CAPITAL STRUCTURE ( TAX PLANNING)
Meaning
1.
Capitalization
refers to the total amount of securities issued by a company.
2.
Capital
structure refers to the kind of securities and the proportionate amounts that
make up capitalization
3.
Capital
structure is the proportion of debt and preference and equity share on balance sheet.
4.
Financial
Structure means the entire liability side of balance sheet.
Capital Structure
1.
Factors
Determining the capital Structure
2.
Financial
leverage : The use of long term fixed interest bearing debt and preference
share capital is called financial leverage.
3.
Growth
and stability of sales
4.
Cost
of Capital :Every rupee invested in a firm has a cost. Cost of capital refers
to minimum return expected by its suppliers.
Tax Consideration in deciding capital
structure
1.
Cost
of Capital and its tax treatment
2.
Flotation
Cost and its tax treatment
3.
Effect
Of Corporate tax rate
4.
Tax
treatment in the hands of investor
5.
Tax
treatment ( interest)
1. Interest on loan/debt/debentures is 100%
deductible while calculating business income.
2. Allow ability of interest can be on due basis
or on paid basis depending upon the method of accounting adopted by business
house.
3. Allow ability of interest on payment basis in
certain cases :-where the loan has been taken from public financial institute
and term loan taken from a scheduled
bank including a coperative bank.
4. Capitalized interest
5. When interest is to be capitalized and then
written off:-
6. Interest on loan taken before commencement of
business is treated as preliminary expenditure and is written off 1/5 th every
year.
7. In case loan is taken to acquire the asset and
then interest on loan from the taking of loan till the date is put into use is
treated as capital expenditure and is added to cost of asset for depreciation
purpose.
Example
Case A
company wants to raise capital 20,00,000 for a project where EBIT will be 30% of the capital
employed. The company can raise debt fund@12% p.a. suggest which of the
following three alternatives should be opted
- 20,00,000 to be
raised as equity
- 16,00,000 as equity
and 4,00,000 as debt
- 4,00,000 as equity
and 16,00,000 as debt
No comments:
Post a Comment