Ups And Downs For The Union Budget 2009-10
Ups
Roadmap for consolidated Goods and Services Tax
India, at this time, badly needs a consolidated goods and services tax (GST), as the present system of separate tax on goods and services (a) leads to duplication of levies and falls short of the broad principle of value-added tax; and (b) leads to tremendous confusion, as several cases have reached the Supreme Court on whether a particular transaction is a sale of goods or service. The controversy has only aggravated, after the Supreme Court ruling last year in the case of Bharat Sanchar Nigam, when the Court ruled that the government cannot levy both sales tax and service tax on the same transaction. The attempted harmonisation of value added tax (VAT) has also failed, as States have continued to tinker with their own laws, and governments have even increased rates of tax from the agreed slabs of 4 per cent and 12.5 per cent. Rajasthan, for instance, has increased the general VAT rate to 14 per cent. As the government goes for a constitutional amendment to introduce GST, it may hopefully reduce the scope of the States’ discretion in changing the rates of tax.
Abolition of Fringe Benefits Tax
The Fringe Benefit Tax was both inequitable, as also unduly burdensome and it is commendable that the Finance Minister has taken the bold step of abolishing this tax.
Downs
Amendments pertaining to deemed income
There are amendments proposed to Section 50C of the Income Tax Act to bring to tax a difference between a “stamp duty valuation” of an immovable property and the actual transfer price. This is based on the old-age notion that parallel economy still thrives in real estate, which is probably mistaken as real estate development, is now in the hands of much larger, professionally managed and listed development companies. Besides, most real estate purchases are leveraged with loans; hence the element of black money in real estate is considerably reduced. However, stamp duty presumptive values are arbitrary in many cases. Real estate prices may have crashed in many places; stamp duty rates have not been revised in tune with market rate changes. Besides, there is no basis to assume that all property transactions, even within a particular locality or particular complex, will actually take place at a uniform price.
What is even more surprising is that the difference between the stamp duty valuation and actual consideration has also been taken as the “other income” of the buyer by amending Section 56. This is most illogical—if the differential price is taxed as a presumed capital gain in the hands of the seller, there is no basis for taking the same amount as income of the buyer. What adds to the injury is that though the buyer pays tax on the differential consideration, the same is not added to the cost of acquisition. This means, when the buyer sells the same property, he will be paying tax on the differential consideration once again, leading to a triple tax on the same differential consideration.
Deemed other income on any property transferred at less than fair value
There is an ominous provision in Section 56 (2) (vii) (c), whereby the difference between fair market value and actual purchase consideration of any property will be taken as deemed income. “Any property” is an extremely wide term. Though the Section is applicable to individuals and HUFs, consider the case of an option to buy an asset. For example, there may be an option to buy an asset in case of a lease contract (cars leased to employees are normally bought at 1 per cent price). There may be several options and future contracts in securities. The very meaning of an option contract is that the asset will be bought at less than the prevailing market value. There is a scope to impose a tax on all such option contracts under the proposed provisions. The clause, as proposed, does not contain any exception for a purchase that arises in pursuance of a contract. So, if there is a contract today to buy a property 12 months down the road at the price prevailing today, if the price at the time of actual transfer has gone up, there is a scope for bringing the difference to tax. The clause, as it is worded, is patently illogical and unfair, and would surely be struck down, unless it gets amended.
Vinod Kothari is a Calcutta based Chartered Accountant. He is an internationally recognized author, trainer and expert on securitisation, asset-based finance, credit derivatives and derivatives accounting.
Sujit Ghosh comments on the indirect tax proposals under the Union Budget, 2009-10
In the midst of slowdown in the world economy, India could not have remained insulated. Erosion of consumer demand has led to reduction of production and thus impacting the entire economy. The services sector, much of which has been dependent upon offshore demand, also witnessed slowdown, as the offshore economies started contracting to incomprehensible levels. Similar to most countries, the Government of India infused stimulus into the economy by adjusting the credit policies in terms of the Repo & Reverse Repo Rates and also aimed at improving the consumption demand by reducing taxes on manufacture (i.e. excise) and taxes on services (i.e. service tax) in the last quarter of 2008-09.
Overall, the stimulus packages seemed to have worked, given that the economy has been an witnessing upward growth trajectory since April 2009 and perhaps showing signals of possible bottoming of the economy. It was possible for the Government to get carried away with these results and attempt at reversing the tax reductions, given that it has been under tremendous pressure to bridge the fiscal deficits which had leaped to 6.2 per cent. However, it was heartening to hear the Hon’ble Finance Minster refrain from taking any such steps and instead have maintained the status quo in so far as the key indirect tax rates are concerned.
The next important aspect of the Budget proposal was the commitment to introduce the Goods and Services Tax (GST) by 1 April, 2010, and a sneak preview of its basic structure—a dual GST comprising Union and State GST. This is a desirable step, given that multiplicity of indirect taxes and break in the credit chain for goods and services have often led to a cost-prohibitive supply chain. Indirect taxes in their current form are not entirely a tax on consumption for it taxes business as well. However, with the introduction of GST, we hope that cost efficiencies are achieved in supply chains, and consumers bear the impact of indirect taxes and businesses are freed from its impact.
However, there are significant issues that need to be ironed out before the GST can be a reality. These issues range from the need for constitutional amendment permitting the States to have the proprietary to levy taxes on matters listed in List I of the Seventh Schedule, uniformity of legislative provisions across the country, introduction of GST in one go as opposed to phased introduction (unlike what one witnessed during the roll out of VAT), uniform definition of supply of services/goods rules across the States, seamless flow of tax credits across the political boundaries of the States etc.
Alignment on the territorial jurisdiction of the three federal indirect taxes—customs, excise and service tax was another important aspect of the Budget proposal. Until this Budget, the territorial jurisdiction of the customs and excise laws extended to the entire Continental Shelf and Exclusive Economic Zones of India, whereas service tax laws extended only to designated coordinates in this area. Territorial jurisdiction of service tax laws are now being extended almost in line with that applied under customs and excise. This can have a far-reaching impact on oil and gas exploration in the east coast. The cost of exploration and production is likely to increase. It also has the potential to create confusion as the term “India” (in the context of service tax) has been defined to mean installations, structures and vessels in the entire Continental Shelf and Exclusive Economic Zones of India, without explaining what these terms mean and why restrict it to only these points!
As has been the trend in the past, this year, three more services have been added to the list of services liable to service tax and one of them pertains to the Legal Services. However, this tax is not intended to be imposed on (a) legal services provided by individuals (b) legal services provided to individuals and (c) litigation services.
Overall, the Hon’ble Finance Minster has tried to strike a balance between reform and meeting the aspirations of the “common man”. In his words, “A single Budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so”. Perhaps, it is a clear signal that reform would be a continuous process and one can expect these any time during the year and not necessarily on the day of the Budget. Therefore, we may just need to “wait and watch” to ascertain what lies ahead!
Sujit Ghosh is Partner, BMR Advisors. The views expressed here are personal and do not represent the views of BMR Advisors.