Talking Tax

Law Street in The Economic Times (January 2012)

2012-01-29T09:44:00.000-08:00

Dear Readers,

As the press had a rare holiday on India's Republic Day, viz January 26, we did not get a printed copy of the newspaper the next day. However, my column was duly uploaded on the website.

It is likely that the Companies Bill, when reintroduced, will continue with its proposition to make CSR disclosures mandatory. That said, shouldn't the tax laws be in synch so as to propel the corporate sector towards CSR activities? Perhaps a weighted deduction for CSR activities would be a blessing. It would also reduce the litigation on whether a CSR expense is a business expenditure or a CSR expenditure. Click here to read the online edition of The Economic Times, or scroll below.

Tax Karma

CSR activities may be mandatory
Appropriate tax deductions should be introduced
The Finance Bill and Cos Bill must be in synch

Zenobia Aunty firmly believes in Karma, little wonder then, that Spot is forced to share his biscuit treats with the alley cat. In an ideal world, if a Company contributed towards the society, it would be amply rewarded by its various stakeholders in myriad ways. However, without expecting anything in return, many companies do contribute by building townships, providing funds or assets for schools, hospitals and the like. Yet, there are others who firmly believe that this is not their role and the taxes paid by them should cover take care of their social obligations.

Perhaps, it is only a matter of time before contribution towards Corporate Social Responsibility (CSR) will be mandatory. The Companies Bill, 2011, at the insistence of the opposition was withdrawn from the Parliament in the winter session, but it is likely to be reintroduced in the budget session in March. This Bill called upon corporate entities meeting certain parameters to engage CSR activities. In the budget session, the Finance Bill, 2012 will also be tabled and perhaps also the Direct Tax Code. Thus, here is an opportunity for our draftsmen to ensure that the tax laws cover the treatment of CSR expenditure.

The Companies Bill had prescribed that every Company having a net worth of Rs 500 crore or more; or a turnover of Rs one thousand crore or more; or a net profit of Rs 5 crore or more; during any financial year shall set up a CSR Committee, which would guide and monitor the company’s CSR agenda and expenditure. Companies meeting this criterion were required to spend at least 2 % of their average net profits made during the three previous financial years towards CSR activities. Proper disclosure of the CSR policy including reasons for not meeting the required expenditure was called for.

Schedule VII prescribed the various activities that would fit into the CSR policy agenda. Besides contribution to the PM’s National Relief Fund and certain other funds of the Central and State governments, the CSR activities covered those relating to eradicating hunger, promoting education or health, ensuring environmental sustainability and everything that could fall in the definition of social business projects.

Let us assume that the Companies Bill, containing mandatory CSR spend in some form or the other gets passed in the budget session. To ensure that the corporate sector gets its due recognition for such activities the Finance Bill should also contain suitable provisions providing for tax deductions for CSR activities.

At present tax exemption for cash donations can be broken up into various categories: donations which entitle the donor to a 100 % or 50 % tax exemption without any qualifying limit such as the PM’s National Relief Fund and PM’s Drought Relief Fund respectively; and donations which are subject to 100 % or 50 % deduction subject to a cap of 10 % of the adjusted gross total income. In such cases, even if you make a donation larger than 10 % of the adjusted gross total income the total donation amount eligible for a tax deduction would be capped at this 10 %limit.

The Companies Bill, by defining CSR activities has widened the field. Currently, it may be possible for a Company to treat a particular CSR related activity as a bondfide business deduction, say installation of solar panels in its office premise (which helps environment sustainability) against which it claims a tax depreciation. But, claiming expenses for a medical camp in a nearby rural district as a business deduction may result in litigation.

To avoid any further litigation on the issue, any expenditure that qualifies as a CSR expenditure, whether it be capital or revenue in nature, should be entitled to a separate tax treatment. A deduction, for tax purposes of 120-150 per cent of the CSR expenditure should be permitted with a prescribed cap. As, the Companies Bill calls for a minimum spend of 2% of the average net profits during the previous three years, perhaps a cap of 5% of this amount should be set for the purpose of claiming a tax deduction. Any excess expenditure beyond 5% should not be permitted, as this would ensure that scrupulous companies do not overspend under the CSR banner just for the sake of a tax claim.

Several companies have set up their own trusts or foundations for CSR activities. Perhaps companies may need to move these activities within the corporate fold so as to take the tax benefit. However, it would be best for the tax laws to provide that a contribution to the trust or foundation is also regarded as a CSR expenditure, provided the trust or foundation has spent that money fully during a financial year.

While internal CSR committees would bear the responsibility of ensuring that the prescribed funds are used for genuine CSR activities, appropriate tax policies would ensure clarity and also prompt India Inc to fully support this initiative.

Source of the photograph

Law Street in The Economic Times (December 2011)

2011-12-30T00:38:00.000-08:00

Dear Readers,

As this year draws to a close Zenobia Aunty wonders which way India is headed. The true worth of a democracy lies in a strong government and a strong opposition. But clearly both the sides in India are playing foul. Zenobia Aunty feels that the opposition parties clearly did not let the government function, this winter session or for that matter during the earlier monsoon session. Just as the ruling party should know how to lead, the opposition parties should know how to oppose in a responsible manner.

Thus, the Companies Bill was tabled and hastily withdrawn, the Lok Pal Bill was passed in the Lok Sabha (lower house) but could not meet muster in the Rajya Sabha (the Upper house), the standing committee led by the opposition is still sitting on the Direct Tax Code, so it could not be presented during the winter session and will not be in place for us to usher in a new Tax Code in the coming fiscal April, 1. The petty politics is just sickening.

As they say, each dark cloud has a silver lining. The Companies Bill, 2011, had called for rotation of auditors. Since it now stands withdrawn, perhaps this issue can be revisited.

For the online edition of this column in The Economic Times, click here.

The column is also pasted below.

Zenobia Aunty and I wish all our readers a joyous 2012.

Warm regards,
Lubna

Playing musical chairs

• Audit rotation could be a short sighted approach

• Joint audit mechanism may ensure better quality checks

• A pragmatic well thought out view must be taken

The Companies Bill, 2011, which was tabled in the Lok Sabha and withdrawn almost immediately owing to opposition pressure, prescribed for audit rotation. Zenobia Aunty wonders whether this measure would have achieved the intended objective of greater audit independence and better shareholder protection. Hopefully, before a revised Bill is tabled in the next calendar year this issue will be revisited.

For listed companies, this Bill prescribed that an individual cannot be an auditor for more than one term of five consecutive years and it also proposed a change in the audit firm every ten years. While the above prescription was mandatory, in addition the Bill gave the leeway to companies to rotate the audit partner and audit team each year or appoint joint auditors.

The European Union (EU) has also issued a proposal for discussion calling for mandatory rotation of audit firms of listed companies and those in the financial sector, after six years with a cooling off period of four years before the audit firm can be reappointed. Joint audits, where two or more auditors or audit firms conduct the audit are not proposed to be mandatory but are implicitly encouraged by extending the period of mandatory rotation from six to nine years.

In the United States, the Public Company Accounting Oversight Board (PCAOB) has sought public comments on ways that auditor independence, objectivity and professional skepticism could be enhanced; it has not concentrated on auditor’s rotation as the only or best solution.

Zenobia Aunty decided to don a journalist’s cap and interviewed a few prominent CFOs. The tenure prescribed for an audit firm was logical and doable, rotation of auditors could bring in fresh perspectives, yet this had its own evils and was not the best measure, is the overall view.

“Rotation will only result in one-upmanship with the new audit firm wanting to prove its worth vis-à-vis the previous firm, audits will remain open and audit committee meetings will cease to be productive,” predicted one CFO. Another chimed in: “When auditors change, a Company will have to battle with differences in interpretations, disclosure requirements etc. Rotations will result in either pushing up the cost of audit higher or quality of audit lower.”

PCAOB has queried: Does payment of fees by the audit client create systematic distortion which can be dramatically reduced by audit rotation? One CFO bites the bullet: “If we really want auditor independence the fees would need to be fixed by a formula based on various parameters as opposed to being fixed by the company.”

But this could be difficult, as the audit complexities vary widely from company to company. “Thus perhaps, if independent directors and consequently the audit committee were to appoint the auditors and fix their remuneration there would be greater independence,” he adds.

Joint audits found strong favour, thus perhaps before the next Companies Bill is tabled this concept should be examined in-depth. It was felt this mechanism would also resolve the constraints, weakness and loopholes contained in the mechanism of mandatory rotation, such as increased audit costs, lack of historical knowledge of the audit client, consolidation issues for global companies, and lack of specialization at the audit firm level.

Large listed companies which have met the threshold limit (based on turnover or assets) should be mandated to have joint auditors. The audit work scope and areas should be equally divided each year and mandatorily swapped after each year, such that no single audit firm audits the same area in consecutive years. Although the audit firms need not necessarily be rotated at regular intervals, perhaps the audit partner and senior audit team members of each joint audit firm could be changed every five years. The auditors opinion would be a joint opinion of the two or more firms, thus both responsibility and liability would be joint.

“Joint auditors will, most essentially, ensure that there is an in-built quality check on the work of the audit firms. This is because each audit firm will be required to satisfy itself as to the extent and adequacy of the audit work performed by the other before issuing the joint audit opinion. A natural quality control system far better than the regulatory bodies conducting third part external checks on the quality of audit work across an audit firm, would thus exist,” concluded a CFO.

All said and done, the bottom line is that an auditor is a watch-dog and not a bloodhound. Zenobia Aunty has no straight answer on the effectiveness of audit rotation. But adds: Since time is available, in addition to India Inc’s views perhaps even the views gathered at the EU level and by the PCAOB will provide more insight into this issue.

Source of the photograph.

Law Street in The Economic Times (November 2011)

2011-11-25T20:59:00.000-08:00

Dear Readers,
Technology! What would life be without a fast internet connection. Sadly, even as technology moves forward rapidly, the tax-men are left grappling with how to deal with new emerging issues. Take the issue of withholding tax on import of software, it hasn't been resolved till date. Now comes cloud computing. It is a mystery how this will be dealt with.
For the first time ever, The Economic Times, cut the few last sentences to fit the copy (owing to a change in format), hence perhaps you may want to scroll below for the entire column, instead of reading the online version.
Have a nice weekend.
Best,
Lubna

The grey tax clouds

• Tax laws must rapidly evolve to meet technology advancements
• Tax on software continues to be litigative
• Tax on cloud computing needs an answer

Will tax be able to keep pace with changing technology issues? Going by recent trends, at least in India, Zenobia Aunty thinks the pace of keeping up is sluggish, much slow than the slowest internet connection.

A recent news item took her by surprise. The Karnataka High Court has recently held that import of computer software would result in transfer of a copyright and the payment made to the foreign supplier would be in the nature of a royalty payment. Thus, the Indian buyer would have to withhold tax on the same, both as per the Indian Income tax Act and the relevant tax treaty.

Transfer of a copyrighted article, such as shrink wrapped software ought not to result in a royalty payment. It is similar to buying a book off the shelf. However, Zenobia Aunty is given to understand that the High Court in the given case, observed that the right to make a copy of the imported software and use it for internal business, store it in the hard disk of the designated computers and take a back up would amount to copyright under the Indian CopyRight Act. It was actual transfer of part of a copyright, rather than an outright sale of a copyrighted product. Hence, the need to classify it as royalty, which both you and I know suffers a withholding tax in India.

In the past there have been several rulings of tax tribunals and Authority of Advance Rulings which have appreciated that a distinction needs to be made between a copyright right and a copyrighted article for the purpose of characterization of computer software transactions. In case, the transaction is held to be a sale of a copyright right, then unless and until the foreign supplier has a permanent establishment in India, India cannot tax the payment as it constitutes a business income of the foreign supplier and is not a royalty payment.

The issue of withholding tax on import of computer software is a hot bed of litigation globally. Tax experts state that a few countries, such as Singapore, US, UK have taken a clear stand and do not advocate imposition of withholding tax at source, either owing to the existence of clear cut guidelines or practice adopted by the tax authorities and the judiciary. On the other hand, countries such as China and India seem to have adopted an ambiguous stand with divergent views.

Ambiguity doesn’t help. Now we need to wait till the Supreme Court addresses the issue. Perhaps clarity in the Direct Tax Code would help. A final decisive answer is needed. While a foreign tax credit can be availed of in the home country (foreign supplier’s country) if tax has been legitimately with-held at source in the other country, it can be cumbersome to get a foreign tax credit if tax has been presumed to be wrongly withheld. No wonder then that this issue continues to be in the forefront of tax litigation in India.

Zenobia Aunty saves some of her data in cyberspace on the cloud. Thus, she has begun to have nightmares of the possible tax consequences that will arise if payment is made for such cloud services. Cloud computing is having access to software and/or infrastructure facilities in cyber space. Users do not have to spend on upgrading software or hardware. It is cheap and many a self employed professional and SMEs or even banks are opting for cloud usage. Many high profile technology companies are providing cloud services.

Based largely on ownership of data and access, clouds can be private, public or hybrid. Further, based on what is provided to the cloud user, cloud models are classified as software as a service (SaaS), platform as a service (PaaS) or Infrastructure as a service (IaaS).

With the ambiguity that exists even in the realm of import of shrink-wrapped software, Zenobia Aunty shudders to think of the magnitude of tax litigation that may crop up in instances where cross border cloud services are used.

Going by the recent Karnataka High Court decision, would the tax authorities view that what was used under the cloud computing service agreement was a part of the software (copyright), which was hosted on the vendor’s cloud server and thus it was royalty subject to withholding in India? Or would they interpret that the payment was for use of scientific equipment - applications hosted in the cloud and thus were in the nature of Fees for Technical service (FTS)? Both payments towards royalty or fees for technical service would typically be subject to a tax withholding in India.
Further, in some treaties entered into by India, such as those with US, a ‘narrow approach’ with respect to taxation of FTS is followed and only if the technical service ‘makes available’ technical know-how, skill etc to the recipient of the services (in our case, the Indian user of the cloud service) is it regarded as FTS subject to withholding at source. However, interpretation of this term – make available - is not free from litigation either.

While technology may be making our lives easier, the ambiguities in tax laws do cast a grey cloud overhead.

Source of the photograph

Law Street in The Economic Times October 2011)

2011-10-27T21:41:00.000-07:00

Dear Readers,

Diwali greetings. Journalists partake only a few public holidays, yesterday being a Diwali was a holiday and there is no paper today. But the online edition rolls on and this column appeared in the online edition of The Economic Times.
There is one thing I hate about Diwali the noise and the pollution cause by a massive display of fireworks. Spot hates it too and hides beneath the bed, and comes out on occasions to bark his head off, and adds to the noise. Noises aren't healthy not even in tax land or in the process of policy formulation.
There needs to be clarity on what exactly the governments want to do, more so, in a cash strapped economy. Click here to read more, or as usual scroll down.
Hope the coming year will be a good one for you.
Best regards,
Lubna

A cacophony of noises
• A higher tax rate across the board for the top slab would harm
• Distinction could be made between passive and non passive income
• PF issues for international workers must be sorted

Spot hates Diwali because of the noisy fireworks. Noises are disturbing. Thus, when PC (our former FM), mentioned that the rich must be prepared to pay higher taxes, it sparked off a debate.

In the US, Warren Buffett hastily clarified his statement about the wealthy having to pay more taxes. His clarification, picked up by news reports, states that he is advocating “a higher tax rate on people who make money with money only….. If they earn money by normal jobs, what I say would not hit them at all!” Meanwhile, Prez Obama, introduced the Buffett Rule, which creates a new tax on the wealthy, but as an ordinary tax rate. A huge difference from what Buffett actually meant.

In Germany, France and Italy a few of the richest people have stood up and said: Tax us more, we shall help the troubled economy. Can India just cherry-pick the sentiments prevailing in some of the developed countries?

PC was right in saying that his statement will not go down well. Psychologist Shigehiro Oishi, has recently looked into the relationship between the tax mechanism and the quality of life in 54 countries (Incidentally, even the Oecd has introduced a model for computing the quality of life). Using Gallup numbers from 2007, Oishi discovered a direct co-relation between tax progressiveness and a country’s happiness. Is it then logical to say, the more tax the rich pay, the happier that particular country? No. As Oishi explains, it is what the government actually does with the tax payer’s money which makes a country happy.

Zenobia Aunty understands the merits of a progressive system of taxation and understands the woes of the farmers and the need for tax exemption on agricultural income. However, she cannot comprehend why her salary earning, honest tax-paying family members should have to pay more taxes. At present those earning taxable income of above Rs 8 lakh pay tax at 30 per cent, plus a 3 per cent education cess. Perhaps the government may, at the most, increase the highest tax slab to Rs. 10 lakh. Yet, given the inflation trends a higher tax rate across this slab would be unfair.
The best option is to increase the tax base. But if this is impossible, then perhaps the government could consider carving out yet another slab of the very rich and imposing a surcharge on this slab, after having a healthy debate with such stakeholders. Or as Buffett had suggested, perhaps those who earn money with money should be asked to pay more. Currently, long term capital gains arising on shares/listed units of equity MFs are not subject to any tax at all. The Direct Tax Code (DTC) had proposed to continue this exemption. In fact, for short term capital gains, arising if the holding period is less than twelve months, the DTC had proposed that 50% of the short term capital gains would be allowed as a deduction, which would result in a lower tax impact, depending on the slab rate to which the individual belonged. Currently, short term capital gains are taxed in the individuals hand’s at 15 per cent.

A miniscule Securities Transaction Tax (STC) is levied on sale/ purchase transactions undertaken on recognized stock exchanges and on redemption of equity oriented mutual funds. Newspapers reported the possibility of scrapping of STC to boost the share market. True, imposition of tax on long term capital gains on sale of listed shares could dampen sentiments, but in a worst case scenario if there is a need for increasing tax revenue a distinction between passive and non passive income (such as salary income) is perhaps the best approach.

Mind you, Zenobia Aunty is not advocating these measures; she is merely saying that these steps would perhaps be better than imposing a higher tax rate on everyone across the current highest slab.

We cannot compare India with France, Germany or the Italy, where the majority pays taxes and there is also a well-set social security system. So just because a few Europeans have stood up and said we are willing to pay more, the same approach may be harmful to us.

Coming to the issue of social security, PF issues continue. A recent circular issued by the PF authorities seems to imply that an international worker can withdraw his PF money only after retirement or attaining the age of 58 years.

If an Indian employee goes overseas to work in a country with whom India has signed a social security agreement (such as Belgium, Germany, France, Switzerland, Luxembourg and Denmark), such a worker is designation as an international worker. On obtaining a certificate of coverage, he no longer has to pay social security tax in the other country. The whammy of course, being that he isn’t treated on par with other Indian employees when it comes to withdrawals from his PF account. This is certainly not in the best interest of India’s mobile workforce and needs to be resolved.

Source of the photograph

Law Street in The Economic Times (September 2011)

2011-09-29T20:58:00.000-07:00

Dear Readers,
Circulars keep getting issued by various regulatory agencies, some of which just add to the confusion. A case in point is what components of salary should be included for calculating your PF? True, a bigger PF means a better security blanket for the future (provided there are no hurdles in withdrawing it), but for now, it means a lesser take home pay. Read on, by clicking here, to know more.
Meanwhile, try and have a nice day.
Best,
Lubna

PF: Perplexing fundamentals?
• Clarity in accounting for PF contributions is required
• Bonus does not form part of basic pay for computing PF
• Employees prefer a better take home pay and this must be kept in mind

One fine evening, during her recent trip to Bengaluru, Zenobia Aunty caught up with Gopal and his pals. “Provident fund (PF) issues,” are haunting us, Gopal stated after they had settled in a cosy corner of the local watering-hole. The mood among this group at the local pub was subdued. Not only were bonus payouts expected to be low owing to the depressing economy, but there was an underlying fear that a portion of their bonus would have to be taken into account for computing Provident Fund – the net result, a lower take home bonus.

“I was looking at paying off my home loan, with the bonus,” mourned Mohan. Gopal, on the other hand was thinking of a ski-vacation abroad. “Forget your bonus worries,” chipped in Shilpa. “Our monthly take home pay will be reduced as well, worry about that!” she added. The gloom deepened.

Zenobia Aunty, was still puzzled. What had changed in the PF spectrum that had anything to do with a lower take home pay-packet or a reduced bonus take home? After all, the rate of employer and employee contribution towards PF is 12 per cent of basic salary, dearness allowance and retaining allowance (if any). Further the motley trio were not ‘international workers’ – those who had been deputed abroad and had returned, which does lead to some more complexities. More on this in another column.
As mugs of beer continued to be downed, it seemed this trio was able to explain things better. Sometimes, beer does seem to clear the mind. It appeared that the PF officers were examining the records in some organizations to ensure that salary was not restructured in a way to reduce the PF contributions. This was a matter of concern, because who doesn’t want a better take home pay?

It all began with two recent judgements in favour of the PF department, which held certain allowances to be part of basic salary for computing the PF contributions. The judgement given by the Madras High Court included the following allowances to be part of basic salary for PF purposes, viz: conveyance, education, food concession, medical, special holiday, night shift and city compensatory allowances. That of the Madhya Pradesh High Court stated that conveyance/transportation allowance and special allowance fell within the ambit of basic pay.

Soon thereafter, the Employee Provident Fund Office began to issue internal circulars to the Regional PF Offices to follow these favourable rulings. The circulars also directed that the PF authorities have the power to examine and look into the employment contract, as well as the pay structure to determine whether the pay has been split into several headings (allowances) to help avoid PF contributions.
“Oh,oh, the crux of the problem is what constitutes basic wages,” exclaimed Zenobia Aunty, now understanding the magnitude of the problem. Her network is far and wide. A few phone calls to the experts, sorted out some issues.

There was good news for both Mohan and Gopal. Bonus cannot be included for the purpose of computing the PF contributions. Any payment by way of special incentive or work; payment based upon contingencies and uncertainties do not form part of basic salary. This has also been accepted earlier by the Supreme Court.

Both Mohan and Gopal obtained a bonus, which was a reward for hard work, given based on a performance rating. The better your performance rating, higher was the percentage of bonus payout. Further, the bonus payout did not depend on individual performance alone, but also on performance of the department and the team to which they belonged and the profits of their employer organisation.

Shilpa continued to sulk. She finished the entire bowl of chips, something she always did when worried. An extra hour on the treadmill is now called for, she sighed, even as she called for a refill.

Again, Zenobia Aunty, had good news to share, at least for Shilpa. Perhaps a position can be taken by the employer, based on Provisio to Paragraph 26A of the PF Scheme that the statutory limit under the EPF Act is restricted to 12 per cent of the monthly pay capped at Rs. 6,500 per month each, in respect of the employer and employee’s contributions.

Employer organizations, covered by the EPF Act, must ensure that the compensation or salary paid to an employee is true and correct and tallies across all records, be it pay-slips, salary register, books of accounts, TDS certificates etc and splitting up of the gross compensation into various allowances must not be carried out with the sole intent of reducing PF contribution (this would especially apply where the contribution is below the cap limits).

Meanwhile, Zenobia Aunty was also given to understand that a review petition has been filed before the Madhya Pradesh High Court and a writ appeal has been filed in the Madras High Court. Both should come up for hearing shortly and perhaps offer some clarity. Cheers to clarity!

Source of the image used.

Law Street in The Economic Times (August 2011)

2011-08-26T10:09:00.000-07:00

Dear Readers,

Bonjour.

It appears that governments world over and trying to adopt ways and means to have corporate entities to cough up some extra dough, whether directly or indirectly. Recently, a bill has been passed in France, which requires corporate entities (well, most of them) to pay a bonus to employees when they declare dividends. This sure is tantamount to interference in business policy. Read on, for this new revolutionary bill!
As always, by clicking here, you can get to the online edition of The Economic Times, else scroll below.
Have a nice weekend.
Merci,

Lubna

Law Street/Lubna Kably (August 26)

Corporate caretaker

•France now requires companies to pay mandatory employee bonus on dividend distribution
•Ideally, governments should not interfere with company’s internal affairs
•This legislation is expected to push up purchasing power and boost the economy

Dilbert is one of Zenobia Aunt’s favourite comic strips. In fact, she reads this comic strip first, before turning over to the front page and of this newspaper.

Not so long ago, Scott Adams, creator of the Dilbert comic strip in his blog has mentioned that tax policy has two purposes. One is to collect money to enable the government machinery to function. The other is to promote public policy. For instance, he cites: mortgage deductions are meant to encourage home ownership. Or as Zenobia Aunty adds, back home, stiff taxes on tobacco are expected to deter tobacco chewing or smoking.
Scott Adams wonders, whether we could have a tax on stupidity and thereby reduce its prevalence over time. One big obstacle to taxing stupidity is identifying it. But he has quite a few suggestions which include a general knowledge test running thousands of questions long. And it would be entirely optional. If you choose to not take the test, you can simply pay a stupidity tax instead. If you take the test, and score 100%, you pay no stupidity taxes at all; else the tax paid would be dependent on your score. Unlimited chances would be available to improve your score.

He is curious on whether tax policy could make a huge difference in the effectiveness of society by directly taxing stupidity. Unfortunately, Scott Adams admits it is an impractical idea and no government would buy it. But perhaps he may, some day, on some island create his own kingdom, design this tax mechanism from scratch and introduce it. Zenobia Aunty would love to be a resident of this island, maybe she could help in preparing the questionnaire and thereby get an exemption from the tax.
Some tax laws can be stupid, to put it mildly. Other legislations are equally insane. Several months ago, there was a hue and cry, in Corporate India, when the government in India had proposed to make Corporate Social Responsibility (CSR) mandatory – in other words companies would have to contribute a certain percentage of their profits towards CSR. The reasons were many. Those opposing it felt that the main duty of corporate sector was to earn returns and dividends were a way of paying back to the shareholders. Since corporate entities paid tax, there was no need to contribute separately towards CSR, it was the government job to work for society’s welfare from the taxes collected. Fortunately for those opposing the move, such CSR contribution is not mandatory.

But, it seem that the French government has also adopted a similar stand, that corporate entities need to pay back!!!. To improve purchasing power of the hoi polloi and put some punch back in the economy, it has not eased the tax burden on individual tax payers but wants the corporate entities to pay a bonus to its employees, if they declare a higher bonus.
Oracle, as this columnist’s boss is often referred to, because of his in-depth insight into ever changing and complex global tax laws, persuaded Zenobia Aunty to cover this topic. Venting her ire, only against the draftsmen in India, was discriminatory, Oracle firmly stated. Zenobia Aunty meekly obeyed his orders, as does this columnist.
Last month, the French Parliament adopted a wide sweeping bill, which requires companies to pay a bonus to all the employees when the dividend per share distributed to the shareholders is higher than the average of the dividends per share distributed in the two previous fiscal years. These provisions apply to all companies having more than 50 employees. Those companies having a lesser number of employees can voluntarily opt for the proposed provisions. These rules apply to dividend distributions authorised as from the beginning of this calendar year and will be valid for a period of three years.

As far as the amount of the bonus to be paid is concerned, an agreement will have to be signed by the Company with employee representatives within three months starting from decision to distribute the dividends made by the ordinary general meeting of the shareholders. The agreement is subject to the modalities applicable to the signing of a profit-sharing agreement.

Failure to start the negotiations results in penalties and prosecution for the Company and its officials. The French Ministry has provided for some minor sops such as exemption a bonus up to EUR 1,200 per employee and per year, from certain social security contributions.

The moot issue is: Can the government really expect the corporate sector to step into its shoes. In the Indian scenario, the government wanted the society to benefit by ensuring that a certain sum was spent on social welfare (it is a different matter altogether that CSR activities were not defined). Now the French government, to boost the sagging economy has decided to burden companies that are earning profits and want to share it with the rightful segment – the shareholders! Market forces would automatically ensure that any company’s pay to its employees is at parity with that of its competitors.

But, as economies continue to stagnate and governments can ill afford to reduce taxes further, perhaps additional burdens, in myriad forms will fall on the corporate sector. Stay tuned…

Source of the photograph

Law Street in The Economic Times (29 July, 2011)

2011-07-29T09:25:00.000-07:00

Dear Readers,

I am glad I have this blog. At times, The Economic Times online edition does not feature my column in the opinion section. It is rare, but this does happen on occasions. So it becomes a tad difficult to find the column online. The url which will take you to the column online is here.

Zenobia Aunty and indeed yours truly, often get into trouble for being plain outspoken. But, when it comes to rules, regulations, legislation, et al, while plan English is welcome as it aids proper interpretation, the latter is crucial. As of now, thanks to a recent Advance Ruling, Indian companies are quite perplexed. If they do not withhold tax at source on payments made to its foreign affiliates for employees seconded by them, the penal consequences for the Indian company would be high, including disallowance of this entire expenditure for tax purposes. Not a fine situation to be caught in.

Have a nice weekend.

Best regards,
Lubna

Seconding tax problems

• There needs to be clarity on TDS on employee secondment
• Conflicting judgements have caused confusion
• The CBDT could bring out guidelines in this regard

Loyal readers of Zenobia Aunty’s columns are well aware that her favourite books are Alice in Wonderland and Through the Looking Glass. On umpteen occasions, she has taken these books down from the shelves, in an attempt to draw an analogy with tax laws and better grasp the tax situation on hand.

So just the other day, this columnist, found her Aunt rocking herself back and forth and reciting a paragraph from Alice in Wonderland, as quoted here: ‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means what I choose it to mean, neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

Yes, words are important. Just recently, the US Congress enacted the Plain Writing Act, which will ensure that government documents are better understood. Less jargon, more clear, lucid, simple speak! Back home, the draft Direct Tax Code, 2010, was an attempt to move in a similar direction. But will plain writing help make sense of tax laws, be it in India or US or any other country?

Zenobia Aunty agrees with Alice - words can mean so many different things. Let us take a recent ruling given by the Authority for Advance Rulings (AAR). The AAR held that reimbursement made by an Indian company to its US affiliate company, who had seconded its employees to the Indian company would be treated as ‘Fees for Included Services’ under the India-US tax treaty. Thus, such payment (reimbursement of salary costs) to the US affiliate would be subject to withholding tax in India.

The US affiliate company sent three of its personnel to India, one of whom was the Managing Director of the Indian Company. The role of the other two was to liaise between the Indian company and the US Parent and to supervise and provide directions to the Indian company on its overall business strategies. The Indian company was obliged to reimburse salary expenses of the seconded employees on a monthly basis to its US affiliate. Such payment was required to be made on a ‘net of tax’ basis.

In its application and before the AAR, the Indian company contended that, the Indian company was the ‘economic employer’ of the personnel that had been deputed. In other words, the seconded employees remained the employees of the US affiliate which alone had the right to terminate the services.

In its capacity as economic employer, it had paid taxes under section 192 of the Income tax Act, 1961 (The IT Act) as applicable to salary disbursements and thus there should be no further withholding tax in India when the payment was made to the US affiliate.

In this context, The AAR held that the nature of the two receipts, one in the hands of the US affiliate for rendering services and the other in the hands of the seconded employees by way of salaries, spring from different sources, are of different character and represent different species of Income.

By correlating the two payments, neither the nature nor substance of the transaction would change to give it the character of reimbursement. The name given to transaction does not decide the nature of the transaction. Therefore the amounts reimbursed by the Indian company represent income accruing to the US affiliate. As the services rendered by the seconded employees was managerial in nature, it would be covered under the provisions relating to ‘Fees for Included Services ‘under the India-US tax treaty and subject to withholding tax in India, as per this Article in the tax treaty.

Secondment of personnel to India affiliate companies is quite a common practice adopted by global MNCs. The seconded personnel typically continue to remain on the payroll of the foreign company, even as they continue to work under the control and direction of the Indian company during their tenure in India. While the foreign employer pays the salary, the Indian affiliate reimburses the same to the foreign company.

Tax Tribunals in similar cases have held that there was no tax liability in the hands of the foreign affiliate company that had seconded employees to India, in respect of reimbursement payments made by the Indian company, thus no tax was to be withheld in India. Yet this ruling denotes otherwise. Rulings given by AAR do have a persuasive value in the course of assessment proceedings in similar cases.

Even if simple English is used in tax laws, varying interpretations will continue to perplex tax payers. The moot question now is: To what extent should an Indian tax payer take into considering this ruling? If it does not withhold tax at source on payments made to its foreign affiliates for employees seconded by them, the penal consequences for the Indian company would be high, including disallowance of this entire expenditure for tax purposes. Not a fine situation to be caught in.

Source of the photograph

For Thursday evening (Friday eve) The story of Mushkil Gusha

2011-06-26T06:57:00.000-07:00

Dear Readers,

Stories in several cultures, be it India, Iran, Morocco are passed on from generation to generation. Recently, I read the book In Arabian Nights (IN search of Morocco, through its stories and story tellers) by Tahir Shah and came across the story of Mushkil Gusha, the remover of difficulties.

It is said: "When your need is greater than your want,
Mushkil Gusha will appear and remove all difficulties"

I heard this story, when I was a child, from both my paternal and maternal grandmothers. Unfortunately, both my grandfathers expired when my mother and father were toddlers. But, I guess my grannies more than made up for it, by passing on several stories, including the story of Mushkil Gusha and yes, it came replete with an offering of candysugar, roasted gram (chick peas) and dried raisins, which were distributed on Friday eve. Thus, I was delighted to come across the story of Mushkil Gusha again.

This story has a few varied forms, such as change in name of the characters, but the essence is the same. Once you know the story, or rather some of it (as this story is supposed to never really end)you must retell it every Thursday after dusk.

I googled and found two variants of this story.

I am pasting one of the versions here:

THE TALE OF MUSHKIL GUSHA
Retold by Eric Twose

Once upon a time not so long ago, there lived a woodcutter whose name was Ahmed. The old man was a widower and he lived with his daughter, Samira, in a small hut in the forest.

He used to go every day to chop branches from the trees, cut the branches up, gather the sticks together and take them back home. Then, in the afternoon, he'd have a bite to eat and take the sticks to the nearby market town, where he'd sell them for firewood and buy some food for himself and for his daughter.

One evening, they'd just settled down to eat their meal when Samira said: 'Father, I sometimes wish that we could have different kinds of food to eat .'

The old man thought about this and so the following morning he got up much earlier than he usually would and he went deeper into the mountains where there were more trees.

Ahmed worked long and hard sawing wood and bundling it up, and he collected far more than he usually would. And when he'd done, the old man carried the heavy bundle back home on his shoulders and left it round the back of the hut, ready to take to market.

When he tried the door of their little hut, he found it locked and he knocked and knocked, calling 'Samira, Samira, please let me in, for I am tired and hungry and I must have something to eat and have a nap before taking the wood to market.'

But while he'd been away, having forgotten all about their conversation the night before, Samira had got up, made herself some breakfast, tidied the hut and gone out for a walk by the stream.

So the old man thought about this and decided that he might as well go back into the mountains and collect some more wood, so that the next day they'd have a double load of wood to take to market. And he worked for longer than he he usually would, sawing wood and bundling it up.

When he'd done, the old woodcutter carried the heavy bundle back home on his shoulders and left it round the back of the hut, ready to take the double bundle of wood to market first thing the next day.

When he returned, however, he was already much later than he would usually be, and Ahmed again found the door locked, and he knocked and knocked, calling 'Samira, Samira, please let me in, for I am tired and hungry and I must have something to eat and sleep if I am to be up early tomorrow morning for market.'

But while he'd been away, his daughter had returned, made herself something to eat and gone to bed, thinking that her father must have gone to market and arranged to stay the night there.

So, tired and hungry, the old woodcutter went to sleep by the piles of wood round he back of the hut. But he was so tired and hungry that he could not stay asleep.

Then Ahmed thought he heard a voice saying: 'Old man, what are you doing there?'

'I am telling myself my own story,' he replied and went on to tell everything that had happened to him since his daughter had first mentioned wanting different kinds of food to eat.

Then the voice told him to leave his wood. If you want little enough and need enough,' the voice said, 'you shall have delicious food.'

So the old man got up and followed the voice, but eventually as the light faded, he became hopelessly lost. And again, even more tired and hungry by now, he sat down and fell asleep. But he was so tired and hungry that he could not stay asleep.

Then he thought he heard a voice, just like the first, telling him to follow him. The voice told him to stand up, close his eyes and to raise his right leg, as if mounting a stair.

'But I do not se a stair,' he said.

'Nevertheless,' the voice insisted: 'If you wish me to help you, do as I say. Stand up, close your eyes and raise your right leg, as if mounting a stair.'

The old man did as he was told and as soon as he thought of it, he found himself standing up. He lifted his right leg and, sure enough, when he put his foot down, he could feel a step beneath him.

'Keep your eyes closed until I tell you to open them,' the voice commanded.

And not the old woodcutter could feel that the staircase was moving quickly and he could feel himself being lifted up with it.

Finally he reached the top of the staircase and the voice told him that it was alright to open his eyes now.

So the old man opened his eyes and when he did so, he was astonished to find himself in a place that looked like a desert, except that instead of sand, the place seemed to be made out of gleaming stones in all colours: red, green and blue.

'Now, gather up as many of these stones as you can,' the voice told him, and he filled his pockets and his shirt with them until he could carry no more.

'Now, close your eyes once more,' the voice said. 'And don't open them until you are at the bottom of the staircase.'

He did so, and again he felt something like a staircase, moving beneath him. And when he opened his eyes, he saw that he was back home, standing outside his own little hut.

He knocked at the door and Samira came out to greet him, and he told her what had happened to him while he'd been away. But his story seemed so far-fetched to her and she could make little sense of it.

They did not know what to do with the stones - they looke dlike ordinary stones to them - so they placed them in a corner of the room and left them there.

'Nevertheless, you may not know it,' he said, as they ate their meal and shared some dates that evening: 'but we have been helped by Mushkil Gusha. Mushkil Gusha is the remover of all difficulties, and we must always be grateful. Every Thursday evening we must give thanks or give a gift to the needy, in the name of Mushkil Gusha.'

Each day for a week, he collected wood and sold it easily for a god price, so he bought different kinds of food for himself and his daughter to eat.

Then one evening, there was a knock at the door and when he opened it, he found it was his neighbours. 'Our fire has gone out. Please give us some of those wonderful lights which you have in your window.'

'What lights?' the old woodcutter asked.

'Come outside,' said one of his neighbours, 'and see for yourself.'

And, sure enough, when he went outside and looked, Ahmed saw all-manner of wonderful lights streaming out of the window.

He went inside and checked, but found that the light coming from the stones was cold and he could not have kindled a fire from it, so he went outside and said: 'Neighbours, I am sorry, but I have no light to give you.'

He shut the door in the neighbours' faces, and they went away muttering. But they leave our story here.

Then the old man and his daughter Samira covered the stones up with all the scraps of cloth they could find, for fear that someone would come and steal them.

Next morning, when they uncovered the stones they found a heap od sparkling precious gems. And each day they took them to different towns and sold them, and with the money they received they built a fine mansion right opposite the king's palace.

One morning, the king's daughter got up and saw the mansion. 'Who has built it?' she demanded to know. 'How dare they build such a thing so close to the palace?' And she sent her servants to assertain the woodcutter's story as best they were able.

So the princess set out to confront the woodcutter and his daughter, but when the princess and Samira met they soon became fast friends and they used to go and play in the stream which the princess's father had built for her.

Then one day, as the princess was going to swim in the stream, she took off a valuable necklace her father had given her and hung it on the branch of a tree overlooking the stream. And when she came out, she forgot it.

When she got back home, the princess noticed that the necklace was missing and she thought a little and decided that the woodcutter's daughter must have taken it, so she ran to her father the king and told him. He had the woodcutter arrested and thrown into jail, had his land confiscated, and had the daughter sent to an orphanage.

After a time, according to the customs of the country, the old woodcutter was taken from the cells and put in the stocks in the town square with a sign around his neck which read: 'This is what happens to people who steal from kings.' And for a time the townspeople would jeer at him and throw rotten vegetables in his face. But after a time they forgot about him, as is the way of men. Sometimes a passer-by would toss him a little food; sometimes they would not and he would go hungry.

Then one Thursday evening, the old man suddenly realized that it was the eve of Mushkil Gusha, the remover of all difficulties, and that he'd forgotten to commemorate the occasion for so long.

No sooner had the thought entered his mind than a passing merchant tossed him a tiny copper coin.

'Kind sir,' said the woodcutter. 'This coin is of no use to me. But if your generosity would stretch to buying a handful of dates with the money and you would come and share them with me, I would be eternally grateful.'

And so the merchant bought some dates and shared them with the old man and Ahmed told him his whole story right from the time his daughter first asked for different kinds of food to eat, and how he'd been helped by Mushkil Gusha, the remover of all difficulties.

'You must be mad,' the merchant said, but he himself was beset by difficulties and when he returned home he found they had been remarkably removed, which made him think a great deal about Mushkil Gusha. But he leaves our story here.

The very next day, the princess went back to her favourite bathing place and as she bent down to dive in, she thought she saw something glistening in the bottom of the pool. At that moment, she happened to sneeze and as her head went back she noticed her necklace hanging in a branch where she'd left it so long ago, and that what she'd thought was a necklace in the stream was merely a reflection.

So she took the necklace and ran back to the palace to tell her father, the king, and he had the woodcutter released and his daughter brought back from the orphanage.

And they all lived happily ever after.

Another link to the story:
The Magic of Mushil Gusha told by Aaron Shepard

Idries Shah: CARAVAN OF DREAMS, The Octagon Press, London 1968
Source of the photograph: Beauty of Sun Photography

Law Street - Economic Times (June 2011) -CCCTB in the EU

2011-06-24T05:27:00.000-07:00

Dear Readers,

We have seen the fall of the Berlin Wall, the emergence of the Euro, now what next? Perhaps we may see the CCCTB or CCTB in the years to come.

Currently, companies operating in the European Union may have one single currency to transact in, but they have to deal with 27 different tax provisions for calculating their taxable profits, and must file returns with the tax authorities in each EU country in which they operate. This is neither cost-effective nor tax-efficient.

Thus, on the drawing board is a proposal that will help them file just one tax return. The single consolidated tax return would be used to establish the tax base of the company, after which all EU countries in which the company is active would be entitled to tax a certain portion of that base, according to a specific formula based on three equally-weighted factors (assets, employees and sales). Each member country can levy its own tax rate against this base.

While Germany and France are fully supporting the CCCTB, other EU countries haven't jumped on this gravy train as yet.

You may read this column online in The Economic Times, by clicking here. Alternatively the article is pasted below. Happy Reading.

Best regards,
Lubna

CCCTB, what on earth?
• EU’s CCCTB move is expected to reduce tax costs

• Even Indian companies with EU operations can opt in

• Not all EU countries are keen to jump on the bandwagon

The sentence reads: CDB. DBSABZB or rather: See the Bee, the Bee is a busy bee. ‘CDB’, is in fact a famous children’s book, first written by William Steign in 1968 and its popularity remains unabated. Thus, when I came across the word, CCCTB, I immediately had this vision of an overeager kid excitedly pointing to a bee in the garden. But what stand for is EU’s: Common Consolidated Corporate Tax Base proposals, which are now up on the drawing board.

Under the proposed mechanism, a company or group of companies would have to comply with just one EU tax system for computing their taxable income, rather than following different rules in each EU country in which they operate and would have to file a single tax return for the whole of their activity in the EU.

The single consolidated tax return would be used to establish the tax base of the company, after which all EU countries in which the company is active would be entitled to tax a certain portion of that base, according to a specific formula based on three equally-weighted factors (assets, employees and sales).

The objective of the proposed approach is to create the possibility for such companies to pool profits and losses among their EU group companies, minimize tax compliance costs and mitigate transfer pricing complexities. Currently, companies operating in the EU may have one single currency to transact in, but they have to deal with 27 different tax provisions for calculating their taxable profits, and must file returns with the tax authorities in each EU country in which they operate. This isn’t cost effective nor tax efficient. Besides reduction in compliance costs, by allowing the consolidation of profits and losses at EU level, the CCCTB would enable the cross border activities of businesses to be fully taken into account and would avoid over taxation.

Information available in cyberspace indicates that the EU Commission views that the CCCTB will save corporate groups across the EU something like Euro 700 million in compliance cost savings each year. In addition, by allowing businesses to offset losses in one EU country against profits elsewhere in the EU for tax purposes (i.e. consolidation), CCCTB could result in additional savings for companies operating in the EU of around Euro 1.3 billion.

In fact, the CCCTB proposals are proposed to include not just the blue-blooded (if one may use this term), but also covers companies established under the laws of a third country, such as India, that have similar legal forms and are subject to corporate taxation in at least one member EU country. Thus, if an Indian company has branches or subsidiaries in the EU member country, it could opt for the CCCTB in relation to its EU business activities.

The point to note is that CCCTB is optional. However, once a group of companies opts to use the CCCTB, the member companies are no longer able to utilize individual member country tax incentives. While Germany and France have supported the CCCTB movement, it has not enjoyed universal support, with current opposition from Ireland, UK, Netherlands, Bulgaria, Sweden, Poland, Malta and Romania.

A UK tax expert tells Zenobia Aunty, that member countries will continue to have the right to decide on their own corporate tax rates, as CCCTB deals with the tax base and not the tax rate. However, a member country could choose to apply a different tax rate for the CCCTB if its own national base was extremely different and it wanted to maintain the same effective tax rate (i.e. the real level of tax paid once the rate, base and various deductibles are taken into account). For example, if the CCCTB base were broader than the national base, the member country may choose to set a lower rate for the CCCTB to maintain the same effective tax rate. Or member countries could align their national bases close enough to the CCCTB in order to avoid having different rates for the two.

However, there is growing competition among countries to attract investments, be a good jurisdiction for housing of corporate headquarters. Take UK’s recent tax developments. It wishes to have a low tax rate among the G20 so as to attract foreign companies.

The competition is stiffening to capture more activity in one’s country by offering various sops such as low tax rates, full territorial taxation and so on. Given this, it remains to be seen how the final picture on the CCCTB will emerge, a common base and no consolidation may be a possibility, or some countries could join in and kick start the movement. For now, all one can say is let us wait and C (see).

Source of the picture

Law Street - Economic Times (May) -Unearthing black money

2011-06-02T06:49:00.000-07:00

Dear Readers,

Newspapers are filled with news on how essential it is for the government to unearth black money stashed away in low tax jurisdictions. Social activists are even going on hunger fasts to protest against the perceived failure of the government to tackle the black money menace.

While it appears that Mauritius has agreed to part with some information, perhaps taking a leaf from what the UK government has done in relation to Swiss accounts of UK citizens is needed. In other words, the interest income in relation to such bank accounts will be subject to a withholding tax which will be passed on to the UK treasury coffers. A quick way indeed.
Click here, for the online edition of The Economic Times, to read this column. Else, as always scroll below.
Have a nice weekend.
Best,
Lubna

A bird in hand, is worth two in the bush

• India could follow UK’s example of taxing Swiss bank interest
• This will speeden by the process of bringing back black money
• Tax treaties, till amended are sacrosanct

Zenobia Aunty is one perplexed lady. Things appear to be in a complete flux in tax-land. One stand is taken today and yet another the next day. These days, poor Aunty is scared to read the newspapers or tune in to the news.

Years ago, in the famous case of Azadi Bacho, the Supreme Court has made it quite clear that Mauritius resident will not pay capital gains tax in India, on sale of Indian shares. Further, the India-Mauritius tax treaty does not even have a limitation of benefit clause, as was pointed out by the Apex Court, in this judgement.

Yet a recent news item says, that E Trade (Mauritius) which had already obtained a favourable ruling from the Authority for Advance Rulings (AAR) will have to face some sleepless nights. News reports cite that the Supreme Court has sent a notice to E Trade (Mauritius) seeking its response to the special leave petition filed by the tax department challenging this ruling given by the AAR. She wonders whether tax treaties have any sanctity at all.

While Zenobia Aunty is vehement that tax treaties are sacrosanct and bring about certainty and must be adhered to till amended, she is rooting for the efforts to bring back ‘black money’ into India.

In 2009, the Income tax Act, 1961, was amended to enable the government to enter into agreements with specified ‘non-sovereign jurisdictions’ (tax havens). Since then, India has entered into a number of Exchange of Information Agreements with various tax havens; the first such agreement was with Bermuda.

As regards countries with which India already has a tax treaty, negotiation is on-going in many instances, to bring about amendments to ensure exchange of information, if such a clause does not exist in the tax treaty. For instance, a revised treaty containing an Exchange of Information clause was signed with Switzerland.

These are steps in the right direction and such efforts need to be applauded. But, Zenobia Aunty, being an impatient lady and a cranky one at that (she blames her crankiness to a severe allergic cold), is asking: Where is the moolah?

According to her, perhaps, India needs to take a second look at the step adopted by the United Kingdom (UK). Last October, the UK and Swiss governments signed a joint declaration to work towards taxing UK owned Swiss bank accounts. Recent news reports say, the deal is almost concluded and will be announced shortly.

Swiss banks will now be obliged to tax interest payments made to UK bank account holders. Switzerland will impose a 50% withholding tax (earlier this percentage was believed to range between 20 to 30%) on income from Swiss bank accounts. This would be collected by Swiss banks, forwarded to the Swiss tax authority and then remitted anonymously to UK’s Treasury authorities. While this withholding tax will apply from the start date, it is reported that investors will have to pay a separate one-off levy in recognition of past unpaid taxes. We need to wait and see what the final fine print will be.

As part of the agreement, Swiss banks will require all British clients to supply evidence that their bank accounts comply with the UK’s tax system.
The money collected in withholding taxes will be collectively handed over to the UK Treasury and will not include any details of who has paid them. The deal therefore allows the UK to collect tax on Swiss bank accounts and at the same time allows Switzerland to retain its banking secrecy.

The UK Treasury estimates that British tax residents have 125 billion British Pounds hidden in Swiss banks. The interest earnings are not being declared and therefore not being taxed by the UK tax authorities. This deal with Switzerland will therefore be a lucrative victory for the UK Treasury. It has been estimated that the UK Treasury will earn between 3-6 billion British Pounds over the next few years as a result of this agreement.

Maybe India needs to think along these lines? It is true that under such an agreement, India will never know the names of those who stashed their money overseas. But the end result is that India will get its share of revenue, which it would have never captured or got into its kitty after ages. After all, a bird in hand is worth two in the bush.

India must be perceived as a country that is not against foreign investments or cross border transactions – unfortunately with the mixed signals being thrown out foreign investors are perplexed. Simultaneously, India must also be perceived as a country that is willing to take action to ensure that it gets its due share of money that is illegally stashed in secret bank accounts overseas.

Since this is the summer season and many are on vacation, Zenobia Aunty quotes one of her favourite travel authors. Paul Theroux said: Tourists don’t know where they’ve been, travelers don’t know where they are going. But, the tax administration and judiciary need to know the right path to walk upon, to ensure results that are best for India in the long term.

Law Street - Economic Times (April 2011) -Overseas investors need certainty in tax laws

2011-04-29T07:30:00.000-07:00

Dear Readers,
Zenobia Aunty's neice has shifted to a new office premise, which is at present very dusty and crates of files are being unpacked --- hence she is down with a terrible allergic cold. Please do not mind if she goes on a sneezing spree while typing this. So without much further ado, for now she is just linking the column to the online version of The Economic Times.
Zenobia Aunty has been meeting lots of overseas visitors and this column covers what they are saying: India needs certainty in tax laws to attract serious investments.
Have a great weekend.
PS: She managed to copy and paste the column below.
Best,
Lubna

Ho-Hum, the comfort factor is missing

• Investors require certainty in tax policies and administration
• Introduction of safe harbours would help
• The process of drafting APAs must kick-start without delay

Zenobia Aunty is a staunch advocate of clean governance. Yet, in the backdrop of the stir relating to the Lok Pal Bill, she says: “The change begins with us. Only if each one of us takes a pledge not to participate in corruption – by vowing not to give a bribe, even if it is the easy way out, will we see a change”.

It is true the change begins with us. But legislations, if properly drafted, after a dialogue with all sections of stakeholders, do bring about some certainty. Punitive legislations can also effectively act as a deterrent. Yet legislations without a change in the mind set or fair administration are of no use.

Zenobia Aunty has lately been hob-knobbing with a lot of overseas visitors, who are looking at cross-border trade opportunities or for setting up India operations. Zenobia Aunty takes these visitors through various regulatory changes which have made us a much more investor friendly country. Take for instance, the recent step deleting the FIPB approval requirements for foreign investments, even in those cases where joint ventures and technical collaborations exist in the same field.

Yet, the expressions on the faces of these visitors reflect that they are thinking: “Ho-Hum”, even as they are too polite to voice their opinion vocally. Yes, there is a lot of interest in our country, but at times such interest does not devolve into action. Investment figures are clearly reflecting this. FDI inflows during the ten month period ended January 2011, were INR 77, 902 crore showing a decline of 29% over the previous corresponding figure of INR 109,668 crore.

On digging deeper, Zenobia Aunty finds that uncertainty in tax policies as well as in the administration of such policies is causing a lot of anxiety. While cross border M&A deals have caused a lot of apprehension owing to heavy tax demands on a few buyers, today there is growing uncertainty in other areas as well.
Today, the scope of the transfer pricing officers stands widened. They have the powers of survey to conduct on-spot enquiry and verification. There has been a mention of introduction of ‘safe harbour’ provisions in the Finance Bill, 2011-12, but guidelines are yet to be issued. The dispute resolution mechanism, which was introduced sometime ago, hasn’t been able to alleviate the tax payers’ woes fully.
What is needed is certainty. We still haven’t been able to put in place an advance pricing mechanism (APA), even as it has been given lip service for quite some time. An APA is an arrangement between the tax authorities and a tax payer that determines in advance of intra-group transactions, an appropriate transfer pricing methodology for a fixed period of time. This finds mention in the DTC, but one remains uncertain of whether we will have an APA mechanism in place even on introduction of the DTC.

India is entering into exchange of information pacts with a host of tax havens (with whom India does not have tax treaties), such as Cayman, British Virgin Islands etc. This is a good step. Yet, new provisions on the transfer pricing (TP) front provide that: If a tax payer enters into a transaction, where one of the parties to the transaction is located in a notified jurisdiction (one which does not effectively exchange information with India), all parties to that transaction shall be deemed to be ‘related parties’ covered by Indian transfer pricing regulations. While the intent of this anti-avoidance provision maybe justified, it will create complexities in doing business with India.

The Supreme Court, has directed the Central Board of Direct Taxes (CBDT) to issue directions to tax authorities including transfer pricing officers to take the opinion of technical experts and bring on record technical evidence in cases involving complex issues and substantial tax revenues. The CBDT has accordingly issued instructions. The instructions provide that the evidence would be made available to the concerned tax payer whose case is being scrutinized and a reasonable opportunity would be given to the tax payer before finalization of its assessment proceedings. One hopes, that a reasonable opportunity is indeed given and it is also open to the tax payer to submit the reports of its own technical experts, if need be. There is a fear that if these instructions are not judicially applied, it will not ease the situation but result in prolonged litigation.

Safe harbours (wherein transactions meeting the criteria are not subject to scrutiny), finalization of advance pricing agreement procedures to ensure that there is no delay come April 1, issuance of revenue rulings on important legal issues having wide ramifications, judicious application of provisions and instructions will provide a comfort factor to investors. Certainty in tax policies and judicious administration is required to help us emerge victorious in the global market arena.

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

2011-03-25T10:34:00.000-07:00

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,
Lubna

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

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

2011-03-05T22:29:00.000-08:00

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,
Lubna

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.

Law Street - Economic Times (Jan 2011) -At what cost?

2011-01-30T03:08:00.000-08:00

Dear Readers,

The budget is around the corner. What will it bring for us? Zenobia Aunty is fretting about it. Click here, to read her views in the online edition of The Economic Times.
As always, you may also scroll below to read the column.
Hope you are having a pleasant Sunday.
Best regards,
Lubna

At what cost, this service tax?

The service tax net must be expanded after weighing its impact

The transition towards GST must be smooth

Issues relating to point of taxation must be mitigated

It is not easy to silence Zenobia Aunty, but these days, you don’t hear her chattering away. Even her one sided conversations with Spot, are a rarity.
You see, the budget is around the corner and Zenobia Aunty, for once, is stumped whether this budget will offer any respite to her, or to corporate India. On the direct tax front, Pranabda has already stated: Wait for the direct tax code! GST also seems far away. So what could be in store?

Maybe some minor tinkering in tax slabs for the individual and perhaps an abolition of surcharge for Corporate India? However, what is perhaps making Zenobia Aunty a bit gloomy is her hunch that service tax rate of 10% may be hiked this year. Under the proposed GST regime, to begin with, services were proposed to be taxed at 16%, essential goods at 12% and other goods at 20%. So perhaps, the service tax rate could be increased this year.

In fact, Zenobia Aunty was quite surprised to learn that more than hundred services are currently under the service tax net. Perhaps we will see an expansion of the ambit of service tax in respect of services already taxes, such as in the arena of health or education. Or perhaps many more services will come in the service tax net.
It is true that as indirect taxes are a stable source of revenue as compared to direct taxes, from which rural India is largely exempt. Yet, any expansion in the service tax ambit or even an increase in tax rate must be undertaken with abundant caution.

For instance, last year, service tax was imposed on health check-ups undertaken by hospitals or medical establishments for employees of business entities, where the services were provided under health schemes offered by insurance companies. The tax on such services was payable only if the payment for such health checkups was made directly by the business entity or the insurance company (Cashless option) to the concerned hospital or medical establishment.

However, taxing services based on the manner of payment, i.e.: when the payment is made directly by the business entity, led to some grey areas. Business establishments which were not entitled to credit of service tax paid by them found it to be an additional burden and it resulted in shrinking health benefits for employees. Second, it really did not help the government much if input tax credit was available to these business establishments.

Thus the effect of each levy, must be carefully weighed before bringing it within the tax ambit. One wonders, whether our politicians should be subject to service tax levy. But wait a minute, going by their current behavior; they don’t seem to be providing any service. Maybe they should pay entertainment tax. As things stand today, unfortunately, entertainment is not entirely proposed to be subsumed in the GST regime, as and when it happens. But that is another story.

Coming back to the realm of service tax, perhaps we may just see the introduction of the Point of Taxation Rules. Currently a service provider is required to deposit service tax with the government on payment basis. The liability to deposit service tax arises only upon the ‘receipt of the payment’ (as advance or otherwise) from the service recipient, irrespective of the issuance of the invoice, debit note etc.
Under the proposed rules, the liability to deposit service tax would trigger on ‘issue of invoice’ or ‘receipt of the payment’, whichever occurs earlier. Thus, once the Rules are enacted the providers of taxable services, such as telecom companies, et all, will be required to pay the applicable service tax immediately on issue of invoice or bill, even though they have not received the payment from their clients/customers.

Payment liability under the proposed GST would arise on accrual basis. Thus, it is true that the introduction of taxation rules would take us one step close to GST, but it could entail more working capital requirements for service providers as they may not be allowed to wait for the actual realization of money from their customers to discharge the service tax liability. Further, the service providers’ eligibility to claim the input tax credit on service tax payable to their vendors would continue on the ‘payment-basis’ even after introduction of the Rules. Cash flow issues for service providers could arise and would need to be handled.

Yes, a transition always has its pain points. Thus, one can expect that a transition to a more efficient and effective regime such as GST would hurt in the interim. However, measures must be taken to ensure that the ‘damage’ to you and me is kept to the minimal.

Source of photograph

Law Street - Economic Times (Dec 2010) -Rounding up 2010

2010-12-31T09:29:00.000-08:00

Dear Readers,

Zenobia Aunty has completed a decade, writing her columns in The Economic Times and has immensely enjoyed interacting with you. In the December 2010 column, she asks whether things do change in tax land? Old problems do continue, even as new challenges arise. But, here is looking forward to 2011.

Do click on the online edition of the newspaper or else scroll below.

Happy New Year.
Warm regards,
Lubna

Ring out the old!
• Greater clarity on royalty payments is required
• Clearer guidelines are required for determining permanent establishment
• Cloud computing will create more tax challenges

Happy 2011, dear Readers. As Zenobia Aunty begins to type this column, she realizes that she has completed a decade of interacting with her loyal readers. She raises her cup of tulsi tea to toast them. This is a time for reflection. While a decade may have passed since this column first rolled out, there are so many issues in tax land that remains unresolved.

For instance, litigation in the tax arena as regards the classification of payments on import of shrink wrapped software continues. At the judicial level, the tax orders are largely in favour of the foreign recipient as the judiciary seeks to distinguish between a copyrighted article and exploitation of a copyright. Software licensing to the Indian payer is treated as a transaction of a copyrighted article and thus not a royalty payment.

However, at the lower levels, the going is tough for the foreign recipient or even the Indian payer. Faced with the prospect of being treated in default, the Indian payer seeks to withhold tax at source, even when it is technically not subject to tax under the tax treaty. To compound the problem, if the foreign recipient does not have a Permanent Account Number (PAN), tax has to be withheld at the higher rate of 20%. It is also likely that the home country of the foreign recipient may not allow a foreign tax credit on the ground that the tax was wrongfully withheld in India.
Recently, professionals were a bit taken aback with a ruling given by the Delhi Income tax Tribunal, in the widely published case of Microsoft. While holding that the payments made by the Indian payer would be subject to withholding tax as the payment for license of the software was royalty, the Tribunal also went ahead to observe that reliance cannot be placed on the OECD commentary in interpreting a tax treaty and that a later provision in domestic laws would override tax treaty provisions. Thankfully, the Mumbai Income tax Tribunal followed suit with a few favourable decisions, upholding the distinction between a copyright and a copyrighted article. Yet uncertainty continues to loom large.

Let us take another instance. Indian companies are often sub-contracted work by their foreign parent and other overseas group entities. The Delhi Income tax Tribunal in another instance has held that the relationship of the US entities with its Indian subsidiary to which it had subcontracted or assigned software development or call centre services resulted in a permanent establishment in India.

Moreso, since the Indian subsidiary had not been remunerated on an arm’s length basis, the Delhi Income tax Tribunal largely upheld the approach adopted by the tax department of attributing profits to such permanent establishment of the US entities based on a proportion of Indian assets to global assets.

Looks like foreign entities wanting to do business with India, need to pay more detailed attention to these ongoing issues. While it may be time to ring out the old, in tax land, the existing issues never seem to die.

But one must also look forward at emerging business scenarios, for instance e-commerce or the even more nascent cloud computing. A prominent feature of business activities conducted via the internet is that it is impossible to pin-point where that activity is taking place. The physical location of the business activity has traditionally been the crucial factor in determining where the permanent establishment is located and thus in which country the profits can get taxed.

In the context of a computer server, the OECD in its commentary has made several observations. If an enterprise which carries on a business through a website has the server (in another country) at its own disposal – it owns or leases and operates the server, it could result in a permanent establishment exposure in such other country. In most cases, it is likely, especially given the lack of usage of personnel manning the server that the all substantial assets and risks would be at the head office level and negligible profits alone could be attributed to the server created permanent establishment. But yes, attribution of profits would be a tricky matter.
If this were not enough, cloud computing will blur the boundaries further. However, it is likely that a cloud computing solution may help reduce the tax exposure arising through permanent establishment creation, as in essence it would mean that a foreign entity is merely using the services of the cloud computing provider and the cloud computing provider is not its dependent agent so as to constitute a permanent establishment.

As Zenobia Aunty looks back on the existing tax issues and foresees some new tax issues emerging she exclaims: There is never a dull moment in tax land.

Law Street - Economic Times (Nov 2010) -GAAR

2010-11-27T09:09:00.000-08:00

Dear Readers,
How do I describe GAAR? My greatest fear is that commercial business transactions backed by proper substance, may also fall foul of the GAAR provisions owing to ambiguity and wide sweeping powers. For views from Zenobia Aunty read further. Please click here.
As always the column is also cut and pasted below. Have a nice weekend.
Best regards,
Lubna

The sting in the GAAR tale

• Specific anti avoidance rules are preferable
• If GAAR is a must, grandfathering clause is vital
• Times limits must be imposed for invoking GAAR

When was the last time you received a hand-written letter? Recently, the post man knocked at our door and handed Zenobia Aunty a hand-written letter. Zenobia Aunty hastened to open the envelope. But, it was no gushing fan-mail. Instead, it was a letter from an eminent advocate and her reader, criticizing her for calling attention only to the Controlled Foreign Corporation Rules in the Direct Tax Code (DTC), 2010, and not the “draconian” General Anti-Avoidance Rules (GAAR).

Well, touched by this advocate’s zeal to spare some time and pen a letter, a long spell of research and dictation to her long suffering niece (yes, this columnist) began. The advocated lamented how scams had taken over our country. Scams he explained often arise because of wide discretionary powers and their intended or unintended misuse. Finally, he came back to tax laws, stating that wide discretionary powers even in tax land can resulted in unwanted scenarios.

If the powers given are wide and there are no specific guidelines in place, often even a hardworking honest tax official also finds himself standing at the cross roads, not knowing which way to turn. He stands at the cross roads knowing any action will lead him into the non enviable situation of: Damned if you do, and damned if you don’t!”

The letter was referring to the GAAR proposals. GAAR as contained in the DTC gives wide discretionary powers to a Tax Commissioner to invoke these provisions and to declare any transaction as an “impermissible tax avoidance arrangement”. It is possible that tax authorities could look not at the transaction in its entirety but only at certain aspects of the entire transaction and scream: Foul! As things stand at present, even transactions or arrangements approved by the Courts can be subjected to the wide sweeping powers of the Commissioner.

Zenobia Aunty is all in favour of plugging tax abuse. But at the same time, she does not favour a climate of uncertainty. Specific anti-avoidance rules, such as thin-capitalisation rules, which kick in to prevent misuse of related party debt, are a better option as they deter tax abuse without creating a climate of uncertainty, she explains.

At present, the DTC provides for only the following safeguards in invoking GAAR: (i) The Central Board of Direct Taxes (CBDT) will issue guidelines to govern when GAAR should/could be invoked (ii) A safe harbor, possibly a monetary one, may be included only beyond which the GAAR provisions would be invoked and (iii) Tax payers can approach the Dispute Resolution Panel, if GAAR provisions are sought to be applied to the tax payer.

Are these safeguards adequate? Zenobia Aunty could not help but chanting this ditty (with due apologies to William Shakespeare) under her breath as she went about doing more research on this subject: For a charm of powerful trouble; like a hell broth boil and bubble, GAAR doth bring toil and trouble, Fire burn and DTC caldron bubble.
True certain safeguards have been mentioned. However, it is essential that the proposed guidelines providing for the circumstances in which GAAR could be invoked are objective and remove all traces of uncertainty. The GAAR provisions should not interfere with legitimate and commercial transactions. Further, a monetary threshold for invoking GAAR should be set and this must be reasonable.

It would be ideal if GAAR is dropped and specific anti-avoidance measures are introduced. However, if the powers that be, wish to continue on the path of GAAR certain additional provisions must be built in.

While the DTC prescribes that tax payers can approach the Dispute Resolution Panel if GAAR is sought to be applied, prevention is better than cure. Thus creation of an authority which would give a clean chit to a proposed transaction – on the lines of the Authority for Advance Rulings would create a sense of comfort among the investors, especially the foreign investors. The only fair way to administer a GAAR mechanism would be to introduce a clearing service where the tax authorities would review a proposed transaction or a transaction and give their opinion on the tax position.

The DTC should provide grandfathering provisions under GAAR and ensure transactions entered into only during after the DTC has come into effect can be subject to GAAR. Further, there should be a time limit within which tax authorities can invoke GAAR in respect of any transaction. The Damocles sword cannot hang over the heads of the tax payers in perpetuity. The onus of proof that there has been tax avoidance should lie on the revenue and not the tax payer.

Such additional precautions are necessary to ensure that GAAR does not become a weapon to meet tax revenue targets. Zenobia Aunty hopes that the eminent advocate and indeed her other readers are satisfied that she had done some justice to the complex proposed GAAR mechanism.

Law Street - Economic Times (Oct 2010) -CSR issues

2010-10-14T22:11:00.000-07:00

Dear Readers,

Wishing you a happy Diwali. Zenobia Aunty and I hope that you will also be spreading the light by donating whether in cash or in kind. For the October column of Law Street: Charity begins at India Inc, please click here for the online edition of The Economic Times.

Else as always, scroll below.

Best regards,
Lubna

CHARITY BEGINS AT INDIA INC

Most non-profits which Zenobia Aunty is associated with would call her a good soul. She, in turn, admires a host of companies (editorial etiquette will prevent her from naming these companies) who voluntarily give back to society. In one of her earlier columns, she had advocated the need for uniform reporting guidelines for CSR activities, perhaps a CSR index. This would ensure that market forces could take into cognisance the contributions of such companies and would directly or indirectly boost their market value and profits.

However, the concept of a ‘mandatory CSR regime’ has taken her a bit aback and she decided to seek views from a cross section of her friends. The Standing Committee has approved of a provision contained in the Companies Bill, 2009, that mandates every company having a net worth of more than . 500 crore or turnover higher than Rs 1,000 crore; or a net profit of Rs 5 crore or more during a year to formulate a CSR policy to ensure that every year at least 2% of its average net profits during the three immediately preceding financial years is spent on CSR activities as may be approved and specified by the company.

In addition, directors are required to make suitable disclosures in the annual reports. In case any such company does not have adequate profits or is not in a position to spend prescribed amount on CSR activities, the directors are required to provide an explanation.

The intention seems laudable, but is it the right approach? After all, corporate entities do pay taxes. Zenobia Aunty’s friend, Ravichandar, a Bangalore-based consultant, doesn’t think it is a good idea. He explains: “It just reaffirms that the compact between business and government is broken. The role of the corporate sector is to create jobs, generate income and pay taxes. The government was required to take care of law and order, security and social infrastructure provisioning . This machinery has failed and now there are plans to mandate CSR on business. My concern is that ‘fudge’ will be the order of the day on conforming to specified CSR percentage requirements that are to be met. A more sustainable solution will evolve only when business entities realise that getting engaged on social issues is good for business success, this trend is slowly emerging.”

Dave Mason, a businessman from the US, seems to agree. He says: “The devil is in the details and what constitutes a CSR activity is a pretty big detail to have not defined prior to any passage of the Bill. I don't believe I could support such a measure without knowing ‘the what’ and ‘where’ of the money flow.” In case you are wondering, there is no defined mandatory regulation requiring companies to engage in CSR in the US.

Others point out that a few businessmen use the corporate vehicle to fund the so-called CSR activities for their own personal gratification or glory, whereas they should actually be using their own personal money for this purpose.

Zenobia Aunty agrees that there is scope for ‘fudging’ results. Further, what constitutes CSR is in itself quite subjective. Could a landscaping of a workplace campus be CSR? After all, they are ‘making the environment greener’ !

The line between a business activity and a CSR activity could be blurred. At times, CSR can be truly linked to business needs and yet be a worthy cause, such as providing free education to the children of their shop floor workers by setting up a good school near the factory complex which, in turn, could lower attrition or deter strikes.

Yet at other times, CSR activities could be totally delinked to business objectives such as donating to known organisations including government funds especially during natural calamities. There could even be a hybrid model wherein goods or services of the company are used for CSR activities, such as a pharma company donating drugs to a government-aided hospital.

Another issue would arise, some CSR activities could be a business expenditure and deductible, others may benefit from a tax deduction (such as cash donations to recognised organisations), but there may be others which would not get any benefit at all.

However, a few are more optimistic. Dilip sir, a former army personnel and now a management professor, says: “We do have examples of corporate leaders who believe that a ‘profits only’ approach is much too short-sighted . Profit is important for survival and growth but must not the only reason for existence. It is in such companies that CSR emanates as a natural byproduct. The government making it mandatory to earmark at least 2% average net profit during the previous three years will help increase awareness and is a positive step.”

Zenobia Aunty sums it up by saying: “It is better than a CSR cess, for instance as regards education cess, it is impossible for us to know where the money went. At least the power will now be with the shareholders to ensure that the money is put to its rightful use.” The need of the hour is: mature shareholders. Are we ready for that?

Source of the Photograph.

Law Street - Economic Times (Sept 2010) -DTC - Change for the better

2010-09-24T04:00:00.000-07:00

Dear Readers,

The cup can be half full or half empty, depending on how one sees it. As a lot had been written and published about the "harsh" provisions in the DTC and moreso, since "Zenobia Aunty" was in a good mood she decided to see the DTC in a good light. As always, you can read it online on The Economic Times' website. It is also cut and pasted below.
Have a nice weekend.
Best regards,
Lubna

Change for the better
• Cascading impact of DDT is resolved for domestic multi-tiered groups
• Dispute resolution expanded to cover GAAR cases
• Advance pricing mechanisms introduced for international transactions

Zenobia Aunty recently read an amazing book, “Leaving Microsoft to change the world”. Written by John Wood, founder of the global NGO, “Room To Read” which facilitates education for girls in developing countries including India, it shows that change for the better is always possible, if one is committed to the cause.

Our new tax law was supposed to be a change for the better – in essence it sought to achieve stability, simplicity, minimize litigation and also prevent abuse of tax laws. Thus, at first glance, Zenobia Aunty was taken aback to see that the Direct Tax Code, 2010 (DTC) ran into something like 400 pages.

Some of her friends have outright pooh-poohed the DTC mainly because the radical low rates of tax spoken about in the 2009 draft could not be introduced. However, basking in the aftermath of having contributed her mite towards girl’s education and being in a very generous mood, Zenobia Aunty decided to concentrate on what was good in the DTC.

For long, India Inc has been complaining about the double whammy when it comes to dividend distribution tax (DDT). The Finance Act, 2008, alleviated this grievance partly by providing that the domestic holding company will not have to pay DDT on dividends paid to its shareholders to the extent it received dividends from its subsidiary company on which DDT has been paid by such subsidiary. However, this reduction benefit was available only up to one level. Once the DTC comes into force, this restrictive provision will be abolished enabling multi-tiered domestic companies to get the reduction benefit up to the last level of the corporate chain.

It is true that the wide provisions of the General Anti-Avoidance Rules (GAAR) continue to exist, the CBDT has been empowered to lay down the conditions for application of GAAR and Zenobia Aunty hopes powers will be judiciously exercised. That said the DTC provides that taxpayers in whose case GAAR is invoked can approach the Dispute Resolution Panel (DRP).

An assessing officer, who has received a direction from the tax commissioner for applying GAAR in relation to a particular case, is required to prepare a draft assessment order and serve it on this tax payer. The tax payer can then directly approach the Dispute Resolution Panel (DRP) against this order for resolution of the matter. Zenobia Aunty points out: “Currently, DRP is a mechanism used in the arena of transfer pricing, hopefully the mechanism when extended to GAAR cases will be equally effective and mitigate long winded protracted litigation.”

The mechanism of advance pricing agreements has at last been introduced. The arm’s length price for international transactions can be decided upfront for a maximum of up to five years and this will go a long way in mitigating transfer pricing litigation. Even as SEZ developers and units will now fall under MAT levy, the profit linked exemptions have been suitably grandfathered. R&D expenditure (other than land and building) will carry a weighted deduction of 200% against the existing 150% and more so will be expanded to the non-manufacturing sector also. The practical realities facing the Not for Profit (NPO) segment have also been factored in. Further, donors will continue to get a tax benefit for their deduction to approved and registered NPOs

True there are certain uncalled for changes. Instead of the wide sweeping GAAR provisions, the government could have introduced specific anti avoidance provisions. The government has sought to bring into the tax ambit cross border acquisitions, if: the target foreign company holds directly/indirectly assets in India that are valued at more than 50 per cent of the fair market value of all assets held by such company, at any time, within the twelve months prior to such transfer. Perhaps an extra territorial move? Controlled foreign corporation rules have been defined and exemptions carved out, but sadly underlying tax credit norms are not introduced. While profit linked incentives for SEZs are grandfathered, they find themselves in the MAT net.

Coming to individuals, there has been some minor tinkering in tax slabs, but not much. The silver linings are many. The existing EEE mechanism continues and various perquisites such as HRA continue to enjoy tax benefits.

Zenobia Aunty has always lamented about two things, both of which have been favourably resolved. Medical reimbursement is now exempt up to Rs. 50,000 in a year (as compared to the measly Rs. 15,000 under current tax provisions). Further, the DTC provides that there will be no provision for presumptive rent where properties have not been let out during the financial year. Currently presumptive rent provisions apply and tax is payable on notional income.

Zenobia Aunty signs off on the note that: The FM cannot please everyone, but some of the changes are for the better. Hopefully, the jarring changes will also be streamlined.

Photograph: This photograph was taken at the Lalbaugh Flower Show in Bangalore, India.

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

2010-08-27T20:42:00.000-07:00

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,
Lubna

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

Law Street - Economic Times (July 2010) -CFC Rules, Keep it simple

2010-07-30T01:59:00.000-07:00

Dear Readers,
It appears that India is gearing up to introduce CFC Regime. However, introduction of these without measures such as underlying tax credit, participation exemption or even parent-subsidiary directives will not augur well for Indian companies having overseas subsidiaries. Practical safe harbours must be introduced and an underlying tax credit mechanism assured to Indian companies prior to introduction of the CFC Regime.

You can read this in the online edition of The Economic Times.

This photograph was taken in July 2010 off the Worli Sea Face. If CFC is implemented in a hurry without much thought, the dreams of Indian companies planning overseas expansions will be "ON THE ROCKS"

Alternatively scroll down below.
Best regards,
Lubna

CFC Rules: Keep it simple!

Alternative measures would do away with the need for CFC rules

If introduced, exemptions must be carved in CFC rules

Underlying tax credit must be introduced

Thick heavy clouds hung over a stormy Arabian Sea. Flashes of lighting streaked across the sky. The scene could be regarded either as spectacular or gloomy, depending on how one chose to see it. Much like the revised discussion paper (RDP) on the proposed direct tax code - one could say that the Central Board of Direct Taxes (CBDT) had ironed out many difficulties or one could say it had only added to the problems of the corporate tax payer.

Zenobia Aunty, down with a few niggling ailments, was not her cheerful self and preferred to see the glass half empty, so to speak. A paragraph tucked away in the RDP proposing the Ministry of Finance intent to introduce Controlled Foreign Corporation (CFC) provisions in India, caught her eye.

This proposal is viewed as an anti-avoidance measure and provides that passive income earned by a foreign company which is directly or indirectly controlled by an Indian resident, shall be subject to CFC provisions. In other words, even where such passive income is not distributed to the Indian shareholders it shall be treated as having been distributed and shall be subject to tax in India in the hands of the Indian shareholders as dividend income.

Mind you, dividend received in India is taxed at the full corporate rate (currently 30%) plus applicable surcharge and cess. It is only dividend that is declared by an Indian company, on which dividend distribution tax has been paid, that is exempt from Indian income tax in the hands of its shareholders be they Indian or foreign shareholders.

“Why introduce something which was not there in the draft direct tax code?” muttered Zenobia Aunty. “Why can’t they go to the root of the problem?” she added and stomped her foot in anger taking a slumbering Spot by surprise.

Dear readers, please bear with her while she repeats herself: If only, India would exempt dividend repatriated from overseas there would be no need for Indian companies making overseas forays to set up intermediary holding companies to park overseas profits and no need for introduction of complicated CFC provisions. True, the Indian corporate tax rate has steadily declined, but if one compares it with the tax rates in some developed regimes, such as neighbouring Singapore which is now 17% we still have a long way to go. Thus bringing back dividends into India and subjecting such income to 30% doesn’t make economical sense, it seems more feasible to keep it overseas and use it for further overseas growth. The best solution, to attract dividend repatriation, is either a full exemption to foreign dividends repatriated to India or if this is not possible, a reduced rate of tax.

“Further, how could the intention of introducing CFC provisions be announced without a parallel intent to introduce underlying tax credit rules? In the absence of underlying tax credit rules, the Indian multinational will be subject to multiple taxation of the same income” exclaims, Zenobia Aunty. An underlying tax credit is a credit for any tax on the underlying profits, out of which the dividend is paid.
Perhaps it was the Vijay Mathur Committee, which in its report in January 2003, first made mention of the need for introduction of CFC provisions. However, the very same report also spoke of the need to introduce underlying tax credit. This report provided illustrations of various exemptions from the CFC regime (in other words instances where the undistributed profits would not be taxed in the hands of the Indian shareholder as dividend income in India). The exemptions covered: a CFC that would distribute a certain percentage of income in a year; was engaged in genuine business activities; was not established for the purpose of avoiding domestic tax; was listed on a stock exchange; or even a de-minimis exemption if the total income of the CFCs did not exceed a particular threshold amount.

In addition, the Vijay Mathur Committee accepted that since CFC regime attributes income to the shareholders before actual distribution of income, relief provisions are ordinarily built in to prevent double taxation of CFCs income which is subsequently distributed. It provided illustrations for inclusion of relief provisions such as: relief on account of foreign taxes paid; relief on account of dividend paid out of the previous attributed income; relief in respect of losses incurred and relief from double taxation on subsequent capital gains arising from disposition of shares arising out of CFC by the shareholder, where the shareholders have been previously taxed on the undistributed income of the CFC.

It would have been simpler to encourage repatriation of foreign dividend into India, but now that the intent to introduce CFC is made clear, care must be taken to ensure it does not sound the death knell for Indian companies. Perhaps, some sensible measures will cheer up Zenobia Aunty.

Law Street - Economic Times (June 2010) -Towards a greener world

2010-06-13T00:06:00.000-07:00

Dear Readers,

We celebrated environment week, this month. But, are we ready to turn towards the more expensive green products? Appears not! It is time the government subsidized the purchas of these products through tax credits, as have several other countries. Looking forward to a greener world. Read this column online in The Economic Times, by clicking here.

As always, the column is also cut and pasted below.

Have a nice weekend.

Best,
Lubna

Towards a greener cleaner world
• Tax sops must be at the consumer level
• Tax carrots rather than sticks will work
• Monetary sops will be an added advantage
We celebrated Environment Week this month. Various organizations as part of their Corporate Social Responsibility (CSR) initiatives got their act together, conducted workshops to sensitize their employees, planted trees, et al. A few friends participated in “cycle to work” initiatives which were understandably short lived.
Short spurts of efforts, while they do contribute in a way, are not adequate to save the planet. We need long term efforts which provide lasting results and it is here that the government can really help. Zenobia Aunty has been reading a lot about green investments. She says: “A recent international survey undertaken by Regus states that: Governments worldwide must introduce new tax breaks to increase the uptake of green investment.”

Eco-friendly measures seem attractive on paper, but they do entail a higher cost, at least initially. No wonder then that 46% of companies surveyed have declared that they will only invest in low-carbon equipment if the running costs are the same or lower than those of conventional equipment. A mere 40% have invested in low-carbon equipment and only 38% have a company policy to do so.

Governments world over have down the years, devised various forms of green taxes to save the environment. Such taxes have been as varied as a ‘plastic tax’ on use of plastic bags in Ireland, to a ‘flight tax’ in the UK which airlines had to cough up if they did not fly at full capacity.

While Zenobia Aunty was in Bangalore (Bengaluru) there were talks of permitting cars with odd numbered license plates to drive on one day and those with even numbers on another day. Would this have helped in reducing carbon emission? “Not really, with an inefficient public transport mechanism, families were really thinking of buying yet another car, as car pooling was not always an option,” explains Zenobia Aunty.
If spreading the tax net wide, pays dividends, so does spreading of tax sops. Perhaps, it would make better sense to provide sops for green investments at the consumer level. It would help spread the movement make the world greener.
United States for instance, with its green tax sops covers the consumers. Tax credits as distinct from tax deductions are available for purchase of hybrid cars or battery, electrical or alternate fuel vehicles; heating and air conditioning systems that are ‘energy star rated’; renewable energy systems; solar and wind energy systems and even something as simple as insulation such as new doors, windows or roofing that meet set criteria and help save on electricity bills.

How is a tax credit different from a tax deduction? A tax credit is a ‘rupee-for-rupee’ reduction in your total tax bill. For instance, your tax bill works out to Rs. 2.50 lakh. Let us assume that a tax provision states that for each solar panel that you install in your house you get a deduction of 20% of the purchase price subject to a cap of Rs. 50,000 per solar panel. Assuming you purchase three solar panels and can claim Rs. 1.5 lakh through such purchase. Your tax bill will then be just Rs. One lakh.

On the other hand, a tax deduction is expenditure or a prescribed amount (such as depreciation) which is allowed as a deduction from your total income to arrive at the net taxable income, which is then subject to tax at the applicable rate. While both reduce your tax bill, in pure monetary terms a tax credit is more beneficial.
It is the consumer who can propel a demand for environmental friendly products. With prices for such products being higher, tax sops alone can provide the much needed spending boost in the right direction.

In India we have seen a few sporadic attempts such as wind farms being eligible for 100 per cent depreciation or higher depreciation rates for pollution control equipment. However, till date attempts have not been made to start at the consumer level.

Imagine the potential that we have to use solar energy, especially in the rural areas of India, which are prone to power cuts, or for that matter, even small scale industries in urban areas. To boost demand for use of solar energy, start at the consumer level, enabling him to get a tax credit. This would mean that the manufacturer of solar panels does not have to face hardships to convert people towards a more friendly power source and can make fair profits. After all, even a green manufacturer needs to survive. Moreover, provision of softer loans for purchase of green products by households, farmers, small scale enterprises and certain other segments would be an added advantage.

It is true that the government is considering abolition of tax holidays, however, tax credits to the individual for purchase of green products, is something which needs to be seriously contemplated. Drat, the power just went off, now where is that candle?

Source of the photograph.

Law Street - Economic Times (May 2010) - PANs Prickly Pains

2010-05-28T20:52:00.000-07:00

Dear Readers,
Sometimes laws can be shortsighted. Take the instance of everyone being required to have a PAN or else suffer a higher withholding, on payments due to them. This includes senior citizens, who perhaps are not tax payers, or even foreign entities doing a one off transaction with India. To hear Zenobia Aunty, rave and rant, click here. Else as always, if the link doesn't work, it is cut and pasted below.
Have a nice weekend.
Best regards,
Lubna

PANs prickly pains

Sweeping all encompassing amendments cause problems
Exceptions must be carved out in tax laws
Practical regulations are required

These days, owing to the heat and humidity, Zenobia Aunty spends her evenings, sitting on the bench outside her colony, people watching and catching the breeze. In fact, she is soon joined by some friends, all of who sit quietly, at peace with each other and the world as they observe other people go about their tasks. I am sure one day; this group will surprise us with a book on human psychology or something equally profound.

Thus, this little group of senior citizens was taken aback, when Jingoo Uncle was spotting angrily waving his walking stick at all and sundry and muttering at random. He sure spoiled their peace and quiet.

However, one can empathize with Jingoo Uncle. The main reason for his anguish was that he had sold an antique table and tax had been withheld by the buyer at 20%, just because Jingoo Uncle, a retired person, did not have a PAN card.

Let us not even get into the argument of whether tax ought to have been withheld on such transaction or not. For now, let us solely concentrate on this new amendment, which came into effect from April 1, this year and requires tax to be withheld at 20% or the rate in force, whichever is higher, if PAN is not furnished by the payee (recipient of the income).

Perhaps the tax authorities can argue that Jingoo Uncle’s case is a rare exception. Jingoo Uncle retired at least two decades ago and is well looked after by his children. He is no longer a tax payer and does not have a PAN card, or rather does not remember whether he once had a PAN card and where it is. So couldn’t he be exempt from this new provision?

If you think the situation cannot get any more absurd, there is more to come. India is today a global player. Foreign entities carry out business with Indian parties even if they are not physically present in India. Let us take another illustration.
EasyDesign PLC has supplied an industrial design to another company in India. Such payment is in the nature of fees for technical services and under the relevant tax treaty, tax is to be withheld only at 10%.

EasyDesign PLC has never carried out any operations in India, this is its first transaction with an Indian buyer and everything seems to be smooth sailing, till such time that the Indian party insists on withholding tax at 20%.

An argument ensues. EasyDesign PLC is thunderstruck by the absurdity of Indian tax laws that require it to obtain a PAN to ensure that tax is withheld at the correct rate of 10 per cent and not 20 per cent. Moreso, if tax is incorrectly withheld in India, it would result in complexities in its assessments in its home country. The Indian buyer, on the other hand, wants to protect itself from any legal hassles.
Tax laws which are not practical have dented a good business relationship. Based on these designs, the Indian company would have been able to sell its final products to EasyDesign’s contacts overseas. It is true that withholding taxes ensure that the tax authorities get their share of the tax pie immediately and effortlessly. However, this rigid rule has complicated business matters.

Exceptions must be carved out to make laws practical. As regards obtaining a PAN number, certain categories must be exempt, such as senior citizens or foreign entities that do not have a fixed place of business in India. If there is a commercial branch in India, it is perfectly fine to expect the foreign entity to apply for and obtain a PAN and indeed to file its tax return and comply with other relevant tax obligations.

In the realm of withholding taxes, the larger issue still remains, of whether tax ought to be withheld at source in India irrespective of whether or not the payment made to the non resident is chargeable to tax in India.

It was the decision of the Karnataka High Court in the case of Samsung Electronics, which sparked off this debate. However, lately a decision by the Delhi High Court in the case of Van Oord ACZ, followed by that of the special bench of the Chennai Tribunal in the case of Prasad Productions have rightly concluded that an Indian payer need not withhold taxes on making payments if such payments are not liable to tax in the hands of the recipient. Yet, this has certainly dealt a blow to those in Karnataka and left others confused. Perhaps in the coming days, a decision by India’s apex court – The Supreme Court of India, will resolve this matter.

It is fair to expect any country to protect its share of the tax pie, however, as Zenobia Aunty always says: One must never miss the woods for the trees.

Courtesy: Image.

Law Street - Economic Times (April 2010) - Overseas acquisitions

2010-04-30T09:23:00.000-07:00

Dear Readers,

The days are getting warmer, the sun beats down mercilessly, this prompts Zenobia Aunty to stay indoors, even as she dreams of a visit to Iceland (volcanic eruptions, notwithstanding). But it seems that India Inc is truly leaving its footprints behind on foreign soil. Tax laws, if amended with this growing need in mind, could really put India Inc on the global map. To read more, click here.

In case, you can't access the above link, or the summer heat is making you lazy, the article is also pasted below. Have a nice weekend.

Best regards,
Lubna

Source of the photograph

Globetrotting anew
Overseas M&As must be encouraged
Reforms for overseas M&As must be progressive
Singapore has introduced a M&A write-off
--------------------------------------------------------------
Travel writer, Pico Iyer is known to have said: “…Travel for me is an act of discovery and of responsibility as well a grand adventure and a constant liberation.” India Inc which is once again confidently striding overseas and engaging not only in setting up shop overseas but boldly acquiring companies overseas would no doubt agree.

After all, in a flat world and one which is only getting flatter, inorganic growth, especially cross-border growth is essential to emerge as a leader or at least find a firm footing on the global map. We do have astute business leaders who are willing to embark on the overseas expansion road trip, keeping in view their stakeholder’s interests. However, the much desired change in regulations to spur outbound growth remains largely elusive.

Indian Companies are expanding their operations worldwide – either through acquisitions or by setting-up new companies. A corresponding trend that has emerged is that more and more Indian companies use their overseas subsidiaries to hold offshore investments. One of the principal reasons in doing so is that repatriating funds to India is extremely inefficient from a taxation point of view – foreign dividends when received by the Indian investor company in India are taxed at the normal corporate rate (current of 30%) plus applicable surcharge and cess.

In addition there is economic double taxation, because Indian companies are taxed on dividends received from its overseas subsidiaries without receiving any credit for foreign taxes that were paid by the dividend paying subsidiary (only a few tax treaties entered into by India, such as those with Mauritius and Singapore provide for underlying tax credit). Developed tax regimes avoid this issue through either providing a tax credit for foreign taxes or by totally exempting the dividend from tax in the recipient jurisdiction. For instance, UK and Japan last year, introduced legislative changes whereby dividend income received from an overseas subsidiary is not taxed.

In fact, globally there are constant developments in the realm of taxation, to encourage outbound growth. Zenobia Aunt’s Singapore attorney friend provided some interesting details. He dropped in last weekend to meet Zenobia Aunty who is currently recuperating and is housebound.
While he was sipping a cup of Darjeeling tea, he happened to look at this paper and the headlines relating to an overseas acquisition. This sparked off a debate on whether India was really friendly to its overseas investors (domestic companies investing overseas). Our friend, the Singapore attorney, felt India still had a lot to do to catch up.

Jet lagged, he wasn’t at this diplomatic best. “The Bandra-Worli sea-link, isn’t enough”, he quipped. This invited glares from all of us and a growl from Spot. Zenobia Aunty was more realistic. While she acknowledges the liberalisation reforms carried out, she still thinks that there is a lot more we can do, or rather must do.
Singapore recently announced its budget proposals which contain some interesting features. A merger and acquisition (M&A) allowance will be available in respect of transactions that qualify during the five year period commencing from April 1, 2010. The quantum of the M&A allowance is 5 per cent of the value of the acquisition
subject to a cap of Singapore dollars 5 million. This M&A allowance is to be written off by the Singapore company equally over a five year period. Further stamp duties on transfer of unlisted shares in respect of such qualified M&As will also be remitted subject to the stipulated caps.

The Singapore government has recognised that M&As are a necessary tool for strategic growth and globalisation. The M&A allowance, in the form of a tax write-off helps defray a portion of the costs of acquisitions. It is simple, because it does not distinguish between interest costs and other costs and hence is neutral between debt and equity financing in the M&A deal.

Zenobia Aunty is quick to point out that the RBI has over the years liberalised the provisions relating to outbound investments. The overall limit for outbound investments by Indian companies now stands at 400 per cent of its net-worth. However, our tax laws have not been as progressive.

While anti-avoidance provisions are sure to be introduced when the Direct Tax Code (DTC) comes into play, progressive tax laws must not be ignored. Perhaps a cue can be taken from Singapore, and also from Japan and UK, which have now exempt foreign dividends repatriated back to the home country. And if we could introduce an M&A write-off, nothing like it.

Recent statistics released by ‘Business Monitor International’ show that the outbound foreign direct investment as a percentage of GDP in developed countries is 33 per cent. In the BRIC countries it is as follows: Russia (20 per cent); Brazil (10 per cent), China (3 per cent) and India (2.6 per cent). For India to catch up, supportive domestic legislations, especially on the tax front hold the key.

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

2010-03-25T20:52:00.000-07:00

Dear Readers,

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

Best regards,
Lubna

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)

Law Street in The Economic Times (Feb 2010) Pre budget

2010-02-18T22:38:00.000-08:00

PS: This is the sea off Marine Drive. The funny shaped concrete blocks are sea breakers meant to weaken the strength of the strong waves as they lash against the Mumbai coastline. This photograph was taken much later in July 2010, but I thought I would add it here.

Dear Readers,

Sometimes,the right procedural amendments without a change in tax rates can also cheer up the tax payers. Zenobia Aunty suggests a few such amendments in the run-up to the Finance Bill, 2010-11 which will be tabled in the Parliament in India on Friday, February 26. For more, click here or scroll down below.

Law Street/ Lubna Kably
Dear Finance Minister, simplify taxation

• Small procedural changes can help the aaam admi
• ESOP taxation needs to be practical
• Savings must be encouraged

Expectations are mounting and the fiscal deficit is looming overhead. Yes, our FM is not to be envied during these tough times. Just last year, he offered us some respite. There was no change in the number of slabs or the tax rate for each slab, however the basic threshold exemption limit was marginally raised and also the surcharge of 10% was abolished. Tax rate cuts may not see the light of the day, this year, yet without adversely denting the Treasury coffers, the FM can help some of us smile.

Zenobia Aunty’s favourite pastime is to view a kaleidoscope and people watching she claims is no different. A walk along Marine Drive and a quick chat with Mumbaikars from various backgrounds and with varying needs itself threw up clues on what can be easily done.

Jogging a few paces with Mohan, helped Zenobia Aunty understand the practical problems of ESOP taxation. Today, Mohan is taxed on the notional perquisite value (the difference between the fair market value as on the date of exercise of the option by him, as reduced by the amount contributed by him). Payment of tax at the time of exercise is an uncalled for burden, as employees have to cough up cash even before they have sold their ESOPS (which has a lock in period post exercise). Then there is yet another incidence of tax on sale, which is the price obtained minus the fair market value as on the date of exercise.

ESOP taxation has been subjected to various amendments over the years. Perhaps the tried and tested regulation which existed prior to introduction of FBT (now abolished), must be reintroduced. Employees must be subject to tax only on sale of the shares which they obtained under an ESOP scheme, provided the ESOP scheme fulfils certain criteria. This will put them on a better footing to bear their tax liability, instead of paying their dues when they are cash strapped.
Tax on notional perquisite value, impacts their purchasing power by denting, sometimes badly their take home pay. An added sore point is that at the time of sale of the shares, the prices may have fallen – after all the market ain’t booming yet. Thus they would have not only paid perquisite tax at the time of exercise but are saddled with a capital loss.

Spot and Zenobia Aunty were soon out of breath and sat down to enjoy the sea breeze. Soon enough, Freny joined them. She walked daily between Nariman Point to Churchgate, it saved her from the hassle of joining a bus or taxi queue or even a gym.

Freny was upset that contributions by her employer to superannuation, in excess of Rs one lakh, were taxed in her hands. In fact, superannuation benefits are contingent - such as the requirement of having served a certain number of years etc and Freny may not even get that benefit, but for now she will be taxed first in the year of contribution to the extent it exceeds Rs one lakh and secondly at the time of receipt of annuity. Yes, she was aware that the concept of EET is the subject of much debate, but for now she wants this immediate issue to be sorted out.

It was never a dull moment for Zenobia Aunty, even as Freny rushed off to catch the local train, Dilip came by. Dilip loved to save money and invest for a rainy day. “Long term savings, such as pensions, could be mobilized for infrastructure needs and this is not effectively done,” he complained.

Zenobia Aunty agrees our much touted National Pension Scheme turned out to be a damp squib, because the tax sop ceiling was clubbed with various other savings to stand at a cumulative of Rs one lakh. Not to mention that it is one of the schemes that falls under EET mechanism. Perhaps by increasing the eligible limit upward or carving out a separate eligibility category it will help the government to pump savings into the needed sectors.

In the previous column Zenobia Aunty spoke about the perils of making payments to non-residents owing to the lack of clarity on withholding of tax. There is an additional procedural problem associated with TDS. The tax laws mandate that if PAN is not furnished by the payee, the withholding tax will be 20% or the applicable rate, whichever is more. Senior citizens may not have applied for a PAN card because they do not fall within the taxable limit, so also foreign companies which merely export goods to India and do not have a place of business in India. Thus, some safe harbours must be built in. We all know the process of obtaining a refund is time consuming, even as direct refunds to bank accounts have made things easier.
Yes, the folks at the MoF just need to put on their thinking caps and they can make life a bit easier for you and for me.

Law Street - Economic Times (January 2010) - Should all payments to non residents be subject to tax withholding in India?

2010-01-29T03:38:00.001-08:00

Dear Readers,

As you will learn on reading this column, Zenobia Aunty thinks she doesn't understand tax anymore. A fall out of a recent High Court decision appears to indicate that tax needs to be withheld at source on all payments made to non-residents, unless a certificate stating otherwise is obtained from the tax authorities. Yes, the tax-men need to meet their revenue targets, but what happened to the good old concept that only income chargeable to tax in India can be subject to tax by India?

Some clarification would be welcome. Read on by clicking here.

Or else, as always, feel free to scroll below.

PS: The next column will be related to pre-budget issues and will be published not on the last Friday of next month but earlier. Zenobia Aunty shall keep you all posted.

Best regards,
Lubna

A tax spanner for international trade

• A recent High Court decision has raised doubts on tax withholding in India
• It appears tax has to be withheld on all imports or payments to non residents
• A clarification is urgently required to resolve doubts

Zenobia Aunty was spotted the other day, staring dismally at the crashing waves off Marine Drive. She just doesn’t seem to understand tax anymore or so she thinks. Her niece; this columnist decided to approach a friendly tax expert to find out the root cause of her Aunt’s gloom. “If you want to pay a non-resident, just deduct tax at source,” he snapped and booted her out.

The cause of this turmoil, faced by everyone in India and everyone who does business with India, appears to be a recent decision of the Karnataka High Court, in the case of Samsung Electronics Ltd. The High Court has held that on import of shrink-wrapped software tax has to be deducted at source in India. Earlier, Tax Tribunals in umpteen cases have held that payments made for import of shrink-wrapped software is akin to purchase of goods (a copyrighted article) and is not ‘royalty’ and no tax is to be withheld in India.

Interestingly, the High Court did not answer the issue of nature of payment for import of shrink-wrapped software question but said that all payments for imports into India are subject to tax deduction at source.

Tax authorities asked for a lemon, but they have got a melon. The judgement has very wide ramifications. The implication of the Karnataka High Court’s decision seems to be, that in all instances of import of any goods, irrespective of its chargeability to tax in India, tax must be withheld and paid to the Indian government and only the balance can be remitted to the foreign supplier.

The only scenario under which the payer (Indian importer in this case) shall be not be under an obligation to withhold tax in India or may withhold tax at a lower rate, is when the payer obtains prior approval from the assessing officer by making an application under section 195(2) of the Income tax Act (Act).

The Karnataka High Court apparently has relied on the Supreme Court decision in the case of Transmission Corporation of A.P. However, tax experts point out that the implications of the Supreme Court decision are quite different.

The tax expert called back to grumpily explain that the Supreme Court in the case of Transmission Corporation had held that: Tax is to be deducted at source only on the sum on which income tax is leviable and which income could be assessed to tax under the Act. Thus, in his view, the payer has to determine whether or not the payment is subject to tax in the hands of the foreign recipient or supplier of goods or services. If income is not chargeable to tax in India, where is the question of deducting tax when making payment to the foreign supplier? There are CBDT circulars which the payer can still rely on and not deduct tax at source, if the income is not taxable in India, he stresses.

However, if one does not wish to take this stand, as suggested by the tax expert, it does appear that in all instances of payments, the tax payer will have to approach the tax authorities for obtaining a dispensation order under section 195(2), an additional administrative burden! If the Indian payer does not do so, the payer will bear the consequences of non-withholding.

For example, an Indian company imports equipment, if tax is not withheld at source, the entire expense will be disallowed, even if in the view of the Indian company, there is no tax to be withheld in India as the foreign supplier does not have a permanent establishment (fixed place of business in India) and such payment is not royalty or fees for technical services, which mandate a tax withholding. Plus, the home country of the foreign supplier may not give a foreign tax credit for taxes ‘wrongfully’ withheld in India. It sure puts a spanner in the wheels of international trade and commerce.

One can also visualize scenarios where the implications of this judgement stretch beyond import of goods. A Mauritius company, sells its shareholding in ABC Ltd, an Indian company to XYZ Ltd, another Indian company. Sale of shares of an Indian company by a Mauritius resident, under the “Capital Gains’ clause of the tax treaty, does not trigger a tax incidence in India.

However, will XYZ Ltd, as per the ‘letter’ of this High Court decision, have to deduct tax at source, before remitting money to the Mauritius seller of shares? If this be the case, global restructuring will get a beating.

Even as Zenobia Aunty was dictating this column, a single member bench of the Mumbai Tax Tribunal has relied on the Samsung decision, however, this was done presumably without considering a favourable view of the Mumbai Tribunal’s Special Bench. Zenobia Aunty learns that a similar issue will now come up before a Special Tribunal Bench in Chennai.

It may be some time before the Supreme Court can clarify this issue. Thus, the MoF must quell the doubts arising in the minds of global players. Else who would want to do business with India?

Source of the photograph

Law Street in The Economic Times (December 2009) - Withdrawal of CBDT circulars

2009-12-03T22:56:00.000-08:00

Dear Readers,

Zenobia Aunty, with her entire family (which includes this blogger) and her dog Spot will be moving back to home-town, Mumbai. She may take time to re-settle, after all, Mumbai has changed in the nine years that she and her family have been away.
Thus, please look up the print and online edition (as you please) of The Economic Times, on December 25, as it may not be possible for Zenobia Aunty to order her niece to upload it pronto.

Merry Xmas and a great 2010.

Photograph courtesy: Wikimedia

Warm regards,
Lubna

PS: Zenobia Aunty and clan are still in Bangalore, they will be in Mumbai from Sunday onwards, December 27, hopefully for ever. Relocating is a pain and Zenobia Aunty promises to stay away from this ordeal in the years to come. Of course, her ambition is to buy a strawberry farm in Panchgani and settle down there - perhaps someday.....

So, here is the column online and as always you can scroll below as well.

MERRY XMAS AND A GREAT 2010.

Best wishes,
Lubna

City roads, CBDT Circulars and more…

- Withdrawal of CBDT’s circulars have led to uncertainty
- Transfer pricing provisions should be followed
- Safe harbours and advance pricing mechanisms are the way forward

By the time, you dear Readers, get to read this column, Zenobia Aunty and her family will probably be back home. It was in late 2000 that Aunty stepped in Bangalore, learnt to love it and stayed on. But, there is something about Mumbai that prompted her, her favourite niece, assorted family members and her dog Spot to make the big move again, this time back home.

At least we will now not have to hear Zenobia Aunty take a cue from John Denver and sing: “City roads, take me home; to the place I belong, aamchi Mumbai, crowded streets, vada-pav and sea breeze, take me home, city roads….”You all know by now, that when Zenobia Aunty decides to sing, Spot dives beneath the bed hoping to be out of hearing distance and we all remember some urgent errands and dash off.

But facts come first. Zenobia Aunty is dictating this column several weeks in advance, to make sure that in all the chaos which a move entails; she does not miss her strict editor’s deadline. Nine years is a long time to be away and Mumbai may seem a tad unfamiliar. Familiarity is always comforting, be it the city roads, which one grew up in or CBDT circulars that one relied upon and took their existence for granted.

The Central Board of Direct Taxes (CBDT), has recently withdrawn a forty year old circular, viz: Circular no 23, dated July 23, 1969. Tax circulars as we all know, are binding on the tax authorities.

Section 9, of the I-T Act, 1961, deals with income accruing or arising, through or from a ‘business connection’ in India. There is no definition of a business connection in the I-T Act. However, judicial decisions have interpreted it to mean a relation between a business carried on by a non-resident which yields profits and some activity in India which contributes to the earning of such profits.

However, Circular no 23, mitigated the impact of the broad sweeping definition of a ‘business connection’ and provided respite to those non-residents who were not covered by tax treaty provisions (the Permanent Establishment clause in a tax treaty provides for a comparatively narrow definition and mitigates risk of tax exposure in India).

As per this Circular, if the commission received by the Indian agent was fully representative of the value of the profits attributable to his service, no further income was assessessable in the hands of the non-resident. The Supreme Court in the case of Morgan Stanley (which of course was an instance where treaty provisions were applicable) has taken the same approach.

The intention for withdrawal of this circular appears to be that tax payers relied on it to claim relief beyond what was originally intended. With it, the CBDT has also withdrawn two other circulars, viz. Circular no 786, dated February 7, 2000, and Circular no 163 dated May 29, 1975. These circulars also provided instances where non-residents would not be subject to tax in India and no income would be deemed to accrue or arise in the hands of the non-resident.

What now? Well, tax payers can still rely on judicial decisions including that of the SC in the case of Morgan Stanley and can argue that the arm’s length payment to an Indian agent extinguishes its tax liability in India.

On one hand, the MoF has tried to be proactive and keep abreast with international norms by announcing the safe harbour provisions in the Finance Bill, 2009 and also by seeking to introduce advance pricing mechanisms as enshrined in the Tax Code. On the other hand, with the withdrawal of the Circular one gets the message that it has put paid to the transfer pricing principles that an arm’s length payment to an Indian agent will extinguish the liability of the foreign tax payer. Withdrawal of this circular and two others has just led to more uncertainty in the minds of the foreign tax payers.

It is not just those tax payers who aren’t covered by a treaty that are left wondering, but all foreign investors, as it could signify a trend towards more litigation, during assessment proceedings.

An allied insight: The provisions of the Tax Code have amended the definition of income deemed to accrue and arise in India to even include income accruing or arising from the transfer, directly or indirectly of a capital asset situate in India.

This can result in an absurd scenario. Shares of a listed overseas company listed and traded on an overseas stock exchange could result in an indirect transfer of a capital asset situate in India, if such overseas company has a subsidiary in India. This provision of the Tax Code and now the withdrawal of these circulars has certainly added fuel to the fire of uncertainty.

I can hear, Zenobia Aunty now taking a cue from Bill Joel and singing: Income tax Act, Tax Code, CBDT Circulars, tax treaties, Interpretation issues and uncertainty galore! We didn’t start the fire; It was always burning – since the day taxes have been imposed; We didn’t start the fire, No, we didn’t light it, but we tried to fight it…Well, I must be off, I suddenly remembered an urgent errand. Wishing you all a Happy 2010.

Law Street - Economic Times (November 2009)

2009-11-27T06:52:00.000-08:00

Dear Readers,

The provisions in the tax code seem to have disregarded the ground realities involved in running a non-profit organisation. Zenobia Aunty is very upset about it, but somewhat soothed as the Finance Minister has agreed to look into these provisions. Click here to read more.

As always, the column is also cut and pasted below

Booting charity?

• Capital expenditure, to qualify as a deduction, has to be from gross receipts
• Even partial business operations will subject entire income to higher tax
• Cash system of accounting could lead to a huge tax whammy

The government is on an austerity drive, not only is it frowned upon if a Minister travels by business class but the government had walked that “extra mile” and suggested that “India Inc refrain from doling out vulgar salaries to its top management.”

This is not the first time that such a reference has been made. True, when this columnist flies to her home-town Mumbai and the plane is about to land, she can see a sea of blue – this isn’t the Arabian sea, nor the cute blue-roofed settlements which one views in Jodhpur but blue plastic sheets housing the poor. These settlements are found amidst the splendor of the luxury residential towers, which seem to have sprung up everywhere. Yes, the divide between the rich and the poor continues unabated and if at all it is only increasing.

So what can the government do? It can help those who help others and try to bridge this gap. Unfortunately, the Tax Code tells us a different story. Yes, Zenobia Aunty is hopping mad! But her social worker friend soothes her by saying that Finance Minister Pranab Mukherjee, the good man that he is, has promised to take a re-look at these proposed provisions.

Before we take a look at the proposed provisions which had Zenobia Aunty tearing her hair, let us examine how the Tax Code proposes to tax non-profit organizations (NPOs).

The surplus generated from permitted welfare activities will be determined based on the cash system of accounting. In other words, the gross receipts as reduced by the outgoings will determine the taxable surplus. Of course, each term such as gross receipts, outgoings have all been defined. In addition, the amount of capital gains – computed in accordance with the provisions under the head ‘ Capital Gains’, arising on transfer of a financial investment asset held by an NPO will also be taxable.

The aggregate of both the taxable surplus income and capital gains will be taxed at 15 per cent. However, if one thought that at least NPOs will not be subject to the rigors of MAT based on gross assets, if MAT is applicable, they are wrong.

Does tax of NPOs sound simple and logical? The legal drafters of these provisions really need to volunteer at an NPO to understand the realities. More often than not, NPOs have to buy land or incur other capital expenditure upfront. Let us take an NGO involved in building and running vocational training centers for the differently-abled. It finds a suitable plot of land in the outskirts of Mumbai, takes a huge bank loan and begins to construct a training centre.

As a tax expert, whom Zenobia Aunty spoke to states: “The Tax Code effectively mandates that capital expenditure for the purpose of carrying on the permitted welfare activity should be incurred only out of gross receipts within that financial year.” Now, land required for charitable purposes cannot be acquired in fragmented pieces, based on the gross receipts during the year. Nor can construction be withheld merely because the gross receipts during that year are not adequate. Bank loans are taken, against land mortgage and these loans are repaid out of the gross receipts (largely donations received) in subsequent financial years.

Or take for instance, another example. A huge donation is received in March, towards the close of the financial year. The entire amount cannot be used by the NPO for its operations, even though it would be fully used in the next financial year. Now the entire amount, which would end up being a surplus, just because it could not be used as it was received at the ‘wrong time’ will end up being subject to tax.

Over a strong cup of coffee, which Zenobia Aunty needed to keep herself from fainting, the tax expert shared more horror stories which are embedded in the Tax Code. Gross receipts for a NPO include any rent received in respect of land/buildings owned by it. Fair enough. However, no deduction fro gross rent as prescribed in section 26 (such as 20% of the gross rent towards repairs and maintenance) which is available to other tax payers is available to an NPO. Now, isn’t this sheer discrimination?

What happens if an NPO partly carries on a business operation which is not incidental to the permitted welfare activities? In this case, the entire income of the NPO and not just that portion of the income derived from business operations is subject to the corporate tax rate of 30%. Why could the Tax Code not have distinguished between two different areas of operation, remains to Zenobia Aunty, a huge mystery? In fact, in most cases, even the profits of the business are ploughed back for welfare activities.

There are some likely procedural hassles also that may arise. It appears that once the Tax Code becomes effective a re-registration with the tax authorities may be required. We all know the hassles associate with several registration processes. Clearly, the provisions of the tax code covering both the tax implications and the procedural norms require a close relook and redrafting keeping in view the realities of how an NPO operates on a day to day basis.

Photograph of the statute taken at Lalbagh Garden, Bangalore.

Law Street in The Economic Times (Oct 2009) - Make this world a better place

2009-10-03T11:53:00.000-07:00

Dear Readers,

I was in Mumbai recently, the city aptly described in Slumdog Millionaire, where luxurious residential towers and just next door are plastic sheets sheltering the poorest of the poor. The rich seem to have grown richer and the poor poorer. But, small efforts can collectively promise a better future for the poor, even if it seems impossible to bridge this growing divide. Government policies and collective action should spur us on to greater good. For reading this column on the web pages of The Economic Times, click here. As always, the column is also pasted below.

Best,
Lubna

Make this world a better place

• Standardized CSR reporting must be introduced
• India Inc must follow a standardized CSR Index
• India Inc must be allowed to transfer dividend income to reputed NGOs

Zenobia Aunty is in a somber mood these days. Various niggling issues are plaguing her. She feels that there is so much each of us can do to make this world a better place. Some of us don’t merely because of lack of time, or information on how to help. Initiatives such as Teach-India, Joy of Giving Week etc help but much more needs to be done.

Fortunately, business entities are increasingly expected to devote some of their resources towards social welfare (corporate social responsibility, as it is called). Today stakeholders look beyond mere numbers. The World Bank conducted a survey, albeit some years ago, of 107 MNCs. 80% or more MNCs reported analyzing the CSR performance of potential partner firms in developing countries; 50% or more chose certain partners over others because of CSR concerns; and 88% reported that CSR issues are more influential today.

From a sheer business standpoint it makes sense to report on CSR activities. It makes greater sense for intermediaries involved in policy initiatives to track such activities and for the government to support disclosure practices either directly or indirectly.

The World Bank in its report, viz: Opportunities and Obstacles for CSR responsibility reporting in developing countries (World Bank Report, March 2004) points out: Intermediary groups are critical in analyzing and deploying information and in creating demands for improved reporting. Stakeholder groups with built-in incentives for using, analyzing and monitoring the quality of the information are central to its long term sustainability.

In India, while a lot of companies and groups are actively engaged in CSR activities, CSR reporting is not obligatory under the Companies Act, 1956 nor prescribed in the proposed Companies Act. Way back in 1978, it was the Sachar Committee that had first recommended that a social report be made mandatory in annual reports to shareholders. Today we see a hotchpotch of reporting styles, if at all any.

Zenobia Aunty also learns that an NGO or two, do rate companies based on their CSR activities. But government backing and that of its stakeholders would create a better reporting environment and help in rewarding the socially conscious companies.

The World Bank states that there is no single reporting system or model of corporate transparency that fits all social or environmental problems. However, it suggests that matrices for reporting should in general be: Agreed upon by key stakeholders (representing what matters to them); Factual, accurate and verifiable; Reported at regular intervals in relatively simple language or data; Comparable across locations, firms and products; Flexible and dynamic – so that the metrics can change over time; Usable by key stakeholders and lastly easily accessible.

Zenobia Aunty adds: “Professional Institutions such as The ICAI or trade associations such as FICCI, CII, Assocham etc, can play an important role in bringing uniformity and in encouraging companies to take firm steps towards CSR accounting/disclosure.” Further awards for those Companies which give back to the society would also provide an extra impetus.

It may be easy to argue that a particular company has sponsored a village merely because its labor force is based in that village. Whatever, be it, by adopting the village it has helped Indian society.

While some Companies do report their CSR activities, others do not. There is no uniformity. In fact, lack of standardized reporting also means that those who do not contribute to society do not suffer any adverse impact at all, nor are those who give back to the society benefitted in any manner.

Steps must be taken to create a standardized CSR Index across India Inc. It could comprise essentially of four-five elements such as contributions towards – the environment, education, medical and lastly donations for disaster recovery plans come to mind. Weightages for each element could vary but disclosure of the parameters and weightages would be a must in the CSR Index.

It may be too much to ask the government to provide additional tax concessions (other than those available – say for donation to a PM’s National Relief Fund), to companies that are actively engaged in CSR activities. However, in the long run, market forces would reward such companies.

Other policies also need to change and it is here that the government can help. Zenobia Aunty wanted XYZ Company to divert her dividend income to a reputed NGO’s bank account. Alas XYZ Company as per the Companies Act is required to send the dividend cheque to Zenobia Aunty or to transfer the dividend directly to her bank account. Companies must have the option of crediting the bank account of an NGO with the dividend amount, at the direction of a shareholder. In fact, they can then even sponsor a particular NGO and provide for a form in their Annual Report or newsletter that would facilitate such a transfer. Small things can go a long way.

Law Street in The Economic Times (Sept 2009)

2009-09-11T14:21:00.001-07:00

Dear Readers,

Governments across the world are indeed becoming more creative when it comes to levy of taxes. Reminds me of the old Beatles song.

Yes, anything and everything can be taxed. To read this column on the online edition of The Economic Times click here.
Best,
Lubna

From sin tax to lifestyle taxes

• A new trend of lifestyle taxes is remerging across the globe
• The need to fill in treasury coffers has resulted in creative tax levies
• Periodic review of all new levies and regulations is a must

Tax professionals in India have been very busy lately. The budget was followed by the issuance of the Tax Code. Late nights spent dissecting the tax code, networking meetings, media appearances et al have left them exhausted. So, when Zenobia Aunty decided to call and ask: “Hey, what’s new?” she only heard groans.

Thus, Zenobia Aunty decided to have a look around much beyond Indian shores. We have heard of the phrase: Pop goes the weasel. Interestingly enough, this phrase has nothing to do with a furry little animal. It is just something that was shouted at random, in an old English dance. But, today, Zenobia Aunty is sure that the tax man out there in the United States is saying: Pop, goes the soda! Cheers.

Yes, lifestyle taxes are the in-thing in the United States. They don’t call them ‘sin taxes’ anymore, after ‘change’ is the new mantra. US Congress, while drawing up a bill as part of President Barack Obama's drive for health reform, has proposed a federal tax on soda, energy drinks and other sugary drinks to fund health care.

The revenue from the tax would help pay for obesity-related health spending, which reached $147 billion last year. Well, if you don’t want to cough up this tax, cut down your consumption and be healthier, seems to be message. Is it this simple? One wonders whether consumption of soda will really go down. Even as the debate rages on and lobbying by the software giants continues, September 1, marked the effective date for a steep increase on the taxation of candy and soft-drinks in Illinois State. In the past it was alcohol and tobacco that was targeted (including in India) today the United States seems to have moved on to explore other avenues, including marijuana as in California State.

Another move in the US Senate is to impose a 10% excise tax on cosmetic surgery. Perhaps it is taking a leaf from India, where cosmetic surgery was recently brought within the service tax net. Wanna-be Miss India’s or for that matter Wanna-be super models now have to pay through their nose. Quite literally!

While green taxes have been in vogue for quite sometime such as tax on use of plastic bags – made very popular in Ireland, lifestyle taxes are remerging. Green taxes have been used as both a carrot and stick. Carrots included higher sops to windmills or hybrid cars, sticks were instances such as heavy levies on use of plastic bags. But as regards lifestyle taxes, the trend is to adopt the stick approach.

One wonders whether this will serve the underlying purpose – such as ‘soda tax’ reducing obesity. Perhaps, it will not. But then, revenue authorities need to justify the need to fill their depleting coffers. Of course when the economy is bleeding carrots cannot be doled out. Else perhaps tax incentives for building walkways, parks, public gymnasiums and encouraging people to participate would have been a better answer than soda tax.

If the objective is to really reduce obesity and not merely to fill treasury coffers, then ‘sin taxes’ be it soda tax or otherwise must be periodically reviewed to see whether they are serving their intended purposes. Talking of periodical review brings Zenobia Aunty back to our Tax Code.

The need for a ‘change’ prompted issuance of our proposed tax code, after all our Income tax Act dates back to ‘1961’ with periodic annual amendments brought out by Finance Bills, down the years.

Zenobia Aunty has already commented earlier on some of the ‘finer points’ in this Tax Code, so she now prefers to speak in the wider context. “It is good that the government has decided to adopt the white paper approach. Only if it invites comments from all stakeholders, including corporate entities – both domestic and those dealing with India; will practical realities be factored in,” she adds.
But the government must not stop at white papers, alone. “Legislations must be periodically reviewed, practical grievances must be considered and amendments carried out immediately”, emphasises Zenobia Aunty.

The Tax Code should not be a one time exercise. Once enacted, periodical review is vital, as needs of the tax payers keep evolving. Zenobia Aunty’s request to the powers that be is: Do continue with the policy of issuing white papers for public discussions. However, once enacted do continue with the process of an open dialogue.

Hold open houses periodically, invite an assorted group of stakeholders for their views, listen to them carefully. Make immediate amendments if required, with retrospective effect if there is a genuine lapse in the provision. Only this mechanism will reduce the endless bouts of litigations that we face and lead to a more co-operative tax environment. There are so many instances that can come to mind, where periodic review and amendments would have helped the tax payers and the tax department. Best practices such as open houses must not be relegated just to the Tax Code, but must continue for ever.

Source of the photograph

Law Street in The Economic Times (Aug 2009) - Tax Code

2009-08-28T01:31:00.000-07:00

Dear Readers,

We sorely needed a new simple tax code. After all, the current one dates back to 1961, and it is now riddled with amendments that happen each year, without fail, via the Finance Bills. Some amendments are even introduced with retrospective effect. To this extent the Tax Code is a breath of fresh air, alas, it appears to be regressive in nature on several fronts. Progressive measures like participation exemption have not been introduced. Please click here for the online edition of The Economic Times, or scrawl below.

Source of the photograph

Best regards,
Lubna

Storm in the tax cup

• Anti-avoidance provisions are included, similar to the mechanism in well developed tax regimes, but could impact genuine transactions;
• Developed tax regimes also have measures in place such as participation exemption provisions, which are missing
• A balanced code, aiding Indian companies to go global, would have been beneficial

David and Shawn who jointly ran an IT company in Sweden were chatting on myriad topics on a beach in Goa, including where they should travel next. Eventually, they also took a few decisions regarding the immediate plans for their IT Company. Suddenly, a tax guy loomed large on the scene. “Your company is partially controlled and managed from India. You have just taken an important decision. Hence you pay taxes here,” he bellowed. He then disappeared in a cloud of smoke. Zenobia Aunty woke up in a cold sweat.

But the fact of the matter is that while the Tax Code seeks to continue with the present system of combination of residence- based taxation and source-based taxation and seeks to continue to apply residence based taxation to residents (taxing their world wide income) and source-based taxation to non-residents, there are a few major changes.

For instance, it provides that that, for a company, the existence of partial control and management would result in residence in India. The principles relating to source of income are also proposed to be modified to cover even income arising from indirect transfer of capital asset situated in India, as deemed to accrue or arise in India.

Zenobia Aunty’s dream (sorry, nightmare) may have been a tad exaggerated but the fears are real. Whether or not a company is partially controlled and managed from India will be dependent on the fact and assessments could only get tougher. This may mean maintenance of the relevant records to prove that there was no control and management from India. It could well result in a host of litigation.

Much has been written already about MAT and one needs to agree that the proposed provisions of a gross asset-based taxation seem flawed. More so, since the Tax Code seeks to replace profit-based tax holiday incentives with investment-based incentives. Is this a classical example of the left hand not knowing what the right hand does?

Under the investment based incentives, the taxpayer will be allowed to recover all capital and revenue expenditure (except land, goodwill and financial instrument). The period consumed in recovering all capital and revenue expenditure will be the period of tax holiday. The only silver lining is that, the Tax Code also provides for grandfathering provisions in connection with current profit-linked incentives and area-based exemptions under the existing Income-tax Act. If you recall when the provisions relating to taxation of a VCF had been amended and only investments in certain sectors were treated as eligible for pass through provisions, there was no grandfathering clause. At least, this mistake has not been repeated.

Zenobia Aunty feels that the Tax Code is not progressive enough. True anti-avoidance provisions have been introduced, as is the case in well developed tax regimes.

However, these developed regimes also have measures in place such as participation exemption provisions or parent subsidiary directives. Subject to conditions, foreign dividends from qualified overseas entities, including wholly-owned subsidiaries are not subject to tax in the home country. Countries such as UK and Japan have sought to exempt foreign source dividend which is repatriated back, subject to fulfillment of conditions.

As the newsletter of the organization this columnist is currently employed with states: The proposal to codify General Anti Avoidance Rules (GAAR) in the tax legislation represents a new approach of the Government for dealing with tax avoidance. While policy makers world-wide have extensively debated the advantages and disadvantages of GAAR, the most common argument against a statutory GAAR is that it promotes uncertainty for tax payers. In framing legislation that is sufficiently all embracing to deter tax avoidance, there is always the danger of penalizing those who have genuine reasons for entering into a bona fide transaction. Further, by recognizing deferral of tax as a tax advantage and by empowering the tax authority to re-characterize debt into equity, the GAAR contains elements of “thin-capitalization” principles and “anti-deferral” principles. The intention to apply GAAR by overriding India’s tax treaties could also impact the stability provided to foreign investors by an applicable treaty.

Zenobia Aunty feels that: A balanced Tax Code, which would have aided Indian companies to go global would have been beneficial. The Tax Code, could have introduced progressive mechanisms such as participation exemption, underlying tax credit or even exempted foreign dividends. It has introduced an Advance Pricing Mechanism, but nothing else. Zenobia Aunty recalls her nightmare and quips: “It is more of an attempt to treat global companies as local.”

Neighbour Gopal, the software techie grins. Pointing to this columnist he chuckles, “You will have a new Tax Act and a new Companies Act. Happy studying!” Yes, it is back to school, but unfortunately life does not promise to be carefree, rather a tad more taxing.

Law Street in The Economic Times (July 2009) - Budget special

2009-07-30T21:07:00.000-07:00

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.
Best,
Lubna

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

Law Street in The Economic Times (June 2009)

2009-06-20T05:24:00.000-07:00

Dear Readers,

The Economic Times (ET) carried this column, much earlier, on June 11. Guess, it was vital for others to know Zenobia Aunty's thoughts on what the government can do during this budget season for you or for me. Unfortunately, ET has also not uploaded it in the columns section, even though it is there on their website. Go here, to read the online version.

Or else, do scroll down. The Union Budget date is now announced, viz: July 6. Let us wait and watch.

Best,
Lubna

Roti, makan aur taxes

• Salaried class must not be penalized
• Standard deduction should be introduced
• There must be simplicity in tax administration

Tax freedom day, for American tax payers, is computed annually by the US based Tax Foundation, an independent tax research group. This year, in 2009, American’s celebrated their “tax freedom day” a week earlier on April 13 as compared to last year and two weeks earlier than in 2007. The main reasons for its early arrival: Recession reduced tax collections even faster than it reduced income and the stimulus package included large temporary tax cuts for 2009 and 2010.

This is how it gets computed: An official government figure for total tax collections in US is divided by US’ total income. For 2009, taxes accounted for 28.2 per cent and the stretch of 103 days from January 1 up to April 13 is 28.3 of the calendar year. Thus, till April 13, it can be assumed that an American tax payer earned his salary only for the government, post which he or she earned this salary for himself or herself.

In India, personal tax collections stood at Rs. 96,500 crore for the period April 1, 2008 up to March 17, 2009, around 7% higher than the previous corresponding periods figure. However, salaried employees are likely to feel the pinch of the economic slow down in the coming year, with declining bonus, low increments or worse still pink slips. Companies may not hire on the same scale as in the previous years. These factors may see a dip in personal tax collections. Hopefully, the government will not tax the salaried class further, in the coming budget.

Zenobia Aunty agrees with the famous US jurist who said: Taxes are the price we pay for civilization. But, she would be a more cheerful tax payer and would ensure that her grumpy niece would also pay with a smile, if she saw steps taken towards:
simplicity, rationalization and transparency.

Perhaps the much awaited new tax code will usher in simplicity. That said there is also a need for greater ease in making tax payments and in filing tax returns. Perhaps salaried employees whose tax obligation has been entirely fulfilled as tax has been deducted at source by the employer need not file their tax returns? Or if they do have to file it, it should not be more than a page, require only basic details and they should be able to deposit it with their local nationalized bank or even the post office, instead of queuing up at the tax department. It is easy to say, why not avoid the last minute rush, but most of us get the needed Form 16 from our employers at the last minute.

There is another issue which Zenobia Aunty is very peeved about. Today, most employer organizations have set up funds, which do good work. Money is collected from employees by way of salary deduction and used for upliftment of the poorer sections of the society, such as sponsoring local schools. Most of these funds also have obtained the relevant exemptions, permitting their employees to claim a deduction (generally 50% of their contribution subject to an overall cap).

Now there are two issues. Firstly, an employer organization is not permitted to take into consideration this donation while with-holding salary, forcing the employee to remember and claim a deduction while filing his return. Second, why must only 50% of the contribution be eligible for tax deduction? There is a need to boost good work and perhaps greater tax sops would be welcome.

Given the inflation and rising costs of living, perhaps there is a need to reduce or abolish the surcharge of 10%? Today every individual tax payer earning in excess of Rs. 10 lakh per annum has to cough up this surcharge. Surcharge is always introduced for a specific purpose; however, it tends to stick – forever. The time is right to remedy this situation.

Some deductions that are given to us – the salaried class, are a laughing matter. Take for instance, the Rs. 15,000 annual deduction for medical expenses or the Rs. 800 per month tax free transport allowance. There is an urgent need to revise it upward, keeping in tune with rising medical expenses and conveyance costs. Standard deduction which was earlier available to salaried employees should be reintroduced. Preferably a higher standard deduction should be available to those in the lower slabs. Most employers are passing on the costs of FBT to employees through appropriate salary structuring and this hurts, standard deduction will help alleviate the pain, a bit.

A new pension scheme may soon be introduced in India; we must wait and watch the final print including the tax incentives. But, isn’t it time to revise upwards the cap on deduction under section 80 C for various investments. This threshold is too low and a major chunk of it, if not all of it, is exhausted with statutory deductions such as Provident Fund deductions. Ditto for the deduction available to pay back bank interest on home loans. The current limit of Rs. 1.5 lakh per year is miniscule, considering that property prices are still high, leaving no choice but to borrow heavily.

Last but not the least, we pay so many bills by giving our banks standing instructions. Payment of taxes should also be made as simple. If all this is done, Zenobia Aunty says, every day will be a happy taxpayers day.

Law Street in The Economic Times (May 2009)

2009-05-29T06:49:00.000-07:00

Dear Readers,
Our Finance Bill is to be tabled in early July, our next column shall deal with what we truly need by way of tax reforms. For now, international tax policy reforms advocated by the Obama administration have truly upset the globalisation apple cart. Do we need protectionist measures? Zenobia Aunty thinks what we need are universal stimulus packages. For more, click here.
As always, for your convenience, the column is also pasted below.
Have a nice weekend.
Best regards,
Lubna
(Photograph taken from the official website of then Senator Barak Obama)

The circle of taxes

• Local policies must not dent globalization
• Global competiveness is the key to survival
• Countries must adopt progressive tax policies

This columnist vaguely remembers watching her elder cousins sip cold fizzy Coke from a bottle in the mid 1970s, which she as a toddler prone to frequent bouts of allergic cold was not allowed to touch.

Zenobia Aunty, the ever generous Aunt, who took us kids to Chowpatty beach over weekends, would ignore my plaintive cries for just a sip. A few years later, Coke, had to exit India. However, Coke made a comeback in 1990s and it has been part of my staple quick-fix diet, ever since.

Somehow, the international tax proposals recently announced by Prez Obama, made this columnist think of Coke. In an era, where companies play in the world market and are not confined to local spaces, one wonders whether these proposals will result in localization of companies. Companies of US origin are today, brand names not only in the US but across the world. Coke, is just but one example.

Zenobia Aunty is of the firm view that there should be a strong demarcating line between abuse of tax havens, setting up of sham companies merely to get a tax break and genuine global business operations. Unfortunately, Prez Obama’s international tax policy announcements appear to have blurred this distinction.

Let us just concentrate on one such proposal. The reform deferral proposal requires US companies to defer deductions in the US, if such deductions (with the sole exception being R&D) are associated with foreign income, until such time that the income is brought back to the US and is subject to US tax.

A press note by the US Treasury provides an illustration: Suppose that two US companies decided to borrow to invest in a new factory. Company A invests that money to build its plants in US, while Company B invests overseas in a jurisdiction with a tax rate of only 10 per cent.

Now Company A will be able to deduct its interest expense, reducing its overall US tax liability by 35 cents for every dollar it pays in interest. But it will also pay a 35 per cent tax rate on its corporate profits. On the other hand, Company B will also be able to deduct its interest expense from the US tax liabilities at a 35 per cent rate. But it will only face a tax of 10 per cent on its profits. Thus, our current tax code uses US tax payer dollars to put companies that invest in the US at a competitive disadvantage with companies who invest overseas.

Zenobia Aunty doesn’t quite understand it. Today the world is a consumer - does this mean that US companies with existing subsidiaries should just pack up and go? Fortunately, the Congress is yet to deliberate upon these proposals, which have been announced with an effective date of January 1, 2011.

Perhaps some exceptions to the norm should be carved out for genuine business operations. True, it amounts to a deferral of the expense, but it will impact the immediate cash flow status of a US company with global operations. At times, dividends may not be repatriated back with a long term view to expand overseas operations and earn more profits – which ultimately would flow back to the US parent.

Citizens for Justice, a US non profit group focusing on tax research, in a press note points out: “Most of the corporate practices the administration wants to crack down on probably don’t even involve companies that are truly competing abroad. Rather, they involve companies operating within the United States but using sham transactions to make their income appear to be earned abroad, so that the U.S. taxes on that income can be ‘deferred’ (meaning ‘not paid’).”

Zenobia Aunty agrees that this may be true, but argues that genuine business needs will be hurt. To this, this association has another point of view. It states:
“Even in cases where U.S. multinational companies are carrying out real business in a foreign country, their competition with other companies in that country is generally based on the price they charge for their products. Corporate income taxes don’t affect the price a foreign subsidiary can charge so much as they affect the dividends the U.S. owners receive.” Well, corporate income taxes do impact profitability and profitability does impact the ability of a company to compete. It is not just about pricing.

But coming back to US policies, the only exception that has been carved out is in respect of R&D expenditure because of the positive spill-over impact of these investments on the US economy. However, the Citizens for Justice Forum opines that: Unfortunately, this exception is a boon to the companies who are among the worst abusers of deferral, the tech and pharmaceutical companies.

It sure isn’t easy to please everyone. But, one can only hope that the US Congress will think it over rationally and the policies that will be put in place will be those that not only help the US economy back on the track but also will not stem the process of globalization.

Interestingly both Japan and UK have made receipt of foreign dividends exempt in their respective home jurisdictions. One hopes India adopts a similar progressive stand. What we need today are universal stimulus packages. Increasing protectionism and localization sounds scarier than a horror movie.

Law Street in The Economic Times (April)

2009-04-10T22:40:00.000-07:00

Dear Readers,
India Inc., like companies across the world is on a cost-cutting spree. Be, it through simple measures like reinforcing the need to switch off the lights at the workplace, greater reliance on video conferencing, travelling by economy class, if at all required (even for the top level of management), or even more complex measures such as new mechanisms of salary structuring with a higher margin of variable pay, or salary cuts etc, not to mention hiving off of non-core business or even doling out pink slips.

India Inc is trying it all out. This brings me to values. When times are tough, do companies just pay lip service to values? True, you will find values splashed across a corporate office, most probably a huge frame in the chairperson's corner room, or in the board room, or it could even hit you through large visuals in the vistors' lobby. Yet, do values get diluted when the going gets rough and the eye is only on the bottomline?

CK Prahalad in The Economic Times, Corporate Dossier, dated April 10, had this to say: "The values have to be continuously reinforced because there is a lot of pressure to cut corners. So it’s important to emphasise that how we do things is as critical as what we do. Core means many different things to different people. It is the same for values. We have to be careful about what can change and what we cannot. For example, can the business models change? Of course, they must. Can the product portfolios change? Of course, they should. But should we change issues of integrity, respect for individuals, the need for globalisation or transparency? These we should not change. They need to be reinforced. So a crisis is not a licence to change core values."

How are values connected to tax land? Well, some companies walk that extra mile to ensure that not only are they honest tax payers, but are highly responsible tax deductors as well. Arguably the administrative costs for such companies is comparatively higher. Should'nt a more simple mechanism exist?

I have been so impressed with one particular company - MindTree Limited. You can find its integrity book: All about integrity on its website

ET's editorial policies do not permit me to name companies in my column, but now you know which company I am referring to.

To read the article online, click here. Else, as always it is pasted below.

Happy reading.

PS: Some people contacted me stating that the link to MindTree's integrity policy was not functional. I have now provided the correct url. Let me all add that I am in no way associated with MindTree Limited - neither as an employee nor as a shareholder.

Best regards,
Lubna

Honesty is the best policy

 Administrative tax obligation costs for employers must be low
 Alternative mechanisms should be introduced
 Practical tax regulations are required

Zenobia Aunty has been under the weather these days and is prone to biting people’s head off. So, it was with much trepidation, that this columnist tip-toed into the guest bedroom to remind Aunty of the forthcoming deadline.

Aunty violently waved Corporate Dossier, which contained the tête-à-tête with CKP, in her niece’s face. CKP had emphasised that in these tough times, the message of a company’s core values needs to be reinforced and never diluted. Aunty croaked: Why should honest employers be penalised with higher tax administrative costs?

Recently, the Supreme Court (SC) had to determine whether a company is under a statutory obligation to collect evidence that its employees have actually utilised their LTA claims. In its brief order, the apex court held that, there is no CBDT circular requiring the employer under section 192 to collect and “examine” the supporting evidence to the LTA declarations made by the employees.

In respect of each financial year, the CBDT issues a circular relating to: Income tax deduction from salaries under section 192 of the I-T Act. The circular pertaining to the recently concluded financial year 2008-09, requires an employer to collect and examine the supporting evidence to the declarations submitted by the employees only in case of HRA claims, made under section 10(13A) and Rent claims made under section 80GG.

This columnist decided to ask other experts for their views on this decision. Experts say: “The employer is required to withhold tax from the estimated salary of its employees. It has to be a bona-fide estimation made without intent to avoid withholding of tax. All that the SC decision does is to state that as long as the bona-fides of the employer have been established, the tax authorities cannot charge the employer for short withholding of tax merely because the requisite supporting documents evidencing incurrence of actual LTA expenses were not collected or examined, as actual examination in case of LTA, is not obligated by law.”

However, employers need to continue to ensure in case of all tax exemption/deduction claims of employees that they have the requisite material to convince the tax authorities that the estimation of salary income of the employee on the basis of which tax was withheld was honest and fair. The employer cannot turn a blind eye to wrong-doings.

New joinees at a Bangalore based IT Company are explained that the tax exemption/deduction claims made by them have to be genuine. A hand book is given to them which makes it clear that the Company will not look the other way and settle payments, because hey, it is the government which is losing and not the employer. This columnist is sure that there are a handful of others like this company which walk an extra mile to ensure that they do the right thing and the government does not lose its tax dues.

But, what is the price of this honesty? Some employers may just pay lip service to their obligation of fairly estimating and deducting tax, they may resort to convenient means of overlooking some dodgy claims – thereby keeping their administrative costs low and being perceived as a employee friendly organisation (honesty is not always palatable).

Suddenly this columnist understood her Aunty rhetorical question. True, the CBDT in the wake of this SC decision could just add to the administrative burden of employers by asking them to collect and examine each and every tiny scrap of paper that supports a tax claim.

Instead Zenobia Aunty suggests that standard deduction should be brought back and certain insignificant sops should be removed. Take for instance, the Rs. 15,000 annual deduction for medical expenses, or the Rs. 800 per month transport allowance. The standard deduction should be so fixed that it takes care of the loss of the abolition of these claims. Or better still, even other tax sops such as HRA etc could be abolished and the resulting higher tax incidence could be offset by a lower tax rate. This will mean low administrative costs to the employer, no loss of revenue for the government and no frenzy for the employees in putting things together for submission.

In another case, pertaining to several companies, the issues relating to tax withholding on salary of expat employees were clubbed together for hearing. Here, the SC has confirmed that salary even if paid outside India will be taxable in India if it relates to services rendered in India. The Indian employer would be obliged to deduct tax at source, on the entire remuneration that relates to services performed in India, even if part of such remuneration was paid to the expat’s bank account in his/her home country.

True, India needs its slice of the tax pie. Withholding tax at source is the best mechanism for mitigation tax avoidance. However, ushering in practical tax laws will make life easier for the diligent, dutiful Indian companies.

This article featured in the Tax Carnival. For other equally interesting articles that featured there, click here.

Law Street in The Economic Times (March)

2009-03-27T03:26:00.000-07:00

Hi Readers,
Bangalore is IT centric and yes the slow down in US has had an impact on Bangalore soil. In fact, everyone here is wondering what stand Prez Obama will adopt at regards outsourcing. Any attorney worth his or her salt has a flair for words, the Prez is no exception. Read on by clicking here, or shall we say, read between the lines.
As always, the column is also cut and pasted below.
Happy Ugadi and Gudi Padwa.
Best regards,
Lubna

What next?

 Protectionist measures do damage in a flat world
 Taxes should be used as carrots not sticks
 Capitalism forces should be allowed full play

Is shipping jobs overseas the same as outsourcing? Is outsourcing not frowned upon if no existing American jobs are lost? Is outsourcing permissible if carried out by captive subsidiaries of US companies? Then again, if the answer to this last question is yes, the objective is the same – whether a US company is serviced by its own captive or a third party. Lower costs means more returns to shareholders and a more vibrant economy. The only difference being that a captive subsidiary can repatriate dividends to the parent – but then most captive subsidiaries operate on a cost plus model.

In his speech to the Congress, in late February, Prez Obama said the Administration will eliminate "incentives for companies that ship jobs overseas." His words have merely left us guessing. In other words, will Obama punish those US companies that outsource work? Or will he provide tax incentives to US companies that create jobs in America? On the cards are “tax reform policies”, but only time will tell whether these will be a carrot or a stick.

Zenobia Aunty dug up some historical facts from cyberspace. Yes, in today’s instant era proposals which are more than a year old count as history. On August 2, 2007, US Senators, Dick Durbin, Barack Obama and Sherrod Brown proposed a legislation to reward companies with a 1 per cent income tax break, that produced 90 per cent of goods and services in the US, paid a living wage, provided health benefits to at least 60 per cent of employees and supported their employees when called to active duty (read wars).

In other words, there was no ban on outsourcing; just an incentive to US companies for on-shoring (if one may coin this word). Of course, this proposal also had its own questions – it spells out 90 per cent of goods and services that are produced in the US. Now if a car manufacturer imports auto ancillaries – would he not fall in this criterion, even if the car is otherwise manufactured in the US and provides employment to tons of people? In this flat world, it is increasingly complex to draft policies, which would serve the spirit of the legislation.

Talking of employment, H-IB visas are in the news again (the current annual cap is 65000 visas). These visas enable aliens (yes this is an actual term) to work in the US. Even US companies and not just Indian software giants apply for such visas.

Reid Hoffman founder of LinkedIn, in his recent column in ‘The Washington Post’ advocates removing the cap on H-IB visas and imposing a payroll tax beyond the benchmark salary for each extra visa. Thus, US companies if they need to can hire workers from overseas and at the same time they contribute back to the American society by paying a payroll tax. Capitalism forces will ensure that the additional tax H-IB workers are called in when actually required, and not merely because they are relatively cheaper.

This columnist hated economics as a student, but realises that capitalism has become a more complex term, today. Governments are treating tax cuts as a sure fire solution to increasing demand. Yet, research shows that during the Great Depression and in the 1990’s in Japan, cuts in taxes did not effectively increase demand because customer confidence was very low. Thus, fiscal policy failed to reduce unemployment. Today the matter is more complicated, because an increase in demand may mean an increase in imports in the US for day to day consumer products. This may not stimulate job creation, not in the US, at least.

On an entirely different note, Zenobia Aunty points out that: At the time of writing this column, the US Senate is all set to discuss the Levin Bill, aimed at targeting off-shore tax havens. As US money is stashed in these tax havens, Senator Levin feels that tax havens “are undermining the integrity of our tax system and increasing the tax burden on middle income families.” This Bill puts a greater burden on taxpayers to show that their tax arrangements are legitimate.
Zenobia Aunty stresses: Fair enough, the US like any other country in the world has the right to prevent tax abuse. However, outsourcing is neither tax abuse, nor tax avoidance and policies are perhaps best not drawn up to prevent it.

Perhaps the current situation in the US calls for a direct impact on employment – perhaps reducing the minimum wage rate to lower costs or a ceiling in management salaries? But these issues must be left to market forces to provide an optimum balance. Government tinkering is best left to the minimum. If the US adopts protectionist measures it will not only harm itself, but in the process it will also harm the global economies and this is a catch 22 situation. Countries such as China and India are projected to grow by double digits over the next five years. It is imperative for the US to gain a foothold in these markets. Protectionist measures will not help in doing so.

But as the title of this column says: What next? Time alone will tell.

Law Street in The Economic Times (February)

2009-02-18T03:35:00.000-08:00

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,
Lubna

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.

Law Street in The Economic Times (January 2009)

2009-01-21T22:47:00.001-08:00

Dear Readers,
Do you feel you are being squeezed dry by the tax authorities? Well you are not alone. Read on for Zenobia Aunty's views by clicking here.

As always, the column is also cut and pasted below.

Law Street/Lubna Kably

New Year woes

• Economic slow down necessitates downward revision of tax targets
• Knee jerk reactions are uncalled for
• Alternative dispute mechanisms are required

We are now firmly entrenched in a brand new year. But our new financial year, is a few months away - April 1, 2009. Quite apt I must admit, because it isn’t really our New Year but one for the tax authorities. We poor souls begin work anew and spend the initial months just working for the government, after all a fair share does slip away as taxes. Not that Zenobia Aunty or her niece is complaining. Taxes, albeit taxes imposed and collected fairly, are needed to keep the wheels of democracy churning smoothly.

The past financial year 2008-09, will not give the tax authorities much to smile about. In fact, even the RBI, in one of its monthly bulletins, affirms a decline in the growth of tax revenue owing to the general economic slowdown. India Inc is required to pay its annual tax liabilities as advance taxes. The last such installment was due by December 15, 2008 and the showings were dismal. Newspapers have cited that: Advance tax collections from India Inc declined by over 22 per cent to Rs 42,600 crore in the third quarter of this fiscal. In the same period last fiscal the advance tax collection stood at Rs 54,900 crore.

Well, targets have to be met and news-reports have it that a full fledged presentation has been made at a recent meeting of top tax officials in Mumbai asking them to roll up their sleeves and launch surveys. Zenobia Aunty has time and again advocated that revenue targets must not be the criteria for appraisal of a tax officer. Unfortunately the system is such that targets have to be met, even if it means an endless bout of litigation followed by refunds to the tax payer as the demands were raised on weak grounds, in some cases just to meet the target. In the long run this practice is costly not just to the tax payer but also to the revenue authorities. The very same newspaper report mentions that: Nowhere does this presentation talk of the economic slow down which has had its impact on India Inc resulting in a short fall in tax collections.

The Comptroller and Auditor General of India, from time to time, comes out with reports which cite the amount of taxes remaining uncollected, the tax collected and the amount refunded during a particular period. However what perhaps needs to be done is a study on tax demands where the amount has had to be refunded later on, as the ground for raising these demands were weak. Believe, me you, or rather believe Zenobia Aunty, this study will put things in the right perspective.

We, in India have a long winded mechanism for settlement of tax disputes and this only adds to tax payer woes. Let us just take the example of one country, USA. Its tax laws are no less complex than ours. Yet, USA has mechanisms such as private letter rulings and advance pricing agreements which provide tax certainty at the outset.

The most common type of advance ruling in the USA is the private letter ruling. It involves a private request by a taxpayer, in advance of a transaction, for determination of the tax treatment of such proposed transaction. Once obtained, the ruling is binding on the government in the absence of a showing of substantial factual error, misrepresentation, or fraud. Our advance ruling mechanism is not available to all and sundry, further it is quasi judicial in its approach. Private rulings are more taxpayer friendly, authorities are empowered to discuss issues on hand and act as advisors rather than tax collectors. Something on these lines is vital for India Inc.

Transfer pricing is one of the most complicated subjects in international tax law, and the tax payer and tax authorities can easily disagree about it. The US Internal Revenue Service implemented the Advance Pricing Agreements (APAs) program in 1991, to avoid the prolonged, lengthy, expensive, and uncertain litigation. Prior to the APA program, transfer pricing was generally not a subject for private letter rulings because of its highly factual nature. Under an APA, as with any private letter ruling, disputes are avoided by an advance agreement.

Coming back, to home ground. Fortunately the Bombay High Court, recently, in Clifford Chance’s decision, has upheld the doctrine of territorial nexus for levy of Indian taxes. Hopefully cognisance will be taken of this concept in Vodafone’s case, where transfer of shares between two non residents of another non resident entity were held taxable in India, merely because shareholding in India was indirect held by the company whose shares were transferred. Knee jerk reactions if any, are not going to help in the long run, rather a mechanism of tax certainty will help attain the objectives of tax collection and avoid inconvenience to the taxpayer.

Law Street in The Economic Times (December)

2008-12-20T05:26:00.000-08:00

Dear Readers,

Calvin and Hobbes will always be my eternal favourites. LinkedIn now has a group of Calvin and Hobbes devotees, well I am one of them. In India, not all are lucky to get a school education, and unlike Calvin, many of these kids do want to go to school. We do pay a separate education cess, I would love to know how it actually gets utilised. Wouldn't you?

Click here for some thought provoking ideas on how we could best pay our taxes. And if the government does want to speed up spending how about giving us a tax holiday or a month or so?

Happy New Year, readers. I shall post again in the new year.

PS: Kay Bell has included this on her blog as part of the Tax Carnival. Click here for many more exciting tax articles from across the world.

Warm regards,
Lubna

PS: The column is pasted below as well.

Direct taxes, with a difference

Eliminate the middleman
Funds must directly reach the poor
There must be accountability of tax spend

The economic slow down has had its effect even on the Indian economy, the terror strikes have momentarily shattered the spirit of India, even as it seeks to rise united from such strife. Thus, it appears that 2008 will end on a sombre note. In fact, this columnist wonders whether the world will change again by the time the column, which is penned much in advance, sees the light of the day.

Zenobia Aunty is a firm believer in the “Glass is always half-full” philosophy. “Every dark cloud has a silver lining”, she says. And she adds her own phrase, “You can see a rainbow only after the storm”. Perhaps this is true, even though her niece is still not fully inclined to believe in this philosophy and would prefer not to face a storm, even for a rainbow. Yet, life is a roller-coaster with its ups and downs.

Post the strife in Bombay, Zenobia Aunty and her niece were intrigued by one placard which stood out in a peace procession. It read: No more taxes. Why should we pay taxes, if we can’t be protected? Given the situation and the emotions holding sway over Bombayites (I prefer this term), this outcry did seem justified. One can only hope that Bombay and India heal, heal soon, and concrete steps are taken that will benefit us all. Right now, we do seem to be grappling for answers and there is a cacophony of bewildered sounds each time the telly is switched on.

In the US, tax payers are crying over the use of their money for bail-outs. Surfing the net for the tax implications of bail-outs, Zenobia Aunty came across a unique suggestion by US Congressman Louie Gohmert – a tax holiday for ‘we the people’. In short, a two month tax holiday for the hoi-polloi of the United States of America.

In his press release Congressman Gohmert states: “By instating a temporary tax holiday, we could electrify the American economy and provide overwhelming relief to taxpayers, all for less than the cost of the current failed bailout system."

He continues: “Think about how much you would have if you didn't have any social security or income tax withheld from your pay check, or if you didn't have to pay those taxes for January and February! Americans could take and invest their own money where they believe it should go - to paying down mortgages, buying a new car, making credit card payments. The economy would get relief where it is needed the most. Why try to decide how to prevent foreclosures? Just give taxpayers their own money to catch up on their payments. Those in lower income brackets who are hit the hardest by the FICA tax would see huge money back, and then they could choose who should benefit from their hard earned money. Even the self-employed and small business owners would receive a fantastic amount of their own much-needed money, and they will be able to invest that back into their businesses and even create the ability to hire more people.” Gohmert is currently preparing a bill to declare the tax holiday for January and February of 2009 and is also gathering support at the same time.

I agree with this concept in so many ways. Loyal readers may recall how Zenobia Aunty had mentioned that she doesn’t really know what happens to the education cess which she coughs up as part of her tax dues. Now mind you, this is collected for a specific purpose – for educating India, education hopefully will create a more aware India and she is all for it.

Now, if instead of just paying this cess, if she could deposit it at a school of her choice, wouldn’t that be better? If we all know that the entire sum meant for the poor recipient does not reach him or her, wouldn’t this direct payment system be better? True, a handful of people may fake such payments. But, I am sure patriotism burns strongly within each of us – at least in those of us who pay our taxes, and if it is for the right cause, most of us would pay the money willingly. Perhaps select schools could set up e-bank accounts, where the deposits could be directly made? This would eliminate any middleman.

Gurucharan Das, in one of his columns has written that India spends 14% of GDP in subsidies for the poor, which is more than enough to wipe out poverty. But poverty persists because subsidies leak out through corruption.

Zenobia Aunty had earlier held that perhaps tax sops even for donations in kind, such as a computer manufacturing company donating computers to a government aided school should be entitled to tax sops. While, this could be introduced, perhaps it is time to spread the net wider and make it possible for us to give directly a portion of our tax for what it is meant for. And what better way to start than through education cess? But, is anyone listening?

This column can best end with the words of Rabindranath Tagore: Where the mind is led forward by thee into ever-widening thought and action; Into that heaven of freedom, my Father, let my country awake.

Limited Liability Partnerships: Ushering in change

2008-12-17T06:59:00.000-08:00

The LLP Bill, 2008, has been passed by the Lower House of the Parliament in India on December 12. Now it awaits Presidential assent, followed by a notification for it to become an Act. True, it promises a brand new vehicle for doing business in India and it is much welcome. However, other legislations, including the Indian Income tax Act, 1961, now have to ensure that they meet the requirements of this new business vehicle. Click here for my analysis on UTVi.com. Yes once again, written for my employer organisation.

My article on UTVi.com on India's interpretation of tax treaties in the light of its position to the OECD MC update 2008

2008-12-07T06:03:00.000-08:00

Hi Readers,
While I contribute to The Economic Times monthly, in my personal capacity (Zenobia Aunty is fiercely independent), my current employer organisation does stress upon our writing for various publications as well and sharing knowledge.
So here is one such contribution that appeared on UTVi.com's portal. India has made as many as 73 reservations on the positions taken by OECD in its 2008 update across issues panning definition of permanent establishment (PE), attribution of profits, royalties and mutual agreement procedures. Click here to read more.
Best regards,
Lubna

Law Street in The Economic Times (November 2008)

2008-11-10T08:37:00.001-08:00

Dear Readers,
This column was written and sent much before the mayhem broke out in Bombay. Bombay, being Bombay, tried to get back on its feet pretty quickly, even as the war is still on. Today, I learnt that colleagues tried to go to work, even though they have been advised to stay at home. Perhaps Bombayites for once, need to stem this spirit - which is spoken of in awe after every disaster.
Perhaps for once, they need to just stop work, till there are survelliance cameras installed in the city, till the police work (and an independent police force please) is adequately equipped. Bombay doesn't need politicians which create further divisions on the basis of caste, creed, religion, region. It needs good sound administration.
Please do pray for those Bombayites who lost their lives in this terror which was unleashed upon them. I just spoke to some family friends, and they have lost a family which was dear to them, at Oberoi-Trident shootouts/blasts. Please pray.
Anyway, coming back to tax land, this column got published today. Please click here to read online, or else as always scroll below.
Best regards
Lubna

Yes we can!
* Tax policies must be in norm with changing times
* Genuine needs of corporate entities should be addressed
* A high-handed approach is to be avoided at all costs
I was amazed with Zenobia Aunty’s enthusiasm. She followed Barak Obama’s each and every move during the run up to voting day. Agreed that guy can speak. Perhaps it was only he, who could collectively have so many Americans and even people across the world join in the chorus of: Yes we can!
Zenobia Aunty may be momentarily swept up in this euphoria, but her niece is sceptical. America is facing the highest level of unemployment to be seen in recent times. No matter, how much we try and brush the issue beneath the carpet, pink slips are more than visible even in India. Any techie, or equity analyst, even those worth their jobs, appear to be uncertain of their tomorrow, especially if they are not working for a ‘desi’ company. Zenobia Aunty’s neice, having realised the value of human life and not just corporate life, was also contemplating a change – some action in the sphere of Corporate Social Responsibility, but with funds drying up, CSR programs across India Inc seem to have taken a beating. Yes, the situation seems to be bleak everywhere, as bleak as the grey skies in Bangalore.
But, is this recession another “Great Depression”? Zenobia Aunty, who has heard many an economist on the telly, says that it isn’t so. The biggest difference is that governments are taking steps to stem the rot. Perhaps, as they say, it is better late than never. During the Great Depression, for instance, the Fed just wringed its hands and let Wall Street Banks collapse. Today, not only have banks been rescued but much more has been done.
Steps have also been taken in the United States to promote liquidity. For instance, the IRS has issued guidance increasing the opportunities for a US corporation to borrow, interest free, money from a controlled foreign subsidiary (CFC) without triggering tax on a deemed dividend in the US. Generally, an obligation owed to a CFC by its US parent is treated as an investment in the US property and thus a deemed dividend which is subject to US tax. Today it appears that a CFC may loan funds to its US parent provided that such loan is repaid within sixty days and the total number of days in a taxable year that the CFC has such loans outstanding is less than 180 days. In such circumstances, there will be no tax incidence in the US on receipt of the loan.
However, like most legislation, it is a unilateral approach and this in itself may hamper its success. For instance, RBI regulations permit an Indian company to lend money to its foreign subsidiaries. Can interest free loan be given to a parent? Second, will such a transaction be a deemed dividend distribution under Indian tax laws? What about transfer pricing provisions? The issues that one can visualise are endless. Well, cross border tax as we all know is not simple. So yes, US companies may perhaps find themselves in a nice pickle. Other countries are bound to have some regulation or the other which could hinder flow of loans to US parent companies.
India is also facing a slowdown. IPOs have been postponed, some indefinitely. Thus, it is not just US companies which are in a pickle. So are Indian companies. There is an added twist to this entire issue.
Hob-knobbing with the who’s who in tax land in Mumbai, Zenobia Aunty was inquiring about the fate of these companies. She knew that expenditure incurred in connection with an IPO (and believe me, these expenses can be heavy) are treated as capital expenditure that can be amortised over a period of time under the provisions of section 35D of the Income-tax Act, 1961, rather than a revenue expenditure that can be written off at one stroke. Now, if the company is not able to raise funds at all, either through an IPO or otherwise, it is likely it will have to face a prolonged litigation to claim the fund raising expenses, as bonafide business expenditure. In this very cocktail party, merchant bankers argued themselves hoarse with the wise men from tax land, but no consensus was reached.
Zenobia Aunty feels that the government should recognise this problem and in genuine cases help resolve it, so that companies do not have to face an endless bout of litigation – just because the market tanked. Unfortunately, this time, Zenobia Aunty is leaving us, not with solutions but just questions. She hopes that these will be appropriately addressed. After all the mantra of today is: Yes we can!
In fact, this columnist’s boss is now eager to delve into the entire scenario of how governments have tackled downturns through appropriate policy changes. It is a question of the survival of the fittest. But then, this is another story to watch out for!

Law Street in The Economic Times (October-ahem Nov)

2008-10-03T21:13:00.000-07:00

Dear Readers,

A slight slip up, perhaps in keeping with the title of this column "Many a slip between the cup and the lip". This column got published on November 4, instead of on the last Friday of the Month, it was slated to appear on October 31.

As they say, it is better late than never. So, here is the link to the online edition of The Economic Times. Zenobia Aunty seriously wonders why we are creating impediments in the flow of funds into India and she means FDI and not FII funds which are often frowened upon and treated as second class citizens. For the benefit of her readers, the column is also cut and pasted below.

Enjoy.

Best regards,

Lubna
Many a slip, between the cup and the lip
- Simplicity is the key to good governance
- More approvals need not mean good governance
- Clarity is urgently required in the FDI context
Reading the news about financial giants in the US come tumbling down, Zenobia Aunty’s mind wandered over to the stories written by one of her many favourite authors – Ruskin Bond. No, this Bond is not the one with the 007 tag attached, but rather an author who writes eloquently and simply about human life, with a few ghosts thrown in here and there.
In his story, “The boy who broke the bank”, the author captures life in a small town and how a chance remark by a poor village boy, precipitated a crisis with a long queue to withdraw money from the local bank.
However, the current crisis is not a fall out of a chance remark. Many ascribe it to greed. All said and done, Zenobia Aunty is quite perplexed. The bail out entails purchase of bad debts held by the financial institutions because they lent money to people who could not repay, or equally bad, purchased loans from institutions who lent money to people who could not repay. She is so glad, that her tax money will not be used for this, but her US based friends are certainly not smiling. Unfortunately, in this flat world, the trickle down effect will be felt even in Bangalore or Chennai or anywhere else.
There are lots of things which Zenobia Aunty does not understand, apart from the reasons why these giants tumbled. Take our very own Foreign Direct Investment (FDI) Policy, for instance.
The Economic Times, which is Zenobia Aunt’s favourite financial paper, has reported that the government is now planning to rework the FDI policy for holding companies. Joint venture companies with foreign equity are required to seek fresh approval from the Foreign Investment Promotion Board (FIPB) within 90 days while investing in downstream companies.
According to the stand taken by the FIPB in recent times, once an Indian operating company (having an FDI stake), makes an downstream investment, it changes its stake from an ‘operating company’ to that of an ‘operating cum holding company’ and FIPB approval is mandated. Even if such downstream investment has been made in the past approval is now required.
A plain reading of a Press Note, which had sought to simplify the issue, makes Zenobia Aunty; literally tear her unruly silver hair out. This Press Note had clearly stated that foreign owned Indian holding companies can undertake downstream investments in activities falling under the automatic route – without FIPB approval, subject to certain conditions. So what now?
Mind you, this isn’t a case of purchase of bad debts of the entity in which the downstream investment is being made. It is pure investments into India, required for further growth and development of the economy. It is money coming in, not going out (something which some belonging to the class of ‘powers that be’ still frown upon, India’s pride on foreign acquisition of mega companies notwithstanding).
To add insult to injury, even a marginal foreign holding in a company which makes a downstream investment can trigger a strong reaction from the FIPB. Shouldn’t the FIPB define the percentage of FDI in the primary operating company which is set to make further downstream investments, as the trigger for seeking approval? Can’t this be restricted to say a FDI percentage of 75 per cent or more? Further what exactly constitutes downstream investments? Would it cover non-equity?
Do you remember Chris? Zenobia Aunty’s globe trotting expat neighbour? He is all set to quit and take a long break in Bali. Lucky guy. He swears he will take up another profession, probably teaching people how to scuba dive. Sharks according to him, are safer than ambiguous legislations. Spot, while conjuring up dreams of shark fin soup (something he saw on telly) wags his tail in approval.
Chris’ employer company thought he was now an ‘India champ’ and could take on anything and everything, including the Bangalore traffic! However, he could not handle any more scenarios, where one thing is intended and another implemented. Apart from this issue, which has led to him sleepwalking in the neighbourhood (only Spot enjoys these post midnight journeys over potholes and slush) Chris is irked that a 100 per cent tax holiday was intended for SEZ units, but hang on - thanks to a tiny formulae, this actually gets reduced, if one goes by the literal interpretation and the company has both SEZ and STPI units and other business units. A similar situation in another section of the Income tax Act was favourably resolved, this pertaining to SEZ’s remains pending, till this date.
There is many a slip between the cup and the lip. Just paying lip service, to the cause of foreign investments or the SEZ sector doesn’t’ help in the long run.

Law Street in The Economic Times (September 2008)

2008-09-06T02:38:00.000-07:00

Hi Readers,

Zenobia Aunty ventured into cyberspace again, but with a difference. This time she got responses from across the world on the world's most weird taxes. So read on.

Economic Times is redesigning its website and Zenobia Aunty has still not been slotted. So for now, click here and we hope it works. Else just scroll below.

Best regards,

Lubna

Life with the world’s worst taxes

- Tax laws are getting weird
- Technology is not helping matters
- Taxman’s reach on fringe benefits is widening

“Excuse me, but yours couldn’t have been the world’s worst dog, because mine was”. This was the typical response that John Grogan, author of the bestseller Marley & Me, got when he wrote a touching obituary of his beloved dog Marley.

Zenobia Aunty asked on a networking site: Which is the most insane tax law in your country? And answers poured in. While, these tax laws may seem stranger than fiction, these responses are from real people, all eager to tell their story.

Since we are talking of Marley, did you know that in the Netherlands all dogs are subject to a Dog Tax? It is an annual charge which is calculated on the number of dogs per household. As good friend, Jacques J.J. Soudan, pointed out, “These days you have to pick up your dog’s droppings. Yet, you still pay this tax, perhaps for the noise pollution!”

But, if you want to keep man’s best friend, there is no choice. Adam Jewell, from USA stresses upon “choice”: “The most insane tax law is that the tax payers have virtually no say over where the majority of our tax dollars are spent. There should be a list of categories or even specific projects where you allocate your tax dollars – such as military, education, health care, corporate tax breaks, etc.”

Michael Gardner, from USA, offers a slight variant of the concept of choice and says he would like to choose if he wants to invest in social security (15 per cent plus of income goes here). “Or truly invest in something that provides me an opportunity to have a decent income at retirement” he adds. As regards social security tax, Martin Thomas, now based in the UAE has an additional point. He fails to understand why countries levy income taxes on social security payments, made out of tax levies itself!

If you thought FBT was something only you suffered from, take heart. Jacques pipes up: In the Netherlands if you use your company car for personal trips beyond a certain mileage, there is an addition to your taxable income. Guess what? Video surveillance is on at strategic places to tape licence plates – match them with the data base of company cars and most likely with individual tax declarations. The arms’ of the taxman have really stretched.

Perhaps it is taxes that drove Bill James from Down Under. He explains: “ In Australia, the personal tax rate is higher than a corporate tax rate. It is just 30% for corporate entities, but the maximum marginal rate is a high of 46% for individuals. Add to that, is a 10% VAT, a 1.5% tax to support the health scheme and of course there is also capital gains tax on specified assets.”
Do you think you can pray for relief from taxes? Not really. Recall the experience of Edmilson Palmeira, who resided in Germany for a year. They have ‘Kirchensteuer’ or Church tax – 8-9% of your income. This, an internet search shows, is collected by the public tax offices and transferred to the churches, but the government retains a percentage as collection fee! Church tax is also imposed on some members of religious congregations in Denmark, Sweden, Finland, Austria and some parts of Switzerland.

Is technology making things better? Not really. Take Mark Lee’s example. In the UK, the filing deadline for paper based self assessment tax returns has been set as 31 October, this year. Previously it was 31 January, (which still remains the deadline for tax returns filed over the internet). However, the rules relating to penalty for late filing have not changed, thus even if paper returns are filed in November, December or January next year, there will be no penalty. In effect, the 31 October deadline is unenforceable.

Björn Larsen, from Sweden, calls his country – the Home of Taxes (with such a high tax rate, that Zenobia Aunty refuses to mention it) and with so many strange laws, he admits it is hard to keep up with them. Most irksome to Bjorn is the energy tax. On the electricity bill you may energy tax and VAT to top this tax. He also speaks of Property Tax, payable every year on your house property and a Fortune tax, which gets levied every year if you have saved a million.

Phil Parkinson, from Canada points out, there is no running away (rather flying away) from taxes. Use air travel, pay airport security tax and oh, don’t forget the air fuel tax!

Nothing is certain, but death and taxes. Simon Hamer, from UK, has the last word: “I'm absolutely wholly against inheritance tax, you save all your life to look after your kids futures, only to have a huge lump of it taken by the taxmen.” Agrees, Texas based, real estate attorney, Matthew Aycock: If I had to pick one tax as the worst tax, I would pick the Estate Tax on non-liquid assets. It affects too many families that have a lot of land and absolutely no cash.

Time for Zenobia Aunty to write a bestseller!

Law Street in The Economic Times (August 2008)

2008-08-18T09:01:00.000-07:00

Dear Readers,

Another column, after a brief gap. Hope you enjoy reading this one.

Unfortunately I could not find it on the web edition today (Aug 29), I will upload the link later, when the article is uploaded. On rare occassions there is a slip in uploading.

PS: ETonline suddenly decided to upload it under the "guest writer" and not "columnist section". Just found the url, click here
Cheers

Lubna

A helping hand during taxing times

- Tax authorities must adopt risk management techniques
- Understanding the tax payer’s commercial scenario is crucial
- Transparency must be improved

“Life is mostly froth and bubble; two things stand like stone, kindness in another’s trouble, courage in your own”. This columnist recalls scrawling these lines in year-books of school-mates aeons ago, when Facebook was non-existent.

Year-books, may have become extinct, but Zenobia Aunty claims that this quote still holds true. She has recently experienced and understood first hand the ethos of this quote and has learnt to accept and appreciate help.

Talking of help, in tax-land, it is invariably the tax intermediaries (your friendly tax advisors) who offer help, and at times offer what is perceived by tax authorities to be aggressive tax planning advice. After all, they cater to your actual needs!

In this backdrop, a team set up by The Organisation of Economic Co-operation and Development (Oecd) has recently published a report on “Study into the role of tax intermediaries”. Recognising that tax advisors merely supply what client’s require and are perhaps not the real decision makers, this Study Team examined the tripartite relationship between tax payers (in particular the biggies), tax authorities and tax advisors. The participating countries also included non-Oecd members such as India.

The name of the game here is risk management, not by the tax payers, mind you, but by the tax authorities. To quote from this report: “A key point to keep in mind is that risk management is not only about what tax bodies do but also about which tax returns not to audit, which tax issues not to ask about and which enquiries not to pursue. Judging what they will not do assists tax bodies to prioritise the things that they will do.”

And all this should be conducted keeping in view, the five attributes that large corporate tax payers want tax authorities to demonstrate, viz: understanding based on commercial needs; impartiality; proportionality; openness and responsiveness. If this is done, it would encourage tax payers to provide early disclosure of potential tax issues and usher in greater transparency.

Proportionality is all about balance, knowing what issues to pursue and what not to pursue. And the first tiny steps to achieve this seem to have been taken in India. After all just because a company is popular on the stock exchanges does not mean it is a high risk company from a tax perspective!

Recent news reports indicate that: “The tax authorities have decided not to scrutinise the tax returns of over 1000 top companies, provided no major disputes are pending against them. Last year, the CBDT had taken a decision to scrutinise tax returns of about 200 ‘A’ group companies listed on the Bombay Stock Exchange BSE, 500 National Stock Exchange companies and a large proportion of non-banking finance companies”.

But Zenobia Aunty feels much more can be done. Take for instance, understanding based on commercial needs, which should also include understanding the basic characteristics of that particular industry, say – industry trends, commercial risks, use of intellectual property et al. Without an understanding of this, the broader context of an activity or transaction would be misunderstood resulting in costly litigation. We have seen this happen, such as the withholding tax litigation in relation to software imports.

Coming to impartiality, there must be consistency and objectivity in the issue resolution; perhaps it is high time that alternative dispute resolution techniques were introduced in India, such as fast track settlement using a mediation process. If tax authorities are forced to chase tax collection targets, impartiality may be impacted.

Openness and responsiveness are aspects that Zenobia Aunty prefers to club together. For instance, changes in tax policy should be introduced after sufficient dialogue. The need of the hour is to develop enhanced relationships, on the lines of projects undertaken in Ireland, the Netherlands or even the USA.

In the Netherlands, a pilot project commenced way back in 2005, with twenty large companies to conclude “supervision agreements”. In essence, CFO’s have to commit to full transparency on current tax issues, in return the tax authorities give a binding opinion on that issue expediently. The advantages for the company are: certainty, being in control of their tax position, and lesser administrative burdens. This project is now going strong.

With India having contributed its inputs to this study, one can hope for better times ahead. In other words, collaboration and not confrontation holds the key to a brighter future and tax authorities world over are awakening to this realisation.

Amen to that.

PS: This also featured in Kay Bell's Tax Carnival. Check out the other interesting articles as well, which featured here.

My technical article in the Bombay Chartered Accountants Journal

2008-08-13T05:44:00.000-07:00

Whooooooooooooooo. An article co authored by me, with my boss, Rajendra Nayak, partner, Ernst & Young, on "Thin capitalisation" appeared in the prestigious Journal of the Bombay Chartered Accountants Society. This Society is outstanding!!! I am just so thrilled to see my name in print in their July 2008 Journal.

This article is part of the "Worldwide trend series" that is published at least once every quarter.

The article is available online and for those of you, who are so inclined to read technical stuff, please go to the website and type in my name in the search section on the top right hand corner. Lo and behold you will get the article. Happy reading.

Law Street (June) in The Economic Times, Once Upon a Time

2008-06-07T03:54:00.000-07:00

Hi Readers,
I so love fairy tales, but they all have a moral don't they? Well, Zenobia Aunty decided to be a story teller recently. This is what happened, click here. As always, if the url doesn't work, read the story pasted below.
Best
Lubna

Once upon a time…

Lubna Kably

Taxes have been put to various uses
Taxes yield results, only if used well
Taxes must offer equity, certainty, convenience and transparency

Down with fever, this columnist recalled vividly the time when her Granny used to tuck her into bed and narrate a bed-time story. Well, Zenobia Aunty, decided to act that part, ahem- as well as she could.

Hot soup and toast, the pitter-patter of the rain, a cool breeze and story telling time, courtesy Zenobia Aunty, who had rushed from Mumbai to be at the bed side of her favourite niece, while the doctors pondered over the cause of this low but irritating fever that just refused to go away, cured this columnist in no time. After all, one can only tolerate tax stories, that much!

Knowing fully well, that her niece now also had an Irish boss to contend with “or vice-versa,” as he is bound to retort (though he sure knows how to deal with just about any situation this columnist can ever dream of conjuring up), Zenobia Aunty began with a story – no, not about pixies and fairies and other Irish folklore, but on the ‘plastic bag tax case’. Introduced in 2002, in the Republic of Ireland, it had an immediate impact where the plastic bag usage per person decreased within weeks by 94%. Years later there was again a slight increase in consumption of plastic bags, prompting the Irish government to increase the levy from Euro 15 cents to Euro 22 cents in July 2007, said the wise Aunt.

The New York Times, has a few months ago, written about this interesting experiment. The paper attributes the success of the tax imposed on plastic bags to several factors, viz: Creating environmental awareness by the government; lack of a power manufacturer’s lobby: there were no plastic bag manufacturers in Ireland (most bags were imported from China); strict enforcement– resulting in people carrying their own cloth bags – if retailers were to switch to paper bags, this too would have been brought to tax; easy adoptability to the new tax regime: most retail chains were highly computerised and adding the “plastic bag tax” involved minimal reprogramming; the means justified the end: the tax was put to good use – to finance environmental enforcement and clean up processes. It is clear it was not tax alone that did the trick. I am sure my Irish boss will agree on this one.

That said; Zenobia Aunty hopped over to a more recent example or rather Kelly’s post on her blog ‘taxgirl.com’ regarding the levy of tax on “alcopops” – pre mixed soda-like alcoholic drinks. Australia, to decrease dangerous underage drinking has sought to increase the tax on alcopops.
Has it helped? Kelly explains: The Distilled Spirits Industry Council (DSIC) says that the increase in tax on alcopops has led to increase in dangerous drinking. Specifically, the DSIC cites figures that show that sales of alcopops have fallen by almost 40% since the tax increase took effect last month. That would be good, right? However, in that same time, sales of bottles of pure spirits have increased by about 20%. Most people are now mixing their own drinks and are perhaps drinking even more alcohol. The Ministry of Health, however, may stick to clear narrow statistics alone.

Kay Bell, tax writer from the US chimes in, with her post on ‘dontmesswithtaxes.typepad.com’ Texas, where she resides, imposed a tax on adult entertainment last year. Lone Star State legislators authorized a USD 5-per-patron fee, aka pole tax, on strip clubs. The money, an estimated USD 40 million a year, is to go to anti-sexual-assault programs and health care for the uninsured. However, in March an Austin judge found that the tax infringed on First Amendment rights of freedom of expression and declared the tax on exotic dancers unconstitutional. While Texas is collecting the tax even as the case is on appeal, other States seem to be waiting and watching.

What is the point in taking you through the above cases? Is Zenobia Aunty just spinning a yarn. No, she isn’t. Every fairytale ends with a moral and here comes one.

She nods her head sagely and states that the plastic bag tax worked, because it fulfilled all the tenets of a good tax regime – viz: equity (the taxes were nominal and imposed on all users); certainty (the timing and amount was certain); convenience (it was easy to pay the tax); and lastly economy in collection (it was easy to administer). Moreover, there was no wiggle room, papers bags if used, would have been subject to a similar levy. Whereas in case of alcopops, probably the users just shifted to something else, a more dangerous situation, in fact. And yes, the tax laws must not to contrary to the fundamental constitution – while the Pole Tax, is an offbeat example, this tenet holds good.

Moral of the story: Taxes are a powerful weapon, but must be used correctly. Else like the alcopop tax, it may just lead to contrary results. That, law makers is something Zenobia Aunty wishes that you ponder over, whenever a new tax levy is being contemplated.

Law Street in The Economic Times -May 2008

2008-05-27T09:12:00.000-07:00

Hi Readers,

This time, "Zenobia Aunty" whom you are all well acquainted with, did suffer from the writer's block. Fortunately an excellent decision read favourable to the tax payers) of the Delhi Tribunal which impacts global employees came to the rescue.
Around the word in eighty days, has taken a new meaning altogether and the world is flatter than what even Thomas Friedman envisaged. So read on. Meanwhile, I wish I was sailing in this hotair balloon, don't you? Click on the title below to access Economic Times online. Else simply read on or read maadi, as it is said in Bangalore (Bengaluru).

And this post also gets a mention in Kay Bell's Tax Carnival. Hurrah!

So go ahead and spot this column and read up on many others.

Best,

Lubna

Employees on the go…
Zenobia Aunty is rarely tongue tied, or let us put it this way, she never ever faces a writers block. She always has a lot to say, whether it be through spoken or written communication.

Well, this weekend, we experience what the writers block was all about. I sat motionless for hours together, waiting for Zenobia Aunty to dictate her column to me. Alas, we ran up several drafts, but the topic kept changing. Right from why Bush was blaming us for our Aloo Tikka burger and saying it led to spiraling food prices in his country, to whether or not the barter system would replace monetary currency. It was truly a step back into the dark ages for us, more so, with the power shortage which Bengaluru is exposed to, off and on, especially during the summer months.

Zenobia Aunty wished she was in the cooler climes of Iceland. But alas, only global mobile employees have all the fun she said, referring to our neighbour – Chris who shuttles between Finland, China and India. Chris, doesn’t agree. Imagine having to deal with the tax authorities of three different countries, he sighs. His greatest nightmare is that he will get a tax notice from these countries, which cumulatively is higher than even his total annual salary!

It is quite common for talented employees such as Chris to take responsibility for several countries and to spend time in different countries managing different entities in these various countries. Fortunately, for Chris, the Delhi Tax Tribunal has taken a correct view.

Even more fortunately for both Zenobia Aunty and myself, a tax partner of the firm this columnist is currently employed in, provided much food for thought (or let us say food for the column).

For those who are residents but not ordinary residents in India, whose contract of employment clearly defines the split of services, the Tribunal has held that salary for services rendered outside India is not taxable in India.

Under the Income Tax Act, 1961, (the Act), the scope of taxable income varies with the residential status of the individual. The Act prescribes two tests of residence for individual taxpayers. Each of the two tests relate to the physical presence of the individual in India in the course of the ‘tax year’. An individual is said to be a resident in India in the tax year, if he is: (a) physically present in India for 182 days or more in that tax year; or (b) physically present in India for 60 days in that tax year and 365 days or more in the preceding four tax years.

If either of the tests is not satisfied, he will be considered as ‘non resident’. Additionally, an individual, who is defined as a resident in a given tax year is said to be ‘not ordinarily resident’ in any tax year if he has been a non-resident in India in 9 out of the 10 preceding tax years or has been in India for less than 730 days during the 7 preceding tax years. Therefore, under the Act, an individual may be classified as a resident and ordinarily resident (ROR); resident but not ordinarily resident (RNOR); or a non-resident (NR).

A RNOR is liable to pay tax in India, only on Indian income, i.e.: income received or deemed to be received or income accruing or arising or deemed to accrue or arise in India. Salary income for services performed outside India under a split contract, where such services do not relate to Indian operations does not fall within the above definition.

Of course, if the residential status of the person, even if he is a global employee, is that of a ROR, he would be taxed on his worldwide income in India. But, global employees who keep shuttling from country to country for not very long assignments; this is rarely bound to be the case.

Let us go back to the facts of the Delhi Tribunal decision. Here, the terms of employment between Air France and the assesses (in this case), required that they spend 80 per cent of their time in managing operations in India, 5 per cent of their time in South Asia and 15 per cent in France. The contract of employment itself clearly recognised the division of services to be rendered in India and outside India. The Tribunal held that it could not be said that the period of employment outside India should also be considered as services rendered in India.

In fact, even as our politicians keep fighting on whether or not a North Indian can sell vada pav’s in Mumbai, global mobility is on the rise. In fact, India Inc benefits from foreign talent.

A lot has been written on global acquisitions, on greater access to new geographies, better access to high quality raw material, and in short greater efficiency. The fact of the matter is that the world is flatter than what even Thomas Friedman had originally envisaged. Globalisation whether inbound or outbound, will result in expats coming to India and sharing their expertise.

One can say, sharing of global talent is what the future holds. Properly structured employment agreements, will help Chris and others, concentrate on their work, instead of having unwarranted nightmares. This decision is a step in the right direction, and substantiates the provisions of the Act.

Unending dividend debates

2008-04-26T23:10:00.000-07:00

Hi Readers,
The heat is getting to Zenobia Aunty and her niece and indeed Spot, who lies beneath the fan, or close to the AC draft and does nothing else. It sure ain't a dog's life for him. This year Bangalore seems to be warmer than usual and I think one of the reasons is the high rises, with glass facades which reflect the light and make it just hotter. Sad, we don't construct buildings in keeping with our environmental needs, but prefer to work in glass house furnances, with the AC on full blast resulting in further adding to the global warming. That is one story, tax on dividends is another. So read on.

Please click here for the entire story. Zenobia Aunty is too lazy to cut and paste it for you this time.

Sorry about that

Law Street in The Economic Times (March edition) on the Budget

2008-03-04T09:20:00.000-08:00

Hi Readers,

Soon after the budget annoucements, my first thoughts were: Wish I was a farmer, enjoying tax free income and a debt write off. But, no. Life is not easy for them. They are at the mercy of the weather gods and also money lenders.

The budget was quite a damp squib for the corporate sector - the retrospective amendments are derogatory to the very concept of fairness. Mercifully though, no increase in tax rate nor any major new taxes. Call it shaken but not stirred enough for reforms or stirred but not shaken enough for reforms. Something did seem to be lacking.

For the Budget related lawstreet click here. Or as always read below.

Stirred but not shaken enough
4 Mar, 2008, 0000 hrs IST,LUBNA KABLY, TNN

Zenobia Aunty, who grew up in rural Dhanu, can understand the plight of a farmer. But even she has questions to ask her favourite finance minister. Are we pumping money — in this case Rs 60,000 crore in the right direction? Who will save the farmers from the clutches of the money lenders where the poorest of the poor actually go? Further, will this write-off of debts make defaulting on loans a habit? To be fair to P Chidambaram, even if this debt was not written off, the banks may have had to write off their non-performing assets. While this columnist could not find any mention of an expenditure outlay for compensating banks, she understands that they will be. Well, this means, banks are better off than otherwise.

Yet, we must think of an alternative long-term solution. T K Arun, has earlier written about how Magarpatta’s village folk got together, pooled their land, set up a company, developed their lands into modern townships and are now crorepatis. If Shankar Magar, one such villager whose photograph was carried in TOI’s budget day edition could prosper, so can others. ‘Super-boss’, for whom this columnist currently works advocates a ‘corporate-farmer’ partnership model. He thinks that if farmers pooled their land together under a cooperative mechanism, this cooperative then dealt with a corporate house and entered into an agreement for 15 years or so for corporate farming it would be a ‘win-win’ situation for all. The corporate entity would have one organisation to deal with; a larger area of land would be available for corporate farming and farmers would be assured of transparency and better profits. ‘Super-boss’ hopes someone takes up this idea and he isn’t even asking for a fee.

With the rationalisation of tax slabs, individuals stand to gain, but India Inc is in for some disappointments. Perhaps WTO commitments put paid to the strong demands to extend the tax holidays for undertakings in EOUs, STPI, EHTPs, etc., and this expires on March 31, 2009. While the corporate tax rate remains the same, there is bad news if you are a MAT company. Even as the tax rate remains unchanged at 11.33%, book profits will now include deferred tax and provision for dividend distribution tax (including surcharge and cess), and this means more MAT tax. In fact, with this move the Finance Bill, like any other good Finance Bill has sought to overturn judicial decisions. Further, how can a Finance Bill be complete without any retrospective amendment? So this takes place retrospectively from April 1, 2001 and may result in reopening of several cases.

In between the lines are a few more shocks. Generally when you receive an invalid notice — notice sent to you beyond the due date, you still appear before the tax authorities and cooperate with them, without prejudice to the fact that the notice was invalid. Well, better beware. If you do appear in any proceeding or cooperate in any inquiry relating to an assessment or reassessment, it shall be deemed that the scrutiny notice was served to you in time. You cannot then battle out on the ground that the notice was invalid. Talk about being caught between the devil and the deep blue sea. Another retrospective amendment, this time dating back to April 1, 1989: now, there is no need for the tax officer to mention reasons for initiating penalty proceedings. ‘Just do it’, seems to be the new mantra at the tax office.

Retrospective amendments are unfair to the taxpayer, but some traditions do not die — like FBT they are here to stay. However, global employees may get some respite. The Finance Bill provides that if FBT is recovered from them in respect of their ESOP plans by their employer, such tax shall be regarded as tax paid by them. They can claim a credit for such tax in their home country (the country where they are deputed and are now a tax resident). However, this will ultimately depend on whether such other country accepts this. Gopal, our techie next door neighbour is not too optimistic. There has just been a half-hearted attempt to mitigate the cascading effect of dividend distribution tax, no relief will be available to intermediate companies in case of a multi-tier structure or if the ultimate parent is a foreign company.

Bond markets got an unexpected boost. Foreign Currency Exchangeable Bonds can be converted into shares of any group company. The conversion shall not be regarded as a transfer, read it to mean, no capital gains at this juncture and it comes with a retrospective effect by a year. Going forward, there will be no TDS on interest against demat corporate bonds traded in Indian stock exchanges. PC could well say, Mein hoon Bond. Yet, shaken but not stirred enough for reforms, this about sums up the budget for Zenobia Aunty.

Break Time

2008-02-03T04:06:00.001-08:00

Hi Readers,

Everyone needs a break, including Zenobia Aunty. Well, actually she has already aired her views on what the Finance Minister should announce on February 29, budget day for both you, me and India Inc. So she had nothing more to say, especially since the next column was due for publication on Feb 29 itself.

So she has taken a break and will appear twice during the month of March. So watch her rant on the finance bill in March.

Till then adieu.

Best regards

Lubna

India Inc's wish list - Law Street in The Economic Times (Jan 2008)

2008-01-25T22:40:00.000-08:00

Hi Readers,

Last month, Zenobia Aunty pleaded a case for you and me. This time, she is all in favour of fighting for Indian Inc and its rights. So read on, by clicking here.

As always, the article is also cut and pasted below.

India Inc's wish list
25 Jan, 2008, LUBNA KABLY

Well, in the previous column Zenobia Aunty wished that PC would make life easier for the aam aadmi. Needless to say, she got a few fan mails and copies of pre-budget memorandums from various associations and professional bodies protesting that she was ignoring the needs of India Inc.

Truth be told, she had already thought of telling PC about the need for a few changes. The memorandums sent her way, helped her fine-tune her thoughts. PC has been hinting at reducing the corporate tax rate. Will this make Shahbhai, the finance manger at a large product company, smile? Perhaps, just a wee bit.

He would rather see scrapping of FBT provisions, ease in tax administration and yes, correction of the formula for calculating SEZ tax relief.

He is so tired of setting up yet another subsidiary company for his employer organisation. The reason, this subsidiary company will set up an undertaking in a SEZ. If a separate company was not set up, the fear is that the tax holiday benefit that is prescribed would get diluted.

In brief, the deduction from the SEZ undertaking’s profits is required to be computed as a proportion of the export turnover of the said SEZ undertaking to the total turnover of the business of the company.

Actually, it is logical to state that the deduction should be available in the proportion of the export turnover of the SEZ undertaking without considering the turnover of the other business of the company in the denominator as is the case for tax holidays enjoyed by STPI’s, EOUs etc.

Else, it is not merely Shahbhai but many others who will have to set up multiple legal entities (companies) to house each SEZ undertaking. And this means more costs, more paper work, more filings and yes even more taxes and even more costs. Further when the subsidiary distributes dividend to its parent, there is again dividend distribution tax levy.

Having to set up of multiple companies to take the full tax holiday, is killing and doesn’t serve the spirit of the legislation. So what is required is remedial action to correct the erroneous formulae.

The less said about fringe benefit tax (FBT) and its hassles the better. But then, Zenobia Aunty is not known for keeping quiet. Last year, India Inc, was protesting and even conceded to a slight hike in the tax rate with a scrapping of the FBT. On its part, tax authorities have argued that this is not feasible as not all companies pay tax. Looks like, India Inc has given up hope of this levy being scrapped.

Well, even if it isn’t scrapped, it must be made more taxpayer friendly and this alone is what Zenobia Aunty intends to concentrate on, in her letter to PC. She insists that all procedural aspects, including assessments be combined with that for corporate tax, so as to at least save on administrative costs for India Inc.

Second, Zenobia Aunty says that there should be safe harbours built in for all expenses. Only those above a certain limit should be subject to FBT. After all the cost of tax collection must be commensurate with the taxes collected. Will PC listen? Let us wait and see.

Zenobia Aunty’s friends from Bombay Chartered Accountants Society (BCAS) also speak of another challenge taxpayers’ face – that of the dreaded deemed dividend mechanism. In simple terms, an advance or a loan to a shareholder having at least 10% voting power in a private company, to the extent that the company has accumulated profits, is treated as deemed dividend and taxed in the hands of the recipient.

Apart from payment to the shareholder, a loan or an advance to a firm in which he is a partner with a 20% share or to an association of persons of which he is a member and is entitled to 20% of the income is also considered as dividend and is taxed accordingly.

The objective of introduction was to prevent tax avoidance, by ensuring that people do not give loans and advances, instead of distributing dividend. However, this provision does impact genuine loans, including those that are paid back in a short time. Further, this tax is attracted even if the loan is advanced at a commercial rate of interest and even if the majority of the people owing the concern which received the loan are not even shareholders of the lending company.

BCAS, in its pre-budget memorandum points out that, at present, no tax is payable by the shareholder on dividend received from companies and only the company pays a dividend distribution tax of 15%. Thus, levy of tax on deemed dividend in the hands of the shareholder at the normal rate is not justified.

Guess, once again, PC should carve out certain exceptions, such as the duration of the loan or the rate of interest and exempt such loans from the concept of deemed dividend. Now we just have to wait and see what the budget will unfold.

Happy New Year - Law street in The Economic Times, December 2007

2007-12-15T21:48:00.000-08:00

Hi Readers,

Happy New Year. There is a nip in the air, and I sort of envy Calvin sitting with his favourite pal before a roaring fire. Well, I always wanted to be Calvin.....

As always, click to read the column in The Economic Times

Or scroll down to read the same.

Cheers

Lubna

Law Street

The Economic Times, December 28, 2007

Happy New Year

The fog rolls in, only it is not the mist but pollution. The smog envelopes tree tops, newly constructed high-rises and even the morning joggers who have dared to venture out. Zenobia Aunty and Spot haven’t, they keep indoors these days, much to the chagrin of other household members. So, let us just say it was a joyous moment for all of us, when Aunty became a member of one of the various social networking sites that abound in cyberspace. This kept her blissfully occupied throughout the day and indeed most of the night. In this case, she haughtily informs us that it is not a social networking site, but a professional networking site. Well, I guess it has its uses.

She posted a question on what people would like their governments to do in the sphere of taxation in the New Year and the answers rolled in from across the globe. The one common thread in the replies she got from the US, UK, France, South Africa, India, Iceland (frankly speaking I have lost count of the innumerable countries the replies rolled in from) was: We would like our governments to use our money in a responsible manner. That apart, there were many more suggestions on what governments should do.

Let us begin with tax slabs. Said a member from the US: There are hundreds of brackets! It is silly. The lowest tax bracket that really made me angry is for a head of a household, if you make US$11,200 you have to pay US$1,200 as taxes! That is absurd! No wonder they poor don’t want to work, they can’t afford to! What is the point? How in the world can anyone in today’s world live on that income and pay those taxes? Yet, there is no equal percentage applied to the wealthy. They can earn as much as they please and only pay 35%. The scales are very unbalanced. The proposal on the table for change is to eliminate all the hundreds of levels and go to just three for each category type (single, married, etc.)”.

Well said. In India, we have three basic slab rates. The basic threshold limit for tax trigger now stands increased at Rs 1.10 lakh. In respect of women and senior citizens, this basic threshold limit is Rs 1.45 lakh and Rs 1.95 lakh respectively. However, the maximum marginal rate of 30% applies to those earning more than Rs 2.5 lakh. With a taxable income of just Rs 2.5 lakh, the honest taxpayer has to cough up Rs 77,500 leaving him a paltry sum of just 1.72 lakh. Well, unlike the US, in India, there is no cushion for the unemployed, so they just have to work and if they are good citizens also pay their taxes. Zenobia Aunty really feels that this must change. Only those earning above Rs 10 lakh or so must fall in the highest tax bracket. However, she is willing to negotiate with the North Block on this issue. In addition to the 3% education cess levied on all those subject to tax, those with an income of Rs 10 lakh have to pay a surcharge of 10%. Thus, the maximum marginal rate of tax is now 33.99%. Here, Zenobia Aunty suggests a two-tier level of surcharge — a lower surcharge for income between Rs 10-25 lakh and a higher surcharge for income beyond this limit.

Says another member of this network, also from India: “If exporters are clamouring for relief because the rupee is appreciating, I want salaried individuals to get some respite because of the rising interest rates.” Currently, in case of a self-occupied property (financed by a housing loan) taken after April 1, 1999 for acquisition or construction, the borrower can claim interest deduction up to Rs 1.50 lakh per year, subject to meeting certain conditions. Zenobia Aunty hopes for doubling of this limit to Rs 3 lakh.

Yet another participant wrote back with three distinct sets of wish lists. A ‘realistic’ wish list, a ‘pipe dream’ wish list and an ‘outright whacky’ wish list. Some of these were real gems. For instance, this gentleman suggests that the tax laws should permit a set off of the tax refunds against the advance tax payable, if the refund (which is not rejected by the tax authorities) is not received within thirty days. His ‘pipe dream’ wish list includes: Cut red tape, reduce bureaucracy, simplify tax structures, tax procedures, tax return formats and tax refund procedures. Of course, his whacky list says: Abolish Income tax and replace the same with a 1% expenditure tax. This will boost government revenues manifold, as this will cover not just segments which are currently outside the income tax net, but also those that fall under the net, but still have huge levels of ‘untaxed’ income. Well, Zenobia Aunty admits that there are pros and cons to this list and leaves it at that.

Now if only Santa Claus could grant all these wishes.

Happy Diwali- Law street in The Economic Times (November 2007)

2007-11-17T04:11:00.000-08:00

Dear Readers,

Belated diwali greetings. This festive season, prompted Zenobia Aunty to pick her next theme. ET decided to carry it earlier, ie: on Nov 27, instead of the last friday of the month as always, which would have been Nov 30. Also they did not provide a link below my name, anyway, this apart, hope you enjoy this "cracker of an article". As always for the link click here.

The article is also copied and pasted below from ET's online edition.

Cracker of an ESOP notification

Lubna Kably, November 27, 2007

Ziiiing, screeched the rocket launched from the terrace by kids who live next door. Suffice to say, Spot squealed and dived into the bed covers, closely followed by Zenobia Aunty who raved and ranted how kids these days were devils in disguise. Both of them hate noisy firecrackers.

The festive spirit was truly missing in our house. Gopal, the techie, whom readers may recall from his occasional mention in earlier columns, came around with a box of sweets and a big smile on his face. His visit was cut short and his smile soon evaporated as Spot decided to pee on his new shoes and Zenobia Aunty refused to listen to his tax woes. After all, with her ears plugged up with cotton and her head wrapped in a thick muffler, one can’t really blame her for not listening. She did, however; devour the home-made sweets with great gusto. Thank you, Gopal.

While he sat on a comfortable bean ban, Gopal whined and groaned, not from a stomach ache but at the thought of having to stomach tax when he exercised his stock options, later on this financial year. Given Zenobia Aunty’s uncharacteristic behaviour of not wanting to listen to tax issues, this columnist was forced to listen to his tax grievances. Gopal lamented about the imposition of FBT on ESOPs. Here is why. Gopal works for a listed Indian company. Had Gopal exercised the options prior to April this year and sold the shares, all he would have to do is cough up a paltry securities transaction tax on sale. There would have been no capital gains tax incidence (if the shares were held by him for a year, post allotment) and he would have been a richer man. Now, when he exercises the options and shares are allotted to him, fringe benefit tax liability will be triggered in the hands of his employer company. Further, as the government has permitted recovery of the FBT liability from his employer, his employer intends to do so. Gopal is in a pickle.

However, instead of sympathising all that Aunty did was glare at him; tell him to be thankful for still being employed and not getting a pink slip. Yes, she was probably referring to the fact that many companies owing to a weakening dollar are cutting down costs and even retrenching employees. Funny, isn’t it? When growing up, this columnist used to hear complaints on how weak the rupee is. Now she hears complaints on how strong the rupee is. Well, human nature is such, that it is never satisfied. Spot, on the other hand, looked quite satisfied after having eaten a huge piece of Mysore Pak and yes having happily ruined a pair of brand new shoes.

Perhaps even PC (the finance minister and not your personal computer!) finds it difficult to please everyone. He may have pleased India Inc by permitting it to recover FBT from the employee, arising on allotment of shares, under ESOP plans. However, he has left others, like Gopal truly upset. Having recovered from the noise and pollution, post Diwali, Zenobia Aunty, was back to her normal talkative and curious self. Well, she is talking to all the neighbours and attempting to talk to Gopal, who now pretends to ignore her. Maybe, on reading this column, he may soften up and bring around another plate of home-made Mysore Pak and also forgive Spot for his misdeeds.

After having pointed out Gopal’s predicament which is worse off than earlier - remember earlier he paid no tax on ESOPs, if the capital gains were free and only a small and paltry STT was paid by him, Zenobia Aunty is now looking at the larger picture. She is now asking why the concept of issuing draft CBDT circulars for inviting comments was abolished. In the past, the CBDT has issued draft circulars, such as before issuing final guidelines on deciphering whether an activity is an investment or trading activity. Is it because these draft circulars result in public hysteria in the media? Of course, it is hard to swallow criticism, but at least draft circulars enable the CBDT to realise the drawbacks of a particular piece of legislation. Even if there is a hue and cry in the media and various opinions are aired, such opinions help the CBDT to clarify things and clear the air.

A senior bureaucrat politely pointed out to her that the MoF cannot afford to waste time by issuing drafts for everything. Point well taken, but this exercise definitely helps bring to light issues that companies are now grappling with, whether it be valuation of unlisted shares and the fear that this would lead to litigation or otherwise. Perhaps, the MoF could just reach out to a few well known chambers of commerce, professional institutions and elicit their views on a draft circular or notification. This sharing of knowledge will not harm anyone and would lead to better acceptance of tax policies. This newspaper firmly believes that Knowledge is Power. Zenobia Aunty, quips, sharing of knowledge means double the power.

How Green Was My Valley - Law Street in The Economic Times, October 26, 2007

2007-10-26T10:21:00.000-07:00

Hi Readers,

Climatic change is a reality. It is sunny in the morning and begins to pour later on in the evening (at least we are experiencing it in Bangalore or Bengaluru). Zenobia Aunty, thinks the government must dangle carrots in the form of tax sops as this will help make a better greener world. So read on, by clicking here.

As always for your reading convenience, the article is also cut and pasted below.

Have a nice weekend. Use less paper, save the trees!

How green was my valley?

26 Oct, 2007,

LUBNA KABLY

Zenobia Aunty fondly remembers the movie — How Green was my Valley. It may have nothing to do with taxes but as always she brings tax into the picture in any and every conversation. Life is ‘taxing’ with her around the house, no wonder this columnist spends so much time at her office. She was so excited when former US vice-president Al Gore and the Intergovernmental Panel on Climate Change (IPCC), which is chaired by Dr Rajendra Kumar Pachauri, won the 2007 Nobel Peace prize that she and Spot performed an impromptu crazy jig in the local park. Perhaps in their own way, they did spread awareness of Global Warming.

Zenobia Aunty just can’t figure out the climate in Bengaluru these days and just hates it when the rain prevents her and Spot from taking their morning walks. For instance, it was a warm sunny morning today and presto just when Aunty decided to stop across at a nearby café for muffins and coffee, it began to rain cats and dogs (Spot wonders why we humans coined up this phrase, but that would make for another column.) Any guesses for what she did next when she came back home? Of course, she grumbled. But, in addition, she zoomed on to the topic of ‘green taxes’. Our government had actually ‘warmed’ up to this topic quite a few years ago, before Climate Change hit us smack in the face. Today, no weather report can be accurate, or so it seems.

A notification issued in February 1983 introduced for the first time a higher rate of depreciation of 30% for pollution control equipment as compared to 25% available to general plant and machinery. This 30% was gradually increased to 100% in the 1993-94 budget. In short and simple terms, in India, the depreciation rate is 80% for energy saving devices and 100% for air and water pollution control equipment. Wind farms, which were once looked upon as a mere tax planning device — especially since they attracted the attention of Bollywood and our cricketers — are today churning out a success story.

Yet there is much more that can be done. But the government should remember that it is better to dangle the carrot rather than use the stick. If the other approach is adopted, it could even hit the poorest in the society. We have seen rasta roko’s when the state governments in a few states tried to impose additional tax on polluting road transport. The UK government has very recently announced a new tax on flights; in fact it has shifted the proposed burden from passengers to the airlines. It is a tax that penalises airlines for flying their aircraft half empty.

It will come into effect on November 1, 2009 and in the meantime, air passenger duty tax will stay at its current levels. We don’t know, as yet, how this will work. Perhaps, flights may operate only during peak hours so that they are full of passengers. This may save the environment but not those who have to travel in an emergency situation. Green taxes must be thought through carefully. In fact, it is ‘green tax relief’ which would be more effective. Today, in India, is there any incentive for anyone to buy a smaller, fuel-efficient car rather than an SUV, which comparatively is a fuel guzzler? Or what would this columnist get, if she adopted rain water harvesting techniques for her retirement home, which she is currently dreaming of? Well, water may soon be a very precious commodity and needs to be conserved. For that matter, donations made to environment preservation societies should also be eligible for deductions similar to charitable donations.

The US-based IRS has some interesting stuff on its website. Zoom off in an Altima Hybrid, 2007 and you can get a credit of $2,350. A form called the ‘Alternative Motor Vehicle credit’ with various details filled in has to be attached to your tax return. Federal tax incentives are offered on purchase of new hybrid, lean burn, alternative fuel and electric vehicles, such as the Altima mentioned above.

Once again, Kay Bell, the US-based tax writer, provided some useful insights to Zenobia Aunty on what else is available by way of ‘green tax relief’ in her home country. Kay says that purchase and installation of specific products such as energy efficient windows, insulation, doors, roofs and heating and cooling equipment in the home can get one a tax credit of up to $500. The Tax Relief and Health Care Act of 2006, extended a portion of the energy efficient tax breaks for another year, providing substantial tax breaks of up to $2,000 for qualified photovoltaic, fuel cell and solar water heating systems.

The possibilities are endless. A little push from our finance minister in the right direction may lead to a greener environment. For now, Zenobia Aunty extends her heartiest congratulations to Al Gore and Dr Pachauri and to all employees of the IPCC and prays that there is hope for this world.

Law Street (The Economic Times-Sept) - on Housing Loans

2007-09-29T08:16:00.000-07:00

Home sweet home. Both Zenobia Aunty and I are exhausted. We are recovering from a viral - so I guess we are both glad to be at home and in our very own comfortable beds.

Yes, there is no place like home. This article is on housing loans and dear readers, I hope you enjoy this article. As always the url is here and the article is also cut and pasted below.

A taxing connection

Friday, September 28, 2007

"Haven’t you read about the subprime fiasco," screeched Zenobia Aunty over the phone to one helpless caller, trying to sell her a personal loan. Well, I guess Aunty’s screeching will continue since, for some strange reason, she could not successfully register with her mobile phone service provider to enlist herself on the "Do Not Call Registry". The SMS sent at the number provided bounced back with the message — this facility is not available to you!

T K Arun, one of her favourite columnists in this paper, has already written about subprime. But Aunty decided to dig deeper and find out whether she could put the blame on taxes! She found she could, but not on tax per se but rather on tax incentives.

With a network of tax blogger friends, Zenobia Aunty’s life has become easier. She no longer has to visit various networking events in Bangalore and Mumbai. With Bangalore’s flooded roads and Mumbai’s distances — the two cities she alternates between, cyber surfing is an easy way to get the required information. In fact, one marvels at her capacity to meet interesting people in cyber space and get a varied global view.

Her US based blog pal, Kelly an attorney who blogs on “TaxGirl” recently told a friend that it is unlikely that mortgage interest deductions would be repealed in the US, even as tax policies are used to encourage or discourage certain behaviour. However, TaxGirl is having second thoughts of the likely move of the US government. The subprime bailout will reportedly cost the US government over $10 billion per year. Raising taxes is always an unpopular option, anywhere in the world. So to Kelly, repealing tax policies does not sound as bad on paper. Kelly adds on her blog that in November 2005, the advisory panel on tax reform under President Bush recommended eliminating the mortgage interest deduction and replacing it with a significantly smaller mortgage interest credit. The panel also recommended eliminating the deduction completely for second homes and home equity loans. Quite a few taxpayers bought more houses than they could afford over the last few years, as at least the interest was tax deductible. Zenobia Aunty understands that the US currently limits mortgage interest to mortgages under $1,000,000 and home equity loans under $1,00,000. Unless, AMT is applicable, individuals enjoy a cool tax break.

Prof James Edward Maule of the “Mauled Again” tax blog fame, with whom readers of this column are familiar, cites that in extreme cases not only do people end up losing their homes owing to foreclosure but they also find themselves with increased taxable income and thus increased tax liabilities to the extent that the loan is written off for an amount less than the principal balance. This happens if the value of the house has declined and the lender does not or cannot hold the borrowers accountable for the balance. In April this year, a bill was introduced in the US House of Representatives to propose that income from cancellation of qualified residential debt is excluded from gross income, followed by another similar legislation introduced in the US Senate. The US Prez has now jumped on the bandwagon to help homeowners.

However, Prof Maule points out that this tax break would mean either higher taxes or an increased deficit — the burden of which has to be shared by future generations. This brings one back to India. Here, the subprime sword is not dangling above the heads of borrowers and lenders, yet it is always prudent to learn a lesson.

This leads one to wonder about the tax laws prevailing in India. For instance, repayment of the principal sum against a home loan is permissible as a tax deduction up to a limit of Rs 1 lakh. Further, such home has to be retained for the next five years. Interest can be claimed as a deduction of up to Rs 1.5 lakh per year. Yes, there are tax breaks available here as well. At the same time repealing this, as was suggested by the Kelkar committee, could put paid to many a dreams of enjoying not only roti and kapada but also makaan. In fact, this columnist wonders whether the tax sops in India are equitable, given the wide disparity of property rates across cities, say, from Mumbai to Hyderabad. Tax sop or not, buying a house in Mumbai is tough indeed for you or me. With interest rates no longer as soft as they once were, even with the tax breaks available a new home owner who has borrowed funds, could feel the pinch.

So should governments think out of the box and devise an alternative? Perhaps a property purchase deduction — be it a lump-sum deduction or an amount amortised over a period of time, such as depreciation, spread over a certain number of years. Perhaps this could also be limited to one house per individual. This may curb the tendency of taking a loan, just because you get a tax break, howsoever small. Instead it could well encourage savings and then investments.

As Zenobia Aunty does not profess to be an expert on housing loans, she just leaves you with this thought. It is over to you dear readers

Law Street (The Economic Times, August 2007)

2007-08-31T05:47:00.000-07:00

Hi Readers

As always click here for reading the latest column on: A tax vision for global India.

For your reading pleasure, in case of any difficulties in accessing the above url, the copy is cut and pasted below.

Happy reading.

A tax vision for global India
LUBNA KABLY

Wishing you all a happy Independence Day, albeit belatedly. India has made considerable progress over the last sixty years, including far reaching progress as regards its tax policies. Gone are the days, when a tax rate of 90% plus, together with industrial licensing, import controls, high import tariffs dented the zeal to have a vision. Today, owing to liberalisation Indian entrepreneurs can dream and can also achieve their dreams. Yet, is there a need for further progress on the tax front? Zenobia aunty’s friends from across the world have pitched in to share their view of the progress they would like to see in the realm of taxation. Some of these views pertain to their own home country but apply equally to India or for that matter to any other democratic country. Let us begin with the United States.

The Tax Foundation is a US-based non-profit, non-partisan organisation, which helps create a momentum for US tax reforms. While, US may be a tax developed regime (or so we think), like any other democracy the concerns of its citizens on the tax front are very much the same as in India. The ten principles of sound tax policy set down by the Tax Foundation are: Transparency is a must; be neutral; maintain a broad base; keep it simple; stability matters; no retroactivity; keep tax burdens low; don’t inhibit trade; ensure an open process; state and local laws also matter and the same general principles must apply to them.

In its recent release the Tax Foundation has rightly remarked that the US has the second highest corporate tax rate in the OECD and is only one of the two countries that has not reduced its tax rates since 1994. Chris Atkins, senior tax counsel and co-author of this new study, cites the benefits of reducing the US corporate tax rate: A lower effective tax rate on new investments in the US would steer international investments to the US; US multinationals would feel less pressure to engage in corporate inversions and other forms of profit-shifting; US companies would be more likely to reinvest foreign earnings in US companies and lastly state governments would feel less pressure to offer special tax preferences and credits in their efforts to attract new international business investments. In short, the wake up call in the US is that even the US needs to keep up with international trends and to ensure a steady stream of investments which alone lead to progress and prosperity.

Today, while we pat ourselves on the back as regards India Inc’s acquisitions overseas, we should not forget that foreign direct investment is still needed in India and so are local investments. For this, we need to ensure that the ten principles of a good tax policy continue to exist in India or if found lacking are introduced in India. This means having stable tax policies — the recent brouhaha over the SEZ policy and retrospective tax amendments do not present a stable picture. The less said about the prolonged litigation that any taxpayer in India is exposed to, the better. As India is today a strong player in the global market place it cannot rely on archaic laws. Laws, including tax laws have to be progressive in nature. Tax costs do play a crucial role in determining the choice between India or for that matter, China, Mexico or even Philippines! Yes, competition is stiff out there and we need to survive.

Similarly, as Zenobia aunty may have hinted on occasions that for Indian multinationals, which are striding overseas, tax laws need to be made friendlier. She recalls reading in the newspaper that the tax authorities will closely examine various overseas acquisition deals. If required, the tax treaty provisions will be denied. Why are Indian companies structuring outbound investments via holding companies set up in favourable jurisdictions? One of the main reasons is that repatriation of foreign funds to India directly from the investee jurisdiction is tax inefficient. Dividends from a foreign subsidiary company when brought back to India are taxed at the steep rate of almost 34%. The solution is to use a holding company structure, dividends that flow into this holding company, which is situated in a favourable tax regime is not taxed or is taxed at a low rate. Such funds can then be used for further overseas expansions or acquisitions and not brought back to India at all.

Thus instead of taking a short term view, the Indian government should look for alternative solutions — perhaps a lower tax rate on foreign dividends or exemption of Indian tax on such dividends provided these funds are used for further investments in India, could be the right solution. India stands on the threshold of being a major global power; it is for us to collectively pitch for the right policy framework. This, after all is the true worth of being a citizen in a large democracy.

I'm famous!!!

2007-08-21T05:22:00.000-07:00

Hurrah! I'm famous now (blush). Actually I am just so thrilled to be sharing the space with other famous bloggers from across the world.

Kelly of The Tax Girl fame, in a unique and interesting concept, brings tax bloggers together. She interviews a tax blogger and posts their replies every Tuesday (well almost).

Getting to know you Tuesday brings across to tax blog addicts several interesting interviews. Kay Bell, whom regular readers of this blog know well and several others have been featured in this series.

Check it out.

(Disclaimer- Unfortunately the photograph is not mine, but that taken in the Dance Village, Bangalore. This little guy propped up against the wall seemed cute)

Happy Independence Day, what is an ideal tax policy?

2007-08-17T21:50:00.000-07:00

Law street, the monthly column, which gets published in The Economic Times, is generally penned over the weekend. However, August 15, 2007 - our independence day, set me thinking.

It is true that we are no longer reeling under a 90 per cent plus tax rate, liberalisation has made it possible for our enterpreneurs to dream and achive their dreams. Yet, Indian tax legislation needs to keep pace with the changing needs of the economy.

Look out for this column in the August 31, 2007 edition of The Economic Times.

As always, it shall be uploaded on this blog as well.

A new website - Risksopportunities. Read about Indian global companies and much more...

2007-08-12T09:07:00.000-07:00

Hi Readers

Erich Neilsen, a LinkedIn contact of mine and a consultant to boot decided to launch a new website. I have contributed an article, relating to the growing trend of Indian companies going outbound.

Liberalisation has made it possible for Indian companies to step beyond India's borders. However, not all is hunky dory on the tax front. Foreign dividends are subject to tax in India, when repatriated. Because of this Indian companies going outbound have to structure their investments carefully. Generally, holding companies are set up in favourable jurisidictions. If only the tax laws in India were changed to tax foreign dividends at lower rates or provide for participation exemption, dividend repatriation back into India from overseas investments would be less taxing for Indian multinationals.

I have recently read in the newspapers that the Indian revenue authorities are hell bent on examining recent outbound acquisitions to claim their share of the tax pie. The Indian government would certainly be missing the woods for the trees, if it attempts to just add to the litigation and does not bring about suitable amendments in tax laws.

This is the age of outbound investments and it is time for the Indian government to act as a true business partner.

Happy times, a mention in the Tax Carnival again

2007-08-07T03:40:00.000-07:00

I always call Sunflowers - Happy Flowers. They seem to be smiling as they nod their brown and yellow heads in the breeze. Well, today I am as happy as these Sunflowers.

One of the columns featured in this blog, has been mentioned in The Tax Carnival hosted by Kay Bell. It is the second time, this blog got a mention. I am so thrilled.

Please do check out the articles selected in the tax carnival, they are all very interesting. Do watch out for these tax carnivals - they are hosted every month by Kay.

Law Street in The Economic Times (July 2007)

2007-07-27T07:29:00.000-07:00

Hi Readers,

All roads in tax land seem to lead to transfer pricing. It is time that India introduced alternate dispute resolution mechanisms - such as Advance Pricing Agreements. It would augur well for foreign investments if safe habour provisions were also introduced. For understanding the background, click here.

By the way, I love the new look of the online edition of The Economic Times.

For your convenience, the article is also cut and pasted here. Happy reading.

Regards,

Lubna

Transfer pricing a taxing issue
27 Jul, 2007, LUBNA KABLY

Anthony Bourdain in his book Kitchen Confidentia recalls the time when as a kid he had his first raw oyster, on a boat in France. “It tasted of seawater, of brine and flesh and somehow of the future.” Then it hit him, Food had power. “My life as a cook and as a chef had just begun” he described in his book. One has not tasted his dishes, but if he cooks as well as he writes, well then — compliments to the chef.

Perhaps it was the delicious smell of printing ink which wafted out of the Times of India building in Bombay (it was then not called Mumbai and the press was located in this building) that prompted one to be a journalist and continue as a columnist. Well, if food and ink had the power to sway Bourdain and this writer respectively, so do taxes.

In fact, they hold sway over all of us. It is interesting to know how taxes have been used down the ages to persuade people to buy, to stop buying, to operate in backward areas, to stop emitting carbon or even to stop putting on weight. Yes, tax has power. Googling away one found these two gems: Queen Elizabeth 1 (1558-1603) is said to have disliked beards and therefore established a tax on them. Actually, it was just the British way to garner more taxes, as beards were then in vogue. Years later, as beards were no longer in fashion in western Europe, in 1698, Peter the Great of Russia levied a tax on beards to bring Russian society in line with western European fashion. Strange, but true!

Fortunately, back home, we will not be hearing of new innovative taxes till the finance minister (or PC, as people in ET fondly call him) kick starts his budget discussions sometime in December. Yet, there has been enough excitement in tax land in recent days. To begin with, there was the long awaited order of the Supreme Court, in the case of Morgan Stanley. This decision has brought a sigh of relief to many MNCs that had set up captive processing entities in India. Even if such a captive processing entity creates a permanent establishment (PE) in India — thus bestowing the right on the Indian tax authorities to tax the profits attributable to this PE — there is a glimmer of hope. This order clearly points out that there can be no further profit attribution if the pricing between the foreign enterprise and its PE in India — the captive service provider — is at an arm’s length. However, if one looks closer at the order one notices that this tenet applies only if the functions performed and risks undertaken by the captive service provider are the same as that of the permanent establishment.

Thus, there is no automatic insulation from tax assessments. Indeed tax authorities and transfer pricing officers can still make enquiries and satisfy themselves about the arms’ length pricing.

Close on the heels of this order came the next one. The special bench of the Bangalore Income-tax Appellate Tribunal, in the case of Aztec Software and Technology Services Ltd (Aztec), seems to have taken away the insulation from transfer pricing adjustment, which was believed to be available to entities enjoying a tax holiday. The order of the commissioner of income tax (Appeals) in this case had held that transfer pricing provisions are special provisions relating to avoidance of tax and should be invoked only if the tax officer was satisfied that there is a motive and act by the taxpayer to avoid taxes in India. Companies enjoying a tax holiday, however, cannot have any such motive. But the ITAT has held otherwise.

The Indian tax authorities have been quite aggressive with transfer pricing assessment for the IT/ITES sector in recent years. Risk mitigated captive service providers are reeling under high profit margins that have been attributed to their operations in the course of transfer pricing audits. In fact, this ITAT order also acknowledges that industry averages, such as Nasscom man hour rates, cannot be blindly applied. The risks and functions of the entity have to be taken into consideration.

We know tax has power. It can also have negative power. Lack of clarity and convenience may result in taking away the shine from this sunrise sector. MNCs may think it best to operate from other shores. If there are inherent difficulties in introducing an advance pricing mechanism— which would enable MNCs to determine the transfer price payable to their captive service providers in India and prevent future litigation — then perhaps some safe harbour principles need to be introduced. Companies in India in the IT/ITES sector operating on a specified mark up as decided by the Central Board of Direct Taxes, after mutual consultation with the industry, could be deemed to have complied with the arm’s length principle.

And a mention in the Tax Carnival

2007-07-04T09:15:00.000-07:00

What is a blog carnival? Well it is more or less like a magazine on a topic that is blogged about. The tax carnival is hosted on Kay Bell's blog, I participated and found a mention in the July edition of the carnival. Click here.

It made my day.

Law Street in The Economic Times (June 2007)

2007-06-28T23:47:00.000-07:00

Ever participated in the corporate social responsibility program at your office? Guess, you do get a tax break for the contribution from your salary income. Don't you wish you could actually go across to that orphanage occassionally with a bunch of books and toys? The US grants a tax break for donations in kind. We should follow suit, this will reduce social inequality, one of the fears expressed recently by our Prime Minister.

Click here for the url to this months column. As always it is also cut and pasted below.

Happy reading and happy donating.

Good deeds deserve tax breaks

Law Street -Edition dated June 29, 2007

Recently Prime Minister Manmohan Singh’s statements took the entire corporate world in India by surprise. His intentions were no doubt laudable — to bridge the divide between the haves’ and have-nots’ since social inequity can lead to unrest. However, his hinting that huge salaries paid by India Inc were the cause for this divide was perhaps a bit unfair. Globalisation means that a person does not compare his salary with what his peer in another domestic company gets, but rather what his or her value is in the global market place.

In this knowledge economy, no company can afford to lose its key people. It is not surprising that India Inc revolted against his suggestion. Yet there are other ways of curbing this divide — including the digital divide. This can be done by perhaps providing incentives for companies engaged in charitable work or what is popularly known in corporate cubicles as corporate social responsibility.

It is true, that under the current provisions of section 80G of the Income tax Act, 1961 (‘the Act) tax deduction is available to any taxpayer (be it an individual or company) for donations made. This ranges from 50% to 100% of the amount of donation, subject to an overall limit. There is a restriction clause in the tax benefit, which states that for donations made to specific funds, the amount that is contributed and claimed as a deduction should not exceed 10% of the adjusted gross total income. This is called the net qualifying amount and it restricts the tax benefit that can be claimed by a taxpayer.

The need of the hour is to further incentivise charitable work. Perhaps, corporate entities could be encouraged to directly sponsor government-aided schools or hospitals? Have you ever walked into one such school? Zenobia Aunty, once an avid social worker prior to her bout of arthritic pains, states that most of these schools are in shambles. The roofs are generally leaking, the walls are cracked, the furniture is broken, the rooms are crowded, the toilet facilities largely lacking. True, in most states, lunch is provided to the children under a mid-day meal scheme, but even this, at times, is mired in political battles. Ditto is the case with most government hospitals. The doctors there strive to do their best, but lack of funds, means limited facilities.It cannot be denied that we are still a developing country. What is required is large scale participation from India Inc. Perhaps a cement company could donate tonnes of cement, an architect could provide his services free, a computer manufacturing company could provide computers, a software company the requisite software, a food manufacturer — confectioneries for special occasions such as Children’s Day?

India Inc could also arrange to provide for donations in kind — to ensure that it reaches the children directly without any intermediaries (sometimes things do get lost if the delivery mode comprises of a long chain), such as clothes, woollens, medicines, etc. Unfortunately, such donations in kind at present do not get any tax sops. But then, there is the tendency to think only of oneself. Focusing on I, me and mine can lead to social unrest, as well, and it is time to think more on the lines of ‘we’ in the social spectrum.

We at India Inc, including all its employees can do a lot more towards social upliftment. While this columnist was chatting with her US-based tax-author friend Kay Bell, she learnt that donations in kind are eligible for tax sops in the US. Kay says, many charities are happy to accept used clothing and household goods and you’re actually allowed to claim the fair market value of these items as a tax deduction. However, to curb the misuse of this provision, household goods that are donated must be in good condition (charitable organisations generally give a receipt to help support such claims). The tax return is required to detail, non-cash charitable contributions. There are additional caveats, if you are claiming a deduction of more than $5,000 for an item, a certificate from a qualified appraiser is required to be attached with the tax return. In some circumstances, the entire deduction is not allowed in the same year, but is staggered.

Yet the moot point is that donations in kind are eligible for tax sops. Now if the same could be emulated in India, it would definitely help boost corporate social responsibility. Further, Zenobia Aunty would also be assured that the biscuits donated by her actually reach the school children, instead of a cash donation that could perhaps be lost in the way.

Taxing Communication (Law Street in The Economic Times for May 2007)

2007-05-25T04:47:00.000-07:00

Hi Readers,

Global warming has taken its toll, in more ways than one. Believe it or not, globalisation also has its repurcussions in tax land. So read on for the latest column. For the url click here

As always, the column is also cut and pasted here from the online edition of The Economic Times for your convenience.

Taxing communication

Global warming is the hottest topic these days. But please do not bring up this subject if conversing with Zenobia Aunty. She has returned from her vacation, badly sunburned, and vows not to step out of the house for days to come. Slathered in calamine lotion, she is not attending the tonnes of networking events which she is addicted to, yet she is still inundated with requests for her views. In fact, her email-inbox overflows each day with tirades against a recent Mumbai Tribunal decision, where it was held that the payment of the arm’s length price to the dependent agent does not extinguish the tax liability of the foreign company in India. In this case, the assessee was a telecasting company, which was a Singapore tax resident. It had an agent in India for marketing airtime slots; this agent was considered to be a dependent agent and hence constituted a permanent establishment in India.

If a permanent establishment of a foreign entity exits in the other country, tax treaties prescribe that such other country has the right to tax the foreign entity. However, the foreign entity can be taxed only in respect of the profits attributable to the permanent establishment. Based on past judicial precedent and also based on two circulars issued by the Central Board of Direct Taxes (CBDT), one of which had clarified the tax position in cases where outsourcing activities were carried out from India, the Singapore company held that there was no tax incidence in India. The Singapore company argued that as it remunerated its dependent agent at an arm’s length price, nothing further would be attributable to it in India and hence it would not be subject to Indian taxes. However, the Tribunal held otherwise.

Perhaps for the first time, the Tribunal explicitly held that the foreign entity and the dependent agent are two different tax payers. In other words, the tax liability of the foreign entity was not subsumed in the arm’s length price paid to the dependent agent in India. This ruling, has led to some degree of unease. It is true that a dual tax payer approach is advocated by the Organisation for Economic Co-operation and Development (Oecd) - a think tank comprising largely of developed economies. Back home, the unease lies in the subjectivity which may arise during the course of tax assessments in determining whether or not a permanent establishment exists in India and also the manner of attribution of profits.

It is one thing to say that mere business operations in India through a subsidiary will not always create a permanent establishment. Further, even if such a permanent establishment exits, it is not essential that there would be a profit attribution. However, tax authorities especially at the lower levels may take a different view, resulting in an endless bout of litigation. Oecd in its paper has clearly specified that there cannot be an automatic attribution profit trigger merely because a permanent establishment exits. It should be examined whether or not there is an actual undertaking of risks and economic ownership of assets by the dependent agent, only then in certain circumstances can there be any attribution to the foreign principle over and above the arm’s length price already paid to the dependent agent. This, in essence brings us back to transfer pricing and the need for advance pricing mechanisms. Something that Zenobia Aunty is now tired of advocating.

With tax uncertainties on the rise, tax risk management has become the need of the hour. An annual survey of CFOs and finance professionals carried out by the firm where this columnist currently work, shows that tax risk management is gaining importance. With cross-border impact of taxes, this should not come as a surprise. Companies must have in place tax risk management strategies approved at the highest levels. While tax risk management has been recognised and is being increasingly put into practice, by identifying the tax risk points - be it cross-border transactions or transfer pricing, tax reporting is something which CFOs and finance professionals need to equip themselves with much better. In this era of corporate governance, as tax incidence has an impact on stake holders, it is essential to get the right message across, including the next steps that are proposed to be taken by the company concerned. Further, this needs to be done in simple terms so that it can be understood by a cross section of stakeholders who may not be tax experts. It is true that tax uncertainties can act as a hurdle to effective communication. For once Zenobia Aunty is asking for your views. Any thoughts on the best way to report tax uncertainties?

(The author is a CA. Views are personal.)

Piercing the glass ceiling (Law Street in The Economic Times, April 2007)

2007-04-27T05:43:00.000-07:00

Well folks, here is another column. It was written with a long sabbatical in mind. Unfortunately, this ain't happening. This means, you can look forward to another column next month - there is always a silver lining somewhere (or so I hope to think). I hope my readers agree.

The url is here or as always the column is cut and pasted below for your reading pleasure.

Piercing the glass ceiling
Law street/Lubna Kably
April 27, 2007

The time has come, the Walrus said, to talk of many things. With Zenobia Aunty off on a long well deserved sabbatical, I am taking help from the Walrus. Yes, the very same one that spoke to Alice, in Through the Looking Glass. The animal kingdom is as talkative as us, what is more, they seem to know all about tax blogs. Perhaps Dr Dolittle helps them. Enough of talk about books and movies, admonishes the Walrus and commands me to get down to serious business — of typing this monthly column.

Now James Edward Maule, a US-based professor and taxpayer has an interesting blog called, ‘Mauledagain’. He reports recently of a CNN article which points out that not many people knew much about taxes. According to the IRS only 40% or so of the taxpayers eligible for telephone tax refund (see Law Street: ET, February 27) are claiming it. Two thirds did not know the value of child credit and fewer than half were familiar with alternative minimum tax. (Yes, unlike India, AMT is applicable to individuals as well, here only corporate entities find themselves on the MAT). According to the learned professor, the cause of ignorance is a combination of several factors. One is the lack of tax education (he advocates a basic tax education in schools). Another is a reluctance of citizens to educate themselves about taxation and lastly the complexity of tax laws, seasoned with constant changes. He quotes that this “prevents even those who want to learn and understand tax from getting enough time to let things sink into their brains.”

Drawing on this the Walrus has a solution for garnering more tax revenues in India. No, it does not mean more tax. Introduce coaching classes or touch button systems in hi-tech cities. Classes must run at prime locations — railway stations, bus terminus, shopping malls, where people get to know what a tax return looks like, what form they must use, how they should file their return. Besides, introduce a system where tax returns are collected at every post office, every bank counter. I know, many people are so scared of the word tax. They rather not file their return. Coaching classes will help. The Walrus ends his long speech. I dare not comment on whether this is a ‘hare brained’ scheme or not. But I do believe that education on the tax regime will help, perhaps through voluntary clinics, proper print advertisements, helpful brochures and even an interactive web demo. It should actually teach people how to file their own tax return — I hear a simple one is around the corner, one prepared with the help of a reputed educational institution.

Hare brained, squeaks a voice and I spot the March Hare. “You should say what you mean”, he tells me. “I do, at least, I mean what I say,” I reply trying to remember Alice’s exact words. “That’s the same thing you know” I add. “No, it isn’t,” says the March Hare. This time, I do not need to turn to the Walrus for better understanding. I am so sure the March Hare is referring to the scheme of bringing ESOP under the tax ambit. True, top hi-flyers have amassed ESOPs and have minted a fortune on sale of shares by paying a marginal STT and nil capital gains tax. Yet, what is FBT all about? The Walrus recalls, the Finance Bill, 2005, ushered in FBT with the intention to tax perquisites enjoyed collectively by employees that escaped taxation altogether or were subject to reduced taxation. ESOPs are not collective benefits; in fact, they may not even be enjoyed by all employees. FBT on ESOPs, it just isn’t cricket.

I looked around to see whether a cricket would now appear from somewhere or perhaps Sachin would be swinging his bat. Instead, there came the Dormouse. I was surprised to see him alive. Hadn’t an attempt been made to drown him in the tea pot or some such thing? He had just returned from London, hoping to meet the Queen but Shilpa Shetty beat him to that.

Back home, there was some talk of a higher tax or cess or whatever to be paid by domestic flayers during peak time. Fortunately, this idea was shelved. But, in London, wheezed the Dormouse, they are introducing a green tax, if they haven’t introduced it already. Millions of people who fly abroad every year are to be taxed on the number of miles they travel. Passengers would be issued with a green miles allowance and forced to pay more if they took extra flights. Other options include putting VAT or fuel duty on flights within the UK or a per flight tax on airlines. All this world tax news is getting a bit too much for me. Now before the Mad Hatter turns up and joins the party and adds his thoughts, I think I shall join my Zenobia Aunty for a much needed sabbatical.

(The author is a CA. Views are personal.)