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.