000 1,20,000 18,18,000 10,62,000 3,28,160 2,44,720 19.10%

 TAX INCIDENCE ON FIRM AND PARTNERS
100% 350,000
90%
300,000
80%
70% 250,000

60%
200,000
50%
150,000
40%
30% 100,000
20%
50,000
10%
0% 0
1 2 3 4 5 6
Interest Salary taxable Income
Firm Tax Liablity Partner Tax Liablilty
Private limited
company
On the same data tax incidence is computed in the
case of private limited company, the following
assumptions have been made:
1. X and Y will be the two shareholder and directors of
the company.
2. they will draw salary, as there is no maximum limit
under the income tax act. They will draw salary @
90% of profit up to Rs. 3,00,000 of profit and 60% of
balance it is assumed that provision of section 40A(2)
are not attracted.
 Taxable
income
Taxable Tax Total tax
before Salary to Taxable Tax
income of liability of of the
payment directors income of liability of
the the company
of salary X and Y X X
company company X and Y
to
directors

1 2 3 4 5 6 7
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
5,00,000 3,90,000 1,10,000 33,990 1,95,000 0 33,990
10,00,000 6,90,000 3,10,000 95,790 3,45,000 4,640 1,05,070
15,00,000 9,90,000 5,10,000 1,57,590 4,95,000 20,090 1,97,790
20,00,000 12,90,000 7,10,000 2,19,390 6,45,000 55,620 3,30,630
25,00,000 15,90,000 9,10,000 2,81,190 7,95,000 86,520 4,54,230
30,00,000 18,90,000 11,10,000 3,42,990 9,45,000 1,17,420 5,77,830
TAX INCIDENCE ON PROVATE LIMITED COMPANY AND DIRECTORS
100% 400,000
90% 350,000
80%
300,000
70%
60% 250,000

50% 200,000
40% 150,000
30%
100,000
20%
10% 50,000

0% 0
500000 1000000 1500000 2000000 2500000 3000000
SALARY COMPANY TAX LIABILITY
TAX BY COMPANY TAX BY DIRECTOR
 Firm V/s Company
25.00%

20.00%

15.00%

Total Tax as % of income 10.00%

5.00%

0.00%
HOW TO REDUCE TAX
INCIDENCE ON COMPANY
firm Private limited company
Partners are increased to Directors are increased
five to five
Total salary payable to Total salary payable to
partner remains the directors is increased to
same (maximum 90 per cent of total
permissible) income of the company.
(there is no maximum
limit on remuneration
payable to directors)
 Tax incidence on Firm and Partners
Taxable Interes Salary Taxable Tax Tax Total
income t on payable income liability liability tax as
before capital to 5 of firm of the of the percent
deducti to Partner after firm partner age of
on of partner s salary s income
salary s and (5+6)
and interest as % of
interest (1)
(1) Rs. (2) Rs. (3) Rs. (4) Rs. (5) Rs. (6) Rs. (7) Rs.

5,00,000 1,20,000 3,18,000 62,000 19,160 0 3.83%

10,00,000 1,20,000 6,18,000 2,62,000 80,960 0 8.10%

15,00,000 1,20,000 9,18,000 4,62,000 1,42,760 0 9.52%

20,00,000 1,20,000 12,18,000 6,62,000 2,04,560 0 10.23%

25,00,000 1,20,000 15,18,000 8,62,000 2,66,360 14,200 11.22%

30,00,000 1,20,000 18,18,000 10,62,000 3,28,160 45,100 12.44%

 Tax Incidence on Fim and Five Partners
100% 350,000
90%
300,000
80%
70% 250,000

60%
200,000
50%
150,000
40%
30% 100,000
20%
50,000
10%
0% 0
1 2 3 4 5 6
Interest Salary taxable Income
Firm Tax Liablity Partner Tax Liablilty
 Tax incidence on company and five
directors
Taxabl
e
incom Total
Taxabl Taxabl Taxabl
e tax of
e e e
before Salary Tax of the
incom liabilit incom (7) as
to five one compa
e of y of e of % of
payme direct direct ny and
the the one (1)
nt of ors ors five
compa compa direct
salary direct
ny ny ors
to ors
direct
ors
(1) Rs. (2) Rs. (3) Rs. (4) Rs. (5) Rs. (6) Rs. (7) Rs. (8) Rs.
5,00,000 4,50,000 50,000 15,450 90,000 0 15,450 3.09%
10,00,000 9,00,000 1,00,000 30,900 1,80,000 0 30,900 3.09%
15,00,000 13,50,000 1,50,000 46,350 2,70,000 0 46,350 3.09%
20,00,000 18,00,000 2,00,000 61,800 3,60,000 6,180 92,700 4.64%
25,00,000 22,50,000 2,50,000 77,250 4,50,000 15,450 1,54,500 6.18%
30,00,000 27,00,000 3,00,000 92,700 5,40,000 33,990 2,62,650 8.76%
TAX INCIDENCE ON PRIVATE LIMITED COMPANY AND FIVE DIRECTORS
100% 100,000
90% 90,000
80% 80,000
70% 70,000
60% 60,000
50% 50,000
40% 40,000
30% 30,000
20% 20,000
10% 10,000
0% 0
500000 1000000 1500000 2000000 2500000 3000000
SALARY COMPANY TAX LIABILITY
TAX BY COMPANY TAX BY DIRECTOR
 Firm V/s Company
14.00%

12.00%

10.00%

8.00%

Total Tax as % of income 6.00%

4.00%

2.00%

0.00%
 The aforesaid proposition is
examined in the following case
study:
Firm Private Company

Number of partners : 4 Number of partners : 4

Taxable income before Taxable income before

interest\remuneration: Rs. 14,00,000 interest\remuneration: Rs. 14,00,000

Interest on capital to partners on total Remuneration payable to directors :

capital contribution of Rs. 15,00,000 @ Rs.12,00,000 salary to each being Rs.
12% : Rs. 1,80,000 3,00,000 payable in cash.
Remuneration payable to partners at
the maximum level : Rs. 8,22,000
(salary to each partner being
Rs.2,02,500 payable in cash / kind)
 FIRM
Basic pay 1,20,000
Education allowance 2,400
Free residential house at Delhi ( rent paid by employer is Rs. 158,000
1,68,000)
Transport allowance 19,200

Firm income 14,00,000

Less: Interest on capital 1,80,000
book profit 12,20,000
Less : remuneration to partners 8,22,000
Net income of firm 3,98,000
Tax liability of firm (rounded off) 1,22,980

Partner salary 2,05,500

Interest 45,000
Net income 2,50,500
Tax (rounded off) Nil
Tax liability of firm and four partners 1,22,980
Tax incidence as percentage of income 8.78%
 Private Limited Company
Income 14,00,000
Less: salary and perquisites to four directors 12,00,000
Net Income 2,00,000
Tax @ 30.9% (rounded off) 61,800
Director

Basic salary 1,20,000

Education allowance (not taxable under section 10 (14) NIL

Valuation of rent free house at Delhi (as per rule 3) 18,000

Gross salary 1,38,000

Less: Standard deduction Nil
Salaries 1,38,000
Net income 1,38,000
Tax on net income Nil
Tax Liability of company and four directors 61,800
Tax incidence as percentage of income 4.41%