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Saving 585000 Mahaveer and Company's Tax Optimized Growth Journey with TaxBuddy

About the Case:

Explore Mahaveer & Co.'s tax-optimized journey with TaxBuddy, saving ₹5,85,000. The case involved strategic measures to reduce tax burden, preserve control, resolve conflicts, and avoid surcharges. TaxBuddy's recommendation to include new partners, distribute profits, and manage surcharges led to significant tax savings and increased benefits for the entire partnership.

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Issues faced By

Mahaveer and company

Strategizing to reduce the firm's tax burden while preserving control and ownership.

Minimizing Tax Liabilities while Preserving Control & Ownership:

  • The firm grapples with the challenge of minimizing tax liabilities while ensuring control and ownership preservation. In the upcoming Assessment Year 2023-24, the partnership faces a flat tax rate of 30%. Additional taxes like surcharge, health and education cess, and alternative minimum tax may apply under the provisions of the Income Tax Act, demanding strategic measures for effective tax alleviation.

Conflict Avoidance Strategies between Partners:

  • Conflict avoidance among partners emerges as a critical concern. Trust issues, divergent goals, unequal contributions, decision-making discrepancies, and personality clashes among external partners pose potential risks to the firm's harmony. Implementing conflict resolution strategies becomes imperative to foster a cooperative and productive partnership environment.

Mitigating Extra Tax Burden through Surcharge Management:

  • The imposition of surcharges introduces an extra layer of tax burden. A 12% surcharge is applied to the income-tax amount when the total income exceeds one crore rupees. Strategically managing the total income below this threshold becomes essential to avoid surcharges, thereby effectively reducing the overall tax burden on the firm.

Clarifying Partners' Confusion on Taxation Scheme:

  • The intricate nature of tax laws and their frequent changes contribute to partners' confusion regarding the scheme of taxation. Navigating these laws effectively becomes challenging, leading to ambiguity about the applicable scheme of taxation for the firm's operations. Addressing this confusion requires clarity and understanding in the firm's overall tax planning strategy.

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How TaxBuddy Helped

Recommending the inclusion of relatives as partners to restructure the business, diluting profits, and thereby reducing tax liabilities. The addition of Jatin, Shyam & Swaraj resulted in substantial tax savings by diluting overall profits and reducing individual tax liabilities. This strategic move offered several advantages.

Reduced Tax Liabilities:

  • Upon the inclusion of Jatin, Shyam & Swaraj in the partnership, the distribution of profits and losses among them becomes pivotal. This strategic move holds the potential to significantly alleviate the tax burden on each partner. The individual taxation on their respective shares of profits, as opposed to the entire amount, becomes a key tax-saving mechanism. It's noteworthy that the suggestion includes the addition of low-income individuals below the 30% tax slab, enhancing the overall tax efficiency.

 Table of Tax Saving by Partnership Firm

After diluting profits with three new partners and redistributing Rs. 9,00,000, the calculated tax per partner is Rs. 85,800, even without any deductions. The total tax payable by all partners is Rs. 2,57,400 and tax payable by the firm Rs.93,600. resulting in substantial overall tax reduction from Rs.9,36,000 to Rs.3,51,000.

Hence overall tax saving  amounting to Rs. 5,85,000.

After incorporating three new partners with incomes below 10 lakhs and distributing Rs. 9 lakhs of profit to each, the total tax payable by all partners decreases to Rs. 2,57,400, resulting in substantial tax savings for the firm.

Surcharge Avoidance:

  • Distributing profits among more partners helped the firm stay below the one crore rupee income threshold, successfully avoiding the 12% surcharge. This strategic move further reduced the overall tax burden.

Increased Deductions and Benefits:

  • With more partners, the partnership gains the opportunity for increased deductions. Various expenses and allowances can be distributed among partners, leading to higher deductions overall. This, in turn, reduces the firm's profit and consequently lowers taxes.

Scheme of Taxation and Added Benefits:

  • The introduction of new partners may bring in new assets, investments, or expertise, generating additional deductions or tax benefits for the entire partnership.

  • Compliance with TDS regulations ensures timely deductions at the source, avoiding penalties and interest. Correct TDS deductions can be claimed as expenses, reducing the firm's taxable income.

  • Buying assets under the partnership firm's name can lead to depreciation benefits, allowing the firm to claim depreciation on these assets and reduce taxable income.

  • Eligible for investment-related tax credits or deductions, providing additional financial benefits.

  • Properly maintaining books of account is crucial for availing deductions, allowances, and exemptions legally allowed by tax authorities. Accurate records maximize tax benefits and reduce the chances of errors triggering tax audits.

  • The distribution of a capital asset to the retiring partner needs to be deemed as a transfer, potentially offering tax advantages.

Strengthening Family Trust in Partnership:

  • The inclusion of relatives (Jatin, Shyam & Swaraj) as partners builds trust, reducing conflicts within the family-based partnership.

  • Optimizing Finances and Strategies:

  • New family partners open avenues for restructuring finances, refining investment strategies, and enhancing profit-sharing arrangements.

TAXBUDDY.COM facilitates the addition of family partners, considering tax implications.

This support aims for potential tax savings and promotes the growth of your partnership firm.

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The Conclusion: 

Mahaveer and company

Tax saving Journey

The inclusion of new partners not only diminished individual tax burdens by diluting profits but also averted the 12% surcharge on income exceeding one crore rupees. This strategic move enabled increased deductions and introduced expertise, assets, and investments, leading to additional tax benefits. These measures aim to streamline operations, foster growth, and ensure compliance with tax laws, highlighting the crucial role of collaboration with TAXBUDDY.COM in navigating complexities for the firm's financial well-being.

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