Friday, November 24, 2006

The issue is not shrinking: Law Street (Nov) in The Economic Times

The debate on the withholding tax incidence on import of shrinkwrapped software continues. I wonder when this will end. In India's Silicon Valley, as Bangalore tends to be called, this debate is very much alive.

To read more, click here.

Or scroll down for the article extracted from The Economic Times online.

The issue is not shrinking
[ FRIDAY, NOVEMBER 24, 2006 12:00:00 AM]

Normally, I scoff at self-help books. Yet, when I was gifted a book, Naked in the Boardroom, authored by legendary media executive Robin Wolaner I devoured it in one sitting. In fact, I have even memorised some of the ‘naked truths’ outlined in this book. One of them is: “Before worrying overly about your job’s lack of challenge and certainly before complaining about it, concentrate on delivering.” I have held quite a few jobs in the past, ranging from working in a media-house, a law firm and a few CA firms. Each one of them has been challenging and interesting. Yet, I have had reason to complain off and on. After all, tax was the common theme in all these jobs and tax issues often leave one with no other option but to complain and gain sympathy from fellow sufferers.

Let me begin with a question. What is the difference between a copyright and a copyrighted product? The answer is simple. If the buyer has the right to commercially exploit a product by making multiple copies of it and reselling it, he or she has purchased a copyright. On the other hand, if the buyer simply has the right to use it, the buyer has purchased a copyrighted product. When I walk into my favourite bookstore and purchase a book, all I am buying is a copyrighted product. I do not have the legal right to photocopy this book and sell it on the pavement.

Recently, a decision by the Authority for Advance Rulings (AAR) has once again thrown open for debate, the issue of whether tax needs to be withheld at source in India on import of software. This matter had been more or less put to rest. The Bangalore tribunal in the case of Samsung Electronics, a landmark decision, which was reported promptly by this paper, had held that payments made by an Indian company to a foreign company for import of shrink wrapped (off-the-shelf) software are not in the nature of royalties, since what the Indian purchaser has acquired is only a copy of the copyrighted product. Several similar judicial pronouncements were made by various tax tribunals. If the payment gets classified as royalty, then the foreign supplier is subject to withholding tax in India. Else, if such foreign supplier of shrink wrapped software does not have a fixed place of business in India there is no tax liability in India.

If one interprets a recent ruling of the AAR in the case of Headstart Business Solutions, it appears that a debate may spark off again. The applicant had in its submission to the AAR contended that as the purchase of software did not entail transfer of a copyright, there was no element of royalty. However, the AAR held that the question raised by the applicant on whether tax needs to be withheld at source, did not require an examination of the nature of payment or finding whether any element of income arose in India for the purpose of taxation under the Income-tax Act, 1956 (I-T Act).

Under section 195 of the I-T Act, any person paying to a non-resident, any sum chargeable under the provisions of the Act is required to deduct tax at the applicable rates. There is some confusion now on whether the payer should play it safe and withhold tax at source prior to making payment to the foreign supplier, even if the belief is that such payment is not royalty and therefore not chargeable to tax in India.

The rulings given by the AAR do not set a precedent; they are binding only on the applicant and the tax authorities in relation to the transaction for which the ruling was sought. However, these rulings still have persuasive value in the course of tax assessments.

While we dream of making some of our cities the next Singapore, perhaps we do need to borrow a leaf from its tax laws. Way back in November 2000, the Singapore government announced that royalty payments made to non-residents for shrink-wrapped software will be exempt from tax in Singapore. Later, in February 2001, it was announced that in addition certain categories of software payments accruing on or after February 23, 2001 will also be exempt from tax. These categories were downloadable software for end user, site license and software bundled with computer hardware. We do need similar clarity in India. Perhaps a circular on the same lines will help.

Imposing taxes through withholding on import of shrink-wrapped software will only make genuine software that much more expensive. I am sure that the intent is not to encourage piracy, but indirectly that is precisely what the complexity in tax laws will end up encouraging. I am sure, dear readers, you now understand why I occasionally complain.

(The author is a CA. Views are personal.)

Saturday, October 28, 2006

Food for Thought, Law Street in The Economic Times (October's column)

Have you seen the documentary Super size me? Well, all said and done, I still gorge on potato chips, especially during the tax season when I am glued to my lap top and a working day has almost 16 hours non stop. India is set to streamline food tax. A province in Canada wants to curtail obseity through higher taxes on junk food. Cultural influences pave the path for our future taxes. With globalisation, transfer pricing issues are the hottest thing in tax land. So here is the latest column dealing with food tax and transfer pricing.

Click here, to read this column on the website of The Economic Times. Or else, just scroll below.

The Economic Times Online

Food and tax go together

Once upon a time, in the good old days, when I was a full time journalist with this newspaper, the page heading of the tax pages on budget day, of this newspaper was: Taxing times, relaxing times. In this peak tax season as I grapple with the new versions of software that are released almost every day to take care of some bug or another and enable e-filing for India Inc, I wonder when the relaxing times will arrive.

Till then, I and all my colleagues will continue to burn the midnight oil, well after midnight, and gorge ourselves silly on junk food. Thinking about food led me to Zenobia Aunty’s favourite subject — tax. Believe it or not, food and tax go together.

News reports state that the ministry of food processing industry is considering implementing a single rate of tax on all food items. Currently, there is a band for food products which results in tax anomalies with similar products having duty differences up to 16%. For example, biscuits, in general, attract excise duty of 8%, while coated wafer biscuits carry a duty of 16%. In another corner of the world, in British Columbia (the western province of Canada) steps are being considered to beat obesity through taxes. One of its ministers has recently remarked that the price of some junk food items will have to increase by something like 40%, if it is to have an impact on decreased usage. This tax money can then be used in positive programmes, he had added. Fortunately, this will be a collective decision and committees in any part of the world take their own time to reach a decision. Till then, my pal Megan, who hails from that part of the world, can continue to devour potato crispies.

Since we are on the subject of food, here is some more food for thought, but a more serious one. For me, it is the transfer pricing season as well. Thus, it was interesting to learn that the Canadian Revenue Agency (CRA) has recently issued a circular, clarifying the revenue authority’s position on the similarities and dissimilarities in computing a transfer price for income-tax purposes as compared with a duty value for custom purposes. This circular admits that while the underlying principles for establishing inter company selling prices are the same, it does not mean that a transfer price can be the same for both. This is something that our revenue authorities should keep in mind.

There are quite a few differences, explains the circular. For instance, the application of different methods for custom purposes and income-tax purposes would lead to different results; the custom method will arrive at a single value whereas the income-tax method may produce a range of results; bundled transactions may be acceptable for custom purposes whereas income-tax payers may be called upon to unbundle transactions and evaluate them separately. In addition, there would be timing differences and even differences in the exchange rates used for valuation. In essence, while the CRA states that the transfer pricing documentation prepared for income-tax purposes may be useful to evaluate the reasonableness of the values established for customs and vice versa, it has recognised that revenue authorities should not arrive at unreasonable conclusions by relying on one set of documents since the purpose of that set would be fundamentally different.

It is true that rationalisation is possible, but the bottom line is that the legislation, and indeed the revenue authorities, must not go overboard. In the US, an importer cannot value merchandise inconsistently for custom and income tax purposes.

In India, transfer pricing is still at a nascent stage. The income tax transfer pricing officers and the special bench valuation officers at customs would do well to understand the subtle differences in the mechanics of transfer pricing and valuation under the two sets of regulations and not blindly rely on the results of a study under a different legislation. In fact, exchange of data between the two authorities if used wisely and well, together with introduction of an advance pricing mechanism would help not only the revenue authorities but also the multinationals who transact with their group entities in India. It will mean less hassles. So come next budget, as I look towards a rationalisation in tax on food items (hopefully something that will benefit a junk food eater like me), I also look forward to rationalisation in transfer pricing and introduction of an advance pricing mechanism.

(The author is a CA. Views are personal)

Tuesday, October 24, 2006

Due dates for filing extended up to November 30

Don't know whether to laugh or cry. With the government introducing efiling, life was quite a misery for all of us. It began with software bugs (in the software released by the government), cells that were incapable of taking an alternate correct rate of tax and so on. The list was endless. Then, the server could not stand the heavy traffic and the revenue website remained inaccessible for major parts of the day and returns could not be uploaded. Fortunately the date for filing the tax return and fringe benefit tax return stands extended to November 30.

We worked throughout the festive season (Diwali and Eid) but just got the good news of the date extension and at least I am now celebrating. On the flip side, it means an extended month of hard work. Well, that is life. As Readers'Digest would say it: It is all in a day's work.

For those interested, the notification extending the date is below.

F.No. 133/38/2006-TPL(Pt)Government of IndiaMinistry of FinanceDepartment of RevenueCentral Board of Direct Taxes
New Delhi, the 24th October, 2006
Order under section 119 of the Income-tax Act
In exercise of powers conferred by sub-section (1) and clause (a) of sub-section (2) of section 119 of the Income-tax Act, 1961, the Central Board of Direct Taxes hereby extends the due date for obtaining the report of audit under section 44AB of the Income-tax Act, 1961 and furnishing the return of Income under sub-section (1) of section 139 and return of fringe benefits under sub-section (1) of section 115WD in case of companies (other than the companies assessed or assessable in the State of Gujarat) for Assessment Year 2006-2007 from 31st day of October, 2006 to 30th day of November, 2006.
(Sharat Chandra)Director (TPL-IV)

Saturday, October 14, 2006

Food for thought

New taxes are constantly introduced, yet others are rationalised. Canada's BC is considering measures to combat obesity through a tax on junk food, India proposes to rationalise its system and have a flat food tax. Yet, taxes are complex. For instance, the same set of transfer pricing documentation, will just not do for income tax and custom purposes. Watch out for the column, Food for Thought on October 27 in The Economic Times. Yes, it will be posted here.

For my loyal readers, I am sorry, being the tax season (due date October 31), I haven't really being able to work on this blog. I will do so once work is less hectic. Thanks for stopping by.

Sunday, September 24, 2006

Home Away - the tax issues. Law street in The Economic Times (September)

This was published in The Economic Times on September 29. As they say, one can never run away from taxes. US citizens deputed to other countries may now end up paying more tax.

Click here for the link on

Or else, read the text that has been pasted below:

Lubna Kably

Potpourri of tax stories

The introduction of fringe benefit tax, forced companies in India to pay taxes on fringe benefits provided to their employees. Keeping in view the demand-supply scenario of human capital, some of these companies through salary structuring passed on a portion of the fringe benefit tax to their employees. Others just had to grin and bear this levy.

Today, it is US companies that frequently depute their employees abroad that are facing a similar scenario. I happened to pick up the International Herald Tribune at an international airport lounge and this is what I learnt: The US Congress has raised taxes on Americans living abroad, forcing expats and US companies to rethink their compensation policies. Yes, we all know that US taxes its citizens on their global income, irrespective of whether they are deputed to a technology company in India or are teaching English in Japan. However, thanks to the foreign tax credit mechanism, a credit is available for foreign taxes against the taxes payable in the US.

Yet, a recently introduced legislation is set to make life more taxing. While US taxpayers will owe no tax on their first $82,400 of income earned abroad this year (against $80,000 in 2005), the new law caps the exclusion for housing allowances (rent), utilities (other than telephone), furniture rentals etc, which are common and significant salary components especially of senior personnel sent overseas. Under the earlier law there was no such cap and the sudden imposition of a cap certainly means bad news. Americans in no-tax or low-tax jurisdictions with high housing costs, like the Middle East, Singapore and Hong Kong, will be hit hardest, states this news report.

If one were to analyse, the foreign tax credit mechanism will not be effective enough, in these cases as the actual tax paid in the low tax foreign jurisdiction will be much lower than the US taxes.

International airport lounges are great for people watching. Except at times, you find to your surprise that other people have the same hobby. So, Sean who was watching me read this news item, walked up to me, glad he had found someone he could air his grievances to.
Sean who was being deputed to Bangalore may also face a greater tax brunt. He explained that on deputation one is forced to lead a more lavish lifestyle than back home. Entertaining people, which is a major role the expats, have to play, means having a lavish house, a huge allowance, including a substantial furniture allowance. For US tax exclusion purposes this allowance is now capped.

It is easier to speak about tax credits for taxes paid in the foreign country (such as India) than in actually obtaining one. Litigation does crop up. He however, hopes that his company will pick up this additional tax burden. Yet, like you or me, Sean is angry about tax evaders. The new mechanism does not have arms long enough to reach those Americans who are living abroad and are not filing their tax returns. “Believe me, if an American is not working for a US company but a foreign company, through omission or deliberate tactics, he or she tends to forget the US tax filing obligations,” he explains. Sean was in India to set up back office business operations. I wonder whether the extra burden on US expats will have a ripple effect on the Indian economy.

If an expat is being deputed to an Indian subsidiary, will the subsidiary have to indirectly bear the burden of this additional tax levy?

At the same time, there is some good news. Sean was glad to note that India is now emerging as a friendly place in which to do business. The Doing Business 2007 report released by the World Bank and the International Financial Corporation ranks 175 countries on the ease of doing business by considering factors affecting how easy it is to run and start business operations in such countries. Singapore has emerged as the easiest place in the world in which to operate a business, followed by New Zealand, US, Hong Kong (China) and the UK. India has emerged as the top reformer in South Asia. India cut the time to start a business from 71 to 25 days and reduced the corporate tax rate to 33.66%. A Supreme Court decision made enforcing collateral much simpler. Import time stood reduced through new custom procedures and reforms were introduced to strengthen investor protection. Pakistan emerges as the runner up. Yet, India still ranks relatively low at 134 and is 41 places behind China.

And as we boarded the flight, Sean leaned back in his seat, thankful that at least his business operations in India will kick off in 25 days. I certainly hope so.

(The author is a CA. Views are personal.)

Friday, August 25, 2006

A plea for hassle free tax returns

During his budget speech on February 28, 2006, our Finance Minister announced that a scheme would be introduced and people would be trained to be 'tax preparors'. Not only would this provide employment but would also help us in filing our tax returns, if the matters were not complex. However, till date, this plan does not seem to have materialised.

This is analysed in my column, Law Street for the month of August, which appeared on August 25, in The Economic Times.

You may visit the above link for a better visual feel or view the entire column here:

A plea for hassle-free tax returns
[ FRIDAY, AUGUST 25, 2006 02:25:12 AM]

It has been over a month now, well almost. But I still recall the day that I took off from work to file my tax return. The news in my favourite daily newspaper that very day was a big let down. It appeared that the tax department was all set to go on strike on the last day on which one could file a tax return, merely because the government had permitted the friendly neighbourhood post office to accept tax returns.
The representatives of the association of the tax officials (well, a section of them), had screamed: "This move is outrageous; we are short-staffed because there are pending vacancies. How can lowly postal clerks step on our turf?"
This country needs honest tax paying citizens. Yet, when some taxpayer-friendly step is taken, like permitting a poor soul to walk around the corner and file his return, it is not well taken. It is in bad taste to hold people to ransom. I mean, if the tax department is short-staffed, surely it should have welcomed a move that would help ease its burden during peak time? Fortunately, all went well, the strike did not go through and yes both the tax department and the post office accepted tax returns. So it was a fairy tale ending after all.
Yet, this incident did leave me pondering. To be fair to this association of the tax department, they were concerned that the postal department would accept incorrect returns, including those where the much needed PAN was missing. But, isn’t there a solution?
Zenobia Aunty thinks there is a simple solution. Let nationalised banks and post offices accept tax returns. "I will not mind paying a tiny sum to the tax preparor (remember the grand scheme announced in the budget?). This tribe of men (tax preparors) stationed behind desks at banks and post offices will review my return, make sure all details are contained in my return and give me a chit of having filed my return. It will be so much easier for my creaking bones to go to the post office next door instead of to a far off tax office."
Did I hear someone say, e-filing? My dear, that is not easy. A corporate lawyer pal is undergoing treatment for baldness. The result of frequent revision in various e-forms that were required to be filed under the Companies Act. A plethora of bugs led to revision and re-revision in some cases and he was left tearing his hair out.
This bit of news makes me shudder. It now appears that India Inc will have to file its returns online and, yes sir, the forms have been revised. Believe me, it is so much easier to write about these things, rather than having to actually face the music.
Talking about e-returns has made me think about blogs. Yes, Indian bloggers and surfers were cut off from blog land for some time. A pal and scribe of this paper wrote that perhaps bloggers will learn from this and be more productive instead of concentrating on the ME factor in their blogs.
This prompted me to begin a search on whether any bloke out there in the world has actually tried to come clean regarding his taxes in the blog world. After all, PC would find this blog productive.
I actually discovered a very famous blogger, Julian Dibbell. Have you ever got entangled in the cyber web of massively multiplayer online games (MMOs)? Well, if you haven’t, let me explain. To gain greater glory in this game, players actually purchase virtual weapons, protective suits of armour, magic spells, power pills and what have you from other players on e-auction sites for real money.
Way back in June 2003, Julian wrote on his blog: "On April 15, 2004, I will truthfully report to the IRS that my primary source of income is the sale of imaginary goods and that I earn more from it, on a monthly basis, than I have ever earned as a professional writer."
True to his word he declared that his earnings from selling items procured while playing an MMO game — Ultima Online — were US$ 11,000. He paid taxes on the same.
But the IRS was perplexed with his query: what about the various virtual assets which he owns, such as protective suits of armour? Would these be subject to tax? He was given a non-binding view that such virtual assets even if they could be converted into cash, would not be taxed. It is only the cash which he actually pocketed that would be his income and that would be taxable. The IRS is still pondering over his query.
Unlike Julian, I am not approaching the tax department with complex virtual issues, but with just a plea. Let physical filing of my tax return be a simple, hassle-free affair. Give me the option of e-filing or paper filing. Give me the option of filing at a tax office or bank branch. And please give me this option, irrespective of whether I am an individual tax payer or a new entrepreneur or a corporate giant. Amen to that.

(The author is a CA. Views are personal)