Finally, tax planning is likely to have a significant bearing on capital structure decisions. Under till  Tax Act, 1%1, while interest on borrowed funds is allowed as a deduction under Section is dividend on shares is not deductible from the operating profits of a company. With effect April 1. 2003, distributed profits are subject to an extra 10 per cent tax under Sections 11, cost of raising finance through borrowings is deductible in the year of in occurrence. If, it is incurred during pre-commencement of business period, it has to be capitalized. The of issue of shares is allowed as a deduction in 10 years under Section 3; D. As a result, the taxation is an important determinant of the choice between different sources of finance widely-held company with expansion involving Rs 100 lakh, the implication on taxes on return equity capital with reference to the alternative capital structures are depicted Re 12.8: (1) Alternative I, Rs 100 lakh equity capital; (2) Alternative II, equity capital, Rs 40 + debentures, Rs 40 lakh + institutional loans, Rs 20 lakh, and ,(3) Alternative III, equity , Rs 20 lakh + debentures, Rs 30 + loans from financial institutions, Rs 50 lakh. The tax expected rate of return = 25 per cent. The rate of dividend is 20 per cent.

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