Saturday, January 26, 2008

India Inc's wish list - Law Street in The Economic Times (Jan 2008)

Hi Readers,

Last month, Zenobia Aunty pleaded a case for you and me. This time, she is all in favour of fighting for Indian Inc and its rights. So read on, by clicking here.

As always, the article is also cut and pasted below.

India Inc's wish list
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.

1 comment:

Seo said...

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.MORE....
offshore company formation