Friday, March 25, 2011

Law Street - Economic Times (March 2011) - Green cars?

Dear Readers,

I have been at the receiving end of many emails to switch off power for an hour tomorrow and help save planet Earth -- this one hour of darkness is called Earth Hour. Is one hour really enough?
Aren't long term solutions needed, such as not driving large fuel guzzling cars (even if driving a car is unavoidable), switching off lights/appliances that are not in use, trying to reduce carbon footprint?
Thus, the Finance Bill, 2011, seems have their heart in the right place (if we treat the proposals of the Finance Bill, as a living thing capable of emotions). Yet, perhaps much more is really required to promote hybrid cars in India. Perhaps one needs to take a leaf from the experiences in US, Japan and other countries. Tax sops to the end user of hybrid cars and higher gasoline bills, would act as a catalyst, well perhaps to an extent, for the audience the Government wishes to convert into green car users. For much more, click here for the online edition of The Economic Times. Or scroll below.
Try not to be cynical and do switch off your lights for an hour or more tomorrow. After all, at times symbolism helps spread awareness.
Best regards,

And all the king’s horses…

• Green sops to consumers are the key
• Clarifications on CKD imports is required
• A carrot-stick approach works best

In a quaint conversation between Alice, of the Alice in Wonderland fame and Humpty-Dumpty, the latter keeps reiterating a promise made to him by no other than the King, to put him together again, if he fell off the wall. But, we know the gory end result.

There are many such promises made in the Finance Bill, 2011, which perhaps are made with the right intent, but at this juncture one is skeptical of the results.

For instance, our Finance Minister (FM) in his budget speech has remarked:
“The Indian automobile market is the second fastest growing in the world and has shown nearly 30 per cent growth this year. World over, substantial investments are being made in the field of hybrid and electric mobility. To provide green and clean transportation for the masses, National Mission for Hybrid and Electric Vehicles will be launched in collaboration with all stakeholders.” Alice would probably ask quite a few questions, such as: How? When?

Hybrid and electric mobility requires a lot more to be done in India, rather than just R&D in this sector – such as proper roads, but that is another story. In India, Hybrid or electric cars will have limited usage, by a limited number of people, on some limited routes. Yet, this announcement will perhaps (if one is as optimistic as Humpty Dumpty) be a beginning.

Some countries are not only pumping money into R&D efforts to promote the green auto sector but are providing tax credits to the end user. In the United States, tax credit available to hybrid diesel-electric cars, under the Energy Policy Act, 2005, which ended in December last year. These had granted up to USD 3,400 as a tax credit for the most efficient hybrid cars and USD 4,000 for a compressed natural gas vehicle.

However, there was a catch. This policy called for a phase-out of the tax credit when any specific automaker sold more than 60,000 hybrid or clean-tech vehicles. News reports indicate that certain Toyota and Lexus hybrids became ineligible for tax credits much earlier in September 2007.

Now the focus in the United States is on electric drive vehicles. Indeed federal and state legislations offer many ‘greenies’ to the end user. The tax credit can be as much as USD 7,500 plus a UDS 2,000 credit for charging equipment installation.
In 2009, Japan, in its tax reform bill, waived an automobile weight tax for people buying hybrid cars and electric vehicles. News reports point out that: Normally, people purchasing new cars pay the automobile acquisition tax, which is equivalent to roughly 5% of the car’s price, and three year’s worth of the weight tax. This means a person buying a Yen 2 million car that weighs 1.3 tons has to pay approximately Yen 146,700 in taxes. If the car is a hybrid or an electric vehicle, the taxes will be waived completely. Other types of environmentally friendly cars also receive 50-75% tax reductions depending on their fuel economies and exhaust emissions. In addition, Japan also imposed a higher levy on gasoline. By adopting a carrot and stick approach, many hybrid or electric car models, such as Toyota’s Prius became a runaway success in Japan.

As Zenobia Aunty’s tiny car (not an expensive hybrid, but not a petrol guzzling vehicle either) shudders as it passes a huge pot-hole, she grimaces. But, she is kind enough to let us know that a few concrete announcements have also been made. Full exemption from basic customs duty and a concessional rate of central excise duty has been extended to batteries imported by manufacturers of electrical vehicles. The government has announced excise duty of 10 % on vehicles based on fuel cell technology. Exemptions have also been granted from basic custom duty and special CVD, to critical parts/assemblies needed for hybrid vehicles. The government has also proposed a reduction in excise duty, on kits used for the conversion of fossil fuel vehicles into hybrid vehicles.

Indirect-tax experts point to a slight snag in the above and say certain clarifications are required. In India, car manufacturers tend to import Completely Knocked Down (CKD) kits and carry out assembling in India. As per a recent notification, a CKD unit means a unit having all necessary components, parts or sub assemblies for assembling a complete vehicle but does not include a kit containing a pre-assembled engine, gear box or transmission mechanism; nor one that includes a chassis or a body assembly for a vehicle. The fear is that these kits may continue to be subject to higher basic custom duties, despite the intent to promote import of assemblies needed for hybrid vehicles.

The Mumbai heat, the pollution and the long drive is getting to Zenobia Aunty. So you are sure, she will keep a watch out on how National Mission for Hybrid and Electric Vehicles will pan out.

Source of the photograph

Sunday, March 06, 2011

Law Street - Economic Times (March 2011) - Post budget column on LO

Dear Readers,
Zenobia Aunty is a bit perturbed about the duplication in work load that business entities are subjected to. Take for example, Liaison offices in India. They are currently filing activity statements with India's apex bank - The Reserve Bank of India (RBI) .

The Finance Bill, 2011-12 has announced the intent to introduce a new form that will be filed with the tax authorities. It is true that India should not lose its slice of the tax pie, as while legally Liaison offices are not permitted to carry out business activities in India, it is vital to examine whether this is really so. If business activities are carried out in India, the profits attributed to the Permanent Establishment (PE) in India (in this case the Liaison Office) can be subject to tax in India.

But, some better co-ordination with the RBI would have helped matters. Further, it is vital to avoid a spate of litigation in this arena. All Liaison Office's should not be subjected to the same brush stroke and treating as a PE of their foreign enterprise.

Interesting times lie ahead and we need to wait for the developments.

For reading this column on the epaper of The Economic Times, click here. Or you may scroll below as the column is also pasted below.
You may also look up the budget booklet of Ernst & Young, on its website, by clicking here.
Disclosure: This blogger is an employee at Ernst & Young, India. The above booklet is available on the internet for public use.
Hope everyone is having a nice weekend.
Best regards,

LO and behold!
• Liaison Offices currently file annual activity certificates with authorized banks
• Finance Bill’s proposal of filing of annual information is yet another procedure
• Such additional procedure must not lead to additional hassles

This columnist was seated in her favourite restaurant enjoying every little delectable morsel of lemon cheesecake. Everyone seemed to be in a cheerful mood, even the otherwise surly man at the cash counter was smiling. But, peace and quiet was soon shattered! In stomped Zenobia Aunty, note-book in hand and pounced on her once-favourite niece, for having neglected to take dictation last month, which resulted in a column missed.

Let us say: Hell, hath no fury, like an Aunty scorned. The lemon cheese cake suddenly seemed unappetizing. Perhaps this columnist redeemed herself a bit by letting Spot gobble the uneaten slice. “Right ho, then,” remarked Zenobia Aunty, thrusting note pad and pen at her niece and commencing her dictation post haste.

“So Pranab-da (as India's Finance Minister) wants to eat his slice of the cheese cake and perhaps much more,” began Zenobia Aunty. “It is one thing to put down things on paper, another thing to ensure that these are implemented in the right spirit,” she went on. Zenobia Aunt was referring to the information disclosure required from Liaison Offices in India.

The recently tabled Finance Bill has made it mandatory for filing of annual information within sixty days from the end of the financial year. This proposal will take effect a few months down the line from June 1, this year.

In the initial stages, where India is being explored as a potential market, foreign enterprises prefer to set up a LO. Later, once they know for certain they want to carry on business operations in India, they may set up a subsidiary in India. As LO’s cannot carry out an income generating business activity in India and fund their expenses through remittances from overseas, they typically do not file a tax return.
A debate that often arises is whether a LO can constitute a permanent establishment (PE) of its foreign parent company in India. Only if the answer is positive, can profits be attributed to the PE and consequently, the foreign enterprise can be subject to tax in India.

Under most of India’s tax treaties, a fixed place through which a business of a foreign enterprise is wholly or partly carried would result in a PE of that enterprise in India. This could typically be the case where a foreign enterprise sets up a branch office for carrying on commercial or core business activities. However, having regard to the limited operational profile which a LO is subject under the exchange control regulations and also on account of the fact that most tax treaties exclude from the definition of PE a fixed place whose purpose restricted to that of purely preparatory of auxiliary for the enterprise, a question often arises as to whether a LO can create a PE for the foreign enterprise and if so, under what circumstances.

Over the last few years, the above question has come up on several occasions before the judiciary. As acknowledged by the OECD Commentary, it is often difficult to distinguish between the activities which have a “preparatory or auxiliary” character and those which do not. Thus each case needs to be examined on its own merits.
At present, as prescribed by the Reserve Bank of India (RBI), LO’s have to file an Annual Activity Certificate (AACs) obtained from the Auditors, as at end of March 31, along with the audited Balance Sheet on or before September 30 of that year, stating that the LO has undertaken only those activities permitted by the RBI. This has to be filed with an authorized bank, which in turn intimates the RBI in case of any impermissible activities have been carried out. In case the annual accounts of the LO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet.

Thus, the annual filing of information, albeit in a form prescribed by the MoF appears to be just another procedural addition for the LO’s. Perhaps, this new form (not yet prescribed) will better enable the tax authorities to understand the nature of activities carried out by a foreign enterprise in India through its LO and also whether or not any revenue has been generated in India, the source of funding of Indian expenses and what have you. This may perhaps equip the tax department to decipher whether such activities in India are business activities that can be subjected to Indian taxes.

It is vital that India does not lose its justified share of tax revenues, however, LO’s must not be subjected to any additional uncalled for hassles. Else, like many unresolved issues chocking up our tribunals and courts, litigation on this front will be a never ending dilemma, forcing many a foreign enterprise to turn away from its India dreams, in turn denting a largely FDI friendly image of the Indian economy. After all, an LO set up is the ‘first taste of India’, sums up Zenobia Aunty, biting into a chocolate mud pie.

Photograph: This photograph is of the Gateway of India, shot several months ago.