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| Sunday, 8 December 2002 |
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| News Business Features Editorial
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Legislating the budget proposals Biz Buzz by IRIS & AVED Tax experts, accountants and business leaders who have analysed the Budget proposals of 2003 are now lobbying with the Government to amend some of the proposals before giving effect to them through legislation. Lobbying to reduce taxes or to serve narrow sectoral interests is unavoidable but not desirable and should not to be encouraged. However, there seem to be certain budget proposals that can lead to confusion and complexities which will inevitably result in manipulative practices by many taxpayers, unproductive time in crafting tax minimisation schemes, analysis of legal interpretations and tax appeals which will ultimately result in loss of productivity and a greater loss of revenue (tax collections) to the Government. Such proposals need to be fine tuned when legislation is drafted, if revenue leaks and losses as well as unproductive efforts are to be avoided. Analysts have picked the extension of the Value Added Tax (VAT) to the financial services sector and the expansion of the debits tax to cover all bank accounts as tax proposals that need careful study before laws are enacted. VAT on financial services, according to the budget proposals, is to be computed at 10 per cent on value added by an organisation, says a bank. The value added quite logically represents in its simplest form the amount spent on employee emoluments and overheads as well as profits earned. For banks and others that are in the service industry, value added is substantial and the Budget 2003, as a measure of relief and perhaps for equity, included only emoluments and profits as the elements of value added to be taxed at 10 per cent. Problems are good to be identified and dealt with early. There seem to be many such issues on the proposal to charge VAT on emoluments and profits of banks and other financial services sector organisations. Bankers point out that their profits include the surpluses of income over expenditure from activities such as leasing and fee-based activities (as opposed to income from the investment of funds) that are already subject to VAT. They also argue that an essential element of VAT, input tax credit, is not available on the proposed VAT payable. Similarly, the intended VAT on banks cannot be passed on to customers (which will then enable them to claim it as input tax credit). Definition and the computation of profits is another headache. Profits are based on accounting rules (or on specific legislation in rare instances) that have some uniformity and basis of reference in the form of accounting standards. But within those standards, there are alternative methods permitted to measure and recognise (timing of recognition) income and expenditure, assets and liabilities. For example, one may depreciate fixed assets (property, plant and equipment) at a rate higher than another, goodwill may be written off in one year or amortised over 20 years. Provisions for debts doubtful of recovery or inventory (stock) obsolescence are based on judgement. One may provide for debts in default for over three months while another may wait for a longer period. So are accounting estimates. A VAT on profits can lead to manipulation of profits. Similarly, a VAT on emoluments will lead to outsourcing most of the activities that are presently performed by the employees of a bank. One who may have to pay VAT on a huge emoluments bill can outsource the janitorial, security and transport functions and reduce the amount shown as emoluments. Outsourcing can be extended to the accounting and data processing function and to many more. Ingenuity of business people is at its best when tax legislation is complex or leaves room for manipulation. Banks and other institutions should not seek amendments that will be patchwork to the emerging problem. The best solution will be to impose a two to three per cent tax on interest payments as a special levy on the financial services sector in place of the 10 per cent tax on emoluments and profits. The industry associations comprise pragmatic personnel and they recognise (if not should recognise) that any amendment to the budget proposals should not result in a loss of estimated revenue to the Government. Recommendations to the Government should be aimed at eliminating manipulative practices, confusion and complexity in the interpretation of legislation, unproductive efforts and loss of State revenue. It is the responsibility of the private sector and its tax experts and leaders to clearly articulate recommendations. The responsibility of the Ministry of Finance is to use the time available before drafting the laws to examine those proposals and where necessary, accommodate suggestions that simplify the application of the tax statutes, calculation of taxes and determination of the tax base. Such suggestions will be favourable to both the Government and taxpayers. |
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