Tuesday, March 13, 2007

Yeah, I'm the tax man (Law Street in The Economic Times-March - Budget based column)

We were waiting for a break - a substantial hike in the exemption limits and a lower rate of tax. Instead a slightly higher rise in the exemption limit has been more or less offset by an additional cess - for higher education. Taxes are the price we pay for civilisation. But for once, we would like to know who this cess collection actually trickles down. As they say, seeing is believing. Zenobia Aunty shares her thoughts on the budget with you. Click here.

As always, you can scroll down, in case of difficulties in accessing the link above.

Yeah, I’m the tax man

Lubna Kably, March 13, The Economic Times

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.

1 comment:

LindsayDayton said...

I thought you'd appreciate this page that my friend just posted--his ideas about personal tax earmarking would give people access to some gov't budgets...