Proposed levy on financial assets could hit capital formation

We also bring to you latest news from Tax in India. Below is the article published in one of the News Tabloid in India.

 



Finance minister P. Chidambaram’s proposal to levy wealth tax on financial assets of individuals and trusts above Rs50 crore is set to hit not just affluent investors but entrepreneurs too, say tax experts.

If one takes the example of Reliance Industries chairman Mukesh Ambani, the proposal could lead to an extra tax demand of Rs 86 crore a year on the 36 lakh shares he holds in the company. Internet entrepreneurs, whose companies may have fairly good market capitalisation but little revenue flow, may also find it hard to comply with the proposed wealth tax norm.

While official sources said the tax base of wealth tax has not been precisely quantified, rough estimates suggest the proposed 0.25% tax, if signed into law, could fetch a maximum of Rs 19,000 crore assuming the entire market capitalisation of financial assets accounting for 60% of the Rs 1,28,39952 crore GDP projected for 2014-15 is taxed. However, only those owning assets worth more than Rs 50 crore would come under the tax net, lowering estimates of receipts from this tax further.

Experts, therefore, worry whether changes in wealth tax would be worth the effort and warned that the move may lead to undesirable results. “Including financial assets within the scope of wealth tax will cause a lot of hardship to entrepreneurs who may not have the cash flow in the initial years to comply. This would adversely affect capital formation,” said Girish Vanvari, co-head, tax, KPMG in India.

The revised Direct Taxes Code released for public comments earlier this week raised the threshold for this levy from Rs 30 lakh to Rs 50 crore, lowered the rate to 0.25% from 1% now and excluded companies from the scope of this tax. The revised code proposes to tax financial assets in the hands of individuals, Hindu undivided families and private discretionary trusts. At present, companies are covered under wealth tax but they will not be under wealth tax ambit if the code is implemented.

“One has to leave aside the emotions of taxing the super-rich and dispassionately analyse the cost of wealth tax collection against the amount that could be garnered. I doubt whether such collections would help in reducing the fiscal deficit. This (proposed change) amounts to paying taxes on market value of assets when there is no cash flow. Does one expect taxpayers to sell the financial assets and pay wealth tax?” asked Sudhir Kapadia, partner & leader, business tax services, EY.

Levying wealth tax on the market value of a financial asset would mean paying tax on sentiment-driven valuations without actually benefiting from such valuation, which is possible only at the time of a sale.

But the finance ministry is of the view that the cost of acquisition of an asset may not be the right indicator of the value of an asset and, therefore, cannot be the basis for wealth tax.

The ministry was earlier of the view that wealth tax was just a means to collect information on assets, but subsequently changed the view that it is only one of the objectives. The tax department has been increasingly paying extra attention on assets of assessees to see if they correspond with their declared income as black money became a sensitive issue in the last few years.

“This concentrated effort to target the very rich was not part of the original DTC and it is a retrograde step,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.

DTC may undergo a makeover under new govt

We also bring to you latest news from Tax in India. Below is the article published in one of the News Tabloid in India.

 Finance Minister P Chidambaram showed his commitment to the Direct Taxes Code (DTC) by releasing a revised draft of the Bill ahead of the elections, but its fate is in limbo as a non-UPA government might review it afresh or make significant changes to the current draft.

Experts said technically, Chidambaram has completed most of the major steps towards replacing the archaic Income Tax Act of 1961 and if the new government is on the same page, it would, at most, be required to refer the Bill to a select committee after tabling it in Parliament. However, the possibility of a new government junking this version of DTC or incorporating a Parliament standing committee recommendations on exemptions is not ruled out. “The timing (of inviting comments on the draft) is entirely misplaced. What do they hope to achieve? My advice to the bureaucracy is to wait for political guidance,” said senior Bharatiya Janata Party (BJP) leader Yashwant Sinha. The Standing Committee on Finance Chairman, however, added the BJP was in favour of a new direct tax law, as the current legislation had become complex after amendments over the years.

Some finance ministry officials and tax experts, however, said DTC in its current form does not serve any purpose as most of the things it proposed initially, such as General Anti-Avoidance Rules, Advance Pricing Agreements, have been incorporated in the Income Tax Act over the last couple of years.

“No policy is cast in stone. The future of DTC will depend on new economic realities and polices of the next government,” said a finance ministry official, adding the law could be simplified by amending the I-T Act.

Inviting comments on the revised draft of the DTC Bill on Tuesday, the finance ministry had proposed a 35 per cent tax on those earning more than Rs 10 crore, while turning down a Parliamentary Standing Committee recommendation on widening of tax slabs.

While it said widening the slabs was not possible as it would lead to a revenue loss of Rs 60,000 crore, Sinha said deciding the exemption limit should be the prerogative of the next government.

Another major proposal in the revised draft was to make a company liable to tax in cases of indirect transfers like Vodafone, if 20 per cent of its global assets are in India.

“Simplicity is certainly not one of the major features of any of the versions of DTC. The next government at the Centre should be allowed a say in the re-packaging of DTC as the extant DTC Bill lapsed at the end of last session of Parliament,” said Sunil Jain, Partner, J Sagar Associates.

He said the next government should decide the design and construct of a new I-T law and provide more clarity on how indirect transfers would be taxed in India.

Even if the new government accepts the current version and gets it cleared in Parliament in 2014-15, the earliest the legislation can be introduced is April 2016, as one year is needed for framing the rules.