Direct and Indirect Tax Planning and Management
This domain tests the boundary between legitimate planning, avoidance and evasion, and your ability to compute tax under the Income-tax Act and GST with planning insight.
Core rules
- Tax planning uses provisions in the intended manner; avoidance exploits loopholes; evasion is illegal concealment. GAAR can override arrangements lacking commercial substance.
- Capital gains: short-term versus long-term depends on the asset's holding period; indexation applies to long-term assets subject to current rules. Exemptions such as sections 54, 54EC and 54F carry conditions and time limits.
- MAT under section 115JB applies to companies at 15% of book profit plus surcharge and cess, with MAT credit carry-forward.
- GST input tax credit requires a valid tax invoice, receipt of goods or services, tax paid to government and return filing. Blocked credits under section 17(5) include motor vehicles (with exceptions), food and beverages, club membership and works contract for immovable property.
- Place of supply determines whether a transaction is inter-state or intra-state.
Worked example
A company sells a long-term property for ₹50 lakh; cost was ₹20 lakh and transfer expenses ₹1 lakh. Assume the cost inflation index moved from 200 to 300. Indexed cost = ₹20 lakh × 300/200 = ₹30 lakh. LTCG = 50 − 30 − 1 = ₹19 lakh. Investing the net consideration in a residential house under section 54F can exempt the gain proportionately. Reasoning: indexation adjusts only the cost, not sale expenses; the exemption is linked to the amount invested.
Traps
Claiming 54EC beyond the ₹50 lakh limit or without the six-month investment condition; treating blocked GST credits as available; ignoring reverse charge; confusing e-invoicing turnover thresholds; calling a sham arrangement "planning" when GAAR applies.