Tax Planning and Location of Business: formula sheet

Key formulas

Tax planning

Legal means + honest intent + commercial substance = tax planning

It uses the incentives and options the law gives, in both letter and spirit.

Tax avoidance

Follows the letter of law + defeats its purpose + tax saving is the main motive = tax avoidance

Not outright illegal, but exposed to anti-avoidance rules and can be disregarded.

Tax evasion

Illegal means (concealment, falsehood, forgery) + deliberate intent = tax evasion

Attracts penalty and prosecution.

Tax management

Compliance with law on time (returns, records, TDS, payment) = tax management

Reduces penalty and interest. It does not by itself cut the tax liability.

Treaty benefit, section 159(4) and (6), Income-tax Act, 2025

Where a section 159 agreement applies to an assessee, the provisions of the Act apply to the extent they are more beneficial to that assessee; the provisions of Chapter XI apply to the assessee even if they are not beneficial to him

Section 159(6) is the exception to section 159(4). Quote it as the section words it, and check the Act before describing what Chapter XI contains.

Non-resident treaty claim, section 159(8)

Residency certificate from the other country or territory + prescribed documents and information

Both are needed before a non-resident can claim relief under an agreement.

Impermissible avoidance arrangement (s.179(1))

Main purpose = tax benefit AND at least one of: (a) non-arm's length rights or obligations; (b) misuse or abuse of the Act; (c) lacks commercial substance; (d) means or manner not ordinarily used for bona fide purposes

Main purpose is compulsory. The four limbs are alternatives.

Presumption of main purpose (s.179(2))

Main purpose of a step or part is a tax benefit ⇒ whole arrangement presumed to have that purpose, unless the assessee proves otherwise

The burden of rebuttal is on the assessee.

Deemed lack of commercial substance (s.180(1))

(a) form ≠ substance; (b) round trip financing, accommodating party, offsetting elements, or disguised funds; (c) tax-driven location; (d) no significant effect on business risks or net cash flows

Any one limb is enough. Clause (b) has four sub-items.

Round trip financing (s.180(2))

Funds transferred among parties through a series of transactions + no substantial commercial purpose other than tax benefit

Tracing, time or sequence, and means or mode of transfer are disregarded.

Factors not sufficient alone (s.180(3))

Period of existence; payment of taxes; exit route provided

Relevant, but cannot alone decide the question.

Consequences (s.181)

Deny tax or treaty benefit; disregard, combine or recharacterise steps; treat as not entered into; disregard accommodating party; treat connected persons as one; reallocate receipts and expenses; re-place residence or situs; look through corporate structure

The list is inclusive, not exhaustive. Equity may be treated as debt and vice versa, and capital as revenue and vice versa.

Lawful tax planning

Genuine transaction + within the law + real commercial purpose = respected, even if tax is saved

The form chosen by the parties is accepted. Tax saving alone is not wrong.

Sham or colourable device

Documents do not match reality, or the arrangement has no purpose except avoiding tax = disregarded

The authority looks at substance over form and taxes the real transaction.

McDowell principle

Tax planning within the legal framework may be legitimate; colourable devices and dubious methods to avoid tax are not tax planning and are impermissible

Later cases limited how widely this can be used to ignore a transaction.

Azadi Bachao Andolan principle

A valid treaty or legal route used as intended is not illegal merely because it saves tax

Treaty shopping through a valid certificate was upheld in this case.

Vodafone principle

Look at the transaction as a whole; respect its form unless it is a sham or a device lacking commercial substance

A genuine transaction is not recharacterised merely because it saves tax, but the authority may look through a sham or a device that lacks commercial substance.

Total tax burden of a company

Company tax + tax on dividend in the shareholder's hands

Compare this with the firm or LLP figure, where the partners' share of profit is not taxed again. Use the rates given in the question.

Tax saving from interest

Interest deductible × tax rate

This holds only if the interest is allowable as a business expense. Check the conditions and limits that apply to the interest.

Post-tax profit

Profit before tax − tax

Compare the options on post-tax return to the owners, not on tax alone.

Long-term finance (section 66(10))

Repayment with interest over a period of not less than five years

The definition applies for the purposes of section 32(e) of the Income-tax Act, 2025.

Meaning of paid (section 66(15))

Actually paid or incurred, according to the accounting method used for business profits

Section 37 is excluded from this meaning.

Section 147(1): OBU and IFSC deduction

Deduction = 100% × eligible income under section 147(3)

For a scheduled bank or foreign bank with an OBU in an SEZ, or an IFSC unit.

Section 147(2): deduction period (from 1 April 2026)

OBU: 20 consecutive tax years. IFSC unit: 20 consecutive tax years out of 25, at the assessee's option

Earlier text gave 10 years (OBU) and 10 out of 15 years (IFSC). An OBU whose tenth year of section 80LA deduction ended on 31 March 2025 gets a further ten years from 1 April 2026.

Section 147(4): conditions

Accountant's report + copy of permission/registration, filed with the return

Permission under section 23(1)(a) of the Banking Regulation Act, 1949, or permission or registration under the IFSCA Act, 2019.

Section 147(5): new unit condition

Unit starting on or after 1 April 2026 must not arise from splitting up, reconstruction, reorganisation or transfer of an existing Indian business

Otherwise the deduction is not available.

Section 144: SEZ entrepreneur

Deduction as calculated under section 10AA of the 1961 Act, for only the years it would have allowed

Applies to an entrepreneur who is eligible as if the 1961 Act had not been repealed.

Section 139: SEZ developer

Deduction as calculated under section 80-IAB of the 1961 Act, for only the years it would have allowed

For SEZs notified on or after 1 April 2005.

Section 88: shifting to an SEZ

Taxable gain = capital gain − cost of new asset (if positive); if cost ≥ gain, nil

Purchase or construction within 1 year before or 3 years after transfer. Unused gain must be deposited under the notified scheme before the return due date.

After-tax cost of a deductible expense

After-tax cost = Expense × (1 − tax rate)

Use only when the expense is allowed as a deduction and the company has taxable profit to absorb it.

After-tax receipt

After-tax receipt = Receipt × (1 − tax rate)

Applies to a fully taxable receipt.

Tax shield on depreciation

Tax shield = Depreciation × tax rate

Depreciation is not a cash cost, but it reduces tax and so saves cash.

After-tax cost of debt

Kd (after tax) = Interest rate × (1 − tax rate)

Valid when interest is fully deductible. Dividend on equity gets no such deduction.

Net advantage of leasing (comparison)

Net cost of owning = Outflows − PV of tax shields; Net cost of leasing = PV of after-tax rentals

Discount both at the after-tax cost of borrowing and pick the lower net cost.

Buy-back gain in the shareholder's hands (Income-tax Act, 2025, section 69)

Deemed capital gains = Consideration received − Cost of acquisition

Taxed in the year the company buys back the shares. Promoters bear additional tax under section 69(2) on a buy-back under section 68 of the Companies Act, 2013.

Quick revision

• Tax planning is lawful. Evasion is unlawful. Avoidance uses the form of law to defeat its purpose.
• Section 179(1): the main purpose must be a tax benefit, and one of four limbs must apply.
• The four limbs: non-arm's length rights or obligations, misuse or abuse of the Act, lack of commercial substance, and means not ordinarily used for bona fide purposes.
• Section 179(2): if the main purpose of a step is a tax benefit, the whole arrangement is presumed to have that purpose unless the assessee proves otherwise.
• Section 180(1) deems lack of commercial substance for round trip financing, an accommodating party, offsetting elements, or disguising the value, location, source, ownership or control of funds.
• Substance differing significantly from form, or no significant effect on business risks or net cash flows apart from the tax benefit, also shows a lack of commercial substance.
• Section 180(3): period of the arrangement, payment of taxes and an exit route are relevant but not sufficient.
• Section 181: consequences may include disregarding or recharacterising steps, treating the arrangement as not entered into, looking through a corporate structure, and reallocating income or deductions.
• Section 181(3): equity may be treated as debt, and capital receipts as revenue, or the reverse.
• Section 163: an international transaction is between associated enterprises, one of which is necessarily a non-resident.
• A third-party transaction is deemed an international transaction if there is a prior agreement with the associated enterprise, or its terms are determined in substance with it.
• In every answer, give the provision, analyse the facts, and then conclude.

Common mistakes

• Calling tax avoidance legal and safe. Fix: Say avoidance is not a crime like evasion, but it defeats the purpose of the law and can be struck down by anti-avoidance rules.
• Treating tax planning and tax management as the same thing. Fix: Planning reduces the tax burden through lawful choices. Management ensures timely compliance, records and payment.
• Saying any tax-saving arrangement lacks commercial substance. Fix: State that the main purpose must be a tax benefit and a section 179(1) limb must be met. Genuine planning with a business purpose is not caught.
• Treating all four limbs of section 179(1) as compulsory. Fix: Main purpose is compulsory. The four limbs (a) to (d) are alternatives. Lack of commercial substance is only one of them.
• Saying McDowell bans all tax planning. Fix: Write that McDowell accepts tax planning within the legal framework and rejects only colourable devices and dubious methods to avoid tax.
• Treating Azadi Bachao Andolan as approval of every tax-saving scheme. Fix: State that it upheld a genuine treaty route and did not protect shams.
• Comparing only the entity's tax rate and ignoring tax on dividend. Fix: Always compute the second layer when profits are distributed, and show total tax in both cases.
• Treating all interest as fully deductible. Fix: Say interest is deductible subject to the conditions and limits of the Act, and use the full figure only when the question says so.
• Quoting the old 10-year period for OBU or IFSC units. Fix: Use the substituted text from 1 April 2026: 20 years, and for IFSC units 20 out of 25 years at the assessee's option.
• Allowing the deduction on all income of the unit. Fix: Apply it only to income listed in section 147(3), such as income of the OBU or approved business of the IFSC unit.

Exam tips

• Answer in the order: meaning, intent, legality, example, consequence. It matches the provision, analysis and conclusion style of the paper.
• Use a comparison in short points when asked to distinguish. Cover meaning, legality, motive, substance and consequence.
• In case questions, quote facts that show substance or concealment before naming the category.
• Cite section 159 of the Income-tax Act, 2025 only for treaty points, and do not give section numbers you are unsure of.
• Quote the section number with the limb, such as section 180(1)(b)(i), and match it to a fact from the case.
• Always state the main-purpose test from section 179 before section 180. Section 180 alone does not complete the answer.
• Mention section 180(3) when the facts give duration, tax paid or an exit route.
• End with section 181 consequences chosen to fit the facts, and add a drafting or documentation point.