Irritants in Taxation:
There are many inputs being given by trade and industry as well as by the experts on income tax for consideration of the finance minister. The major consultancy firms have recently published their comments which more or less raise common issues. Their suggestions speak about the need to reduce corporate tax rates to 30% with no surcharge so as to be competitive with neighbouring countries. There is vociferous demand to extend the tax holidays by at least three years in respect of IT/ITES sector. The infrastructure and power sector tax holiday need to be extended further and the demand for natural gas to be treated as “mineral oil” for the purpose of 100% deduction. There is growing feeling for scrapping FBT/STT/CTT and cut in dividend distribution tax and above all rationalization of transfer price norms and to adopt the concept of advance transfer pricing as is prevalent in the U.S.
One very sustainable argument is with respect to the benefit under S.10AA in respect of SEZ units where even in spite of exports the SEZ units are not able to obtain full benefit as the deduction is granted in the ratio of export turnover of undertaking to the total turnover of the business of the payer in order to exempt the profits of the said undertaking. This is very hurting where there are multiple units or undertakings as there will be a reduced benefit in such a case.
In case of EOU there is scope for transfer from one EOU to another EOU technically called as “Third Party Transfer” which is recognized under Customs Act and EHTP/STP/SEZ schemes as well as under FTP and RBI. The Reserve Bank of India recognizes such as exports, entitling the units to receive payments in foreign exchange in respect of such transactions vide its circular AD (DIR Series) Circular 54 dated 25th of November, 2002 but strangely the Income Tax Act does not recognizes the Third Party Exports and does not have a concept of supporting manufacturer too as was there in S.80HHC.
There are many other irritants and these are being carried by the tax framers for many years on end and these can be addressed in some useful way by the finance ministry if not now at least in the forthcoming budget which is few month away.
Individuals AOP/BOI and Firms:
There is a case for elimination of surcharge in the case of individual assessees starting over ten lakh of total income as compared to the corporate and firms where it starts over one crore of income. There is no reason to tax partnership firms which infact comprises of individuals and has the ease of formation in comparison to corporate form of entity to be taxed at the same rate as companies and that too without any threshold exemption. The tax rates in respect of individual, BOI/AOP are the same in respect of taxable income leaving two cases where individual is over sixty five years of age whether a man or a woman and another case where it is a case of woman assessee less than sixty five years. But the real problem comes when AOP/BOI are to go through the stringencies of S.167B (1) and (2) where the taxation is based on the premise of share of members whether determinate or indeterminate and to tax at maximum marginal rate and in certain cases it may even increase much beyond this rate when AOP/BOI has a member which is a foreign company with share of members being indeterminate. But in another case if the total income of any member exceeds the exemption limit and the share of members are known the rate shall again be maximum marginal rate though in case the total income of none of the members exceed the exemption limit the rate of tax on the AOP shall be as that of an individual with basic exemption benefit. There is need to rationalize the taxation of AOP/BOI in this case to wipe out the burdensome rate of taxation and complicated provisions further in terms of section 67A when we come to compute the member’s share in the income of AOP/BOI. There is need to evolve simplification of tax provisions and to bring them at par with the individuals. The issue of taxation of limited liability partnership is also to be framed the uniformity in the taxation could be addressed in some meaningful way for these entities too.
The remuneration to working partners S. 40(b) too is an irritant in so far as it seeks to allow it only at the prescribed slabs based on book profits in case of a specified profession. The first slab itself for allowability begins with ninety percent of book profits on first Rs.100000/-.The next slab of book profit allows the same at 60% and on the balance of book profit it is 40%. It is difficult to see the rationale for such a treatment where the remuneration has practically no limit in case of companies’ directors subject to fulfilling certain criterion as per Schedule XIII of the Companies Act, 1956. This provision is very illogical if viewed in overall scheme of the Act. The remuneration is taxable in the hands of the concerned partners and as such this miserly treatment does not hold good any more. The justification remains the same in the case of any other firm where slabs are little lower starting at Rs.75000/-.
There is a crying need to increase the tax slabs of cooperative societies too where the first slab itself is Rs.10000/- with tax rate of 10% and on next ten thousand slab, the rate is 20%, with balance over Rs.20000 is taxable at 30%. This tax rate structure is innocuous and very disparaging one. It has nothing to offer to such societies which the government of the day wants to encourage. The cooperative societies should be treated at par with individuals or else their slab rate should be suitably modified to grant larger threshold limit and widen the slab.
The taxmen are very nostalgic about old British days. In present day scenario there is hardly any case for the government employees to be afforded a different treatment when the fact is that their efficiency at all level is deficient and their salaries are not performance based in general when compared to private sector employees. In view of this it is but pertinent to note the following provision that need to be suitable modified and/or omitted:
(i) Section 16(ii) gives benefit to government employees only in the matter of entertainment allowance.
(ii) Section 10(7) again gives benefit to the government employees who are citizens of India in respect of allowances while rendering services outside India.
(iii) Section 17(2)(ii) read with Rule 3(i) takes in to account the licensed fee fixed by government or state government as per rules framed in the matter of valuing the rent free accommodation of government employees while in case of other employees they are at fixed percentages of salary depending on the place of residence in metros or non metro cities which is substantial.
(iv) Entire amount received by the government employees and employees of local authority in respect of death cum retirement gratuity is exempt under section 10(10)(i) but in case of other employees covered under Gratuity Act, 1972 under section 10(10)(ii) and the others covered under section 10 (10)(iii) the limit of maximum of such exemption is fixed at Rs.350000/-.This limit need revision otherwise in view of the gigantic salary structures that we see in the industry today, the non government employees need not bear the burnt of low exemption.
(v) Special treatment under section 10(10A)(i) is given by exempting commuted pension received by the government employees or employees of statutory corporations or local authorities under Civil Pensions(Commutation) Rules of Central Government.
(vi) Section 10(10AA)(i) leave encashment received in respect accumulated leave by the employees of the central or state government employees is fully exempt while in case of other employees, the exemption is maximum of Rs.3lakhs. The exemption is quite low.
(vii) There is unfavourable treatment meted out to non government employees in the matter of Provident Fund contribution and interest benefits thereon. The employer’s contribution to statutory provident fund –Provident Fund Act, 1925 is exempt even if it exceeds 12% of salary and so is the interest exempt even if it exceeds 9.5% in respect of employees of government, semi-government, universities and institutions affiliated to the universities etc. The repayments from statutory fund are exempt though repayment from RPF u/s.10 (ii) may require five years continuous service or else the exemption would require specified conditions under certain circumstances to be fulfilled.
(viii) Everyone is equal before law and it is only befitting that the tax provisions favouring the judiciary should also be fine tuned to the uniformity in the matter of taxation and the provision relating to their sumptuary allowance too need to be omitted.
Like FBT there is another potent irritant in the form of MAT u/s.115JB but the same piece of legislation was done away with by countries like Pakistan in their recent budget stating that this thwarts retention of profit in the business and dissuades the entrepreneur from embarking upon expansion. The irritant is further apparent with petty tinkering made every now and then while calculating minimum alternate tax. The inclusion in the book profits the long term capital gains does not find favour with the companies. Taxmen do not leave at that they have even tinkered with the proviso to include for brought forward of loss or unabsorbed depreciation whichever is lower for deduction from book profits and if either loss brought forward or unabsorbed depreciation is NIL then neither of these shall be reduced from the book profits. This results as disincentive to those companies which may have large projects and have backlog of unabsorbed depreciation and if business loss is NIL then they would be required to pay MAT. In case there is profit before charging depreciation and after charging the same this result in loss still no adjustment shall be available under the section since profits are fully adjusted against depreciation leaving no business loss to be carried forward. The depreciation by its nature is carried forward indefinitely but MAT suggests otherwise and acts as an irritant. Such a situation should be remedied even where there is business loss only out of the two.
S.79 denies the carry forward and set off of unabsorbed business losses in case of change in shareholding of a company in which public is not substantially interested and it will be allowed only if the beneficial shareholding of at least 51% of the voting power in the previous year remains the same as it was on the last day of the previous year in which the loss was incurred. There appears to be no logic in the context of present day environment to deny this carry forward when there is global meltdown and one company is being tossed over to another for continuance of operations and viability though this provision will help closely held companies still it will be a great deal for providing relief by knocking off the statute books an obnoxious provision.
The irritants are many if one were to peep out to service tax where the services are taxed piecemeal in each budget and there remains no separate code. There is a complete dichotomy in its implementation by covering only one hundred two services of course, leaving the profligacy enshrined in the business auxiliary services, business support services which may encompass host of other services said and unsaid due to various interpretations. Why are services like those of lawyers, doctors kept untouched when other professionals like chartered accountants, company secretaries, cost accountants and consulting engineer’s services etc have been covered, remains a mystery and is devoid of any rationale. We talk of income tax code which is likely to be presented in next year’s budget but there is urgent need for service tax code as the goods and services tax shall take few years more to come on the statute books as the present tax too came after four years in 1994 through Chapter V of the Finance Act, 1994 while is its recommendations by Dr.Raja J. Chelliah were made in 1990. The GST could bring in much relief as it is going to merge excise duty, service tax and value added tax and help reduce compliance cost also. The real culprit is the month of March when the service tax is required to be deposited by 31st of March and very strangely it does not make any distinction between the assessees whether corporate or non corporate in this regard. It is not an assessee friendly provision which seeks to collect the said tax for rest of the months by 5th of the following month or quarter depending on company or non company assessee. There is no scope for leaving out services received on 31st of March which is the last day of deposit of such tax under rule 6(1). Even the mandatory penalty under Rule 7C is also very harsh for delay in filing half yearly returns that may go to a maximum of Rs.2000 but if there is no service tax payable then this may not be finally imposable by central excise officer even then in all cases this is being appropriated from the assessees as no returns are accepted unless the penalty is paid. This is draconian as there might be many genuine reasons for which due consideration may be required by the authority before imposing the same.
There is need to proceed with caution and the tax authorities should be generous in the current scenario so that economic activity is allowed to grow than be impeded by carrying the legacy of provisions which are not helping business and the industry.
Contributed By: CA. Vijay Kumar Kalia M.No- 080352