Saturday, August 28, 2010

Law Street - Economic Times (Aug 2010) -New Tax Code on the anvil

Dear Readers,
Even as this column had been sent for publication, on Thus, August 26, 2010, the Cabinet Committee gave its nod to the New Tax Code Bill. It will now be placed before the Parliament this month. Then it will be placed before a committee and hopefull it will be finally passed in the Winter Session.
Through media reports, we know of a few snippets, such as:
1) Corporate tax rate continues at 30% (Perhaps there will be no surcharge and cess, if so then it will be better than the prevailing rate which works out to close to 34%)
2) MAT is now pegged at 20% (Currently it is 18% on adjusted book profits)
3) There is minor tinkering in slab rates for individuals
4) EEE regime largely continues
Well, we need to see the fine print once the Tax Code Bill is made available to the public.
I do hope this Bill offers clarity. The August column points out at the need for simplification and clarity.
You can view it online by clicking here.
Alternatively, as always, the column is also cut and pasted below.
Have a nice weekend.
Best regards,

Monsoon musings
• Both BPT and MAT clarity must be provided in new tax laws
• A urban cost of living adjustment could be considered in tax rates
• Tax must be attuned to real needs of the tax payers

It has been raining cats and dogs here in Mumbai. It is perhaps, just the right season for Zenobia Aunty to sit on her favourite chair and surf the internet for tax news or to connect with all her friends across the globe to chat on latest happenings in the tax arena.

Yes, it is pouring tax news. Let us start with home base, India. Soon after the revised discussion paper on the Direct Tax Code (DTC) was issued, came the report of the Takeover Regulations Advisory Commentary followed by announcements on the GST front and then suddenly some States had second thoughts about the constitutional amendment for introducing a GST regime. It has sure has been one busy season and never a dull moment.

It beats me why it always pours over the weekends. Or perhaps on weekdays, unless we are scurrying for meetings, one doesn’t have time to look out of the window, even if it offers a sea view. A spate of grey days makes one appreciate the sunbeams.
Likewise, two recent rulings relating to applicability of MAT on foreign companies have gladdened many. The Authority of Advance (AAR) Rulings in two cases has ruled that a foreign company that has not established a place of business or permanent establishment in India would not be subject to the MAT regime. Unfortunately, the Income tax Act itself does not provide any specific clause stating that a foreign company is exempt from MAT. While AAR rulings are binding only that particular transaction in relation to which the ruling was sought, they do have a persuasive effect in assessments dealing with a similar issue. Thus, these rulings are much welcome.

These favourable rulings, prompt Zenobia Aunty to raise questions as regards the Branch Profit Tax (BPT) provisions contained in the DTC. While sipping a strong cup of masala tea she says: “It should be clarified by the government that the levy of BPT is restricted to a foreign company that has a fixed place of business in India by virtue of a branch office or project office. Further the BPT should only be levied on actual remittance of profits. In the context of MAT if tax laws itself had provided for such clarity foreign companies would not have faced ambiguity, at least now, in the context of BPT and MAT clarity must be ensured in the new Income tax Act.”

While I was in Bengaluru I really thought it was no longer a garden-city but a Mall city. When we left Mumbai, eight years ago, perhaps there were only one or two Malls. Now, while on a drive from South to suburban Mall all you see are signs screaming: SALE!!! Malls have, overrun Mumbai as well.

Kay Bell, a famous tax blogger from the US points out that in August, States in the US are having what is typically referred to as back-to-school sales tax holidays. These last for two-ten days and during this period shoppers don’t have to pay state sales taxes and sometimes they also avoid local levies, on selected items.
Zenobia Aunty quotes from her blog: The most popular tax exempt products are clothing and footwear where the bill is below a certain limit. Some US States also exempt school supplies, with a few including computers and PC peripherals in the no-tax category. Wish we had something similar back home, but well, perhaps we shall settle for the monsoon discounts offered by Malls, over this weekend.

Mumbai is an expensive city, so are various others cities across the globe, such as New York. This bit of news, gladdened Zenobia Aunty’s heart: Six Congressmen from New York are pushing a tax cut for people who live in high-income areas. The idea is to index everyone's income tax brackets to the cost of living, giving a big tax break to everyone who lives in the nation's most expensive areas. It other words, what they are pressing for is regional cost-of-living adjustments for tax rates.

I agree, for example: a salary of Rs 20 lakh in Mumbai does not go as far as a similar salary in say Bengaluru or Hyderabad. Rentals or property prices are just too steep in amachi Mumbai. After all if agricultural income can be tax exempt because understandably farmers do face a lot of hardship, shouldn’t the hardship faced by those in expensive Indian cities also be considered? Perhaps cities can be classified as Class A, B and C and a cost of living adjustment built into the tax rate? Or is this just wishful thinking?

It is pouring again, there go my plans of strolling along Colaba Causeway. Maybe I shall go join Zenobia Aunty in her quest for tax news in cyberspace.

Photograph: This photograph was taken at Lalbaugh Garden, Bangalore, Karnataka

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