HUTCH DEAL: SC ASKS VODAFONE TO DEPOSIT RS 2500 CR IN TAX CASE
The Supreme Court on Monday directed Vodafone to deposit Rs 2500 crore ($550 million) within three weeks in relation to the $2.5 billion tax dispute, a Vodafone spokesman said. The Supreme Court has also fixed Feb 05 as final date of hearing. Vodafone has also been directed to make a bank guarantee worth Rs 8500 crore ($1.9 billion) within eight weeks, the official said. Vodafone, fighting a tax bill in India over its 2007 purchase of Hutchison Whampoa Ltd's mobile business in the country, had appealed to the Supreme Court challenging a lower court order that Indian tax authorities had jurisdiction over tax bills in cross-border deals. The tax office asked Vodafone to pay Rs 11,218 crore ($2.53 billion) within 30 days, but the British firm said it "strongly disagrees" with the calculation. Meanwhile, The Netherlands has now written to India asking it to consider an alternate dispute resolution that will run parallel to the ongoing court process through what is termed as a Mutual Agreement Procedure (MAP), a government official aware of the development said. India would examine the request and take a decision in accordance with the provisions of the India-Netherlands double tax avoidance agreement (DTAA), this official added. MAP is an alternate process of dispute resolution, and is an option available to a taxpayer in addition to and concurrent with the appellate process. However, under MAP, once the proceedings are initiated, it is possible to obtain a stay on the tax demand provided one gives a bank guarantee. This opens up the possibility of a settlement on the lines of what Vodafone clinched in the UK earlier this year, when it agreed to pay £1.25 billion in taxes to settle a decade- long dispute dating back to 2000 regarding its Luxembourg subsidiary.
Thursday, 25 November 2010
INCOME TAX PROBE ON 2G LICENCE HOLDERS BEGINS
In a development that could spell more trouble for embattled former union telecom minister A Raja, the Income Tax (I-T) department has begun probe into charges of alleged bribing and possession of disproportionate assets against some of the new operators who were awarded licences under the 2G spectrum deal and some telecom ministry officials. The department has also begun an investigation into the tax returns of telecom operators who were granted 2G licences to ascertain their registered profits and find discrepancies, if any, according to official sources. The department, according to sources, will specifically look into the angle of tax evasion in the entire process of allotment of the 2G spectrum through under-stating profits and escalating losses to allegedly facilitate bribes and kickbacks. The department is using its intelligence wing to gather financial information on all the stakeholders and individuals who were part of the spectrum allocation deal that has been marred by controversies, including on the role of Raja. The Comptroller and Auditor General has reportedly put the revenue loss to exchequer at Rs 1.4 lakh crore in addition to another Rs 36,700 crore on allocation of spectrum beyond contractual limit to existing nine operators. In 2008, the Department of Telecom (DoT) had issued 2G spectrum to eight new operators at Rs 1,658 crore for pan-India operations. DoT has asserted that there was no loss to the exchequer due to distribution of new licences in 2008. The CAG report is also understood to have castigated Raja for ignoring the advice of finance and law ministries on allocation of 2G spectrum licenses to benefit a few operators. On his part, Raja asserted had that he had not done anything wrong and had only followed the policies pursued by his predecessors. The companies that were allotted spectrum include Unitech Wireless Ltd (rebranded as Uninor), Loop Telecom, S Tel, Datacom Services (now known as Videocon Mobile) and DB Group-promoted Swan Telecom (now Etisalat DB Telecom). The telecom ministry has earlier told the Supreme Court that the government auditor CAG did not have the authority to question the policy decision according to which licence were issued to new players in 2008.
In a development that could spell more trouble for embattled former union telecom minister A Raja, the Income Tax (I-T) department has begun probe into charges of alleged bribing and possession of disproportionate assets against some of the new operators who were awarded licences under the 2G spectrum deal and some telecom ministry officials. The department has also begun an investigation into the tax returns of telecom operators who were granted 2G licences to ascertain their registered profits and find discrepancies, if any, according to official sources. The department, according to sources, will specifically look into the angle of tax evasion in the entire process of allotment of the 2G spectrum through under-stating profits and escalating losses to allegedly facilitate bribes and kickbacks. The department is using its intelligence wing to gather financial information on all the stakeholders and individuals who were part of the spectrum allocation deal that has been marred by controversies, including on the role of Raja. The Comptroller and Auditor General has reportedly put the revenue loss to exchequer at Rs 1.4 lakh crore in addition to another Rs 36,700 crore on allocation of spectrum beyond contractual limit to existing nine operators. In 2008, the Department of Telecom (DoT) had issued 2G spectrum to eight new operators at Rs 1,658 crore for pan-India operations. DoT has asserted that there was no loss to the exchequer due to distribution of new licences in 2008. The CAG report is also understood to have castigated Raja for ignoring the advice of finance and law ministries on allocation of 2G spectrum licenses to benefit a few operators. On his part, Raja asserted had that he had not done anything wrong and had only followed the policies pursued by his predecessors. The companies that were allotted spectrum include Unitech Wireless Ltd (rebranded as Uninor), Loop Telecom, S Tel, Datacom Services (now known as Videocon Mobile) and DB Group-promoted Swan Telecom (now Etisalat DB Telecom). The telecom ministry has earlier told the Supreme Court that the government auditor CAG did not have the authority to question the policy decision according to which licence were issued to new players in 2008.
COS CAN USE LEGAL FINANCIAL STRUCTURES TO SAVE TAX: TRIBUNAL
Tribunal In a ruling that will have a bearing on foreign companies operating in India, a Mumbai-based tax tribunal has held that tax-planning carried out within the provisions of law cannot be construed as a structured transaction carried out only for the purpose of evasion of taxes, even if the transaction helps the taxpaying company save taxes. In its November 10 order, a division bench of the Income-Tax Appellate Tribunal (ITAT), Mumbai, comprising NV Vasudevan and Pramod Kumar, held that the finance structure used by the taxpayer had to be specifically prohibited for it to be illegal. "As long as the finance structure adopted by the taxpayer is not specifically prohibited by the applicable tax treaty provisions and as long as there are no specific anti-abuse provisions, the effect of the finance structure cannot be ignored." Sanjay Sanghvi, tax partner of Khaitan & Co said: "This is a significant ruling by ITAT. The tribunal has observed that when there are no anti-abuse provisions in the treaty concerned, it is not open to the tax authorities to apply general anti-avoidance rules of the I-T Act to deny a tax benefit to a foreign company." The ITAT order was on an appeal filed by the Belgium company, Besix Kier Dabhol SA. The company, which has a permanent establishment (PE) in India, was engaged in the construction of a fuel jetty near Dabhol. The company, with a share capital of Rs 38 lakh, was owned by two foreign companies who had advanced Rs 94-crore loan. Hence, the debt-equity ratio was an abnormal 248:1. The company paid Rs 5.73 crore as interest on the loans advanced toit by the lenders, and claimed this as deduction. This deduction was the bone of contention. The assessing officer did not allow the deduction, saying the debt-equity ratio was abnormal and, therefore, the loan had to be treated as capital/loan taken from the head office. Borrowing from shareholders is tantamount to borrowing from the head office. Under the domestic tax laws, payment of interest on such borrowings do not constitute admissible deductions as these payments are from "self to self", the officer held. The officer held that the RBI had approved the PE on the condition that it should not borrow. Therefore, the loan was in contravention of law and the deduction of interest could not be allowed. The abnormal debt-equity ratio attracted "thin capitalisation rule", a ground for treating debt as equities, the officer said. After examining the finance structure, ITAT said since the company is taxable in India on the profit made in India, it is eligible for deduction on expenses incurred for generating the profit. It said the thin capitalisation rule, in existence in other countries, is not a law in India, except it being mentioned in the proposed Direct Tax Code. Also, the Indo-Belgium tax treaty did not have anti-treaty abuse provisions. ITAT stated: "It is also possible that tax consideration may have played a role in assessee's planing the capital structure but an element of planning in structuring capital does not transform a tax deductible expense of interest into an expense that is non-tax deductible.
Tribunal In a ruling that will have a bearing on foreign companies operating in India, a Mumbai-based tax tribunal has held that tax-planning carried out within the provisions of law cannot be construed as a structured transaction carried out only for the purpose of evasion of taxes, even if the transaction helps the taxpaying company save taxes. In its November 10 order, a division bench of the Income-Tax Appellate Tribunal (ITAT), Mumbai, comprising NV Vasudevan and Pramod Kumar, held that the finance structure used by the taxpayer had to be specifically prohibited for it to be illegal. "As long as the finance structure adopted by the taxpayer is not specifically prohibited by the applicable tax treaty provisions and as long as there are no specific anti-abuse provisions, the effect of the finance structure cannot be ignored." Sanjay Sanghvi, tax partner of Khaitan & Co said: "This is a significant ruling by ITAT. The tribunal has observed that when there are no anti-abuse provisions in the treaty concerned, it is not open to the tax authorities to apply general anti-avoidance rules of the I-T Act to deny a tax benefit to a foreign company." The ITAT order was on an appeal filed by the Belgium company, Besix Kier Dabhol SA. The company, which has a permanent establishment (PE) in India, was engaged in the construction of a fuel jetty near Dabhol. The company, with a share capital of Rs 38 lakh, was owned by two foreign companies who had advanced Rs 94-crore loan. Hence, the debt-equity ratio was an abnormal 248:1. The company paid Rs 5.73 crore as interest on the loans advanced toit by the lenders, and claimed this as deduction. This deduction was the bone of contention. The assessing officer did not allow the deduction, saying the debt-equity ratio was abnormal and, therefore, the loan had to be treated as capital/loan taken from the head office. Borrowing from shareholders is tantamount to borrowing from the head office. Under the domestic tax laws, payment of interest on such borrowings do not constitute admissible deductions as these payments are from "self to self", the officer held. The officer held that the RBI had approved the PE on the condition that it should not borrow. Therefore, the loan was in contravention of law and the deduction of interest could not be allowed. The abnormal debt-equity ratio attracted "thin capitalisation rule", a ground for treating debt as equities, the officer said. After examining the finance structure, ITAT said since the company is taxable in India on the profit made in India, it is eligible for deduction on expenses incurred for generating the profit. It said the thin capitalisation rule, in existence in other countries, is not a law in India, except it being mentioned in the proposed Direct Tax Code. Also, the Indo-Belgium tax treaty did not have anti-treaty abuse provisions. ITAT stated: "It is also possible that tax consideration may have played a role in assessee's planing the capital structure but an element of planning in structuring capital does not transform a tax deductible expense of interest into an expense that is non-tax deductible.
VODAFONE LOOKS FOR INDIA TAX DISPUTE SETTLEMENT: REPORT
The Dutch government has approached India on behalf of Vodafone's Netherlands unit to settle a three-year-old tax dispute involving a Rs 11,000 crore claim, an Indian newspaper reported on Monday. The Netherlands has asked India to consider an alternate dispute resolution that will run parallel to the ongoing court process, the paper said, quoting unnamed tax and government officials. Indian tax authorities had asked Vodafone to pay Rs 11,218 crore ($2.5 billion) tax on its 2007 purchase of Hutchison Whampoa Ltd's mobile business in the country, which the company is fighting in court. "The Dutch government has been in discussion with Vodafone and we believe it has initiated a formal process under the tax treaty between the Dutch and Indian governments," the paper quoted a Vodafone spokesperson as saying.
The Dutch government has approached India on behalf of Vodafone's Netherlands unit to settle a three-year-old tax dispute involving a Rs 11,000 crore claim, an Indian newspaper reported on Monday. The Netherlands has asked India to consider an alternate dispute resolution that will run parallel to the ongoing court process, the paper said, quoting unnamed tax and government officials. Indian tax authorities had asked Vodafone to pay Rs 11,218 crore ($2.5 billion) tax on its 2007 purchase of Hutchison Whampoa Ltd's mobile business in the country, which the company is fighting in court. "The Dutch government has been in discussion with Vodafone and we believe it has initiated a formal process under the tax treaty between the Dutch and Indian governments," the paper quoted a Vodafone spokesperson as saying.
A MENU FOR TAX-CONSCIOUS INVESTOR
After the financial crisis, Prakash has been following the asset allocation model and portfolio rebalancing as tools to ensure that he is invested as per his pre-defined asset allocation percentage. The recent spurt in equity has skewed the asset allocation in favour of equity. His advisor, Ravi, has now re-jigged his portfolio according to the pre-defined asset allocation score. Ravi has also suggested booking of partial profits and investing them in debt funds. Prakash considered bank fixed deposits as the safest form of debt investment. However, he has now been suggested to invest in debt mutual funds, which bring in both liquidity and tax efficiency. There is now a plethora of debt funds in the mutual fund space. Let's look at a few of them and understand the suitable debt fund options: Debt funds are mutual funds which invest in a variety of debt securities like commercial papers (CPs), certificate of deposits (CDs), government securities or gilts, treasury bills, bonds and money market securities. The most common classes of debt funds are:
Fixed maturity plans:
As the name suggests, the investment is for a fixed period, say 100 days, 370 days or even 1,000 days. FMPs invest in instruments that mature at the same time that their schemes come to an end. So, a 100-day FMP will invest in instruments that mature within this period. This insulates the schemes from volatility in interest rates. In FMPs, returns are not guaranteed. However, usually indicative returns are disclosed. The major advantage of an FMP investment is that it is tax efficient in two ways - double indexation benefits and lower tax rate In case an investor has a demat account and there is a need for liquidity, FMPs can also be traded. Besides FMPs, there are also interval funds, which are also valid for a fixed period, say, monthly, quarterly or annually. In this instance, the funds are open for redemption or purchase only during a specific day of the month or the quarter.
Liquid funds or money market funds:
Money market funds or liquid funds invest in money market securities and debt securities that mature in 91 days. This is an ideal instrument to park funds for short-term requirements, before allocating the funds for long-term investment needs. A major benefit of this is a higher interest rate than the savings bank rate, a zero exit load and easy liquidity.
Ultra short-term funds:
Ultra... short-term funds, earlier known as liquid-plus funds, are slightly riskier compared to liquid funds and tend to give slightly higher returns. The funds invest in debt securities maturing in over of one year. It suits investors who want to park their money for a few months.
Short-term funds:
Short-term funds invest in debt securities that mature in the next 15 -18 months. They invest mostly in AAA or AA+ rated debt securities and interest rate hikes mildly impact the returns. Short-term funds are best suited for invstors with an investment horizon of 1 - 2 years.
G-secs:
G-secs or government securities or gilt funds invest in debt securities issued by RBI on behalf of the g overnment of India or the state governments. G-secs have no risk of default, as they have a sovereign guarantee but are, however, prone to interest rate movements. G-secs come with a wide range of maturity periods, from a few days to 10, 20 and 30 years. So, many gilt funds have short-term and long-term plans. Ideally, they are suited for an investment horizon in line with the asset allocation strategy.
Monthly income plans:
Monthly income plans or MIPs are hybrid investment funds and are being aggressively sold today. They invest a minor portion (5-25%) in equities and the rest in debt securities. MIPs aim to provide regular and periodic incomes, either monthly, quarterly, half-yearly or yearly. The income is guaranteed, which is not the case in mutual fund MIPs. Only the surplus distributable income is available for distribution. They are more suitable for investors looking for regular income rather than capital appreciation.
After the financial crisis, Prakash has been following the asset allocation model and portfolio rebalancing as tools to ensure that he is invested as per his pre-defined asset allocation percentage. The recent spurt in equity has skewed the asset allocation in favour of equity. His advisor, Ravi, has now re-jigged his portfolio according to the pre-defined asset allocation score. Ravi has also suggested booking of partial profits and investing them in debt funds. Prakash considered bank fixed deposits as the safest form of debt investment. However, he has now been suggested to invest in debt mutual funds, which bring in both liquidity and tax efficiency. There is now a plethora of debt funds in the mutual fund space. Let's look at a few of them and understand the suitable debt fund options: Debt funds are mutual funds which invest in a variety of debt securities like commercial papers (CPs), certificate of deposits (CDs), government securities or gilts, treasury bills, bonds and money market securities. The most common classes of debt funds are:
Fixed maturity plans:
As the name suggests, the investment is for a fixed period, say 100 days, 370 days or even 1,000 days. FMPs invest in instruments that mature at the same time that their schemes come to an end. So, a 100-day FMP will invest in instruments that mature within this period. This insulates the schemes from volatility in interest rates. In FMPs, returns are not guaranteed. However, usually indicative returns are disclosed. The major advantage of an FMP investment is that it is tax efficient in two ways - double indexation benefits and lower tax rate In case an investor has a demat account and there is a need for liquidity, FMPs can also be traded. Besides FMPs, there are also interval funds, which are also valid for a fixed period, say, monthly, quarterly or annually. In this instance, the funds are open for redemption or purchase only during a specific day of the month or the quarter.
Liquid funds or money market funds:
Money market funds or liquid funds invest in money market securities and debt securities that mature in 91 days. This is an ideal instrument to park funds for short-term requirements, before allocating the funds for long-term investment needs. A major benefit of this is a higher interest rate than the savings bank rate, a zero exit load and easy liquidity.
Ultra short-term funds:
Ultra... short-term funds, earlier known as liquid-plus funds, are slightly riskier compared to liquid funds and tend to give slightly higher returns. The funds invest in debt securities maturing in over of one year. It suits investors who want to park their money for a few months.
Short-term funds:
Short-term funds invest in debt securities that mature in the next 15 -18 months. They invest mostly in AAA or AA+ rated debt securities and interest rate hikes mildly impact the returns. Short-term funds are best suited for invstors with an investment horizon of 1 - 2 years.
G-secs:
G-secs or government securities or gilt funds invest in debt securities issued by RBI on behalf of the g overnment of India or the state governments. G-secs have no risk of default, as they have a sovereign guarantee but are, however, prone to interest rate movements. G-secs come with a wide range of maturity periods, from a few days to 10, 20 and 30 years. So, many gilt funds have short-term and long-term plans. Ideally, they are suited for an investment horizon in line with the asset allocation strategy.
Monthly income plans:
Monthly income plans or MIPs are hybrid investment funds and are being aggressively sold today. They invest a minor portion (5-25%) in equities and the rest in debt securities. MIPs aim to provide regular and periodic incomes, either monthly, quarterly, half-yearly or yearly. The income is guaranteed, which is not the case in mutual fund MIPs. Only the surplus distributable income is available for distribution. They are more suitable for investors looking for regular income rather than capital appreciation.
REFUNDS SCAM HITS TAXPAYERS
Worried over reports of alleged corruption especially in issuing refunds to taxpayers, the Income Tax Department has brought its own officials under strict vigilance scanner and has issued instructions to the top brass to constantly monitor the process. The I-T vigilance wing has also decided to conduct surprise inspections to check the process of issuing refunds from both the department and the bankers side. The vigilance wing has found that the issue of refunds is "prone to grievances" from taxpayers and that pro-active measures should be taken by top I-T officials to make the process more transparent. The I-T vigilance wing has written to all the Chief Commissioners of Income Tax (CCITs) in the country in this regard. "A number of complaints regarding refunds including those issued under the Refund Banker Scheme have been brought to the notice of the department. Due to various reasons, the refunds do not reach the taxpayer that result into corruption related complaints," a senior I-T officer said. A huge amount of money, running into few crores is processed by the department as a part of refunds, the official said. "Timely issue and proper delivery of refunds has been a major source of grievance and complaints leading to cases of punitive vigilance. "As predominant task of vigilance is to prevent fault from taking place, Refund Banker Scheme is one such landmark measure in this area which would go in a long way in further reducing the number of public grievances, besides improving quality of service, accountability of employees and consequently, the reputation of the organisation," the vigilance letter said. The department has also decided to deploy surprise inspection and audit teams to check proper delivery of refunds. The I-T department has extended the Refund Banker Scheme to almost all its offices across the country in collaboration with the State Bank of India (SBI) since September this year. "Supervisory authority may ask assessing officers to furnish list of all cases where refund remains unpaid for more than a month and ascertain the reasons thereof to take corrective measures. Constant monitoring and follow up would reduce the grievances to a large extent," the anti-corruption watchdog of the department told the CCITs. The department has identified atleast two main reasons for delay in refunds and subsequent complaints against tax officials by taxpayers. The first category of cases is where necessary instructions were issued by the Assessing Officer (AO) for grant of refunds but same remained unpaid by the banker for.
Worried over reports of alleged corruption especially in issuing refunds to taxpayers, the Income Tax Department has brought its own officials under strict vigilance scanner and has issued instructions to the top brass to constantly monitor the process. The I-T vigilance wing has also decided to conduct surprise inspections to check the process of issuing refunds from both the department and the bankers side. The vigilance wing has found that the issue of refunds is "prone to grievances" from taxpayers and that pro-active measures should be taken by top I-T officials to make the process more transparent. The I-T vigilance wing has written to all the Chief Commissioners of Income Tax (CCITs) in the country in this regard. "A number of complaints regarding refunds including those issued under the Refund Banker Scheme have been brought to the notice of the department. Due to various reasons, the refunds do not reach the taxpayer that result into corruption related complaints," a senior I-T officer said. A huge amount of money, running into few crores is processed by the department as a part of refunds, the official said. "Timely issue and proper delivery of refunds has been a major source of grievance and complaints leading to cases of punitive vigilance. "As predominant task of vigilance is to prevent fault from taking place, Refund Banker Scheme is one such landmark measure in this area which would go in a long way in further reducing the number of public grievances, besides improving quality of service, accountability of employees and consequently, the reputation of the organisation," the vigilance letter said. The department has also decided to deploy surprise inspection and audit teams to check proper delivery of refunds. The I-T department has extended the Refund Banker Scheme to almost all its offices across the country in collaboration with the State Bank of India (SBI) since September this year. "Supervisory authority may ask assessing officers to furnish list of all cases where refund remains unpaid for more than a month and ascertain the reasons thereof to take corrective measures. Constant monitoring and follow up would reduce the grievances to a large extent," the anti-corruption watchdog of the department told the CCITs. The department has identified atleast two main reasons for delay in refunds and subsequent complaints against tax officials by taxpayers. The first category of cases is where necessary instructions were issued by the Assessing Officer (AO) for grant of refunds but same remained unpaid by the banker for.
GST CAN USHER IN A LEVEL-PLAYING FIELD
The rollout of GST (Goods and Services Tax) and the removal of exemptions and tariff variations will change the market dynamics, feels Mr K. P. Gopal, Director, Stuser Tools Pvt Ltd, Chennai ( http://bit.ly/F4TKPGopal). "It can make some companies more price- competitive than earlier, while it can make others (who enjoyed the benefit of tariff variations) less competitive," he adds, during the course of a recent interaction with Business Line.
Excerpts from the interview: What do you see as the top two areas in your industry that will be impacted the most by the proposed GST regime?
The primary area that will be impacted would be the ushering in of the "simplicity" factor. Historically, Indian industry has resigned itself to a highly complicated and cumbersome way of doing business. This problem is compounded in the case of MSMEs (micro, small, and medium enterprises) since they have to deal with the same plethora of taxes, rates, and agencies like a large industry but with only a fraction of the manpower available at their disposal. If GST is implemented in its true spirit, simplicity and transparency are what most companies are looking forward to. The second important area is that GST would create a level-playing field for companies where success would be determined by efficiency and not by artificial factors such as tax rates offered by different States. Kindly specify one key issue on which policy clarity required, as regards GST. One key issue would be whether GST will be administered by a single agency or if there will be a Central and State level agency administering it. The standoff between the Centre and the States has made the possibility of a two-agency solution very likely. This can be a major disappointment since it will be against the very fabric of an efficient GST and will only end up as a modified version of the current system. It would be better if in the ongoing dialogue between the Centre and the States, the basic principles of GST are not forgotten - one tax at one rate for goods and services across all States, managed by a single agency. So long as this final objective is not diluted and there is a roadmap to achieve it, it is better for the country as a whole. Your take on one priority that merits attention in enterprises, ahead of the GST rollout. For most companies the focus in the run-up to GST has been the law itself and compliance issues. However, the issue they need to focus on with equal if not more importance is the business angle and the impact on it. Every enterprise would do well to be prepared in factoring this impact on both their purchases as well as on their final product pricing. To facilitate full understanding of this impact and enable readiness for the same, it would be necessary for the rates of GST to be finalised at the earliest.
The rollout of GST (Goods and Services Tax) and the removal of exemptions and tariff variations will change the market dynamics, feels Mr K. P. Gopal, Director, Stuser Tools Pvt Ltd, Chennai ( http://bit.ly/F4TKPGopal). "It can make some companies more price- competitive than earlier, while it can make others (who enjoyed the benefit of tariff variations) less competitive," he adds, during the course of a recent interaction with Business Line.
Excerpts from the interview: What do you see as the top two areas in your industry that will be impacted the most by the proposed GST regime?
The primary area that will be impacted would be the ushering in of the "simplicity" factor. Historically, Indian industry has resigned itself to a highly complicated and cumbersome way of doing business. This problem is compounded in the case of MSMEs (micro, small, and medium enterprises) since they have to deal with the same plethora of taxes, rates, and agencies like a large industry but with only a fraction of the manpower available at their disposal. If GST is implemented in its true spirit, simplicity and transparency are what most companies are looking forward to. The second important area is that GST would create a level-playing field for companies where success would be determined by efficiency and not by artificial factors such as tax rates offered by different States. Kindly specify one key issue on which policy clarity required, as regards GST. One key issue would be whether GST will be administered by a single agency or if there will be a Central and State level agency administering it. The standoff between the Centre and the States has made the possibility of a two-agency solution very likely. This can be a major disappointment since it will be against the very fabric of an efficient GST and will only end up as a modified version of the current system. It would be better if in the ongoing dialogue between the Centre and the States, the basic principles of GST are not forgotten - one tax at one rate for goods and services across all States, managed by a single agency. So long as this final objective is not diluted and there is a roadmap to achieve it, it is better for the country as a whole. Your take on one priority that merits attention in enterprises, ahead of the GST rollout. For most companies the focus in the run-up to GST has been the law itself and compliance issues. However, the issue they need to focus on with equal if not more importance is the business angle and the impact on it. Every enterprise would do well to be prepared in factoring this impact on both their purchases as well as on their final product pricing. To facilitate full understanding of this impact and enable readiness for the same, it would be necessary for the rates of GST to be finalised at the earliest.
WHERE THERE'S WILL, THERE'S TAX
It is admirable that many Indians are in the Forbes list of richest persons in the world. It is equally gratifying that an Indian citizen has built a mansion apartment at a cost of around 5,000 crore as residence, equipped with gardens, swimming pools, helipads and a host of other amenities not commonly perceived. Predictably, the project has drawn mixed reaction. Instances of ostentious spending are many in a country where nearly 30% of the population lives below the poverty line. Much of such affluence can be attributed to faulty tax policies persued over the past several years where dividend income is totally exempt and wealth taxation has been reduced to a farce through the introduction of the concept of productive and non-productive assets. As a result, the wealth tax gets the government a mere 420 crore in a year although the country is home to quite a few of the world‘s richest individuals and some very prosperous companies. Such instances demonstrate the need to have an effective law for wealth taxation. Historical account of inheritance tax: Wealth taxation has two dimensions: an annual tax on wealth, and when it gets passed on by way of gift or on inheritance. The weakness in annual taxation of wealth in the existing law has been stated earlier. Gifts, though exempt from tax for years, are now taxable as income since 2005 at income-tax rates with an exemption limit. This article considers the case for reintroducing inheritance tax/estate duty, which the country had for nearly 32 years from 1953 till it was scrapped in 1985 by the then-finance minister Late V P Singh. "The estate duty has not achieved the twin objectives to reduce the unequal distribution of wealth and assist the states in financing their development schemes. While the yield from estate duty is only about 20 crore, the cost of administration is relatively high," he had said in his Budget speech. Hence, the estate duty was abolished from March 16, 1985. This tax had to be scrapped not because of a conceptual flaw or deficiency but because of its wrong designing and weak administration. Another attempt was made in 1989 to tax property passing on death by Wealth (Inheritance) Duty Bill, 1989. This was more simple, pragmatic and easy-to-administer enactment. The rate of tax was moderate, highest being 10%, where the property passing on death exceeded 20 lakh. But it lapsed following the dissolution of Parliament, and has not been discussed since then. Why inheritance tax?: Wealth-transfer tax complements income tax. An income tax by itself does not tax wealth - only accretions to it. In various countries, wealth is being taxed when it is transferred by way of gifts or bequeaths as a surrogate to income tax. England, France, Germany, US and Greece tax properties passing on death at rates of about 40%. Economic benefits of inheritance tax: Inheritance tax has economic benefits. An individual, who inherits property, has less incentive to wokand accumulate assets on his or her own. Taxing inherited wealth pushes up incentive to work. Also, by inheritance, wealth can pass into wrong hands and may get squandered away. It is better that the state gets a share of such wealth for nation-building. Administrative cost of such tax in comparison to revenue gained is comparatively low vis-a-vis income tax because the former is to be collected only once on death. Inheritance tax has many benefits. It is a revenue-raiser, a means to redistribute wealth, supplements income tax by compensating for its deficiencies in reflecting taxable capacity, can help in lowering income-tax rates by an increase in collection of taxes through this tax on principle of ability to pay, and gives greater equality of opportunities. The Taxation Review Committee, 1975, of the US in paragraph 24.4 of its report has argued that death taxes serve to "support the progressivity of the tax structure by the indirect means of progressive levy on wealth once a generation" and that they remove the ‘undesirable social consequences‘ of the ‘growth of large inherited fortunes‘. With prosperity growing in India - Mumbai alone is reported to have more than one million wealthy people - it is time to think of an inheritance tax. After all, the Indian Constitution proclaims it to be a ‘sovereign socialistic republic‘ and Article 39 provides, inter-alia, that (i) the ownership and control of the material resources of the community are so distributed as best to sub-serve the common good, and (ii) the operation of economic system does not result in the concentration of wealth and means of production to the common detriment. An inheritance tax will further these objectives. To start with, the exemption limit can be fixed at a higher figure, say, 25-30 crore, with the rates rising progressively to a maximum of 30% for amounts over 100 crore.
It is admirable that many Indians are in the Forbes list of richest persons in the world. It is equally gratifying that an Indian citizen has built a mansion apartment at a cost of around 5,000 crore as residence, equipped with gardens, swimming pools, helipads and a host of other amenities not commonly perceived. Predictably, the project has drawn mixed reaction. Instances of ostentious spending are many in a country where nearly 30% of the population lives below the poverty line. Much of such affluence can be attributed to faulty tax policies persued over the past several years where dividend income is totally exempt and wealth taxation has been reduced to a farce through the introduction of the concept of productive and non-productive assets. As a result, the wealth tax gets the government a mere 420 crore in a year although the country is home to quite a few of the world‘s richest individuals and some very prosperous companies. Such instances demonstrate the need to have an effective law for wealth taxation. Historical account of inheritance tax: Wealth taxation has two dimensions: an annual tax on wealth, and when it gets passed on by way of gift or on inheritance. The weakness in annual taxation of wealth in the existing law has been stated earlier. Gifts, though exempt from tax for years, are now taxable as income since 2005 at income-tax rates with an exemption limit. This article considers the case for reintroducing inheritance tax/estate duty, which the country had for nearly 32 years from 1953 till it was scrapped in 1985 by the then-finance minister Late V P Singh. "The estate duty has not achieved the twin objectives to reduce the unequal distribution of wealth and assist the states in financing their development schemes. While the yield from estate duty is only about 20 crore, the cost of administration is relatively high," he had said in his Budget speech. Hence, the estate duty was abolished from March 16, 1985. This tax had to be scrapped not because of a conceptual flaw or deficiency but because of its wrong designing and weak administration. Another attempt was made in 1989 to tax property passing on death by Wealth (Inheritance) Duty Bill, 1989. This was more simple, pragmatic and easy-to-administer enactment. The rate of tax was moderate, highest being 10%, where the property passing on death exceeded 20 lakh. But it lapsed following the dissolution of Parliament, and has not been discussed since then. Why inheritance tax?: Wealth-transfer tax complements income tax. An income tax by itself does not tax wealth - only accretions to it. In various countries, wealth is being taxed when it is transferred by way of gifts or bequeaths as a surrogate to income tax. England, France, Germany, US and Greece tax properties passing on death at rates of about 40%. Economic benefits of inheritance tax: Inheritance tax has economic benefits. An individual, who inherits property, has less incentive to wokand accumulate assets on his or her own. Taxing inherited wealth pushes up incentive to work. Also, by inheritance, wealth can pass into wrong hands and may get squandered away. It is better that the state gets a share of such wealth for nation-building. Administrative cost of such tax in comparison to revenue gained is comparatively low vis-a-vis income tax because the former is to be collected only once on death. Inheritance tax has many benefits. It is a revenue-raiser, a means to redistribute wealth, supplements income tax by compensating for its deficiencies in reflecting taxable capacity, can help in lowering income-tax rates by an increase in collection of taxes through this tax on principle of ability to pay, and gives greater equality of opportunities. The Taxation Review Committee, 1975, of the US in paragraph 24.4 of its report has argued that death taxes serve to "support the progressivity of the tax structure by the indirect means of progressive levy on wealth once a generation" and that they remove the ‘undesirable social consequences‘ of the ‘growth of large inherited fortunes‘. With prosperity growing in India - Mumbai alone is reported to have more than one million wealthy people - it is time to think of an inheritance tax. After all, the Indian Constitution proclaims it to be a ‘sovereign socialistic republic‘ and Article 39 provides, inter-alia, that (i) the ownership and control of the material resources of the community are so distributed as best to sub-serve the common good, and (ii) the operation of economic system does not result in the concentration of wealth and means of production to the common detriment. An inheritance tax will further these objectives. To start with, the exemption limit can be fixed at a higher figure, say, 25-30 crore, with the rates rising progressively to a maximum of 30% for amounts over 100 crore.
TAXING WITH CONNECTION OR WITHOUT?
The general rule of imposition of tax hinges on the connection of the taxpayer with the taxing state and/or the relationship of the taxpayer with the taxing state based on his residence or nationality. In the case of non-residents, the jurisdiction of a state to tax them would, therefore, be based on the existence of such connection of the person sought to be taxed. The activities of such nonresidents may enure incidence of tax either as a result of physical presence or by virtue of application of the source rule, where the income earned by the non-resident has a source in the taxing state. This concept of 'nexus' for taxing non-residents in the country is gaining momentum because of the notable tax disputes, legislative proposals and amendments. Under the existing income-tax framework, as regards nexus arising from source, tax can be imposed on income that (i) is received in India, (ii) accrues and arises in India, and (iii) is deemed to accrue or arise in India. Such situation resulting in incidence of tax in the country would only arise when there is some nexus with India. The domestic tax laws recognise the concept of nexus in the most widely interpreted and complex connotation termed as business connection. The expression business connection has been explained and interpreted by several courts denoting something that produces profit or gain and not just a situation that is conducive of earning such profit. The term business connection was given an inclusive, but not exhaustive, explanation through an amendment to section 9 of the Income-Tax Act introduced in the Finance Act, 2003. Earlier, the circular number 23 of July 23, 1969, had provided sufficient guidance to the befuddled taxpayer from the labyrinth of tax laws. Drafted in an easy-tounderstand style, the clarificatory circular provided the taxpayer guidance on whether they have a business connection in the country and whether an income accrued in their hands through that business connection, giving specific instances. But this circular was withdrawn in 2009 vide circular 7 of 2009 to reaffirm the mandate of section 9, which, according to the CBDT, was vehemently ignored by taxpayers to claim relief. According to CBDT, the new circular puts the rationale of section 9 back on track. The irony of circular 7 of 2009 is that it fails to provide clarity about the implication of the circular vis-a-vis different situations that the circular did touch upon. Thus, the complexities existing in the interpretation of the term business connection and taxation of non-residents have been amplified by the manner in which the circular has been withdrawn without providing alternate means of interpreting the specific situations. Amendments through the Finance Act, 2010, that have retrospective effect from June 1, 1976, to tax services of a non-resident utilised in the country regardless of whether rendered in India or not has not helped either. The Direct Taxes Code Bil, 2010, has increased uncertainties as it includes many activities of nonresidents that are not considered as business connection under the law. These include collection of news from India for transmission abroad by a nonresident news agency or publishers of newspapers, magazines or journals, and shooting of cinematograph films in the country. Existing ambiguities have also increased following the removal of the proviso that clarified that a broker or a commission agent, where acting wholly on behalf of the non-resident or those subject to common control, would constitute a business connection. The extant Act incorporates the principle of apportionment, i.e., taxes only such income attributable to operations carried out in India that has been imbibed into the provisions of the code on as-is basis. Moreover, taxing mergers between foreign companies having underlying Indian subsidiaries may be taxed in India where not sanctioned under the domestic corporate law regime and expanding the tax net to offshore share acquisitions where the target foreign company holds direct or indirect assets in India that are more than 50% of the fair market value of all assets held by the company at any time within 12 months preceding the transfer also depicts an intention of taxing offshore transaction having 'some' connection with India. Here, the Vodafone case and its likes may in future clearly fall under the tax net in the country, thereby expanding its ambit expansively. Further, the ramifications of such changes in the domestic direct-tax laws would also merit consideration while interpreting use of similar expressions like that of fixed establishment for provisions relating to service tax payable on a reverse-charge basis. Thus, with the ever-increasing pursuit of the country's tax department to tax overseas activities having some connection with India and the legislative mandate, it needs to be seen if India can deviate from the source principle to the extent of modifying the concept of business connection and, thereby, widening its tax footprint. Such keen and vigorous envisaged initiatives would need to be examined on the touchstone of principle of territoriality and sovereignty, being inherent for every nation.
The general rule of imposition of tax hinges on the connection of the taxpayer with the taxing state and/or the relationship of the taxpayer with the taxing state based on his residence or nationality. In the case of non-residents, the jurisdiction of a state to tax them would, therefore, be based on the existence of such connection of the person sought to be taxed. The activities of such nonresidents may enure incidence of tax either as a result of physical presence or by virtue of application of the source rule, where the income earned by the non-resident has a source in the taxing state. This concept of 'nexus' for taxing non-residents in the country is gaining momentum because of the notable tax disputes, legislative proposals and amendments. Under the existing income-tax framework, as regards nexus arising from source, tax can be imposed on income that (i) is received in India, (ii) accrues and arises in India, and (iii) is deemed to accrue or arise in India. Such situation resulting in incidence of tax in the country would only arise when there is some nexus with India. The domestic tax laws recognise the concept of nexus in the most widely interpreted and complex connotation termed as business connection. The expression business connection has been explained and interpreted by several courts denoting something that produces profit or gain and not just a situation that is conducive of earning such profit. The term business connection was given an inclusive, but not exhaustive, explanation through an amendment to section 9 of the Income-Tax Act introduced in the Finance Act, 2003. Earlier, the circular number 23 of July 23, 1969, had provided sufficient guidance to the befuddled taxpayer from the labyrinth of tax laws. Drafted in an easy-tounderstand style, the clarificatory circular provided the taxpayer guidance on whether they have a business connection in the country and whether an income accrued in their hands through that business connection, giving specific instances. But this circular was withdrawn in 2009 vide circular 7 of 2009 to reaffirm the mandate of section 9, which, according to the CBDT, was vehemently ignored by taxpayers to claim relief. According to CBDT, the new circular puts the rationale of section 9 back on track. The irony of circular 7 of 2009 is that it fails to provide clarity about the implication of the circular vis-a-vis different situations that the circular did touch upon. Thus, the complexities existing in the interpretation of the term business connection and taxation of non-residents have been amplified by the manner in which the circular has been withdrawn without providing alternate means of interpreting the specific situations. Amendments through the Finance Act, 2010, that have retrospective effect from June 1, 1976, to tax services of a non-resident utilised in the country regardless of whether rendered in India or not has not helped either. The Direct Taxes Code Bil, 2010, has increased uncertainties as it includes many activities of nonresidents that are not considered as business connection under the law. These include collection of news from India for transmission abroad by a nonresident news agency or publishers of newspapers, magazines or journals, and shooting of cinematograph films in the country. Existing ambiguities have also increased following the removal of the proviso that clarified that a broker or a commission agent, where acting wholly on behalf of the non-resident or those subject to common control, would constitute a business connection. The extant Act incorporates the principle of apportionment, i.e., taxes only such income attributable to operations carried out in India that has been imbibed into the provisions of the code on as-is basis. Moreover, taxing mergers between foreign companies having underlying Indian subsidiaries may be taxed in India where not sanctioned under the domestic corporate law regime and expanding the tax net to offshore share acquisitions where the target foreign company holds direct or indirect assets in India that are more than 50% of the fair market value of all assets held by the company at any time within 12 months preceding the transfer also depicts an intention of taxing offshore transaction having 'some' connection with India. Here, the Vodafone case and its likes may in future clearly fall under the tax net in the country, thereby expanding its ambit expansively. Further, the ramifications of such changes in the domestic direct-tax laws would also merit consideration while interpreting use of similar expressions like that of fixed establishment for provisions relating to service tax payable on a reverse-charge basis. Thus, with the ever-increasing pursuit of the country's tax department to tax overseas activities having some connection with India and the legislative mandate, it needs to be seen if India can deviate from the source principle to the extent of modifying the concept of business connection and, thereby, widening its tax footprint. Such keen and vigorous envisaged initiatives would need to be examined on the touchstone of principle of territoriality and sovereignty, being inherent for every nation.
GST ROLLOUT ONLY AFTER APRIL 2011, SAYS FINMIN
The finance ministry on Wednesday admitted that the proposed goods and services tax (GST) regime will not be implemented from April 1, 2011 and said that no timeframe for the introduction of the new indirect tax system has been set yet. Revenue secretary Sunil Mitra said it would be difficult to roll out GST without constitutional amendments , contrary to the suggestion made by some states. "No question of it (GST) happening (from) April 1, 2011. Certainly not. It is not possible ," Mr Mitra said. For GST to be implemented , certain amendments to the constitution are needed, he said. These amendments require time, Mitra said, adding that the finance ministry has not decided on new timeframe for introducing GST. Originally scheduled to be implemented from the beginning of this fiscal, the GST regime will subsume excise duty, service tax at the Centre's end and VAT on states front, besides some local levies surcharges and cesses. However, differences between states and the Centre over the structure of the new tax regime has led to delays in its implementation. Now, even the revised deadline will be missed. Constitution amendments are required because, under the current mechanism, the Centre cannot impose tax beyond manufacturing , and states cannot levy service tax.
The finance ministry on Wednesday admitted that the proposed goods and services tax (GST) regime will not be implemented from April 1, 2011 and said that no timeframe for the introduction of the new indirect tax system has been set yet. Revenue secretary Sunil Mitra said it would be difficult to roll out GST without constitutional amendments , contrary to the suggestion made by some states. "No question of it (GST) happening (from) April 1, 2011. Certainly not. It is not possible ," Mr Mitra said. For GST to be implemented , certain amendments to the constitution are needed, he said. These amendments require time, Mitra said, adding that the finance ministry has not decided on new timeframe for introducing GST. Originally scheduled to be implemented from the beginning of this fiscal, the GST regime will subsume excise duty, service tax at the Centre's end and VAT on states front, besides some local levies surcharges and cesses. However, differences between states and the Centre over the structure of the new tax regime has led to delays in its implementation. Now, even the revised deadline will be missed. Constitution amendments are required because, under the current mechanism, the Centre cannot impose tax beyond manufacturing , and states cannot levy service tax.
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