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My Notes- 11JAN2016 11-01-2016

Playing games with taxmen

Terminology to understand

Transfer Price

The price at which divisions of a company transact with each other. Transactions may include the trade of supplies or labor between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.

It may include royalty payments, interest payments or licensing fee paid by the subsidiary to the parent company.

Index / Report to quote in answer/Essay

Report on Illicit financial flows by global financial integrity

Report on illicit financial flows by global financial integrity says that $510 bn of black money flew out of India from 2004 to 2013. It can be of many proportions higher if it includes wrong invoicing of trade in services (not goods), cash transactions and hawala transactions. Most of the (83.4%) of illicit financial flows is due to trade related wrong invoicing.

 

MNC account for major illicit flight of capital. Transfer pricing is the convenient route for this and capital is shifted from countries with tax rates to low or Zero tax rates (often described as tax heavens). For Ex- Mauritius, Bermuda, Luxemburg etc. EU estimates the tax losses across the world are to the tune of $1.1tn.

This capital flew out from developing countries flies back to them as investment with Government offering too many subsidies and benefits. This gives it a dual advantage. No tax and subsidies to the same capital out bound and coming back. This cycle repeats further. So, a tax regime is necessary to ensure revenue for every country while avoiding double taxation.

Here there is a fundamental difference between UN and OECD model of taxation. UN model favored taxing income at the source country. (Source of income shall be the basis for taxation.) OECD countries residents of a country would be taxed on their worldwide income, while nonresidents would be taxed only on their domestic income. (Residence as a criteria – where the management of a company sits). It provides for the tax heavens and transfer pricing mechanism to form a deadly combination for tax evasion. Indian double taxation avoidance agreements are based on OECD model.

In India, the need of the hour is to curb the illicit flight of the capital and reforming the tax laws appropriately.

No tax on seed funding

Seed funding refers to the funds invested in a start up by an investor. Finance act of 2013 introduced a tax on seed capital provided to startups by investors.

In India, Funds invested in startups are treated as income of the startup and taxed. It mean 30% of the money is taken by the Government from every domestic investment. Profit earned by the investor is taxed again creating a double taxation cycle. The same do not apply for a foreign investor. He ends paying only capital gains tax. It is making the startups to relocate to the countries such as Singapore.

LPG subsidy

Government of India recently announced for withdrawal of subsidy on LPG gas cylinders, if either of the partners – wife or husband crosses an income of 10lakhs per annum on the basis of self-declaration. It intends to transfer these benefits to the poor to provide clean energy.

Income of the individuals is not verified but it shall be self-declared and it depends solely on the integrity of the people. On the other hand, Government would have considered high value asset ownership as a criteria for the same. Information is largely available based on the census data.

Digital transformation

Organisations are fast changing and work flows are getting redefined with changing technology. It is posing new challenges to the organization to adapt, hire, and train the human resources. Life cycle of the organization is also coming down rapidly and it is reduced from 60yrs to 15 yrs. over 50 yrs.

Srilanka – Refer to last week notes.

 

Question of the day

In era of globalization, curbing the illicit capital flight shall be the primary goal of taxation. Discuss the recent tax amendments and laws proposed and passed in India in the light of the above statements.

 

All the best and wait for the model answer video. 

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