Law Street in The Economic Times (August 2008)

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

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

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

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

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

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

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)

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

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)

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

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

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)

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!!!

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?

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...

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

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)

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

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)

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.