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Which is better option?

Sam (CEO) (27 Points)

28 May 2016

One of my friend is about to crack one big land deal to get brokerage of 10 crores. He has to pay 3 crores to 3 individual sub brokers who has helped him crack this deal so my question is " Can he claim 3 crores which has to be paid to 3 sub brokers as business expenses against tax if he will take this 10 crores on the name of private limited company? or he should take full 10 crores on personal name and show income from other sources and pay full income tax (I guess 40%) plus service tax and give 3 crores to 3 sub brokers? Which is better option to save more tax legally? How much income tax (and any other taxes if any) he has to pay if he will prefer to get 10 crores on company name?

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7 Replies

Mohan (Audit Assisstant & Accounts Manager) (489 Points)
Replied 28 May 2016

In both cases tour income will be 7 crore before claiming any expenditures. You will have to maintain book of accounts and get audited since you will be covered under 44AB. Tax will be charged on net taxable income after due allowances and disallowances.

CA Rohan Dedhia (Practicing Chartered Accountant) (83 Points)
Replied 28 May 2016

Dear Sam,

Let's get things into perspective.

1. If Income is earned by Pvt Ltd. company-
In this case, service tax will be applicable on entire amount of 10 CR.
Further income tax will be charged on 10 CR. (assuming that the other 3 persons are also shareholders) at 30% (not 29%) along with surcharge of 7% and applicable cesses.

But the main issue at hand will be distribution of profits to the shareholders which attracts Company Dividend Distribution Tax of around 20.358% and additional Individual dividend tax (introduced w.e.f. F.Y. 2016-2017) of around 10.3%..

Please note that Dividend Distribution Tax can be avoided to the extent shown as Directors remuneration but this remuneration shall be taxable in the hands of directors. In our case, limit of directors remuneration as per companies act will not help in reducing DDT substantially.

2. If Income is earned by individual-

In this case, the profit shall be 7 crores. And taxable at individual tax slabs plus surcharge of 12% and applicable cesses.

Service tax shall be chargeable at 7 crores (after CENVAT of 3 crores) in hands of your friend and the rest 3 crores in the hands of his respective individuals.

As is seen, for the current taxation, income earned in the individual name shall best serve the purpose.

Sam (CEO) (27 Points)
Replied 28 May 2016

Thank you for quick reply.

3 sub brokers/persons are not share holders. They are not accocieted with my friend or his company, will this affect tax ratio? Still you think, he should take brokerage on personal name? If I am not wrong, 3 crores which has to be distributed amongst 3 sub brokers will be considered as company expenses but can he claim distribution of 3 crores/expenses of 3 crores if he will take on his personal name?

He has registered his private limited company on 2011 with no income till today but unfortunately he has not filed zero tax or has not shown losses. Can he get benefits of no income for yester years in this case?

CA Rohan Dedhia (Practicing Chartered Accountant) (83 Points)
Replied 28 May 2016

Dear Sam,

1. If sub-brokers are not shareholders, your can claim the expenses w.r.t. 3 crores. However corporate tax, surcharge and cess shall be applicable on the profit of 7 crores. (No benefit of yester years shall be available). Further, additional Corporate DDT and Individual DDT as outlined above shall be additionally leviable. The Net Income Tax rate shall work around 54.653% (approx.). The DDT can be avoided if the amount is not withdrawn by the shareholders (which is not the case I assume) and the same is kept in the business for re-investment.

2. As against, if income is taken as proprietorship income, then in such case, the expense of 3 crore shall be allowable. and balance profit shall be taxable at individual tax slab rates as increased by surcharge and cesses. Net tax rate works at around (approx.) 34.608%.

Sam (CEO) (27 Points)
Replied 28 May 2016

Thanks a lot Rohan for quick reply.

1 - He is not willing to take out single rupee from company except 3 crores which has to distributed amongst 3 sub brokers so in this case also corporate DDT will apply? Or corporate DDT will come into the picture because he will be issuing cheques of 3 crore to sub brokers.

2 –

a - Approx how much amount he will get if he will take full amount on personal name considering 3 crores of expenses

b - Approx how much amount he will get if he will choose proprietorship considering 3 crores of expenses

c - Approx how much amount he will get if he will prefer to take it on private limited company considering 3 crores of expenses

3 - What if, he will ask business owner (from where he will be getting brokerage) to issue 3 different cheques to each respective person’s name directly to avoid tax confusion so that his net income will be 7 crores? Will this be in favor of my friend?

Or/and

what if he will take some amount on personal name and some on company or proprietorship? Will that help in saving more tax?

I am quite impressed with you; can I suggest your name as a CA to my friend if you are around Mumbai? (of course it will take 2.5 to 3.5 months to get his cheque ready)

CA Rohan Dedhia (Practicing Chartered Accountant) (83 Points)
Replied 28 May 2016

Hi Sam,

1. in that case, we can show that as professional fee, deduct TDS and claim the same as expense. 3 crores shall be taxed individually in their hands. DDT will not apply.

2.
a. & b. proprietorship or personal name, balance amount in hand shall be 7 crores after Income Tax of 34.608%. (Service Tax if borne by client, will further reduce the amount)

c. in case of company, in-hand amount will be 7 crores after 54.653% income tax if withdrawn from company or 34.608% of retained by company.

3. in this case, your friend will not have to look after service tax compliance by 3 sub-brokers. income tax purpose, it doesnt make much difference. this is recommended.

I am based in Mumbai (Thane) if any help required, please feel free to contact on 98926-78133.

Sam (CEO) (27 Points)
Replied 29 May 2016

If I am not wrong, you are suggesting that taking money on personal name will be the best idea as being owner of private limited company, I doubt that my friend will go for proprietorship and get new TAN. Later if required, funds can be arranged in various companies to save tax legally. (Of course that’s your/CA’s part)

He has to bear service tax so (Approx) how much amount he will get if he will take full amount on personal name and distribute 3 crores to sub brokers? In this case I guess tax will be calculated on 7 crores so please tell me the approx amount on his 7 crores after tax with all applicable taxes.
I have suggested my friend to open trust/NGO on his own name to help people visit temples which he is alreay doing for free. Can we divert some part/full tax money to newly open own trust-NGO as he is already sponsoring temple visits of economically weak families of course on small scale at present but if he will get an opportunity, he can do it on large scale. Strictly no intention to do any kind of scam and no intention to take donations from others like 80G in future so please suggest accordingly.