For the young and restless, equity rules!

We ask working professionals how they manage their money. As part of this series, we spoke to two young women and got wealth experts to evaluate their financial plan of action.

Is their money working hard, enough? Let's find out!

MANASI Deshmukh, 25, an HR professional with a BPO company in Mumbai, saves Rs 15,000 from her take-home, every month.

She invests this amount in 'safe' avenues such as National Savings Certificate (NSC), Public Provident Fund (PPF), infrastructure bonds and life insurance policies offered by the Life Insurance Corporation.
"I usually invest at the end of the (financial) year, when it's time to save tax," she confesses.

Maya Kumar, 27, another young turk from the IT sector, saves around Rs 17,000 per month. She predominantly invests in PPF. She also puts Rs 5,000 every month, in a bank recurring deposit. Maya's total investment works out to approximately Rs 150,000 (Rs 1.5 lakh) per annum. The rest, lies idle in her bank account.

Is your money wasting time in a bank?
Yes! Here's why. "Though the recurring deposit is a good saving habit, the interest you receive on it, may not be enough to cover inflation," says investment consultant Sandeep Shanbhag. Both Manasi and Maya should invest their money, aggressively, in equity.

"The only time you can take advantage of equity without sweating at the risk level, is when you have at least 10 to 15 years before you retire and no family responsibilities ," he adds.

Why equity rules
Both girls have parked a significantly large amount of money, in a savings account. According to investment advisor Ajay Bagga, Maya and Manasi's year-end planning strategy is more of a tax minimisation plan. Instead, they need to invest, keeping their long-term financial goals in mind.

"Sure, we need to keep some amount in the bank for daily expenses and emergencies. But we must invest the rest in short-term mutual fund schemes. These schemes offer higher returns. And you can sell them any time," advises Shanbhag.

Ajay recommends a portfolio of 90 per cent equity mutual funds and 10 per cent in fixed return products such as PPF, recurring deposits, bank deposits.

Save tax. But make money!
The investment favourites to save tax seem to be: NSC, PPF and LIC. But Equity Linked Saving Schemes (ELSS) are a better bet. Here's why.

The returns for NSC are 8 per cent, and this is taxable. Equity, on the other hand, yields anywhere between 15 to 18 per cent, when held over a long period of at least five to seven years. What's more, the returns are tax-free!

Infrastructure bonds are not such a good investment either, according to Ajay. "The returns have fallen to approximately 5 to 5.5 per cent. Earlier, the attraction was that they were tax-saving instruments," he says.

Section 80C now allows investors the freedom to choose any investment of their choice, up to Rs 100,000 (Rs 1 lakh) per annum. So, infrastructure bonds are no longer an attractive option, because they yield low returns, and the interest is taxable.

Do I really need insurance?
Ajay suggests that Manasi reevaluate her insurance coverage and see if she really has dependents whom she needs to cover. Did she buy the policy because her agent insisted? Or merely because she wanted to buy tax? Ideally, she must try switch to a low-cost term insurance policy, which is offered by all companies, but which agents usually do not sell, because the commissions on these are pretty low.

5 wealth rules for the young and restless!
If you are in your early 20s with no dependents and earn more than you need to spend on essentials, follow these five wealth rules.

1. Invest 90 per cent of your money in equity mutual funds.

2. Opt for a Systematic Investment Plan (SIP) plan to help you save, regularly. With SIP, the benefit is that you will have to keep aside a monthly amount.

3. Invest in short-term mutual fund schemes (less than three years). The returns you earn from these schemes are higher and you have the advantage of selling whenever you please.

4. Choose a low-cost term insurance policy, which is the cheapest form of insurance.

5. Choose ELSS investments; it helps in tax-saving.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.


Photograph courtesy Allen Solly
(Photograph used for illustrative purposes only)

Source: http://wealth.moneycontrol.com/features/financial-planning/for-the-young-and-restless-equity-rules-/272/0

  

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Didn't file tax returns? Plan of action for late Latifs!

THE last date for filing your tax returns for the financial year 2008-2009 was July 31, 2009.

But even though the process got a tad simpler with the online option, some of you may have missed your deadline. But don't fret. You have a second chance.

If all your tax was deducted at source, you can file your returns by March 31, 2010, sans a penalty.

In other words, if your only source of income in 2007-08 was your salary and your company has deducted the tax at source, then you can file your tax returns by March 31, 2010.

And if you miss this date, you can still file your returns by March 31, 2011. However, be ready to shell out Rs 5,000 as penalty!

If you still have some tax to pay, file your returns by March 31, 2010. But you will be charged a penalty of 1 per cent for each month of delay.

That means that if say, you have income from rent or investments, ideally, you should have calculated your tax and paid it by 31 July 2009. But if you haven't, you can still do so by 29 March 2010 (with the 1 per cent penalty per month of delay).

For instance, if you have to pay Rs 4,000 in tax, and instead of paying it by July 31, you pay it on October 31, you would have to pay a penalty of 3 per cent (1 per cent for three months), that is Rs 120.

If you miss this date, too, file your returns by March 31, 2011. But you will need to shell out Rs 5,000 as penalty, over and above the 1 per cent!

But late filing of tax return is not a good option for everyone.

If you made a loss (in business or capital gains) and want to carry it forward to the next year, you must file your returns on time.

"You cannot carry forward the same to claim a set-off against future income if the tax return is not filed on time," advises tax expert Sandeep Shanbhag.

 

Source: http://wealth.moneycontrol.com/features/tax-planning/didnt-file-tax-returns-plan-of-action-for-late-latifs-/10031/0

 

  

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I have NEVER saved tax

GADGETS, guitars, long weekends, music and his Maruti Swift are a few things technology critic Laiq Qureshi, spends most of his money on.

Laiq's mantra: Don't spend less, earn more. "I wouldn't want to cut down on comfort. It's just not me!" he exclaims.

 

The good life The 26-year old who works for an online media company in Mumbai earns Rs 25,000 per month. This amounts to approximately Rs 3 lakh (Rs 300,000) per annum.

 

Of this amount, more than half his salary goes to repay his five-year car loan from ICICI Bank. "They deduct about Rs 10,000 per month," he says. Laiq hopes to pay back the entire amount by 2010. Fuel expenses for weekend trips out of Mumbai eat up about Rs 6,000.

 

Laiq's girlfriend is based out of Bengaluru. So, STD calls and visiting her at least once a month, eats up the remaining part of his salary. "My cellphone bill is the only constant variable in my spending habit," he sighs.

 

If he has some money left over, he donates it to an NGO for children suffering from AIDS. "There was a time when money used to lay idle in my bank account," laments Laiq. Not any more.

 

Does he invest or save money ? No! Unfortunately, Laiq does not manage to save any tax, either.

 

Tax-wise

Though Laiq has been working for five years, he has NEVER saved tax. Why? He says he could simply never save enough money to invest. "But I have been thinking about it and once I enter the high income bracket I'll start saving," he says.

That's why Laiq has never bothered to fill out the investment declaration form handed out by his employers. "It totally goes above my head!" he exclaims. We do a quick calculation.

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Taking into account his annual income, Laiq pays Rs 31,620, annually, ie on an average Rs 2,635 will be deducted from his salary every month for a period of 12 months.

To reduce this figure all Laiq has to do is fill out this form and show proof of this investment. He can invest up to Rs 1 lakh to save tax. The good news: the contribution that he makes to his company Provident Fund can be included in this amount. Laiq's PF works out to Rs 20,000 this year, due to which the tax deducted automatically reduces from Rs 31,620 to Rs 25,620.

He can invest up to Rs 80,000 more to save the remaining Rs 25,620. Depending on how much he actually manages to save, this is the amount of tax he can avoid paying:

If he invests this amount per annum...	Tax he pays	Tax he saves
Rs 80,000	Rs 9,080	Rs 16,540
Rs 24,000	Rs 20,280	Rs 5,340
Rs 12,000	Rs 22,680	Rs 2,940

Where Laiq can invest

It's pretty obvious that the more he invests, the more tax he saves. So, how much can he shell out?

"With my car loan and spending habits I don't think I can keep aside a large sum of money (read Rs 7,000-8,000 per month)," says Laiq.

The good news is that he can save tax with less money by:

-Breaking up his investments into installments and investing say Rs 1,000-2,000 per month.

-Read all about low budget investing here .

-Investing this money in a tax saver mutual fund or Public Provident Fund. While these are the preferred investments, he can also choose from other options like National Saving Certificates, five-year bank deposits, insurance policies and pension policies.

Laiq must get cracking on his investment plan right away, instead of waiting till January or February of next year. Or else his money could suffer the ills of 11th-hour tax planning!

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, the website or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Source: http://wealth.moneycontrol.com/profile/tax-planning/i-have-never-saved-tax-/9291/0

  

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Are taxes eating into your returns?!

The investment world is vast and complicated, and most people often fail to see, or choose to overlook the intricacies involved. The decision on where to invest is often arrived at arbitrarily; for example because a relative/friend/ colleague recommended it.

 

But investing is much more than that. Investing involves not only looking at returns but also understanding impact of other variables like inflation or taxation on returns. In this article, let us look closely at the impact of taxation on returns.

 

Public Provident Fund (PPF) versus bank fixed deposits FD

On the face of it PPF and FDs may look starkly similar.Both are low-risk options and offer moderate and more or less similar returns. PPF has a 15 Year term; FDs can have varied terms.

 

Now coming to the tax aspects. As far as deductions are concerned, both are available for deduction under secion 80C. However, an FD with a lock in of 5 years qualifies.

 

Coming to the returns. Returns on FDs are taxable, but the return on PPF is tax-free. So, lets say, if both these options gave a return of 8 per cent. The post tax returns on PPF would still be 8 per cent but on an FD it would be 5.6 per cent (assuming you are in the 30 per cent tax bracket).

 

NSCs, KVPs and Govt. of India Bonds

National Savings Certificate (NSC) and Kisan Vikas Patra (KVP) provide a returns of 8 per cent. However, the interest is taxable and if you are in the highest tax bracket of 30 per cent, your post tax returns come to 5.6 per cent.

 

So other things being equal, you should be looking at investing in options which offer higher post-tax returns or preferably options which give tax-free returns. And as far as possible avoid investments in options where the returns could get taxed substantially. Let us look at some such options.

 

Equity MFs and stocks

In the long term, equities are relatively less risky and the systematic investing route can definitely help reduce the downside. Also, equity mutual funds or direct equities become tax efficient only in the long term. If you sell your equity mutual fund or share holdings after holding them for over 1 year, you would not be liable to pay any tax. If you sell them before 1 year, your gains would attract a short term capital gain tax of 15 per cent plus cess.

 

Insurance versus Pension Plan

Pension plans have always been a favorite among investors, the word 'pension' acting as a psychological soother. The premiums are paid during a certain tenure and at vesting (retirement age), the payouts start. These payouts will however be taxed at normal rates.

 

There is an alternate to this. All payouts from any type of insurance plans; guaranteed, bonus linked or Unit linked are tax–free. So why not choose a whole life insurance plan with an option of year-on-year withdrawals. Such payouts are tax-free.

 

Debt Funds Vs. Bank Deposits

Liquid funds are appropriate for very short term deposits.

Avenue	Bank deposit	Liquid plus
Amt Invt.	Rs 1 lakh	Rs 1 lakh
Tenure	90 days	90 days
Return (%) per annum #	5.25%	6%
Maturity amount	Rs 101270	Rs 101447
Returns	Rs 1270	Rs 1447
Taxability of returns	30.9%	-
Dividend distribution tax	-	14.16%
Tax applicable	Rs 392	Rs 205
Post tax yield	Rs 877	Rs 1242
Post tax returns (%) per annum	3.61%	5.13%

#Average returns for Liquid Plus funds for Jun 09
Tax rates are inclusive of 3% cess

 

If you are looking at a slightly longer tenure (more than 1 year), you could look at Fixed Maturity plans (FMPs) which would prove to be an interesting and efficient option. With the help of FMPs investors can get 'double indexation' benefit. This advantage can be availed by investing in an FMP just prior to the end of a financial year and withdrawing it after the end of the next financial year. Here's a quick look at how one could benefit by investing in FMPs as against FDs.

A 13 Month FMP, launched on March 2007, will mature in April 2008. It will pass through two financial years and thus has the benefit of double-cost indexation for the purpose of calculating post-tax yield.

Details	Bank fixed deposit	FMP - with indexation	FMP - without indexation
Investment Rs	10000	10000	10000
Indicative yield (annualised)	9.5%	9.5%	9.5%
Tenure (mths)	13	13	13
Maturity amount Rs	11033	11033	11033
Return/capital gain Rs	1033	1033	1033
Indexed cost Rs	NA	11214	NIL
Indexed long term capital gain Rs	NA	-181	NA
Tax rate	30.3%	20.6%	10.3%
Tax Rs	313	NA	106
Post tax gain Rs	720	1033	927
Post tax annualised return	6.63%	9.5%	8.52%

Cost Inflation Index FY06-07 - 519; FY08-09 – 582

As is evident above, the post tax returns of FMPs with double indexation can be significantly higher (over 50% higher returns), even while pre tax returns are similar.

Gold

Holding physical gold is risky, however, often it is the usual last resort for someone who needs money urgently. Sale of Gold jewelry within a period of 36 mths, is treated as short term capital gains and taxed at normal rates. Post 3 Yr horizon, one needs to accommodate indexation benefit and would end up paying roughly about 10%-20% of taxes. There is a definite need to give a second thought on undue acquisition of gold. Investing in Gold via Mining funds (mutual funds) / exchange traded funds would be far more tax-efficient.

Real Estate

Here again, it would depend on the holding period. If you sell off the asset before 36 months, you would have to pay taxes at normal rates. For any period exceeding 36 months, if the asset is a residential property, you have the option of claiming exemption if it is re-invested. However, not only is the asset illiquid, earning a decent return on income could take an average of 10 yrs – given that the market cycle is inherently longer.

The list of avenues is not exhaustive; we have touched on the key avenues. We leave you with the wishful thought to prioritize tax-efficient avenues for your investments.he list of savings / investment options presented here is not exhaustive; I have touched only on the more popular options and leave you with the thought that tax-efficiency is a key yardstick in evaluating investment options.

Summary

• Invest don't save
• Look at Post tax returns wherever relevant
• Wherever possible choose tax free/lower tax instruments
• Low risk – tax free combo would fit Traditional insurance options and PPF/VPF. Gold/Debt Mutual funds/Real Estate are relative less taxed than fixed deposits
• Medium/High Risk tax efficient avenues are Unit Linked Insurance Plans, Equity/Balanced Mutual Funds and direct equities
• Interest bearing assets are generally tax inefficient. Hence look at post tax return before investing.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

Source: http://wealth.moneycontrol.com/columns/tax-planning/are-taxes-eating-into-your-returns-/13672/0

 

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Complete guide: Tax sops on donations

 

INSPITE of all the contributions made to social causes, there is a huge gap between the demand of money from the needy and the amount donated by philanthropists.

This probably, is the reason why the Government has given tax benefits on donations. The amount donated towards charity attracts deduction under section 80G of the Income Tax Act. Section 80G has been in the law book since financial year 1967-68 and it seems it's here to stay. Several deductions have been swept away but the tax sop for donations appears to have survived the axe. The main features of tax benefit with respect to charity are as follows:

Who can get a tax break?
Any person or 'assessee' who makes an eligible donation is be entitled to get tax deductions subject to conditions. This section does not restrict the deduction to individuals, companies or any specific category of taxpayer.

Which donations can get you a tax break?
There are thousands of trusts registered in India that claim to be engaged in charitable activities. Many of them are genuine but some are untrue. In order that only genuine trusts get the tax benefits, the Government has made it compulsory for all charitable trusts to register themselves with the Income Tax Department. And for this purpose the Government has made two types of registrations necessary. Only if the trust follows the registration, they will get the tax exemption certificate, which is popularly known as 80G certificate.

How much deduction will I get if I donate?
Firstly, a taxpayer claiming deduction under section 80G should find out the donation amount that qualifies for the deduction. He has to compute the actual donation with reference to the qualifying amount. For this purpose, donations can be broadly divided into two categories:

1. Donations to private trusts

Step 1: Find out the qualifying amount

The qualifying amount under this category will be lower of the the following two amounts:

a) The amount of donation

b) 10 per cent of the gross total income as reduced by all other deductions under Chapter VI-A of the Income Tax Act such as 80C (PPF, LIC etc.), 80D (mediclaim), 80CCC (pension schemes etc.

For example, a taxpayer named Laxmi Arcelor has taxable salary of Rs 500,000. He has deposited Rs 70,000 in Public Provident Fund and Rs 60,000 in his company provident fund. He donates Rs 45,000 to CRY (Child Relief & You) trust. Presuming he has no other income, his taxable income will be computed as under:

Gross salary	Rs 500,000
Less: Deduction under section 80C restricted to	Rs 100,000
Gross total income (before 80G)	Rs 400,000

After making donation to CRY, his qualifying amount for 80G will be:

Actual amount of donation	Rs 45,000
10% of Gross total income as computed above	Rs 40,000 whichever is lower

Since 40,000 is lower, the qualifying amount will be Rs 40,000

Step 2: Find out actual deduction
The next question that arises is how much would be the actual deduction? In the case of donations to private trusts, the actual amount of donation would be 50 per cent of the qualifying amount.

Therefore, in the example given above, since the donation is made to a private trust, the deduction will be 50 per cent of the qualifying amount ie 50 per cent of Rs 40,000 = Rs 20,000.

So,

Gross total income (Before 80G)	Rs 400,000
Less: deduction under section 80G	Rs 20,000
Total income (taxable income)	Rs 380,000

Step 3: Check upper limit
Finally, the deduction under section 80G cannot exceed your taxable income. For example, if your income before deduction is Rs 3 lakh and if you have given donation of Rs 5 lakh to the Prime Minister's National Relief Fund, please do not expect to claim a loss of Rs 2 lakhs. Your income will be NIL (Rs 3 lakh - Rs 3 lakh). The deduction will be restricted to the amount of your income.

ii) Donations to trusts/funds set up by the Government
In this category, the entire amount donated ie 100 per cent of the donation amount is eligible for deduction. There is a long list of 21 funds/institutions/purposes for which donations given would qualify for 100 per cent eligibility. Notable among this list are:

- The National Defense Fund

- The Prime Minister's National Relief Fund

- Any fund set up by the State Government of Gujarat for earthquake relief

The funds that figure in this long list are all set up by the Government. Private Trusts do not figure in this list.

Thus, in this category of donations, the ceiling of 10 per cent of the gross total income as reduced by all other deductions under Chapter VI-A of the Income Tax Act does not apply.

In the above example, if instead of donating to CRY, had the donation been given to say, The Prime Minister's National Relief Fund, then the calculations would have different as shown below:

Gross Total Income (Before 80G)	Rs 400,000
Less: Deduction under section 80G	Rs 45,000
Total Income (Taxable Income)	Rs 355,000

iii) Donations to approved research organizations:
There are special sections for businessmen and professionals who earn income under the head Profits and Gains of Business or Profession. Section 35AC and 35CCA allow a deduction of 100 per cent of the amount donated for scientific research and rural development to approved research organisations. For this, the research organisation requires the approval of the Government.

Those who do not have any business or professional income (like salaried persons), donations can be given to such organisations and 100 per cent deduction can be claimed under section 80GGA.

What points should I keep in mind for claiming deduction?
Following points must be borne in mind:

i) A stamped receipt is a must:
- For claiming deduction under Section 80G, a receipt issued by the recipient trust is a must. The receipt must contain the name and address of the Trust, the name of the donor, the amount donated (please ensure that the amount written in words and figures tally!).

- The most important requirement is the Registration number issued by the Income Tax Department under Section 80G. This number must be printed on the receipt. Generally, the Income Tax Department issues the registration for a limited period (of 2 years) only. Thereafter, the registration has to be renewed. The receipt must not only mention the Registration number but also the validity period of the registration.

The donor must ensure that the registration is valid on the date on which the donation is given. For example, the registration of a trust may be valid from April 1, 2004 to March 31, 2006. Now, if the trust does not get its registration renewed after April 1, 2006 then even if donation receipt is issued by the trust to the donor for donations received after April 1, 2006, the donor would not get any tax benefit.

So, please check the validity period of the 80G certificate. Always insist on a photocopy of the 80G certificate in addition to the receipt.

ii) File the original donation receipt with your return of income:
For claiming deduction under section 80G, file the original donation receipt alongith the return of income. If the receipt is not filed, you will not get the deduction.

iii) Only donations in cash/cheque are eligible for the tax deduction:
Donations in kind do not entitle for any tax benefits. For example, during natural disasters such as floods, earthquake, many organisations start campaigs for collecting clothes, blankets, food etc. Such donations will not fetch you any tax benefits.

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

Source: http://wealth.moneycontrol.com/columns/income-tax/complete-guide-tax-sops-on-donations-/12282/0

  

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Budget: Service tax rate may be raised to 12 pc

With the government's fiscal deficit ballooning, there are chances of service tax rate being restored to 12 per cent in the upcoming Budget, official sources said. The government had last year cut down service tax rate from 12 to 10 per cent as part fiscal stimulus measures to help the economy tide over the then slowdown. Official sources said service tax rates could be raised to the original level of 12 per cent as the booming sector is something the revenue department banks upon but the 2 per cent duty cut has brought a dip in the service tax revenues. Together with cut in service tax and excise duty reductions, Plan expenditure was also stepped up, leading to widening of fiscal deficit as the total stimulus amounted to Rs 1,86,000 crore. The fiscal deficit, which was projected to be 2.5 per cent of GDP at the beginning of 2008-09, crossed six per cent by the end of the fiscal. It is projected to further rise to 6.8 per cent this fiscal. "With rising fiscal deficit to manage and the economy showing some signs of recovery, the government may withdraw the fiscal stimulus, though not completely. Service tax ambit could be widened and the rates may see upswing to the pre-stimulus period," said Ernst and Young Partner and Indirect Tax Leader Vivek Mishra.   Source: PTI

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Tax Policy 2010: Climate Change for the Better?

By Sudhir Kapadia, E&Y

One of the advantages of December year end musings of life in general is the fact that one can 'cherry pick' some salutary omens in the environment, wrap around a comfortably warm blanket and announce to amuch wearied hassled and over worked populace the golden mantra: 'All is well!'. When it comes to musings on India's Tax policy the temptation is no different. After all, we witnessed a bold intent to completely overhaul an over engineered and grammatically battered (and, therefore, incongruous in many parts) Direct Tax law and to subsume a plethora of parallel but often overlapping bouquet of Indirect Tax laws into one integrated Goods & Services Tax Law. If nothing else, these two initiatives demonstrated that at last the winds of change from the Atlantic were making their presence felt in Lutyen's Delhi offering hope that sincere efforts are being considered to make the alarming 'hot' tax climate in India cooler. So how green and soothing will the tax environment be in 2010 and beyond? Here is my prognosis:-

Direct Tax Code (DTC): With the Govt already having identified seven key areas of rethink, there is a question mark on the implementation of the DTC itself. The moot point is whether some of the suggested changes creep their way as 'business as usual' amendments to the current law through the Finance Bill 2009. Some examples of these are as follows:

1) Indirect Transfer of shares : China has recently announced its intent to tax indirect transfer of shareholdings in Chinese companies under specified circumstances a move said to be 'inspired' by India's much celebrated and eagerly watched Vodafone case. Many multinationals hold the view that they would rather have clear cut guidelines setting out the conditions under which India would seek to tax indirect share transfer rather than live with perpetual uncertainty of Indian Revenue's subjective application of the principle of taxing indirect share transfers.

2) GAAR : Here again multinationals and India Inc alike would ideally like the application of time tested 'common law' principles of 'economic substance' over 'form' and onus being on Revenue to prove malafide on past of the tax payer before applying anti- avoidance law. If Revenue is concerned about specific fact patterns or 'tax shelters' it would be far better to have specific anti avoidance rules like in many other countries rather than a general omnibus provision with uncertain outcomes.

3) Indian tax residency definition : Current attempt to rope in foreign companies 'partially' controlled and managed from India for subjecting their global profits to Indian tax would lead to horrendous consequences for India Inc with overseas subsidiaries. This is doubly compounded by the fact that no underlying corporate tax credit for taxes paid overseas is not provided for. The common law principle of 'central management & control' is a far better test to apply and will ensure that genuine subsidiaries and group companies outside India are not ensnared for tax in India.

4) Capital Gains taxation : A vital area of 'simplification' in the DTC is the proposal for uniform rate of taxation for business income and capital gains. The current system of levying Securities Transaction Tax (STT) and exemption of long term capital gains on listed securities from taxation has the merits of simplicity, certainty and avoidance of any leakages in tax collection. Even if there is a policy imperative to abolish STT and bring back capital gains tax, it is essential to retain the distinction between short term and long term capital gains. Whilst world over short term capital gains are treated on par with normal trading income, in the interest of promoting long term capital investments, it is advisable to atleast have a concessional rate of tax on long term capital gains if not complete exemption. Towards this, a rate of 15% tax on long term gains can be considered on par with dividend distribution tax (DDT) in the interest of horizontal equity.

5) Uniform Maximum Marginal Tax Rate : Whilst the much touted sharply reduced Corporate tax rate of 25% in the DTC hinges precariously upon the 'revenue compensating' measures such as the Gross Assets Tax, Finance Budget 2010 could well consider a uniform tax rate of 30% for both individuals ( at the highest slab) and corporates. This would mean a much delayed and over awaited removal of all kinds of surcharges notorious for sticking around much beyond their originally planned tenure.

6) Goods & Services Tax (GST) : GST is by far the most path breaking and revolutionary piece of tax legislation in independent India. As a concept, GST was eagerly awaited by an over burdened Industry grappling with multiple layers of asymmetrical indirect taxes ranging from Excise duties, sales taxes, service tax to a variety of local taxes such as octroi, entertainment and luxury taxes. In it purest form a single uniform GST rate with no exempted items would seamlessly integrate al the different taxes currently prevailing and ensure zero leakage of input tax credits against output tax payable by a provider of goods or services. If implemented with political will and administrative ( and technological) efficiency we could well see an improvement of 2% in GDP of the economy. This ofcourse highlights both the criticality of GST as well as the pitfalls (and lost opportunity) if its implementation is unduly delayed and still worst, done half heartedly.

As with the Climate Summit in Copenhagan, it seems safer to predict a reduction in the 'hot' tax climate in India in the long term while we 'callibrate' our tax temperature in the short term. For the present whether with the physical or tax environment in India we can choose to ignore the obvious challenges and the inevitable sweat and grind amidst us all around and offer a uniquely Indian prognosis for our situation: 'All is well!'

Source : Moneycontrol.com

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New tax code may penalise long term investors

The new tax law may penalise long-term investors

Most finance ministers in the past gave direct tax reforms a miss, preferring discretion to valour, until P. Chidambaram took the bull by its horns and drafted a new code to replace the Income Tax Act of 1961. The new code is expected to simplify the tax procedures and adopt international best practices. But it could be tough on investors because their overall tax burden is likely to increase.

The biggest blow to investors is the removal of tax exemption for long-term capital gains. The code proposes abolishing the securities transaction tax of 0.25 percent, which by itself, would have been welcome. But the code also imposes capital gains tax on all gains made by selling shares, irrespective of the time they were held for. Thus it eliminates the distinction between short-term and long-term gains.

Earlier, gains from the sale of shares after one year were tax-free. Now they will be clubbed with your income and charged at the slab rates going up to 30 percent.

The tax code introduces the 'Exempt-Exempt-Taxation' (EET) method for savings. Under this method, investors will enjoy tax benefits at the time of investment and growth, but will be taxed when they withdraw the money. Earlier, investments enjoyed tax benefits on all the three legs, under the Exempt-Exempt-Exempt system. The only saving grace here is that contributions made to provident and pension funds schemes until March 31, 2011, will continue to enjoy the full exemption.

A key segment to be hit from the EET system will be equity-linked savings schemes (ELSS). These schemes are popular with tax savers. But the new system could make ELSS dividends taxable.

Hiresh Wadhwani, partner at Ernst & Young, says the DTC is doing things backwards. He says the code accords tax benefit to a saver when he has earning potential, but will tax him in his old age. "This might work better in a developed country but not in India. We need a TEE system, Tax-Exempt-Exempt, for the Indian context," he says.

The burden of wealth tax is also likely to increase. Surely, the code proposes raising the exemption on wealth tax to Rs.50 crore and a tax of 0.25 percent for wealth above that threshold. That is, a wealth of Rs. 51 crore will attract a tax of only Rs. 25,000. Sounds good. But the definition of "wealth" has now been expanded to include shares and financial instruments.

So, even promoter holdings in companies become taxable. "But even then, it's a minimal rate. I think it's quite fair, especially for rich promoters who have multiple holdings on listed entities, as they will see increased outflows annually," says Uday Ved, head of tax at KPMG India.

The direct tax code is not yet law and the government is reviewing many aspects of it. It might be a bit harsh on the investors in the form P. Chidambaram got it drafted when he was finance minister, but there is still hope that Pranab Mukherjee may soften it a bit.

By: Shloka Nath/ Forbes India

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