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INCOME TAX - DRAFT DIRECT TAX CODE 2009

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MoF 'Interactive Session' on DTC: Dear FM, did anyone give you this feedback?

Based on www.taxindiaonline.com story

On 09-10-2009, two months after the release of the Direct Taxes Code (DTC) Bill 2009, the Ministry of Finance (MoF) formally organised a large-scale 'Interactive Session' with the Trade and Industry at Vigyan Bhawanin the National Capital. Since the Finance Minister was the star of the show, the industry, the trade, the voluntary sector and even media persons attended it in good numbers. Jewels of all the three leading Chambers of Commerce - the CII, the FICCI and the ASSOCHAM - were not only in the audience but were also on the podium. The session took off on a positive note with the Revenue Secretary, after welcoming the speakers and the gathering, categorically said that the DTC was not going to ignore the wealth of judicial wisdom accumulated over the years. He emphasised that the finer principles of taxation decided by the judiciary were not going to be buried by the DTC. He then listed out certain notable areas of discord like General Anti-Avoidance Rules (GAAR), MAT, capital gains tax on non-residents, the definition of effective management of an enterprise, the Treaty Override, taxation of charitable institutions and the switchover from Exempt Exempt Exempt (EEE) to EET.

The mike was then handed over to the FICCI President, Mr H Singhania who lambasted the authors for meaninglessly switching over from the profit-based system to gross assets-based system for MAT. He said it was certainly not in tune with the international practice. The MAT provision in the DTC clearly does not take into account the reality of debt-funded assets and that there is no legitimacy for doing away with the carry forward of MAT credit. He urged the Finance Minister to completely drop the gross assets-based MAT provisions from the DTC.

He then flayed the rationale for incorporating GAAR which gives unbridled powers to the CIT. He also raised serious objection to the change proposed in the concept of effective management being applied as a test of residency. He harped on the so-called international practice of treaty override which was being amended by the Code. He also touched upon the issues of Dividend Distribution Tax, capital gains on foreign portfolios, EET and withdrawal of tax incentives for EOUs and SEZs. On the issue of wealth tax, he suggested that the financial assets should be exempted therefrom. For charitable bodies, he suggested that end-use of income criterion should be followed.

Next speaker was the CII President, Mr Venu Srinivasan. He began his address on an aggressive note when he observed that the simplification of the Income Tax Act should not be at the cost of fairness, equity and judicially-established treasure-trove of good principles of taxation. He elaborated how badly the Indian economy needs to invest in roads, ports and power. Thanks to slow investments in infrastructure, India lags behind China. And finally he flayed the proposed MAT provisions which are investment-based rather than income-based. He also wondered as to how the Government would attain the target of 50 mn jobs-creation being envisaged by the Prime Minister in the next five years! Having castigated the MAT provisions, he briefly touched upon other contentious issues like the GAAR, the tax residency, the treaty override and phasing out of tax incentives for EoUs and SEZs.

Then came the Chairman of Direct Taxes Committee of ASSOCHAM, Mr M H Dalmia. He questioned the rationality of proposing no carry-forward of losses if there is any delay in return-filing. He also dismissed the proposal for a change in the Rectification of mistakes (ROM) which is not to be allowed beyond six months. He doubted the intention of the authors to expand the definition of royalty and technical fees and inclusion of activities like hiring of industrial equipment for royalty.

Having touched upon these points quickly, he switched over to the favourite punching bag - the MAT provisions. He said that the proposed changes have been borrowed from Argentina and Nicaragua. Nowhere else such a system exists. Even in these two South American countries, such a system was adopted only because of abnormal local conditions which do not prevail in India. He further explained that these two nations were forced to go for such a system only because of hyper inflationary pressure. Even then they had provided the option of profit-based or asset-based taxation whichever was the lower of the two. He also elaborated on the possibility of a cascading effect of such a system for Group Companies where the same set of assets was likely to be taxed repeatedly.

Having heard these speakers, the Finance Minister, Mr Pranab Mukherjee, took the mike to clarify that the industry and trade should not forget the basic fact that the DTC is designed to be a futuristic piece of legislation and may not necessarily have a direct nexus with all the concepts and principles incorporated in the present I-T Act, 1961. He referred to the fact that there are thousands of companies which have huge assets but they do not pay tax, and such assets are not being put to productive use. However, the FM agreed to take a fresh look at the alleged worse-off conditions of income-earners in the range of Rs 3 lakh.

After his brief address the FM excused himself because of his prior engagements but he handed over the floor to the Revenue Secretary for carrying on the 'Interactive Session'. As soon as the FM left, the Revenue Secretary appeared to regain his elements, and made a few observations, just to set the ''atmospherics right'', as he put it! He began with his profound observation that India has not embarked on a campaign to ignore international tax practices. And that is why the DTC proposes EET in place of EEE which is not in tune with international trend. He clarified that the proposed Treaty Override would only be prospective, and will not affect the past cases. He further clarified that the present savings and their future interests were not going to be subjected to EET. Supporting his statement, the JS (TPL), Mr Arvind Modi, said that the present savings upto March 31, 2011 are protected under the existing law, and only future savings would be taxed under the DTC.

However, when a querist asked Mr Modi as to whether an old LIC policy maturing in April 2011 will be taxed, his answer was not a categorical NO. He referred to the bonus earned which may be taxed. On the issue of withdrawal of all the tax benefits like deduction on housing loans, PPF, LIC etc, Mr Modi took refuge to the proposed much higher income bracket like Rs 10 lakh which cannot, of course, be politically guaranteed today. Justifying the new MAT provisions, Mr Modi took recourse to jargons and said that the profit-based tax system was distortionary, and prone to manipulation and avoidance without any further explanation.

Replying to the industry on the question of excessive elements of subjectivity being offered to the taxmen under the GAAR provisions, and also the proposal to form a collegium of revenue officials and industry representatives to ensure fair invocation of the new provisions only in genuine cases, the Revenue Secretary contemptuously dismissed the idea by saying that the collegium system does not work in the tax world. However, he asked the CBDT Chairman to speak on the issue, and all that the Chairman could say was that the Board will have some administrative bulwarks to prevent misuse of these provisions.

In reply to a suggestion for introduction of a code for tax administrators, the Revenue Secretary said that many steps have been taken, and the taxmen would be much better administrators over a period of time. But how? He did not elaborate except for referring to some of the vaguely connected steps like business process re-engineering and training for upgradation of their skills.

Observations of TIOL correspondents present in the audience & the feedback of some of the members of Chambers of Commerce:

AFTER the Finance Minister's carcade left with the MoS(R) and also his advisor, Ms Amita Paul, the Revenue Secretary took the floor and changed the ambience into something which was far distant from the word 'Interactive'. Suddenly, millions of gallons of water were poured on the hope, high optimism and high spirit of the industry members who had come to be heard rather than their doubts and misgivings being summarily dismissed.

About 97% of the queries were handled by the Revenue Secretary rather than the CBDT Chairman or its Members or even TPL. And when an about-to-retire generalist rides the waves of such a technical session, the Finance Minister is far too technically qualified to imagine what sorts of answers must have been given. The Revenue Secretary was simply dismissive not only in his countenance and gesticulation but also in his choice of words. His dismissive approach gave the impression to the audience, as shared by many industry members, that this so-called 'Interactive' session was just a charade organised to merely fill a feedback form that the industry and trade were consulted before finalising this vital piece of legislation.

So dismissive and embarrassing were the mannerisms of the Revenue Secretary while answering some of the major apprehensions of the industry, that many noted industrialists (members of the CII) were seen leaving the hall no sooner their queries were rejected with some pedestrian comments. The suggestions of the business chambers to work closely with the experts reviewing the DTC were sarcastically welcomed by the observation that the CBDT was yet to receive their comments albeit the DTC was two-month-old.

On the part of the chambers of commerce, it was noticed that a large number of their queries related to international taxation. Virtually, all the three Chambers appeared to be in competition with one another to impress MNCs by taxing the podium with issues relating to treaty override, the Residency Test, the concept of effective management impacting the taxability of cross-border transactions, capital gains tax on investments by FIIs etc. All of them appeared to be espousing the cause of non-resident companies rather than raising important issues relating to domestic taxation. Such a collective or common stand of the industry associations apparently exasperated the Revenue Secretary and perhaps also added to the natural acidity of his tongue.

In a nutshell, scents of arrogance dominated the entire proceedings, and gave the impression that the organisers of the show were in a tearing hurry to wrap up the session as if they were pre-determined that nothing meaningful would come out of the exercise to improve the text of the DTC. The spirit of partnership with the private sector in policy-making was evidently missing. And the Revenue Secretary's mannerisms clearly demonstrated that 'he was the government and need not necessarily listen to all'! Ideally, the Finance Minister should have kept away the original authors of the DTC from this session and should have directed the CBDT to collect inputs from all stakeholders, and then looked at the feedback collectively. It would perhaps have given him a better picture to take a final call on the possible amendments in the DTC. Since the authors of the DTC, technically speaking, become one of the interested parties, the CBDT and its chosen officers of known technical expertise could certainly have done a better job to the word 'Interactive' used as prefix for the event, more so because the Board was contemptuously not involved in the making of the DTC as is jag jahir now! Let's hope that the Finance Minister does have a more reliable alternative channel of feedback on this issue or at least a time-tested formula to determine the extent of discounting he should do for the feedback reaching him officially!

The views expressed in this article are those of the author and are not intended to represent the views of www.referencer.in

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