Financial Management
Introduction to Various Taxes
Excise Duty
Excise duty is a form of
tax imposed on goods for their production, licensing and sale. An indirect tax
paid to the Government of India by producers of goods, excise duty is (the
opposite of Customs duty) that it applies to goods manufactured domestically in
the country, while Customs is levied on those coming from outside of the
country.
Excise duty was levied
on manufactured goods and levied at the time of removal of goods, while GST is
levied on the supply of goods and services.
Service tax
Service tax is a tax
levied by the government on service providers on certain service transactions,
but is actually borne by the customers. It is categorized under Indirect Tax
and came into existence under the Finance Act, 1994.
In this case, the
service provider pays the tax and recovers it from the customer. Service Tax
was earlier levied on a specified list of services, but in the 2012 budget, its
scope was increased. Services provided by air-conditioned restaurants and short-term
accommodation provided by hotels, inns, etc. were also included in the list of
services.
It is
charged to the individual service providers on cash basis, and to companies on
accrual basis. This tax is payable only when the value of services provided in
a financial year is more than Rs 10 lakh. This tax is not applicable in the
state of Jammu & Kashmir.
Income Tax
An income tax is a tax imposed on individuals or
entities (taxpayers) that varies with respective income or profits (taxable income). The tax imposed
on companies is usually known as corporate tax and is levied at a flat rate. However, individuals are
taxed at various rates according to the band in which they fall.
Income tax is applied to both earned income (wages, salaries and commission) and unearned income (dividends, interest and
rents).
Income
tax refers to annual taxes levied
by the federal government and most state governments on individual and
business income.
By law, businesses and individuals must file federal and state income tax
returns every year to
determine whether they owe taxes. Governments use the taxes they collect
to fund their
activities.
V A T
Value added tax or VAT is an
indirect tax, which is imposed
on goods and services at each stage of production, starting from raw materials
to final product. VAT is levied
on the value additions at different stages of production. VAT is widely applied in the European
countries.
A value-added
tax (VAT) is a consumption tax placed on a
product whenever value is added at each stage of the supply chain, from
production to the point of sale. The amount of VAT that the
user pays is on the cost of the product, less any of the costs of materials
used in the product that have already been taxed.
Customs Duty
Customs Duty is a tax
imposed on imports and exports of goods.
Customs duty refers to the tax
imposed on goods when they are transported across international borders. In
simple terms, it is the tax that is levied on import and export of goods. The
government uses this duty to raise its revenues, safeguard domestic industries,
and regulate movement of goods e.g., Import
Duty & Export Duty
The rate of Customs duty varies
depending on where the goods were made and what they were made of.
Types of custom duty
·
Basic
Customs Duty (BCD)
·
Countervailing
Duty (CVD)
·
Additional
Customs Duty or Special CVD
·
Protective
Duty,
·
Anti-dumping
Duty
The objectives
of financial management are given below:
Main aim of
any kind of economic activity is earning profit. A business concern is also
functioning mainly for the purpose of earning profit. Profit is the measuring
techniques to understand the business efficiency of the concern.
The finance
manager tries to earn maximum profits for the company in the short-term and the
long-term. He cannot guarantee profits in the long term because of business
uncertainties. However, a company can earn maximum profits even in the
long-term, if:
a) The Finance manager takes proper financial decisions.
b) Finance manager uses the finance of the company
properly.
2. Wealth maximization
Wealth
maximization (shareholders’ value maximization) is also a main objective of
financial management. Wealth maximization means to earn maximum wealth for the
shareholders. So, the finance manager tries to give a maximum dividend to the
shareholders. He also tries to increase the market value of the shares. The
market value of the shares is directly related to the performance of the company.
Better the performance, higher is the market value of shares and vice-versa.
So, the finance manager must try to maximize shareholder’s value
3. Proper
estimation of total financial requirements
Proper
estimation of total financial requirements is a very important objective of
financial management. The finance manager must estimate the total financial
requirements of the company. He must find out how much finance is required to
start and run the company. He must find out the fixed capital and working capital requirements of the company. His estimation
must be correct. If not, there will be shortage or surplus of finance.
Estimating the financial requirements is a very difficult job. The finance
manager must consider many factors, such as the type of technology used by
company, number of employees employed, scale of operations, legal requirements,
etc.
4. Proper
mobilization
Mobilization
(collection) of finance is an important objective of financial management.
After estimating the financial requirements, the finance manager must decide
about the sources of finance. He can collect finance from many sources such as
shares, debentures, bank loans, etc. There must be a proper balance between
owned finance and borrowed finance. The company must borrow money at a low rate
of interest.
5. Proper
utilization of finance
Proper
utilization of finance is an important objective of financial management. The
finance manager must make optimum utilization of finance. He must use the
finance profitable. He must not waste the finance of the company. He must not
invest the company’s finance in unprofitable projects. He must not block the
company’s finance in inventories. He must have a short credit period.
6. Maintaining
proper cash flow
Maintaining
proper cash flow is a short-term objective of financial management. The company
must have a proper cash flow to pay the day-to-day expenses such as purchase of
raw materials, payment of wages and salaries, rent, electricity bills, etc. If
the company has a good cash flow, it can take advantage of many opportunities
such as getting cash discounts on purchases, large-scale purchasing, giving
credit to customers, etc. A healthy cash flow improves the chances of survival
and success of the company.
7. Survival of
company
Survival is
the most important objective of financial management. The company must survive
in this competitive business world. The finance manager must be very careful
while making financial decisions. One wrong decision can make the company sick,
and it will close down.
8. Creating
reserves
One of the
objectives of financial management is to create reserves. The company must not
distribute the full profit as a dividend to the shareholders. It must keep a
part of it profit as reserves. Reserves can be used for future growth and
expansion. It can also be used to face contingencies in the future.
9. Proper
coordination
Financial
management must try to have proper coordination between the finance department
and other departments of the company.
10. Create
goodwill
Financial
management must try to create goodwill for the company. It must improve the
image and reputation of the company. Goodwill helps the company to survive in
the short-term and succeed in the long-term. It also helps the company during
bad times.
11. Increase
efficiency
Financial
management also tries to increase the efficiency of all the departments of the
company. Proper distribution of finance to all the departments will increase
the efficiency of the entire company.
12. Financial
discipline
Financial
management also tries to create a financial discipline. Financial discipline
means:
a) To invest
finance only in productive areas. This will bring high returns (profits) to the
company.
b) To avoid
wastage and misuse of finance.
13. Reduce
cost of capital
Financial
management tries to reduce the cost of capital. That is, it tries to borrow
money at a low rate of interest. The finance manager must plan the capital structure in such a way that the cost of capital it
minimized.
14. Reduce
operating risks
Financial
management also tries to reduce the operating risks. There are many risks and
uncertainties in a business. The finance manager must take steps to reduce
these risks. He must avoid high-risk projects. He must also take proper
insurance.
15. Prepare
capital structure
Financial management
also prepares the capital structure. It decides the ratio between owned finance
and borrowed finance. It brings a proper balance between the different sources
of capital. This balance is necessary for liquidity, economy, flexibility and
stability.
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