Saturday, December 20, 2008
Calvin and Hobbes will always be my eternal favourites. LinkedIn now has a group of Calvin and Hobbes devotees, well I am one of them. In India, not all are lucky to get a school education, and unlike Calvin, many of these kids do want to go to school. We do pay a separate education cess, I would love to know how it actually gets utilised. Wouldn't you?
Click here for some thought provoking ideas on how we could best pay our taxes. And if the government does want to speed up spending how about giving us a tax holiday or a month or so?
Happy New Year, readers. I shall post again in the new year.
PS: Kay Bell has included this on her blog as part of the Tax Carnival. Click here for many more exciting tax articles from across the world.
PS: The column is pasted below as well.
Direct taxes, with a difference
Eliminate the middleman
Funds must directly reach the poor
There must be accountability of tax spend
The economic slow down has had its effect even on the Indian economy, the terror strikes have momentarily shattered the spirit of India, even as it seeks to rise united from such strife. Thus, it appears that 2008 will end on a sombre note. In fact, this columnist wonders whether the world will change again by the time the column, which is penned much in advance, sees the light of the day.
Zenobia Aunty is a firm believer in the “Glass is always half-full” philosophy. “Every dark cloud has a silver lining”, she says. And she adds her own phrase, “You can see a rainbow only after the storm”. Perhaps this is true, even though her niece is still not fully inclined to believe in this philosophy and would prefer not to face a storm, even for a rainbow. Yet, life is a roller-coaster with its ups and downs.
Post the strife in Bombay, Zenobia Aunty and her niece were intrigued by one placard which stood out in a peace procession. It read: No more taxes. Why should we pay taxes, if we can’t be protected? Given the situation and the emotions holding sway over Bombayites (I prefer this term), this outcry did seem justified. One can only hope that Bombay and India heal, heal soon, and concrete steps are taken that will benefit us all. Right now, we do seem to be grappling for answers and there is a cacophony of bewildered sounds each time the telly is switched on.
In the US, tax payers are crying over the use of their money for bail-outs. Surfing the net for the tax implications of bail-outs, Zenobia Aunty came across a unique suggestion by US Congressman Louie Gohmert – a tax holiday for ‘we the people’. In short, a two month tax holiday for the hoi-polloi of the United States of America.
In his press release Congressman Gohmert states: “By instating a temporary tax holiday, we could electrify the American economy and provide overwhelming relief to taxpayers, all for less than the cost of the current failed bailout system."
He continues: “Think about how much you would have if you didn't have any social security or income tax withheld from your pay check, or if you didn't have to pay those taxes for January and February! Americans could take and invest their own money where they believe it should go - to paying down mortgages, buying a new car, making credit card payments. The economy would get relief where it is needed the most. Why try to decide how to prevent foreclosures? Just give taxpayers their own money to catch up on their payments. Those in lower income brackets who are hit the hardest by the FICA tax would see huge money back, and then they could choose who should benefit from their hard earned money. Even the self-employed and small business owners would receive a fantastic amount of their own much-needed money, and they will be able to invest that back into their businesses and even create the ability to hire more people.” Gohmert is currently preparing a bill to declare the tax holiday for January and February of 2009 and is also gathering support at the same time.
I agree with this concept in so many ways. Loyal readers may recall how Zenobia Aunty had mentioned that she doesn’t really know what happens to the education cess which she coughs up as part of her tax dues. Now mind you, this is collected for a specific purpose – for educating India, education hopefully will create a more aware India and she is all for it.
Now, if instead of just paying this cess, if she could deposit it at a school of her choice, wouldn’t that be better? If we all know that the entire sum meant for the poor recipient does not reach him or her, wouldn’t this direct payment system be better? True, a handful of people may fake such payments. But, I am sure patriotism burns strongly within each of us – at least in those of us who pay our taxes, and if it is for the right cause, most of us would pay the money willingly. Perhaps select schools could set up e-bank accounts, where the deposits could be directly made? This would eliminate any middleman.
Gurucharan Das, in one of his columns has written that India spends 14% of GDP in subsidies for the poor, which is more than enough to wipe out poverty. But poverty persists because subsidies leak out through corruption.
Zenobia Aunty had earlier held that perhaps tax sops even for donations in kind, such as a computer manufacturing company donating computers to a government aided school should be entitled to tax sops. While, this could be introduced, perhaps it is time to spread the net wider and make it possible for us to give directly a portion of our tax for what it is meant for. And what better way to start than through education cess? But, is anyone listening?
This column can best end with the words of Rabindranath Tagore: Where the mind is led forward by thee into ever-widening thought and action; Into that heaven of freedom, my Father, let my country awake.
Wednesday, December 17, 2008
Sunday, December 07, 2008
My article on UTVi.com on India's interpretation of tax treaties in the light of its position to the OECD MC update 2008
While I contribute to The Economic Times monthly, in my personal capacity (Zenobia Aunty is fiercely independent), my current employer organisation does stress upon our writing for various publications as well and sharing knowledge.
So here is one such contribution that appeared on UTVi.com's portal. India has made as many as 73 reservations on the positions taken by OECD in its 2008 update across issues panning definition of permanent establishment (PE), attribution of profits, royalties and mutual agreement procedures. Click here to read more.
Monday, November 10, 2008
This column was written and sent much before the mayhem broke out in Bombay. Bombay, being Bombay, tried to get back on its feet pretty quickly, even as the war is still on. Today, I learnt that colleagues tried to go to work, even though they have been advised to stay at home. Perhaps Bombayites for once, need to stem this spirit - which is spoken of in awe after every disaster.
Perhaps for once, they need to just stop work, till there are survelliance cameras installed in the city, till the police work (and an independent police force please) is adequately equipped. Bombay doesn't need politicians which create further divisions on the basis of caste, creed, religion, region. It needs good sound administration.
Please do pray for those Bombayites who lost their lives in this terror which was unleashed upon them. I just spoke to some family friends, and they have lost a family which was dear to them, at Oberoi-Trident shootouts/blasts. Please pray.
Anyway, coming back to tax land, this column got published today. Please click here to read online, or else as always scroll below.
Yes we can!
* Tax policies must be in norm with changing times
* Genuine needs of corporate entities should be addressed
* A high-handed approach is to be avoided at all costs
I was amazed with Zenobia Aunty’s enthusiasm. She followed Barak Obama’s each and every move during the run up to voting day. Agreed that guy can speak. Perhaps it was only he, who could collectively have so many Americans and even people across the world join in the chorus of: Yes we can!
Zenobia Aunty may be momentarily swept up in this euphoria, but her niece is sceptical. America is facing the highest level of unemployment to be seen in recent times. No matter, how much we try and brush the issue beneath the carpet, pink slips are more than visible even in India. Any techie, or equity analyst, even those worth their jobs, appear to be uncertain of their tomorrow, especially if they are not working for a ‘desi’ company. Zenobia Aunty’s neice, having realised the value of human life and not just corporate life, was also contemplating a change – some action in the sphere of Corporate Social Responsibility, but with funds drying up, CSR programs across India Inc seem to have taken a beating. Yes, the situation seems to be bleak everywhere, as bleak as the grey skies in Bangalore.
But, is this recession another “Great Depression”? Zenobia Aunty, who has heard many an economist on the telly, says that it isn’t so. The biggest difference is that governments are taking steps to stem the rot. Perhaps, as they say, it is better late than never. During the Great Depression, for instance, the Fed just wringed its hands and let Wall Street Banks collapse. Today, not only have banks been rescued but much more has been done.
Steps have also been taken in the United States to promote liquidity. For instance, the IRS has issued guidance increasing the opportunities for a US corporation to borrow, interest free, money from a controlled foreign subsidiary (CFC) without triggering tax on a deemed dividend in the US. Generally, an obligation owed to a CFC by its US parent is treated as an investment in the US property and thus a deemed dividend which is subject to US tax. Today it appears that a CFC may loan funds to its US parent provided that such loan is repaid within sixty days and the total number of days in a taxable year that the CFC has such loans outstanding is less than 180 days. In such circumstances, there will be no tax incidence in the US on receipt of the loan.
However, like most legislation, it is a unilateral approach and this in itself may hamper its success. For instance, RBI regulations permit an Indian company to lend money to its foreign subsidiaries. Can interest free loan be given to a parent? Second, will such a transaction be a deemed dividend distribution under Indian tax laws? What about transfer pricing provisions? The issues that one can visualise are endless. Well, cross border tax as we all know is not simple. So yes, US companies may perhaps find themselves in a nice pickle. Other countries are bound to have some regulation or the other which could hinder flow of loans to US parent companies.
India is also facing a slowdown. IPOs have been postponed, some indefinitely. Thus, it is not just US companies which are in a pickle. So are Indian companies. There is an added twist to this entire issue.
Hob-knobbing with the who’s who in tax land in Mumbai, Zenobia Aunty was inquiring about the fate of these companies. She knew that expenditure incurred in connection with an IPO (and believe me, these expenses can be heavy) are treated as capital expenditure that can be amortised over a period of time under the provisions of section 35D of the Income-tax Act, 1961, rather than a revenue expenditure that can be written off at one stroke. Now, if the company is not able to raise funds at all, either through an IPO or otherwise, it is likely it will have to face a prolonged litigation to claim the fund raising expenses, as bonafide business expenditure. In this very cocktail party, merchant bankers argued themselves hoarse with the wise men from tax land, but no consensus was reached.
Zenobia Aunty feels that the government should recognise this problem and in genuine cases help resolve it, so that companies do not have to face an endless bout of litigation – just because the market tanked. Unfortunately, this time, Zenobia Aunty is leaving us, not with solutions but just questions. She hopes that these will be appropriately addressed. After all the mantra of today is: Yes we can!
In fact, this columnist’s boss is now eager to delve into the entire scenario of how governments have tackled downturns through appropriate policy changes. It is a question of the survival of the fittest. But then, this is another story to watch out for!
Saturday, October 04, 2008
Many a slip, between the cup and the lip
- Simplicity is the key to good governance
- More approvals need not mean good governance
- Clarity is urgently required in the FDI context
Reading the news about financial giants in the US come tumbling down, Zenobia Aunty’s mind wandered over to the stories written by one of her many favourite authors – Ruskin Bond. No, this Bond is not the one with the 007 tag attached, but rather an author who writes eloquently and simply about human life, with a few ghosts thrown in here and there.
In his story, “The boy who broke the bank”, the author captures life in a small town and how a chance remark by a poor village boy, precipitated a crisis with a long queue to withdraw money from the local bank.
However, the current crisis is not a fall out of a chance remark. Many ascribe it to greed. All said and done, Zenobia Aunty is quite perplexed. The bail out entails purchase of bad debts held by the financial institutions because they lent money to people who could not repay, or equally bad, purchased loans from institutions who lent money to people who could not repay. She is so glad, that her tax money will not be used for this, but her US based friends are certainly not smiling. Unfortunately, in this flat world, the trickle down effect will be felt even in Bangalore or Chennai or anywhere else.
There are lots of things which Zenobia Aunty does not understand, apart from the reasons why these giants tumbled. Take our very own Foreign Direct Investment (FDI) Policy, for instance.
The Economic Times, which is Zenobia Aunt’s favourite financial paper, has reported that the government is now planning to rework the FDI policy for holding companies. Joint venture companies with foreign equity are required to seek fresh approval from the Foreign Investment Promotion Board (FIPB) within 90 days while investing in downstream companies.
According to the stand taken by the FIPB in recent times, once an Indian operating company (having an FDI stake), makes an downstream investment, it changes its stake from an ‘operating company’ to that of an ‘operating cum holding company’ and FIPB approval is mandated. Even if such downstream investment has been made in the past approval is now required.
A plain reading of a Press Note, which had sought to simplify the issue, makes Zenobia Aunty; literally tear her unruly silver hair out. This Press Note had clearly stated that foreign owned Indian holding companies can undertake downstream investments in activities falling under the automatic route – without FIPB approval, subject to certain conditions. So what now?
Mind you, this isn’t a case of purchase of bad debts of the entity in which the downstream investment is being made. It is pure investments into India, required for further growth and development of the economy. It is money coming in, not going out (something which some belonging to the class of ‘powers that be’ still frown upon, India’s pride on foreign acquisition of mega companies notwithstanding).
To add insult to injury, even a marginal foreign holding in a company which makes a downstream investment can trigger a strong reaction from the FIPB. Shouldn’t the FIPB define the percentage of FDI in the primary operating company which is set to make further downstream investments, as the trigger for seeking approval? Can’t this be restricted to say a FDI percentage of 75 per cent or more? Further what exactly constitutes downstream investments? Would it cover non-equity?
Do you remember Chris? Zenobia Aunty’s globe trotting expat neighbour? He is all set to quit and take a long break in Bali. Lucky guy. He swears he will take up another profession, probably teaching people how to scuba dive. Sharks according to him, are safer than ambiguous legislations. Spot, while conjuring up dreams of shark fin soup (something he saw on telly) wags his tail in approval.
Chris’ employer company thought he was now an ‘India champ’ and could take on anything and everything, including the Bangalore traffic! However, he could not handle any more scenarios, where one thing is intended and another implemented. Apart from this issue, which has led to him sleepwalking in the neighbourhood (only Spot enjoys these post midnight journeys over potholes and slush) Chris is irked that a 100 per cent tax holiday was intended for SEZ units, but hang on - thanks to a tiny formulae, this actually gets reduced, if one goes by the literal interpretation and the company has both SEZ and STPI units and other business units. A similar situation in another section of the Income tax Act was favourably resolved, this pertaining to SEZ’s remains pending, till this date.
There is many a slip between the cup and the lip. Just paying lip service, to the cause of foreign investments or the SEZ sector doesn’t’ help in the long run.
Saturday, September 06, 2008
- Tax laws are getting weird
- Technology is not helping matters
- Taxman’s reach on fringe benefits is widening
“Excuse me, but yours couldn’t have been the world’s worst dog, because mine was”. This was the typical response that John Grogan, author of the bestseller Marley & Me, got when he wrote a touching obituary of his beloved dog Marley.
Zenobia Aunty asked on a networking site: Which is the most insane tax law in your country? And answers poured in. While, these tax laws may seem stranger than fiction, these responses are from real people, all eager to tell their story.
Since we are talking of Marley, did you know that in the Netherlands all dogs are subject to a Dog Tax? It is an annual charge which is calculated on the number of dogs per household. As good friend, Jacques J.J. Soudan, pointed out, “These days you have to pick up your dog’s droppings. Yet, you still pay this tax, perhaps for the noise pollution!”
But, if you want to keep man’s best friend, there is no choice. Adam Jewell, from USA stresses upon “choice”: “The most insane tax law is that the tax payers have virtually no say over where the majority of our tax dollars are spent. There should be a list of categories or even specific projects where you allocate your tax dollars – such as military, education, health care, corporate tax breaks, etc.”
Michael Gardner, from USA, offers a slight variant of the concept of choice and says he would like to choose if he wants to invest in social security (15 per cent plus of income goes here). “Or truly invest in something that provides me an opportunity to have a decent income at retirement” he adds. As regards social security tax, Martin Thomas, now based in the UAE has an additional point. He fails to understand why countries levy income taxes on social security payments, made out of tax levies itself!
If you thought FBT was something only you suffered from, take heart. Jacques pipes up: In the Netherlands if you use your company car for personal trips beyond a certain mileage, there is an addition to your taxable income. Guess what? Video surveillance is on at strategic places to tape licence plates – match them with the data base of company cars and most likely with individual tax declarations. The arms’ of the taxman have really stretched.
Perhaps it is taxes that drove Bill James from Down Under. He explains: “ In Australia, the personal tax rate is higher than a corporate tax rate. It is just 30% for corporate entities, but the maximum marginal rate is a high of 46% for individuals. Add to that, is a 10% VAT, a 1.5% tax to support the health scheme and of course there is also capital gains tax on specified assets.”
Do you think you can pray for relief from taxes? Not really. Recall the experience of Edmilson Palmeira, who resided in Germany for a year. They have ‘Kirchensteuer’ or Church tax – 8-9% of your income. This, an internet search shows, is collected by the public tax offices and transferred to the churches, but the government retains a percentage as collection fee! Church tax is also imposed on some members of religious congregations in Denmark, Sweden, Finland, Austria and some parts of Switzerland.
Is technology making things better? Not really. Take Mark Lee’s example. In the UK, the filing deadline for paper based self assessment tax returns has been set as 31 October, this year. Previously it was 31 January, (which still remains the deadline for tax returns filed over the internet). However, the rules relating to penalty for late filing have not changed, thus even if paper returns are filed in November, December or January next year, there will be no penalty. In effect, the 31 October deadline is unenforceable.
Björn Larsen, from Sweden, calls his country – the Home of Taxes (with such a high tax rate, that Zenobia Aunty refuses to mention it) and with so many strange laws, he admits it is hard to keep up with them. Most irksome to Bjorn is the energy tax. On the electricity bill you may energy tax and VAT to top this tax. He also speaks of Property Tax, payable every year on your house property and a Fortune tax, which gets levied every year if you have saved a million.
Phil Parkinson, from Canada points out, there is no running away (rather flying away) from taxes. Use air travel, pay airport security tax and oh, don’t forget the air fuel tax!
Nothing is certain, but death and taxes. Simon Hamer, from UK, has the last word: “I'm absolutely wholly against inheritance tax, you save all your life to look after your kids futures, only to have a huge lump of it taken by the taxmen.” Agrees, Texas based, real estate attorney, Matthew Aycock: If I had to pick one tax as the worst tax, I would pick the Estate Tax on non-liquid assets. It affects too many families that have a lot of land and absolutely no cash.
Time for Zenobia Aunty to write a bestseller!
Monday, August 18, 2008
- Tax authorities must adopt risk management techniques
- Understanding the tax payer’s commercial scenario is crucial
- Transparency must be improved
“Life is mostly froth and bubble; two things stand like stone, kindness in another’s trouble, courage in your own”. This columnist recalls scrawling these lines in year-books of school-mates aeons ago, when Facebook was non-existent.
Year-books, may have become extinct, but Zenobia Aunty claims that this quote still holds true. She has recently experienced and understood first hand the ethos of this quote and has learnt to accept and appreciate help.
Talking of help, in tax-land, it is invariably the tax intermediaries (your friendly tax advisors) who offer help, and at times offer what is perceived by tax authorities to be aggressive tax planning advice. After all, they cater to your actual needs!
In this backdrop, a team set up by The Organisation of Economic Co-operation and Development (Oecd) has recently published a report on “Study into the role of tax intermediaries”. Recognising that tax advisors merely supply what client’s require and are perhaps not the real decision makers, this Study Team examined the tripartite relationship between tax payers (in particular the biggies), tax authorities and tax advisors. The participating countries also included non-Oecd members such as India.
The name of the game here is risk management, not by the tax payers, mind you, but by the tax authorities. To quote from this report: “A key point to keep in mind is that risk management is not only about what tax bodies do but also about which tax returns not to audit, which tax issues not to ask about and which enquiries not to pursue. Judging what they will not do assists tax bodies to prioritise the things that they will do.”
And all this should be conducted keeping in view, the five attributes that large corporate tax payers want tax authorities to demonstrate, viz: understanding based on commercial needs; impartiality; proportionality; openness and responsiveness. If this is done, it would encourage tax payers to provide early disclosure of potential tax issues and usher in greater transparency.
Proportionality is all about balance, knowing what issues to pursue and what not to pursue. And the first tiny steps to achieve this seem to have been taken in India. After all just because a company is popular on the stock exchanges does not mean it is a high risk company from a tax perspective!
Recent news reports indicate that: “The tax authorities have decided not to scrutinise the tax returns of over 1000 top companies, provided no major disputes are pending against them. Last year, the CBDT had taken a decision to scrutinise tax returns of about 200 ‘A’ group companies listed on the Bombay Stock Exchange BSE, 500 National Stock Exchange companies and a large proportion of non-banking finance companies”.
But Zenobia Aunty feels much more can be done. Take for instance, understanding based on commercial needs, which should also include understanding the basic characteristics of that particular industry, say – industry trends, commercial risks, use of intellectual property et al. Without an understanding of this, the broader context of an activity or transaction would be misunderstood resulting in costly litigation. We have seen this happen, such as the withholding tax litigation in relation to software imports.
Coming to impartiality, there must be consistency and objectivity in the issue resolution; perhaps it is high time that alternative dispute resolution techniques were introduced in India, such as fast track settlement using a mediation process. If tax authorities are forced to chase tax collection targets, impartiality may be impacted.
Openness and responsiveness are aspects that Zenobia Aunty prefers to club together. For instance, changes in tax policy should be introduced after sufficient dialogue. The need of the hour is to develop enhanced relationships, on the lines of projects undertaken in Ireland, the Netherlands or even the USA.
In the Netherlands, a pilot project commenced way back in 2005, with twenty large companies to conclude “supervision agreements”. In essence, CFO’s have to commit to full transparency on current tax issues, in return the tax authorities give a binding opinion on that issue expediently. The advantages for the company are: certainty, being in control of their tax position, and lesser administrative burdens. This project is now going strong.
With India having contributed its inputs to this study, one can hope for better times ahead. In other words, collaboration and not confrontation holds the key to a brighter future and tax authorities world over are awakening to this realisation.
Amen to that.
PS: This also featured in Kay Bell's Tax Carnival. Check out the other interesting articles as well, which featured here.
Wednesday, August 13, 2008
Saturday, June 07, 2008
I so love fairy tales, but they all have a moral don't they? Well, Zenobia Aunty decided to be a story teller recently. This is what happened, click here. As always, if the url doesn't work, read the story pasted below.
Once upon a time…
Taxes have been put to various uses
Taxes yield results, only if used well
Taxes must offer equity, certainty, convenience and transparency
Down with fever, this columnist recalled vividly the time when her Granny used to tuck her into bed and narrate a bed-time story. Well, Zenobia Aunty, decided to act that part, ahem- as well as she could.
Hot soup and toast, the pitter-patter of the rain, a cool breeze and story telling time, courtesy Zenobia Aunty, who had rushed from Mumbai to be at the bed side of her favourite niece, while the doctors pondered over the cause of this low but irritating fever that just refused to go away, cured this columnist in no time. After all, one can only tolerate tax stories, that much!
Knowing fully well, that her niece now also had an Irish boss to contend with “or vice-versa,” as he is bound to retort (though he sure knows how to deal with just about any situation this columnist can ever dream of conjuring up), Zenobia Aunty began with a story – no, not about pixies and fairies and other Irish folklore, but on the ‘plastic bag tax case’. Introduced in 2002, in the Republic of Ireland, it had an immediate impact where the plastic bag usage per person decreased within weeks by 94%. Years later there was again a slight increase in consumption of plastic bags, prompting the Irish government to increase the levy from Euro 15 cents to Euro 22 cents in July 2007, said the wise Aunt.
The New York Times, has a few months ago, written about this interesting experiment. The paper attributes the success of the tax imposed on plastic bags to several factors, viz: Creating environmental awareness by the government; lack of a power manufacturer’s lobby: there were no plastic bag manufacturers in Ireland (most bags were imported from China); strict enforcement– resulting in people carrying their own cloth bags – if retailers were to switch to paper bags, this too would have been brought to tax; easy adoptability to the new tax regime: most retail chains were highly computerised and adding the “plastic bag tax” involved minimal reprogramming; the means justified the end: the tax was put to good use – to finance environmental enforcement and clean up processes. It is clear it was not tax alone that did the trick. I am sure my Irish boss will agree on this one.
That said; Zenobia Aunty hopped over to a more recent example or rather Kelly’s post on her blog ‘taxgirl.com’ regarding the levy of tax on “alcopops” – pre mixed soda-like alcoholic drinks. Australia, to decrease dangerous underage drinking has sought to increase the tax on alcopops.
Has it helped? Kelly explains: The Distilled Spirits Industry Council (DSIC) says that the increase in tax on alcopops has led to increase in dangerous drinking. Specifically, the DSIC cites figures that show that sales of alcopops have fallen by almost 40% since the tax increase took effect last month. That would be good, right? However, in that same time, sales of bottles of pure spirits have increased by about 20%. Most people are now mixing their own drinks and are perhaps drinking even more alcohol. The Ministry of Health, however, may stick to clear narrow statistics alone.
Kay Bell, tax writer from the US chimes in, with her post on ‘dontmesswithtaxes.typepad.com’ Texas, where she resides, imposed a tax on adult entertainment last year. Lone Star State legislators authorized a USD 5-per-patron fee, aka pole tax, on strip clubs. The money, an estimated USD 40 million a year, is to go to anti-sexual-assault programs and health care for the uninsured. However, in March an Austin judge found that the tax infringed on First Amendment rights of freedom of expression and declared the tax on exotic dancers unconstitutional. While Texas is collecting the tax even as the case is on appeal, other States seem to be waiting and watching.
What is the point in taking you through the above cases? Is Zenobia Aunty just spinning a yarn. No, she isn’t. Every fairytale ends with a moral and here comes one.
She nods her head sagely and states that the plastic bag tax worked, because it fulfilled all the tenets of a good tax regime – viz: equity (the taxes were nominal and imposed on all users); certainty (the timing and amount was certain); convenience (it was easy to pay the tax); and lastly economy in collection (it was easy to administer). Moreover, there was no wiggle room, papers bags if used, would have been subject to a similar levy. Whereas in case of alcopops, probably the users just shifted to something else, a more dangerous situation, in fact. And yes, the tax laws must not to contrary to the fundamental constitution – while the Pole Tax, is an offbeat example, this tenet holds good.
Moral of the story: Taxes are a powerful weapon, but must be used correctly. Else like the alcopop tax, it may just lead to contrary results. That, law makers is something Zenobia Aunty wishes that you ponder over, whenever a new tax levy is being contemplated.
Tuesday, May 27, 2008
This time, "Zenobia Aunty" whom you are all well acquainted with, did suffer from the writer's block. Fortunately an excellent decision read favourable to the tax payers) of the Delhi Tribunal which impacts global employees came to the rescue.
Around the word in eighty days, has taken a new meaning altogether and the world is flatter than what even Thomas Friedman envisaged. So read on. Meanwhile, I wish I was sailing in this hotair balloon, don't you? Click on the title below to access Economic Times online. Else simply read on or read maadi, as it is said in Bangalore (Bengaluru).
So go ahead and spot this column and read up on many others.
Employees on the go…
Zenobia Aunty is rarely tongue tied, or let us put it this way, she never ever faces a writers block. She always has a lot to say, whether it be through spoken or written communication.
Well, this weekend, we experience what the writers block was all about. I sat motionless for hours together, waiting for Zenobia Aunty to dictate her column to me. Alas, we ran up several drafts, but the topic kept changing. Right from why Bush was blaming us for our Aloo Tikka burger and saying it led to spiraling food prices in his country, to whether or not the barter system would replace monetary currency. It was truly a step back into the dark ages for us, more so, with the power shortage which Bengaluru is exposed to, off and on, especially during the summer months.
Zenobia Aunty wished she was in the cooler climes of Iceland. But alas, only global mobile employees have all the fun she said, referring to our neighbour – Chris who shuttles between Finland, China and India. Chris, doesn’t agree. Imagine having to deal with the tax authorities of three different countries, he sighs. His greatest nightmare is that he will get a tax notice from these countries, which cumulatively is higher than even his total annual salary!
It is quite common for talented employees such as Chris to take responsibility for several countries and to spend time in different countries managing different entities in these various countries. Fortunately, for Chris, the Delhi Tax Tribunal has taken a correct view.
Even more fortunately for both Zenobia Aunty and myself, a tax partner of the firm this columnist is currently employed in, provided much food for thought (or let us say food for the column).
For those who are residents but not ordinary residents in India, whose contract of employment clearly defines the split of services, the Tribunal has held that salary for services rendered outside India is not taxable in India.
Under the Income Tax Act, 1961, (the Act), the scope of taxable income varies with the residential status of the individual. The Act prescribes two tests of residence for individual taxpayers. Each of the two tests relate to the physical presence of the individual in India in the course of the ‘tax year’. An individual is said to be a resident in India in the tax year, if he is: (a) physically present in India for 182 days or more in that tax year; or (b) physically present in India for 60 days in that tax year and 365 days or more in the preceding four tax years.
If either of the tests is not satisfied, he will be considered as ‘non resident’. Additionally, an individual, who is defined as a resident in a given tax year is said to be ‘not ordinarily resident’ in any tax year if he has been a non-resident in India in 9 out of the 10 preceding tax years or has been in India for less than 730 days during the 7 preceding tax years. Therefore, under the Act, an individual may be classified as a resident and ordinarily resident (ROR); resident but not ordinarily resident (RNOR); or a non-resident (NR).
A RNOR is liable to pay tax in India, only on Indian income, i.e.: income received or deemed to be received or income accruing or arising or deemed to accrue or arise in India. Salary income for services performed outside India under a split contract, where such services do not relate to Indian operations does not fall within the above definition.
Of course, if the residential status of the person, even if he is a global employee, is that of a ROR, he would be taxed on his worldwide income in India. But, global employees who keep shuttling from country to country for not very long assignments; this is rarely bound to be the case.
Let us go back to the facts of the Delhi Tribunal decision. Here, the terms of employment between Air France and the assesses (in this case), required that they spend 80 per cent of their time in managing operations in India, 5 per cent of their time in South Asia and 15 per cent in France. The contract of employment itself clearly recognised the division of services to be rendered in India and outside India. The Tribunal held that it could not be said that the period of employment outside India should also be considered as services rendered in India.
In fact, even as our politicians keep fighting on whether or not a North Indian can sell vada pav’s in Mumbai, global mobility is on the rise. In fact, India Inc benefits from foreign talent.
A lot has been written on global acquisitions, on greater access to new geographies, better access to high quality raw material, and in short greater efficiency. The fact of the matter is that the world is flatter than what even Thomas Friedman had originally envisaged. Globalisation whether inbound or outbound, will result in expats coming to India and sharing their expertise.
One can say, sharing of global talent is what the future holds. Properly structured employment agreements, will help Chris and others, concentrate on their work, instead of having unwarranted nightmares. This decision is a step in the right direction, and substantiates the provisions of the Act.
Sunday, April 27, 2008
The heat is getting to Zenobia Aunty and her niece and indeed Spot, who lies beneath the fan, or close to the AC draft and does nothing else. It sure ain't a dog's life for him. This year Bangalore seems to be warmer than usual and I think one of the reasons is the high rises, with glass facades which reflect the light and make it just hotter. Sad, we don't construct buildings in keeping with our environmental needs, but prefer to work in glass house furnances, with the AC on full blast resulting in further adding to the global warming. That is one story, tax on dividends is another. So read on.
Please click here for the entire story. Zenobia Aunty is too lazy to cut and paste it for you this time.
Sorry about that
Tuesday, March 04, 2008
Soon after the budget annoucements, my first thoughts were: Wish I was a farmer, enjoying tax free income and a debt write off. But, no. Life is not easy for them. They are at the mercy of the weather gods and also money lenders.
The budget was quite a damp squib for the corporate sector - the retrospective amendments are derogatory to the very concept of fairness. Mercifully though, no increase in tax rate nor any major new taxes. Call it shaken but not stirred enough for reforms or stirred but not shaken enough for reforms. Something did seem to be lacking.
For the Budget related lawstreet click here. Or as always read below.
Stirred but not shaken enough
4 Mar, 2008, 0000 hrs IST,LUBNA KABLY, TNN
Zenobia Aunty, who grew up in rural Dhanu, can understand the plight of a farmer. But even she has questions to ask her favourite finance minister. Are we pumping money — in this case Rs 60,000 crore in the right direction? Who will save the farmers from the clutches of the money lenders where the poorest of the poor actually go? Further, will this write-off of debts make defaulting on loans a habit? To be fair to P Chidambaram, even if this debt was not written off, the banks may have had to write off their non-performing assets. While this columnist could not find any mention of an expenditure outlay for compensating banks, she understands that they will be. Well, this means, banks are better off than otherwise.
Yet, we must think of an alternative long-term solution. T K Arun, has earlier written about how Magarpatta’s village folk got together, pooled their land, set up a company, developed their lands into modern townships and are now crorepatis. If Shankar Magar, one such villager whose photograph was carried in TOI’s budget day edition could prosper, so can others. ‘Super-boss’, for whom this columnist currently works advocates a ‘corporate-farmer’ partnership model. He thinks that if farmers pooled their land together under a cooperative mechanism, this cooperative then dealt with a corporate house and entered into an agreement for 15 years or so for corporate farming it would be a ‘win-win’ situation for all. The corporate entity would have one organisation to deal with; a larger area of land would be available for corporate farming and farmers would be assured of transparency and better profits. ‘Super-boss’ hopes someone takes up this idea and he isn’t even asking for a fee.
With the rationalisation of tax slabs, individuals stand to gain, but India Inc is in for some disappointments. Perhaps WTO commitments put paid to the strong demands to extend the tax holidays for undertakings in EOUs, STPI, EHTPs, etc., and this expires on March 31, 2009. While the corporate tax rate remains the same, there is bad news if you are a MAT company. Even as the tax rate remains unchanged at 11.33%, book profits will now include deferred tax and provision for dividend distribution tax (including surcharge and cess), and this means more MAT tax. In fact, with this move the Finance Bill, like any other good Finance Bill has sought to overturn judicial decisions. Further, how can a Finance Bill be complete without any retrospective amendment? So this takes place retrospectively from April 1, 2001 and may result in reopening of several cases.
In between the lines are a few more shocks. Generally when you receive an invalid notice — notice sent to you beyond the due date, you still appear before the tax authorities and cooperate with them, without prejudice to the fact that the notice was invalid. Well, better beware. If you do appear in any proceeding or cooperate in any inquiry relating to an assessment or reassessment, it shall be deemed that the scrutiny notice was served to you in time. You cannot then battle out on the ground that the notice was invalid. Talk about being caught between the devil and the deep blue sea. Another retrospective amendment, this time dating back to April 1, 1989: now, there is no need for the tax officer to mention reasons for initiating penalty proceedings. ‘Just do it’, seems to be the new mantra at the tax office.
Retrospective amendments are unfair to the taxpayer, but some traditions do not die — like FBT they are here to stay. However, global employees may get some respite. The Finance Bill provides that if FBT is recovered from them in respect of their ESOP plans by their employer, such tax shall be regarded as tax paid by them. They can claim a credit for such tax in their home country (the country where they are deputed and are now a tax resident). However, this will ultimately depend on whether such other country accepts this. Gopal, our techie next door neighbour is not too optimistic. There has just been a half-hearted attempt to mitigate the cascading effect of dividend distribution tax, no relief will be available to intermediate companies in case of a multi-tier structure or if the ultimate parent is a foreign company.
Bond markets got an unexpected boost. Foreign Currency Exchangeable Bonds can be converted into shares of any group company. The conversion shall not be regarded as a transfer, read it to mean, no capital gains at this juncture and it comes with a retrospective effect by a year. Going forward, there will be no TDS on interest against demat corporate bonds traded in Indian stock exchanges. PC could well say, Mein hoon Bond. Yet, shaken but not stirred enough for reforms, this about sums up the budget for Zenobia Aunty.
Sunday, February 03, 2008
Saturday, January 26, 2008
25 Jan, 2008, LUBNA KABLY
Well, in the previous column Zenobia Aunty wished that PC would make life easier for the aam aadmi. Needless to say, she got a few fan mails and copies of pre-budget memorandums from various associations and professional bodies protesting that she was ignoring the needs of India Inc.
Truth be told, she had already thought of telling PC about the need for a few changes. The memorandums sent her way, helped her fine-tune her thoughts. PC has been hinting at reducing the corporate tax rate. Will this make Shahbhai, the finance manger at a large product company, smile? Perhaps, just a wee bit.
He would rather see scrapping of FBT provisions, ease in tax administration and yes, correction of the formula for calculating SEZ tax relief.
He is so tired of setting up yet another subsidiary company for his employer organisation. The reason, this subsidiary company will set up an undertaking in a SEZ. If a separate company was not set up, the fear is that the tax holiday benefit that is prescribed would get diluted.
In brief, the deduction from the SEZ undertaking’s profits is required to be computed as a proportion of the export turnover of the said SEZ undertaking to the total turnover of the business of the company.
Actually, it is logical to state that the deduction should be available in the proportion of the export turnover of the SEZ undertaking without considering the turnover of the other business of the company in the denominator as is the case for tax holidays enjoyed by STPI’s, EOUs etc.
Else, it is not merely Shahbhai but many others who will have to set up multiple legal entities (companies) to house each SEZ undertaking. And this means more costs, more paper work, more filings and yes even more taxes and even more costs. Further when the subsidiary distributes dividend to its parent, there is again dividend distribution tax levy.
Having to set up of multiple companies to take the full tax holiday, is killing and doesn’t serve the spirit of the legislation. So what is required is remedial action to correct the erroneous formulae.
The less said about fringe benefit tax (FBT) and its hassles the better. But then, Zenobia Aunty is not known for keeping quiet. Last year, India Inc, was protesting and even conceded to a slight hike in the tax rate with a scrapping of the FBT. On its part, tax authorities have argued that this is not feasible as not all companies pay tax. Looks like, India Inc has given up hope of this levy being scrapped.
Well, even if it isn’t scrapped, it must be made more taxpayer friendly and this alone is what Zenobia Aunty intends to concentrate on, in her letter to PC. She insists that all procedural aspects, including assessments be combined with that for corporate tax, so as to at least save on administrative costs for India Inc.
Second, Zenobia Aunty says that there should be safe harbours built in for all expenses. Only those above a certain limit should be subject to FBT. After all the cost of tax collection must be commensurate with the taxes collected. Will PC listen? Let us wait and see.
Zenobia Aunty’s friends from Bombay Chartered Accountants Society (BCAS) also speak of another challenge taxpayers’ face – that of the dreaded deemed dividend mechanism. In simple terms, an advance or a loan to a shareholder having at least 10% voting power in a private company, to the extent that the company has accumulated profits, is treated as deemed dividend and taxed in the hands of the recipient.
Apart from payment to the shareholder, a loan or an advance to a firm in which he is a partner with a 20% share or to an association of persons of which he is a member and is entitled to 20% of the income is also considered as dividend and is taxed accordingly.
The objective of introduction was to prevent tax avoidance, by ensuring that people do not give loans and advances, instead of distributing dividend. However, this provision does impact genuine loans, including those that are paid back in a short time. Further, this tax is attracted even if the loan is advanced at a commercial rate of interest and even if the majority of the people owing the concern which received the loan are not even shareholders of the lending company.
BCAS, in its pre-budget memorandum points out that, at present, no tax is payable by the shareholder on dividend received from companies and only the company pays a dividend distribution tax of 15%. Thus, levy of tax on deemed dividend in the hands of the shareholder at the normal rate is not justified.
Guess, once again, PC should carve out certain exceptions, such as the duration of the loan or the rate of interest and exempt such loans from the concept of deemed dividend. Now we just have to wait and see what the budget will unfold.