Union Budget 2015: Decoding tax puzzles

Latha: I am more intrigued by this acronym that you have used in your note, introduction of POEM (Place of Effective Management), how does that confuse or clarify, tax responsibilities and obligations on domestic companies?

A: As regards the domestic companies are concerned, they will be impacted when and if they have companies outside of India, which are carrying on business activities outside of India and are earning interest and income etc. they are not repatriated into India till such time that they want to repatriate. But if a board of director on the board of the foreign company is in India for a day or for any part of time and that board member is participating in the decision-making process or in a board meeting that is being held by the foreign company and this person is in India and he is participating from India then it is very likely that it will be treated that the foreign company is resident in India and it will be taxed on its worldwide income at least in that year, in which this happens.

Latha: So these directors cannot participate in video conferencing, they have to go there, if they go there, it doesn’t matter?

A: That doesn’t matter because then it is the management in control at any time during the year is not located in India. It is situated outside India.

Sumaira: Also this time around wealth tax has been abolished, I understand there was a lot of leakage on that anyway, it wasn’t getting fulfilled but there is a 2 percent tax now on the super rich with income of about Rs 1 crore. How do you see the effect of that?

A: Obviously it will mean a little bit of a higher tax but to look at it from that perspective, that 2 percent tax is resulting in the net marginal tax rate going up from 34 percent or 34.6 percent, which is of course when the amounts involved are large - is a significant amount - but if we look at it from the perspective of that 0.6 percent replacing the wealth tax, which was 1 percent of the value of wealth above 30 lakh then perhaps it is not such a huge increase for those who are in that 30 percent bracket.

Latha: The other thing is about what all of us are celebrating that eventually corporate taxes going down from 30 percent to 25 percent -- DTC also said something like that that we will bring down the corporate tax but ally it with reduction of exemptions. The finance minister repeated that. So is it too early to celebrate because it will be synchronized with removal of exemptions and that had industry up in arms and they pretty much sabotaged it?

A: It is like this - the way I look at it is that ask any corporate, any one who is claiming exemptions which exemptions amount to large amounts, they usually are mired in litigation. So if you remove - therefore what happens is if we see what is pending tax collections because of litigation, it is something like 4.5 lakh crore, it is a staggering amount. So if you are removing one calls of litigation, which is arising out of claiming or not allowing the exemptions and again on the other side, you are reducing the total net tax rate, I think on balance probably it is not such a bad thing.

What finance minister also said is in general the companies are paying - that their net tax incidence is 23 percent. So yes, if you compare it with that, probably it goes up by 2 percent but look at the other side that you will be reducing the tax litigation arising out of that and when you are paying taxes, you look at the tax rate, you are not looking at the cost of you defending your position on tax that you are fighting with the tax department.