The Tax Impact in Leasing

'Leasing' signify a very widespread way of doing business today. It is very commonly employed by businesses who cannot afford to make huge investment in assets in one go, particularly during start up or even otherwise as well. Such are called Lessees. On the other side - the Lessors find out investors for their assets who pays them value for their assets over an agreed time period (called as lease term), and usually an enhanced value inclusive of an interest. Thereby, enhancing purchasing power of consumers and increasing thy customer base. At the end of lease term, both parties decide the future course of action - whether to extend the lease, take the asset back, transfer the asset to Lessee only or any other. Through leasing, big assets or projects requiring huge capex investment can be easily funded and operationalized.

We find various types of Lessors doing business as such - could be strategic investors or professional asset leasing companies having love for particular assets or purely financial investors such as Banks who are only interested in generating returns from the whole set up. There are Lessees who take the assets on lease and operate such assets as per terms of lease and agreed structure between the parties.

Thus, we have seen that Leasing can be quite a complicated business which can have complex structures, terms of agreement, financing, the way it is accounted for in books (following the prescribed Accounting Standards); and yes, quite a big taxation impact!

Under the Indian tax laws, Leasing can have several tax implications from both Direct and Indirect tax sides. Interestingly, under the Indian tax laws, particularly Income tax, the lawmakers have been paying attention to leasing concept from olden days itself and we can see some clarifications emerging from the year 1943 as well. Under the Indirect tax laws also, we can see clearly prescribed implications arising on leasing under VAT and Service tax laws. Consequently, there has been a lot of litigation around the subject.

Let's firstly see the different types of structures that can emerge under this business, as the implications can vary significantly depending upon the structure that we have in place. Leases can be classified into Operating and Finance lease. The chief difference between the two is that in case of Finance Lease, substantial risks and rewards are transferred by lessor to lessee - just like Banks finances a Car purchase under a lease structure. Typically, Finance lease term cover the entire life of the asset and the lessee virtually gains all rights of the owner and becomes the economic owner of the asset. Operating lease on the other hand is exactly opposite and akin to a normal lease structure that we can see in different forms in our routine lives. Thus, the presence / absence of certain vital factors in any arrangement would determine whether it is in the nature of Operating Lease or Finance Lease. 

Within the principal categories of lease as seen above, there can be Dry lease or Wet lease. Whereas, Dry lease signify providing only the asset on lease, Wet lease signify providing the asset on lease as well as the personnel to operationalise such asset. Something like providing a Ship along with the crew and staff as a complete package. Thus, Wet lease can be very close to becoming a 'Service' in real terms.

There are several structures such as Hire Purchase, installment systems, sale and leaseback transactions etc that possess very close proximity with Lease, of course with its underlying differences as well. Such transactions would be governed by their respective governing a laws. Now, let's see the tax impact on leases.

Under the Income tax, the lease payment can trigger the tax withholding implications straight. Providing asset on rent under dry lease or in a wet lease as a transaction much akin to service, it can clearly invoke tax withholding requirements. Even in international transactions, tax withholding requirement would emerge as payment of lease rental would partake the character of royalty and subject to tax as such. There are few tax treaties that provide specific exemptions / benefits. Such as Ireland which exempts lease of Aircraft or Israel which does not tax royalty paid on 'Equipment'. Wet leases as seen earlier can partake the character of service and become taxable or exempt accordingly.

Another vital aspect of leasing in Income tax is the tax impact of payments of lease rent, which the Lessee would make, particularly in Finance lease. In operating lease, it could be a simple deduction for renting of asset or leasehold rights.

In Finance lease, lease rent typically comprise of principal repayment (of loan) and also the interest. The question arise on the deductibility of principal component. Since the Lessee acquire ownership rights in the asset by virtue of making such payments, the lessee would like to capitalize the value of asset in its books and claim depreciation thereon. But, the legal owner of such asset remain the Lessor, hence the Taxmen may not allow depreciation to the Lessee. Also, it can be argued that such principal payment is in the nature of capital payments, therefore it cannot be allowed even otherwise. So Lessee has generally to substantiate that it is the owner of asset and can claim depreciation. Thus arise the litigation.

Whereas, the law provides depreciation in case of Hire Purchase to the Purchaser, it does not clearly provide for the Leasing. Basis a few case - laws (including the ones decided by Hon'ble Supreme Court), a position can be taken that in finance lease, lessee can claim the depreciation, but it is not very clear and settled. Though in the draft Direct Tax Code or the DTC, there was a provision that in case of Finance Lease, depreciation will be allowed to Lessee. Thus, it is left to the facts and circumstances to ultimately decide who will claim the benefit. Hence a matter of taking a position.

Talking about the Indirect taxes, Hire Purchase transactions and 'transfer of right to use the goods' are clearly included in definition of 'Sale' and thus subject to VAT or sales tax. What constitutes transfer of right to use the goods is also defined by certain case laws. Thus, if there is transfer of such right, it could have VAT, if not, it may be subject to Service tax. Thus, lessor has to charge such taxes at the time of invoicing the lessee and the lessee can claim input credit of the same, if eligible. In case of Financial leasing services and hire purchase, service tax shall be levied on the 10% component of the interest part included in the lease rent.

As we have seen the tax impact on leasing transactions can vary significantly depending on its nature, one has to look at the underlying structure, the intention of parties, the accounting aspect, tax impact and the cash flows to define the terms of lease agreement and arrive at a most suitable structure. The tax implications would arise thereon accordingly.

It is imperative that amid evolving laws, accounting practices and tax jurisprudence, Leasing is governed by several legal and other attributes and thereby, holds a substantial exposure arising from tax and other fronts. Therefore, the business must consciously an proactively make efforts towards reckoning the issues that can arise on account of the above and try to find out ways to resolve the same amicably. 

How to do a ‘Tax Review’ of the Agreements

An entity enters into several agreements during its lifetime. As a very normal course, before any transaction is executed / entered into, a draft agreement is prepared which captures the general understanding of the two (or more) contracting parties and after a typical phase of negotiation(s), it gets finalized. More and more organizations today are realizing that before a draft agreement is finalized, all the different departments and stake holders must review the same (not only the legal and operations department) and include their points therein. Whether it is a commercial, NGO, charitable or a Government concern, it is becoming imperative to get its draft agreements comprehensively reviewed from all before finalization.

Hence, emerges the need to get all such agreement(s) reviewed from the Tax person in an(y) organization. But as a Tax reviewer, how should a review of an agreement be done? Lets see how.

Let us first keep in perspective the general role / responsibilities of a Tax Person. The basic duty is to see that all the tax laws /requirements involved in any transaction gets complied with; this coupled with the endeavor to achieve cost savings for the entity. In a synopsis form, the Tax review would involve (i) understanding the nature of the document under review; (ii) understanding the tax implications that would be involved in the transaction, both in present and future; and (iii) a sanctity check. Thereafter, one could incorporate the tax clauses in such agreement(s); and finalize it in consonance with legal & business teams.  

It would be important to understand the nature of the document / draft agreement in hand, first. Chances would be that it could be a Master Agreement or could be a subsidiary document which would be governed by a Master Agreement; or even a term sheet which would be culminated into an agreement later on. The Tax clauses might vary on the basis of the nature of document under review. For example, if it is a subsidiary agreement governed by a Master Agreement and the Master Agreement captures all tax clauses properly, there may not be a need to include any tax clause in such subsidiary agreement. Similarly, it may be agreed to insert the tax clauses only in Side Letters and not main agreement. Hence, it is very important to understand the nature of the document under review.

Now, the tax implications. To understand the tax implications involved, the reviewer must obtain a clear understanding of the transaction contemplated by the entity. In typical situations, the transaction would involve a payment, a receipt or barter or might sometimes have no monetary terms. After the basic understanding of the transaction(s), one can draw a caricature of the typical tax laws / implications that would be involved in such transaction(s) and then could proceed further.

The Reviewer must be able to clearly understand what tax implications are involved in such agreement and know the responsibilities of each of contracting parties arising therefrom. The Reviewer must ensure that the contracting parties remain responsible for taxes and compliance of their respective parts on their own; and appropriate clauses must be built accordingly in the agreement.

One would also like to understand the status of the contracting parties involved – whether such are company, non-company, LLP, university), its nationality (Indian, foreign), whether legal entity (branch or head office etc), since the tax implications would vary accordingly. As an example, if the contracting entity is a non-company and thereby, not eligible to claim benefit under the respective Double Tax Avoidance Agreement, it might cause certain concerns and the tax clauses would accordingly change.

The reviewer must incorporate the clause(s) to ensure compliance with all the tax implications. For example, to comply with the tax withholding obligations at the time of payments, a clause must be there in the draft to clearly state that the payments will be subject to tax withholding (under the Indian Income-tax or Work Contract Tax ‘WCT’ under the respective state VAT laws). If taxes have to be grossed up, clauses for the same. Also, for providing / getting Form 16A or tax withholding certificates.

One must also understand if the transaction would have bearing of indirect taxes such as Excise, Service tax, VAT, Central Sales tax (in case of inter-state sale and subject to availability of C forms) or Customs. Whether such taxes would be included in the price agreed in the agreement, or would it be charged extra. The relevant clauses must be incorporated accordingly. In case of foreign party agreement(s), one must understand what taxes would the foreign party charge in its own country and whether the agreement prices are inclusive or exclusive of such foreign taxes.

If certain documents (PAN, valid invoices with all necessary details, tax withholding certificates, waybills in case of interstate movement of goods; in case of foreign parties, no-PE and Tax Residency Certificate (TRC)) are required from the other contracting party, and the duration of submission of such documents (no-PE and TRC every year, invoices every month etc.), the relevant clauses must be incorporated. In case of purchases or foreign imports, it must be clearly defined when the title of goods would be transferred to the purchaser (VAT implications could vary basis the place of transfer); also, the delivery terms (FOB, CIF etc.) and the roles of the respective parties (as to who would be responsible for custom clearance etc.).  

If the agreement is between unrelated parties, a clause must be incorporated in the agreement that the status of parties would remain as independent parties and one should not be deemed as agent or representative of the other. Similarly, a clause could be there stating that both parties will remain responsible for their own tax liabilities and compliance, on their own. However, if the agreement is between related parties, it must take into consideration the transfer pricing implications (domestic and / or foreign).

The reviewer must also look at the confidentiality/non-disclosure clause, it should not restrict the entity from sharing such agreement with tax / regulatory authority if required under assessment or other such proceeding. Tax indemnity must be clearly provided. It must clearly state the items against which tax indemnity is provided / availed and the beneficiaries of such tax indemnity.

The Tax Reviewer must also keep in perspective, the present tax obligations and the future ones as well; and build the tax clauses accordingly. For instance, if there is a change in tax rates expected or a new type of tax (such as GST in India) envisaged, the Reviewer must understand who will bear such higher / lower taxes and put clauses accordingly. Similarly, if the other contracting party does not charge taxes properly on its invoice or does not deposit the taxes, adequate safeguards must be built in the agreement, so that no liability / implications could arise therefrom.

In the Sanctity check of the draft, the Reviewer must ensure that the transaction, the terms around it and consideration are clearly defined, without any ambiguity. There must be consistency in agreement. For instance, rates quoted in main agreement (tax inclusive or exclusive) and in annexures are same. The contract for Supplies is not termed as Service or Works Contract. The Agreement, invoice to/from, payment to / from remain with same party and has same terms. Also, ensure that the agreement is as per the entity’s policies and not against it. The tax clauses appearing in the annexures of the draft should be considered as agreement / part of the agreement only. Wherever any complicated tax position is incorporated in an agreement by way of an example, one could use examples to explain it clearly and mitigate ambiguity therein. One must put accurate referencing of the clause numbers in agreement.

The Tax Reviewer must follow the basic rule of ensuring entity’s compliance with tax laws (not to have any excessive responsibilities by virtue of the agreement), achieving cost savings and accordingly put clauses in the draft with a clear language. After having incorporated all tax clauses, the reviewer must obtain a buy-out of the same from legal or commercial / business teams; chances are that the business teams would have agreed different terms with the other contracting parties and the clauses would thus have to be suitably amended in view of the business exigencies.

As discussed above, due to the vital stake which the Tax person would hold in the transaction(s) / agreement(s), more and more organizations must ensure an effective Tax Review of the agreements for better and efficient business.    

TDS.....is far from Tedious

The concept of Tax Withholding at Source has always been a very controversial topic in the tax laws. In India, the commonly used term for tax witholding is TDS. It simply means that the payer of certain incomes has to deduct tax at a prescribed percentage of the total amount, at the time of payment or booking the expense and pay such tax to the authorities. Thereby, paying the sum net of TDS to the destined recipient or sometimes, merely accounting for the expense and paying TDS thereon to the authorities. Interestingly, there is also a concept of Tax Collected at Source or TCS under the Indian tax laws. TDS or TCS is an age old concept in the Indian tax laws and comes with its complicated and often, costly compliances and controversies. Let's see how.

Interestingly, the very nature and existence of TDS under the laws can spark several controversies. The underlying rationale of this concept is that the law assumes a certain tax component in every payment / expense which any person or enterprise make / incur and it demands the payer to pay such tax amount to the authorities without any delay. Thus, for tax authorities, TDS yield revenue immediately without even the need to reach out to the ultimate taxpayer. What happens to the payer and payee who have to fulfill TDS obligations, lets see : The payer has to deduct and deposit TDS and file its returns in the prescribed manner. If the payer of such income does not fulfill it's obligations, he can be subject to additional taxes, interest, penalties etc. Vide TDS, the recipient of such income pays a certain portion from its total tax on his income at the time of earning of such income itself. At the year-end, there is a final assessment done of such person's (recipient) income and tax liability and after offsetting the TDS already deposited on his income, such person pays balance taxes or claim refund. 

But without questioning the sanctity or the existence of the TDS concept, the parties wants to meet their obligations. So, how to devise a system to comply with the requirements effectively. 

As we now know, TDS arise at the time of every payment or expense, however for ease of performance, the law requires TDS on all payments / expenses for a particular month to be deposited in the first week of next month. For a payment made or expense booked booked month of May, TDS thereon can be deposited till June 7. Thus, arise the need to account for all payments / expenses and keep a check thereon to accurately comply with TDS requirements. And thus, arise the need to have a robust accounting system in place, develop a culture of proper and systematic accounting and administration by the people responsible for such tasks and having an effective reviewer for a final check and on time compliance.

But is it really so complicated? Let us see : the number of transactions for any enterprise can vary from few to extremely huge, however, every payment or expense has to be examined to see what is its nature/categorisation for TDS and thereby applying accurate TDS rate thereon. It is important to remember that wrong rate of TDS can cause worries for both payer and recipient. While short deduction of TDS by payer can lead to penalties and interest on the shortfall, the excess deduction of TDS can have the destined recipient receiving lower amounts than expected. Thus, correct classification of payments for TDS and deduction of taxes at accurate rates is very important. The complications arise further when payment is made to a foreign party and the classification and TDS rate can be determined under Indian domestic tax laws or the tax treaty with such country, whichever is beneficial to the foreign recipient. The payer / recipient can also obtain a lower tax certificate from the tax authorities and TDS on their respective payments can be at lower prescribed rates. 

The TDS accumulated from payments made in a month has to be deposited with the authorities in the early next month. Thereafter, TDS return has to be filed by the payer and it has to be ensured that the deductee's name, registration number and other details are filled in accurately. If in the TDS return, the payer makes a mistake with the party's name, the credit of TDS will not go to the correct recipient. Then, the payer has to provide a TDS certificate to the recipients, basis which the recipient claim credit of TDS in their final tax computation and assessment. 

As we have seen above, there are several obligations cast on the payer, the non- compliance of which can lead to penalties, interest, litigation. In some cases, such as TDS deducted and deposited late, the penalties can be more serious and can implicate prosecution of persons responsible. Yes, its prosecution even in cases of delay in deposition of TDS even by one day. 

So, how to comply with the above. One robust accounting system is certainly the must have. The system must be designed comprehensive enough to capture all transactions taking place in an enterprise and that can generate reports at periodic intervals and enable the compliance teams perform compliances and also enable checker or reviewer to check the necessary details for corrections. 

Then, comes an effective and a well defined accounting and administrative function. The accountants must possess adequate knowledge of their function and how they have to comply with TDS. The data entry teams must ensure that TDS is accurately booked and in the name of correct recipient. If there is lower tax certificate, it's effect is correctly taken. The teams must ensure that the lower tax certificate is reviewed periodically and if it gets cancelled or expired, the recipient is informed and TDS deducted accurately. Whenever, any new transaction is entered into or in doubt, professional advice is sought. Delays in accounting of invoices and expenses must be avoided. Records are properly filed and kept. The funds are allocated for payment of TDS. Year end expenses / provisions are properly booked. Having a cultured and effective accounting and administration of TDS is a regular and long term process, but if there are cracks in the accounting then things can fall into cracks and go unnoticed. It can lead to serious repercussions, as we have seen earlier. 

As a natural process, errors are bound to happen in any function, so it will be there. Hence, the role of a final reviewer or checker, who has to be ultimately made responsible for checking the details and giving his go-ahead and thereby, carrying out all the compliances in time. 

After doing all the above, will there be a system that can lead to error free and litigation free TDS process from the payer's end, is a difficult question. The inherent nature of TDS process, the manner in which tax laws are framed and administered by the authorities and the way TDS impact any business generally makes it highly tough to have an error free process. 

However, as said earlier, better to invest in effective administration, compliance procedures and solving TDS controversies, than incurring cost in falling prey to those complications and finding solutions thereafter. 

What happens...when a foreign vendor says I will not bear the tax withholding cost in India:

What happens...when a foreign vendor says I will not bear the tax withholding cost in India:

Ours a small beautiful world today! Foreign suppliers, vendors, service providers, business partners are very commonly found in our increasingly interdependent world. Thus, here are several Indian entities buying goods, services, technologies from overseas (and generally better) suppliers and making payments for the same. Even paying dividends, interest, lease, return on capital etc. to foreign investors and lessors is not that uncommon.
Often, the business discussions between foreign and indigenous parties start on a very positive note and while the parties head towards successful closure, they start discussing 'commercials'. And Often, such discussions overlook a very critical component 'TAXES' while deciding 'commercials'. Lucky are those, who identify the implications of TAXES well within time and take suitable decisions.

What can be the implications of TAXES? The commonest of those remain withholding taxes or tax deducted at source or TDS as commonly said. Under the Indian Tax Laws, the Indian payer is required to withhold taxes on taxable income arising to the foreign entity by virtue of the payments made by the Indian payer. Apart from payments made by an Indian party for pure purchase of goods from foreign supplier, rest all type of payments (whether for revenue or capital purpose(s)) has the exposure of withholding taxes. The implications of withholding taxes are many, not only does it have financial impact, but also certain procedures.

Withholding taxes means, before making the payment to foreign vendor, the Indian party has to deduct a certain % therefrom (could be 10%, 15%, 20 or 25% or even 40%), depending upon the situation. The Indian party thereafter deposit such withheld (tax) amount to the Indian Government and issues a certificate to the foreign vendor, which entitles the foreign vendor claim credit of such taxes (withheld in India) in its respective country.

For example, while making a payment of USD 100 to an American vendor, if the Indian payer withhold 10% tax, then it will pay USD 90 to the vendor and deposit USD 10 with the Indian Government and issue a tax withholding certificate to the American Co. Thus, the American Co. receive USD 90 immediately in consideration of its services worth USD 100 and it receive certificate of USD 10 which it can claim from the USA Government by way of reduction in its taxes (may be at at the time of filing it's annual return).

The % at which taxes are withheld is governed by the tax deduction rates provided in Indian domestic tax laws on a particular type of payment and also by the rates provided in double tax avoidance treaty between India and the country of that vendor. Taxes are withheld at the rate which is lower out of rates provided in domestic law or treaty and which is beneficial to the taxpayer.  In our example, if the Indian payer is paying Dividends and rate of tax withholding provided for dividends under Indian domestic law is 20%, and rate of tax withholding under India-USA tax treaty is 10%, then Indian payer can withhold taxes at 10% (at lower of the two rates). Similar analysis will have to be done if Indian payer makes payment of royalties or interest or anything else (it differs with type/nature of payment made). Further, in order to apply the lower rate of tax, the US Co. will have to provide certain documents such as Indian Permanent Account Number ('PAN' obtained from Indian tax authorities), Tax residency Certificate ('TRC' provided by US or any other country's Tax Authorities). As said before, to claim credit of taxes withheld in India or for reduction in its tax liability, the US Co. will have to apply before the US tax authorities as per their laws and get such benefit.

Now, here comes the difficulty.  The financial and procedural aspects of tax withholding would seem to be putting foreign party in some dis-advantage and make the whole a long drawn process. Even getting prescribed documents would sound troblesome. However, without tax withholding, Indian payer cannot make the payment. Else, there could be serious penalties imposed on Indian payer.

So what would happen when foreign party refuse to have any tax withholding on its payments from India. In other words, the foreign company is asking Indian Co. to bear the cost of tax withholding and make payments net of taxes to foreign vendor. This means for a USD 100 payment, Indian payer will have to bear additional cost of USD 11.11 to comply with tax withholding requirement of 10%. Higher the tax rate (such as 20% or 40% depending on nature of payment or availability of required documents), higher the incremental cost to Indian payer. So what happens in such situation?

First it boils down to commercials. If it is commercially viable for Indian payer to absorb the incremental cost of taxes (and thereby increase its overall project cost), then it must negotiate, else it may have to leave the deal there and then. Though, the Indian party can ask the foreign payee to bear half of the cost, so that both parties share equal burden of it. It's both's business after all!

But if both parties try to find a solution, there are many options to choose one from. Firstly, withholding taxes are a reality found in every part of the world and not alien to India alone, thus, the parties must recognise and accept it as a vital component of business and be open to finding solutions around it.

It calls for a proper analysis of domestic tax laws and relevant tax treaty. There are several tax exemptions and benefits provided in the law(s) itself whose benefits can be availed and taxes could be reduced to NIL naturally. If the standard laws do not provide for any such benefit, then there are ways (provided in the law itself) in which parties can approach tax authorities and ask their permission for applying lower tax rates (by way of 197 certificate or advance ruling). The tax authorities of the two countries involved can also speak with each other to find solution to a particular tax problem (provisions of information exchange and Mutual Agreement Procedure are found in every tax treaty).

Even when taxes are withheld, for a foreign company to approach tax authorities of it's own country for claiming credit of taxes withheld is easier than it looks. Those authorities gave their consent (as a signatory to the tax treaty) to allow such credit and have simple and effective procedures through which benefit envisaged by their laws is provided. The foreign Co.  has to ask for it, that's it. Even in cases of non-treaty countries, credit mechanism is provided. Thus, money withheld as taxes is never sunk, contrary to the fond perception.

Another interesting solution in our above-mentioned example could be that while Indian party pays USD 100 net to the US Co., it deposit USD 11.11 to Indian Government from its own pocket and provide a tax withholding certificate to the US Co. Therafter,  the US Co can claim credit of such taxes from US tax authorities and after getting such benefit, it can refund back USD 11.11 to the Indian party. Putting no one to loss, except following certain procedures, that's all.

Now the documents required for lowering tax rate or making an exemption (such as PAN or TRC), they are not tough to obtain. By filing simple details with tax authorities (online or manual) these documents can be obtained in 2 weeks time. The apprehensions that having obtained such documents bring foreign Co. before eyes of tax authorities and they could be exposed to unnecessary tax filing and other requirements is baseless. Nothing happens merely due to having those documents in your name in any country. Its similar to the case that merely having a license to drive on road doesn't create any issue, it is the crime of rash driving which expose people towards penalties.

Thus, the resistance of foreign entities towards Indian tax withholding has more to do with a mindset of trying to find easier routes to doing business and baseless apprehensions, which one should not let deter the business realities. As we have seen, parties must discuss issues with openness and try to find solutions in real sense, which are not difficult to come by.

Whichever route one want to take or ultimately takes, as earlier said, better to be lucky to make or break it in time.

Business amid Indian Taxes...driving thru tough waters

'TAXES' occupy a significant position in today's business world.

 

Especially, in a place like India, 'TAXES' do come with their higher cost tags, inherent complexities, burdensome procedures and above all gloominess - all this inspired by social, politicial, economic, administrative and geographical factors. Thus, businesses are often left thinking about the tax expoure that they acutall face and thereby, strategising and finding out the best ways to deal with it.

 

Imagine, any commonly found business or commercial concern - a manufacturing unit or a service provider, functioning in India. Ever wonder, how would 'TAX' cause any impact to it and what all tax complexities would it have to deal with?

 

In our example of the manufacturing or service provider concern, we understand that its basic objective would be to convert raw material to finished product and sell it to the customers. Similarly, the service provider would perform various procedures and render services to its clients. This is what our manufacturing or service concern is meant to do. Hence, it would perform several such transactions in any given time frame. The wide impact of 'TAXES' can be seen in any and all transactions such organization would carry out as its basic objective or existence. 'TAXES' impact business in every sphere , every transaction of its existence. Ironically, the Tax impact does no stop here. It goes right up till the year-end when such our concern prepares its Financial Statements and again it has to pay a Tax bill. How does 'TAXES' impact business, lets see:

 

In a usual transaction, our manufacturing concern would purchase raw materials for producing the finished products. Imagine, in addition to the price of raw materials, its raw material supplier would charge 'EXCISE DUTY' as tax on manufacture of products and 'SALES TAX / VAT' being a tax on sale of products. If the goods are imported from a foreign land, there would be 'CUSTOMS' being a tax on import of goods to India. While transporting the products to the works of our manufacturing concern, there would be 'ENTRY TAX, MUNICIPAL TAX or OCTROI' being tax on movement of goods from one region to another. While processing such raw materials to finished products, our manufacturing concern would obtain severa services (of consultants, labourer etc.) on which it will have to pay 'SERVICE TAX' being a tax on services. Depending on where our manufacturing unit is located, it could have 'PROFESSIONAL TAX WORK CONTRACT TAX, Luxury TAX, Fuel TAX or Entertainment TAX'. Same would be the story with our Service concern as well.

 

Now we are ready with our final product, the manufacturing concern would again charge its customer, in addition to the product price, EXCISE, SALES TAX / VAT (set it off with the taxes it already paid at the time of purchase) and deposit with the Central or State Government. As many times, our manufacturing or service concern would perform its business, the above story would be repeated with every revenue cycle. All the above mentioned are called as 'INDIRECT TAXES'.

 

Now comes the year end and our manufacturing or service concern is ready with its Financial Statements and here again we have a tax bill to obey. Its time for 'DIRECT TAXES' now. Our manufacturing or service concen arrive at its yearly profits and pay 'INCOME TAX' thereon. It further pays 'DIVIDEND DISTRIBUTION TAX', 'WEALTH TAX' or may be 'CAPITAL GAINS TAX', 'SECURITY TRANSACTION TAX', depending on the operations it perform.

 

Now we have seen above that there is a whole gamut of DIRECT and INDIRECT TAXES levied by Central and/or State Government which impact any and all business concerns in many ways. While there is an underlying premise that INDIRECT TAXES are actually passed on by the business concern to its ultimate customer(s), concerns often tend to absorb a portion of the costs on its own. DIRECT TAXES certainly are a cost to the concern. But it is not only the levy of multiple taxes and incremental costs that impact and concerns a business.

 

COMPLIANCES that a business concern is required to perform at regular and sporadic intervals also hold considerable exposure. Tax return filings, Audits, Assessments, Withholding and Tax payment requirements on monthly basis are certain procedures that every concern has to mandatorily comply with (and with equal amount of seriousness!). Business concerns also have to deal with irregular behaviour of Tax authorities, bear with long drawn tax disputes and late redressal of issues by Appellate Authorities.  

 

In sum and substance, TAXES have grown as a major concern for businesses, of late and it require businesses to remain on their toes and a constant proactive thinking in today's world to deal with its exposure effectively.