Food for Thought, Law Street in The Economic Times (October's column)

Have you seen the documentary Super size me? Well, all said and done, I still gorge on potato chips, especially during the tax season when I am glued to my lap top and a working day has almost 16 hours non stop. India is set to streamline food tax. A province in Canada wants to curtail obseity through higher taxes on junk food. Cultural influences pave the path for our future taxes. With globalisation, transfer pricing issues are the hottest thing in tax land. So here is the latest column dealing with food tax and transfer pricing.

Click here, to read this column on the website of The Economic Times. Or else, just scroll below.


The Economic Times Online

Food and tax go together
LUBNA KABLY [ FRIDAY, OCTOBER 27, 2006]

Once upon a time, in the good old days, when I was a full time journalist with this newspaper, the page heading of the tax pages on budget day, of this newspaper was: Taxing times, relaxing times. In this peak tax season as I grapple with the new versions of software that are released almost every day to take care of some bug or another and enable e-filing for India Inc, I wonder when the relaxing times will arrive.

Till then, I and all my colleagues will continue to burn the midnight oil, well after midnight, and gorge ourselves silly on junk food. Thinking about food led me to Zenobia Aunty’s favourite subject — tax. Believe it or not, food and tax go together.

News reports state that the ministry of food processing industry is considering implementing a single rate of tax on all food items. Currently, there is a band for food products which results in tax anomalies with similar products having duty differences up to 16%. For example, biscuits, in general, attract excise duty of 8%, while coated wafer biscuits carry a duty of 16%. In another corner of the world, in British Columbia (the western province of Canada) steps are being considered to beat obesity through taxes. One of its ministers has recently remarked that the price of some junk food items will have to increase by something like 40%, if it is to have an impact on decreased usage. This tax money can then be used in positive programmes, he had added. Fortunately, this will be a collective decision and committees in any part of the world take their own time to reach a decision. Till then, my pal Megan, who hails from that part of the world, can continue to devour potato crispies.

Since we are on the subject of food, here is some more food for thought, but a more serious one. For me, it is the transfer pricing season as well. Thus, it was interesting to learn that the Canadian Revenue Agency (CRA) has recently issued a circular, clarifying the revenue authority’s position on the similarities and dissimilarities in computing a transfer price for income-tax purposes as compared with a duty value for custom purposes. This circular admits that while the underlying principles for establishing inter company selling prices are the same, it does not mean that a transfer price can be the same for both. This is something that our revenue authorities should keep in mind.

There are quite a few differences, explains the circular. For instance, the application of different methods for custom purposes and income-tax purposes would lead to different results; the custom method will arrive at a single value whereas the income-tax method may produce a range of results; bundled transactions may be acceptable for custom purposes whereas income-tax payers may be called upon to unbundle transactions and evaluate them separately. In addition, there would be timing differences and even differences in the exchange rates used for valuation. In essence, while the CRA states that the transfer pricing documentation prepared for income-tax purposes may be useful to evaluate the reasonableness of the values established for customs and vice versa, it has recognised that revenue authorities should not arrive at unreasonable conclusions by relying on one set of documents since the purpose of that set would be fundamentally different.

It is true that rationalisation is possible, but the bottom line is that the legislation, and indeed the revenue authorities, must not go overboard. In the US, an importer cannot value merchandise inconsistently for custom and income tax purposes.

In India, transfer pricing is still at a nascent stage. The income tax transfer pricing officers and the special bench valuation officers at customs would do well to understand the subtle differences in the mechanics of transfer pricing and valuation under the two sets of regulations and not blindly rely on the results of a study under a different legislation. In fact, exchange of data between the two authorities if used wisely and well, together with introduction of an advance pricing mechanism would help not only the revenue authorities but also the multinationals who transact with their group entities in India. It will mean less hassles. So come next budget, as I look towards a rationalisation in tax on food items (hopefully something that will benefit a junk food eater like me), I also look forward to rationalisation in transfer pricing and introduction of an advance pricing mechanism.

(The author is a CA. Views are personal)

Due dates for filing extended up to November 30

Don't know whether to laugh or cry. With the government introducing efiling, life was quite a misery for all of us. It began with software bugs (in the software released by the government), cells that were incapable of taking an alternate correct rate of tax and so on. The list was endless. Then, the server could not stand the heavy traffic and the revenue website remained inaccessible for major parts of the day and returns could not be uploaded. Fortunately the date for filing the tax return and fringe benefit tax return stands extended to November 30.

We worked throughout the festive season (Diwali and Eid) but just got the good news of the date extension and at least I am now celebrating. On the flip side, it means an extended month of hard work. Well, that is life. As Readers'Digest would say it: It is all in a day's work.

For those interested, the notification extending the date is below.

F.No. 133/38/2006-TPL(Pt)Government of IndiaMinistry of FinanceDepartment of RevenueCentral Board of Direct Taxes
New Delhi, the 24th October, 2006
Order under section 119 of the Income-tax Act
In exercise of powers conferred by sub-section (1) and clause (a) of sub-section (2) of section 119 of the Income-tax Act, 1961, the Central Board of Direct Taxes hereby extends the due date for obtaining the report of audit under section 44AB of the Income-tax Act, 1961 and furnishing the return of Income under sub-section (1) of section 139 and return of fringe benefits under sub-section (1) of section 115WD in case of companies (other than the companies assessed or assessable in the State of Gujarat) for Assessment Year 2006-2007 from 31st day of October, 2006 to 30th day of November, 2006.
(Sharat Chandra)Director (TPL-IV)

Food for thought

New taxes are constantly introduced, yet others are rationalised. Canada's BC is considering measures to combat obesity through a tax on junk food, India proposes to rationalise its system and have a flat food tax. Yet, taxes are complex. For instance, the same set of transfer pricing documentation, will just not do for income tax and custom purposes. Watch out for the column, Food for Thought on October 27 in The Economic Times. Yes, it will be posted here.

For my loyal readers, I am sorry, being the tax season (due date October 31), I haven't really being able to work on this blog. I will do so once work is less hectic. Thanks for stopping by.