Law Street in The Economic Times (Feb 2010) Pre budget

PS: This is the sea off Marine Drive. The funny shaped concrete blocks are sea breakers meant to weaken the strength of the strong waves as they lash against the Mumbai coastline. This photograph was taken much later in July 2010, but I thought I would add it here.

Dear Readers,

Sometimes,the right procedural amendments without a change in tax rates can also cheer up the tax payers. Zenobia Aunty suggests a few such amendments in the run-up to the Finance Bill, 2010-11 which will be tabled in the Parliament in India on Friday, February 26. For more, click here or scroll down below.




Law Street/ Lubna Kably
Dear Finance Minister, simplify taxation

• Small procedural changes can help the aaam admi
• ESOP taxation needs to be practical
• Savings must be encouraged

Expectations are mounting and the fiscal deficit is looming overhead. Yes, our FM is not to be envied during these tough times. Just last year, he offered us some respite. There was no change in the number of slabs or the tax rate for each slab, however the basic threshold exemption limit was marginally raised and also the surcharge of 10% was abolished. Tax rate cuts may not see the light of the day, this year, yet without adversely denting the Treasury coffers, the FM can help some of us smile.

Zenobia Aunty’s favourite pastime is to view a kaleidoscope and people watching she claims is no different. A walk along Marine Drive and a quick chat with Mumbaikars from various backgrounds and with varying needs itself threw up clues on what can be easily done.

Jogging a few paces with Mohan, helped Zenobia Aunty understand the practical problems of ESOP taxation. Today, Mohan is taxed on the notional perquisite value (the difference between the fair market value as on the date of exercise of the option by him, as reduced by the amount contributed by him). Payment of tax at the time of exercise is an uncalled for burden, as employees have to cough up cash even before they have sold their ESOPS (which has a lock in period post exercise). Then there is yet another incidence of tax on sale, which is the price obtained minus the fair market value as on the date of exercise.

ESOP taxation has been subjected to various amendments over the years. Perhaps the tried and tested regulation which existed prior to introduction of FBT (now abolished), must be reintroduced. Employees must be subject to tax only on sale of the shares which they obtained under an ESOP scheme, provided the ESOP scheme fulfils certain criteria. This will put them on a better footing to bear their tax liability, instead of paying their dues when they are cash strapped.
Tax on notional perquisite value, impacts their purchasing power by denting, sometimes badly their take home pay. An added sore point is that at the time of sale of the shares, the prices may have fallen – after all the market ain’t booming yet. Thus they would have not only paid perquisite tax at the time of exercise but are saddled with a capital loss.

Spot and Zenobia Aunty were soon out of breath and sat down to enjoy the sea breeze. Soon enough, Freny joined them. She walked daily between Nariman Point to Churchgate, it saved her from the hassle of joining a bus or taxi queue or even a gym.

Freny was upset that contributions by her employer to superannuation, in excess of Rs one lakh, were taxed in her hands. In fact, superannuation benefits are contingent - such as the requirement of having served a certain number of years etc and Freny may not even get that benefit, but for now she will be taxed first in the year of contribution to the extent it exceeds Rs one lakh and secondly at the time of receipt of annuity. Yes, she was aware that the concept of EET is the subject of much debate, but for now she wants this immediate issue to be sorted out.

It was never a dull moment for Zenobia Aunty, even as Freny rushed off to catch the local train, Dilip came by. Dilip loved to save money and invest for a rainy day. “Long term savings, such as pensions, could be mobilized for infrastructure needs and this is not effectively done,” he complained.

Zenobia Aunty agrees our much touted National Pension Scheme turned out to be a damp squib, because the tax sop ceiling was clubbed with various other savings to stand at a cumulative of Rs one lakh. Not to mention that it is one of the schemes that falls under EET mechanism. Perhaps by increasing the eligible limit upward or carving out a separate eligibility category it will help the government to pump savings into the needed sectors.

In the previous column Zenobia Aunty spoke about the perils of making payments to non-residents owing to the lack of clarity on withholding of tax. There is an additional procedural problem associated with TDS. The tax laws mandate that if PAN is not furnished by the payee, the withholding tax will be 20% or the applicable rate, whichever is more. Senior citizens may not have applied for a PAN card because they do not fall within the taxable limit, so also foreign companies which merely export goods to India and do not have a place of business in India. Thus, some safe harbours must be built in. We all know the process of obtaining a refund is time consuming, even as direct refunds to bank accounts have made things easier.
Yes, the folks at the MoF just need to put on their thinking caps and they can make life a bit easier for you and for me.