TAX PLANNING IN RESPECT OF BONUS SHARES

• TAX PLANNING IN RESPECT OF BONUS SHARES
• CORPORATE TAXATION
• MEANING OF BONUS SHARES

1. THESE SHARES ARE GIVEN TO SHAREHOLDERS FREE OF COST AND GIVEN OUT OF ACCUMULATED PROFITS OF THE COMPANY AND GIVEN TO EXISTING SHAREHOLDERS IN PROPORTION OF THEIR EXISTING SHAREHOLDINGS IN THE COMPANY.
2. THE PROCESS OF CONVERSION OF RESERVE AND SURPLUS INTO SHARE CAPITAL ARE CALLED CAPITALIZATION OF RESERVE AND SURPLUS.

• IT HAS THE FOLLOWING EFFECT:-

1. REDUCES ACCUMULATED PROFITS
2. CORRESPONDING INCREASE IN THE PAID UP SHARE CAPITAL OF THE COMPANY
3. PROVISIONS

• SEC 205 OF THE COMPANIES PUT RESTRICTION ON COMPANY TO ISSUE BONUS SHARE IN LIEU OF DIVIDEND.
• THE BONUS SHARES CAN BE ISSUED OUT OF THE FOLLOWING RESERVES:-

a)       GENERAL RESERVE

b)       BALANCE IN PROFIT AND LOSS ACCOUNT

c)       RESERVE FUND

d)       PROFIT REALIZED IN CASH

e)       DIVIDEND EQUALIZATION FUND

f)        CAPITAL REDEMPTION RESERVE

g)       SECURITY PREMIUM RECEIVED IN CASH

·         3. BONUS SHARES CANNOT BE ISSUED OUT OF SPECIFIC RESERVES AND  ALSO NOT OUT OF CAPITAL RESERVE CREATED OUT OF REVALUATION OF ASSETS

• TAX TREATMENT
• TAX TREATMENT IN CASE OF COMPANY ISSUING BONUS SHARES.

a)       THE ISSUE OF BONUS SHARE IS NOT REGARDED AS DISTRIBUTION OF DIVIDEND. IT DOES NOT INVOLVE IN THE RELEASE OF ANY ASSETS OF THE COMPANY

b)       BUT CLAUSE B OF SEC 2(22) SPECIFICALLY PROVIDES THAT DISTRIBUTION OF BONUS SHARES TO PREFERENCE SHARES  WILL BE TREATED AS DIVIDEND.

c)       MARKET VALUE OF BONUS SHARES ON THE DATE OF DISTRIBUTION WILL BE TREATED AS AMOUNT OF DIVIDEND RECEIVED BY SHAREHOLDERS.

• TAX TREATMENT
• IF BONUS SHARES ARE ISSUED TO EQUITY SHAREHOLDERS:-

1. AT THE TIME OF ISSUE – NO TAX
2. AT THE TIME OF REDEMPTION :-IT IS TREATED AS DIVIDEND DISTRIBUTED BY COMPANY TO THE EXTENT OF ACCUMULATED PROFITS. COMPANY IS REQUIRED TO PAY DIVIDEND TAX U/S 115-O AT PRESCRIBED RATES.
3. TAX TREATMENT
4. AT THE TIME OF LIQUIDATION OF ISSUING COMPANY
5.  ANY SUM DISTRIBUTED TO EQUITY SHAREHOLDERS AGAINST  BONUS SHARES AS WELL AS OTHER SHARES TO THE EXTENT OF ACCUMULATED PROFIT SHALL BE TREATED AS DIVIDEND

• TREATMENT OF EXPENDITURE
• EXPENSES INCURRED FOR THE INCREASING AUTHORIZED SHARE CAPITAL
• TREATMENT OF OTHER EXPENSES SUCH AS PRINTING STATIONERY ETC
• TAX TREATMENT IN THE HANDS OF SHAREHOLDERS
• IN THE HANDS OF EQUITY SHAREHOLDERS

a)       AT THE TIME OF RECEIPT

b)       AT THE TIME OF REDEMPTION

c)       AT THE TIME OF LIQUIDATION OF COMPANY

• IN THE HAND OF PREFERENCE SHAREHOLDERS

1. AT THE TIME OF RECEIPT
2. AT THE TIME OF REDEMPTION
3. AT THE TIME OF LIQUIDATION OF COMPANY