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  • --> OUTLOOK ARENA  >>   FACE TO FACE >>  JULY 12, 2004

    "Gift Tax Act has been brought through the back door..."
    MYSTOCKS | FREE NEWSLETTER

    Mr. Kanu H. Doshi is a B.Com., (Bombay University) and a fellow member of the Institute of Chartered Accountants of India. After qualifying as a Chartered Accountant, Mr. Doshi was associated with Mr. S.V. Ghatalia, eminent Chartered Accountant, for a few years. He is now a Partner of Kanu Doshi Associates, Chartered Accountants, Mumbai.

    Mr. Doshi, having specialised in the field of Taxation, is at present Tax Consultant to UTI and several other Mutual Funds and companies on Taxation, Company Law and Financial matters. He is also the Dean - Finance, at Welingkar Institute of Management Development & Research, Mumbai where he teaches Corporate Tax Planning and Financial Management for the Master's Degree in Business Management. Mr. Doshi has made presentations at a number of seminars and conferences on Taxation, Investments and allied subjects arranged by several professional organisations including Association of Mutual Funds in India, the Institute of Chartered Accountants of India and UTI Institute of Capital Markets, among others.

    Pfn: How would you rank the budget on a scale of 1-10 with 10 being the highest?

    Mr. Doshi : Ordinarily I would have ranked it higher given the 2 budgets Mr. Chidambaram has presented in the past. These 2 budgets were trendsetters so a lot of expectation was built up before this one. Given his penchant for innovation and originality, I would rank this budget only at 4. If the same budget had been presented by someone else I would have given it a 6.

    The reason I give it such a low rank is because I think there are several things he could have done in the budget that he has not done. For instance, the dividend distribution tax could have been abolished. In 1997, he had abolished it stating that he was not in favour of double taxation. He said then that since he was abolishing dividend distribution tax and would lose revenue from it, he would impose a token 10% tax. After presenting this budget when he was reminded that he had re-imposed dividend distribution tax, he tried to rationalise it by explaining it was like a withholding tax. When he was reminded that a withholding tax implies that the tax-payer should get a credit in his personal income tax, he again argued that companies need not declare dividends and they could chose to preserve the cash for say bonus and bonuses were left untaxed.

    Another move was imposing a turnover tax on security transactions. This was again a very sweeping move. He has said that it will apply to all transactions in stocks, futures and options. When he was asked how much money he expects to mobilise, he said it would depend on the volume of transactions. I wish he had taken credit for the amount of money he expects to mobilise from this move so as to give a clearer picture.

    Of course he has abolished long-term capital gains tax on all securities. This is a very bold move. Over here I would like to stress that securities includes private equity shares. Earlier Mr. Jaswant Singh included only stocks within the ambit of securities. But this budget includes all tradeable securities including stocks, futures, options and even private equity in a closely held company.

    Pfn: Do mutual fund units qualify as securities?

    Mr. Doshi : No, they don't. I am aware that AMFI (Association of Mutual Funds in India) has made a representation to SEBI to include mutual funds units within the definition of securities. The central government did make an attempt to amend the Securities Act to include units of mutual funds as securities. But that bill fell through and the time within which the bill was to be passed lapsed. The authorities are going to take a view that units of mutual funds are not a security, else there was no need to amend the law. This could create a problem.

    Pfn: Specify one strong positive and negative aspect of the budget.

    Mr. Doshi : A strong positive is that he has widened the scope of long-term capital gains to include even futures, options and private equity (in addition to stocks). Another strong positive is that he has reduced tax on short-term capital gains to a flat 10% from a level as high as 33% in the case of individuals and 35% in the case of corporates. A strong negative is that he should have abolished dividend distribution tax.

    Pfn: Identify one thing that you would have liked to see in the budget.

    Mr. Doshi : I would have liked it if he had made things with respect to mutual fund taxation simpler. Right now its very complicated. For instance, distribution on dividends to individuals and HUFs is 12.5%. If it goes to anyone other than these 2 entities its 20%! Of course, this move was triggered by the data on mutual fund inflows, which indicate that it is largely the corporates who benefit from the dividend payouts in debt funds. They enter the fund just before the dividend declaration (which is exempt), collect the dividend and exit. To solve this problem he has introduced measures to prevent what is know as dividend stripping. Earlier there was some confusion on whether it is 3 months pre-dividend or post-dividend or it is 3 months each pre-dividend and post-dividend. Right now the Finance Minister has left no room for doubt, he has made it 9 months with 3 months before the dividend declaration and 6 months after that. But the rule for bonus units (not bonus shares of companies) is that any capital loss on bonus units will be disregarded. By doing this he has effectively bought dividends at par with bonus as far as claiming capital loss is concerned. So just like one can't claim loss on dividends to set off against capital gains, without fulfilling the pre-requisites, one can't claim loss on issue of bonus units.

    Pfn: How faithful has the budget been to the Kelkar report?

    Mr. Doshi : The budget has ignored the Kelkar Committee report. There was not even a whisper of it. Only the abolition of long-term capital gains was in line with the Committee recommendations and over here in fact he has gone beyond it by extending it to all tradeable securities and not just listed shares.

    Pfn: What is your view on the following budgetary measures:

    Mr. Doshi :

    • Rs 100,000 taxable income
      So long as your taxable income is below Rs 100,000 you will not pay a rupee in tax. But if your taxable income is Rs 101,000 then you will pay tax on Rs 50,000 to Rs 100,000 as well as on the excess amount over Rs 100,000.

    • 2% surcharge for above and below 850,000
      If your taxable income is Rs 850,000 then you will have to pay 2% surcharge on the tax amount. If your income is higher than Rs 850,000, say Rs 900,000, you will have to pay 10% surcharge on the tax amount.

    • Gift Tax
      A novel feature of this budget is that the Gift Tax Act has been brought through the back door. He has not revived the Act but what he has done is that gifts that are paid to you on capital account are treated as income with some exemptions. First exemption is that gifts upto Rs 25,000 are exempt. If I get Rs 24,000 as gifts from say a dozen people it will be added to my income and taxed. Of course he has exempted gifts from close relatives which are defined in the Act. He has also exempted gifts received at the time of marriage.

    Pfn: The budget is silent on Section 88?

    Mr. Doshi : Yes he has not mentioned anything on it and the tax breaks will continue.

    Pfn: What is the strategy for the tax-paying investor going forward?

    Mr. Doshi : The Finance Minister has not said that he will discontinue the 6.5% Tax-free GOI Bond. But he has said that he will introduce a 9% bond for senior citizens. Since this has come instead of the Varishtha Yojana Pension Plan which was taxable, it is fair to conclude that this bond will also be taxable. After that we have the 8% Taxable GOI Bond.

    Pfn: How has the budget impacted the NRIs?

    Mr. Doshi : Earlier FCNR interest was totally exempt from tax and now it will be taxable. Even NRI deposits will now be taxed. This is perhaps from an embarrassingly high level of forex reserves. The NRIs were borrowing their money cheap, investing in India and earning say 3%, which was tax-free. They did not pay tax even in their country as this money was invested in overseas markets. This was a significant arbitrage opportunity for them. And with the rupee depreciating (only recently this trend has been reversed and we see it appreciating vis--vis the US dollar) they even made some gains over there.

    Pfn: What is a good investment strategy for the NRI in view of the changes in the budget?

    Mr. Doshi : I think equities are a good investment proposition for NRIs going forward.

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