Law Street in The Economic Times (Feb 24, 2012)

Dear Readers,

Just when we had thought that the Supreme Court's verdict in Vodafone's case had brought about clarity on India's right to tax in instances of indirect transfer, a review petion filed by the tax authorities has once again created an element of uncertainity.
The Economic Times has reported a few days ago: The Income-Tax Department has filed a review petition in the Supreme Court asking it to reconsider its verdict dismissing the government's $2.2-billion tax claim on telecom company Vodafone, but the UK-based group appeared unfazed.The department has sought the review on the grounds the judgement suffered from errors, failed to consider its submissions, and that certain provisions in the income-tax law had not been correctly interpreted.
Meanwhile in the February column of Law Street, Zenobia Aunty looks ahead at the provisions contained in the draft Direct Tax Code and wonders whether the government will cherry pick some of the provisions, especially those relating tax in India on indirect transfer of shares and introduce them in the Finance Bill in the coming month. The column is available online here, and as always it is also cut and pasted below.
Best regards,
Lubna


Taxing indirect transfers

Tax provisions on indirect transfers must be clear
Exemptions must be granted for intra group transfers
Valuation comparisons should be date specific

Lately Zenobia Aunty has been very busy. Seminars, lunches and dinners, to discuss the landmark Vodafone judgement are still going strong. Understandably tax practitioners are jubilant with the Supreme Court’s verdict. As we wait for the Finance Bill, 2012, to be unfolded the question uppermost in everyone’s mind is whether this joy of the tax practitioners will be short-lived.

It is well known that in 2009, China introduced a legislation to tax an indirect transfer of a capital asset situated in China. It is believed that the Chinese authorities borrowed a leaf from the Indian tax authorities’ action in Vodafone’s case. Circular Number 698 requires non-resident transferors to report their share transfer transactions, together with the relevant supporting documentation, including share transfer agreements, after they indirectly transfer their equity interests in Chinese resident companies, via disposal of intermediate holding company. This is required to be done if the resultant tax on the transaction through the use of the intermediate holding company is less than 12.5 per cent.
Chinese tax authorities then examine the transaction. If it is found that the intermediate holding company has no business substance and was set up only for tax avoidance, the transaction is regarded as transfer of shares of the Chinese resident company (and not that of the intermediate company) and is subject to tax in China. Since issue of this circular, in a number of cases, the Chinese tax authorities have ‘looked-through’ the intermediary companies and taxed the transaction in China.

From a technical legal perspective, the provisions of Circular 698 or even Chinese General Anti Avoidance Provisions (GAAR) apply only to corporate tax payers and are governed by the framework of corporate tax laws. However, in recent months, a case has been reported on the collection of individual income tax of close to USD 2.1 mn on the capital gain arising from an indirect transfer of an equity interest in a Chinese company through an offshore transfer of its Hong Kong parent by a Hong Kong resident individual. The fear among the business community is that this case could be used as a guiding principle when dealing with non-resident individuals and not just corporate tax payers.

At one point of time, when grey clouds shrouded the tax frontier in India, global tax payers had felt that at least the Chinese tax laws provided some clarity on tax incidence as regards indirect transfer of capital assets. But with the wide interpretation now given to this circular by the Chinese tax authorities, which has roped in even individual tax payers, there is understandably a sense of apprehension.

Coming back to perhaps what the future holds in India. Section 5 (1) (d) of the Direct Tax Code (DTC) seeks to bring within the tax ambit direct or indirect transfer of a capital asset situated in India. Section 5(4) (g) adds that: The capital gains would not be deemed to arise in India from such transactions unless at any time in twelve months preceding the transfer, the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent of the fair market value of all assets owned by the company.
The intent of introducing the above provision seems to be to cover cases where ‘controlling interest’ in an Indian company is sought to be transferred outside India, by transferring shares of the foreign company which holds shares in the Indian company. Considering the unintended consequences that could arise owing to ambiguity in the language, the coverage of indirect transfer may be restricted to cases where: (i)The foreign company whose shares are transferred owns, directly or indirectly, more than 50% of the share capital of an Indian company and (ii) The shareholder transferring the shares of the foreign company, should own more than 50% of the share capital of the foreign company.

Further the window period of twelve months referred to in valuation could lead to practical difficulties. For the purpose of comparison of the values, the comparison should be should be restricted to the balance sheet date immediately preceding the date of transfer. A merger of two foreign companies should also not result in tax implications in the hands of the shareholder on account of indirect transfer of capital asset. Additionally, an exemption should be granted for intra-group transfers. Indian tax laws do provide for tax incidence in the hands of the representative assessee. From a practical perspective, a representative assessee must be one who has possessed the non-residents money in the course of the transaction.

Be it China or India, tax authorities are keen to gain a bigger slice of the tax pie, but ambiguity hurts. Investor confidence is now riding high as far as India is concerned, appropriate amendments in the DTC will be of an added help.


Source of the photograph

Law Street in The Economic Times (January 2012)

Dear Readers,

As the press had a rare holiday on India's Republic Day, viz January 26, we did not get a printed copy of the newspaper the next day. However, my column was duly uploaded on the website.

It is likely that the Companies Bill, when reintroduced, will continue with its proposition to make CSR disclosures mandatory. That said, shouldn't the tax laws be in synch so as to propel the corporate sector towards CSR activities? Perhaps a weighted deduction for CSR activities would be a blessing. It would also reduce the litigation on whether a CSR expense is a business expenditure or a CSR expenditure. Click here to read the online edition of The Economic Times, or scroll below.


Tax Karma

CSR activities may be mandatory
Appropriate tax deductions should be introduced
The Finance Bill and Cos Bill must be in synch

Zenobia Aunty firmly believes in Karma, little wonder then, that Spot is forced to share his biscuit treats with the alley cat. In an ideal world, if a Company contributed towards the society, it would be amply rewarded by its various stakeholders in myriad ways. However, without expecting anything in return, many companies do contribute by building townships, providing funds or assets for schools, hospitals and the like. Yet, there are others who firmly believe that this is not their role and the taxes paid by them should cover take care of their social obligations.

Perhaps, it is only a matter of time before contribution towards Corporate Social Responsibility (CSR) will be mandatory. The Companies Bill, 2011, at the insistence of the opposition was withdrawn from the Parliament in the winter session, but it is likely to be reintroduced in the budget session in March. This Bill called upon corporate entities meeting certain parameters to engage CSR activities. In the budget session, the Finance Bill, 2012 will also be tabled and perhaps also the Direct Tax Code. Thus, here is an opportunity for our draftsmen to ensure that the tax laws cover the treatment of CSR expenditure.

The Companies Bill had prescribed that every Company having a net worth of Rs 500 crore or more; or a turnover of Rs one thousand crore or more; or a net profit of Rs 5 crore or more; during any financial year shall set up a CSR Committee, which would guide and monitor the company’s CSR agenda and expenditure. Companies meeting this criterion were required to spend at least 2 % of their average net profits made during the three previous financial years towards CSR activities. Proper disclosure of the CSR policy including reasons for not meeting the required expenditure was called for.

Schedule VII prescribed the various activities that would fit into the CSR policy agenda. Besides contribution to the PM’s National Relief Fund and certain other funds of the Central and State governments, the CSR activities covered those relating to eradicating hunger, promoting education or health, ensuring environmental sustainability and everything that could fall in the definition of social business projects.

Let us assume that the Companies Bill, containing mandatory CSR spend in some form or the other gets passed in the budget session. To ensure that the corporate sector gets its due recognition for such activities the Finance Bill should also contain suitable provisions providing for tax deductions for CSR activities.

At present tax exemption for cash donations can be broken up into various categories: donations which entitle the donor to a 100 % or 50 % tax exemption without any qualifying limit such as the PM’s National Relief Fund and PM’s Drought Relief Fund respectively; and donations which are subject to 100 % or 50 % deduction subject to a cap of 10 % of the adjusted gross total income. In such cases, even if you make a donation larger than 10 % of the adjusted gross total income the total donation amount eligible for a tax deduction would be capped at this 10 %limit.

The Companies Bill, by defining CSR activities has widened the field. Currently, it may be possible for a Company to treat a particular CSR related activity as a bondfide business deduction, say installation of solar panels in its office premise (which helps environment sustainability) against which it claims a tax depreciation. But, claiming expenses for a medical camp in a nearby rural district as a business deduction may result in litigation.

To avoid any further litigation on the issue, any expenditure that qualifies as a CSR expenditure, whether it be capital or revenue in nature, should be entitled to a separate tax treatment. A deduction, for tax purposes of 120-150 per cent of the CSR expenditure should be permitted with a prescribed cap. As, the Companies Bill calls for a minimum spend of 2% of the average net profits during the previous three years, perhaps a cap of 5% of this amount should be set for the purpose of claiming a tax deduction. Any excess expenditure beyond 5% should not be permitted, as this would ensure that scrupulous companies do not overspend under the CSR banner just for the sake of a tax claim.

Several companies have set up their own trusts or foundations for CSR activities. Perhaps companies may need to move these activities within the corporate fold so as to take the tax benefit. However, it would be best for the tax laws to provide that a contribution to the trust or foundation is also regarded as a CSR expenditure, provided the trust or foundation has spent that money fully during a financial year.

While internal CSR committees would bear the responsibility of ensuring that the prescribed funds are used for genuine CSR activities, appropriate tax policies would ensure clarity and also prompt India Inc to fully support this initiative.

Source of the photograph

Law Street in The Economic Times (December 2011)

Dear Readers,

As this year draws to a close Zenobia Aunty wonders which way India is headed. The true worth of a democracy lies in a strong government and a strong opposition. But clearly both the sides in India are playing foul. Zenobia Aunty feels that the opposition parties clearly did not let the government function, this winter session or for that matter during the earlier monsoon session. Just as the ruling party should know how to lead, the opposition parties should know how to oppose in a responsible manner.

Thus, the Companies Bill was tabled and hastily withdrawn, the Lok Pal Bill was passed in the Lok Sabha (lower house) but could not meet muster in the Rajya Sabha (the Upper house), the standing committee led by the opposition is still sitting on the Direct Tax Code, so it could not be presented during the winter session and will not be in place for us to usher in a new Tax Code in the coming fiscal April, 1. The petty politics is just sickening.

As they say, each dark cloud has a silver lining. The Companies Bill, 2011, had called for rotation of auditors. Since it now stands withdrawn, perhaps this issue can be revisited.

For the online edition of this column in The Economic Times, click here.

The column is also pasted below.

Zenobia Aunty and I wish all our readers a joyous 2012.

Warm regards,
Lubna




Playing musical chairs

• Audit rotation could be a short sighted approach

• Joint audit mechanism may ensure better quality checks

• A pragmatic well thought out view must be taken


The Companies Bill, 2011, which was tabled in the Lok Sabha and withdrawn almost immediately owing to opposition pressure, prescribed for audit rotation. Zenobia Aunty wonders whether this measure would have achieved the intended objective of greater audit independence and better shareholder protection. Hopefully, before a revised Bill is tabled in the next calendar year this issue will be revisited.

For listed companies, this Bill prescribed that an individual cannot be an auditor for more than one term of five consecutive years and it also proposed a change in the audit firm every ten years. While the above prescription was mandatory, in addition the Bill gave the leeway to companies to rotate the audit partner and audit team each year or appoint joint auditors.

The European Union (EU) has also issued a proposal for discussion calling for mandatory rotation of audit firms of listed companies and those in the financial sector, after six years with a cooling off period of four years before the audit firm can be reappointed. Joint audits, where two or more auditors or audit firms conduct the audit are not proposed to be mandatory but are implicitly encouraged by extending the period of mandatory rotation from six to nine years.

In the United States, the Public Company Accounting Oversight Board (PCAOB) has sought public comments on ways that auditor independence, objectivity and professional skepticism could be enhanced; it has not concentrated on auditor’s rotation as the only or best solution.

Zenobia Aunty decided to don a journalist’s cap and interviewed a few prominent CFOs. The tenure prescribed for an audit firm was logical and doable, rotation of auditors could bring in fresh perspectives, yet this had its own evils and was not the best measure, is the overall view.

“Rotation will only result in one-upmanship with the new audit firm wanting to prove its worth vis-à-vis the previous firm, audits will remain open and audit committee meetings will cease to be productive,” predicted one CFO. Another chimed in: “When auditors change, a Company will have to battle with differences in interpretations, disclosure requirements etc. Rotations will result in either pushing up the cost of audit higher or quality of audit lower.”

PCAOB has queried: Does payment of fees by the audit client create systematic distortion which can be dramatically reduced by audit rotation? One CFO bites the bullet: “If we really want auditor independence the fees would need to be fixed by a formula based on various parameters as opposed to being fixed by the company.”

But this could be difficult, as the audit complexities vary widely from company to company. “Thus perhaps, if independent directors and consequently the audit committee were to appoint the auditors and fix their remuneration there would be greater independence,” he adds.

Joint audits found strong favour, thus perhaps before the next Companies Bill is tabled this concept should be examined in-depth. It was felt this mechanism would also resolve the constraints, weakness and loopholes contained in the mechanism of mandatory rotation, such as increased audit costs, lack of historical knowledge of the audit client, consolidation issues for global companies, and lack of specialization at the audit firm level.

Large listed companies which have met the threshold limit (based on turnover or assets) should be mandated to have joint auditors. The audit work scope and areas should be equally divided each year and mandatorily swapped after each year, such that no single audit firm audits the same area in consecutive years. Although the audit firms need not necessarily be rotated at regular intervals, perhaps the audit partner and senior audit team members of each joint audit firm could be changed every five years. The auditors opinion would be a joint opinion of the two or more firms, thus both responsibility and liability would be joint.

“Joint auditors will, most essentially, ensure that there is an in-built quality check on the work of the audit firms. This is because each audit firm will be required to satisfy itself as to the extent and adequacy of the audit work performed by the other before issuing the joint audit opinion. A natural quality control system far better than the regulatory bodies conducting third part external checks on the quality of audit work across an audit firm, would thus exist,” concluded a CFO.

All said and done, the bottom line is that an auditor is a watch-dog and not a bloodhound. Zenobia Aunty has no straight answer on the effectiveness of audit rotation. But adds: Since time is available, in addition to India Inc’s views perhaps even the views gathered at the EU level and by the PCAOB will provide more insight into this issue.

Source of the photograph.

Law Street in The Economic Times (November 2011)

Dear Readers,
Technology! What would life be without a fast internet connection. Sadly, even as technology moves forward rapidly, the tax-men are left grappling with how to deal with new emerging issues. Take the issue of withholding tax on import of software, it hasn't been resolved till date. Now comes cloud computing. It is a mystery how this will be dealt with.
For the first time ever, The Economic Times, cut the few last sentences to fit the copy (owing to a change in format), hence perhaps you may want to scroll below for the entire column, instead of reading the online version.
Have a nice weekend.
Best,
Lubna


The grey tax clouds

• Tax laws must rapidly evolve to meet technology advancements
• Tax on software continues to be litigative
• Tax on cloud computing needs an answer

Will tax be able to keep pace with changing technology issues? Going by recent trends, at least in India, Zenobia Aunty thinks the pace of keeping up is sluggish, much slow than the slowest internet connection.

A recent news item took her by surprise. The Karnataka High Court has recently held that import of computer software would result in transfer of a copyright and the payment made to the foreign supplier would be in the nature of a royalty payment. Thus, the Indian buyer would have to withhold tax on the same, both as per the Indian Income tax Act and the relevant tax treaty.

Transfer of a copyrighted article, such as shrink wrapped software ought not to result in a royalty payment. It is similar to buying a book off the shelf. However, Zenobia Aunty is given to understand that the High Court in the given case, observed that the right to make a copy of the imported software and use it for internal business, store it in the hard disk of the designated computers and take a back up would amount to copyright under the Indian CopyRight Act. It was actual transfer of part of a copyright, rather than an outright sale of a copyrighted product. Hence, the need to classify it as royalty, which both you and I know suffers a withholding tax in India.

In the past there have been several rulings of tax tribunals and Authority of Advance Rulings which have appreciated that a distinction needs to be made between a copyright right and a copyrighted article for the purpose of characterization of computer software transactions. In case, the transaction is held to be a sale of a copyright right, then unless and until the foreign supplier has a permanent establishment in India, India cannot tax the payment as it constitutes a business income of the foreign supplier and is not a royalty payment.

The issue of withholding tax on import of computer software is a hot bed of litigation globally. Tax experts state that a few countries, such as Singapore, US, UK have taken a clear stand and do not advocate imposition of withholding tax at source, either owing to the existence of clear cut guidelines or practice adopted by the tax authorities and the judiciary. On the other hand, countries such as China and India seem to have adopted an ambiguous stand with divergent views.

Ambiguity doesn’t help. Now we need to wait till the Supreme Court addresses the issue. Perhaps clarity in the Direct Tax Code would help. A final decisive answer is needed. While a foreign tax credit can be availed of in the home country (foreign supplier’s country) if tax has been legitimately with-held at source in the other country, it can be cumbersome to get a foreign tax credit if tax has been presumed to be wrongly withheld. No wonder then that this issue continues to be in the forefront of tax litigation in India.

Zenobia Aunty saves some of her data in cyberspace on the cloud. Thus, she has begun to have nightmares of the possible tax consequences that will arise if payment is made for such cloud services. Cloud computing is having access to software and/or infrastructure facilities in cyber space. Users do not have to spend on upgrading software or hardware. It is cheap and many a self employed professional and SMEs or even banks are opting for cloud usage. Many high profile technology companies are providing cloud services.

Based largely on ownership of data and access, clouds can be private, public or hybrid. Further, based on what is provided to the cloud user, cloud models are classified as software as a service (SaaS), platform as a service (PaaS) or Infrastructure as a service (IaaS).

With the ambiguity that exists even in the realm of import of shrink-wrapped software, Zenobia Aunty shudders to think of the magnitude of tax litigation that may crop up in instances where cross border cloud services are used.

Going by the recent Karnataka High Court decision, would the tax authorities view that what was used under the cloud computing service agreement was a part of the software (copyright), which was hosted on the vendor’s cloud server and thus it was royalty subject to withholding in India? Or would they interpret that the payment was for use of scientific equipment - applications hosted in the cloud and thus were in the nature of Fees for Technical service (FTS)? Both payments towards royalty or fees for technical service would typically be subject to a tax withholding in India.
Further, in some treaties entered into by India, such as those with US, a ‘narrow approach’ with respect to taxation of FTS is followed and only if the technical service ‘makes available’ technical know-how, skill etc to the recipient of the services (in our case, the Indian user of the cloud service) is it regarded as FTS subject to withholding at source. However, interpretation of this term – make available - is not free from litigation either.

While technology may be making our lives easier, the ambiguities in tax laws do cast a grey cloud overhead.

Source of the photograph

Law Street in The Economic Times October 2011)

Dear Readers,

Diwali greetings. Journalists partake only a few public holidays, yesterday being a Diwali was a holiday and there is no paper today. But the online edition rolls on and this column appeared in the online edition of The Economic Times.
There is one thing I hate about Diwali the noise and the pollution cause by a massive display of fireworks. Spot hates it too and hides beneath the bed, and comes out on occasions to bark his head off, and adds to the noise. Noises aren't healthy not even in tax land or in the process of policy formulation.
There needs to be clarity on what exactly the governments want to do, more so, in a cash strapped economy. Click here to read more, or as usual scroll down.
Hope the coming year will be a good one for you.
Best regards,
Lubna



A cacophony of noises
• A higher tax rate across the board for the top slab would harm
• Distinction could be made between passive and non passive income
• PF issues for international workers must be sorted

Spot hates Diwali because of the noisy fireworks. Noises are disturbing. Thus, when PC (our former FM), mentioned that the rich must be prepared to pay higher taxes, it sparked off a debate.

In the US, Warren Buffett hastily clarified his statement about the wealthy having to pay more taxes. His clarification, picked up by news reports, states that he is advocating “a higher tax rate on people who make money with money only….. If they earn money by normal jobs, what I say would not hit them at all!” Meanwhile, Prez Obama, introduced the Buffett Rule, which creates a new tax on the wealthy, but as an ordinary tax rate. A huge difference from what Buffett actually meant.

In Germany, France and Italy a few of the richest people have stood up and said: Tax us more, we shall help the troubled economy. Can India just cherry-pick the sentiments prevailing in some of the developed countries?

PC was right in saying that his statement will not go down well. Psychologist Shigehiro Oishi, has recently looked into the relationship between the tax mechanism and the quality of life in 54 countries (Incidentally, even the Oecd has introduced a model for computing the quality of life). Using Gallup numbers from 2007, Oishi discovered a direct co-relation between tax progressiveness and a country’s happiness. Is it then logical to say, the more tax the rich pay, the happier that particular country? No. As Oishi explains, it is what the government actually does with the tax payer’s money which makes a country happy.

Zenobia Aunty understands the merits of a progressive system of taxation and understands the woes of the farmers and the need for tax exemption on agricultural income. However, she cannot comprehend why her salary earning, honest tax-paying family members should have to pay more taxes. At present those earning taxable income of above Rs 8 lakh pay tax at 30 per cent, plus a 3 per cent education cess. Perhaps the government may, at the most, increase the highest tax slab to Rs. 10 lakh. Yet, given the inflation trends a higher tax rate across this slab would be unfair.
The best option is to increase the tax base. But if this is impossible, then perhaps the government could consider carving out yet another slab of the very rich and imposing a surcharge on this slab, after having a healthy debate with such stakeholders. Or as Buffett had suggested, perhaps those who earn money with money should be asked to pay more. Currently, long term capital gains arising on shares/listed units of equity MFs are not subject to any tax at all. The Direct Tax Code (DTC) had proposed to continue this exemption. In fact, for short term capital gains, arising if the holding period is less than twelve months, the DTC had proposed that 50% of the short term capital gains would be allowed as a deduction, which would result in a lower tax impact, depending on the slab rate to which the individual belonged. Currently, short term capital gains are taxed in the individuals hand’s at 15 per cent.

A miniscule Securities Transaction Tax (STC) is levied on sale/ purchase transactions undertaken on recognized stock exchanges and on redemption of equity oriented mutual funds. Newspapers reported the possibility of scrapping of STC to boost the share market. True, imposition of tax on long term capital gains on sale of listed shares could dampen sentiments, but in a worst case scenario if there is a need for increasing tax revenue a distinction between passive and non passive income (such as salary income) is perhaps the best approach.

Mind you, Zenobia Aunty is not advocating these measures; she is merely saying that these steps would perhaps be better than imposing a higher tax rate on everyone across the current highest slab.

We cannot compare India with France, Germany or the Italy, where the majority pays taxes and there is also a well-set social security system. So just because a few Europeans have stood up and said we are willing to pay more, the same approach may be harmful to us.

Coming to the issue of social security, PF issues continue. A recent circular issued by the PF authorities seems to imply that an international worker can withdraw his PF money only after retirement or attaining the age of 58 years.

If an Indian employee goes overseas to work in a country with whom India has signed a social security agreement (such as Belgium, Germany, France, Switzerland, Luxembourg and Denmark), such a worker is designation as an international worker. On obtaining a certificate of coverage, he no longer has to pay social security tax in the other country. The whammy of course, being that he isn’t treated on par with other Indian employees when it comes to withdrawals from his PF account. This is certainly not in the best interest of India’s mobile workforce and needs to be resolved.

Source of the photograph

Law Street in The Economic Times (September 2011)

Dear Readers,
Circulars keep getting issued by various regulatory agencies, some of which just add to the confusion. A case in point is what components of salary should be included for calculating your PF? True, a bigger PF means a better security blanket for the future (provided there are no hurdles in withdrawing it), but for now, it means a lesser take home pay. Read on, by clicking here, to know more.
Meanwhile, try and have a nice day.
Best,
Lubna

PF: Perplexing fundamentals?
• Clarity in accounting for PF contributions is required
• Bonus does not form part of basic pay for computing PF
• Employees prefer a better take home pay and this must be kept in mind

One fine evening, during her recent trip to Bengaluru, Zenobia Aunty caught up with Gopal and his pals. “Provident fund (PF) issues,” are haunting us, Gopal stated after they had settled in a cosy corner of the local watering-hole. The mood among this group at the local pub was subdued. Not only were bonus payouts expected to be low owing to the depressing economy, but there was an underlying fear that a portion of their bonus would have to be taken into account for computing Provident Fund – the net result, a lower take home bonus.

“I was looking at paying off my home loan, with the bonus,” mourned Mohan. Gopal, on the other hand was thinking of a ski-vacation abroad. “Forget your bonus worries,” chipped in Shilpa. “Our monthly take home pay will be reduced as well, worry about that!” she added. The gloom deepened.

Zenobia Aunty, was still puzzled. What had changed in the PF spectrum that had anything to do with a lower take home pay-packet or a reduced bonus take home? After all, the rate of employer and employee contribution towards PF is 12 per cent of basic salary, dearness allowance and retaining allowance (if any). Further the motley trio were not ‘international workers’ – those who had been deputed abroad and had returned, which does lead to some more complexities. More on this in another column.
As mugs of beer continued to be downed, it seemed this trio was able to explain things better. Sometimes, beer does seem to clear the mind. It appeared that the PF officers were examining the records in some organizations to ensure that salary was not restructured in a way to reduce the PF contributions. This was a matter of concern, because who doesn’t want a better take home pay?

It all began with two recent judgements in favour of the PF department, which held certain allowances to be part of basic salary for computing the PF contributions. The judgement given by the Madras High Court included the following allowances to be part of basic salary for PF purposes, viz: conveyance, education, food concession, medical, special holiday, night shift and city compensatory allowances. That of the Madhya Pradesh High Court stated that conveyance/transportation allowance and special allowance fell within the ambit of basic pay.

Soon thereafter, the Employee Provident Fund Office began to issue internal circulars to the Regional PF Offices to follow these favourable rulings. The circulars also directed that the PF authorities have the power to examine and look into the employment contract, as well as the pay structure to determine whether the pay has been split into several headings (allowances) to help avoid PF contributions.
“Oh,oh, the crux of the problem is what constitutes basic wages,” exclaimed Zenobia Aunty, now understanding the magnitude of the problem. Her network is far and wide. A few phone calls to the experts, sorted out some issues.

There was good news for both Mohan and Gopal. Bonus cannot be included for the purpose of computing the PF contributions. Any payment by way of special incentive or work; payment based upon contingencies and uncertainties do not form part of basic salary. This has also been accepted earlier by the Supreme Court.

Both Mohan and Gopal obtained a bonus, which was a reward for hard work, given based on a performance rating. The better your performance rating, higher was the percentage of bonus payout. Further, the bonus payout did not depend on individual performance alone, but also on performance of the department and the team to which they belonged and the profits of their employer organisation.

Shilpa continued to sulk. She finished the entire bowl of chips, something she always did when worried. An extra hour on the treadmill is now called for, she sighed, even as she called for a refill.

Again, Zenobia Aunty, had good news to share, at least for Shilpa. Perhaps a position can be taken by the employer, based on Provisio to Paragraph 26A of the PF Scheme that the statutory limit under the EPF Act is restricted to 12 per cent of the monthly pay capped at Rs. 6,500 per month each, in respect of the employer and employee’s contributions.

Employer organizations, covered by the EPF Act, must ensure that the compensation or salary paid to an employee is true and correct and tallies across all records, be it pay-slips, salary register, books of accounts, TDS certificates etc and splitting up of the gross compensation into various allowances must not be carried out with the sole intent of reducing PF contribution (this would especially apply where the contribution is below the cap limits).

Meanwhile, Zenobia Aunty was also given to understand that a review petition has been filed before the Madhya Pradesh High Court and a writ appeal has been filed in the Madras High Court. Both should come up for hearing shortly and perhaps offer some clarity. Cheers to clarity!

Source of the image used.

Law Street in The Economic Times (August 2011)

Dear Readers,

Bonjour.

It appears that governments world over and trying to adopt ways and means to have corporate entities to cough up some extra dough, whether directly or indirectly. Recently, a bill has been passed in France, which requires corporate entities (well, most of them) to pay a bonus to employees when they declare dividends. This sure is tantamount to interference in business policy. Read on, for this new revolutionary bill!
As always, by clicking here, you can get to the online edition of The Economic Times, else scroll below.
Have a nice weekend.
Merci,

Lubna


Law Street/Lubna Kably (August 26)

Corporate caretaker

•France now requires companies to pay mandatory employee bonus on dividend distribution
•Ideally, governments should not interfere with company’s internal affairs
•This legislation is expected to push up purchasing power and boost the economy

Dilbert is one of Zenobia Aunt’s favourite comic strips. In fact, she reads this comic strip first, before turning over to the front page and of this newspaper.

Not so long ago, Scott Adams, creator of the Dilbert comic strip in his blog has mentioned that tax policy has two purposes. One is to collect money to enable the government machinery to function. The other is to promote public policy. For instance, he cites: mortgage deductions are meant to encourage home ownership. Or as Zenobia Aunty adds, back home, stiff taxes on tobacco are expected to deter tobacco chewing or smoking.
Scott Adams wonders, whether we could have a tax on stupidity and thereby reduce its prevalence over time. One big obstacle to taxing stupidity is identifying it. But he has quite a few suggestions which include a general knowledge test running thousands of questions long. And it would be entirely optional. If you choose to not take the test, you can simply pay a stupidity tax instead. If you take the test, and score 100%, you pay no stupidity taxes at all; else the tax paid would be dependent on your score. Unlimited chances would be available to improve your score.

He is curious on whether tax policy could make a huge difference in the effectiveness of society by directly taxing stupidity. Unfortunately, Scott Adams admits it is an impractical idea and no government would buy it. But perhaps he may, some day, on some island create his own kingdom, design this tax mechanism from scratch and introduce it. Zenobia Aunty would love to be a resident of this island, maybe she could help in preparing the questionnaire and thereby get an exemption from the tax.
Some tax laws can be stupid, to put it mildly. Other legislations are equally insane. Several months ago, there was a hue and cry, in Corporate India, when the government in India had proposed to make Corporate Social Responsibility (CSR) mandatory – in other words companies would have to contribute a certain percentage of their profits towards CSR. The reasons were many. Those opposing it felt that the main duty of corporate sector was to earn returns and dividends were a way of paying back to the shareholders. Since corporate entities paid tax, there was no need to contribute separately towards CSR, it was the government job to work for society’s welfare from the taxes collected. Fortunately for those opposing the move, such CSR contribution is not mandatory.

But, it seem that the French government has also adopted a similar stand, that corporate entities need to pay back!!!. To improve purchasing power of the hoi polloi and put some punch back in the economy, it has not eased the tax burden on individual tax payers but wants the corporate entities to pay a bonus to its employees, if they declare a higher bonus.
Oracle, as this columnist’s boss is often referred to, because of his in-depth insight into ever changing and complex global tax laws, persuaded Zenobia Aunty to cover this topic. Venting her ire, only against the draftsmen in India, was discriminatory, Oracle firmly stated. Zenobia Aunty meekly obeyed his orders, as does this columnist.
Last month, the French Parliament adopted a wide sweeping bill, which requires companies to pay a bonus to all the employees when the dividend per share distributed to the shareholders is higher than the average of the dividends per share distributed in the two previous fiscal years. These provisions apply to all companies having more than 50 employees. Those companies having a lesser number of employees can voluntarily opt for the proposed provisions. These rules apply to dividend distributions authorised as from the beginning of this calendar year and will be valid for a period of three years.

As far as the amount of the bonus to be paid is concerned, an agreement will have to be signed by the Company with employee representatives within three months starting from decision to distribute the dividends made by the ordinary general meeting of the shareholders. The agreement is subject to the modalities applicable to the signing of a profit-sharing agreement.

Failure to start the negotiations results in penalties and prosecution for the Company and its officials. The French Ministry has provided for some minor sops such as exemption a bonus up to EUR 1,200 per employee and per year, from certain social security contributions.

The moot issue is: Can the government really expect the corporate sector to step into its shoes. In the Indian scenario, the government wanted the society to benefit by ensuring that a certain sum was spent on social welfare (it is a different matter altogether that CSR activities were not defined). Now the French government, to boost the sagging economy has decided to burden companies that are earning profits and want to share it with the rightful segment – the shareholders! Market forces would automatically ensure that any company’s pay to its employees is at parity with that of its competitors.

But, as economies continue to stagnate and governments can ill afford to reduce taxes further, perhaps additional burdens, in myriad forms will fall on the corporate sector. Stay tuned…

Source of the photograph