Tuesday, January 30, 2007

What do the stars fortell? Law street in The Economic Times (January 2007)

It is that time of the year again. Everyone is seeking favours albeit through pre budget memorandums sent or presented to the Ministry of Finance. There is much talk of helping the struggling Small Scale Sector in India. Is this just lip service? Zenobia Aunty in this month's column has some suggestions. So read on and enjoy.

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 - Law Street in The Economic Times (December actually)

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.)