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?
LUBNA KABLY

[ 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.)

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