GST Framework: FM may consider extending credit benefit to individuals too!

>
> J!" #$ %&'&
>
> (y " )ris*nadas
>
> +S a result of introduction of ,redit of tax -aid under M./0+T Sc*eme
> followed by ,"!0+T Sc*eme and ot*er series of sim-lifications undertaken in
> t*e country$ t*e cascading tax factor *as been addressed to some extent1
> Similarly$ t*e sco-e of refund *as been enlarged over a -eriod of time to
> -rotect t*e interest of ex-ort community1 T*e indirect tax reforms so far
> undertaken in 2ndia and t*e broad outlines envisaged under t*e -ro-osed GST
> model are based on t*e studies and vision documents -re-ared on t*e tax
> reforms and t*e tax administration in force in various ot*er countries1 2n
> fact "+ %&&& +udit Manual$ -resently in force is based on t*e ,anadian model
> and develo-ed after intense study and exc*ange of information by t*e two
> countries1
>
> .ne of t*e reasons -ut fort* in -romotion of GST is to make t*e 2ndian
> 2ndustry more viable and com-etent enoug* in t*e c*anging global scenario
> and o-en market economy1 3owever$ t*e tax reforms *it*erto undertaken do not
> *ave anyt*ing to -rotect t*e interest of t*e common man1 2t is a fact t*at
> t*e duty relief is seldom -assed on to t*e end customer1 .nly at t*e time
> w*en Mr +1)1+ntony was *olding t*e c*arge of nion Minister for Food and
> ,ivil Su--lies Ministry$ it was insisted u-on to -ass on t*e resultant tax
> benefit to t*e ultimate customer and declare t*e reduction in unit -rice
> conse4uent to t*e ,entral "xcise /uty reduction announced in t*e nion
> (udget1 2t may be recalled t*at most of t*e FM,G com-anies$ including M!,s$
> *ad come out wit* com-re*ensive list of c*anges in t*e nit -rice of various
> M56 -roducts manufactured by t*em t*roug* -ress releases in national and
> vernacular dailies1 .f course$ now t*e t*eory of over*eads may be advanced
> as a reason for t*e inability to -ass on t*e benefit to t*e end customer1
>
> 7*ereas$ it is observed t*at$ in ot*er countries$ it is not t*e case1 2n
> t*is context it is im-erative to mention *ere t*at in ,anada$ for exam-le$
> t*e Goods and Service Tax83armoni9ed sales Tax :GST83ST; -rovides am-le
> sco-e for -rotection of individuals and families as well1 T*e GST83ST credit
> facility is a tax free 4uarterly -ayment t*at *el-s individuals and families
> wit* low and modest incomes offset all or -art of t*e GST or 3ST t*at t*ey
> -ay and t*e GST rebate is calculated in con<unction wit* t*eir income tax1
> 2t could be seen from t*e official web site of t*e ,anadian 5evenue +gency
> :,5+; t*at t*e -rocedure is very sim-le and t*e information to be furnis*ed
> includes details suc* as age$ marital status$ social insurance number$ etc1
> and it is linked to direct tax1 2n order to 4ualify for GST83ST ,redit$ one
> *as to file an income tax and benefit return even if no income is available
> for re-orting1
>
> 2t is sur-rising to note t*at t*is innovative mec*anism in force in ,anada
> *as gone unnoticed even t*oug* we were closely associated in develo-ing and
> im-lementation of "+ %&&& +udit in 2ndia$ w*ic* is based on t*e ,anadian
> Model of +udit1 7*en we talk about all inclusive growt* and social <ustice$
> will it not be a meaningful idea to emulate t*is wonderful and best -ractice
> of GST83ST ,redit system in 2ndia for t*e benefit of t*e common man= 2n fact
> ex-erimenting t*is idea will be a great relief to t*e common man of t*is
> country w*o are virtually cri--led by various ty-es of taxes levied by t*e
> ,entre and t*e State Governments1 2n 2ndia$ already individuals and families
> are over burdened by a -let*ora of regular taxes suc* as 6ro-erty Tax$ water
> tax$ road tax$ ve*icle tax$ Service Tax on Tele-*ones$ etc1 +-art from t*is$
> due to t*e widening of sco-e of Service Tax$ t*e individuals and families
> are bound to -ay Service Tax on various Service related activities suc* as
> +nnual Maintenance ,ontract$ 5e-air and 5ework$ +ut*ori9ed Service of
> +utomobiles$ 2nsurances$ Tours and Travels$ -urc*ase of rail and air
> tickets$ financial transactions t*roug* (ank$ mutual Funds$ e4uities$ s*ares
> etc1 T*e list of taxes mentioned above is only illustrative and not
> ex*austive1 Furt*er$ t*e new -*enomena of c*arging various ty-es of ,"SS on
> t*e taxes are also an added vow to t*e individuals and families1
>
> 2t is felt t*at extending t*e benefit of ,GST8SGST credit facility to t*e
> individuals8families will not only em-ower t*em but also *el- to inculcate a
> uni4ue sense of res-onsibility in t*em and w*ole*eartedly motivate t*em to
> take -art in t*e !ation (uilding in t*eir own way1 T*e tax avoidance
> *it*erto noticed due to t*e mutual benefit will automatically wit*er away
> once t*e ,GST8SGST credit facility is extended to t*e individuals8families
> and t*is will ultimately translate into better tax com-liance and easier tax
> administration1 T*ere is no second t*oug*t t*at w*atever -olicies or
> -rogrammes framed are intended for t*e benefit of t*e '%& crores -o-ulation
> of t*e country and not for any -articular section of t*e society and
> t*erefore$ t*e extending t*e credit facility to t*e individuals and families
> can also be made -ossible wit* t*e *el- of tec*nology1
>
> 6revention is better t*an cure and 2 am o-timistic t*at em-owerment of t*e
> common man can be effectively used as a tool for -revention of tax avoidance
> and tax evasion1 2n ot*er countries tax evasion is a crime1 7*ereas$ in
> 2ndia even t*oug* on statue tax evasion is a -unis*able crime -er se$ in
> effect$ it is noticed t*at t*e redressal mec*anism 8 recovery of tax arrears
> t*roug* -rolonged litigation is a cumbersome exercise1 ,onviction in
> indirect tax matters is a rare -*enomenon in 2ndia1 .n t*e ot*er *and$ due
> to t*e -olitical com-ulsion8interference$ recourse of out of court
> settlement is -referred in 2ndia even if it is at t*e cost of exc*e4uer1
> 7*ereas$ in ot*er countries conviction and im-risonment in tax evasion is a
> regular feature1 Some of t*e convictions made in ot*er countries on tax
> evasion related cases are as under:
>
> + Singa-ore woman !or +9i9a* +bdul +9i9 was -rosecuted for obtaining tax
> refunds from t*e 2nland 5evenue +ut*ority of Singa-ore :25+S; by making
> false entries in t*e GST returns of a com-any$ Trade.ne$ w*ere s*e was a
> manager 1 S*e faces a maximum -enalty of t*ree times t*e amount of tax
> evaded$ a fine of u- to S/ '&$&&& and <ail of u- to > years1
>
> 2n ,anada$ (elleville$ .ntario$ a )irkfield resident was fined S/ ?@$'#A$
> sentenced to ?& days in <ail$ and given '% mont*sB -robation after -leading
> guilty to goods and services tax :GST; fraud in a local court on +ugust %C$
> %&&@1 +ccording to ,anada 5evenue +gency :,5+; investigation revealed t*at
> t*e accused and t*e cor-orations did not conduct any commercial activity$
> nor own or rent -ro-erties$ during t*e -eriod for w*ic* GST refunds were
> claimed1
>
> 2n 0ancouver$ (ritis* ,olumbia$ a (usinessman sentenced to more t*an % years
> in <ail and fined over S/ A&&$&&& for GST fraud in %&&A1
>
> 2n +ustralia$ during t*e year %&&DE&>$ as a result of referrals to t*e
> ,ommonwealt* /irector of 6ublic 6rosecutions$ '&Dcases resulted in
> convictions for serious tax evasion or fraud$ of w*ic* D@ received custodial
> sentences1
>
> !ow t*at t*e -rocess of finali9ation of t*e -ro-osed ,GST8SGST is embroiled
> on t*e com-ensation clause$ 2 t*oug*t it -ro-er to *ig*lig*t and -itc*ing u-
> t*is issue$ w*ic* is in t*e common interest of '%& crore strong -o-ulation
> of t*is country1 "xtending ,GST8SGST credit facility to t*e individuals will
> be true em-owerment of t*e common man in its real sense$ w*ic* will
> automatically result in resilience in tax com-liance as well as tax
> collection1 .nce t*e em-owerment and inclusive growt* is fulfilled w*ere is
> t*e 4uestion for continuing wit* t*e irrational subsidies= T*e resultant
> savings can be better utili9ed in t*e most backward regions of t*e country
> in a -roductive and meaningful manner in social sectors suc* as education$
> *ealt* care sanitation$ and -otable water1
Revised Discussion Paper on DTC An Analysis
JUNE 18, 2010
y ! !iva"u#ar, CA
T$E Government has finally released the revised Discussion Paper on the Direct Tax
Code. As we know, the original Discussion Paper which had een issued in August
!""# had contained a lot of controversial provisions, many of which have een dealt
with, in this revised discussion paper.
$y take on some of the important amendments proposed y the revised discussion
paper....
%AT on &oo" pro'i(s
$inimum Alternate Tax %&$AT'( would continue to e levied on the asis of )ook
profits and not on the asis of the value of gross assets, as had een originally
proposed. This is a huge relief for the capital intensive sector including the
manufacturing and infrastructure sectors. $ore importantly, it would remove the
anomaly etween the services sector and the manufacturing sector, as the services
sector tends to use much lesser assets, as contrasted to the manufacturing and
infrastructure sectors. *evy of $AT on ook profits would also help loss making
companies. This is highly welcome amendment.
DTAA )ill no) override DTC
+n a ma,or relief to -oreign Companies in general and -oreign +nstitutional +nvestors
%&-++s'( in particular, the revised Discussion Paper clarifies that the assessee would e
free to opt for either for the provisions of the Doule Taxation Avoidance Agreement
%&DTAA'( or the +ndian +ncome tax Act, whichever is more eneficial. This is a ma,or
relief to the -oreign Companies given the fact that, in the original version, the DTC
had stated that its provisions would override the provisions of the DTAA, which are
generally more eneficial, including, in respect of the tax rates. As we know, many
-++s get themselves registered in tax havens outside of +ndia, to take advantage of
the eneficial provisions in the DTAAs in respect of capital gains. .f course, +ndia has
entered into with these respective countries/tax havens including $auritius, +sle of
$an, etc. +t is also expected that a lot of unnecessary litigation could e avoided as
many -++s were trying to take the view that their income is to e treated as &usiness
income', in order to claim exemption from the levy of income tax in +ndia, in the
asence of a permanent estalishment in +ndia.
*on+ (er# capi(al +ains on lis(ed s,ares and e-ui(y #u(ual 'unds )ould s(ill
+e( (a.es
The revised discussion paper's proposal on treatment of long term capital gains on
sale of listed shares and units held in e0uity oriented mutual funds however, falls
short of expectations. Currently, as we know, the long term capital gains related to
shares and investment in mutual funds are completely exempt from tax and this has
een one of the significant reasons for the heightened activity in the stock markets.
The original discussion paper had provided that gains and losses arising from the
transfer of investment assets will e treated as capital gains or losses and that these
gains or losses will e included in the total income of the financial year in which the
investment asset is transferred. The original discussion paper had also provided that
the capital gains will e su,ected to tax at the rate of 1"2 in the case of non3
residents and in the case of residents at the applicale marginal rate and that, the
current distinction etween short3term investment asset and long3term investment
asset on the asis of the length of holding of the asset will e eliminated.
.f course, these proposals had created a lot of concerns and many had predicted
that the stock markets would see much less activity, post the DTC, with the proposed
elimination of the tax exemption for long term capital gains for listed shares. The
revised paper states that the capital gains arising from transfer of an investment
asset, eing e0uity shares of a company listed on a recogni4ed stock exchange or
units of an e0uity oriented fund, which are held for more than one year, shall e
computed after allowing a deduction at a specified percentage of capital gains
without any indexation. The ad,usted capital gain will e included in the total income
of the taxpayer and will e taxed at the applicale rate. The loss arising on transfer
of such asset held for more than one year will e scaled down in a similar manner.
The example given in the revised paper seems complex.
This move to tax long term capital gains on listed shares and e0uity mutual funds
might not enthuse the markets, for sure. The Government should try and retain the
exemption that is availale for long term capital gains availale for listed shares and
e0uity linked funds.
!E/ Uni(s se( up &e'ore (,e DTC )ould +e( (a. ,oliday 'or (,e une.pired
por(ion
+t was widely expected that the Government would do a re3think on its earlier
proposal to discontinue tax holiday for new 567s set up, under the DTC. The
reiteration of this stated position that 567s set up after the coming into force of the
DTC, is a ma,or dampener for the very 567 scheme, as this scheme would collapse
without income tax holiday.
+t is also now very clear that there would e no tax holiday for 5TP 8nits eyond
$arch 19, !"99. The revised paper does talk of tax holiday for 567 8nits, to e
continued for the unexpired portion, under the Direct Tax Code. This would mean
that the tax holiday under the DTC would e availale for units which are set up prior
to the coming into force of the DTC, which in all proaility, should e April 9, !"99.
The tax holiday under the 567 scheme is too ig an incentive, to e ignored,
especially, y the medium to large +T exporters. 8nits in 567s are entitled to get 9""
per cent income tax exemption on export income for the first five years, :" per cent
for the next five years. They also get exemption on :" per cent of the ploughed ack
export profit for the next five years after the first 9" years. $ore importantly, unlike
the 5TP 8nits, 567 8nits are also exempted from $AT. ;iewed from any angle, the
567 scheme is a far superior scheme, as compared to the 5TP+ scheme and units
currently operating as 5TP units would do well to act fast and ensure that they don't
miss the tax holiday us under the 567 scheme.
-ollowing the release of draft DTC last year, scores of 567 units and developers had
raised concerns that the 4ones were attractive due to the tax sops and their
withdrawal would drive away future investors. The Government has now assured that
it would protect the tax holiday for 567 8nits, in respect of the unexpired portion,
under the DTC. This is some good news for the 5TP 8nits, which should now
immediately work towards moving into 567s, prior to $arch 19, !"99.
.f course, shifting of the existing usiness y the 5TP 8nits to the 567s, would result
in loss of the income tax holiday, as it would amount to re3structuring of an existing
usiness. <owever, 5TP 8nits are entitled to plan their usiness operations in a legal
manner, y ensuring that, a new &usiness' is set up in the 567, so as to ensure that,
the tax holiday is availale. +t could mean that time is running out for the current
5TP 8nits, who would need to move to 567s, in order to e ale to get the tax
holiday under the DTC. +t is legally permissile for 5TP 8nits to start a unit in the
567, in a small scale and ramp up the same, in suse0uent years. This
announcement from the Government could see a mad rush y the existing 5TP 8nits
and new 8nits, to move towards 567s, resulting in a lot of sudden increase in
usiness for 567 Developers.
0(,er proposals in (,e revised discussion paper
++ Tax exemption on maturity for all existing approved provident and pension
schemes- this is a highly welcome step which would go a long way in encouraging
personal investments.
++ The employer's contribution to provident fund and such schemes within
prescribed limits shall not be considered as salary, as is the existing case.
++ Amounts received as gratuity, from voluntary retirement schemes and pension
at retirement would be exempt subject to specified limits.
++ ent on self owned house property will be the amount of rent received for the
year and would not be taxed on a presumptive basis, as is the current situation. A
welcome proposal.
++ !ealth tax will be levied broadly on the same lines as provided in the !ealth Tax
Act, "#$%. &ne does not understand the 'overnment's continuing love for wealth tax
when many of us have pointed out that it just does not ma(e economic sense to levy
tax on wealth. !ith no need to please the )ommunists any more, the 'overnment
would do well to abolish wealth tax altogether.
++ )apital gains for foreign funds will not be subjected to T*+.
++ A )ompany incorporated outside ,ndia would be treated as resident in ,ndia only
if its effective management in within the country. This is a highly welcome
clarification, considering the fact that in terms of the original discussion paper, a
foreign company which had held its board meeting once in ,ndia, could have been
re-uired to pay tax on its global income.
1overn#en( s,ould )or" (o)ards clari'yin+ (,ese unaddressed issues
The Government should consciously work towards clarifying the following issues
under the DTC...
== +ncome arising or accruing to the >on3?esident and the need to deduct tax at
source in cases when no income arises or accrues to the >on3?esident in +ndia. This
su,ect has een a nightmare for the consultants and the Departmental officers,
alike, over the last few months, in the wake of conflicting decisions of <igh Courts
compounded further y the issue/withdrawal of circulars y the C)DT. .ne hopes
that the Government would provide for clear provisions under the DTC to clarify that
there is no need for tax to e deducted, when no income arises or accrues to the
>on3?esident, in +ndia.
== The Government, thro' the -inance Acts of !""# and !"9" had amended the
current 5ection :@ to provide for levy of tax under &+ncome from other sources', in
respect of the difference etween the market/fair value of the shares transferred and
the actual values, in the case of shares of unlisted companies. This move has
rought aout a lot of uncertainty in terms of private e0uity investments into unlisted
companies. .ne hopes not to see provisions of this kind, in the DTC.
e'ore par(in+222222
++ ,t is now curtains for the tax exemptions for +T. /nits, under the *T). &f
course, the medium and large +T. /nits could still try and set up new units in +01s
before the *T) comes into force.
++ The 'overnment should do a re-thin( on the proposed denial of tax holiday for
new +01s getting set up after the *T) comes into effect. *evelopers have pumped
in tens of hundreds of crores of rupees into +01 projects and the denial of the
income tax benefit coming at this stage, when the realty sector is showing some
signs of recovery, could be disastrous, as *evelopers cannot withdraw from +01
projects already in progress. !ith no new units li(ely to get set up after the *T)
comes into force, +01 *evelopers could be left with a lot of unused space. The
'overnment should give at least two further years' extension for +01s getting set
up, to avail of tax holiday under the *T) and should also amend +ection "2AA of the
,ncome tax Act, to facilitate the shifting of the +T. /nits into +01s, without losing
the tax holiday due to provisions which tal( of denial of tax holiday to +01 units
formed as a result of re-structuring of existing +T. units3business.
The current window of aout # months availale for 567s to get set up, to avail of
tax holiday, is rather too short for any effective planning to happen. +t has een
reported that even the Commerce $inistry is unhappy with the provisions contained
in the revised discussion paper as they relate to tax holiday for 567s.
++ The 'overnment, of course, needs to be complimented for listening to its
sta(eholders and bringing about some welcome changes in the *T). &ne hopes the
'overnment would ma(e further amendments to the *T), especially in respect of
continuation of tax holiday for +01 /nits and *evelopers.
3T,e Au(,or is Direc(or, !4 !olu(ions Pv( *(d, an+alore5