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.

1 comment:

TaxRascal said...

Hi Lubna,

Thanks for the comment!

Your post is absolutely right: we do need to make sure the message taxpayers get is consistent. Right now -- for reasons good and bad -- taxpayers tend to feel like they're getting a bad deal, while other folks are still living large.