The Hindu Business Line : Gross asset tax unfair, says MCCI

Gross Asset Tax, which taxes assets without any reference to income earned (or not earned), is patently unfair, the Madras Chamber of Commerce and Industry (MCCI) has said.

Speaking to journalists about the Direct Tax Code, Mr Sriram Seshadri, Chairman, Direct Taxes Committee, MCCI, pointed out that if the GAT is brought into force, then even loss making companies would need to pay tax. Indeed, a company might need to pay tax, even before it gets into business. For example, if a newly set-up company is putting-up a plant, it would need to pay tax on the basis of the value of the plant, even before the plant goes on-stream.

High impact

“The impact on companies is very high. We found out that capital intensive companies would need to pay two times to 55 times as much tax as they are paying today, if the GAT is brought into force,” Mr Seshadri said.

He said that the GAT would tantamount to double taxation. Suppose a company borrows Rs 100 crore from a bank and puts up a factory. The value of Rs 100 crore is ‘gross asset’ both in the books of the bank and the company. As such, both will pay a tax on that.

SEZs would be hit

The Direct Tax Code, which is today a draft put-up for public discussion, wants to do away with all the tax benefits that a unit put-up in a Special Economic Zone today enjoys. The tax benefits for the SEZ developers would be available to those SEZs that are notified before April 1, 2010. But if the units set-up in the zones do not get tax benefits, how would the SEZ developers populate the zones?

If the envisaged provisions are brought into force, then the SEZs would be hit, Mr Seshadri observed. Today, there are 1.46 lakh hectares of land with SEZs that have in-principle approvals. These lands cannot be sold-off and hence the SEZ developers will also be badly hit, he said.

Treaty violation

India has double taxation avoidance treaties with some 80 countries. Under the DTC, no preference would be given to such tax treaties. This “subordinating tax treaties on unilateral basis” is not taken well by foreign investors, Mr Seshadri said.

Further, the General Anti Avoidance Rules (GAAR) provides enormous powers to the Commissioner to label a transaction as impermissible and ignore and re-characterise a transaction in many ways. For example, the Commissioner could treat a capital transaction as revenue. “Trepidation lurks that GAAR could be used against genuine transactions because wide discretionary powers are envisaged to be given to the tax officers without a mature guiding principle,” Mr Seshadri said.

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