Friday, December 04, 2009

Law Street in The Economic Times (December 2009) - Withdrawal of CBDT circulars

Dear Readers,

Zenobia Aunty, with her entire family (which includes this blogger) and her dog Spot will be moving back to home-town, Mumbai. She may take time to re-settle, after all, Mumbai has changed in the nine years that she and her family have been away.
Thus, please look up the print and online edition (as you please) of The Economic Times, on December 25, as it may not be possible for Zenobia Aunty to order her niece to upload it pronto.

Merry Xmas and a great 2010.

Photograph courtesy: Wikimedia

Warm regards,

PS: Zenobia Aunty and clan are still in Bangalore, they will be in Mumbai from Sunday onwards, December 27, hopefully for ever. Relocating is a pain and Zenobia Aunty promises to stay away from this ordeal in the years to come. Of course, her ambition is to buy a strawberry farm in Panchgani and settle down there - perhaps someday.....

So, here is the column online and as always you can scroll below as well.


Best wishes,

City roads, CBDT Circulars and more…

- Withdrawal of CBDT’s circulars have led to uncertainty
- Transfer pricing provisions should be followed
- Safe harbours and advance pricing mechanisms are the way forward

By the time, you dear Readers, get to read this column, Zenobia Aunty and her family will probably be back home. It was in late 2000 that Aunty stepped in Bangalore, learnt to love it and stayed on. But, there is something about Mumbai that prompted her, her favourite niece, assorted family members and her dog Spot to make the big move again, this time back home.

At least we will now not have to hear Zenobia Aunty take a cue from John Denver and sing: “City roads, take me home; to the place I belong, aamchi Mumbai, crowded streets, vada-pav and sea breeze, take me home, city roads….”You all know by now, that when Zenobia Aunty decides to sing, Spot dives beneath the bed hoping to be out of hearing distance and we all remember some urgent errands and dash off.

But facts come first. Zenobia Aunty is dictating this column several weeks in advance, to make sure that in all the chaos which a move entails; she does not miss her strict editor’s deadline. Nine years is a long time to be away and Mumbai may seem a tad unfamiliar. Familiarity is always comforting, be it the city roads, which one grew up in or CBDT circulars that one relied upon and took their existence for granted.

The Central Board of Direct Taxes (CBDT), has recently withdrawn a forty year old circular, viz: Circular no 23, dated July 23, 1969. Tax circulars as we all know, are binding on the tax authorities.

Section 9, of the I-T Act, 1961, deals with income accruing or arising, through or from a ‘business connection’ in India. There is no definition of a business connection in the I-T Act. However, judicial decisions have interpreted it to mean a relation between a business carried on by a non-resident which yields profits and some activity in India which contributes to the earning of such profits.

However, Circular no 23, mitigated the impact of the broad sweeping definition of a ‘business connection’ and provided respite to those non-residents who were not covered by tax treaty provisions (the Permanent Establishment clause in a tax treaty provides for a comparatively narrow definition and mitigates risk of tax exposure in India).

As per this Circular, if the commission received by the Indian agent was fully representative of the value of the profits attributable to his service, no further income was assessessable in the hands of the non-resident. The Supreme Court in the case of Morgan Stanley (which of course was an instance where treaty provisions were applicable) has taken the same approach.

The intention for withdrawal of this circular appears to be that tax payers relied on it to claim relief beyond what was originally intended. With it, the CBDT has also withdrawn two other circulars, viz. Circular no 786, dated February 7, 2000, and Circular no 163 dated May 29, 1975. These circulars also provided instances where non-residents would not be subject to tax in India and no income would be deemed to accrue or arise in the hands of the non-resident.

What now? Well, tax payers can still rely on judicial decisions including that of the SC in the case of Morgan Stanley and can argue that the arm’s length payment to an Indian agent extinguishes its tax liability in India.

On one hand, the MoF has tried to be proactive and keep abreast with international norms by announcing the safe harbour provisions in the Finance Bill, 2009 and also by seeking to introduce advance pricing mechanisms as enshrined in the Tax Code. On the other hand, with the withdrawal of the Circular one gets the message that it has put paid to the transfer pricing principles that an arm’s length payment to an Indian agent will extinguish the liability of the foreign tax payer. Withdrawal of this circular and two others has just led to more uncertainty in the minds of the foreign tax payers.

It is not just those tax payers who aren’t covered by a treaty that are left wondering, but all foreign investors, as it could signify a trend towards more litigation, during assessment proceedings.

An allied insight: The provisions of the Tax Code have amended the definition of income deemed to accrue and arise in India to even include income accruing or arising from the transfer, directly or indirectly of a capital asset situate in India.

This can result in an absurd scenario. Shares of a listed overseas company listed and traded on an overseas stock exchange could result in an indirect transfer of a capital asset situate in India, if such overseas company has a subsidiary in India. This provision of the Tax Code and now the withdrawal of these circulars has certainly added fuel to the fire of uncertainty.

I can hear, Zenobia Aunty now taking a cue from Bill Joel and singing: Income tax Act, Tax Code, CBDT Circulars, tax treaties, Interpretation issues and uncertainty galore! We didn’t start the fire; It was always burning – since the day taxes have been imposed; We didn’t start the fire, No, we didn’t light it, but we tried to fight it…Well, I must be off, I suddenly remembered an urgent errand. Wishing you all a Happy 2010.

Friday, November 27, 2009

Law Street - Economic Times (November 2009)

Dear Readers,

The provisions in the tax code seem to have disregarded the ground realities involved in running a non-profit organisation. Zenobia Aunty is very upset about it, but somewhat soothed as the Finance Minister has agreed to look into these provisions. Click here to read more.

As always, the column is also cut and pasted below

Booting charity?

• Capital expenditure, to qualify as a deduction, has to be from gross receipts
• Even partial business operations will subject entire income to higher tax
• Cash system of accounting could lead to a huge tax whammy

The government is on an austerity drive, not only is it frowned upon if a Minister travels by business class but the government had walked that “extra mile” and suggested that “India Inc refrain from doling out vulgar salaries to its top management.”

This is not the first time that such a reference has been made. True, when this columnist flies to her home-town Mumbai and the plane is about to land, she can see a sea of blue – this isn’t the Arabian sea, nor the cute blue-roofed settlements which one views in Jodhpur but blue plastic sheets housing the poor. These settlements are found amidst the splendor of the luxury residential towers, which seem to have sprung up everywhere. Yes, the divide between the rich and the poor continues unabated and if at all it is only increasing.

So what can the government do? It can help those who help others and try to bridge this gap. Unfortunately, the Tax Code tells us a different story. Yes, Zenobia Aunty is hopping mad! But her social worker friend soothes her by saying that Finance Minister Pranab Mukherjee, the good man that he is, has promised to take a re-look at these proposed provisions.

Before we take a look at the proposed provisions which had Zenobia Aunty tearing her hair, let us examine how the Tax Code proposes to tax non-profit organizations (NPOs).

The surplus generated from permitted welfare activities will be determined based on the cash system of accounting. In other words, the gross receipts as reduced by the outgoings will determine the taxable surplus. Of course, each term such as gross receipts, outgoings have all been defined. In addition, the amount of capital gains – computed in accordance with the provisions under the head ‘ Capital Gains’, arising on transfer of a financial investment asset held by an NPO will also be taxable.

The aggregate of both the taxable surplus income and capital gains will be taxed at 15 per cent. However, if one thought that at least NPOs will not be subject to the rigors of MAT based on gross assets, if MAT is applicable, they are wrong.

Does tax of NPOs sound simple and logical? The legal drafters of these provisions really need to volunteer at an NPO to understand the realities. More often than not, NPOs have to buy land or incur other capital expenditure upfront. Let us take an NGO involved in building and running vocational training centers for the differently-abled. It finds a suitable plot of land in the outskirts of Mumbai, takes a huge bank loan and begins to construct a training centre.

As a tax expert, whom Zenobia Aunty spoke to states: “The Tax Code effectively mandates that capital expenditure for the purpose of carrying on the permitted welfare activity should be incurred only out of gross receipts within that financial year.” Now, land required for charitable purposes cannot be acquired in fragmented pieces, based on the gross receipts during the year. Nor can construction be withheld merely because the gross receipts during that year are not adequate. Bank loans are taken, against land mortgage and these loans are repaid out of the gross receipts (largely donations received) in subsequent financial years.

Or take for instance, another example. A huge donation is received in March, towards the close of the financial year. The entire amount cannot be used by the NPO for its operations, even though it would be fully used in the next financial year. Now the entire amount, which would end up being a surplus, just because it could not be used as it was received at the ‘wrong time’ will end up being subject to tax.

Over a strong cup of coffee, which Zenobia Aunty needed to keep herself from fainting, the tax expert shared more horror stories which are embedded in the Tax Code. Gross receipts for a NPO include any rent received in respect of land/buildings owned by it. Fair enough. However, no deduction fro gross rent as prescribed in section 26 (such as 20% of the gross rent towards repairs and maintenance) which is available to other tax payers is available to an NPO. Now, isn’t this sheer discrimination?

What happens if an NPO partly carries on a business operation which is not incidental to the permitted welfare activities? In this case, the entire income of the NPO and not just that portion of the income derived from business operations is subject to the corporate tax rate of 30%. Why could the Tax Code not have distinguished between two different areas of operation, remains to Zenobia Aunty, a huge mystery? In fact, in most cases, even the profits of the business are ploughed back for welfare activities.

There are some likely procedural hassles also that may arise. It appears that once the Tax Code becomes effective a re-registration with the tax authorities may be required. We all know the hassles associate with several registration processes. Clearly, the provisions of the tax code covering both the tax implications and the procedural norms require a close relook and redrafting keeping in view the realities of how an NPO operates on a day to day basis.

Photograph of the statute taken at Lalbagh Garden, Bangalore.

Sunday, October 04, 2009

Law Street in The Economic Times (Oct 2009) - Make this world a better place

Dear Readers,

I was in Mumbai recently, the city aptly described in Slumdog Millionaire, where luxurious residential towers and just next door are plastic sheets sheltering the poorest of the poor. The rich seem to have grown richer and the poor poorer. But, small efforts can collectively promise a better future for the poor, even if it seems impossible to bridge this growing divide. Government policies and collective action should spur us on to greater good. For reading this column on the web pages of The Economic Times, click here. As always, the column is also pasted below.


Make this world a better place

• Standardized CSR reporting must be introduced
• India Inc must follow a standardized CSR Index
• India Inc must be allowed to transfer dividend income to reputed NGOs

Zenobia Aunty is in a somber mood these days. Various niggling issues are plaguing her. She feels that there is so much each of us can do to make this world a better place. Some of us don’t merely because of lack of time, or information on how to help. Initiatives such as Teach-India, Joy of Giving Week etc help but much more needs to be done.

Fortunately, business entities are increasingly expected to devote some of their resources towards social welfare (corporate social responsibility, as it is called). Today stakeholders look beyond mere numbers. The World Bank conducted a survey, albeit some years ago, of 107 MNCs. 80% or more MNCs reported analyzing the CSR performance of potential partner firms in developing countries; 50% or more chose certain partners over others because of CSR concerns; and 88% reported that CSR issues are more influential today.

From a sheer business standpoint it makes sense to report on CSR activities. It makes greater sense for intermediaries involved in policy initiatives to track such activities and for the government to support disclosure practices either directly or indirectly.

The World Bank in its report, viz: Opportunities and Obstacles for CSR responsibility reporting in developing countries (World Bank Report, March 2004) points out: Intermediary groups are critical in analyzing and deploying information and in creating demands for improved reporting. Stakeholder groups with built-in incentives for using, analyzing and monitoring the quality of the information are central to its long term sustainability.

In India, while a lot of companies and groups are actively engaged in CSR activities, CSR reporting is not obligatory under the Companies Act, 1956 nor prescribed in the proposed Companies Act. Way back in 1978, it was the Sachar Committee that had first recommended that a social report be made mandatory in annual reports to shareholders. Today we see a hotchpotch of reporting styles, if at all any.

Zenobia Aunty also learns that an NGO or two, do rate companies based on their CSR activities. But government backing and that of its stakeholders would create a better reporting environment and help in rewarding the socially conscious companies.

The World Bank states that there is no single reporting system or model of corporate transparency that fits all social or environmental problems. However, it suggests that matrices for reporting should in general be: Agreed upon by key stakeholders (representing what matters to them); Factual, accurate and verifiable; Reported at regular intervals in relatively simple language or data; Comparable across locations, firms and products; Flexible and dynamic – so that the metrics can change over time; Usable by key stakeholders and lastly easily accessible.

Zenobia Aunty adds: “Professional Institutions such as The ICAI or trade associations such as FICCI, CII, Assocham etc, can play an important role in bringing uniformity and in encouraging companies to take firm steps towards CSR accounting/disclosure.” Further awards for those Companies which give back to the society would also provide an extra impetus.

It may be easy to argue that a particular company has sponsored a village merely because its labor force is based in that village. Whatever, be it, by adopting the village it has helped Indian society.

While some Companies do report their CSR activities, others do not. There is no uniformity. In fact, lack of standardized reporting also means that those who do not contribute to society do not suffer any adverse impact at all, nor are those who give back to the society benefitted in any manner.

Steps must be taken to create a standardized CSR Index across India Inc. It could comprise essentially of four-five elements such as contributions towards – the environment, education, medical and lastly donations for disaster recovery plans come to mind. Weightages for each element could vary but disclosure of the parameters and weightages would be a must in the CSR Index.

It may be too much to ask the government to provide additional tax concessions (other than those available – say for donation to a PM’s National Relief Fund), to companies that are actively engaged in CSR activities. However, in the long run, market forces would reward such companies.

Other policies also need to change and it is here that the government can help. Zenobia Aunty wanted XYZ Company to divert her dividend income to a reputed NGO’s bank account. Alas XYZ Company as per the Companies Act is required to send the dividend cheque to Zenobia Aunty or to transfer the dividend directly to her bank account. Companies must have the option of crediting the bank account of an NGO with the dividend amount, at the direction of a shareholder. In fact, they can then even sponsor a particular NGO and provide for a form in their Annual Report or newsletter that would facilitate such a transfer. Small things can go a long way.

Saturday, September 12, 2009

Law Street in The Economic Times (Sept 2009)

Dear Readers,

Governments across the world are indeed becoming more creative when it comes to levy of taxes. Reminds me of the old Beatles song.

Yes, anything and everything can be taxed. To read this column on the online edition of The Economic Times click here.

From sin tax to lifestyle taxes

• A new trend of lifestyle taxes is remerging across the globe
• The need to fill in treasury coffers has resulted in creative tax levies
• Periodic review of all new levies and regulations is a must

Tax professionals in India have been very busy lately. The budget was followed by the issuance of the Tax Code. Late nights spent dissecting the tax code, networking meetings, media appearances et al have left them exhausted. So, when Zenobia Aunty decided to call and ask: “Hey, what’s new?” she only heard groans.

Thus, Zenobia Aunty decided to have a look around much beyond Indian shores. We have heard of the phrase: Pop goes the weasel. Interestingly enough, this phrase has nothing to do with a furry little animal. It is just something that was shouted at random, in an old English dance. But, today, Zenobia Aunty is sure that the tax man out there in the United States is saying: Pop, goes the soda! Cheers.

Yes, lifestyle taxes are the in-thing in the United States. They don’t call them ‘sin taxes’ anymore, after ‘change’ is the new mantra. US Congress, while drawing up a bill as part of President Barack Obama's drive for health reform, has proposed a federal tax on soda, energy drinks and other sugary drinks to fund health care.

The revenue from the tax would help pay for obesity-related health spending, which reached $147 billion last year. Well, if you don’t want to cough up this tax, cut down your consumption and be healthier, seems to be message. Is it this simple? One wonders whether consumption of soda will really go down. Even as the debate rages on and lobbying by the software giants continues, September 1, marked the effective date for a steep increase on the taxation of candy and soft-drinks in Illinois State. In the past it was alcohol and tobacco that was targeted (including in India) today the United States seems to have moved on to explore other avenues, including marijuana as in California State.

Another move in the US Senate is to impose a 10% excise tax on cosmetic surgery. Perhaps it is taking a leaf from India, where cosmetic surgery was recently brought within the service tax net. Wanna-be Miss India’s or for that matter Wanna-be super models now have to pay through their nose. Quite literally!

While green taxes have been in vogue for quite sometime such as tax on use of plastic bags – made very popular in Ireland, lifestyle taxes are remerging. Green taxes have been used as both a carrot and stick. Carrots included higher sops to windmills or hybrid cars, sticks were instances such as heavy levies on use of plastic bags. But as regards lifestyle taxes, the trend is to adopt the stick approach.

One wonders whether this will serve the underlying purpose – such as ‘soda tax’ reducing obesity. Perhaps, it will not. But then, revenue authorities need to justify the need to fill their depleting coffers. Of course when the economy is bleeding carrots cannot be doled out. Else perhaps tax incentives for building walkways, parks, public gymnasiums and encouraging people to participate would have been a better answer than soda tax.

If the objective is to really reduce obesity and not merely to fill treasury coffers, then ‘sin taxes’ be it soda tax or otherwise must be periodically reviewed to see whether they are serving their intended purposes. Talking of periodical review brings Zenobia Aunty back to our Tax Code.

The need for a ‘change’ prompted issuance of our proposed tax code, after all our Income tax Act dates back to ‘1961’ with periodic annual amendments brought out by Finance Bills, down the years.

Zenobia Aunty has already commented earlier on some of the ‘finer points’ in this Tax Code, so she now prefers to speak in the wider context. “It is good that the government has decided to adopt the white paper approach. Only if it invites comments from all stakeholders, including corporate entities – both domestic and those dealing with India; will practical realities be factored in,” she adds.
But the government must not stop at white papers, alone. “Legislations must be periodically reviewed, practical grievances must be considered and amendments carried out immediately”, emphasises Zenobia Aunty.

The Tax Code should not be a one time exercise. Once enacted, periodical review is vital, as needs of the tax payers keep evolving. Zenobia Aunty’s request to the powers that be is: Do continue with the policy of issuing white papers for public discussions. However, once enacted do continue with the process of an open dialogue.

Hold open houses periodically, invite an assorted group of stakeholders for their views, listen to them carefully. Make immediate amendments if required, with retrospective effect if there is a genuine lapse in the provision. Only this mechanism will reduce the endless bouts of litigations that we face and lead to a more co-operative tax environment. There are so many instances that can come to mind, where periodic review and amendments would have helped the tax payers and the tax department. Best practices such as open houses must not be relegated just to the Tax Code, but must continue for ever.

Source of the photograph

Friday, August 28, 2009

Law Street in The Economic Times (Aug 2009) - Tax Code

Dear Readers,

We sorely needed a new simple tax code. After all, the current one dates back to 1961, and it is now riddled with amendments that happen each year, without fail, via the Finance Bills. Some amendments are even introduced with retrospective effect. To this extent the Tax Code is a breath of fresh air, alas, it appears to be regressive in nature on several fronts. Progressive measures like participation exemption have not been introduced. Please click here for the online edition of The Economic Times, or scrawl below.

Source of the photograph

Best regards,

Storm in the tax cup

• Anti-avoidance provisions are included, similar to the mechanism in well developed tax regimes, but could impact genuine transactions;
• Developed tax regimes also have measures in place such as participation exemption provisions, which are missing
• A balanced code, aiding Indian companies to go global, would have been beneficial

David and Shawn who jointly ran an IT company in Sweden were chatting on myriad topics on a beach in Goa, including where they should travel next. Eventually, they also took a few decisions regarding the immediate plans for their IT Company. Suddenly, a tax guy loomed large on the scene. “Your company is partially controlled and managed from India. You have just taken an important decision. Hence you pay taxes here,” he bellowed. He then disappeared in a cloud of smoke. Zenobia Aunty woke up in a cold sweat.

But the fact of the matter is that while the Tax Code seeks to continue with the present system of combination of residence- based taxation and source-based taxation and seeks to continue to apply residence based taxation to residents (taxing their world wide income) and source-based taxation to non-residents, there are a few major changes.

For instance, it provides that that, for a company, the existence of partial control and management would result in residence in India. The principles relating to source of income are also proposed to be modified to cover even income arising from indirect transfer of capital asset situated in India, as deemed to accrue or arise in India.

Zenobia Aunty’s dream (sorry, nightmare) may have been a tad exaggerated but the fears are real. Whether or not a company is partially controlled and managed from India will be dependent on the fact and assessments could only get tougher. This may mean maintenance of the relevant records to prove that there was no control and management from India. It could well result in a host of litigation.

Much has been written already about MAT and one needs to agree that the proposed provisions of a gross asset-based taxation seem flawed. More so, since the Tax Code seeks to replace profit-based tax holiday incentives with investment-based incentives. Is this a classical example of the left hand not knowing what the right hand does?

Under the investment based incentives, the taxpayer will be allowed to recover all capital and revenue expenditure (except land, goodwill and financial instrument). The period consumed in recovering all capital and revenue expenditure will be the period of tax holiday. The only silver lining is that, the Tax Code also provides for grandfathering provisions in connection with current profit-linked incentives and area-based exemptions under the existing Income-tax Act. If you recall when the provisions relating to taxation of a VCF had been amended and only investments in certain sectors were treated as eligible for pass through provisions, there was no grandfathering clause. At least, this mistake has not been repeated.

Zenobia Aunty feels that the Tax Code is not progressive enough. True anti-avoidance provisions have been introduced, as is the case in well developed tax regimes.

However, these developed regimes also have measures in place such as participation exemption provisions or parent subsidiary directives. Subject to conditions, foreign dividends from qualified overseas entities, including wholly-owned subsidiaries are not subject to tax in the home country. Countries such as UK and Japan have sought to exempt foreign source dividend which is repatriated back, subject to fulfillment of conditions.

As the newsletter of the organization this columnist is currently employed with states: The proposal to codify General Anti Avoidance Rules (GAAR) in the tax legislation represents a new approach of the Government for dealing with tax avoidance. While policy makers world-wide have extensively debated the advantages and disadvantages of GAAR, the most common argument against a statutory GAAR is that it promotes uncertainty for tax payers. In framing legislation that is sufficiently all embracing to deter tax avoidance, there is always the danger of penalizing those who have genuine reasons for entering into a bona fide transaction. Further, by recognizing deferral of tax as a tax advantage and by empowering the tax authority to re-characterize debt into equity, the GAAR contains elements of “thin-capitalization” principles and “anti-deferral” principles. The intention to apply GAAR by overriding India’s tax treaties could also impact the stability provided to foreign investors by an applicable treaty.

Zenobia Aunty feels that: A balanced Tax Code, which would have aided Indian companies to go global would have been beneficial. The Tax Code, could have introduced progressive mechanisms such as participation exemption, underlying tax credit or even exempted foreign dividends. It has introduced an Advance Pricing Mechanism, but nothing else. Zenobia Aunty recalls her nightmare and quips: “It is more of an attempt to treat global companies as local.”

Neighbour Gopal, the software techie grins. Pointing to this columnist he chuckles, “You will have a new Tax Act and a new Companies Act. Happy studying!” Yes, it is back to school, but unfortunately life does not promise to be carefree, rather a tad more taxing.

Friday, July 31, 2009

Law Street in The Economic Times (July 2009) - Budget special

Dear Readers,
Listening to eminent advocate Soli Dastur (or Soli Uncle, as I refer to him, in this column) is always a pleasure. This time, the Bombay Chartered Accountants Society organised a live web-cast which reached zillions of people.
I agree that the Finance Minister seems to have rushed into keeping the budget date. Read on to know what are some of the proposals that could have been avoided.
As always, apart from the online access to The Economic Times, the column is cut and pasted below. (Ahem, ET's editor changed my title in the print and online version, but that is fine).
PS: Not too sure where I downloaded the photograph from. Will add the source once I can trace it.

Keeping the date

• FBT goes, employees saddled with an additional perk
• Some proposed amendments are ill advised
• Corrective amendments should be retrospective

Looks like our new Finance Minister had to rush into keeping his date with the budget. Else he would have paid some extra attention to certain provisions. Technology has changed things and Zenobia Aunty could view Soli Uncle analyse the budget proposals, from the comfort of her arm chair in Bangalore. She thanks the Bombay Chartered Accountants Society for the live web-cast.

There was much rejoicing when abolition of the FBT provisions was announced. It took a second or two for the fact to sink in, that now the employer would not pay FBT but you would. Soli Uncle points out that the poor employee is now stuck with an additional taxable perquisite. Any contribution by an employer of more than Rs 1 lakh, in respect of an employee, is taxable as a perquisite in the employee’s hand.

It was the FBT regime that brought such contribution within the FBT tax ambit. In the pre FBT regime, such contribution was not a perquisite. Stock options were taxable as a perquisite during the assessment year 2000-01; well they are taxable as a perquisite again. However, Soli Uncle, thinks there is a silver lining. Certain items such as foreign travel, use of motor car etc were not taxable perquisites. However, these fell within the ambit of FBT. Hopefully, with FBT abolished, there will rightfully be no tax on such items.

Soli Uncle in his speech also referred to certain “Ill advised amendments”, and dear Aunty cannot agree more. As regards profits and gains of eligible export undertakings, including STPI/SEZ undertakings, EOUs etc, no deduction under the above sections will be allowed if the tax payer fails to make a claim for any such deduction in the tax return. To add insult to injury, this amendment is with retrospective effect from April 1, 2003.

Soli Uncle refers to a CBDT circular, issued in 1955 and a few court decisions. The essence of which is that an assessing officer shall advise the tax payer to make a claim if the tax payer has not made it. Or direct the tax payer to do something which is in his interest. While this may or may not have been practiced, the amendment puts paid to all that was good – at least in spirit. More so, if a deduction has not been claimed in the return, it cannot even be claimed in a revised return, feels Soli Uncle. But can it be claimed before the commissioner or before the tribunal? Court decisions favour this view.

An amendment which, “Takes the piece of cake”, as Soli Uncle would like to put it, is in respect of section 56. Where immovable property or any other property (shares, securities, jewellery, work of art) etc is received without any consideration and the stamp duty value (in case of immovable property)/fair market value (in other cases) exceeds Rs. 50,000, the entire stamp duty value or FMV will be taxable as income from other sources in the hands of the recipient (if received for less than the stamp duty value/FMV the differential is so taxable). Some exceptions include when property is received from a relative or on occasions such as marriage or on inheritance.

Soli Uncle rightly calls it an absurdity. The entire process of determining FMV for diverse items will lead to litigation. He cites a practical example. There is an amalgamation of two companies. The shareholder for every five shares held by him in Company A, gets two shares in Company B. Can it be said, that it is for inadequate consideration and will such shareholder have to pay tax on other income under the amended section?

There is an added dimension to this problem. Assuming Mr. A has sold his house valued as per stamp duty at Rs 70 lakh to a non-relative for 30 lakh. This non-relative has to treat Rs. 40 lakh as income from other sources and pay tax thereon but when he sells the property, he will get only Rs.30 lakh as the cost. Further, for computing capital gains, Mr. A has to take Rs. 70 lakh as consideration. A double whammy!

At the same time, when tax payers were not enjoying a double benefit, the budget provisions seem to think that they were. Presently an exemption is available for income received by an employee from specified employer at the time of voluntary retirement or termination of service, up to Rs. 5 lakh. Now, this exemption will not be available if the employer has claimed relief under section 89. Soli Uncle points out this was not a double benefit. Up to Rs. 5 lakh was an exempt income under section 10. Section 89 merely provided for a rate benefit, because if a person received salary income of more than 12 months in a single year, he or she could shift to a higher slab. Relief could be claimed if the additional salary results in the employee being assessed at a higher rate than the rate at which he/she would have otherwise been taxed.

Zenobia Aunty, wishes to have the last word. If draconian amendments can be retrospective, why not corrective amendments? The lacuna in the formula for computing tax holiday benefits by eligible SEZ units has been corrected, but only with prospective effect. Let us now wait for the tax code – with hopes for a less taxing life

Saturday, June 20, 2009

Law Street in The Economic Times (June 2009)

Dear Readers,

The Economic Times (ET) carried this column, much earlier, on June 11. Guess, it was vital for others to know Zenobia Aunty's thoughts on what the government can do during this budget season for you or for me. Unfortunately, ET has also not uploaded it in the columns section, even though it is there on their website. Go here, to read the online version.

Or else, do scroll down. The Union Budget date is now announced, viz: July 6. Let us wait and watch.


Roti, makan aur taxes

• Salaried class must not be penalized
• Standard deduction should be introduced
• There must be simplicity in tax administration

Tax freedom day, for American tax payers, is computed annually by the US based Tax Foundation, an independent tax research group. This year, in 2009, American’s celebrated their “tax freedom day” a week earlier on April 13 as compared to last year and two weeks earlier than in 2007. The main reasons for its early arrival: Recession reduced tax collections even faster than it reduced income and the stimulus package included large temporary tax cuts for 2009 and 2010.

This is how it gets computed: An official government figure for total tax collections in US is divided by US’ total income. For 2009, taxes accounted for 28.2 per cent and the stretch of 103 days from January 1 up to April 13 is 28.3 of the calendar year. Thus, till April 13, it can be assumed that an American tax payer earned his salary only for the government, post which he or she earned this salary for himself or herself.

In India, personal tax collections stood at Rs. 96,500 crore for the period April 1, 2008 up to March 17, 2009, around 7% higher than the previous corresponding periods figure. However, salaried employees are likely to feel the pinch of the economic slow down in the coming year, with declining bonus, low increments or worse still pink slips. Companies may not hire on the same scale as in the previous years. These factors may see a dip in personal tax collections. Hopefully, the government will not tax the salaried class further, in the coming budget.

Zenobia Aunty agrees with the famous US jurist who said: Taxes are the price we pay for civilization. But, she would be a more cheerful tax payer and would ensure that her grumpy niece would also pay with a smile, if she saw steps taken towards:
simplicity, rationalization and transparency.

Perhaps the much awaited new tax code will usher in simplicity. That said there is also a need for greater ease in making tax payments and in filing tax returns. Perhaps salaried employees whose tax obligation has been entirely fulfilled as tax has been deducted at source by the employer need not file their tax returns? Or if they do have to file it, it should not be more than a page, require only basic details and they should be able to deposit it with their local nationalized bank or even the post office, instead of queuing up at the tax department. It is easy to say, why not avoid the last minute rush, but most of us get the needed Form 16 from our employers at the last minute.

There is another issue which Zenobia Aunty is very peeved about. Today, most employer organizations have set up funds, which do good work. Money is collected from employees by way of salary deduction and used for upliftment of the poorer sections of the society, such as sponsoring local schools. Most of these funds also have obtained the relevant exemptions, permitting their employees to claim a deduction (generally 50% of their contribution subject to an overall cap).

Now there are two issues. Firstly, an employer organization is not permitted to take into consideration this donation while with-holding salary, forcing the employee to remember and claim a deduction while filing his return. Second, why must only 50% of the contribution be eligible for tax deduction? There is a need to boost good work and perhaps greater tax sops would be welcome.

Given the inflation and rising costs of living, perhaps there is a need to reduce or abolish the surcharge of 10%? Today every individual tax payer earning in excess of Rs. 10 lakh per annum has to cough up this surcharge. Surcharge is always introduced for a specific purpose; however, it tends to stick – forever. The time is right to remedy this situation.

Some deductions that are given to us – the salaried class, are a laughing matter. Take for instance, the Rs. 15,000 annual deduction for medical expenses or the Rs. 800 per month tax free transport allowance. There is an urgent need to revise it upward, keeping in tune with rising medical expenses and conveyance costs. Standard deduction which was earlier available to salaried employees should be reintroduced. Preferably a higher standard deduction should be available to those in the lower slabs. Most employers are passing on the costs of FBT to employees through appropriate salary structuring and this hurts, standard deduction will help alleviate the pain, a bit.

A new pension scheme may soon be introduced in India; we must wait and watch the final print including the tax incentives. But, isn’t it time to revise upwards the cap on deduction under section 80 C for various investments. This threshold is too low and a major chunk of it, if not all of it, is exhausted with statutory deductions such as Provident Fund deductions. Ditto for the deduction available to pay back bank interest on home loans. The current limit of Rs. 1.5 lakh per year is miniscule, considering that property prices are still high, leaving no choice but to borrow heavily.

Last but not the least, we pay so many bills by giving our banks standing instructions. Payment of taxes should also be made as simple. If all this is done, Zenobia Aunty says, every day will be a happy taxpayers day.

Friday, May 29, 2009

Law Street in The Economic Times (May 2009)

Dear Readers,
Our Finance Bill is to be tabled in early July, our next column shall deal with what we truly need by way of tax reforms. For now, international tax policy reforms advocated by the Obama administration have truly upset the globalisation apple cart. Do we need protectionist measures? Zenobia Aunty thinks what we need are universal stimulus packages. For more, click here.
As always, for your convenience, the column is also pasted below.
Have a nice weekend.
Best regards,
(Photograph taken from the official website of then Senator Barak Obama)

The circle of taxes

• Local policies must not dent globalization
• Global competiveness is the key to survival
• Countries must adopt progressive tax policies

This columnist vaguely remembers watching her elder cousins sip cold fizzy Coke from a bottle in the mid 1970s, which she as a toddler prone to frequent bouts of allergic cold was not allowed to touch.

Zenobia Aunty, the ever generous Aunt, who took us kids to Chowpatty beach over weekends, would ignore my plaintive cries for just a sip. A few years later, Coke, had to exit India. However, Coke made a comeback in 1990s and it has been part of my staple quick-fix diet, ever since.

Somehow, the international tax proposals recently announced by Prez Obama, made this columnist think of Coke. In an era, where companies play in the world market and are not confined to local spaces, one wonders whether these proposals will result in localization of companies. Companies of US origin are today, brand names not only in the US but across the world. Coke, is just but one example.

Zenobia Aunty is of the firm view that there should be a strong demarcating line between abuse of tax havens, setting up of sham companies merely to get a tax break and genuine global business operations. Unfortunately, Prez Obama’s international tax policy announcements appear to have blurred this distinction.

Let us just concentrate on one such proposal. The reform deferral proposal requires US companies to defer deductions in the US, if such deductions (with the sole exception being R&D) are associated with foreign income, until such time that the income is brought back to the US and is subject to US tax.

A press note by the US Treasury provides an illustration: Suppose that two US companies decided to borrow to invest in a new factory. Company A invests that money to build its plants in US, while Company B invests overseas in a jurisdiction with a tax rate of only 10 per cent.

Now Company A will be able to deduct its interest expense, reducing its overall US tax liability by 35 cents for every dollar it pays in interest. But it will also pay a 35 per cent tax rate on its corporate profits. On the other hand, Company B will also be able to deduct its interest expense from the US tax liabilities at a 35 per cent rate. But it will only face a tax of 10 per cent on its profits. Thus, our current tax code uses US tax payer dollars to put companies that invest in the US at a competitive disadvantage with companies who invest overseas.

Zenobia Aunty doesn’t quite understand it. Today the world is a consumer - does this mean that US companies with existing subsidiaries should just pack up and go? Fortunately, the Congress is yet to deliberate upon these proposals, which have been announced with an effective date of January 1, 2011.

Perhaps some exceptions to the norm should be carved out for genuine business operations. True, it amounts to a deferral of the expense, but it will impact the immediate cash flow status of a US company with global operations. At times, dividends may not be repatriated back with a long term view to expand overseas operations and earn more profits – which ultimately would flow back to the US parent.

Citizens for Justice, a US non profit group focusing on tax research, in a press note points out: “Most of the corporate practices the administration wants to crack down on probably don’t even involve companies that are truly competing abroad. Rather, they involve companies operating within the United States but using sham transactions to make their income appear to be earned abroad, so that the U.S. taxes on that income can be ‘deferred’ (meaning ‘not paid’).”

Zenobia Aunty agrees that this may be true, but argues that genuine business needs will be hurt. To this, this association has another point of view. It states:
“Even in cases where U.S. multinational companies are carrying out real business in a foreign country, their competition with other companies in that country is generally based on the price they charge for their products. Corporate income taxes don’t affect the price a foreign subsidiary can charge so much as they affect the dividends the U.S. owners receive.” Well, corporate income taxes do impact profitability and profitability does impact the ability of a company to compete. It is not just about pricing.

But coming back to US policies, the only exception that has been carved out is in respect of R&D expenditure because of the positive spill-over impact of these investments on the US economy. However, the Citizens for Justice Forum opines that: Unfortunately, this exception is a boon to the companies who are among the worst abusers of deferral, the tech and pharmaceutical companies.

It sure isn’t easy to please everyone. But, one can only hope that the US Congress will think it over rationally and the policies that will be put in place will be those that not only help the US economy back on the track but also will not stem the process of globalization.

Interestingly both Japan and UK have made receipt of foreign dividends exempt in their respective home jurisdictions. One hopes India adopts a similar progressive stand. What we need today are universal stimulus packages. Increasing protectionism and localization sounds scarier than a horror movie.

Saturday, April 11, 2009

Law Street in The Economic Times (April)

Dear Readers,
India Inc., like companies across the world is on a cost-cutting spree. Be, it through simple measures like reinforcing the need to switch off the lights at the workplace, greater reliance on video conferencing, travelling by economy class, if at all required (even for the top level of management), or even more complex measures such as new mechanisms of salary structuring with a higher margin of variable pay, or salary cuts etc, not to mention hiving off of non-core business or even doling out pink slips.

India Inc is trying it all out. This brings me to values. When times are tough, do companies just pay lip service to values? True, you will find values splashed across a corporate office, most probably a huge frame in the chairperson's corner room, or in the board room, or it could even hit you through large visuals in the vistors' lobby. Yet, do values get diluted when the going gets rough and the eye is only on the bottomline?

CK Prahalad in The Economic Times, Corporate Dossier, dated April 10, had this to say: "The values have to be continuously reinforced because there is a lot of pressure to cut corners. So it’s important to emphasise that how we do things is as critical as what we do. Core means many different things to different people. It is the same for values. We have to be careful about what can change and what we cannot. For example, can the business models change? Of course, they must. Can the product portfolios change? Of course, they should. But should we change issues of integrity, respect for individuals, the need for globalisation or transparency? These we should not change. They need to be reinforced. So a crisis is not a licence to change core values."

How are values connected to tax land? Well, some companies walk that extra mile to ensure that not only are they honest tax payers, but are highly responsible tax deductors as well. Arguably the administrative costs for such companies is comparatively higher. Should'nt a more simple mechanism exist?

I have been so impressed with one particular company - MindTree Limited. You can find its integrity book: All about integrity on its website

ET's editorial policies do not permit me to name companies in my column, but now you know which company I am referring to.

To read the article online, click here. Else, as always it is pasted below.

Happy reading.

PS: Some people contacted me stating that the link to MindTree's integrity policy was not functional. I have now provided the correct url. Let me all add that I am in no way associated with MindTree Limited - neither as an employee nor as a shareholder.

Best regards,

Honesty is the best policy

 Administrative tax obligation costs for employers must be low
 Alternative mechanisms should be introduced
 Practical tax regulations are required

Zenobia Aunty has been under the weather these days and is prone to biting people’s head off. So, it was with much trepidation, that this columnist tip-toed into the guest bedroom to remind Aunty of the forthcoming deadline.

Aunty violently waved Corporate Dossier, which contained the tête-à-tête with CKP, in her niece’s face. CKP had emphasised that in these tough times, the message of a company’s core values needs to be reinforced and never diluted. Aunty croaked: Why should honest employers be penalised with higher tax administrative costs?

Recently, the Supreme Court (SC) had to determine whether a company is under a statutory obligation to collect evidence that its employees have actually utilised their LTA claims. In its brief order, the apex court held that, there is no CBDT circular requiring the employer under section 192 to collect and “examine” the supporting evidence to the LTA declarations made by the employees.

In respect of each financial year, the CBDT issues a circular relating to: Income tax deduction from salaries under section 192 of the I-T Act. The circular pertaining to the recently concluded financial year 2008-09, requires an employer to collect and examine the supporting evidence to the declarations submitted by the employees only in case of HRA claims, made under section 10(13A) and Rent claims made under section 80GG.

This columnist decided to ask other experts for their views on this decision. Experts say: “The employer is required to withhold tax from the estimated salary of its employees. It has to be a bona-fide estimation made without intent to avoid withholding of tax. All that the SC decision does is to state that as long as the bona-fides of the employer have been established, the tax authorities cannot charge the employer for short withholding of tax merely because the requisite supporting documents evidencing incurrence of actual LTA expenses were not collected or examined, as actual examination in case of LTA, is not obligated by law.”

However, employers need to continue to ensure in case of all tax exemption/deduction claims of employees that they have the requisite material to convince the tax authorities that the estimation of salary income of the employee on the basis of which tax was withheld was honest and fair. The employer cannot turn a blind eye to wrong-doings.

New joinees at a Bangalore based IT Company are explained that the tax exemption/deduction claims made by them have to be genuine. A hand book is given to them which makes it clear that the Company will not look the other way and settle payments, because hey, it is the government which is losing and not the employer. This columnist is sure that there are a handful of others like this company which walk an extra mile to ensure that they do the right thing and the government does not lose its tax dues.

But, what is the price of this honesty? Some employers may just pay lip service to their obligation of fairly estimating and deducting tax, they may resort to convenient means of overlooking some dodgy claims – thereby keeping their administrative costs low and being perceived as a employee friendly organisation (honesty is not always palatable).

Suddenly this columnist understood her Aunty rhetorical question. True, the CBDT in the wake of this SC decision could just add to the administrative burden of employers by asking them to collect and examine each and every tiny scrap of paper that supports a tax claim.

Instead Zenobia Aunty suggests that standard deduction should be brought back and certain insignificant sops should be removed. Take for instance, the Rs. 15,000 annual deduction for medical expenses, or the Rs. 800 per month transport allowance. The standard deduction should be so fixed that it takes care of the loss of the abolition of these claims. Or better still, even other tax sops such as HRA etc could be abolished and the resulting higher tax incidence could be offset by a lower tax rate. This will mean low administrative costs to the employer, no loss of revenue for the government and no frenzy for the employees in putting things together for submission.

In another case, pertaining to several companies, the issues relating to tax withholding on salary of expat employees were clubbed together for hearing. Here, the SC has confirmed that salary even if paid outside India will be taxable in India if it relates to services rendered in India. The Indian employer would be obliged to deduct tax at source, on the entire remuneration that relates to services performed in India, even if part of such remuneration was paid to the expat’s bank account in his/her home country.

True, India needs its slice of the tax pie. Withholding tax at source is the best mechanism for mitigation tax avoidance. However, ushering in practical tax laws will make life easier for the diligent, dutiful Indian companies.

This article featured in the Tax Carnival. For other equally interesting articles that featured there, click here.

Friday, March 27, 2009

Law Street in The Economic Times (March)

Hi Readers,
Bangalore is IT centric and yes the slow down in US has had an impact on Bangalore soil. In fact, everyone here is wondering what stand Prez Obama will adopt at regards outsourcing. Any attorney worth his or her salt has a flair for words, the Prez is no exception. Read on by clicking here, or shall we say, read between the lines.
As always, the column is also cut and pasted below.
Happy Ugadi and Gudi Padwa.
Best regards,

What next?

 Protectionist measures do damage in a flat world
 Taxes should be used as carrots not sticks
 Capitalism forces should be allowed full play

Is shipping jobs overseas the same as outsourcing? Is outsourcing not frowned upon if no existing American jobs are lost? Is outsourcing permissible if carried out by captive subsidiaries of US companies? Then again, if the answer to this last question is yes, the objective is the same – whether a US company is serviced by its own captive or a third party. Lower costs means more returns to shareholders and a more vibrant economy. The only difference being that a captive subsidiary can repatriate dividends to the parent – but then most captive subsidiaries operate on a cost plus model.

In his speech to the Congress, in late February, Prez Obama said the Administration will eliminate "incentives for companies that ship jobs overseas." His words have merely left us guessing. In other words, will Obama punish those US companies that outsource work? Or will he provide tax incentives to US companies that create jobs in America? On the cards are “tax reform policies”, but only time will tell whether these will be a carrot or a stick.

Zenobia Aunty dug up some historical facts from cyberspace. Yes, in today’s instant era proposals which are more than a year old count as history. On August 2, 2007, US Senators, Dick Durbin, Barack Obama and Sherrod Brown proposed a legislation to reward companies with a 1 per cent income tax break, that produced 90 per cent of goods and services in the US, paid a living wage, provided health benefits to at least 60 per cent of employees and supported their employees when called to active duty (read wars).

In other words, there was no ban on outsourcing; just an incentive to US companies for on-shoring (if one may coin this word). Of course, this proposal also had its own questions – it spells out 90 per cent of goods and services that are produced in the US. Now if a car manufacturer imports auto ancillaries – would he not fall in this criterion, even if the car is otherwise manufactured in the US and provides employment to tons of people? In this flat world, it is increasingly complex to draft policies, which would serve the spirit of the legislation.

Talking of employment, H-IB visas are in the news again (the current annual cap is 65000 visas). These visas enable aliens (yes this is an actual term) to work in the US. Even US companies and not just Indian software giants apply for such visas.

Reid Hoffman founder of LinkedIn, in his recent column in ‘The Washington Post’ advocates removing the cap on H-IB visas and imposing a payroll tax beyond the benchmark salary for each extra visa. Thus, US companies if they need to can hire workers from overseas and at the same time they contribute back to the American society by paying a payroll tax. Capitalism forces will ensure that the additional tax H-IB workers are called in when actually required, and not merely because they are relatively cheaper.

This columnist hated economics as a student, but realises that capitalism has become a more complex term, today. Governments are treating tax cuts as a sure fire solution to increasing demand. Yet, research shows that during the Great Depression and in the 1990’s in Japan, cuts in taxes did not effectively increase demand because customer confidence was very low. Thus, fiscal policy failed to reduce unemployment. Today the matter is more complicated, because an increase in demand may mean an increase in imports in the US for day to day consumer products. This may not stimulate job creation, not in the US, at least.

On an entirely different note, Zenobia Aunty points out that: At the time of writing this column, the US Senate is all set to discuss the Levin Bill, aimed at targeting off-shore tax havens. As US money is stashed in these tax havens, Senator Levin feels that tax havens “are undermining the integrity of our tax system and increasing the tax burden on middle income families.” This Bill puts a greater burden on taxpayers to show that their tax arrangements are legitimate.
Zenobia Aunty stresses: Fair enough, the US like any other country in the world has the right to prevent tax abuse. However, outsourcing is neither tax abuse, nor tax avoidance and policies are perhaps best not drawn up to prevent it.

Perhaps the current situation in the US calls for a direct impact on employment – perhaps reducing the minimum wage rate to lower costs or a ceiling in management salaries? But these issues must be left to market forces to provide an optimum balance. Government tinkering is best left to the minimum. If the US adopts protectionist measures it will not only harm itself, but in the process it will also harm the global economies and this is a catch 22 situation. Countries such as China and India are projected to grow by double digits over the next five years. It is imperative for the US to gain a foothold in these markets. Protectionist measures will not help in doing so.

But as the title of this column says: What next? Time alone will tell.

Wednesday, February 18, 2009

Law Street in The Economic Times (February)

Dear Readers,

February ushers in Valentine Day. This time it also ushered in trouble at least in Karnataka State. Some fanatical politically affiliated groups said celeberating Valentine Day was against Indian culture, bashing women (those who frequented pubs) was in keeping with Indian culture according to them and they set upon this task with gusto. Of course, people took to the streets in rightful protest. The State Government acted but it seems reluctantly. We sure heard a lot of mixed signals. Anyway, this is another story.

All this, together with the interim budget which was announced on February 16, led Zenobia Aunty to wonder about the "Heart of the Taxman". So as always click here.

In case you have problems accessing the online version of The Economic Times at the above url, please scroll below for the article.

Happy Reading and warm regards,

The heart of the tax man

 On the tax front, US and UK are attuned to ground realities
 The genuine needs of tax payers must be addressed
 Mere economic stimulus packages are not adequate

The fan mail poured in. Zenobia Aunty has never been so thrilled. Readers from across the country and a few from overseas have responded to the previous column agreeing that knee-jerk reactions such as surveys merely to garner tax revenues and meet targets is uncalled for.

These days Zenobia Aunty is pondering over the “heart of the taxman”. Yes, she knows that our tax men lead a largely sedentary life in not so comfortable offices; she hopes their working environment improves and that they do take care of their health with morning walks or whatever it is that suits them. Yet, when she talks of the “heart of the taxman” she is referring to the empathy for the tax payer which is very much required these days.

For instance, in the U.S., the IRS Commissioner Doug Shulman has announced that his agency is committed to working with cash-strapped folks so that they can meet their federal tax obligations as best as they can. IRS officials have been given greater authority to suspend collection actions in certain hardship situations. This includes instances when someone has just lost a job, is relying solely on Social Security or is facing significant medical bills. The IRS Commissioner has the last word: “If you can meet your obligations, we will expect you to do so. But, if you can't for legitimate reasons, we want to be especially sensitive in these tough economic times." An amicable or win-win situation is the path ahead.

Take another example of empathy. This time it pertains to the U.K. and the finance ministry has understood the predicament faced by corporate entities, albeit in this case the smaller companies. Small companies, as per the draft budget proposals, get a wide ranging packet of extra finance, including a scheme to spread tax payments and a new 3 year loss carry back rule for losses up to GBP 50,000. In addition, the proposed increase in small companies’ rate to 22 per cent is deferred for a year to 2010. Small companies which are those with profits of less than GBP 300,000 will continue to be taxed at 21 per cent.

Both the examples in US and UK show that the tax authorities/finance ministry are really partnering with the taxpayers and standing by them in their time of need by allowing them the flexibility to pay taxes to the best of their ability. Various countries have also gone in for economic stimulus packages, including US and UK. The packages of these two countries have been widely debated. However, others have also followed suit, be it China, Russia, Netherlands, Hungary, Germany, and even Switzerland, to name a few.

In November last year, the Russian Prime Minister unveiled a USD 20 bn economic stimulus package, which included a 4 per cent cut in profit tax to 20 per cent, which accounts for 8.5 per cent of budget revenues and an accelerated depreciation mechanism. State run banks were also asked to support industry through soft funding. In addition to a monetary stimulus package and government spending on infrastructure funding, China also changed Value Added Tax rules to allow companies to deduct the cost of capital equipment. Switzerland also resorted to increased public expenditure.

Back home, in India, while the interim budget was a tad disappointing, considering that India Inc and the “aam aadmi” had pinned their hopes on tax cuts, the government has over December and January taken the right steps. For instance, the government in December initiated a 4% cut in ad valorem rates of central excise duties. Hence the peak rate of 14% and the other two ad valorem rates were reduced by 4% each.

The first stimulus package announced last December, attempted to lower costs of doing business through fiscal measures. The second stimulus package, which was announced in early January gave the industry access to cheaper credit and eased borrowings. The beneficial impact of these packages is yet to be measured and perhaps we may see a slight revival of the economy in the weeks to come.

India stands on a relatively strong footing and continues to be the second fasted growing economy. Pranab Mukherjee, acting Finance Minister, obviously had his hands tied as regards cut in direct taxes, this being an interim budget. All we got was a hint – “In the days of financial stress, tax rates must fall and our ability to pay taxes must rise”. He then went on to elaborate the past measures undertaken by the UPA government to rationalise the direct and indirect tax system and make it more efficient and equitable.

Yes, a lot has been done. Some things could not be done by the outgoing government owing to elections being around the corner but there are issues that could have been addressed, such as: reaching out to tax payers with empathy, providing flexibility in tax payments, ensuring prompt refunds. These can still be addressed. The right message needs to emanate from the top.

Thursday, January 22, 2009

Law Street in The Economic Times (January 2009)

Dear Readers,
Do you feel you are being squeezed dry by the tax authorities? Well you are not alone. Read on for Zenobia Aunty's views by clicking here.

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

Law Street/Lubna Kably

New Year woes

• Economic slow down necessitates downward revision of tax targets
• Knee jerk reactions are uncalled for
• Alternative dispute mechanisms are required

We are now firmly entrenched in a brand new year. But our new financial year, is a few months away - April 1, 2009. Quite apt I must admit, because it isn’t really our New Year but one for the tax authorities. We poor souls begin work anew and spend the initial months just working for the government, after all a fair share does slip away as taxes. Not that Zenobia Aunty or her niece is complaining. Taxes, albeit taxes imposed and collected fairly, are needed to keep the wheels of democracy churning smoothly.

The past financial year 2008-09, will not give the tax authorities much to smile about. In fact, even the RBI, in one of its monthly bulletins, affirms a decline in the growth of tax revenue owing to the general economic slowdown. India Inc is required to pay its annual tax liabilities as advance taxes. The last such installment was due by December 15, 2008 and the showings were dismal. Newspapers have cited that: Advance tax collections from India Inc declined by over 22 per cent to Rs 42,600 crore in the third quarter of this fiscal. In the same period last fiscal the advance tax collection stood at Rs 54,900 crore.

Well, targets have to be met and news-reports have it that a full fledged presentation has been made at a recent meeting of top tax officials in Mumbai asking them to roll up their sleeves and launch surveys. Zenobia Aunty has time and again advocated that revenue targets must not be the criteria for appraisal of a tax officer. Unfortunately the system is such that targets have to be met, even if it means an endless bout of litigation followed by refunds to the tax payer as the demands were raised on weak grounds, in some cases just to meet the target. In the long run this practice is costly not just to the tax payer but also to the revenue authorities. The very same newspaper report mentions that: Nowhere does this presentation talk of the economic slow down which has had its impact on India Inc resulting in a short fall in tax collections.

The Comptroller and Auditor General of India, from time to time, comes out with reports which cite the amount of taxes remaining uncollected, the tax collected and the amount refunded during a particular period. However what perhaps needs to be done is a study on tax demands where the amount has had to be refunded later on, as the ground for raising these demands were weak. Believe, me you, or rather believe Zenobia Aunty, this study will put things in the right perspective.

We, in India have a long winded mechanism for settlement of tax disputes and this only adds to tax payer woes. Let us just take the example of one country, USA. Its tax laws are no less complex than ours. Yet, USA has mechanisms such as private letter rulings and advance pricing agreements which provide tax certainty at the outset.

The most common type of advance ruling in the USA is the private letter ruling. It involves a private request by a taxpayer, in advance of a transaction, for determination of the tax treatment of such proposed transaction. Once obtained, the ruling is binding on the government in the absence of a showing of substantial factual error, misrepresentation, or fraud. Our advance ruling mechanism is not available to all and sundry, further it is quasi judicial in its approach. Private rulings are more taxpayer friendly, authorities are empowered to discuss issues on hand and act as advisors rather than tax collectors. Something on these lines is vital for India Inc.

Transfer pricing is one of the most complicated subjects in international tax law, and the tax payer and tax authorities can easily disagree about it. The US Internal Revenue Service implemented the Advance Pricing Agreements (APAs) program in 1991, to avoid the prolonged, lengthy, expensive, and uncertain litigation. Prior to the APA program, transfer pricing was generally not a subject for private letter rulings because of its highly factual nature. Under an APA, as with any private letter ruling, disputes are avoided by an advance agreement.

Coming back, to home ground. Fortunately the Bombay High Court, recently, in Clifford Chance’s decision, has upheld the doctrine of territorial nexus for levy of Indian taxes. Hopefully cognisance will be taken of this concept in Vodafone’s case, where transfer of shares between two non residents of another non resident entity were held taxable in India, merely because shareholding in India was indirect held by the company whose shares were transferred. Knee jerk reactions if any, are not going to help in the long run, rather a mechanism of tax certainty will help attain the objectives of tax collection and avoid inconvenience to the taxpayer.