Tax Planning and Managerial Decisions: Make or Buy, Lease, Shut Down

What this chapter covers

Tax Planning and Managerial Decisions: topics in the order to study them

1. 1Tax Planning and Managerial Decisions: OverviewStart here to learn the common method of relevant cash flows, tax adjustment and comparison that every later topic uses.
2. 2Make or Buy DecisionIt is the simplest decision, with only cost comparison and tax on expenses, so it builds the method on easy numbers.
3. 3Own or Lease DecisionIt adds depreciation and the time value of money, which you need for the asset decisions that follow.
4. 4Retain, Renewal or Replacement of Asset DecisionIt builds on the own or lease logic and brings in written down value, scrap value and the tax effect of disposal.
5. 5Shut Down or Continue DecisionIt needs the idea of avoidable and unavoidable costs, which is easier once you are comfortable with relevant cash flows.
6. 6Capital Structure and Dividend DecisionsIt moves from asset choices to funding choices, comparing the tax treatment of interest, dividend and buy-back.
7. 7Tax Planning for Specific Managerial DecisionsStudy it last to pull the earlier ideas together and practise mixed case questions.

How to prepare Tax Planning and Managerial Decisions

1. Read the overview topic and write the common method in your own words: options, relevant cash flows, tax adjustment, comparison, conclusion.
2. Revise the tax rules you will use: depreciation under section 33 of the Income-tax Act, 2025, deductibility of interest and lease rentals, and the buy-back rule in section 69.
3. Solve two or three questions on each decision type, writing the full answer with a short conclusion each time.
4. Keep the tax rate and the discount rate separate. Read the question to see which rate is given for each.
5. Always state the assumptions you make, such as that the company has enough profit to use the tax shield. Section 33(11) carries forward unabsorbed depreciation, so say how you treat it.
6. Finish with mixed case questions from the last topic and time yourself. Write a clear recommendation in every answer.
7. Revise from your own one-page summary of formulas and tax rules a day before the exam.

Common mistakes in Tax Planning and Managerial Decisions

• Including sunk costs or allocated overheads in the comparison

  Fix: Ask of each cost: will it change because of this decision? If not, leave it out and say why.

• Treating depreciation as a cash outflow

  Fix: Remove depreciation from cash flows and add back only the tax saved on it.

• Applying depreciation on the original cost of the asset

  Fix: Use the written down value of the block and the prescribed rate, as section 33(3) requires.

• Mixing the tax rate with the discount rate

  Fix: Label each rate before you start. Use the tax rate for shields and the discount rate for present values.

• Ending with a number but no recommendation

  Fix: Reserve the last two lines for the decision and the reason, and mention non-tax factors if the question hints at them.

• Forgetting the conditions in the tax rule being used

  Fix: Check conditions such as use wholly and exclusively for business, the 180-day test in section 33(4), and the promoter condition in section 69 before applying a rule.

Last-day revision: Tax Planning and Managerial Decisions

• ✓Every decision: list options, find relevant cash flows, adjust for tax, compare, recommend.
• ✓Ignore sunk costs. Only future cash flows that differ between options matter.
• ✓Tax shield on an expense = expense × tax rate.
• ✓Depreciation is a non-cash item. It matters only through the tax it saves.
• ✓Section 33 allows depreciation on tangible assets and listed intangible assets, but not on goodwill, if used wholly and exclusively for business.
• ✓Depreciation on a block of assets is a percentage of written down value, not of original cost.
• ✓Under section 33(4), depreciation is restricted to 50% of the prescribed rate for an asset used for less than 180 days in its first year.
• ✓Unabsorbed depreciation is carried forward under section 33(11) and added to the next year's allowance.
• ✓In own or lease, compare the present value of after-tax costs, not the raw totals.
• ✓In shut down or continue, avoidable fixed costs and contribution decide the answer.
• ✓Interest is deductible. Dividends are paid out of post-tax profit.
• ✓Under section 69, buy-back consideration is compared with cost of acquisition to compute the shareholder's capital gains, and a promoter may bear additional tax as the section provides.
• ✓Write a conclusion that names the better option and gives the reason.

Tax Planning and Managerial Decisions practice questions

• Under the Income-tax Act, 2025 provisions on tonnage tax, which one of the following vessels can be a 'qualifying ship' for a company planni…
• A company owns a qualifying ship that it uses as a fishing vessel for 35 days in a tax year, and otherwise operates it as a cargo carrier. U…
• Under the Income-tax Act, 2025 as reproduced, when is an interim dividend deemed to be the income of a member?
• Under the Income-tax Act, 2025 as reproduced, interest on capital borrowed for business is deductible, but interest on money borrowed to acq…
• Under the Income-tax Act, 2025, as reproduced in the official text, interest paid on capital borrowed for business is deductible, but intere…
• Under the Income-tax Act, 2025, a company shifts its industrial undertaking from an urban area to a non-urban area and claims exemption of c…
• A shipping company wants to opt for the tonnage tax scheme. Which combination of conditions makes it a 'qualifying company' under the Income…
• In a make-or-buy decision, which of the following costs is ignored because it will be the same whether the company makes the component or bu…

Tax Planning and Managerial Decisions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• CMA FinalDifferent Aspects of Tax Planning
• ACCA Applied SkillsMake-or-buy and other short-term decisions
• CMA IntermediateApplications of Marginal Costing in Short Term Decision Making
• CMA FoundationDecision-making - Types and Process