TAX

Almost every person who works always cribs about one thing, paying taxes. Taxes
are a form of contribution to the government by every individual for all that the government
provides (and most governments are inefficient). In my personal blog I have written a lot of
posts criticising taxation practices but this article is however a little different.

The reason I say that “I want to pay tax like a company!” is because companies
taxation rules are very different from individual taxation rules. The most important difference
being …….

A company pays tax only on the profit while an individual pays tax on his income

So if a person earns around Rs 15 lakhs per annum he is in the highest slab of taxes
and will approximately payatleast Rs 4 lakh in taxes. Instead if a company makes Rs 15 lakhs
per annum then ….

Taxation in India

India has a three-tier tax structure, wherein the constitution empowers the union

government to levy income tax, tax on capital transactions (wealth tax, inheritance tax), sales
tax, service tax, customs and excise duties and the state governments to levy sales tax on
intrastate sale of goods, tax on entertainment and professions, excise duties on manufacture
of alcohol, stamp duties on transfer of property and collect land revenue (levy on land
owned). The local governments are empowered by the state government to levy property
tax and charge users for public utilities like water supply, sewage etc. More than half of the
revenues of the union and state governments come from taxes, of which half come
from Indirect taxes. More than a quarter of the union government's tax revenues is shared
with the state governments.

The tax reforms, initiated in 1991, have sought to rationalise the tax structure and increase
compliance by taking steps in the following directions:

 Reducing the rates of individual and corporate income taxes, excises, customs and
making it more progressive
 Reducing exemptions and concessions
 Simplification of laws and procedures
 Introduction of permanent account number (PAN) to track monetary transactions
 21 of the 28 states introduced value added tax (VAT) on April 1, 2005 to replace the
complex and multiple sales tax system
The non-tax revenues of the central government come from fiscal services, interest
receipts, public sector dividends, etc., while the non-tax revenues of the States are grants
from the central government, interest receipts, dividends and income from general, economic
and social services.

Inter-state share in the federal tax pool is decided by the recommendations of the Finance
Commission to the President.
Total tax receipts of Centre and State amount to approximately 18% of national GDP.
This compares to a figure of 37–45% in the OECD

Corporate tax system

Corporations and shareholders                                                                         

Corporate income is assessable in the hands of the corporation.

Taxable entities

Corporation tax payable by resident corporations also applies to the branch operations in
Montserrat of foreign corporations in respect of income arising in Montserrat. A company is
deemed to be resident only in the country in which the central management and control of its
business is situated

Taxation                                                                                                            

Gross income

Accounting period                                                                                          

A newly incorporated company will select a year-end for accounting purposes, usually a year
after commencement of the business. The Comptroller of  Inland Revenue has to approve any
subsequent change of year-end. Such approval is usually given if good reasons for a change
exist.

Accounting methods

Accounts are normally prepared on an accrual basis; any other basis would have to be agreed
on with the Comptroller of Inland Revenue.
Intercompany transactions

There are no specific limitations on prices for goods bought from or sold to foreign affiliates,
but the Inland Revenue will disregard or adjust transactions they consider to be artificial.

Inventory valuation

Inventories are generally stated at the lower of cost or net realizable value. FIFO and average-
cost methods of valuation are generally used for book and tax purposes. However, the
Comptroller of Inland Revenue will normally accept a method of valuation that conforms
with standard account practice in that trade. LIFO is not permitted for tax purposes. General
provisions for obsolescence are not deductible for tax purposes.

Capital gains

Capital gains are not subject to a separate tax or taxed as ordinary income.

Interest

Interest is taxable and forms part of the taxable income assessable to tax in the same way as
any other taxable income.

Dividends and intercompany dividends

Dividends received by a company resident in Montserat from another company resident in

Montserrat are taxed at the rate of 40 percent. However, the recipient company is allowed a
tax credit equal to the tax on the profits out of which the dividends were
paid.                                                  

An Montserrat corporation is taxed on foreign branch income as earned, and on foreign

dividends as received. Double taxation is avoided by means of foreign tax credits where
active tax treaties exist.

Stock dividends

A Montserat corporation can distribute a tax-free stock dividend proportionately to all

shareholders.
Royalties

Royalties are assessed for corporation tax in the same way as interest.

Service fees                                                                                                                         

Service fees are also assessed for corporation tax in the same way as interest.

Exchange gains and losses                                                                                                

Foreign exchange gains and losses would be taken into account in computing taxable income
generally when resulting from trading and when realized

Nontaxable income                                                                                                                  

Income arising from the business of fishing, farming, market gardening and livestock raising
carried on by a resident is exempt from taxation.

Deductions                                                                                                                                    
                                                                                         

Business expenses

For the purpose of ascertaining the taxable income of a corporation, all outgoings and
expenses are to be deducted that are wholly and exclusively incurred in the production of the
income. There are no territorial limits and no prohibitions against payments to affiliates,
provided they conform to the principle of being incurred for the production of the income.
Certain payments to overseas companies are subject to withholding taxes.       

Depreciation                                                                                                                                
Depreciation allowed for tax purposes is computed on the diminishing-balance method at
prescribed rates. Initial allowances are granted on industrial and commercial buildings, built
between April 1998 and March 31,2003, and in respect of capital expenditure incurred on
plant and machinery by a person carrying on a trade or undertaking as defined. Conformity
between book and tax depreciation is not required. Gain on sale of depreciated assets is
taxable as ordinary income up to the amount of tax depreciation
recaptured.                                          

Taxation

No allowance is given for amortization of goodwill or other intangible assets, such as patents,
trademarks and copyrights.

Interest

Interest is an allowable deduction provided the interest is paid on capital employed in

acquiring assessable income.

Interest payments to nonresident persons are subject to withholding tax.

Royalties and service fees

Royalties and service fees are tax deductible if incurred to produce assessable income.
Payments to nonresidents are subject to withholding tax.

Employee remuneration

Deductions may be claimed on payments to employees provided they are properly employed
within the business. The fact that they are foreigners or shareholders has no relevance except
that the salaries must be reasonable having regard to the services performed. Where a
principal shareholder receives a salary from the company, there is a restriction for tax-
deductibility purposes on the amount of that salary to a reasonable commercial level of
remuneration.

Insurance premiums

Insurance premiums are allowable but, in the case of captives, must be at a level that bears a
reasonable resemblance to the arm's-length cost of insuring the risk.

Bad debts                                                                                                          

Specific provisions for bad debts are allowed.                                                                      

Foreign taxes

Relief is given for tax paid on Commonwealth income and taxes paid in territories with
which a double taxation agreement exists.

 Pension funds                                                                                                                     

Contributions to pension funds approved by the Governor in Council are allowed and is 3 per
cent of the individuals salary.

Nondeductible items                                                                                       

No deduction is allowed in respect of domestic or private expenses; expenses not who/ly and
exclusively incurred jn the productjon of income capital withdrawn; any sum recoverable
under an insurance policy or contract of indemnity; legal fees for purchase of an asset or
lease; or amortization of goodwill, patents, trademarks, and copyrights.

Tax computation                                                                                                                        

Net income                                                                                                                                 

Net taxable income is determined by taking the reported profit from the profit and loss
account (income statement) and adding back book depreciation and nonallowable expenditure
and then deducting tax depreciation allowances and nontaxable income, such as gains on
sales of fixed assets, in the amount of accumulated allowances granted earlier.

The adjusted profit may then be reduced by up to 50 percent if there are sufficient agreed tax
losses brought forward from previous years (see Losses above)

Tax rates                                                                  

Corporate tax is imposed at the following rates.

1. Nonresident companies lending money for "approved development" in

Montserrat-20 percent.

2. Resident companies-20 percent.                                             

Tax credits                                                               

There are provisions in the tax laws for a foreign tax credit by way of unilateral relief where
no double taxation treaty exists. Credit is given under the double tax treaties and there are
also bilateral arrangements with certain Commonwealth countries                                           

Consolidation                                                           

There are no provisions for group tax relief where losses of one company may be offset
against profits of another.

Other taxes

There are no other taxes on the income of a corporation resident in Montserrat.        

Branch versus subsidiary

Generally, it is preferable to incorporate a local company in Montserrat rather than operate as

a branch of a foreign company. The advantages derived are as follows.

1. Identity and image:It is better to present a local image.                                         

2. Possible future admission of local shareholders.

3. Possible tax advantages in foreign parent's country of residence:                           

     For example, if the subsidiary had a tax holiday, the parent could be free of tax on  

    Antiguan earnings until distributions were made.                 

4. Saving of substantial stamp taxes if the Antigua operation, including fixed assets, were

   subsequently sold, e.g., stamp tax on share transfers is 2.5 percent, whereas stamp tax 

   on property transfers is a total of 7.5 percent.                          

Branch losses cannot be carried forward on incorporation.

Special industries

Insurance                                                                

In the case of an insurance company (other than a life insurance company) where the gains or
profits accrue in part outside Montserrat, the gains or profits on which tax is payable shall  be
ascertained by taking the gross premiums and interest and other income received or
receivable in Montserrat less reinsurances, claims expenses and a reserve for unexpired risks.

Life insurance companies are taxable on investment income and commission, less
management expenses.

All insurance companies are subject to a premium tax of 3 percent on the premium income,
excluding motor business, net of agents' commissions, whether resident or not.

Shipping

Income arising from the business of shipping carried on by a nonresident is exempt from tax
provided an equivalent exemption is granted by the country in which such person is resident
to persons resident in Montserrat.  The expression "business of shipping" means the business
carried on by an owner of ships, and the expression "owner" includes charterer. 

Subject to the above provisions, an owner or charterer of ships whose principal place of
business is outside Montserrat, but in a part of the Commonwealth, is taxable on the
proportion of profits applicable to shipping in Montserrat.

HOTELS

Under the Hotel Aid ordinance, investors in the hotel industry may benefit from a tax holiday
of up to five years. For five of the following eight years, the investor may offset up to one-
fifth of the incurred capital expenditure against future income. Losses incurred during the tax
holidays may not carried forward against future profit.            
Manufacturers

The Fiscal Incentives Act 1975 provides that manufacturers of an "approved product" are
exempt from local taxation for varying periods, five to ten years, although longer periods of
up to fifteen year maximum may be negotiated depending on the nature of the investment.

Companies qualifying for fiscal incentives are entitled to Capital Expenditure Allowances
after the expiration of the tax holiday. This allowance may not exceed 20% of the total
expenditure on plant, machinery and equipment made during the holiday. There are no
restrictions on the Repatriation of Profits, dividends or registered capital.

 International business corporations

The International Business Companies Ordinance 1985 provides that an international

business corporation is exempt from local taxation.

Holding companies

There is no special tax legislation relating to holding companies, nor is there any provision in
the tax legislation to permit the assessment to tax on a group basis. Each company within the
group is assessed separately and there is no setoff of losses between related companies.

 Corporate tax planning strategies

Type of entity

Tax rates for companies are the same as for other entities 30 percent.

Subsidiary versus branch

A subsidiary Montserrat company is preferable to a branch of a foreign corporation

Special industry companies                                                                                                    

Incentives are available for a wide range of companies, including in tourism, manufacturing
and agriculture.

Acquisitions

In considering asset or share acquisition, the tax consequences depend on the circumstances.
Stamp taxes on the sale of real estate are high. However, capital allowances can be claimed
on the full cost of buildings, as well as plant and machinery. The special concessions relating
to hotels may apply, in which case an asset acquisition would be
preferable.                                                                                                                               

International tax center

The International Business Companies Ordinance 1985 gives tax exemption to international 
companies.

Tax treaties

Active tax treaties are presently in existence with the United Kingdom, and the Organisation
of Eastern Caribbean States (O.E.C.S).

HOTEL INDUSTRY

Tourists to India:

2005 -2006    4.6 million

2006 -2007   5.0 million

Labour involved in Hospitality Industry:

Direct             18.0 million

Indirect           24.0 million

Total 42.0 million and rising

Foreign exchange earnings from tourism have risen 20% to Rs. 25,000 Crores in 2006.

The under mentioned items have been taken up to get the finance ministry to consider while
preparing the new budget.

1. Abolition of expenditure tax has greatly helped the hotel industry but the problems are in
the central taxes and various state governments are levying different level of taxation.

2. Approximately 60,000 rooms need to be built within next 2 to 3 years. Infrastructure

status for hotels has not given as much benefits to hotels as it has given roads, ports,
telecommunications, power, airports etc. Income tax exemption under section 80.1A
for new hotel projects will be equivalent to viability gap funding. This was given from
1991- 1994 and 1997 – 2001. This was the discontinued. This has acted as a deterrent
in adding new hotels. Hotel. Hotels should once again get full benefit of infrastructure
status under section 80-1A of Income Tax Act.

Convention centres should also be brought under section 80-1A of IT Act for full
benefits which are being given to other infrastructure companies and this exemption
should be there for at least 5 years.

3. Continuation of concessions under section 80 HHD of Income Tax Act on Foreign

Exchange earnings of hotels. This benefit under aforesaid section has been
withdrawn. This should be reinitiated. Any revival of benefits available to the export
of manufacture goods under above section should equally apply to hotels.
4. Depreciation rate of hotels that was fixed at 20% for many years has been reduced to
10% with effect from 01.04.2003. Depreciation of 20% should be restored.
5. Section 194 – 1 of I T Act. This section relates to rent received by a company where
the income from such rent from a particular client is above 1.20 lacs in the year.
FHRAI has obtained a stay order from the High Court of Delhi and it still continuing.
We have urged the ministry of finance to take the correct, legal and factual view on
this and exempt the hotel industry from the provisions of this section.
6. Fringe benefit Tax: Introduced in 2005-06 under section 115 W.B. (2) companies are
liable to FBT for expenditure on entertainment, hospitality including Food &
Beverages, Conferences, sales promotion, tour and travel, hotel boarding and lodging,
 health club etc. This has had a negative impact on the establishments. We have asked
the following to be considered:
a. Contribution to superannuation funds should be removed from the FBT for
various good reasons
b. Threshold limit should be prescribed for application of FBT and smaller
entities having an annual turnover of below a certain amount should be
exempted from this tax. This has also been done for Service Tax and for
Central Excise. It is understood that there is such a threshold limit even in the
Australian Tax where FBT has been borrowed.
c. Since this is additional tax, it should not be made applicable to loss making
companies, which primarily do not pay any base tax.
d. To avoid administrative hassle last quarter installment should be made payable
by April 15, instead of March 15th.

It is requested that FBT must be reviewed in the Budget proposals for 2007-2008 and should
be rationalized. We agree with other industry association that it is largely a tax on
expenditure and not on income and is totally unjustified.

7. Minimum Alternative Income Tax: On the corporate sector in 1997 under section 115 (J).

This tax was exempted for all exports. Since the hotel industry has been recognized as a
service exporter, we too should be exempted from this tax.

8. VAT and Sales Tax: In some status VAT is as high as 12.5% and in some state like
Himachal Pradesh as reasonable as 4%. Recommend that VAT at 4% be maintained by all
states.

Secondly many states are charging VAT and Sales Tax, particularly in the sale of liquors.
There should be only ‘one’ tax.

9. Service Tax has virtually replaced expenditure tax. FHRAI has requested that exemption
be granted in respect of all services like Mandap Keeper, Convention Services, Health Club
and Beauty Parlour, Fitness Centers, Dry Cleaning Services, Rent a Cab Service, Event
Management and Internet Access.
Government is charging service tax on the same services on which state government is
charging sales tax or VAT. In some cases state government is charging luxury tax on the
same services on which central government is charging services tax e.g. Internet Service.

1. Service Tax on Foreign Exchange Earning was exempted on foreign exchange

payments for taxable services and discontinued. It has been requested that
export of services be treated in one definition and should include all services
from which the company earns foreign Exchange.

11. Excise Duty on Cakes & Pastries. We have requested that above tax on unpackaged,
freely made Cakes & Pastries be not levied.

12. Additional Custom Duty on liquor. Basic custom duty on liquor at 160% is
already high, and the high rate of additional duty or countervailing duty is taking the overall
duty in certain price categories to about 600%. The excise duties of state government if
calculated on landed CIF process of imported products comes to 15 to 20%. Any
countervailing duty on imported liquors must remain within this range and not higher.

13. Marble Slabs: Allowed for import only if their CIF value is not less than US$ 2700 per
cubic meter vide DG of foreign trade notification no. 26 (RE – 2005)/2004-09 dated
02.09.2005. It has been requested that this import be allowed in case of the slabs costing less
the 2700 US per c m since marble slabs & tiles are also available in lesser categories i.e. 1000
to 1200 USD! Therefore cheaper & resulting in substantial saving in foreign exchange
expenditure of hotels.

14. Taxes on ATF (Aviation Turbine Fuel). Requested that taxes on Aviation fuel be reduced
to 4% to increase Air traffic & tourism. The hon’ble minister of civil aviation has also taken
this up with the government and we are hopeful this reduction in heavy tax on aviation fuel is
considered favorably by the finance minister and reflected in the budget

Hotel Industry Seeks Reduction of Tax

Hotel and restaurant players who are braving a series of setbacks caused by the global
economic slowdown, the Mumbai terror attacks and the H1N1 virus scare, are demanding
that the centre and states take a fresh look at both the nature and level of taxation for the
hospitality sector. Speaking at the All India Convention of Hotels and Restaurants in
Thiruvananthapuram on Monday, South India Hotels and Restaurants Association of India
(SIHRA) president MP Purushothaman said a streamlining of taxes as well as a reduction of
tax levels was required to reinvigorate the hospitality sector in the country.

He said that state governments ought to appreciate the hotel industry’s role in employment
generation and forex earnings, and therefore consider it appropriate to confer the status of
industry for the sector, to stabilize the sector’s growth. Mr Purushothaman said that state
governments in the south should ideally “promote and market the South as one region with
diversified tourism products”, and that the state tourism departments should work together in
a fashion that would facilitate hassle-free intra-region travel for tourists.

On the specific issue of state-wise taxation, Mr Purushothaman said the Kerala government
for instance, should bring down the luxury tax presently levied at 15 per cent on actuals to 10
per cent on actuals on room tariff of over Rs 1,000, and completely remove luxury tax on
other services. Kerala Tourism Development Corporation chairman Cherian Philip said even
the 12 per cent tax applicable for food courts was on the high side, adding that it was
common knowledge that a high taxation structure prompted a higher tendency for tax
evasion. Kerala Tourism Secretary V Venu said over the past two decades, India’s share of
tourism earnings had only inched ahead from 0.5 per cent to 0.6 per cent, pointing to the
country’s hospitality sector just keeping pace with the industry’s growth worldwide.

He said that the future earnings for the hospitality sector hinged on the domestic market, and
pointed to the fact that even the recently-launched cruise operation from Kochi would be
driven by rupee earnings