Saturday, January 16, 2010

Tax Policy 2010: Climate Change for the Better?

By Sudhir Kapadia, E&Y

One of the advantages of December year end musings of life in general is the fact that one can 'cherry pick' some salutary omens in the environment, wrap around a comfortably warm blanket and announce to amuch wearied hassled and over worked populace the golden mantra: 'All is well!'. When it comes to musings on India's Tax policy the temptation is no different. After all, we witnessed a bold intent to completely overhaul an over engineered and grammatically battered (and, therefore, incongruous in many parts) Direct Tax law and to subsume a plethora of parallel but often overlapping bouquet of Indirect Tax laws into one integrated Goods & Services Tax Law. If nothing else, these two initiatives demonstrated that at last the winds of change from the Atlantic were making their presence felt in Lutyen's Delhi offering hope that sincere efforts are being considered to make the alarming 'hot' tax climate in India cooler. So how green and soothing will the tax environment be in 2010 and beyond? Here is my prognosis:-

Direct Tax Code (DTC): With the Govt already having identified seven key areas of rethink, there is a question mark on the implementation of the DTC itself. The moot point is whether some of the suggested changes creep their way as 'business as usual' amendments to the current law through the Finance Bill 2009. Some examples of these are as follows:

1) Indirect Transfer of shares : China has recently announced its intent to tax indirect transfer of shareholdings in Chinese companies under specified circumstances a move said to be 'inspired' by India's much celebrated and eagerly watched Vodafone case. Many multinationals hold the view that they would rather have clear cut guidelines setting out the conditions under which India would seek to tax indirect share transfer rather than live with perpetual uncertainty of Indian Revenue's subjective application of the principle of taxing indirect share transfers.

2) GAAR : Here again multinationals and India Inc alike would ideally like the application of time tested 'common law' principles of 'economic substance' over 'form' and onus being on Revenue to prove malafide on past of the tax payer before applying anti- avoidance law. If Revenue is concerned about specific fact patterns or 'tax shelters' it would be far better to have specific anti avoidance rules like in many other countries rather than a general omnibus provision with uncertain outcomes.

3) Indian tax residency definition : Current attempt to rope in foreign companies 'partially' controlled and managed from India for subjecting their global profits to Indian tax would lead to horrendous consequences for India Inc with overseas subsidiaries. This is doubly compounded by the fact that no underlying corporate tax credit for taxes paid overseas is not provided for. The common law principle of 'central management & control' is a far better test to apply and will ensure that genuine subsidiaries and group companies outside India are not ensnared for tax in India.

4) Capital Gains taxation : A vital area of 'simplification' in the DTC is the proposal for uniform rate of taxation for business income and capital gains. The current system of levying Securities Transaction Tax (STT) and exemption of long term capital gains on listed securities from taxation has the merits of simplicity, certainty and avoidance of any leakages in tax collection. Even if there is a policy imperative to abolish STT and bring back capital gains tax, it is essential to retain the distinction between short term and long term capital gains. Whilst world over short term capital gains are treated on par with normal trading income, in the interest of promoting long term capital investments, it is advisable to atleast have a concessional rate of tax on long term capital gains if not complete exemption. Towards this, a rate of 15% tax on long term gains can be considered on par with dividend distribution tax (DDT) in the interest of horizontal equity.

5) Uniform Maximum Marginal Tax Rate : Whilst the much touted sharply reduced Corporate tax rate of 25% in the DTC hinges precariously upon the 'revenue compensating' measures such as the Gross Assets Tax, Finance Budget 2010 could well consider a uniform tax rate of 30% for both individuals ( at the highest slab) and corporates. This would mean a much delayed and over awaited removal of all kinds of surcharges notorious for sticking around much beyond their originally planned tenure.

6) Goods & Services Tax (GST) : GST is by far the most path breaking and revolutionary piece of tax legislation in independent India. As a concept, GST was eagerly awaited by an over burdened Industry grappling with multiple layers of asymmetrical indirect taxes ranging from Excise duties, sales taxes, service tax to a variety of local taxes such as octroi, entertainment and luxury taxes. In it purest form a single uniform GST rate with no exempted items would seamlessly integrate al the different taxes currently prevailing and ensure zero leakage of input tax credits against output tax payable by a provider of goods or services. If implemented with political will and administrative ( and technological) efficiency we could well see an improvement of 2% in GDP of the economy. This ofcourse highlights both the criticality of GST as well as the pitfalls (and lost opportunity) if its implementation is unduly delayed and still worst, done half heartedly.

As with the Climate Summit in Copenhagan, it seems safer to predict a reduction in the 'hot' tax climate in India in the long term while we 'callibrate' our tax temperature in the short term. For the present whether with the physical or tax environment in India we can choose to ignore the obvious challenges and the inevitable sweat and grind amidst us all around and offer a uniquely Indian prognosis for our situation: 'All is well!'

Source : Moneycontrol.com



Read more...

New tax code may penalise long term investors

The new tax law may penalise long-term investors

Most finance ministers in the past gave direct tax reforms a miss, preferring discretion to valour, until P. Chidambaram took the bull by its horns and drafted a new code to replace the Income Tax Act of 1961. The new code is expected to simplify the tax procedures and adopt international best practices. But it could be tough on investors because their overall tax burden is likely to increase.

The biggest blow to investors is the removal of tax exemption for long-term capital gains. The code proposes abolishing the securities transaction tax of 0.25 percent, which by itself, would have been welcome. But the code also imposes capital gains tax on all gains made by selling shares, irrespective of the time they were held for. Thus it eliminates the distinction between short-term and long-term gains.


Earlier, gains from the sale of shares after one year were tax-free. Now they will be clubbed with your income and charged at the slab rates going up to 30 percent.

mg_17912_direct_tax_280x210.jpg


The tax code introduces the 'Exempt-Exempt-Taxation' (EET) method for savings. Under this method, investors will enjoy tax benefits at the time of investment and growth, but will be taxed when they withdraw the money. Earlier, investments enjoyed tax benefits on all the three legs, under the Exempt-Exempt-Exempt system. The only saving grace here is that contributions made to provident and pension funds schemes until March 31, 2011, will continue to enjoy the full exemption.

A key segment to be hit from the EET system will be equity-linked savings schemes (ELSS). These schemes are popular with tax savers. But the new system could make ELSS dividends taxable.

Hiresh Wadhwani, partner at Ernst & Young, says the DTC is doing things backwards. He says the code accords tax benefit to a saver when he has earning potential, but will tax him in his old age. "This might work better in a developed country but not in India. We need a TEE system, Tax-Exempt-Exempt, for the Indian context," he says.

The burden of wealth tax is also likely to increase. Surely, the code proposes raising the exemption on wealth tax to Rs.50 crore and a tax of 0.25 percent for wealth above that threshold. That is, a wealth of Rs. 51 crore will attract a tax of only Rs. 25,000. Sounds good. But the definition of "wealth" has now been expanded to include shares and financial instruments.

So, even promoter holdings in companies become taxable. "But even then, it's a minimal rate. I think it's quite fair, especially for rich promoters who have multiple holdings on listed entities, as they will see increased outflows annually," says Uday Ved, head of tax at KPMG India.

The direct tax code is not yet law and the government is reviewing many aspects of it. It might be a bit harsh on the investors in the form P. Chidambaram got it drafted when he was finance minister, but there is still hope that Pranab Mukherjee may soften it a bit.

By: Shloka Nath/ Forbes India



Read more...

About This Blog

Get advice on LOANS, INVESTMENT IDEAS, TAX ADVISORY & much much more.

You work hard for your money. So your money should work hard for you. At Finvestguru, we understand these things. Although there is more to a policy than what it costs, we guarantee to get you the best possible deal as per your needs and requirement.

Ours is a thorough professional firm promoted by group of CA's and financial advisors.

Simply Tax

Advertisement

My-India Banner Exchange AdNetwork

My-India Banner Exchange AdNetwork

  © Blogger template The Business Templates by Ourblogtemplates.com 2008

Back to TOP