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

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