12 December 2013, 05:46 PM IST
Last week, Zenobia Aunty and her favourite niece – this columnist, attended several sessions at the annual International Taxation Conference organised by Foundation for International Taxation.
As always Roy Rohatgi, conference director, was at his charming best. He asked tough questions when required, poured oil on troubled waters when discussions got too heated, kept everyone in check and ensured that discussions were crisp and to the point. Of the very many discussions, the topic 'Morality & Legality' – a panel discussion led by Mukesh Butani, piqued Zenobia Aunty's interest.
She made it just in time for the session which began at sharp nine, on a Saturday morning. Understandably tax folks were in full attendance. Even as many had skipped their morning coffee, as the discussions progressed, everyone was wide awake.
Activists are today questioning a company's tax policy – Jeffrey Owens, former head of tax at global think tank – Organisation for Economic Cooperation and Development (OECD) set the tone of the debate.
If more and more people perceive that high net-worth individuals and multi-national companies (MNCs) are not paying their fair share of taxes, voluntary compliance in payment of taxes will diminish. Or, as we are already seeing, there will be widespread protests against those MNCs that are seen as resorting to immoral tax evasion. Starbucks for instance – which tax activists point out has not allocated fair profits to UK and thereby reduced its UK tax liability has faced large-scale customer boycott in the UK, pointed Owens. How then do we decide what is fair taxes? "It means paying the right amount of tax at the right time and in the right place," stressed Owens.
Yes, ladies and gentlemen – the focus has in relation to MNCs has shifted from not what it does with its profits (including doing social good through corporate social responsibility schemes) but how it makes its profits or rather how it allocates it across geographies.
Jeffrey Owens has some interesting points to make. "Tax is a different type of cost. MNCs should not view their internal tax function as a profit centre, this is a wrong starting point."
More often than not in MNCs, the bonus component forms a fair chunk of the salary of executives especially the C-suite executives. When bonus computations are based on post-tax profits, there exists a greater impetus to engage in aggressive tax planning, was a view expressed by Owens.
Arvind Datar, a senior Supreme Court advocate was candid with his views: "Is there anything called morality in legislature, ?" he thundered. "Isn't reneging on promises immoral?"
Zenobia Aunty fully supports him in this regard. She has over the years, seen many entrepreneurs reel from the burden of retrospective amendments. Take for instance, the sudden imposition of Minimum Alternative Tax on SEZ developers and units in SEZs.
On enactment of the Budget proposals of 2011, both SEZ developers and units in SEZs were brought within the ambit of MAT, from the financial year 2011-12 onwards. Prior to such enactment, MAT exemption was available to them. The current rate of MAT is 20.96% and it is computed against book profits.
Earlier, SEZ developers did not pay dividend distribution tax (DDT) on dividend distributed by them. From June 1, 2011, dividend distributed by SEZ developers was covered by DDT which is currently 17%. In fact, a petition against this move filed by a clutch of Bangalore based companies was dismissed by the Karnataka High Court.
Keeping within the framework of legal schemes, if an individual reduces his tax liability his or her action isn't regarded as immoral, but when a corporate does so – the perception is different and the MNC is demonised. "This is hypocrisy," Datar summed the concept of legality v/s morality in payment of taxes by stating: "Thou shall not adopt a colourable device, beyond that an MNC has no obligation".
Retired Justice SH Kapadia, who is sorely missed by the legal fraternity, was given a standing ovation. "The essence of rule of law is certainty; the tax payer must know where he stands." Tax laws impose a charge, in the Indian context, therefore – morality should be a matter of approach and cannot be converted into legality. The principle of morality would be different for a tax department and different for a taxpayer. "Legality is the only test, don't go by morality," were the Retd Chief Justice's valuable words of wisdom.
Pramod Kumar, member of India's Income Tax Appellate Tribunal emphasised that: "Judicial officers are required to be neutral vis-à-vis parties and also vis-à-vis competing set of values." Only when there is an element of ambiguity in law, does the issue of ethical morality creep into the picture, was his view.
No one could disagree with Akhilesh Ranjan, India's competent authority when he referred to the prevailing scenario in the tax arena by stating: "We are standing at an important cross road in the history of tax. Multilateral initiatives are coming up, there is a need for co-operation and exchange among countries, given the nature and volume of cross border transactions."
This brought Zenobia Aunty back to the opening panel discussion on the first day of this three day seminar. Porus Kaka, President International Fiscal Association in his address had said: "Multi-lateral conventions are fast replacing bi-lateral conventions. Over 60 countries including India and China have signed the Multilateral Convention on Mutual Administrative Assistance in tax matters."
One also wonders whether Dr. Parthasarathi Shome, Advisor to the Finance Minister put a cat among the pigeons. He expressed a view that capital financing is an international transaction. If a share transaction between associated enterprises is at less than market value, the tax department can determine the arm's length price.
Interesting times lie ahead in tax land, sums up Zenobia Aunty and wishes all her loyal readers a wonderful 2014.
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