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

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)

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)

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)

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)

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)

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)

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)

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

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

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)

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)

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)

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)

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.