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.)


Kay said...

I am very honored to be mentioned in your column! I have let my readers know about it here:

Anonymous said...

Please answer me the following questions so I can determine my taxable income:
1) Should I use the rules found in 26 USC § 861(b), and the related regulations beginning at 26 CFR § 1.861-8, to determine my taxable domestic income?
2) If some individuals—including myself—should not use those sections for determining their taxable domestic income, please show me where the regulations say who should or should not use those sections for that.
Reason for first two questions: The regulations under 26 USC § 861(b) (26 CFR § 1.861-8 and following) begin by stating that Sections 861(b) and 863(a) state in general terms “how to determine taxable income of a taxpayer from sources within the United States” after gross income from the U.S. has been determined. (The regulations then say that Sections 862(b) and 863(a) describe how to determine taxable income from outside of the U.S.) Section 1.861-1(a)(1) of the regulations confirms that “taxable income from sources within the United States” is to be determined in accordance with the rules of 26 USC § 861(b) and 26 CFR § 1.861-8. (See also 26 CFR §§ 1.862-1(b), 1.863-1(c).)
3) If a U.S. citizen lives and works exclusively within the 50 states, and receives all of his income from within the 50 states, do 26 USC § 861(b) and 26 CFR § 1.861-8 show such income to be taxable?
Reason for question: Section 217 of the Revenue Act of 1921, statutory predecessor of 26 USC § 861 and following, stated that income from within the U.S. was taxable for foreigners and for U.S. citizens and corporations deriving most of their income from federal possessions (but did not say the same about the domestic income of most Americans). The regulations under the equivalent section of the 1939 Code (e.g. §§ 29.119-1, 29.119-2, 29.119-9, 29.119-10 (1945)) showed the same thing. The current regulations at 1.861-8 still show income to be taxable only when derived from certain “specific sources and activities,” which, concerning domestic income, still relate only to foreigners and certain Americans receiving income from federal possessions (26 CFR §§ 1.861-8(a)(1), 1.861-8(a)(4), 1.861-8(f)(1)).
4) Should one refer to 26 CFR § 1.861-8T(d)(2) to determine whether the “items” of income he receives (such as compensation, interest, rents, dividends, etc.) are excluded for federal income tax purposes?
Reason for question: The regulations (26 CFR § 1.861-8(a)(3)) state that a “class of gross income” consists of the “items” of income listed in 26 USC § 61 (e.g. compensation, interest, etc.). The regulations (26 CFR §§ 1.861-8(b)(1)) then direct the reader to “paragraph (d)(2)” of the section, which provides that such “classes of gross income” may include some income which is excluded for federal income tax purposes.
5) What is the purpose of the list of non-exempt types of income found in 26 CFR § 1.861-8T(d)(2)(iii), and why is the income of the average American not on that list?
Reason for question: After defining “exempt income” to mean income which is exempt, eliminated, or excluded for federal income tax purposes (26 CFR § 1.861-8T(d)(2)(ii)), the regulations give a list of types of income which are not exempt (i.e. which are subject to tax), which includes the domestic income of foreigners, certain foreign income of Americans, income of certain possessions corporations, and income of international and foreign sales corporations, but which does not include the domestic income of the average American (26 CFR § 1.861-8T(d)(2)(iii)).
6) What types of income (if any) are not exempted from taxation by any statute, but are nonetheless “excluded by law” (not subject to the federal income tax) because they are, under the Constitution, not taxable by the federal government?
Reason for question: Older income tax regulations defining “gross income” and “net income” said that neither income exempted by statute “or fundamental law” were subject to the tax (§ 39.21-1 (1956)), and said that in addition to those types of income exempted by statute, other types of income were exempt because they were, “under the Constitution, not taxable by the Federal Government” (§ 39.22(b)-1 (1956)).

Taxtalker said...

Kay: Thank you so much

Anonymous: It is best that you approach a US based tax adviser to resolve these issues.