Untitled Document

Dear FM, time is ripe to cut corporate tax and personal tax rates by 5%; Need to soften hard shell of FBT

LIKE any other country the global recession has tangibly hurt the Indian private sector. It is time for the Finance Minister to reduce the corporate tax rates to 25% so that it could generate some surpluses in the hands of companies with the consequential impact on investments and growth.

The Finance Act of 2007 introduced FBT on ESOPs. The value of fringe benefit is being determined in accordance with a prescribed method, for determining the fair market value on the date of vesting of the option. The CBDT has already issued a circular stating the prescribed methodology. The listed companies are now liable to pay FBT at the full rate in the year of exercise of options, for the difference between the actual payment made for the options and the fair market value on the date of vesting.

ESOPs have emerged, over the years, as a critical motivational and retention tool for companies, in a highly competitive market for talent. It is a very effective instrument to encourage employment stability, and is a win-win proposition both for the employers and the employees. Bringing ESOPs under FBT will discourage companies from offering such benefits, at a time when wage costs are high and increasing at exponential rates.

The imposition of FBT on ESOPs need to be reviewed, keeping in mind the following aspects:

It may be noted that SEBI has already issued guidelines on the issuance of ESOPs, and norms for accounting have also been established. Imposing FBT in the form proposed in the Finance Act would not be in consonance with the SEBI guidelines.

The company issuing the ESOPs should not be taxed for market gains that accrue after the date of granting of the option, since the employee to whom the grant is made, is anyway liable for taxation as capital gains if he chooses to sell the shares subsequently (if sold within one year). Therefore, FBT on ESOPs will be a measure of incorrect taxation and against rational taxation principles.

In any case, the Board of a company decides to create an asset and grant an option on a particular date, keeping in mind the liabilities to the Profit & Loss Account accruing from giving the option at a discounted or concessional rate to the employees. Subsequent to that, the ESOPs are in the nature of a capital asset at the hands of the employee, and the employer has no influence whatsoever on when the employee decides to exercise the option. Accordingly, the SEBI Regulations stipulate that the discount to the fair market value at the time of the grant is clearly in the nature of a benefit, which has to be charged to the profit & loss account. This is a mandatory requirement for all listed companies. Any subsequent appreciation, whether at the time of vesting or exercise, is obviously due to the capital market and the employee exercises the option as per his convenience, which when sold, clearly results in a capital gain . Therefore, it would be inappropriate for the Company to be liable for FBT based on either the vesting or exercise of the options.

Further, employees have the liberty to exercise their ESOPs at various points of time which may have vested at different time in various years. Therefore in large companies, this creates huge administrative hassles/complications in monitoring the fair market value for each employee for vesting at different points of time in a year.

As such, the creation of new systems were unnecessary when there is already an established method of SEBI for listed companies for determining the fair market value on the date of grant and perquisite taxation if any, should be applicable only at that point. Subsequent gains can continue to be taxed under capital gains.

Therefore, it is suggested that the imposition of FBT on ESOPs be reviewed. If the same is to be continued, it would be rational to impose FBT, not on the date of exercise of the options by the employees, but on the date of granting of the option.

Withdrawal of MAT or alternately increase in depreciation/additional depreciation:

MAT was introduced to bring into the tax net the dividend paying companies enjoying benefits of higher depreciation and other tax exemptions, resulting in nil/ lower taxable income. The current reduced rate of tax depreciation is more or less similar to the rates allowed under the Companies Act. In fact, the current tax depreciation rate on general plant and machinery is even lower than the rate as per Companies Act on such assets used on a double/ triple shifts. Consequently, continuance of MAT has become redundant and the provision, giving rise to unnecessary litigation should be abolished.

Alternately, the earlier rates of depreciation should be restored to avoid tremendous hardship to the capital intensive industries. Otherwise, the additional depreciation @20% which is applicable on plant & machinery only for the manufacturing sector, on fulfilment of stipulated conditions should be increased to 40% . In fact, in the absence of investment allowances, there is a necessity to incentivise investment flows into India through attractive depreciation benefits.

The rate for short term capital gains tax was increased from 10% to 15% last year. In the context of the current negative sentiments in the global capital market, this has created a greater impact in India. The IPOs have also been severely affected. Further, the lowest income tax slab is at 10% which was earlier in line with the short term capital gains tax rate. The present increase has resulted in a disparity in the said tax structure. For example if an individual has no other income and only short term capital gains of Rs.2 lakhs, he will have to pay tax on Rs.50,000/- @ 15% and not at the lowest slab of 10%. This anomaly also needs to be corrected.

Proposal for multi-tier adjustment of Dividend Distribution Tax and reduction in the tax rate:

The amendment to section 115-O has now provided for adjustment of dividend received from subsidiary if the subsidiary has paid the dividend distribution tax and the domestic company is not a subsidiary of any other company. Subsidiary company has been defined as one in which the holding company holds more than 50% of the equity share capital. However, in case of multi-tier holdings this benefit is not available. Moreover, very many companies in India which are subsidiaries of foreign companies will not get this adjustment benefit. These aspects may kindly be reconsidered.

It is also recommended that the dividend distribution tax rate of 15% be reduced to 10% (which is the lowest rate for personal income tax) and this will bring about greater buoyancy in the capital markets.

The tax benefits under section 72A in respect of amalgamation or demerger are currently limited to industrial undertakings or a ship, hotel, aircraft or banking. It is suggested that in the current liberalised and buoyant environment where various new sectors are growing at a rapid pace, this should now be extended to all businesses including financial services, entertainment/sports, information technology (IT) and IT enabled services. Further, the provisions of section 72A should be simplified specially in respect of the conditions applicable for the amalgamating company like losses/depreciation being unabsorbed for at least three years and holding assets on the amalgamation date upto ¾ of the book value of fixed assets held two years prior to the said date.

Nowadays, reopening notices under section 147/section 148 have become a very common occurrence and such notices are being served in thousands across the country. It appears that there is no consideration in following the principles on the subject laid down by the Hon'ble Supreme Court and High Courts over the years. Simple audit observations, even on points of law, are frequently being used as grounds for re-opening leading to extreme harassment to all assessees. In fact, the position has become so bad that even for legislations which have become obsolete like Interest Tax (withdrawn in Finance Act, 2001) reopenings are being done for very old years since the relevant law permitted reopenings without any time limit.

Further, the said reopening provisions are being misused in various locations, especially for salaried assessees, where scrutiny assessment is not possible as per the CBDT guidelines and this has become a breeding ground for corruption and harassment.

Therefore, it is suggested that proper stipulations be laid down for any reopening and the period of reopening be also reduced to 3 years from the end of the assessment year.

Proviso to section 147 has been inserted to provide that the Assessing Officer may assess or reassess other than matters which are the subject matter of any appeal, reference or revision. However, in respect of matters which have already been examined at the time of original assessment, the current law as laid down by the various courts categorically stipulates that reassessment of the same cannot be done since it will result in change of opinion. Moreover, it does not make sense to keep on assessing/reassessing the same matter again and again. The annual income tax assessment/reassessment procedure should be normal and routine and should not provide for excessive powers to harass assesses. Therefore, it is suggested that the new proviso to section 147 should also state that all matters which have been examined in the original assessment should not be reassessed.

Incidental Activities of a secondary/minor nature for achieving the main objects of trust should be excluded:

A proviso has been inserted under section 2(15) whereby “charitable purpose” will exclude any activity in the nature of any trade, business or commerce or any activity of rendering any service in relation to any trade/business/commerce for a fee, irrespective of the nature or use or application of such activity. This amendment is likely to create a lot of operational difficulties for various genuine trusts, which are involved in various charitable and philanthropic activities. While the intention of the legislature is not to hit the genuine trusts carrying on charitable activities, the provisions may be construed differently by the tax authorities. Therefore it is suggested that if such activity is incidental to the main objects and is of a minor nature, then it should continue to be treated as a charitable purpose. For instance, a charitable trust involved in charitable/philanthropic activities in rural areas eg. organizing self-help groups, cattle grazing etc. can organize a small function and the amounts collected by way of advertisements or entry fees should not result in such trust being treated as being involved in business. Therefore, it is suggested that an explanatory clause be added stating that the ancillary and incidental activities for achieving the main objects of the trust, if it is of a secondary/minor nature, should not constitute any trade, business or commerce.

Moreover, in the context of the principle of mutuality, Chambers of Commerce and Industry Associations should also be excluded from the said proviso since fees / subscriptions are received from members for promotion of their interests and for providing services to them.

The amended section has laid down that all payments to a single party have to be aggregated in a day for determining the limit of Rs.20,000/- in the context of disallowance for cash payments under section 40A(3). However, the said limit of Rs.20,000/- was laid down many years back and there is an urgent need to revise the said sum. It is suggested that this limit may be raised to Rs.50,000/- in the context of inflation over the years.

It has been legally established that TDS is not applicable in case of reimbursement of expenses since there is no income involved. However, very often disputes crop up, leading to unnecessary litigation and harassment. Therefore it is necessary to address this problem through a suitable provision in the Income Tax Law or by way of a CBDT circular.

As per the current computer system, TDS cannot be done properly if the other party from whom TDS is being deducted does not have a PAN number. In fact this makes the entire return technically defective. However in India, there are a large number of "persons" who do not have a PAN and many are also not subject to income tax since their income may be below the taxable limit or they may belong to the Agricultural sector. This situation also creates tremendous difficulties for different organizations since tax is deducted and duly deposited, but subsequently queries are raised by the Tax Authorities for the missing PAN.

It is suggested that new forms be introduced for the purpose of taking declarations to the effect that the income is not taxable and therefore there is no applicability of TDS/PAN in cases of people with agricultural income or the income being below the taxable limit.

As per Section 14A no deduction is allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Method of determining the amount of expenditure was inserted by I.T. [Fifth amendment] Rules, 2008 w.e.f. 24.03.2008 as Rule 8D.

According to the said rule, the disallowance for expenditure in relation to exempt income is to be determined as follows:

The mechanism specified in (c) above is very harsh since it considers all the investments as investments which will generate dividend income. It ignores the situation wherein, the investments are made by companies as strategic investments such as investments in JVs, investments in subsidiary companies, etc. The real motive of such investments is maintaining/exercising the control of the business rather than earning dividend out of such shares. It can also arbitrarily result in a huge disallowance since it does not consider the items of actual expenditure in the profit & loss account.

As a result of method prescribed under Rule 8D, the disallowance is being determined at a substantially high value. This disallowance is extremely harsh and inequitable. The method needs to be immediately corrected.

The disallowance should be made only of the expenses directly incurred in earning the exempt income and not otherwise. This will be in line with the decision of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation [242 ITR 450 (SC)], where it was held that indirect expenses/overheads should not be apportioned between taxable business income and exempt incidental incomes.

It should be specifically clarified that the method will apply prospectively i.e. from A.Y. 2008-09. Such a clarification will be in line with the proviso which was introduced in Section 14A wherein, the section was made applicable prospectively from A.Y. 2001-02.

(b) Deduction for Personal Tax Computation under section 80C to be increased to Rs.1.50 lakhs and a further Rs.1 lakh for investment in infrastructure:

Under section 17 of the Income Tax Act, medical reimbursements to employees are exempted from tax in respect of general medical expenditure (upto Rs.15,000 per annum) and expenditure incurred in approved hospitals. However, this tax benefit is not available to retired employees. It is suggested that the provisions of section 17 be amended to include retired employees for the tax benefit on medical reimbursements/hospitalization expenditure in approved hospitals.

All individuals normally have money in bank accounts which earn interest at a very conservative rate. This interest income, alongwith some other stipulated items like post office deposits, etc. were earlier given the benefit of tax deduction under section 80L to the extent of Rs.12,000/-. This benefit was withdrawn in 2005 and has created unnecessary hardship to individuals alongwith related complications like payment of advance tax. Therefore, it is suggested the tax benefit under section 80L should be re-introduced. Also, considering the sharp reduction in the value of money, the limit should be enhanced to Rs.20,000/-.

15. Leave Travel Concession - Tax Relief Every Year and Replacement of Calendar Year by Financial Year

As per the current provisions, Leave Travel Concession/Assistance is eligible for tax relief for 2 calendar years in a block of 4 calendar years. It is suggested that the concept of calendar year should be replaced with financial year (April – March) in line with the other provisions of the Income Tax Law. Moreover, the concerned tax relief should be granted annually to give a fillip to the Travel and Tourism Industry.

The section 24 of the Income Tax Act provides for deduction of interest on housing loans upto Rs.1.5 lakhs for self occupied property on borrowings done after April 1999 and acquisition/construction completed within 3 years. This limit was introduced by the Finance Act 2001 and therefore, the limit needs to be urgently revised to at least Rs.2.5 lakhs.

17. Exemption For Payment of Gratuity and Leave Encashment to be raised to Rs 10 lakhs

The exemption limits for payment of gratuity and leave encashment are notified by the CBDT in accordance with the powers given under sections 10(10) and 10(10AA). The current limits are very old and needs to be raised substantially with immediate effect. It is suggested that in both the cases the limit should be raised to Rs.10 lakhs.

The amount of revenue collected on account of wealth tax is very meagre currently. As per last year's budget papers, the projected revenue for 2008-09 was Rs.400 crores (approx) and direct expenses were Rs.200 crores (approx). Therefore, it appears that there is no purpose served in continuing with this tax especially when one considers the indirect costs incurred in the areas of assessments and appeals by the Income Tax Authorities as well as the large number of litigations involved.

However, if the Wealth Tax cannot be withdrawn, then the law should be amended in respect of the following aspects :

Motor Cars: Wealth Tax is currently applicable in motor cars which is no longer a luxury item. It should only be made applicable in case of expensive cars say above Rs.10 lakhs

Residential Accommodation for employees: All residential accommodation for employees drawing salary of above Rs.5 lakhs is subject to Wealth Tax. This limit was introduced more than 10 years back and it is recommended that the limit be raised to Rs. 25 lakhs.

Corporate Social Responsibility Costs

Corporates are currently being involved in various areas of social responsibility as part of nation building. It is suggested that suitable tax incentives be introduced (both capital and revenue) in respect of such Corporate Social Responsibility Costs to accelerate the process and to ensure that the country can reach the goal of being a developed mission in the near future.

It has been noted that the Revenue often files frivolous appeals before the Tribunal against the order of Commissioner (Appeals) on any and every issue regardless of the quantum of tax involved and also where the judgment of the Commissioner (Appeals) is based on undisputed facts of the case or covered by earlier Tribunal decisions. It is suggested that a more stringent appeal filing procedure be drawn up (e.g. if covered by earlier Tribunal orders no appeal should be filed, CCITs sanction etc.).

Upto Rs.2 lakhs	nil
From Rs.2 lakhs to Rs.5 lakhs	10%
From Rs.5 lakhs to Rs.7.5 lakhs	20%
Above Rs.7.5 lakhs	25%