Law Street (June) in The Economic Times, Once Upon a Time

Hi Readers,
I so love fairy tales, but they all have a moral don't they? Well, Zenobia Aunty decided to be a story teller recently. This is what happened, click here. As always, if the url doesn't work, read the story pasted below.
Best
Lubna

Once upon a time…

Lubna Kably

Taxes have been put to various uses
Taxes yield results, only if used well
Taxes must offer equity, certainty, convenience and transparency

Down with fever, this columnist recalled vividly the time when her Granny used to tuck her into bed and narrate a bed-time story. Well, Zenobia Aunty, decided to act that part, ahem- as well as she could.

Hot soup and toast, the pitter-patter of the rain, a cool breeze and story telling time, courtesy Zenobia Aunty, who had rushed from Mumbai to be at the bed side of her favourite niece, while the doctors pondered over the cause of this low but irritating fever that just refused to go away, cured this columnist in no time. After all, one can only tolerate tax stories, that much!

Knowing fully well, that her niece now also had an Irish boss to contend with “or vice-versa,” as he is bound to retort (though he sure knows how to deal with just about any situation this columnist can ever dream of conjuring up), Zenobia Aunty began with a story – no, not about pixies and fairies and other Irish folklore, but on the ‘plastic bag tax case’. Introduced in 2002, in the Republic of Ireland, it had an immediate impact where the plastic bag usage per person decreased within weeks by 94%. Years later there was again a slight increase in consumption of plastic bags, prompting the Irish government to increase the levy from Euro 15 cents to Euro 22 cents in July 2007, said the wise Aunt.

The New York Times, has a few months ago, written about this interesting experiment. The paper attributes the success of the tax imposed on plastic bags to several factors, viz: Creating environmental awareness by the government; lack of a power manufacturer’s lobby: there were no plastic bag manufacturers in Ireland (most bags were imported from China); strict enforcement– resulting in people carrying their own cloth bags – if retailers were to switch to paper bags, this too would have been brought to tax; easy adoptability to the new tax regime: most retail chains were highly computerised and adding the “plastic bag tax” involved minimal reprogramming; the means justified the end: the tax was put to good use – to finance environmental enforcement and clean up processes. It is clear it was not tax alone that did the trick. I am sure my Irish boss will agree on this one.

That said; Zenobia Aunty hopped over to a more recent example or rather Kelly’s post on her blog ‘taxgirl.com’ regarding the levy of tax on “alcopops” – pre mixed soda-like alcoholic drinks. Australia, to decrease dangerous underage drinking has sought to increase the tax on alcopops.
Has it helped? Kelly explains: The Distilled Spirits Industry Council (DSIC) says that the increase in tax on alcopops has led to increase in dangerous drinking. Specifically, the DSIC cites figures that show that sales of alcopops have fallen by almost 40% since the tax increase took effect last month. That would be good, right? However, in that same time, sales of bottles of pure spirits have increased by about 20%. Most people are now mixing their own drinks and are perhaps drinking even more alcohol. The Ministry of Health, however, may stick to clear narrow statistics alone.

Kay Bell, tax writer from the US chimes in, with her post on ‘dontmesswithtaxes.typepad.com’ Texas, where she resides, imposed a tax on adult entertainment last year. Lone Star State legislators authorized a USD 5-per-patron fee, aka pole tax, on strip clubs. The money, an estimated USD 40 million a year, is to go to anti-sexual-assault programs and health care for the uninsured. However, in March an Austin judge found that the tax infringed on First Amendment rights of freedom of expression and declared the tax on exotic dancers unconstitutional. While Texas is collecting the tax even as the case is on appeal, other States seem to be waiting and watching.

What is the point in taking you through the above cases? Is Zenobia Aunty just spinning a yarn. No, she isn’t. Every fairytale ends with a moral and here comes one.

She nods her head sagely and states that the plastic bag tax worked, because it fulfilled all the tenets of a good tax regime – viz: equity (the taxes were nominal and imposed on all users); certainty (the timing and amount was certain); convenience (it was easy to pay the tax); and lastly economy in collection (it was easy to administer). Moreover, there was no wiggle room, papers bags if used, would have been subject to a similar levy. Whereas in case of alcopops, probably the users just shifted to something else, a more dangerous situation, in fact. And yes, the tax laws must not to contrary to the fundamental constitution – while the Pole Tax, is an offbeat example, this tenet holds good.

Moral of the story: Taxes are a powerful weapon, but must be used correctly. Else like the alcopop tax, it may just lead to contrary results. That, law makers is something Zenobia Aunty wishes that you ponder over, whenever a new tax levy is being contemplated.

Law Street in The Economic Times -May 2008

Hi Readers,

This time, "Zenobia Aunty" whom you are all well acquainted with, did suffer from the writer's block. Fortunately an excellent decision read favourable to the tax payers) of the Delhi Tribunal which impacts global employees came to the rescue.
Around the word in eighty days, has taken a new meaning altogether and the world is flatter than what even Thomas Friedman envisaged. So read on. Meanwhile, I wish I was sailing in this hotair balloon, don't you? Click on the title below to access Economic Times online. Else simply read on or read maadi, as it is said in Bangalore (Bengaluru).

And this post also gets a mention in Kay Bell's Tax Carnival. Hurrah!

So go ahead and spot this column and read up on many others.

Best,

Lubna

Employees on the go…
Zenobia Aunty is rarely tongue tied, or let us put it this way, she never ever faces a writers block. She always has a lot to say, whether it be through spoken or written communication.

Well, this weekend, we experience what the writers block was all about. I sat motionless for hours together, waiting for Zenobia Aunty to dictate her column to me. Alas, we ran up several drafts, but the topic kept changing. Right from why Bush was blaming us for our Aloo Tikka burger and saying it led to spiraling food prices in his country, to whether or not the barter system would replace monetary currency. It was truly a step back into the dark ages for us, more so, with the power shortage which Bengaluru is exposed to, off and on, especially during the summer months.

Zenobia Aunty wished she was in the cooler climes of Iceland. But alas, only global mobile employees have all the fun she said, referring to our neighbour – Chris who shuttles between Finland, China and India. Chris, doesn’t agree. Imagine having to deal with the tax authorities of three different countries, he sighs. His greatest nightmare is that he will get a tax notice from these countries, which cumulatively is higher than even his total annual salary!

It is quite common for talented employees such as Chris to take responsibility for several countries and to spend time in different countries managing different entities in these various countries. Fortunately, for Chris, the Delhi Tax Tribunal has taken a correct view.

Even more fortunately for both Zenobia Aunty and myself, a tax partner of the firm this columnist is currently employed in, provided much food for thought (or let us say food for the column).

For those who are residents but not ordinary residents in India, whose contract of employment clearly defines the split of services, the Tribunal has held that salary for services rendered outside India is not taxable in India.

Under the Income Tax Act, 1961, (the Act), the scope of taxable income varies with the residential status of the individual. The Act prescribes two tests of residence for individual taxpayers. Each of the two tests relate to the physical presence of the individual in India in the course of the ‘tax year’. An individual is said to be a resident in India in the tax year, if he is: (a) physically present in India for 182 days or more in that tax year; or (b) physically present in India for 60 days in that tax year and 365 days or more in the preceding four tax years.

If either of the tests is not satisfied, he will be considered as ‘non resident’. Additionally, an individual, who is defined as a resident in a given tax year is said to be ‘not ordinarily resident’ in any tax year if he has been a non-resident in India in 9 out of the 10 preceding tax years or has been in India for less than 730 days during the 7 preceding tax years. Therefore, under the Act, an individual may be classified as a resident and ordinarily resident (ROR); resident but not ordinarily resident (RNOR); or a non-resident (NR).

A RNOR is liable to pay tax in India, only on Indian income, i.e.: income received or deemed to be received or income accruing or arising or deemed to accrue or arise in India. Salary income for services performed outside India under a split contract, where such services do not relate to Indian operations does not fall within the above definition.

Of course, if the residential status of the person, even if he is a global employee, is that of a ROR, he would be taxed on his worldwide income in India. But, global employees who keep shuttling from country to country for not very long assignments; this is rarely bound to be the case.

Let us go back to the facts of the Delhi Tribunal decision. Here, the terms of employment between Air France and the assesses (in this case), required that they spend 80 per cent of their time in managing operations in India, 5 per cent of their time in South Asia and 15 per cent in France. The contract of employment itself clearly recognised the division of services to be rendered in India and outside India. The Tribunal held that it could not be said that the period of employment outside India should also be considered as services rendered in India.

In fact, even as our politicians keep fighting on whether or not a North Indian can sell vada pav’s in Mumbai, global mobility is on the rise. In fact, India Inc benefits from foreign talent.

A lot has been written on global acquisitions, on greater access to new geographies, better access to high quality raw material, and in short greater efficiency. The fact of the matter is that the world is flatter than what even Thomas Friedman had originally envisaged. Globalisation whether inbound or outbound, will result in expats coming to India and sharing their expertise.

One can say, sharing of global talent is what the future holds. Properly structured employment agreements, will help Chris and others, concentrate on their work, instead of having unwarranted nightmares. This decision is a step in the right direction, and substantiates the provisions of the Act.

Unending dividend debates

Hi Readers,
The heat is getting to Zenobia Aunty and her niece and indeed Spot, who lies beneath the fan, or close to the AC draft and does nothing else. It sure ain't a dog's life for him. This year Bangalore seems to be warmer than usual and I think one of the reasons is the high rises, with glass facades which reflect the light and make it just hotter. Sad, we don't construct buildings in keeping with our environmental needs, but prefer to work in glass house furnances, with the AC on full blast resulting in further adding to the global warming. That is one story, tax on dividends is another. So read on.

Please click here for the entire story. Zenobia Aunty is too lazy to cut and paste it for you this time.

Sorry about that

Law Street in The Economic Times (March edition) on the Budget

Hi Readers,

Soon after the budget annoucements, my first thoughts were: Wish I was a farmer, enjoying tax free income and a debt write off. But, no. Life is not easy for them. They are at the mercy of the weather gods and also money lenders.

The budget was quite a damp squib for the corporate sector - the retrospective amendments are derogatory to the very concept of fairness. Mercifully though, no increase in tax rate nor any major new taxes. Call it shaken but not stirred enough for reforms or stirred but not shaken enough for reforms. Something did seem to be lacking.

For the Budget related lawstreet click here. Or as always read below.


Stirred but not shaken enough
4 Mar, 2008, 0000 hrs IST,LUBNA KABLY, TNN

Zenobia Aunty, who grew up in rural Dhanu, can understand the plight of a farmer. But even she has questions to ask her favourite finance minister. Are we pumping money — in this case Rs 60,000 crore in the right direction? Who will save the farmers from the clutches of the money lenders where the poorest of the poor actually go? Further, will this write-off of debts make defaulting on loans a habit? To be fair to P Chidambaram, even if this debt was not written off, the banks may have had to write off their non-performing assets. While this columnist could not find any mention of an expenditure outlay for compensating banks, she understands that they will be. Well, this means, banks are better off than otherwise.

Yet, we must think of an alternative long-term solution. T K Arun, has earlier written about how Magarpatta’s village folk got together, pooled their land, set up a company, developed their lands into modern townships and are now crorepatis. If Shankar Magar, one such villager whose photograph was carried in TOI’s budget day edition could prosper, so can others. ‘Super-boss’, for whom this columnist currently works advocates a ‘corporate-farmer’ partnership model. He thinks that if farmers pooled their land together under a cooperative mechanism, this cooperative then dealt with a corporate house and entered into an agreement for 15 years or so for corporate farming it would be a ‘win-win’ situation for all. The corporate entity would have one organisation to deal with; a larger area of land would be available for corporate farming and farmers would be assured of transparency and better profits. ‘Super-boss’ hopes someone takes up this idea and he isn’t even asking for a fee.

With the rationalisation of tax slabs, individuals stand to gain, but India Inc is in for some disappointments. Perhaps WTO commitments put paid to the strong demands to extend the tax holidays for undertakings in EOUs, STPI, EHTPs, etc., and this expires on March 31, 2009. While the corporate tax rate remains the same, there is bad news if you are a MAT company. Even as the tax rate remains unchanged at 11.33%, book profits will now include deferred tax and provision for dividend distribution tax (including surcharge and cess), and this means more MAT tax. In fact, with this move the Finance Bill, like any other good Finance Bill has sought to overturn judicial decisions. Further, how can a Finance Bill be complete without any retrospective amendment? So this takes place retrospectively from April 1, 2001 and may result in reopening of several cases.

In between the lines are a few more shocks. Generally when you receive an invalid notice — notice sent to you beyond the due date, you still appear before the tax authorities and cooperate with them, without prejudice to the fact that the notice was invalid. Well, better beware. If you do appear in any proceeding or cooperate in any inquiry relating to an assessment or reassessment, it shall be deemed that the scrutiny notice was served to you in time. You cannot then battle out on the ground that the notice was invalid. Talk about being caught between the devil and the deep blue sea. Another retrospective amendment, this time dating back to April 1, 1989: now, there is no need for the tax officer to mention reasons for initiating penalty proceedings. ‘Just do it’, seems to be the new mantra at the tax office.

Retrospective amendments are unfair to the taxpayer, but some traditions do not die — like FBT they are here to stay. However, global employees may get some respite. The Finance Bill provides that if FBT is recovered from them in respect of their ESOP plans by their employer, such tax shall be regarded as tax paid by them. They can claim a credit for such tax in their home country (the country where they are deputed and are now a tax resident). However, this will ultimately depend on whether such other country accepts this. Gopal, our techie next door neighbour is not too optimistic. There has just been a half-hearted attempt to mitigate the cascading effect of dividend distribution tax, no relief will be available to intermediate companies in case of a multi-tier structure or if the ultimate parent is a foreign company.

Bond markets got an unexpected boost. Foreign Currency Exchangeable Bonds can be converted into shares of any group company. The conversion shall not be regarded as a transfer, read it to mean, no capital gains at this juncture and it comes with a retrospective effect by a year. Going forward, there will be no TDS on interest against demat corporate bonds traded in Indian stock exchanges. PC could well say, Mein hoon Bond. Yet, shaken but not stirred enough for reforms, this about sums up the budget for Zenobia Aunty.

Break Time

Hi Readers,

Everyone needs a break, including Zenobia Aunty. Well, actually she has already aired her views on what the Finance Minister should announce on February 29, budget day for both you, me and India Inc. So she had nothing more to say, especially since the next column was due for publication on Feb 29 itself.

So she has taken a break and will appear twice during the month of March. So watch her rant on the finance bill in March.

Till then adieu.

Best regards

Lubna

India Inc's wish list - Law Street in The Economic Times (Jan 2008)

Hi Readers,

Last month, Zenobia Aunty pleaded a case for you and me. This time, she is all in favour of fighting for Indian Inc and its rights. So read on, by clicking here.

As always, the article is also cut and pasted below.

India Inc's wish list
25 Jan, 2008, LUBNA KABLY

Well, in the previous column Zenobia Aunty wished that PC would make life easier for the aam aadmi. Needless to say, she got a few fan mails and copies of pre-budget memorandums from various associations and professional bodies protesting that she was ignoring the needs of India Inc.

Truth be told, she had already thought of telling PC about the need for a few changes. The memorandums sent her way, helped her fine-tune her thoughts. PC has been hinting at reducing the corporate tax rate. Will this make Shahbhai, the finance manger at a large product company, smile? Perhaps, just a wee bit.

He would rather see scrapping of FBT provisions, ease in tax administration and yes, correction of the formula for calculating SEZ tax relief.

He is so tired of setting up yet another subsidiary company for his employer organisation. The reason, this subsidiary company will set up an undertaking in a SEZ. If a separate company was not set up, the fear is that the tax holiday benefit that is prescribed would get diluted.

In brief, the deduction from the SEZ undertaking’s profits is required to be computed as a proportion of the export turnover of the said SEZ undertaking to the total turnover of the business of the company.

Actually, it is logical to state that the deduction should be available in the proportion of the export turnover of the SEZ undertaking without considering the turnover of the other business of the company in the denominator as is the case for tax holidays enjoyed by STPI’s, EOUs etc.

Else, it is not merely Shahbhai but many others who will have to set up multiple legal entities (companies) to house each SEZ undertaking. And this means more costs, more paper work, more filings and yes even more taxes and even more costs. Further when the subsidiary distributes dividend to its parent, there is again dividend distribution tax levy.

Having to set up of multiple companies to take the full tax holiday, is killing and doesn’t serve the spirit of the legislation. So what is required is remedial action to correct the erroneous formulae.

The less said about fringe benefit tax (FBT) and its hassles the better. But then, Zenobia Aunty is not known for keeping quiet. Last year, India Inc, was protesting and even conceded to a slight hike in the tax rate with a scrapping of the FBT. On its part, tax authorities have argued that this is not feasible as not all companies pay tax. Looks like, India Inc has given up hope of this levy being scrapped.

Well, even if it isn’t scrapped, it must be made more taxpayer friendly and this alone is what Zenobia Aunty intends to concentrate on, in her letter to PC. She insists that all procedural aspects, including assessments be combined with that for corporate tax, so as to at least save on administrative costs for India Inc.

Second, Zenobia Aunty says that there should be safe harbours built in for all expenses. Only those above a certain limit should be subject to FBT. After all the cost of tax collection must be commensurate with the taxes collected. Will PC listen? Let us wait and see.


Zenobia Aunty’s friends from Bombay Chartered Accountants Society (BCAS) also speak of another challenge taxpayers’ face – that of the dreaded deemed dividend mechanism. In simple terms, an advance or a loan to a shareholder having at least 10% voting power in a private company, to the extent that the company has accumulated profits, is treated as deemed dividend and taxed in the hands of the recipient.

Apart from payment to the shareholder, a loan or an advance to a firm in which he is a partner with a 20% share or to an association of persons of which he is a member and is entitled to 20% of the income is also considered as dividend and is taxed accordingly.

The objective of introduction was to prevent tax avoidance, by ensuring that people do not give loans and advances, instead of distributing dividend. However, this provision does impact genuine loans, including those that are paid back in a short time. Further, this tax is attracted even if the loan is advanced at a commercial rate of interest and even if the majority of the people owing the concern which received the loan are not even shareholders of the lending company.

BCAS, in its pre-budget memorandum points out that, at present, no tax is payable by the shareholder on dividend received from companies and only the company pays a dividend distribution tax of 15%. Thus, levy of tax on deemed dividend in the hands of the shareholder at the normal rate is not justified.

Guess, once again, PC should carve out certain exceptions, such as the duration of the loan or the rate of interest and exempt such loans from the concept of deemed dividend. Now we just have to wait and see what the budget will unfold.

Happy New Year - Law street in The Economic Times, December 2007

Hi Readers,

Happy New Year. There is a nip in the air, and I sort of envy Calvin sitting with his favourite pal before a roaring fire. Well, I always wanted to be Calvin.....

As always, click to read the column in The Economic Times

Or scroll down to read the same.

Cheers

Lubna

Law Street

The Economic Times, December 28, 2007

Happy New Year

The fog rolls in, only it is not the mist but pollution. The smog envelopes tree tops, newly constructed high-rises and even the morning joggers who have dared to venture out. Zenobia Aunty and Spot haven’t, they keep indoors these days, much to the chagrin of other household members. So, let us just say it was a joyous moment for all of us, when Aunty became a member of one of the various social networking sites that abound in cyberspace. This kept her blissfully occupied throughout the day and indeed most of the night. In this case, she haughtily informs us that it is not a social networking site, but a professional networking site. Well, I guess it has its uses.

She posted a question on what people would like their governments to do in the sphere of taxation in the New Year and the answers rolled in from across the globe. The one common thread in the replies she got from the US, UK, France, South Africa, India, Iceland (frankly speaking I have lost count of the innumerable countries the replies rolled in from) was: We would like our governments to use our money in a responsible manner. That apart, there were many more suggestions on what governments should do.

Let us begin with tax slabs. Said a member from the US: There are hundreds of brackets! It is silly. The lowest tax bracket that really made me angry is for a head of a household, if you make US$11,200 you have to pay US$1,200 as taxes! That is absurd! No wonder they poor don’t want to work, they can’t afford to! What is the point? How in the world can anyone in today’s world live on that income and pay those taxes? Yet, there is no equal percentage applied to the wealthy. They can earn as much as they please and only pay 35%. The scales are very unbalanced. The proposal on the table for change is to eliminate all the hundreds of levels and go to just three for each category type (single, married, etc.)”.

Well said. In India, we have three basic slab rates. The basic threshold limit for tax trigger now stands increased at Rs 1.10 lakh. In respect of women and senior citizens, this basic threshold limit is Rs 1.45 lakh and Rs 1.95 lakh respectively. However, the maximum marginal rate of 30% applies to those earning more than Rs 2.5 lakh. With a taxable income of just Rs 2.5 lakh, the honest taxpayer has to cough up Rs 77,500 leaving him a paltry sum of just 1.72 lakh. Well, unlike the US, in India, there is no cushion for the unemployed, so they just have to work and if they are good citizens also pay their taxes. Zenobia Aunty really feels that this must change. Only those earning above Rs 10 lakh or so must fall in the highest tax bracket. However, she is willing to negotiate with the North Block on this issue. In addition to the 3% education cess levied on all those subject to tax, those with an income of Rs 10 lakh have to pay a surcharge of 10%. Thus, the maximum marginal rate of tax is now 33.99%. Here, Zenobia Aunty suggests a two-tier level of surcharge — a lower surcharge for income between Rs 10-25 lakh and a higher surcharge for income beyond this limit.

Says another member of this network, also from India: “If exporters are clamouring for relief because the rupee is appreciating, I want salaried individuals to get some respite because of the rising interest rates.” Currently, in case of a self-occupied property (financed by a housing loan) taken after April 1, 1999 for acquisition or construction, the borrower can claim interest deduction up to Rs 1.50 lakh per year, subject to meeting certain conditions. Zenobia Aunty hopes for doubling of this limit to Rs 3 lakh.

Yet another participant wrote back with three distinct sets of wish lists. A ‘realistic’ wish list, a ‘pipe dream’ wish list and an ‘outright whacky’ wish list. Some of these were real gems. For instance, this gentleman suggests that the tax laws should permit a set off of the tax refunds against the advance tax payable, if the refund (which is not rejected by the tax authorities) is not received within thirty days. His ‘pipe dream’ wish list includes: Cut red tape, reduce bureaucracy, simplify tax structures, tax procedures, tax return formats and tax refund procedures. Of course, his whacky list says: Abolish Income tax and replace the same with a 1% expenditure tax. This will boost government revenues manifold, as this will cover not just segments which are currently outside the income tax net, but also those that fall under the net, but still have huge levels of ‘untaxed’ income. Well, Zenobia Aunty admits that there are pros and cons to this list and leaves it at that.

Now if only Santa Claus could grant all these wishes.