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Jayant M Thakur
The countdown to the budget begins in this country with also the countdown to the Finance Bill which ritually accompanies the budget and which makes important changes in the tax laws. Much is expected from this year's Finance Bill, more so for the corporate sector.
If the pace of reforms has to continue, novel and innovative provisions (and omission or serious amendments of existing provisions) would have to be made. Amendments would have also to be made to remove difficulties and controversies, in respect of existing provisions, which time and experience have revealed.
Let us focus, to start with, on two areas relating to corporates, viz; buyback of shares and minimum alternative tax.
Buyback of shares has the dubious achievement of attracting the most of debates but at the same time be a provision which is not being acted upon by corporates. The expectation was that companies will undertake buyback of shares to shore up market prices and also to act as takeover defences. The reality seems to be thatbuyback would be used as a one-time or regular financial restructuring process as well for returning money to shareholders.
However, apart from other problems, the controversy over tax treatment of buyback in the hands of the company and the shareholders is making corporates hesitant. The controversy is over whether the amount paid for buybacks would be treated as dividends in the hands of the company attracting dividend tax at the rate of 10 per cent-or whether it would be a simple case of sale of shares by the shareholder to the company attracting capital gains in his hands with the company being tax-neutral.
It is not that corporates or the shareholders do not want to pay the tax. The company would have otherwise paid tax if it had declared dividends. Further, there would be no tax in the hands of the shareholders. However, there are inequities. Firstly, the dividend tax would be levied on the whole of amount distributed, though only the portion relating to premium comes out of accumulated profits. Acontroversy would also arise in the future if a portion of the book profits was distributed as dividends. There are practical difficulties also. How will the shareholder know that the company has paid tax on dividends? This is necessary as then only if the company treats the dividends as an amount subject to dividend tax that the shareholder can claim complete exemption of the amount received. How will, in case the buyback is through the stock exchange, the shareholder come to know that the buyer is the company and, hence, he should alter his tax treatment accordingly. Indeed, is it fair to subject one shareholder who intentionally has sold shares to the company be treated differently as compared to a shareholder who has sold to a third party buyer? What if the company disputes the leviability of dividend tax but later loses in appeals? How will the shareholder take benefit of the company having lost and having paid the dividend tax?
On the other side, it may not be appropriate to totally exempt buybackfrom dividend tax. It is clear that the company does return a portion of its reserves to the shareholders which otherwise would have attracted dividend tax. A company, particularly an unlisted one, could carry out buybacks systematically over the years to avoid dividend tax. At the same time, one should not lose sight that the shareholder would pay tax on capital gains on sale of shares, if dividend tax is not levied on buybacks. The better course could be to exempt buybacks from dividend tax altogether. If it is feared (or found in practice) that companies are misusing this provision to distributed earnings by buybacks to avoid dividend tax, a provision could be introduced to curb this misuse, as e.g., what exists in the US. However, it should be ensured that such a provision is capable of being used in glaring cases only. Above all, the issue is of certainty of the levy or otherwise of tax.
The recent statements to the press by the CBDT that this controversy should not arise and is merely the product of"fertile minds" merely sidetrack the fact that at least in three court decisions, differing views have been taken over the subject. If the matter is so clear, why not put it as part of law? Minimum alternative tax (MAT) is almost an obsession with the finance ministry and corporates both. More than the capacity of raising revenue, the intention seems to remove the smirks on the face of savvy corporates who through elaborate tax planning, used to get away paying no income-tax. The fact that MAT has achieved a partial success seems to boost the morale of the department. In this background, it would be futile to suggest that MAT be removed altogether. However, one can certainly ask for removal of uncertainty and difficulties.
Sick companies are treated unfairly under provisions of MAT. It is provided that only for the period from which the company becomes a sick company to the year in which its networth becomes positive that MAT would not apply. In other words, the commencement date is the latest while theexpiry date is the earliest! The commencement date should be appropriately pre-poned to the year in which the net worth becomes zero but it should end not before completion of three years when it becomes positive, to give the company some time to stabilise. Rather than have multiple exemptions for income which is otherwise exempt under other heads, a common provision should provide that all income which is otherwise exempt under any provision of the Act should not be subject to MAT. It is totally inappropriate to permit only that portion of losses of earlier years that is higher than the corresponding accumulated depreciation. In fact, the higher of the two, and not the lower of the two, should be allowed as a deduction for computation of MAT.
(The author is a Mumbai-based chartered accountant)
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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