Friday, March 26, 2010

Law Street - Economic Times (March 2010) - Post budget column

Dear Readers,

Click here for the online version of Zenobia Aunty's budget analysis, or else as always scroll down.

Best regards,

Saral or not?

Practical tax laws alone the purpose
Retrospective amendments cast more burdens
Simplicity and stability is the key to success

Zenobia Aunty lives in what the real-estate brokers call ‘towers’. Now Zenobia Aunt’s apartment is tucked away in the last tower in the residential complex, away from the din and noise and on a lower floor, even as the preference perhaps may have been for apartments on higher floors which offer a sea view. All around her neighborhood mill complexes are giving way to residential complexes. Real estate brokers are a busy lot, towing potential customers across to see the model flat as are perhaps Vastu consultants.

Yes some flats do command a premium – such as a flat overlooking a park or having a sea view or even one which is on a higher floor. Our Finance Minister has now sought to bring into the service tax net: “special services provided by a builder to the prospective buyers such as providing a preferential location or external or internal development”.

Zenobia Aunty scratches her head. “Is this practical, how will they ever implement it?,” she wonders. A Google search shows that in 1696, a tax was placed on British homes based on the number of windows the home had. Previously the tax was levied per household, no matter the size of the house or the number of residents. The law changed, however, to levy higher taxes on larger homes with, presumably, more windows. Instead of paying the higher taxes, people just bricked up the windows that they found to be extraneous. An astute visitor to Britain can still see evidence of this law today in the scores of walled up windows in older buildings throughout the country! This columnist wonders what Mumbai apartment dwellers having a sea view will do, buy thick curtains perhaps?

Zenobia Aunty was really expecting that the tax exemption available for medical expenses would go a bit higher from the current limit of Rs. 15,000. Alas, while this did not happen, payment for treatment made by insurance companies directly to hospitals is now under the service tax net. The past few weeks, we have been seeing headlines on how third party insurance intermediaries are trying to dictate terms as to how much doctors in hospitals should charge. Even as the battle between insurance companies and the patients is hotting up, up comes this whammy. Zenobia Aunty can sense that HR departments, where employees are covered by health insurance plans will have their hands full. And it is quite possible, that the employee covered by the insurance scheme will have to bear this tax for which he cannot take any tax credit.
There is also a retrospective amendment dating back to July 1, 2003 to cover commercial training and coaching services. Once again, the litigation and administrative costs involved thanks to such a retrospective amendment may not be worth the recovery in the form of service tax.

Ah, well, there are some things that the hoi-polloi like you, this columnist, or Zenobia Aunty will never understand. Minimum Alternative Tax is one such thing. Last year, we saw a hike in MAT from 10% to 15%. This year, there is another hike to 18%. On the other hand, the normal tax rate, with the slight decline in surcharge to 7.5% is now 33.22% (for large companies). If one considers the various tax sops including tax depreciation available, the normal effective tax for a company could be slightly lower, say around 25%.

MAT was introduced as a solution to bridge the difference between book profits and taxable profits – to bring into the tax net companies which were paying heavy dividends but owing to tax sops were not paying tax. This bridge or gap has been narrowed down the years through a reduction in depreciation rates and phasing of various exemptions. Reduction in tax depreciation for plant and machinery from a high of 25% to 15% by the Finance Act, 2005 significantly narrowed the disparity between book profits and taxable profits. Thus, Zenobia Aunty really wonders, why MAT still exits.

MAT takes back what was lawfully intended to be given as tax breaks and tax sops. And hiking MAT rates adds insult to the injury. Further, if it is to exist, MAT should be applicable, when there is actual profit after deducting both the carry forward loss and unabsorbed depreciation from the book profit and not the lower of the two. Else, companies where depreciation element is low, but who are making consistent losses – owing to business environment, will have to pay MAT despite heavy carry forward losses. Likewise, companies that are making nominal profit or loss before depreciation but the depreciation charge being very heavy will be liable for MAT.

Zenobia Aunty also hopes that there is some rethink on, as regards levy of MAT on the gross value of the assets which was proposed in the draft Direct Tax Code. Abolish MAT in toto, is what she advocates.

Hopefully once the Direct Tax Code is in place, it will ensure greater simplicity and stability in tax laws, like Saral-II. Let us wait and watch.

(Photograph for illustration purpose only: Planet Godrej, a well known residential tower in Mumbai)

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