Go tax destruction if you can !

Ok. Indian companies do more and more foreign buyouts and don’t bring dividends from those controlled foreign companies (CFC) back in. Taxman goes sniffing.

I object. Take TATA – Corus deal. The £ 4.3 billion ($ 9.16 bn) deal, has been funded by the TATAs almost entirely by leveraged debt and internal accruals that included diluting stakes in group companies like TCS and other TATA group companies. Now this watershed deal (world’s 65th ranked Indian steel company acquiring 5th largest steel company in the world) would not have been possible except for that adventurous yet high risk mode of financing opted by the TATAs. Should we not permit TATA to park its Corus dividend abroad that could be utilized in repaying TATA STEEL’s leveraged debt? Why bring it back only to tax it? If a company has taken some risk, it is entitled to its share of reward. Going after them like a bloodhound is not just irrational, it is way too regressive.

Paying taxes is a citizen’s duty and I acknowledge that so long as the taxmen don’t choke my oxygen supply pipe in the process. I quote Chanakya’s Arthasasthra - “There should be leniency and caution while deciding the tax structure. Ideally, governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive. Taxes should be collected in small and not in large proportions". Granted, I shouldn’t expect brazen taxmen to be endowed with regal finesse, but how about rationality?

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I have often condemned the principle behind excise duty – a tax system leftover by our colonial masters that penalized local enterprise - as well. I say it's about time we chucked this agony off our back. My logic, why tax production? Should they not be taxing destruction with equal vigor? Or will that be too much to ask?

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Our taxmen will soon get this scent

In an increasingly flattening world, no new taxing strategy could slink under the taxman’s radar for long. They are always on the prowl picking up new excuses to tax the citizen. India’s Finance Minister P.Chidambaram borrowed the concept of Fringe Benefit Tax and Securities Transaction Tax not from US or Europe, but went all the way down under and picked it up from Australia. I am sure he will be closely watching the debate on “carried interest tax” on VCs that is raging in the US.

We had a similar row last year when the Government sought to restrict the “pass through” status for income streaming to VC firms around February 2007.

Steve Brotman of SAVP, a VC firm in New York has a detailed post here. I liked the interesting illustration Brotman has inserted in there.

“Suppose a entrepreneur starts a corporation, and invests $50,000 in it. Then they raise $100,000,000 by selling 80% of it in preferred stock; preferred stock means the investors get paid first, and is quite typical structure with startups. Then the entrepreneur sells the corporation for $300,000,000 after 5 years. Should the entrepreneur who continues to own the 20% piece that he owns, pay capital gains tax of 15% or ordinary income tax of 35%?

Today the law is 15%, as these are long term capital gains.

Now change the word "entrepreneur" to "VC".

Is that OK in your book if a VC creates such a company, and generates capital gains this way?”

I haven’t read US tax law. But in the Indian context, VC firms registered with SEBI enjoy a conditional “pass thro” tax status so that the income is not taxed at the firm level. It is taxed in the hands of the investor when it gets distributed. So if the investor stations himself in a tax haven like Mauritius or Cyprus, they escape with nil taxes. But it is biased against India based VC firms like ICICI Venture since the Indian investors in the fund would be liable to pay tax on their income either by way of LTCG or income tax depending upon the nature of its receipt.

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