I recently spent a week in New Delhi and Mumbai, speaking at tax conferences about U.S., Chinese, and Indian tax matters. Now I am back in Hong Kong, where at the Shatin Race Track, the first race is over and not one of the four horses I bet on in a quinella were in the money. I certainly hope that my tax choices are better than my ability to bet on the ponies. I won in races 5-9, but as usual came away with a lighter wallet. I love the ponies, though, and the racing form is the only chance I get to study numbers that have nothing to do with taxes.

They say that there is no such thing as a sure bet — all those inside tips are worthless. But there is a sure bet in India. The India-Switzerland income tax treaty has taken effect, and it is guaranteed that any shady Indian money in Switzerland before the effective date of  the treaty has either been transferred to Singapore or been reduced to avoid any ‘‘black money’’ connota- tions. With all the fuss about money being hidden overseas by wealthy Indians, Finance Minister Pranab Mukherjee is limited in his campaign for Swiss disclo- sure: Nothing will be revealed by the Swiss government to the Indian government regarding any Indian finan- cial holdings or transactions in Switzerland before the October 17, 2011, effective treaty date. You can bet that all Indian accounts were either withdrawn from Switzerland for places unknown or brought down to acceptable amounts well before that date.

Having recently been burned by the financial strength of the United States, the Swiss have wisely concluded new tax treaties with both the U.K. and Germany, giving money instead of information. Where does this eave India? When I was in New Delhi and Mumbai, there was a lot of press regarding the new treaty with Switzerland  but very little information ex- plaining that no prior data will ever change hands.

Of more interest is the brand-new India-Taiwan treaty. You may ask: Why is India — so interested in developing trade relations with China — willing to risk China’s wrath by agreeing to a double tax avoidance agreement (DTAA) with Taiwan? I don’t think that China really minds, but I think the commercial powers in charge of Hong Kong should  mind, as this is a treaty tied into cross-straits agreement changes, while the Hong Kong-India DTAA is more inflexible.

My friend D.P. Sengupta explains in an October 3 article in Tax India International that new section 90A of the India Finance Act of 2006 allows the government to adopt an agreement entered into by specified asso- ciations, rather than one based on jurisdictions. This permits the Indian government to enter into a tax treaty based on India’s belonging to the India-Taipei Association in Taipei and the Taipei Economic and Cultural Centre in New Delhi. As of September 2011, Taiwan has 22 comprehensive DTAAs and 14 interna- tional transportation agreements. The 23rd DTAA is with Taiwan. It’s a remarkable display of ingenuity, coming up with a viable way to work around P.R.C. treaties, but I think the P.R.C. encourages this as an- other brick in the one China wall. This is all part of China, and in the future it is likely to be one China.
 
What’s different in the India-Taiwan treaty? Divi- dends are one area: There is no differentiation between portfolio income (for Indian individuals or business entities playing the Taiwanese stock market) and direct investment, with the rate of taxation fixed by treaty at 12.5 percent, higher than the 10 percent dividend tax that was written into other recent Indian tax treaties. Taiwan also has a 10 percent tax on undistributed prof- its. India once had an undistributed profits tax, but it no longer does. There is no mention of the tax in the treaty.
The India-Taiwan tax treaty still has a capital gains tax situation to contend with. Thus, it may be wise for that Indian company to use both Mauritius and Sin- gapore, as well as do business through Taiwan, as an alternative to Hong Kong.

Don’t get me wrong: I love Hong Kong. Yet the costs of doing business there are high. Everything that is possibly related to rent (including salaries) makes the possibility of Taipei an interesting alternative, espe- cially since, under the India-Taiwan treaty, the prevail- ing law is a choice of either domestic law or treaty law. And if the cross-straits agreement between Taiwan and the P.R.C. is changed and that change is beneficial for a business, then that preferred treatment is what you will get. This is what will prevail, not a treaty without the flexibility. This simply is not part of either the re- cent Hong Kong-India tax DTAA or the Continuing Economic Partnership Arrangement between the P.R.C. and Hong Kong. Of course, Hong Kong has interna- tional banking facilities that are far superior to what you will find in Taiwan, but given time, that will also change for the better. What won’t change is Chinese executives coming in from Beijing on the morning plane to Hong Kong, signing bank papers over an early lunch, and then taking the helicopter to Macao for some fun before going back to Beijing on either the late-night plane or the early-morning China Southern flight to Beijing from Zhuhai. Of course, if they stay over, they’re likely to cross the border back to Zhuhai and stay in a hotel that will give deductible travel re- ceipts.

Although Hong Kong entrepreneurs will dispute this, contract manufacturing — breaking down the manufacturing process with smaller component assem- blies at separate locations — is a process that the Tai- wanese developed to the highest degree of efficiency in Chinese operations. The management expertise from Taiwan in this area could be used in developing multi- national (India-Taiwan-P.R.C.) ventures for use not only in China but in India as well.

A Growing Bureaucracy

Yes, the bureaucracy is growing — not in China but in India — and I know where the money is coming from to enable it to flourish.


On October 12 The Times of  India reported that the Ministry of Finance revised its anticipated revenues forthe year, with the primary amount of rapid growth coming from direct taxes, which are being revised up- ward to an expected 5.85 lakh crore for the year, a 31 percent increase in collections over last year’s total of 4.46 lakh crore. Lakhs and crores are not difficult con- cepts, and if you want to understand the numbers game in India, you should get used to this way of re- ferring to the numbers.

It’s easy to understand why direct tax collections are increasing: All employees with income over the mini- mum amount have withholding that covers nearly all their tax. Plus there is the ease of e-filing. I regularly read both The Times of India and the Business Standard, and free e-filing software frequently appears as part of their online editions. I tried it a year or so ago and it was user-friendly.

If you take into account a relatively low base to im- prove upon, along with the expanding umbrella under which direct tax withholding is made mandatory, you can see how the Ministry of Finance can revise its budget upward by 31 percent. At the same time, India will be expanding its tax bureaucracy.

According to a recent Times of  India, 18,000 addi- tional positions within the tax department are being requested by the finance minister. The Central Board of Direct Taxation has created a new Directorate of Criminal Investigation to specifically target both white- collar and individual tax evasion. If this doesn’t indi- cate which way the tax wind is blowing, nothing will. Obviously, corruption will slow down any accomplish- ments to come, but having serious intent is a big start.

Direct Taxes Code

I was in India in March, speaking at what was thought by many to be one of the last annual budget tax conferences at which professionals would gather to review the annual budget address of the finance minis- ter. This is a system based on what India learned from the U.K: Since nothing is set in stone, the making of financial policy, as reflected in flexible tax law changes, is an annual event looked at by investment bankers as the starstruck in Hollywood and Bollywood look to their annual awards.

As a result, the annual budget address by the party in power would theoretically include annual tax changes that would automatically be passed in the legislature by that party in power. But reality tends to change things. Don’t ever think of the coalition in power as being cohesive.

The Direct Taxes Code (DTC) would take India’s tax system from common law to civil law. The new tax code was going to be less susceptible to annual changes. That was going to make the system more effi- cient. It was a sure thing for implementation in mid- April 2012. But I have been a skeptic for a long time.
 
At the conference I spoke at in Mumbai on October 13, I asked T.P. Ostwal, a prominent Mumbai tax specialist and someone whose opinions I value, whether the DTC would be implemented on schedule. Ostwal believes it will not happen by April 2012, and he has doubts that it will ever happen — at least in our life times.
 
On October 20 the Business Standard (my personal best choice for tax news from India) printed an article that sounded to me as if anything passed regarding the DTC was purely cosmetic and mostly meaningless.

The Direct Taxes Code Bill was introduced in the Lok Sabha (lower house of Parliament) on August 30. It was offered as a complete substitute to the 50-year- old Income Tax Act. The new legislation was proposed for immediate implementation but later postponed until April 2012. The draft bill was referred to the Parliamentary Standing Committee, a black hole of the legislature. It’s inconceivable that someone thought it pos- sible to completely change a tax system — especially in a democracy — in one fell swoop. The tax world in India is no different from that in the U.S.: Special in- terest groups and the lobbyists representing them tend to get involved when their interests are at stake. There’s no way this should ever have been considered a sure thing.

If the Parliamentary Standing Committee issues a report before the end of the winter session, the final bill can be tabled in the Lok Sabha at the budget ses- sion, the next session of Parliament. If you can find a bookmaker willing to take a bet on this, mortgage the house and bet on the DTC never happening. There will be no standing committee report by the end of this session. Far too many special interest groups are now being vocal and visible in the legislative halls of New Delhi.

While the Central Board of Direct Taxes claims that another year’s delay is no big deal, perhaps it should start facing a reality in which there will never be a DTC.

Goods and Services Tax

When I wrote about the goods and services tax the last time, it was as a result of an interview I conducted with S. Dutt Majumder, chair of the Central Board of Excise and Customs, the government’s designated over- seer of the proposed national GST. Majumder at the time (mid-March 2011) appeared confident that as of April 1, 2012, a GST would be in place. As of now, it doesn’t look like Majumder’s con- fidence was warranted.
 
Moneycontrol.com posted an interview with Yash- want Sinha, leader of the Bharatiya Janata Party (BJP), on October 20, who stated that the issues are economic and not political:

When you discuss centre-state taxation issues, states go by their own interests and not by the colour of the government.... You have an NDA- ruled state like Bihar which has been in the fore- front of GST and you have a [BJP-ruled] state like Madhya Pradesh which has been opposed to the GST from Day One.... [But] Tamil Nadu and Uttar Pradesh are not BJP-ruled states. But they are opposed to GST... the state is looking at its own future resources, financial resources.

Well, he is right and wrong. Yes, local and regional interests will always prevail — this is a fundamental feature of Indian democracy. India has a system under which the states will look after themselves as long as they can, before eventually giving in to a national GST. This is also a hot political cricket ball, and I doubt that the prevailing United Progressive Alliance is strong enough to get the ball past the BJP state batters or the independent, regionally focused political batters. In the future, yes, it will happen.

A Change of Accounting Method

India does not yet have a manufacturing economy. But it does have a service economy, which provides 60 percent of the country’s GDP. However, only 9 percent of tax revenues come from it.

To obtain greater tax revenues from the service sec- tor, businesses will have to change from cash basis ac- counting to accrual basis accounting. Thus, even if Majumder’s unbridled optimism is warranted, there is no way a GST would be meaningful until India changes accounting methods.

For most of the country, the accounting transition would probably take a decade or two. But since 70 per- cent of a GST would come from the state of Maha- rashtra and its capital city, Mumbai (a services city if ever there was), a functioning GST could come a whole lot sooner — but not within the next couple of years.