Sunday, December 16, 2007
Saturday, November 17, 2007
Friday, October 26, 2007
How green was my valley?
It will come into effect on November 1, 2009 and in the meantime, air passenger duty tax will stay at its current levels. We don’t know, as yet, how this will work. Perhaps, flights may operate only during peak hours so that they are full of passengers. This may save the environment but not those who have to travel in an emergency situation. Green taxes must be thought through carefully. In fact, it is ‘green tax relief’ which would be more effective. Today, in India, is there any incentive for anyone to buy a smaller, fuel-efficient car rather than an SUV, which comparatively is a fuel guzzler? Or what would this columnist get, if she adopted rain water harvesting techniques for her retirement home, which she is currently dreaming of? Well, water may soon be a very precious commodity and needs to be conserved. For that matter, donations made to environment preservation societies should also be eligible for deductions similar to charitable donations.
Saturday, September 29, 2007
A taxing connection
Friday, September 28, 2007
"Haven’t you read about the subprime fiasco," screeched Zenobia Aunty over the phone to one helpless caller, trying to sell her a personal loan. Well, I guess Aunty’s screeching will continue since, for some strange reason, she could not successfully register with her mobile phone service provider to enlist herself on the "Do Not Call Registry". The SMS sent at the number provided bounced back with the message — this facility is not available to you!
T K Arun, one of her favourite columnists in this paper, has already written about subprime. But Aunty decided to dig deeper and find out whether she could put the blame on taxes! She found she could, but not on tax per se but rather on tax incentives.
With a network of tax blogger friends, Zenobia Aunty’s life has become easier. She no longer has to visit various networking events in Bangalore and Mumbai. With Bangalore’s flooded roads and Mumbai’s distances — the two cities she alternates between, cyber surfing is an easy way to get the required information. In fact, one marvels at her capacity to meet interesting people in cyber space and get a varied global view.
Her US based blog pal, Kelly an attorney who blogs on “TaxGirl” recently told a friend that it is unlikely that mortgage interest deductions would be repealed in the US, even as tax policies are used to encourage or discourage certain behaviour. However, TaxGirl is having second thoughts of the likely move of the US government. The subprime bailout will reportedly cost the US government over $10 billion per year. Raising taxes is always an unpopular option, anywhere in the world. So to Kelly, repealing tax policies does not sound as bad on paper. Kelly adds on her blog that in November 2005, the advisory panel on tax reform under President Bush recommended eliminating the mortgage interest deduction and replacing it with a significantly smaller mortgage interest credit. The panel also recommended eliminating the deduction completely for second homes and home equity loans. Quite a few taxpayers bought more houses than they could afford over the last few years, as at least the interest was tax deductible. Zenobia Aunty understands that the US currently limits mortgage interest to mortgages under $1,000,000 and home equity loans under $1,00,000. Unless, AMT is applicable, individuals enjoy a cool tax break.
Prof James Edward Maule of the “Mauled Again” tax blog fame, with whom readers of this column are familiar, cites that in extreme cases not only do people end up losing their homes owing to foreclosure but they also find themselves with increased taxable income and thus increased tax liabilities to the extent that the loan is written off for an amount less than the principal balance. This happens if the value of the house has declined and the lender does not or cannot hold the borrowers accountable for the balance. In April this year, a bill was introduced in the US House of Representatives to propose that income from cancellation of qualified residential debt is excluded from gross income, followed by another similar legislation introduced in the US Senate. The US Prez has now jumped on the bandwagon to help homeowners.
However, Prof Maule points out that this tax break would mean either higher taxes or an increased deficit — the burden of which has to be shared by future generations. This brings one back to India. Here, the subprime sword is not dangling above the heads of borrowers and lenders, yet it is always prudent to learn a lesson.
This leads one to wonder about the tax laws prevailing in India. For instance, repayment of the principal sum against a home loan is permissible as a tax deduction up to a limit of Rs 1 lakh. Further, such home has to be retained for the next five years. Interest can be claimed as a deduction of up to Rs 1.5 lakh per year. Yes, there are tax breaks available here as well. At the same time repealing this, as was suggested by the Kelkar committee, could put paid to many a dreams of enjoying not only roti and kapada but also makaan. In fact, this columnist wonders whether the tax sops in India are equitable, given the wide disparity of property rates across cities, say, from Mumbai to Hyderabad. Tax sop or not, buying a house in Mumbai is tough indeed for you or me. With interest rates no longer as soft as they once were, even with the tax breaks available a new home owner who has borrowed funds, could feel the pinch.
So should governments think out of the box and devise an alternative? Perhaps a property purchase deduction — be it a lump-sum deduction or an amount amortised over a period of time, such as depreciation, spread over a certain number of years. Perhaps this could also be limited to one house per individual. This may curb the tendency of taking a loan, just because you get a tax break, howsoever small. Instead it could well encourage savings and then investments.
As Zenobia Aunty does not profess to be an expert on housing loans, she just leaves you with this thought. It is over to you dear readers
Friday, August 31, 2007
As always click here for reading the latest column on: A tax vision for global India.
For your reading pleasure, in case of any difficulties in accessing the above url, the copy is cut and pasted below.
A tax vision for global India
Wishing you all a happy Independence Day, albeit belatedly. India has made considerable progress over the last sixty years, including far reaching progress as regards its tax policies. Gone are the days, when a tax rate of 90% plus, together with industrial licensing, import controls, high import tariffs dented the zeal to have a vision. Today, owing to liberalisation Indian entrepreneurs can dream and can also achieve their dreams. Yet, is there a need for further progress on the tax front? Zenobia aunty’s friends from across the world have pitched in to share their view of the progress they would like to see in the realm of taxation. Some of these views pertain to their own home country but apply equally to India or for that matter to any other democratic country. Let us begin with the United States.
The Tax Foundation is a US-based non-profit, non-partisan organisation, which helps create a momentum for US tax reforms. While, US may be a tax developed regime (or so we think), like any other democracy the concerns of its citizens on the tax front are very much the same as in India. The ten principles of sound tax policy set down by the Tax Foundation are: Transparency is a must; be neutral; maintain a broad base; keep it simple; stability matters; no retroactivity; keep tax burdens low; don’t inhibit trade; ensure an open process; state and local laws also matter and the same general principles must apply to them.
In its recent release the Tax Foundation has rightly remarked that the US has the second highest corporate tax rate in the OECD and is only one of the two countries that has not reduced its tax rates since 1994. Chris Atkins, senior tax counsel and co-author of this new study, cites the benefits of reducing the US corporate tax rate: A lower effective tax rate on new investments in the US would steer international investments to the US; US multinationals would feel less pressure to engage in corporate inversions and other forms of profit-shifting; US companies would be more likely to reinvest foreign earnings in US companies and lastly state governments would feel less pressure to offer special tax preferences and credits in their efforts to attract new international business investments. In short, the wake up call in the US is that even the US needs to keep up with international trends and to ensure a steady stream of investments which alone lead to progress and prosperity.
Today, while we pat ourselves on the back as regards India Inc’s acquisitions overseas, we should not forget that foreign direct investment is still needed in India and so are local investments. For this, we need to ensure that the ten principles of a good tax policy continue to exist in India or if found lacking are introduced in India. This means having stable tax policies — the recent brouhaha over the SEZ policy and retrospective tax amendments do not present a stable picture. The less said about the prolonged litigation that any taxpayer in India is exposed to, the better. As India is today a strong player in the global market place it cannot rely on archaic laws. Laws, including tax laws have to be progressive in nature. Tax costs do play a crucial role in determining the choice between India or for that matter, China, Mexico or even Philippines! Yes, competition is stiff out there and we need to survive.
Similarly, as Zenobia aunty may have hinted on occasions that for Indian multinationals, which are striding overseas, tax laws need to be made friendlier. She recalls reading in the newspaper that the tax authorities will closely examine various overseas acquisition deals. If required, the tax treaty provisions will be denied. Why are Indian companies structuring outbound investments via holding companies set up in favourable jurisdictions? One of the main reasons is that repatriation of foreign funds to India directly from the investee jurisdiction is tax inefficient. Dividends from a foreign subsidiary company when brought back to India are taxed at the steep rate of almost 34%. The solution is to use a holding company structure, dividends that flow into this holding company, which is situated in a favourable tax regime is not taxed or is taxed at a low rate. Such funds can then be used for further overseas expansions or acquisitions and not brought back to India at all.
Thus instead of taking a short term view, the Indian government should look for alternative solutions — perhaps a lower tax rate on foreign dividends or exemption of Indian tax on such dividends provided these funds are used for further investments in India, could be the right solution. India stands on the threshold of being a major global power; it is for us to collectively pitch for the right policy framework. This, after all is the true worth of being a citizen in a large democracy.
Tuesday, August 21, 2007
Saturday, August 18, 2007
It is true that we are no longer reeling under a 90 per cent plus tax rate, liberalisation has made it possible for our enterpreneurs to dream and achive their dreams. Yet, Indian tax legislation needs to keep pace with the changing needs of the economy.
Look out for this column in the August 31, 2007 edition of The Economic Times.
As always, it shall be uploaded on this blog as well.
Sunday, August 12, 2007
Erich Neilsen, a LinkedIn contact of mine and a consultant to boot decided to launch a new website. I have contributed an article, relating to the growing trend of Indian companies going outbound.
Liberalisation has made it possible for Indian companies to step beyond India's borders. However, not all is hunky dory on the tax front. Foreign dividends are subject to tax in India, when repatriated. Because of this Indian companies going outbound have to structure their investments carefully. Generally, holding companies are set up in favourable jurisidictions. If only the tax laws in India were changed to tax foreign dividends at lower rates or provide for participation exemption, dividend repatriation back into India from overseas investments would be less taxing for Indian multinationals.
I have recently read in the newspapers that the Indian revenue authorities are hell bent on examining recent outbound acquisitions to claim their share of the tax pie. The Indian government would certainly be missing the woods for the trees, if it attempts to just add to the litigation and does not bring about suitable amendments in tax laws.
This is the age of outbound investments and it is time for the Indian government to act as a true business partner.
Tuesday, August 07, 2007
Friday, July 27, 2007
All roads in tax land seem to lead to transfer pricing. It is time that India introduced alternate dispute resolution mechanisms - such as Advance Pricing Agreements. It would augur well for foreign investments if safe habour provisions were also introduced. For understanding the background, click here.
By the way, I love the new look of the online edition of The Economic Times.
For your convenience, the article is also cut and pasted here. Happy reading.
Transfer pricing a taxing issue
27 Jul, 2007, LUBNA KABLY
Anthony Bourdain in his book Kitchen Confidentia recalls the time when as a kid he had his first raw oyster, on a boat in France. “It tasted of seawater, of brine and flesh and somehow of the future.” Then it hit him, Food had power. “My life as a cook and as a chef had just begun” he described in his book. One has not tasted his dishes, but if he cooks as well as he writes, well then — compliments to the chef.
Perhaps it was the delicious smell of printing ink which wafted out of the Times of India building in Bombay (it was then not called Mumbai and the press was located in this building) that prompted one to be a journalist and continue as a columnist. Well, if food and ink had the power to sway Bourdain and this writer respectively, so do taxes.
In fact, they hold sway over all of us. It is interesting to know how taxes have been used down the ages to persuade people to buy, to stop buying, to operate in backward areas, to stop emitting carbon or even to stop putting on weight. Yes, tax has power. Googling away one found these two gems: Queen Elizabeth 1 (1558-1603) is said to have disliked beards and therefore established a tax on them. Actually, it was just the British way to garner more taxes, as beards were then in vogue. Years later, as beards were no longer in fashion in western Europe, in 1698, Peter the Great of Russia levied a tax on beards to bring Russian society in line with western European fashion. Strange, but true!
Fortunately, back home, we will not be hearing of new innovative taxes till the finance minister (or PC, as people in ET fondly call him) kick starts his budget discussions sometime in December. Yet, there has been enough excitement in tax land in recent days. To begin with, there was the long awaited order of the Supreme Court, in the case of Morgan Stanley. This decision has brought a sigh of relief to many MNCs that had set up captive processing entities in India. Even if such a captive processing entity creates a permanent establishment (PE) in India — thus bestowing the right on the Indian tax authorities to tax the profits attributable to this PE — there is a glimmer of hope. This order clearly points out that there can be no further profit attribution if the pricing between the foreign enterprise and its PE in India — the captive service provider — is at an arm’s length. However, if one looks closer at the order one notices that this tenet applies only if the functions performed and risks undertaken by the captive service provider are the same as that of the permanent establishment.
Thus, there is no automatic insulation from tax assessments. Indeed tax authorities and transfer pricing officers can still make enquiries and satisfy themselves about the arms’ length pricing.
Close on the heels of this order came the next one. The special bench of the Bangalore Income-tax Appellate Tribunal, in the case of Aztec Software and Technology Services Ltd (Aztec), seems to have taken away the insulation from transfer pricing adjustment, which was believed to be available to entities enjoying a tax holiday. The order of the commissioner of income tax (Appeals) in this case had held that transfer pricing provisions are special provisions relating to avoidance of tax and should be invoked only if the tax officer was satisfied that there is a motive and act by the taxpayer to avoid taxes in India. Companies enjoying a tax holiday, however, cannot have any such motive. But the ITAT has held otherwise.
The Indian tax authorities have been quite aggressive with transfer pricing assessment for the IT/ITES sector in recent years. Risk mitigated captive service providers are reeling under high profit margins that have been attributed to their operations in the course of transfer pricing audits. In fact, this ITAT order also acknowledges that industry averages, such as Nasscom man hour rates, cannot be blindly applied. The risks and functions of the entity have to be taken into consideration.
We know tax has power. It can also have negative power. Lack of clarity and convenience may result in taking away the shine from this sunrise sector. MNCs may think it best to operate from other shores. If there are inherent difficulties in introducing an advance pricing mechanism— which would enable MNCs to determine the transfer price payable to their captive service providers in India and prevent future litigation — then perhaps some safe harbour principles need to be introduced. Companies in India in the IT/ITES sector operating on a specified mark up as decided by the Central Board of Direct Taxes, after mutual consultation with the industry, could be deemed to have complied with the arm’s length principle.
Wednesday, July 04, 2007
Friday, June 29, 2007
Click here for the url to this months column. As always it is also cut and pasted below.
Happy reading and happy donating.
Good deeds deserve tax breaks
Law Street -Edition dated June 29, 2007
Recently Prime Minister Manmohan Singh’s statements took the entire corporate world in India by surprise. His intentions were no doubt laudable — to bridge the divide between the haves’ and have-nots’ since social inequity can lead to unrest. However, his hinting that huge salaries paid by India Inc were the cause for this divide was perhaps a bit unfair. Globalisation means that a person does not compare his salary with what his peer in another domestic company gets, but rather what his or her value is in the global market place.
In this knowledge economy, no company can afford to lose its key people. It is not surprising that India Inc revolted against his suggestion. Yet there are other ways of curbing this divide — including the digital divide. This can be done by perhaps providing incentives for companies engaged in charitable work or what is popularly known in corporate cubicles as corporate social responsibility.
It is true, that under the current provisions of section 80G of the Income tax Act, 1961 (‘the Act) tax deduction is available to any taxpayer (be it an individual or company) for donations made. This ranges from 50% to 100% of the amount of donation, subject to an overall limit. There is a restriction clause in the tax benefit, which states that for donations made to specific funds, the amount that is contributed and claimed as a deduction should not exceed 10% of the adjusted gross total income. This is called the net qualifying amount and it restricts the tax benefit that can be claimed by a taxpayer.
The need of the hour is to further incentivise charitable work. Perhaps, corporate entities could be encouraged to directly sponsor government-aided schools or hospitals? Have you ever walked into one such school? Zenobia Aunty, once an avid social worker prior to her bout of arthritic pains, states that most of these schools are in shambles. The roofs are generally leaking, the walls are cracked, the furniture is broken, the rooms are crowded, the toilet facilities largely lacking. True, in most states, lunch is provided to the children under a mid-day meal scheme, but even this, at times, is mired in political battles. Ditto is the case with most government hospitals. The doctors there strive to do their best, but lack of funds, means limited facilities.It cannot be denied that we are still a developing country. What is required is large scale participation from India Inc. Perhaps a cement company could donate tonnes of cement, an architect could provide his services free, a computer manufacturing company could provide computers, a software company the requisite software, a food manufacturer — confectioneries for special occasions such as Children’s Day?
India Inc could also arrange to provide for donations in kind — to ensure that it reaches the children directly without any intermediaries (sometimes things do get lost if the delivery mode comprises of a long chain), such as clothes, woollens, medicines, etc. Unfortunately, such donations in kind at present do not get any tax sops. But then, there is the tendency to think only of oneself. Focusing on I, me and mine can lead to social unrest, as well, and it is time to think more on the lines of ‘we’ in the social spectrum.
We at India Inc, including all its employees can do a lot more towards social upliftment. While this columnist was chatting with her US-based tax-author friend Kay Bell, she learnt that donations in kind are eligible for tax sops in the US. Kay says, many charities are happy to accept used clothing and household goods and you’re actually allowed to claim the fair market value of these items as a tax deduction. However, to curb the misuse of this provision, household goods that are donated must be in good condition (charitable organisations generally give a receipt to help support such claims). The tax return is required to detail, non-cash charitable contributions. There are additional caveats, if you are claiming a deduction of more than $5,000 for an item, a certificate from a qualified appraiser is required to be attached with the tax return. In some circumstances, the entire deduction is not allowed in the same year, but is staggered.
Yet the moot point is that donations in kind are eligible for tax sops. Now if the same could be emulated in India, it would definitely help boost corporate social responsibility. Further, Zenobia Aunty would also be assured that the biscuits donated by her actually reach the school children, instead of a cash donation that could perhaps be lost in the way.
Friday, May 25, 2007
Global warming has taken its toll, in more ways than one. Believe it or not, globalisation also has its repurcussions in tax land. So read on for the latest column. For the url click here
As always, the column is also cut and pasted here from the online edition of The Economic Times for your convenience.
Global warming is the hottest topic these days. But please do not bring up this subject if conversing with Zenobia Aunty. She has returned from her vacation, badly sunburned, and vows not to step out of the house for days to come. Slathered in calamine lotion, she is not attending the tonnes of networking events which she is addicted to, yet she is still inundated with requests for her views. In fact, her email-inbox overflows each day with tirades against a recent Mumbai Tribunal decision, where it was held that the payment of the arm’s length price to the dependent agent does not extinguish the tax liability of the foreign company in India. In this case, the assessee was a telecasting company, which was a Singapore tax resident. It had an agent in India for marketing airtime slots; this agent was considered to be a dependent agent and hence constituted a permanent establishment in India.
If a permanent establishment of a foreign entity exits in the other country, tax treaties prescribe that such other country has the right to tax the foreign entity. However, the foreign entity can be taxed only in respect of the profits attributable to the permanent establishment. Based on past judicial precedent and also based on two circulars issued by the Central Board of Direct Taxes (CBDT), one of which had clarified the tax position in cases where outsourcing activities were carried out from India, the Singapore company held that there was no tax incidence in India. The Singapore company argued that as it remunerated its dependent agent at an arm’s length price, nothing further would be attributable to it in India and hence it would not be subject to Indian taxes. However, the Tribunal held otherwise.
Perhaps for the first time, the Tribunal explicitly held that the foreign entity and the dependent agent are two different tax payers. In other words, the tax liability of the foreign entity was not subsumed in the arm’s length price paid to the dependent agent in India. This ruling, has led to some degree of unease. It is true that a dual tax payer approach is advocated by the Organisation for Economic Co-operation and Development (Oecd) - a think tank comprising largely of developed economies. Back home, the unease lies in the subjectivity which may arise during the course of tax assessments in determining whether or not a permanent establishment exists in India and also the manner of attribution of profits.
It is one thing to say that mere business operations in India through a subsidiary will not always create a permanent establishment. Further, even if such a permanent establishment exits, it is not essential that there would be a profit attribution. However, tax authorities especially at the lower levels may take a different view, resulting in an endless bout of litigation. Oecd in its paper has clearly specified that there cannot be an automatic attribution profit trigger merely because a permanent establishment exits. It should be examined whether or not there is an actual undertaking of risks and economic ownership of assets by the dependent agent, only then in certain circumstances can there be any attribution to the foreign principle over and above the arm’s length price already paid to the dependent agent. This, in essence brings us back to transfer pricing and the need for advance pricing mechanisms. Something that Zenobia Aunty is now tired of advocating.
With tax uncertainties on the rise, tax risk management has become the need of the hour. An annual survey of CFOs and finance professionals carried out by the firm where this columnist currently work, shows that tax risk management is gaining importance. With cross-border impact of taxes, this should not come as a surprise. Companies must have in place tax risk management strategies approved at the highest levels. While tax risk management has been recognised and is being increasingly put into practice, by identifying the tax risk points - be it cross-border transactions or transfer pricing, tax reporting is something which CFOs and finance professionals need to equip themselves with much better. In this era of corporate governance, as tax incidence has an impact on stake holders, it is essential to get the right message across, including the next steps that are proposed to be taken by the company concerned. Further, this needs to be done in simple terms so that it can be understood by a cross section of stakeholders who may not be tax experts. It is true that tax uncertainties can act as a hurdle to effective communication. For once Zenobia Aunty is asking for your views. Any thoughts on the best way to report tax uncertainties?
(The author is a CA. Views are personal.)
Friday, April 27, 2007
The url is here or as always the column is cut and pasted below for your reading pleasure.
Piercing the glass ceiling
Law street/Lubna Kably
April 27, 2007
The time has come, the Walrus said, to talk of many things. With Zenobia Aunty off on a long well deserved sabbatical, I am taking help from the Walrus. Yes, the very same one that spoke to Alice, in Through the Looking Glass. The animal kingdom is as talkative as us, what is more, they seem to know all about tax blogs. Perhaps Dr Dolittle helps them. Enough of talk about books and movies, admonishes the Walrus and commands me to get down to serious business — of typing this monthly column.
Now James Edward Maule, a US-based professor and taxpayer has an interesting blog called, ‘Mauledagain’. He reports recently of a CNN article which points out that not many people knew much about taxes. According to the IRS only 40% or so of the taxpayers eligible for telephone tax refund (see Law Street: ET, February 27) are claiming it. Two thirds did not know the value of child credit and fewer than half were familiar with alternative minimum tax. (Yes, unlike India, AMT is applicable to individuals as well, here only corporate entities find themselves on the MAT). According to the learned professor, the cause of ignorance is a combination of several factors. One is the lack of tax education (he advocates a basic tax education in schools). Another is a reluctance of citizens to educate themselves about taxation and lastly the complexity of tax laws, seasoned with constant changes. He quotes that this “prevents even those who want to learn and understand tax from getting enough time to let things sink into their brains.”
Drawing on this the Walrus has a solution for garnering more tax revenues in India. No, it does not mean more tax. Introduce coaching classes or touch button systems in hi-tech cities. Classes must run at prime locations — railway stations, bus terminus, shopping malls, where people get to know what a tax return looks like, what form they must use, how they should file their return. Besides, introduce a system where tax returns are collected at every post office, every bank counter. I know, many people are so scared of the word tax. They rather not file their return. Coaching classes will help. The Walrus ends his long speech. I dare not comment on whether this is a ‘hare brained’ scheme or not. But I do believe that education on the tax regime will help, perhaps through voluntary clinics, proper print advertisements, helpful brochures and even an interactive web demo. It should actually teach people how to file their own tax return — I hear a simple one is around the corner, one prepared with the help of a reputed educational institution.
Hare brained, squeaks a voice and I spot the March Hare. “You should say what you mean”, he tells me. “I do, at least, I mean what I say,” I reply trying to remember Alice’s exact words. “That’s the same thing you know” I add. “No, it isn’t,” says the March Hare. This time, I do not need to turn to the Walrus for better understanding. I am so sure the March Hare is referring to the scheme of bringing ESOP under the tax ambit. True, top hi-flyers have amassed ESOPs and have minted a fortune on sale of shares by paying a marginal STT and nil capital gains tax. Yet, what is FBT all about? The Walrus recalls, the Finance Bill, 2005, ushered in FBT with the intention to tax perquisites enjoyed collectively by employees that escaped taxation altogether or were subject to reduced taxation. ESOPs are not collective benefits; in fact, they may not even be enjoyed by all employees. FBT on ESOPs, it just isn’t cricket.
I looked around to see whether a cricket would now appear from somewhere or perhaps Sachin would be swinging his bat. Instead, there came the Dormouse. I was surprised to see him alive. Hadn’t an attempt been made to drown him in the tea pot or some such thing? He had just returned from London, hoping to meet the Queen but Shilpa Shetty beat him to that.
Back home, there was some talk of a higher tax or cess or whatever to be paid by domestic flayers during peak time. Fortunately, this idea was shelved. But, in London, wheezed the Dormouse, they are introducing a green tax, if they haven’t introduced it already. Millions of people who fly abroad every year are to be taxed on the number of miles they travel. Passengers would be issued with a green miles allowance and forced to pay more if they took extra flights. Other options include putting VAT or fuel duty on flights within the UK or a per flight tax on airlines. All this world tax news is getting a bit too much for me. Now before the Mad Hatter turns up and joins the party and adds his thoughts, I think I shall join my Zenobia Aunty for a much needed sabbatical.
(The author is a CA. Views are personal.)
Tuesday, March 13, 2007
Zenobia Aunty tends to have a love-hate relationship with PC. However, with Spot now fawning over PC, Zenobia Aunty is not being her sarcastic self. It is not just the “kutta-billi” factor in the budget which has led dear Aunt to develop a soft spot for PC. She is also pleased as punch, because she seriously believes that PC took her suggestion seriously. If you recall the column published on January 30, Zenobia Aunty had advocated a lower rate of tax for the SMEs. Well, the budget proposal has ushered in a dual tax regime for India Inc.
The surcharge of 10 per cent will now apply to domestic companies only if their total income exceeds Rs 1 crore. In other words, even if the cess of 3 per cent is considered (the existing 2 per cent education cess and the proposed 1 per cent cess for higher education) SMEs will face a lower rate of 30.09 per cent as compared to the current rate of 33.66 per cent which applied to all corporate entities irrespective of their size or shall we say, income. One remains to be seen whether SMEs will face litigation or will be able enjoy this beneficial treatment which is long overdue. However, SMEs should note that they still have to pay this surcharge of 10 per cent, when computing their fringe benefit tax.
The thrust of the budget is clearly education and agriculture. No citizen of this country will disagree with the need to provide benefits to these two sectors. We are already paying an education cess of 2 per cent, now there is an additional cess of 1 per cent for higher education. Taxes are the price we pay for civilization, so goes a saying.
True, but I would really like to know how the education cess collected from me is being used. If I stroll down to the end of the road, where there is a government run school, I still find it in a run down condition, there is a lack of teachers, a lack of toilets, and a lack of basic infrastructure. We need to streamline the mechanism right till the grass root level if we are to ensure that the education cess achieves its objective.
Perhaps a bold step would have been to introduce tax sops to those corporate entities that set up or sponsor schools. Public-private partnerships aided with tax sops may achieve better and quicker results. Instead of education cess how about thinking of education sops, PC?
With “India poised”, one had expected several proposals that would aid outbound investment and growth. Sad to say, all one notices is overturning of a Supreme Court decision in the case of Ishikawaji-Harima Heavy Industries Limited. The apex court in line with the provisions of the Income-tax Act, 1961 (I-T Act), had held that any sum payable to a non resident by a resident outside India for services received outside India cannot be deemed to be income that accrues or arises in India and cannot be subject to tax in India. In other words, if services are being rendered from outside India, there should be no withholding in India.
An explanation has been inserted to section 9 of the I-T Act and the ratio of the above decision seems to have been overturned. Furthermore, this explanation has been inserted with retrospective effect from June 1, 1976.
One should not be surprised with retrospective amendments. Even if amendments are not retrospective, they do hamper future business plans if the government goes back on its promise.
Venture Capital Funds/Companies (VCFs/VCCs) registered with Sebi and investing in venture capital undertakings (VCUs) are currently not subject to tax in their hands. VCFs and VCCs are treated as pass through entities and the income arising from investments in VCUs, which is typically in the nature of dividends and capital gains, is taxed only in the hands of the shareholders/unit holders.
The Finance Bill proposes that the pass through status will be available only in respect of income from investments in venture capital undertakings engaged in certain specified sectors, like nanotechnology, IT, seed research development, biotechnology etc. Even if the VCF/VCCs have made investments in VCUs years ago which suddenly are not engaged in eligible business, the VCF/VCCs will now have to pay tax on such income.
Ditto for the IT sector, which we all thought was protected from corporate tax at least till March 31, 2009, if the companies were claiming a tax holiday under section 10A or 10B. Now these companies find themselves on the “MAT”. It is easy to say that a credit will be available to an Indian company for foreign taxes, but this is not free from litigation.
Backtracking on past commitments will not do any good to the image of India as a business friendly economy. One hopes that these proposals will be suitably revised prior to enactment.
The author is a CA. Views are personal.
Tuesday, February 27, 2007
As always, for your convenience, the column is also cut and pasted below.
Gimme my money!
TUESDAY, FEBRUARY 27, 2007
I recall an ad that has stuck in my memory. Gimme Red! I think it was an ad for Eveready Batteries. Exotic energy drinks like Red Bull were not available in that time and age. This was the era when Rasna ruled, where a cute kid repeatedly said: We love you Rasna!
Enough said about the ad world. After all this is a tax related column. Now it is perhaps time to take a cue from the Eveready ad, but to say it differently: Gimme my money! The US based IRS is doing just that this year. It is all set to make significant refunds during the year 2007. It is expected that more than 160 million tax payers will seek a “Telephone Excise Tax Refund” while filing their tax returns for the financial year 2006 (The financial year in the US is the calendar year). Economists at the US Department of Treasury estimate that the amount refunded to individuals will be about USD 10 billion.
This refund pertains to taxes paid on long distance or bundled services for which the users were billed during the period between Feb 28, 2003 and August 1, 2006. Federal courts have held that tax could not be imposed on such calls, hence the refund.
A standard refund amount can be claimed while filing the tax return. If any taxes are payable this would go towards reducing the tax burden immediately at the time of computation of tax payable for the year 2006.
Tax refunds are a sensitive issue for my Zenobia Aunty. Even her charisma has been unable to help her, when it comes to claiming tax refunds.
As FICCI rightly points out in its pre budget memorandum: In spite of streamlining the refund procedure, the refund amount is not being credited into the tax payers bank accounts specifically mentioned in the tax returns.
Refund vouchers, at times, pre-dated, to escape the interest liability, are sought to be handed over personally to the tax payer for obvious reasons. Tax Officers should be obliged to give credit to the bank account provided by the tax payers and be held accountable for any defaults in this regard, adds FICCI.
The story as regards interest on tax refunds is no different. Section 244A provides for payment of interest at 6 per cent for delay in grant of refund. However, no time limit is prescribed within which the appeal effect is to be given and refund to the granted by the tax officer.
Provisions should be introduced in the tax laws stipulating that effect be given to the order of the higher tax authorities, tribunals, courts within a prescribed period, especially in refund cases. Incidentally the Citizen Charter of the Income tax Department which was rolled out with much fan fare a couple of years ago, calls for giving effect to appellate orders within 30 days of the receipt of such orders and issue of refunds within 30 days of its determination.
The Right to Information Act, 2005 (RTI Act) could prove handy to Zenobia Aunty. Her friend, Narayan Varma, a Mumbai based chartered accountant, quoted in several newspapers including sister publications of this paper, has successfully obtained refunds by taking this path.
In effect, it means politely asking where the refunds are stuck. Bombay Chartered Accountants Society is providing service to the aggrieved tax payers by holding tax clinics and educating people on how to take recourse to the RTI Act
In respect of all requests received from citizens under the RTI Act, the respective Chief Public Information Officer has to provide the information within 30 days of receiving the request, failing which there is a penalty imposed on him. An appellate mechanism is also available to the applicant who has sought the information.
All this is fine, but is it fair, that tax payers have to tread on another path to seek what is rightfully theirs – their very own tax refund?
The process is in place, bank account numbers are to be provided in tax returns. All it requires is change of law to ensure that relief orders are actioned upon within a specified period of time and that in all instances there is a direct credit to the bank account of the tax payer within this prescribed period of time. If the IRS can deal with 160 million tax payers and their refund claims, I do not see why we cannot.
The Citizens Charter calls upon us to be prompt, honest and accurate; to pay our taxes in time and to quote our PAN in all our tax returns and correspondence. But I guess, reciprocity is the key word here. Honest tax payers deserve their due – that of getting their timely tax refunds with the correct interest.
(The author is a chartered accountant. Views are personal)
Tuesday, January 30, 2007
As always,for reading it on the online edition of The Economic Times click here.
If this proves difficult, here it is below, cut and pasted, just for you. Happy reading.
What do the stars foretell?
[ TUESDAY, JANUARY 30, 2007 ]
Sun in Sagittarius, Moon in Gemini, Ascendant in Pisces, so goes my birth chart which I received as a new year gift and I look at it perplexed, but curious. Do birth charts really portray one’s character? Guess what, when I next behave in an erratic manner I can blame it on the stars.
May be an astrologer could rake in a fortune by predicting what the budget will hold for us. I wonder when P Chidambaram’s birthday is. Do his stars indicate that he is a risk taker, or someone who follows cold logic?
I think the finance minister likes to dream big — big bang is more his personal style rather than just a scattering of a few not so flamboyant announcements. Yet, politics reins his imagination (or shall we say dreams), as the last budget announcements amply prove.
This year instead of announcing something new as he has done in the past — like tax-free dividend for shareholders, or even tax-free perks for employees which albeit went hand in hand with introduction of dividend distribution tax and fringe benefit tax for India Inc, PC would be much appreciated if he introduced rationalisation and simplification of the Income-tax Act, 1961 (‘the Act’).
According to Ficci, if one were to take into consideration, not just the basic corporate tax rate, but also the fringe benefit tax (FBT) rate and the dividend distribution tax (DDT) rate then India Inc pays a tax of 40% or more.
A US-based investor recently had the same query. True, he was to set up a subsidiary in India in the IT sector, eligible for a tax holiday until March 31, 2009. However, it did not seem to him that he was getting a tax holiday — not if this subsidiary had to pay DDT and FBT.
Zenobia Aunty, who was spending the cold winter months in the serene sunny environment of Alibaugh, took pity on me and resurfaced in Bangalore. Since then, she has been web-surfing and reading up on tax mechanisms the world over. Of course, she is also dictating to me — right now she is dictating this column.
It seems that in order to get rid of the hassles of FBT, a few trade associations are recommending an increase of 1% in corporate tax rate. It would be good if FBT is restricted to certain sectors of industry or to large companies.
In fact, it would be even better, if the Finance Bill could provide for a differential tax rate for large and small companies. Zenobia Aunty informs me that in the UK, the corporate tax rate is 30%.
However, if the taxable profits of a company during a fiscal year are less than £300,000, the small companies’ rate of corporate tax of 19% may be claimed. There are in fact a few such slabs available. A ‘nil’ rate of corporate tax applies if the taxable income is less than £10,000 in a fiscal year. US tax laws also contain a slab mechanism for corporate tax rates.
Possibly the introduction in India of a slab-based mechanism of corporate tax or a differential tax rate for small and large corporate entities would be helpful.
In India, a notification dated July 18, 2006 had notified that the Micro, Small and Medium Enterprises Development Act, 2006 (the Act), will come into force from October 2, 2006. Well, this Act is now in place.
One of the primary objectives of this Act is to ensure timely and smooth flow of credit to the small and medium enterprises (SMEs). It provides for mandatory payment of interest in case of delayed payments by buyers to suppliers from the SME segment.
Further, to add the sting to this penal provision, this Act provides that such interest payment shall not be allowed as a business deduction in the hands of the buyer. The buyers also have to disclose certain information in their audited annual accounts. The aim of this legislation is laudable. But a better idea would be a lower rate of corporate tax for the SME segment.
This newly enacted Act has defined micro, small and medium enterprises in terms of the value of investments in plant and machinery and also on whether they operate in the manufacturing or service sector. To illustrate loosely, if an enterprise is engaged in the manufacture of goods, it is a micro enterprise, provided the investments in plant and machinery do not exceed Rs 25 lakh.
If it operates in the service sector, then the cut off limit is Rs 10 lakh. The same definitions could be adopted even for the purpose of the Income-tax Act. Differential corporate tax slabs could accordingly be introduced.
Further, I know we (Zenobia Aunty and I) say this every year, but the entire concept of minimum alternate tax (MAT) does require a rethink. Now let us see what the Finance Bill, 2007 will bring forth, both for you, me and indeed for India Inc (including the SME segment).
(The author is a CA. Views are personal.)
Wednesday, January 03, 2007
Don't Mess With Taxes! It is not just the title of Kay's blog (see the link on this page), but something government's world over should pay heed to. In a bid towards simplification, things somethings get more complicated. The un-Saral form for individual tax payers is one such example. Newly introduced Form 1 for the Corporate tax payer also caused some heartburn.
This column was actually meant for December. However, the Economic Times carried it today on January 3, 2007. A nice start to the New Year, well almost.
Please click the url here.
Or else, read the version that has been downloaded and pasted below. Happy New Year, blog surfers.
The Economic Times Online
Is it check out time?
[ WEDNESDAY, JANUARY 03, 2007 12:48:12 AM]
Don’t mess with taxes”. This is a popular award winning tax blog, written by US based journalist Kay Bell. But, any tax journalist anywhere in the world would agree with the title of this blog.
Be it is the US-based internal revenue service or the Indian ministry of finance and our very own Central Board of Direct Taxes, the issues remain the same. Where do we find additional revenue? How do we ensure that we do not lose our slice of the tax pie? How do we bring more taxpayers into the net? How do we ensure that there is no tax avoidance?
The answer is simple, don’t mess with taxes. Keep the tax laws and procedures simple, friendly and understandable and there will be more of an incentive for taxpayers to pay, file and smile.
The tax season for India Inc has recently come to an end. November 30 was the last date for the newly introduced electronic filings of the tax returns for corporate taxpayers. The initial glitches faced were dealt with effectively by the Union ministry of finance. Not only by extending the due date by a month, but by releasing updated versions of the software. As they say, all is well that ends well.
However, come next season and again this corporate tax return running into a multitude of 50 pages plus will have to be filled in and filed. It is surprising that I can recall my days in journalism so vividly. For instance, I remember the finance minister, P Chidambaram was a tad uppity while answering the questions raised by us tax journos as to the reason behind introducing tax on cash withdrawals from the ATM and remarked that he knew what he was doing.
Perhaps, once again the ministry of finance is clear about what it will be doing with the plethora of information that has been gathered through the new Form 1, which corporate taxpayers had to electronically file.
Several details were asked for, such as the existence of a permanent establishment, of whether any foreign tax credits were availed of as per the tax treaties, of the number of employees in India and outside India, of the additional funds employed by the company during the previous year, the capital expenditure incurred and also a multitude of ratios had to be computed and carefully filled in the tax return.
Apart from not being certain on how such information will be processed and used, I am at a loss to understand another issue. The ministry of finance did not do away with the need for conducting a tax audit, nor the requirement of obtaining a tax audit report from a chartered accountant in Form 3CD. The only requirement was that this form is not required to be attached to the e-return.
This led to some duplication of work. A host of information in the tax audit report had to be reproduced in the tax return. Perhaps it would have been simpler to provide for physical filing of the tax audit report, as was the case with the transfer pricing certificate (in Form 3CEB). After all, collecting of information, even if it is for some useful purpose, should not result in duplication of time, effort and money to the taxpayer.
The parliamentary standing committee on finance has come out strongly against the new tax forms for non-corporate taxpayers had to file. For instance, it has asked the MoF to revert to the earlier Form 2E (the Saral form) instead of the new Form 2F, which called for among other things a cash flow statement from salaried taxpayers.
The cash flow statement has created confusion as well as apprehension amongst taxpayers that they will have to keep on providing additional information to the tax authorities cited the committee’s report. The committee has recommended that the cash flow statement done away with entirely. Further the MoF has also been criticised for making online filing of returns mandatory as all taxpayers may not be able to do so.
I do hope Form 1 also gets examined. Yes, certain information is required, it is necessary to collect information and to prevent tax avoidance, but it is also necessary to avoid calling for unnecessary details and to save time and costs for the honest corporate tax payer.
Zenobia Aunty has an annoying habit. These days whenever she sees me relaxing, she hums the last few lines of Eagle’s Hotel California: “Last thing I remember, I was running for the door, I had to find the passage back, to the place I was before. Relax, said the night man, we are programmed to receive, you can check-out any time you like, but you can never leave”.
It is true the tax season is over, but does it mean that come next season, we will have to go through this entire exercise, including duplication of work, all over again? Time will tell.
(The author is a chartered accountant. Views are personal.)