It was an Indian business valued at $11 billion – and a lawsuit that involved Vodafone Group Plc.’s acquisition of 67% stake in Hutchison Essar from Hutchison Telecommunications International Ltd. that took place in Cayman Islands way back in 2007.

While the Income Tax department claimed taxes on the grounds of the transaction being a transfer of an Indian asset; Vodafone disputed the claim as a deal between two global companies, even if the assets involved in the deal were located in India.

Finally, the curtains are down – Vodafone wins $2.5 billion tax case, as adjudicated by the Supreme Court. The Government of India can no longer tax the capital gains arising from the transaction that took place in Cayman Islands between the two non-resident companies.

In the words of the Supreme Court of India’s Chief Justise S.H. Kapadia:

“The government has no jurisdiction over Vodafone’s purchase of mobile assets in India as the transaction took place in Cayman Islands between HTIL & Vodafone”

Interestingly, after losing the suit in High Court, this multi-billion dollar tax case has unfolded in Vodafone’s favor in the Supreme Court. Apart from being a big thumbs-up for the British telecom giant, the outcome is a moral victory for similar litigations being faced by foreign companies in India such as GE, Cadbury and Vedanta amongst others.

Though, this set back to the I-T department comes as a big knock on the exchequer’s kitty to the tune of Rs.11000 crore on a deal abroad; this landmark judgment will boost people’s confidence in Indian judiciary and promote Indian shores as attractive investment destination, given that tax regulations play a major role in cross border transactions and investments in a country.

It was one of the rare cases where the Indian I-T department went full throttle to lift the corporate veil, issuing a show-cause notice to Vodafone as to why income tax was not deducted at source at the time of purchase of the Indian JV partnership business and paid to the Government of India.

The apex court ruling has now directed the country’s I-T department to return Rs.2500 crore deposited by the telecom giant within two months, along with 4% interest on the said amount; for an offshore transaction that was ‘bonafide’, hence it was non-taxable.

Huge win for Vodafone – Wide repercussions for I-T dept, isn’t it?

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The much-awaited Direct Tax Code (DTC) Bill was approved couple of days back and few more clarifications have come out – some positive, some negative.

In fact, there is difference of opinion among various analysts. Some say that the new DTC Bill is nothing but old wine in a new bottle, while other says that the government might try to recoup revenue shortfall from DTC from the proposed GST regime.

Updated Direct Tax Code Highlights

1. The most annoying one was that of pushing the effective date of DTC by a year to April 1, 2012. Most of us had almost discounted the roll-out date at April 1, 2011.
2. The long-term capital gains exemption on listed equities stays along with STT. This will ensure that long-term capital investments are not discouraged. And, the short-term capital gains will be taxed at half your slab rate in whichever taxable income bracket you fall in.
3. There is one negative news for women though – women could cease to enjoy income-tax exemptions over and above men get. Only senior citizens will get extra relief with tax exemption upto income of Rs.2.5 lakhs.

facts about the present tax slabs and Changes proposed

Earning groups and their tax slabs :

How it will effect the people paying taxes ??

1. Rs. 0 to Rs. 1,60,000 : No difference (Neither they paid earlier, nor would they now)
2. Rs. 1,60,000 to Rs 2,00,000 : Earlier they were paying 10% and they dont pay now
3. Rs. 2,00,000 to Rs 5,00,000 : Saving of Rs.4000 (Rs.40,000 x 10%)
4. Rs. 5,00,000 to Rs. 8,00,000 : Saving of Rs.4000 (Rs.40,000 x 10%)
5. Rs. 8,00,000 to Rs.10,00,000 : Earlier they were paying 30% and will now pay only 20%
6. Rs. 10,00,000 and above: No difference (They were paying and continue paying 30%)

Data crunching – how many people paid tax at what rate

1. Total number of tax payees during last year: 3.25 crore people (in 3 slabs of 10, 20 and 30%)
2. 95.25% of the total tax payees fall under Rs.1 lakh to Rs.5 lakh slab; contributing 30% of total taxes collected.
3. 2.05% of the total tax payees fall under 20% slab; and their contribution is 10% of all taxes collected.
4. 2.2% of the total tax payees fall under 30% slab; and their contribution is 60% of the total tax collected.

Interesting Observations:

The above figures indicate that vast majority of our fellow countrymen fall in the income range of Rs. 1,60,000 to Rs. 5,00,000 per annum. Though the successive governments drum up the fact that we are a middle-class economy, the facts state that we are infact a lower middle-class economy as 96% of our tax payees are at the lowest level and contribute only 30% of taxes while the cream of the society of 4% contribute 70% of the taxes.

Government and many international agencies claim that the middle class population in India is 300 million strong and is more than the entire population of Germany.

Now consider this – 300 million people means at least 60 million families i.e. 60 million heads of families (consider one family pays only one tax). Still our tax payees are only 3.25 crores. Why the other 2.75 crore people are not paying taxes? Are they farmers (as farm income is tax free)? Are they businessmen (a chunk of whom earn in black)? Are they politicians (who don’t declare their incomes)? Who are they?

Benefits to government due to Direct Tax Code (DTC)

Government by increasing the tax paying limit to Rs. 2,00,000 will effectively bring down the tax payers by almost 10-15% (those falling in the nominal Rs.1,60,000 and Rs.2,00,000) and consequently reducing its paper work.

Loss to government due to Direct Tax Code (DTC)

On the other hand, by raising the tax slab from Rs. 8,00,000 to Rs.10,00,000 at the rate of 20%, from earlier 30%; it will loose a decent chunk of its tax income as the segment of Rs.8,00,000 and above contributes around 60% of all taxes collected, though the numbers are only 2.2% of tax payees – this, assuming that the majority chunk of tax contributors likes at the lower band of a tax slab.

From the above, you can see that due to these changes very few income groups benefitted. I have a strong feeling that this exercise is to reduce the paper work of the tax department rather than to transfer benefits to people.

Instead what government could have done (Our 2 cents)

For transferring the benefits to people it is equally important to consider two factors.

1. Increase taxable slabs (of course, until a certain point), and
2. Reduce tax rates.

Since last decade, we have seen only the taxable slabs going up from Rs. 90,000 to the present Rs.2,00,000. This sure is a welcome gesture from government.

However, the other component is conveniently overlooked – while increasing taxable income ranges liable for paying taxes, the government could have brought down the effective tax rates from 10%, 20% and 30% to 8%,15% and 25% and, so on, gradually upto 5%, 10% and 15% for the above income groups (in line with many developed nations).

This way instead of only two groups of income groups, everybody could have benefited from the exercise.

Related posts:

1. Direct Tax Code Bill approved – Positive for Individuals, Dampener for Corporates!
2. Revised Direct Tax Code – What you should know !
3. Direct Tax Code Bill: Highlights & Full Report

Finally, India is warming up to broadest tax reforms in the form of Direct Tax Code (DTC) and Goods and Services Tax (GST)  . The former is centered around expectations to minimize tax exemptions, but widen tax slab on personal finances; and the latter revolves around evolving an efficient and harmonized consumption tax system in the country.

While the proposed GST Bill still remains mired by the opposition from BJP on grounds related to fiscal autonomy of States in indirect taxation, the Union Cabinet on Thursday approved legislation for the crucial direct tax reform – The Direct Tax Code (DTC) Bill.

Personal Income Tax Slabs – Basic Exemption Limits Raised!

In a big relief for the individual taxpayers, the new DTC has proposed widening of personal income-tax slabs marginally. The Cabinet-approved Bill proposes widening of the tax slabs with lowest rate of:

• 10% for Rs. 2-5 lakh taxable income (current slab Rs.1.6-5 lakh)
• 20% for Rs.5-10 lakh (current slab Rs.5-8 lakh) and
• 30% for above Rs.10 lakh taxable income group of people (current slab above Rs.8 lakh).

If you’re a Senior citizen or women, there is good news for you – the threshold income has been fixed at a higher Rs.2.5 lakh as against Rs.2 lakh for standard categories.

                                                                         (Source: Sify)

Higher Corporate Tax

On the Corporate tax front, the DTC Bill cleared by Cabinet has sought to retain the present level of 30% (for domestic companies), but inclusive of 10% surcharge and a 3% education cess. However, the above figure fall trifle short of expectations of the corporate lobby which stood at 25%, as proposed by the DTC draft released earlier.

Minimum Alternate Tax @20% – A Dampener!

The Bill seeks to impose Minimum Alternate Tax (MAT) at 20% of the book profit as against 18% being levied currently on the Indian companies. The original DTC draft had proposed to calculate MAT on gross asset base which could have translated into effective higher tax rate based on huge asset base for the companies operating in capital-intensive sectors such as infrastructure and capital goods. But, owing to sharp criticism, the levy is to be maintained on book profits, as now.

Further, the axe is likely to fall on Indian IT companies with the advent of DTC regime which would call for the end of “Tax holidays” enjoyed by these companies. This step will bring these IT companies on par with other industries prevailing in India.

Savings – EEE Model on PF to Reign!

In the first DTC draft released in August 2009, the Centre had proposed to cease most of the exemptions, including savings instruments, by taxing them at withdrawal of the investments as per the Exempt-Exempt-Tax (EET) methodology of taxation. However, the Cabinet-cleared DTC Bill has proposed to continue with the EEE method of taxation.

On public demand, the finance ministry had agreed to abandon its previous proposal on tax retirement benefits under Provident Fund. This measure is likely to act as a booster for public savings and income, but may culminate into potential losses in terms of prospective government revenues from taxes that could have been earned during the maturity of investments up to Rs.3 lakh in a fiscal year as per the Exempt-Exempt-Exempt (EEE) model.

To sum it up, the DTC Bill is softer on the aam-aadmi with a decent up-tick in the basic exemption limits, while not so conducive on the corporate lobbies in terms tax reliefs from what is already there in the Income Tax Act currently.

Your thoughts on new DTC ?

Related posts:

1. Direct Tax Code Bill: Highlights & Full Report
2. Revised Direct Tax Code – What you should know !
3. Union Budget 2010: Unraveling Direct Tax Proposals

During his Union Budget 2010 Speech, Finance Minister Pranab Mukherjee had pointed out that the prospects for imposing the Direct Tax Code from April1, 2011, was strong. However, he didn’t sound as much confident speaking about the same for the biggest indirect tax reform – The Goods and Services Tax (GST).

But, some progress certainly seems to have been made by the Centre on this ambitious reformist movement. Pranab’da has unveiled a three-rate structure for GST – which is also a three-year plan – which, if all things go well, could converge into a single-rate regime of 16% on all goods and services.

The Proposed three-rate Structure for GST – How does it look like?

The Centre has proposed a bifurcation of GST rates into services and goods separately, to begin with. For services sector, Pranab’da has articulated a constant rate of taxation at 8%. Further, he has screened goods into two varieties – one with a lower rate of 6% for essential items and other with a standard rate of 10%.

The aforementioned taxation rates will to be payable at both the Centre and the State levels – effectively doubling up as a final impact on the consumers.

The Finance Minister has recommended that the effective rate of taxation for the Standard rate goods should be cut down by 1% in each of the two ensuing fiscal years – with the aim to emerge at a convergent price of 8% for both goods and services by 2014. Thus, the GST should eventually move to a single-rate 16% (8% Centre + 8% State) structure in the third year of its operation.

Once a shift to the GST implemented, all other indirect tax levies such as excise, VAT and service tax will cease to exist as they constitute as a component of the broader tax regime.

The Manmohan Singh-led UPA-II government has fast-tracked its path to Reforms from its current stint at the Central government, thanks to the absence of Left party as its coalition partner this time around.

In its second avatar as the government of India, the UPA has approved of several key reforms such as Women’s Reservation Bill, Education Reforms and several Economic reforms such as 25% public shareholding norm, proposed Direct Tax Code, proposed Take-over Code and two biggest reforms ever in the form of UIDAI project and proposed GST regime.

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There are so many people that ask me this questions – Why should I file my Tax returns, if I have already paid my taxes. Infact, many wrongly believe that there is no need to file the tax returns at all. This is a completely wrong perception and if you are one of those who thinks that way, please read on…

Remember, it is our constitutional obligation to file tax returns when you are required to do so. So your job does not end at paying taxes, filing returns is equally important.

Who should File tax returns

If your income is above the basic tax exemption limit, you are liable to file your tax returns. So you should pay your returns if you

• have taxable income exceeding Rs.160,000 p.a.
• are a Women have taxable income exceeding Rs.190,000 p.a.
• are a Senior Citizens have taxable income exceeding Rs.240,000 p.a.

I know number of my friends who do not file a return – essentially they feel that with hundreds & thousands of them who are paying taxes, they are comparatively small fish. There are thousands who evade taxes in Lakhs of rupees, no one will notice a person who evades a few thousand rupees in taxes – THATS NOT TRUE !

Methodology to nab Tax evaders

The Tax department does not catch based on amount of taxes liable, but based on a system. In order to pick up cases of likely tax evasion, the tax department uses a computer-aided scrutiny system (CASS) that picks up cases by inputting various criteria. You may just be the unlucky one and you can come under scrutiny which is inviting trouble for yourself as you will be required to furnish all details that he asks for which could include, bank account statements, list of all assets owned by you and your family, details of all family members who reside with the you, and then the tax officer will do a match analysis of income and expenditure to figure out the amount of tax evasion.

Fine for Tax Evasion

Individual found to be concealing income will be charged a penalty and that amount can be anywhere up to 3 times the amount of tax evaded. So if your tax evasion amount is Rs. 50,000, if your account is under scrutiny, you may have to pay a penalty of anywhere between Rs. 50,000 and Rs. 150,000 on a case to case basis.

More than the fine, it is also an un-pleasant experience which can be emotionally and mentally draining.

Ok, so if you are ready to File your taxes for FY 2009 – 2010, You can download this Income Tax Return Forms:

• For Individuals and HUFs not having Income from Business or Profession: Word PDF
• For Individuals/HUFs being partners in firms and not carrying out business or profession under any proprietorship: Word PDF
• For individuals & HUFs having income from a proprietary business or profession: Word PDF
• For firms, AOPs and BOIs: Word PDF

Again, never try to evade taxes, it is sure to land you in trouble one time or the other !

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India banned Chinese toys starting January 23 for six months. Good news for Indian toy makers who are facing a losing battle with the Chinese toy deluge. Not so good news for China which supplies 70% of the world toys. As per India, it has done in the public interest. China thinks otherwise and wants to appeal to the World Trade Organization (WTO).

US few days ago is close to passing a bill about limiting the H1-B’s. Yeah! the most popular US visa for a foreigner to work in the US. The limit is only for the US banks which were bailed out with tax payer’s money. Is that fair?

Let’s hear their logic. The unemployment rate in the US is at an all time high. 600,000 Americans have lost their jobs in January alone. Now, so many qualified Americans are job less, these semi-nationalized institutions wants to hire foreign workers? Fair enough.

What goes around comes around – India banned toys from China. America limited H1-B’s from India. This looks like a vicious cycle. These bans are not the first. US has banned around 30 drugs from Indian drug manufacturer Ranbaxy citing irregularities at the manufacturing facilities. The other side of the story is again to protect American drug manufacturers.

US is the biggest consumer and India and China are the major producers. It makes sense to protect the respective economies from imports from these Asian countries. India and China do not yet have the consumption led economy – though India is a better off.

The world is going into a cocoon by protecting their respective economies. This does not augur well for the  global economy which is already contracting. Would this get any worse is the biggest question.

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Now this is a bummer…Here is a letter from Satyam Head Mr. Ramalinga Raju to its Board of Directors.

Part 1

Part 2

Page3

Page4

Page 5

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To the Board of Directors
Satyam Computer Services Ltd. Dear Board Members, It is with deep regret, at tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008
   • Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)
   • An accrued interest of Rs. 376 crore which is non-existent
   • An understated liability of Rs. 1,230 crore on account of funds arranged by me
   • An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.] reflected in the books)
2. For the September quarter (02) we reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial, cash and bank balances going up by Rs. 588 crore in Q2 alone.

The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over; thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.

I would like the Board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share[s] by the lenders on account of margin triggers.

3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Han T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V. Sriram Papani, Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s immediate or extended family members has any idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

1. A Task Force has been formed in the last few days to address the situation arising but of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam; Subu D, T.R. Anand, Keshab Panda and Virender Agarwal , representing business functions; and A.S. Murthy, Han T and Murali V representing support functions. I suggest that Ram Mynampàti be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities.

3. You may have a testatement of accounts’ prepared by the auditors in light of the facts that.I have placed before you.

I have promoted and have been associated with Satyam for well over twenty years now I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps Mr T R Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force arid the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.

Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself to the laws of the land and lace consequences thereof.

(B. Ramalinga Raju)
Copies marked to:
1. Chairman SEBI
2. Stock Exchanges

———————————————————————

Related posts:

1. Satyam acquires Maytas Infra and Maytas Properties – All in the family
2. Satyam banned from World Bank. What else can Satyam do?
3. India set to become the oyster of the world board meetings

Yesterday, when I came across the information on the top Indian taxpayers, I was surprised that Amitabh Bacchan’s name was not mentioned amongst the top ten.

However, he is furious on the publishers of the list.

He claims to be the highest taxpayer with Rs.15.59 crore (Rs.155.9 million), and with Aishwarya Rai joining the family, the Bachchan family’s total tax would be around Rs.25.3 crore (Rs.253 million).

Now thats really quite a sum !

I guess it did not go down well with Amitabh, that kid like Hrithik is paying more taxes than him, especially after considering that Amitabh takes more money and does more movies in a year.

‘I’m surprised by the report and I’ve serious doubts about its authenticity. Because my name isn’t mentioned anywhere among the top most taxpayers of the entertainment business. This gives the utterly false impression that I make pots of money and don’t pay up enough taxes,’ Amitabh told IANS.Clarifying that he tops among the tax-payers of the country, the Big B said: ‘If you look at the figures for the year 2006-2007, you’ll see Amitabh, that’s yours truly, has paid Rs.14.15 crore and from our company AB Corp Ltd. where all the earnings are mine, we’ve paid Rs.1.44 crore.
‘And yet they’ve put Hrithik as the top most taxpayer! Even if you take my tax figures individually I still top.’

I guess I am getting a bit side tracked with this subject, but hey-what the heck, this is some interesting stuff. And I am sure my readers would enjoy it :)

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1. Who are the Highest Taxpayers in India, and how much do they pay?
2. Indian IT companies flush with cash.

Do you know who are the highest Taxpayers in India. Most of you may guess that it may be one of these Business heads or the richest Indian guys on the Forbes list. In practical this is not very true. The top 10 list is crowded with Bollywood Stars, Hrithik Roshan leading the Bollywood list with close to 15.1 crores (approx $ 4 Million). I am surprised with the amount of movies Amitabh and Abhishekh Bacchan do, they do not even figure in top 11. Really really surprising. The 3rd on the list Shah Rukh Khan has been a consistent topper for a last few years.

Here is the list of highest taxpayers in India:

Taxes paid in 2006-07 (Rs. In crores)

1. N Raheja 16.50 ($4.05 Millions)

2. Hrithik Roshan 15.10 ($3.7 Millions)

3. Shah Rukh Khan 14.00 ($4.05 Millions)

4. Zia Mody 6.75 ($1.65 Millions)

5. Akshay Kumar 6.60 ($1.62 Millions)

6. Sachin Tendular 5.75 ($1.41 Millions)

7. M H Mody 5.45 ($1.34 Millions)

8. Dr S Bhattacharya 4.35 ($1.01 Millions)

9. Nishit Desai 3.15 ($.99 Millions)

10. Kareena Kapoor 2.90 ($.71 Millions)

11. John Abraham 1.10 ($.27 Millions)

Seeing the list, the first thought that comes to my mind is, where are all the other Bigwigs ????? I mean, I am sure there are hundreds of Indians earning more than Kareena Kapoor and John Abraham. What’s up with the Billion Dollar + Club, there are at least 40 of them as per last years Forbes list.

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