V.Sounder Rajan has sent you a message.
Date: 1/31/2012
Subject: CLRA Emerging trends-III
Dear Friends
In continuation of the Summary Record of Discussion of the 44th Session of the Standing Labour Committee held on 17th October, 2011 at New Delhi under the Chairmanship of Shri Mallikarjun Kharge, Union Minister of Labour and Employment, Government of India. The national level tripartite meeting was attended by senior level functionaries of Central Trade Union Organizations, Employers‟ Organizations, State Governments and Central Ministries and Departments.This part has many important issues relevant to CLRA which were discussed.The need for rationalizing the working Hours was taken up by Shri Tapan Sen, General Secretary, Centre of Indian Trade Unions.
Shri Tapan Sen, General Secretary, Centre of Indian Trade Unions expressed his concern over the issue of safety at workplace and referred to the horrendous incident of 30 workers being burnt alive at a factory at Peeragarhi. He remarked that the latest (66th round) National Sample Survey Data (2009-10) signalled the consistently deteriorating trend of employment generation potential of the economy despite higher rate of GDPgrowth. Therefore, he suggested that a pattern of “jobless growth” has deeply set in by the neoliberal economic policy regime and structural changes need to be forced upon through appropriate policy interventions. Giving examples from the manufacturing and service sector, he claimed that „12 hours working‟ has become the order and in some cases there is no payment for overtime. Therefore, he stressed upon the need for enforcement of „8 hour working‟ norm and a preparatory survey to be undertaken by VVGNLI to study the impact of stringent enforcement of eight hour working on employment generation. Further he emphasized on the need for employment generation to be structurally and organically linked with the assessment GDP and the periodicity of both employment and GDP statistics must be made same and simultaneous. He also gave valuable suggestions regarding the publication of employment figures quarterly and also the quarterly publication of GDP trends. Such an endeavour, he pointed out would be the best method as well as an instrument to acid test the very efficacy of the economic policies as far as employment generation is concerned.
Shri Michael Dias, Federation of Indian Chambers of Commerce and Industry suggested rationalization of labour laws in the context of unorganized sector. In his view, the issues pertaining to contract labour needs to be addressed in-depth, possibly after receiving the report from V.V.Giri National Labour Institute. In this regard, he fully supported and endorsed that a complete data on contract labour be made available and urged the need for a white paper to be brought out by the Ministry of Labour and Employment at the earliest. He considered the issues of enhancing employability and employment as critical ones which needed serious attention from all stakeholders and should be a part of agenda at the next ILC.
Shri P. Parijat Singh, Labour Minister, Government of Manipur mentioned the following points:
(ii) A Tripartite State Advisory Board has been constituted under section 4 of the Contract Labour (Regulation & Abolition) Act. Status of the implementation of the Act in the State is being reviewed as per the recommendations of the 43rd Session of the ILC. The Act will be amended to increase the rates of fees for registration of establishments, fees for grant of licences to the contractors and security deposits for grant of licences.
..To be continued>>>
With Regards
V.Sounder Rajan
VS Rajan Associates,
Advocates & Notaries & Legal Consultants
No.27, Ist Floor, Singapore Plaza,
No.164, Linghi Chetty Street,
Chennai - 600 001.
E-mail: rajanassociates@eth.net,
Off : 044-42620864, 044-65874684,
Mobile : 9840142164
Tuesday, January 31, 2012
Furnish PAN of landlord for claiming HRA
If you are paying rent and getting HRA allowance every month, you are eligible for tax deductions according to the prescribed limit of HRA exemption. If you want to avail of the benefits, you must submit the rent receipts to your employer every year at the time of the collection of tax proof. Central Board of Direct Taxes (CBDT) has vide CIRCULAR NO. 05/2011, DATED 16-8-2011 said those paying more than Rs 15,000 as HRA every month, or Rs 1.8 lakh annually, need to furnish a copy of their landlord’s permanent account number (PAN), along with the rent receipts.In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.
EXTRACT FROM THE CIRCULAR NO. 05/2011 [F.NO. 275/192/2011-IT(B)], DATED 16-8-2011 RELATED TO HRA
Under Section 10(13A) of the Income-tax Act, 1961,any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent(by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from Income-tax to the extent as may be prescribed, having regard to the area or place in which such accommodation is situated and other relevant considerations. According to rule 2A of the Income-tax Rules, 1962, the quantum of exemption allowable on account of grant of special allowance to meet expenditure on payment of rent shall be:
(a) The actual amount of such allowance received by the assessee in respect of the relevant period; or
(b) The actual expenditure incurred in payment of rent in excess of 1/10 of the salary due for the relevant period; or
(c) Where such accommodation is situated in Bombay, Calcutta, Delhi or Madras, 50% of the salary due to the employee for the relevant period; or
(d) Where such accommodation is situated in any other places, 40% of the salary due to theemployee for the relevant period,
whichever is the least.
For this purpose, “Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in Rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the House Rent Allowance or any portion thereof from the total income of theemployee.
Though incurring actual expenditure on payment of rent is a pre-requisite for claiming deduction under section 10(13A), it has been decided as an administrative measure that salaried employees drawing house rent allowance upto Rs.3000/- per month will be exempted from production of rent receipt. It may, however, be noted that this concession is only for the purpose of tax-deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent.
Further if annual rent paid by the employee exceeds Rs 1,80,000 per annum, it is mandatory for theemployee to report PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.
With regards,
Bipul Kumar
FEMA & Tax Advisory Services
Wisdom Management Consultancy Private Limited
--------------------------------------------------
Reg. Office: B-94/9, Dharni Chamber, Joshi Colony, IP Extension, New Delhi-110092.
+91-9560084833 [Cell]
EXTRACT FROM THE CIRCULAR NO. 05/2011 [F.NO. 275/192/2011-IT(B)], DATED 16-8-2011 RELATED TO HRA
Under Section 10(13A) of the Income-tax Act, 1961,any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent(by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from Income-tax to the extent as may be prescribed, having regard to the area or place in which such accommodation is situated and other relevant considerations. According to rule 2A of the Income-tax Rules, 1962, the quantum of exemption allowable on account of grant of special allowance to meet expenditure on payment of rent shall be:
(a) The actual amount of such allowance received by the assessee in respect of the relevant period; or
(b) The actual expenditure incurred in payment of rent in excess of 1/10 of the salary due for the relevant period; or
(c) Where such accommodation is situated in Bombay, Calcutta, Delhi or Madras, 50% of the salary due to the employee for the relevant period; or
(d) Where such accommodation is situated in any other places, 40% of the salary due to theemployee for the relevant period,
whichever is the least.
For this purpose, “Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in Rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the House Rent Allowance or any portion thereof from the total income of theemployee.
Though incurring actual expenditure on payment of rent is a pre-requisite for claiming deduction under section 10(13A), it has been decided as an administrative measure that salaried employees drawing house rent allowance upto Rs.3000/- per month will be exempted from production of rent receipt. It may, however, be noted that this concession is only for the purpose of tax-deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent.
Further if annual rent paid by the employee exceeds Rs 1,80,000 per annum, it is mandatory for theemployee to report PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.
With regards,
Bipul Kumar
FEMA & Tax Advisory Services
Wisdom Management Consultancy Private Limited
--------------------------------------------------
Reg. Office: B-94/9, Dharni Chamber, Joshi Colony, IP Extension, New Delhi-110092.
+91-9560084833 [Cell]
Wednesday, January 25, 2012
Business standard updates
RBI seeks powerto regulate all subsidiaries of banks
MANOJIT SAHA
Mumbai, 25 January
The Reserve Bank of India (RBI) wants to have the power to regulate bank subsidiaries as well.
The present regulation does not give the banking regulator power to supervise bank subsidiaries, as the central bank can only monitor them. To enable this, RBI has written to the finance ministry to amend laws pertaining to the RBI Act, so that it can supervise such entities.
Supervisory powers will allow RBI to inspect the books of the subsidiaries, give directives and issue norms based on its own regulation.
“Banks have forayed into insurance, broking, mutual funds, private equity, and have become complex and large financial conglomerates. If the subsidiary fails, it can dent banks’ profitability and erode capital. To avoid such a situation, RBI wants to have supervisory powers,” said a source in the central bank.
The source also said the issue came to the fore when RBI wanted to inspect a broking arm of a bank but was not allowed by the market regulator, the Securities and Exchange Board of India.
In its letter to the government, RBI has said while it will supervise subsidiaries involved in non-banking activities, the sector regulator’s advice will also be sought.
Turn to Page 16 >Writes to govt for legal amendment, proposes committee that’ll consult other sector regulators Banks empowered on ECBs’ end-use
The Reserve Bankof India has empowered banks to make changes in the end-use of money raised via external commercial borrowings (ECBs) withoutrouting the requestthrough the regulator. Banks can nowapprove afirm’s requestto change the final use of offshore commercial borrowings underthe automatic route. 6 >
________________________________________
Click here to read more...>
We will request for representatives from the insurance, market and pension regulators while forming the committee, which will supervise the subsidiaries,” said the source.
In the recently released financial stability report, RBI had raised a red flag on the interconnectedness between a bank and its subsidiaries. “Inter-linkages between the insurance and banking sector are a matter of concern, with many insurance companies being part of financial conglomerates. Any financial stability issue regarding the bank in the conglomerate may have an amplifying effect on the insurer. The contagion between the banking and insurance sector will also depend on the insurance companies overall exposure to banks,” RBI had said.
Citing the example of insurance companies promoted by banks, RBI said though the life insurance sector was well capitalised with solvency ratio exceeding the regulatory requirements, there had been a recent concern over non-life insurance companies. That was because the liability requirement and associated capital requirement for the mandatory motor third-party pool had increased and so had the underwriting losses in the non-life sector, it said.
“Reinsurance shares allow diversification of exposure and provide stability to the industry. Currently, the reinsurance capacity is readily available for most of the risks written in India and can support the activity of the insurance business. Even, in case of the failure of the reinsurance industry, it would only increase the price for getting reinsurance cover,” the report said.
>FROM PAGE
DTC only in 2013, key parts in this Budget
BS REPORTER
New Delhi, 25 January
The new Direct Taxes Code (DTC) is to be now introduced only from April 2013, a year later than planned. Hence, the government will introduce some of its key provisions, such as General Anti-Avoidance Rules (GAAR), in Budget 2012-13 itself, finance ministry officials said today.
An official said Parliament’s standing committee on finance was expected to give its report on the DTC Bill in the Budget session of Parliament, likely to commence from mid-March. After this, the ministry would table the revised Bill in the monsoon session of Parliament, usually convened around July.
“The standing committee will give its report in a month. After that, we will also need six months (to consider the recommendations) and table the revised Bill,” said the official.
Tax evasion and mitigation are two of three ways to reduce payment liability. The former, using illegal means to dodge tax, is illegal. Mitigation is the use of expressly legal means to pay less, such as diverting money from a bank deposit to a provident fund. Tax avoidance is the category in between, where the law isn’t clear and courts are called in to decide. DTC had proposed GAAR to ensure this was minimised; it has become more significant for the government after the the recent Supreme Court verdict in the Vodafone tax dispute.
The ruling was in favour of the company and was a big financial blow to the tax department. Wary of a revenue loss from similar deals in future, the finance ministry is expected to tweak the laws without more delay to make income from such cross-border deals taxable under domestic laws.
Officials say GAAR will be put to use only if an entity, apart from obtaining tax benefit, undertakes a transaction which is not at “arm’s length”. Alternatively, if it is found that there has been a misuse or abuse of the DTC provisions or a transaction lacks commercial substance. GAAR is to be invoked only where tax avoidance is beyond a specified threshold.
Keyprovisions such as the General Anti-Avoidance Rules will be introduced in Budget this year
RBI empowers banks on end-use of ECB funds
BS REPORTER
Mumbai, 25 January
Banks will now have greater say with respect to Indian companies raising external commercial borrowings (ECBs). The Reserve Bank of India (RBI) has empowered banks to make changes in the end-use of money raised through ECBs, without routing the request through the regulator.
Banks can now approve a firm’s request to change the final use of offshore commercial borrowings under the automatic route. Banks are viewing it as streamlining of the foreign fund-raising procedure and aremoval of administrative flaws.
“The step shows RBI is now more comfortable in delegating powers to the authorised dealers (banks). The action by the regulator will help in fine-tuning the operational procedure for ECBs," said Moses Harding, head of global research, IndusInd Bank.
Currently, companies can raise up to $750 million under the automatic route.
Earlier, their requests had to be referred by the authorised dealers to RBI. Funds raised under the approval route will still have to be referred to RBI’s department of foreign exchange. ECBs beyond $750 million are approved by RBI case by case.
The regulator has allowed banks to directly approach it for the cancellation of the loan registration number (LRN) used to avail overseas borrowings, both under the automatic and approval routes.
The LRN can be cancelled by banks only if there has been no draw-down on it.
Bankers said it was a continuation of delegation of authority by the central bank, which would save time and make the procedure simpler. "Banks are managing long-term risks. ECBs are of a much shorter duration, which can be managed by the lenders efficiently," said Harding.
Economists feel the step has been taken to enhance dollar liquidity and ease downward pressure
Sebi alone can’trelaxKYC norms forforeign investors
Chairman U K Sinha says this needs to be done in consultation with govt
BS REPORTER Mumbai, 25 January
The Securities and Exchange Board of India (Sebi) alone cannot decide to relax Know Your Client (KYC) norms for qualified foreign investors (QFIs), who now have direct access to Indian stock market and mutual funds, chairman U K Sinha said today.
“It needs to be done in consultation with the government. There are certain requirements with regard to tax. The tax authorities should not feel that tax paid by QFIs is being suppressed or not captured,” he said, adding, consultation exercise with the government was on. Sinha was speaking on the sidelines of an event to inaugurate a KYC Registration Agency (KRA) by a unit of National Securities Depository Limited (NSDL).
In August 2011, Sebi had issued detailed guidelines to allow KYCcompliant foreign investors, termed QFIs, to invest in equity and debt schemes of Indian mutual fund houses. Early this month, the government allowed QFIs to directly invest in the secondary market in India.
However, stringent KYC norms such as mandatory permanent account number and tax filing details have acted as a dampener, say mutual fund executives. In a meeting with Sinha last month, MF executives had requested the regulator to relax the KYC norms for QFIs.
More KRA Agencies in offing
NSDL became the second organisation to start a KRA agency after Central Depository Services Ltd (CDSL). According to Sinha, Sebi has received two more inquires for setting up of KRAs. “I believe there will be more competition. We already have a few inquiries. However, as there will be inter-operatibility among KRAs, the clients will not face any extra difficulty,” he said.
Sinha also said Sebi was in talks with other regulators to use the uniform KYC platform for all financial products. “We are in a dialogue with them. If this system proves to be robust, then maybe other regulators can have a look at it,” he said.
“There are certain requirements with regards to tax. The tax authorities
BS PRIMER
Use your LTA to save tax
TANIAKISHORE JALEEL
Not claiming your leave travel allowance (LTA) can add to higher tax outgo at this time of the year. LTA is simply an allowance granted to you, as an employee, for travelling anywhere within the country when on leave from work.
When you dont claim it, the unclaimed amount is taxed according to the slab. If you are entitled to ~22,000 as LTA in a year, but claim only ~9,000, the remaining ~13,000 gets taxed.
"Companies urge employees to claim the entire LTA to avoid getting taxed. LTA is a good tax-saving instrument," says Sangeeta Lala, vice-president, TeamLease. Under Section 10 of the Income Tax Act, an employee is allowed an income tax exemption when he is travelling, along with his family members, on a holiday for a period of more than five days.
Human resource personnel advise employees, in this case, to claim tickets of immediate family members as well, to avoid getting taxed. LTA covers travel for you and your family. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if he/she is working) and up to two children.
But remember: If your family travels without you, no LTA can be claimed for them. So, you have to make the trip either alone or, if claiming for your family, you should travel with them.
Domestic flight tickets can be claimed if you furnish the boarding pass. Train tickets are acknowledged, too. Road travel should be by government bus only. "LTA is not applicable for foreign travel. And, the tax benefit one can enjoy depends on the LTA component itself," adds Mistry. However, if you get an LTA of ~1 lakh and travel with spouse and two children, even on taking round trip flight tickets you will not be able to avail the entire allowance.
If both you and spouse have travelled together and want to claim LTA at respective companies, can you do so? If you claim, your spouse cant. His/her LTA will be taxed. Unless, of course, you go for another holiday. In case of a job change, the LTA can be availed from the both the new and former employers, provided it is unutilised.
A small problem with LTA is that you can claim only twice in four years, says Homi Mistry, tax partner at Deloitte, Haskins and Sells. January 2012 falls under the 2010-2013 four-year period. Importantly, you can claim only once in a year. Both journeys cannot be claimed in a single year.
If you do not make the claim on time, you can do so when filing returns and avail a refund.
IN HOLIDAYSPIRIT Leave travel allowance applies for both you and your family. PHOTO:THINKSTOCK
MANOJIT SAHA
Mumbai, 25 January
The Reserve Bank of India (RBI) wants to have the power to regulate bank subsidiaries as well.
The present regulation does not give the banking regulator power to supervise bank subsidiaries, as the central bank can only monitor them. To enable this, RBI has written to the finance ministry to amend laws pertaining to the RBI Act, so that it can supervise such entities.
Supervisory powers will allow RBI to inspect the books of the subsidiaries, give directives and issue norms based on its own regulation.
“Banks have forayed into insurance, broking, mutual funds, private equity, and have become complex and large financial conglomerates. If the subsidiary fails, it can dent banks’ profitability and erode capital. To avoid such a situation, RBI wants to have supervisory powers,” said a source in the central bank.
The source also said the issue came to the fore when RBI wanted to inspect a broking arm of a bank but was not allowed by the market regulator, the Securities and Exchange Board of India.
In its letter to the government, RBI has said while it will supervise subsidiaries involved in non-banking activities, the sector regulator’s advice will also be sought.
Turn to Page 16 >Writes to govt for legal amendment, proposes committee that’ll consult other sector regulators Banks empowered on ECBs’ end-use
The Reserve Bankof India has empowered banks to make changes in the end-use of money raised via external commercial borrowings (ECBs) withoutrouting the requestthrough the regulator. Banks can nowapprove afirm’s requestto change the final use of offshore commercial borrowings underthe automatic route. 6 >
________________________________________
Click here to read more...>
We will request for representatives from the insurance, market and pension regulators while forming the committee, which will supervise the subsidiaries,” said the source.
In the recently released financial stability report, RBI had raised a red flag on the interconnectedness between a bank and its subsidiaries. “Inter-linkages between the insurance and banking sector are a matter of concern, with many insurance companies being part of financial conglomerates. Any financial stability issue regarding the bank in the conglomerate may have an amplifying effect on the insurer. The contagion between the banking and insurance sector will also depend on the insurance companies overall exposure to banks,” RBI had said.
Citing the example of insurance companies promoted by banks, RBI said though the life insurance sector was well capitalised with solvency ratio exceeding the regulatory requirements, there had been a recent concern over non-life insurance companies. That was because the liability requirement and associated capital requirement for the mandatory motor third-party pool had increased and so had the underwriting losses in the non-life sector, it said.
“Reinsurance shares allow diversification of exposure and provide stability to the industry. Currently, the reinsurance capacity is readily available for most of the risks written in India and can support the activity of the insurance business. Even, in case of the failure of the reinsurance industry, it would only increase the price for getting reinsurance cover,” the report said.
>FROM PAGE
DTC only in 2013, key parts in this Budget
BS REPORTER
New Delhi, 25 January
The new Direct Taxes Code (DTC) is to be now introduced only from April 2013, a year later than planned. Hence, the government will introduce some of its key provisions, such as General Anti-Avoidance Rules (GAAR), in Budget 2012-13 itself, finance ministry officials said today.
An official said Parliament’s standing committee on finance was expected to give its report on the DTC Bill in the Budget session of Parliament, likely to commence from mid-March. After this, the ministry would table the revised Bill in the monsoon session of Parliament, usually convened around July.
“The standing committee will give its report in a month. After that, we will also need six months (to consider the recommendations) and table the revised Bill,” said the official.
Tax evasion and mitigation are two of three ways to reduce payment liability. The former, using illegal means to dodge tax, is illegal. Mitigation is the use of expressly legal means to pay less, such as diverting money from a bank deposit to a provident fund. Tax avoidance is the category in between, where the law isn’t clear and courts are called in to decide. DTC had proposed GAAR to ensure this was minimised; it has become more significant for the government after the the recent Supreme Court verdict in the Vodafone tax dispute.
The ruling was in favour of the company and was a big financial blow to the tax department. Wary of a revenue loss from similar deals in future, the finance ministry is expected to tweak the laws without more delay to make income from such cross-border deals taxable under domestic laws.
Officials say GAAR will be put to use only if an entity, apart from obtaining tax benefit, undertakes a transaction which is not at “arm’s length”. Alternatively, if it is found that there has been a misuse or abuse of the DTC provisions or a transaction lacks commercial substance. GAAR is to be invoked only where tax avoidance is beyond a specified threshold.
Keyprovisions such as the General Anti-Avoidance Rules will be introduced in Budget this year
RBI empowers banks on end-use of ECB funds
BS REPORTER
Mumbai, 25 January
Banks will now have greater say with respect to Indian companies raising external commercial borrowings (ECBs). The Reserve Bank of India (RBI) has empowered banks to make changes in the end-use of money raised through ECBs, without routing the request through the regulator.
Banks can now approve a firm’s request to change the final use of offshore commercial borrowings under the automatic route. Banks are viewing it as streamlining of the foreign fund-raising procedure and aremoval of administrative flaws.
“The step shows RBI is now more comfortable in delegating powers to the authorised dealers (banks). The action by the regulator will help in fine-tuning the operational procedure for ECBs," said Moses Harding, head of global research, IndusInd Bank.
Currently, companies can raise up to $750 million under the automatic route.
Earlier, their requests had to be referred by the authorised dealers to RBI. Funds raised under the approval route will still have to be referred to RBI’s department of foreign exchange. ECBs beyond $750 million are approved by RBI case by case.
The regulator has allowed banks to directly approach it for the cancellation of the loan registration number (LRN) used to avail overseas borrowings, both under the automatic and approval routes.
The LRN can be cancelled by banks only if there has been no draw-down on it.
Bankers said it was a continuation of delegation of authority by the central bank, which would save time and make the procedure simpler. "Banks are managing long-term risks. ECBs are of a much shorter duration, which can be managed by the lenders efficiently," said Harding.
Economists feel the step has been taken to enhance dollar liquidity and ease downward pressure
Sebi alone can’trelaxKYC norms forforeign investors
Chairman U K Sinha says this needs to be done in consultation with govt
BS REPORTER Mumbai, 25 January
The Securities and Exchange Board of India (Sebi) alone cannot decide to relax Know Your Client (KYC) norms for qualified foreign investors (QFIs), who now have direct access to Indian stock market and mutual funds, chairman U K Sinha said today.
“It needs to be done in consultation with the government. There are certain requirements with regard to tax. The tax authorities should not feel that tax paid by QFIs is being suppressed or not captured,” he said, adding, consultation exercise with the government was on. Sinha was speaking on the sidelines of an event to inaugurate a KYC Registration Agency (KRA) by a unit of National Securities Depository Limited (NSDL).
In August 2011, Sebi had issued detailed guidelines to allow KYCcompliant foreign investors, termed QFIs, to invest in equity and debt schemes of Indian mutual fund houses. Early this month, the government allowed QFIs to directly invest in the secondary market in India.
However, stringent KYC norms such as mandatory permanent account number and tax filing details have acted as a dampener, say mutual fund executives. In a meeting with Sinha last month, MF executives had requested the regulator to relax the KYC norms for QFIs.
More KRA Agencies in offing
NSDL became the second organisation to start a KRA agency after Central Depository Services Ltd (CDSL). According to Sinha, Sebi has received two more inquires for setting up of KRAs. “I believe there will be more competition. We already have a few inquiries. However, as there will be inter-operatibility among KRAs, the clients will not face any extra difficulty,” he said.
Sinha also said Sebi was in talks with other regulators to use the uniform KYC platform for all financial products. “We are in a dialogue with them. If this system proves to be robust, then maybe other regulators can have a look at it,” he said.
“There are certain requirements with regards to tax. The tax authorities
BS PRIMER
Use your LTA to save tax
TANIAKISHORE JALEEL
Not claiming your leave travel allowance (LTA) can add to higher tax outgo at this time of the year. LTA is simply an allowance granted to you, as an employee, for travelling anywhere within the country when on leave from work.
When you dont claim it, the unclaimed amount is taxed according to the slab. If you are entitled to ~22,000 as LTA in a year, but claim only ~9,000, the remaining ~13,000 gets taxed.
"Companies urge employees to claim the entire LTA to avoid getting taxed. LTA is a good tax-saving instrument," says Sangeeta Lala, vice-president, TeamLease. Under Section 10 of the Income Tax Act, an employee is allowed an income tax exemption when he is travelling, along with his family members, on a holiday for a period of more than five days.
Human resource personnel advise employees, in this case, to claim tickets of immediate family members as well, to avoid getting taxed. LTA covers travel for you and your family. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if he/she is working) and up to two children.
But remember: If your family travels without you, no LTA can be claimed for them. So, you have to make the trip either alone or, if claiming for your family, you should travel with them.
Domestic flight tickets can be claimed if you furnish the boarding pass. Train tickets are acknowledged, too. Road travel should be by government bus only. "LTA is not applicable for foreign travel. And, the tax benefit one can enjoy depends on the LTA component itself," adds Mistry. However, if you get an LTA of ~1 lakh and travel with spouse and two children, even on taking round trip flight tickets you will not be able to avail the entire allowance.
If both you and spouse have travelled together and want to claim LTA at respective companies, can you do so? If you claim, your spouse cant. His/her LTA will be taxed. Unless, of course, you go for another holiday. In case of a job change, the LTA can be availed from the both the new and former employers, provided it is unutilised.
A small problem with LTA is that you can claim only twice in four years, says Homi Mistry, tax partner at Deloitte, Haskins and Sells. January 2012 falls under the 2010-2013 four-year period. Importantly, you can claim only once in a year. Both journeys cannot be claimed in a single year.
If you do not make the claim on time, you can do so when filing returns and avail a refund.
IN HOLIDAYSPIRIT Leave travel allowance applies for both you and your family. PHOTO:THINKSTOCK
Saturday, January 21, 2012
Consumer Protection Act
Dear Friends
The Government has introduced Consumer Protection (Amendment) Bill, 2011, in Lok Sabha on December 16, 2011.This is meant to enable speedy disposal of b Consumer Dispute Redressal cases .
The Highlight of changes to be introduced by the Consumer Protection (Amendment) Bill, 2011are on the following heads:
1.On line filing of consumer complaints
2.Enforcement of orders as a Decree of Civil Court
3.Payment to be made for non-compliance of the order
4.Powers to District Forum
5. Powers to State Government in selection process
6.Increase of age in the appointment of Members of State Consumer Redressal Commission.
7.Experience for members
8. Powers to National Commission / State Commission to direct any one to assist the case-Appointment of Experts in specified cases to assist the National Commission / State Commission.
9.Monitoring system of pending cases.
More details of the specific Amendment can be provided on request.
With Regards
V.Sounder Rajan
VS Rajan Associates,
Advocates & Notaries & Legal Consultants
No.27, Ist Floor, Singapore Plaza,
No.164, Linghi Chetty Street,
Chennai - 600 001.
E-mail: rajanassociates@eth.net,
Off : 044-42620864, 044-65874684,
Mobile : 9840142164
Continuous effort - not strength or intelligence - is the key to unlocking our potential.
Winston Churchill
The Government has introduced Consumer Protection (Amendment) Bill, 2011, in Lok Sabha on December 16, 2011.This is meant to enable speedy disposal of b Consumer Dispute Redressal cases .
The Highlight of changes to be introduced by the Consumer Protection (Amendment) Bill, 2011are on the following heads:
1.On line filing of consumer complaints
2.Enforcement of orders as a Decree of Civil Court
3.Payment to be made for non-compliance of the order
4.Powers to District Forum
5. Powers to State Government in selection process
6.Increase of age in the appointment of Members of State Consumer Redressal Commission.
7.Experience for members
8. Powers to National Commission / State Commission to direct any one to assist the case-Appointment of Experts in specified cases to assist the National Commission / State Commission.
9.Monitoring system of pending cases.
More details of the specific Amendment can be provided on request.
With Regards
V.Sounder Rajan
VS Rajan Associates,
Advocates & Notaries & Legal Consultants
No.27, Ist Floor, Singapore Plaza,
No.164, Linghi Chetty Street,
Chennai - 600 001.
E-mail: rajanassociates@eth.net,
Off : 044-42620864, 044-65874684,
Mobile : 9840142164
Continuous effort - not strength or intelligence - is the key to unlocking our potential.
Winston Churchill
Business standard and busines line updates
NTPCprotests accounting norms on forexriskprovision
JOE CMATHEW & JYOTI MUKUL
New Delhi, 21 January
Power major NTPC has protested against the new accounting norms that require companies to provide for foreign exchange risks in their contracts.
The change is part of the International Financial Reporting Standards (IFRS), proposed to be made mandatory for all companies. The recently notified Accounting Standard 39 (AS 39) norm recognises and measures financial assets, financial liabilities and some contracts to buy or sell nonfinancial items. Called ‘embedded derivatives’, companies are required to state upfront the perceived changes in the foreign exchange component of the contracts given out by them every year, by making a provision in the profit and loss account.
A foreign exchange component is present even in contracts given to domestic suppliers such as Bharat Heavy Electricals, to arrive at a fair system of comparison with competing foreign companies. On an average, the forex component comprises nearly athird of NTPC’s total contract values. AS 39 defines derivatives as a financial instrument or other contract whose value changes in response to currency exchange rate fluctuations. What has irked NTPC is the need to account for the variation in fair value of the advance contracts entered with suppliers in foreign currencies (embedded derivatives) as separate entries in the profit and loss account. It has sent a letter of protest it has sent to the Institute of Chartered Accountants of India (ICAI), the accounting standards body, against the new norms. AS 39 was prepared by the Accounting Standards Board of ICAI, vetted by the National Advisory Committee on Accounting Standards and notified by the ministry of corporate affairs.
NTPC feels AS 39 is fraught with serious consequences for Indian companies, particularly rate-regulated entities (where a government regulator determines the rate for the product or service) such as those in the power sector.
Currently, all expenditure towards equipment procurement is included in the asset cost. According to NTPC’s director (finance) A K Singhal, the Central Electricity Regulatory Commission (CERC) allows generation companies to capitalise foreign exchange risks. “Any rate variation is a pass through in tariffs (rates),” he said.
Companies like NTPC follow the Construction Work In Progress (CWIP) method for accounting, where a general ledger records the costs directly associated with constructing an asset. Once the asset is placed in service, all costs associated with it that are stored in the CWIP account are shifted into the most appropriate fixed account asset.
If AS 39 is followed, it would impact the asset costs and increase the volatility of earnings reported by Indian corporate entitties, says NTPC’s letter to ICAI.
Feels AS 39 is fraught with serious consequences for Indian companies
NTPCfollows the CWIP method for accounting, in which a general ledger records the costs directlyassociated with constructing an asset
Is yoursuccession plan in place ?
ARVIND RAO
Entrepreneurship is wrought with challenges, ranging from scaling up and administration to resource issues and succession planning. While most of these issues get the entrepreneurs attention, succession planning often remains a blip on their radar. A dangerous mistake, one that can hamper the business continuity in the long run.
Small business owners prefer to keep the ownership and business management under their control, extending it at most to family. This helps the owner manage the everyday affairs - compliance with government authorities, maintaining accounting records and formulating business policies and so on.
Consequently small businesses, generally, operate as sole proprietorships or partnership firms (requiring minimum two partners for the firm to be incorporated under the Indian Partnership Act, 1932). This helps with tax optimisation as well. In partnerships, the partners are typically spouses, who share profits / losses in an agreed proportion. They may continue to operate with just two partners even after scaling up operations.
There is a risk here though. The sudden death of the business owner can lead to continuity issues. Lack of proper succession planning can even result in an abrupt closure of business. For instance in the above mentioned case of a partnership firm with spouses as partners, the owners death calls for immediate dissolution, as per the provisions of the Act.
Life covers do not help either: When an individual takes a life cover, personal obligations like childrens education, marriage and spouses expenses are prioritised. No provisions are made for business-related obligations, especially, when there is athin line of demarcation between business and personal liabilities, which in turn, would add to the financial pressures on the family.
The best bet then is to find yourself a worthy successor who can take the business further. A tough task as children settling abroad or branching out on their own can limit your options.
Nonetheless, succession planning begins with the search for identifying the ideal candidate and then grooming him to step into your shoes. A succession plan ensures seamless transfer of management, besides preparing the employees and the investors about how the company aims to run its business once the chairman or chief executive demits office.
Traditional Indian companies are mostly family-run where the eldest son is usually tipped to assume the mantle on his fathers death. This remained the case in most large corporate houses, such as the Birlas, which started as small entrepreneurial ventures four or five generations ago.
But in recent years, traditional business houses have also tilted in favour of succession planning in keeping with the changing times and to fulfil the aspirations of other members of the family. Large corporate houses such as the Godrej group, Mahindra & Mahindra, Dabur and the Murugappa Group have succession plans in place.
Succession planning could become complex or fail in its purpose if there is a lack of consensus or shortage of talent. Generation gap between the outgoing and incoming chiefs is another challenge that could result in differences in vision, values and approach.
Remedies: To begin with, small business should stop thinking of succession planning as something restricted to large conglomerates. In fact, it should be a part of every companys strategic plan to be able to see the company go forward in the future. Private family matters should never interfere in or be a part of the business.
Entrepreneurs may start off the proprietorship way. But once the business finds its own feet, it is important for the owner to change forms. A gradual upgrade to a partnership firm and then a private limited company is the key.
Converting to a private limited company format will bring in a board of directors and even a professional management, doing away with a definite succession planning need to acertain extent. If this is not possible, identifying a successor to take command and run the business smoothly may be your only option. The owner should not shy away from exploring options beyond his own family, if a suitable successor is not identified from within the family. Or wherever possible, engage professionals for the mentoring and development of the younger generation.
In case of partnerships with just two partners, add at least one more partner in the firm. This provision would help in the firms continuity on the death of any one partner and prevent any compulsory dissolution. Partners have to take special note of the provisions of the partnership act, which states that an individual can become a partner in a firm only by contract and not from status. In other words, on death of a partner, his son / daughter would not become a partner in the firm automatically. More so, even if the individual provides for his children to become partners in the firm on his death, by way of a specific clause in his / her will, the same is technically not valid.
An efficient way would be to induct one or more efficient partners in business during the owners lifetime. The business owner also has to provide for an equitable distribution of his share in the business to his heirs, in case the same is wound up.
It is important for owners to seek professional assistance for drafting a business succession plan and appoint competent advisors for the same. Growing complexities in the business or any changes in the family structure over time should trigger a review of the succession plan. More importantly, succession must be planned years in advance of expected needs. A skillful succession planning will not only bring peace of mind for the owner but also to family members post his death.
The writer is a certified financial planner
Seek professional help for drafting it and make sure you plan well in advance
MONEYMATTERS
|What is succession planning? The process of scouting, identifying and grooming potential candidates to fill up critical positions in a firm.
| How is a successor chosen? Family-run businesses prefer someone from within the family, multinational companies adopt a more broadbased approach and choose from internal and external candidates.
| Why is it important? It ensures seamless transfer of management, prepares the employees and investors about how the company aims to run its business after the present chairman / chief executive | What are the challenges? Lack of consensus or shortage of talent; generation gap between the outgoing and incoming chiefs
Source Business Line 22-1-2012
Vodafone judgment will speed up cross-border deals
K.R. Srivats
Revenue Dept may get more refund claims from non-residents who deposited tax for similar transactions
New Delhi, Jan. 21:
If there is an important fallout of the Supreme Court's Vodafone judgment, it is that the time taken to conclude cross-border deals or offshore transactions involving Indian assets will come down.
This will be the case to the extent that the structure adopted in such deals follows the Vodafone transaction or the principles enunciated in the Vodafone judgment, say tax experts.
The time taken for concluding cross-border deals is expected to come down as the parties involved in the transactions will not spend considerable time in sorting out tax indemnity issues, applying for advance rulings, withholding tax certificates, etc. “Tax indemnities will not be phased out as a corollary to the Vodafone judgment. The extent of significance of tax indemnities would depend upon extent of applicability of Vodafone judgment and principles settled by it. But the time taken will come down as the Vodafone judgment has settled certain principles of law,” Mr Amit Singhania, Principal Associate, Amarchand & Mangaldas, told Business Line.
Currently, parties involved get into negotiations, consuming significant time on who would control litigation, what would be the point of invocation of indemnity and other issues. This is all the more required to deal with situations where notices are served by revenue authorities on the buyer for not withholding tax or making them the representative assessee. Time spent on such aspects can be productively utilised with the apex court ruling on Vodafone establishing that transfer of shares between non-residents would not be subjected to tax here even if the underlying assets are situated in India.
Mr Amrish Shah, Partner and National Leader for Transaction Tax, Ernst & Young, said that the time taken for concluding cross-border deals will come down post the Vodafone judgment.
More claims
Another fallout of the judgment is that the Revenue Department will now get more refund claims from those non-residents who deposited tax for transactions similar to the Vodafone-Hutch deal.
“The Vodafone judgment will have impact on revenue not only on account of refund of the deposit paid by the telecom giant but it will attract the refunds in other similar transactions,” Mr Singhania said, adding that a sizeable number of offshore transactions involving Indian assets have happened since 2007 post the Vodafone-Hutch deal.
Mr Amrish Shah said that the number of transactions similar to Vodafone-Hutch deal size may not be that many, but certainly sellers will now claim refunds of tax withheld in offshore transactions.
Reacting to the Vodafone judgment, Mr Rohan Shah, Managing Partner, Economic Laws Practice, said that the judgment takes a clear position on India's territorial jurisdiction to tax. It holds that transfer of shares outside India is not taxable in India.
The verdict will bring a certainty in the minds of global investors regarding Indian tax consequences in case of sale of their investments, said Dr Suresh Surana, Founder of RSM Astute Consulting Group.
krsrivats@thehindu.co.in
Keywords: Supreme Court, Vodafone judgment, cross-border deals, claims
When do shareholder rights matter more?
D. MURALI
Share • print • T+
Firms in which the shareholder finds it easier to forecast the effect of a particular management action on the future value of the firm benefit much more from such shareholder rights than do their less transparent counterparts, says a preliminary paper titled ‘‘Signal quality and the option value of shareholder rights'' by Abhiroop Mukherjee of the Department of Finance, Hong Kong University of Science & Technology (www.ssrn.com).
When the information environment in which the firm operates is relatively transparent, the manager understands that the shareholder will find it easy to interpret the impact of management decisions or actions on firm value, the author explains. “Thus, if the manager does not act in the shareholder's best interest, the shareholder will readily become aware of this. If the shareholder has strong rights, she can then bring the governance rules for reprisals into play.”
On the other hand, as the paper distinguishes, when information quality is poor, the shareholder might find it difficult to figure out whether or not the manager is acting in her interest. As a result, in these less transparent firms, the manager might get away without triggering any reprisal, even if he acts contrarily to the shareholder's interest, and even if the shareholder has strong rights to punish bad management, cautions Mukherjee. He concludes by observing, therefore, that shareholder rights matter more for firms that operate in a better information environment; and that for firms that operate in sufficiently opaque environments, shareholder rights do not have any value at all.
A case for greater transparency that can benefit the shareholders.
Peak of life cycle wealth
Who is wealthy? This is the question that Stefan Hochguertel of the VU University Amsterdam, and Henry Ohlsson of the Uppsala University explore in ‘‘Who is at the top? Wealth mobility over the life cycle.'' In the authors' view, the answer is, “Probably an individual in his 60s, married, living in a big household and with more than twelve years of education. He would have been born in the capital city region. The employment income of the household would be high but variable. The macroeconomic environment would be characterised by economic growth, increasing stock market prices, and increasing house values.”
The study, based on a large administrative sample from Sweden covering the years 1968-2005, finds age-wealth probability patterns to be consistent with the life-cycle model of savings and wealth accumulation. Wealth first increases and then decreases, and the peak in the probability of being wealthy occurs when people are about 65 years old, the authors note. “This is close to the age when retiring for most.”
Interestingly, the probability of being wealthy is higher when households experience high income uncertainty, one learns. This is consistent with precautionary motives for savings and wealth accumulation, although effects are small, reason the authors.
Of educative value about wealth movements across generations
SEBI directs bourses to set up grievance redress panel
Our Bureau
Mumbai, Jan. 20:
To facilitate speedy grievance redressal, SEBI has mandated all stock exchanges – functioning on their own and through other exchanges — to set up an investor grievance redressal committee (IGRC) at every investor service centre.
For claims up to Rs 25 lakh, the IGRC will comprise one person, and for claims higher than Rs 25 lakh, the committee would have three members.
Further, the three-member committee shall have independent persons qualified in the area of law, finance, accounts, economics, management or administration. They will also have experience in financial services especially the securities market.
In addition, one member of the committee should be a technical expert capable of handling complaints related to technology issues such as internet based trading, algorithmic trading, etc).
Finally SEBI said the members of the IGRC should not be associated with a trading member in any manner.
SEBI has advised large exchanges NSE, BSE, MCX and USEIL to open investor services centres in other large cities in a time-bound manner.
Exchanges have been asked to submit a list of such centres. The circular comes into effect immediately and exchanges have to communicate the implementation status of this circular in their monthly report to SEBI.
Keywords: stock exchanges, SEBI, investor grievance redressal committee (IGRC), investor service centre, algorithmic trading,
Investing overseas, the easy way
G. KARTHIKEYAN
S
Due to the Double Taxation Avoidance Agreement, the Indian Head Office can take credit of taxes already paid in Australia by the branch office.
Sudhir Rao, an Indian businessman with substantial interest in the winemaking and brewery sector, recognised the growing opportunity in Australia for investment in the vinification business. As this would be a perfect compliment to the vintner's Indian business, he contemplated investing a couple of million dollars in this business in Australia. The benefits of bilateral trade agreements between India and Australia are being explored by many business houses, especially in view of the fact that India has emerged as the 21st largest outward investor globally.
Sudhir completed a due diligence study, and was satisfied with the report on the probability of establishing a successful business model in Australia. The next logical step, of course, was to study the statutory compliances and related aspects of making a foreign investment. The essential first step was to decide on the type of entity to be set up in Australia, in consonance with various laws such as Securities and Exchange Board of India guidelines, Companies Act, Income Tax Act, RBI and FEMA guidelines etc.
SUBSIDIARY COMPANY
The common practice is to set up a subsidiary company in Australia, carry on operations, pay taxes and have the dividends repatriated to the parent company in India. However, the choice of entity could vary, if one examines the benefit of taxation on the subsidiary company versus a branch office at Australia. Purely from a taxation point of view, the following facts deserve consideration. Let us say, the profit of the Australian entity is Rs 100, and assuming that the tax rate is 35 per cent, the profit after tax is Rs 65 in both situations (the subsidiary model and branch model in Australia).
If the subsidiary company declares this profit of Rs 65 as dividend, the Indian parent company needs to pay a tax of Rs 20 (at 30 per cent tax rate in India), and thus the outflow of tax in total would be Rs 55. Whereas, if it is a branch model, the Indian company will have to include the profit of the Australia branch viz. Rs 100, and pay a tax of Rs 30 (at 30 per cent). Since India and Australia have signed a Double Taxation Avoidance Agreement, the Indian Head Office can take credit of the extent of taxes already paid in Australia by the branch office.
Thus, the Indian Head office takes credit to the extent of taxes payable in India i.e. Rs 30, and the effective outflow of tax in total is limited to Rs 35. It must be remembered that though the Australian branch has paid Rs 35, the credit cannot result in refund in India. Thus, the effective tax rate for the branch model is 35 per cent, as against the subsidiary model, at a formidable 55 per cent. It will be very relevant to consider the taxation aspects, in addition to the some other factors for the entity selection.
COMPLIANCES
Having decided the entity, Sudhir needs to plan for compliances with RBI/FEMA regulations. The Reserve Bank of India has simplified the foreign investment procedure to the extent that its designated authorised dealers (specific branches of commercial banks) may allow customers remittances abroad without prior permission upto US$ 200,000 per fiscal year, per person, including a minor. The provisions of FEMA do require that the applicant should have maintained the bank account with the bank for a minimum period of one year, but the said branch, at its discretion, based on the declaration, proof of funds and Income Tax returns of the applicant, can affect outward remittance.
Sudhir's initial requirement of investment is one million dollars. The plan is to carry this out with the help of his family members, with each of them investing $200,000, without seeking specific permission of the RBI. The second phase of investment would be done via the five persons in the next financial year, viz after the month of April. Sudhir's company also has the choice of investing abroad from the balance lying in its EEFC account (Exporter Earner's Foreign Currency Account). The company can invest up to 400 per cent of its net worth abroad without prior RBI approval. The ceiling doesn't apply if the investment is made out of balances held in EEFC account.
Sudhir will have certain reporting duties as well. Sudhir would need to receive a share certificate as evidence of investment, repatriate dues receivable to India and submit an Annual Performance Report for the subsidiary to RBI, through the authorised dealer. In cross-border transactions, it is equally important to comply with various regulations, to be within the framework of the law.
(The author is a Coimbatore-based chartered accountant.)
Keywords: Sudhir Rao, Exporter Earner's Foreign Currency
JOE CMATHEW & JYOTI MUKUL
New Delhi, 21 January
Power major NTPC has protested against the new accounting norms that require companies to provide for foreign exchange risks in their contracts.
The change is part of the International Financial Reporting Standards (IFRS), proposed to be made mandatory for all companies. The recently notified Accounting Standard 39 (AS 39) norm recognises and measures financial assets, financial liabilities and some contracts to buy or sell nonfinancial items. Called ‘embedded derivatives’, companies are required to state upfront the perceived changes in the foreign exchange component of the contracts given out by them every year, by making a provision in the profit and loss account.
A foreign exchange component is present even in contracts given to domestic suppliers such as Bharat Heavy Electricals, to arrive at a fair system of comparison with competing foreign companies. On an average, the forex component comprises nearly athird of NTPC’s total contract values. AS 39 defines derivatives as a financial instrument or other contract whose value changes in response to currency exchange rate fluctuations. What has irked NTPC is the need to account for the variation in fair value of the advance contracts entered with suppliers in foreign currencies (embedded derivatives) as separate entries in the profit and loss account. It has sent a letter of protest it has sent to the Institute of Chartered Accountants of India (ICAI), the accounting standards body, against the new norms. AS 39 was prepared by the Accounting Standards Board of ICAI, vetted by the National Advisory Committee on Accounting Standards and notified by the ministry of corporate affairs.
NTPC feels AS 39 is fraught with serious consequences for Indian companies, particularly rate-regulated entities (where a government regulator determines the rate for the product or service) such as those in the power sector.
Currently, all expenditure towards equipment procurement is included in the asset cost. According to NTPC’s director (finance) A K Singhal, the Central Electricity Regulatory Commission (CERC) allows generation companies to capitalise foreign exchange risks. “Any rate variation is a pass through in tariffs (rates),” he said.
Companies like NTPC follow the Construction Work In Progress (CWIP) method for accounting, where a general ledger records the costs directly associated with constructing an asset. Once the asset is placed in service, all costs associated with it that are stored in the CWIP account are shifted into the most appropriate fixed account asset.
If AS 39 is followed, it would impact the asset costs and increase the volatility of earnings reported by Indian corporate entitties, says NTPC’s letter to ICAI.
Feels AS 39 is fraught with serious consequences for Indian companies
NTPCfollows the CWIP method for accounting, in which a general ledger records the costs directlyassociated with constructing an asset
Is yoursuccession plan in place ?
ARVIND RAO
Entrepreneurship is wrought with challenges, ranging from scaling up and administration to resource issues and succession planning. While most of these issues get the entrepreneurs attention, succession planning often remains a blip on their radar. A dangerous mistake, one that can hamper the business continuity in the long run.
Small business owners prefer to keep the ownership and business management under their control, extending it at most to family. This helps the owner manage the everyday affairs - compliance with government authorities, maintaining accounting records and formulating business policies and so on.
Consequently small businesses, generally, operate as sole proprietorships or partnership firms (requiring minimum two partners for the firm to be incorporated under the Indian Partnership Act, 1932). This helps with tax optimisation as well. In partnerships, the partners are typically spouses, who share profits / losses in an agreed proportion. They may continue to operate with just two partners even after scaling up operations.
There is a risk here though. The sudden death of the business owner can lead to continuity issues. Lack of proper succession planning can even result in an abrupt closure of business. For instance in the above mentioned case of a partnership firm with spouses as partners, the owners death calls for immediate dissolution, as per the provisions of the Act.
Life covers do not help either: When an individual takes a life cover, personal obligations like childrens education, marriage and spouses expenses are prioritised. No provisions are made for business-related obligations, especially, when there is athin line of demarcation between business and personal liabilities, which in turn, would add to the financial pressures on the family.
The best bet then is to find yourself a worthy successor who can take the business further. A tough task as children settling abroad or branching out on their own can limit your options.
Nonetheless, succession planning begins with the search for identifying the ideal candidate and then grooming him to step into your shoes. A succession plan ensures seamless transfer of management, besides preparing the employees and the investors about how the company aims to run its business once the chairman or chief executive demits office.
Traditional Indian companies are mostly family-run where the eldest son is usually tipped to assume the mantle on his fathers death. This remained the case in most large corporate houses, such as the Birlas, which started as small entrepreneurial ventures four or five generations ago.
But in recent years, traditional business houses have also tilted in favour of succession planning in keeping with the changing times and to fulfil the aspirations of other members of the family. Large corporate houses such as the Godrej group, Mahindra & Mahindra, Dabur and the Murugappa Group have succession plans in place.
Succession planning could become complex or fail in its purpose if there is a lack of consensus or shortage of talent. Generation gap between the outgoing and incoming chiefs is another challenge that could result in differences in vision, values and approach.
Remedies: To begin with, small business should stop thinking of succession planning as something restricted to large conglomerates. In fact, it should be a part of every companys strategic plan to be able to see the company go forward in the future. Private family matters should never interfere in or be a part of the business.
Entrepreneurs may start off the proprietorship way. But once the business finds its own feet, it is important for the owner to change forms. A gradual upgrade to a partnership firm and then a private limited company is the key.
Converting to a private limited company format will bring in a board of directors and even a professional management, doing away with a definite succession planning need to acertain extent. If this is not possible, identifying a successor to take command and run the business smoothly may be your only option. The owner should not shy away from exploring options beyond his own family, if a suitable successor is not identified from within the family. Or wherever possible, engage professionals for the mentoring and development of the younger generation.
In case of partnerships with just two partners, add at least one more partner in the firm. This provision would help in the firms continuity on the death of any one partner and prevent any compulsory dissolution. Partners have to take special note of the provisions of the partnership act, which states that an individual can become a partner in a firm only by contract and not from status. In other words, on death of a partner, his son / daughter would not become a partner in the firm automatically. More so, even if the individual provides for his children to become partners in the firm on his death, by way of a specific clause in his / her will, the same is technically not valid.
An efficient way would be to induct one or more efficient partners in business during the owners lifetime. The business owner also has to provide for an equitable distribution of his share in the business to his heirs, in case the same is wound up.
It is important for owners to seek professional assistance for drafting a business succession plan and appoint competent advisors for the same. Growing complexities in the business or any changes in the family structure over time should trigger a review of the succession plan. More importantly, succession must be planned years in advance of expected needs. A skillful succession planning will not only bring peace of mind for the owner but also to family members post his death.
The writer is a certified financial planner
Seek professional help for drafting it and make sure you plan well in advance
MONEYMATTERS
|What is succession planning? The process of scouting, identifying and grooming potential candidates to fill up critical positions in a firm.
| How is a successor chosen? Family-run businesses prefer someone from within the family, multinational companies adopt a more broadbased approach and choose from internal and external candidates.
| Why is it important? It ensures seamless transfer of management, prepares the employees and investors about how the company aims to run its business after the present chairman / chief executive | What are the challenges? Lack of consensus or shortage of talent; generation gap between the outgoing and incoming chiefs
Source Business Line 22-1-2012
Vodafone judgment will speed up cross-border deals
K.R. Srivats
Revenue Dept may get more refund claims from non-residents who deposited tax for similar transactions
New Delhi, Jan. 21:
If there is an important fallout of the Supreme Court's Vodafone judgment, it is that the time taken to conclude cross-border deals or offshore transactions involving Indian assets will come down.
This will be the case to the extent that the structure adopted in such deals follows the Vodafone transaction or the principles enunciated in the Vodafone judgment, say tax experts.
The time taken for concluding cross-border deals is expected to come down as the parties involved in the transactions will not spend considerable time in sorting out tax indemnity issues, applying for advance rulings, withholding tax certificates, etc. “Tax indemnities will not be phased out as a corollary to the Vodafone judgment. The extent of significance of tax indemnities would depend upon extent of applicability of Vodafone judgment and principles settled by it. But the time taken will come down as the Vodafone judgment has settled certain principles of law,” Mr Amit Singhania, Principal Associate, Amarchand & Mangaldas, told Business Line.
Currently, parties involved get into negotiations, consuming significant time on who would control litigation, what would be the point of invocation of indemnity and other issues. This is all the more required to deal with situations where notices are served by revenue authorities on the buyer for not withholding tax or making them the representative assessee. Time spent on such aspects can be productively utilised with the apex court ruling on Vodafone establishing that transfer of shares between non-residents would not be subjected to tax here even if the underlying assets are situated in India.
Mr Amrish Shah, Partner and National Leader for Transaction Tax, Ernst & Young, said that the time taken for concluding cross-border deals will come down post the Vodafone judgment.
More claims
Another fallout of the judgment is that the Revenue Department will now get more refund claims from those non-residents who deposited tax for transactions similar to the Vodafone-Hutch deal.
“The Vodafone judgment will have impact on revenue not only on account of refund of the deposit paid by the telecom giant but it will attract the refunds in other similar transactions,” Mr Singhania said, adding that a sizeable number of offshore transactions involving Indian assets have happened since 2007 post the Vodafone-Hutch deal.
Mr Amrish Shah said that the number of transactions similar to Vodafone-Hutch deal size may not be that many, but certainly sellers will now claim refunds of tax withheld in offshore transactions.
Reacting to the Vodafone judgment, Mr Rohan Shah, Managing Partner, Economic Laws Practice, said that the judgment takes a clear position on India's territorial jurisdiction to tax. It holds that transfer of shares outside India is not taxable in India.
The verdict will bring a certainty in the minds of global investors regarding Indian tax consequences in case of sale of their investments, said Dr Suresh Surana, Founder of RSM Astute Consulting Group.
krsrivats@thehindu.co.in
Keywords: Supreme Court, Vodafone judgment, cross-border deals, claims
When do shareholder rights matter more?
D. MURALI
Share • print • T+
Firms in which the shareholder finds it easier to forecast the effect of a particular management action on the future value of the firm benefit much more from such shareholder rights than do their less transparent counterparts, says a preliminary paper titled ‘‘Signal quality and the option value of shareholder rights'' by Abhiroop Mukherjee of the Department of Finance, Hong Kong University of Science & Technology (www.ssrn.com).
When the information environment in which the firm operates is relatively transparent, the manager understands that the shareholder will find it easy to interpret the impact of management decisions or actions on firm value, the author explains. “Thus, if the manager does not act in the shareholder's best interest, the shareholder will readily become aware of this. If the shareholder has strong rights, she can then bring the governance rules for reprisals into play.”
On the other hand, as the paper distinguishes, when information quality is poor, the shareholder might find it difficult to figure out whether or not the manager is acting in her interest. As a result, in these less transparent firms, the manager might get away without triggering any reprisal, even if he acts contrarily to the shareholder's interest, and even if the shareholder has strong rights to punish bad management, cautions Mukherjee. He concludes by observing, therefore, that shareholder rights matter more for firms that operate in a better information environment; and that for firms that operate in sufficiently opaque environments, shareholder rights do not have any value at all.
A case for greater transparency that can benefit the shareholders.
Peak of life cycle wealth
Who is wealthy? This is the question that Stefan Hochguertel of the VU University Amsterdam, and Henry Ohlsson of the Uppsala University explore in ‘‘Who is at the top? Wealth mobility over the life cycle.'' In the authors' view, the answer is, “Probably an individual in his 60s, married, living in a big household and with more than twelve years of education. He would have been born in the capital city region. The employment income of the household would be high but variable. The macroeconomic environment would be characterised by economic growth, increasing stock market prices, and increasing house values.”
The study, based on a large administrative sample from Sweden covering the years 1968-2005, finds age-wealth probability patterns to be consistent with the life-cycle model of savings and wealth accumulation. Wealth first increases and then decreases, and the peak in the probability of being wealthy occurs when people are about 65 years old, the authors note. “This is close to the age when retiring for most.”
Interestingly, the probability of being wealthy is higher when households experience high income uncertainty, one learns. This is consistent with precautionary motives for savings and wealth accumulation, although effects are small, reason the authors.
Of educative value about wealth movements across generations
SEBI directs bourses to set up grievance redress panel
Our Bureau
Mumbai, Jan. 20:
To facilitate speedy grievance redressal, SEBI has mandated all stock exchanges – functioning on their own and through other exchanges — to set up an investor grievance redressal committee (IGRC) at every investor service centre.
For claims up to Rs 25 lakh, the IGRC will comprise one person, and for claims higher than Rs 25 lakh, the committee would have three members.
Further, the three-member committee shall have independent persons qualified in the area of law, finance, accounts, economics, management or administration. They will also have experience in financial services especially the securities market.
In addition, one member of the committee should be a technical expert capable of handling complaints related to technology issues such as internet based trading, algorithmic trading, etc).
Finally SEBI said the members of the IGRC should not be associated with a trading member in any manner.
SEBI has advised large exchanges NSE, BSE, MCX and USEIL to open investor services centres in other large cities in a time-bound manner.
Exchanges have been asked to submit a list of such centres. The circular comes into effect immediately and exchanges have to communicate the implementation status of this circular in their monthly report to SEBI.
Keywords: stock exchanges, SEBI, investor grievance redressal committee (IGRC), investor service centre, algorithmic trading,
Investing overseas, the easy way
G. KARTHIKEYAN
S
Due to the Double Taxation Avoidance Agreement, the Indian Head Office can take credit of taxes already paid in Australia by the branch office.
Sudhir Rao, an Indian businessman with substantial interest in the winemaking and brewery sector, recognised the growing opportunity in Australia for investment in the vinification business. As this would be a perfect compliment to the vintner's Indian business, he contemplated investing a couple of million dollars in this business in Australia. The benefits of bilateral trade agreements between India and Australia are being explored by many business houses, especially in view of the fact that India has emerged as the 21st largest outward investor globally.
Sudhir completed a due diligence study, and was satisfied with the report on the probability of establishing a successful business model in Australia. The next logical step, of course, was to study the statutory compliances and related aspects of making a foreign investment. The essential first step was to decide on the type of entity to be set up in Australia, in consonance with various laws such as Securities and Exchange Board of India guidelines, Companies Act, Income Tax Act, RBI and FEMA guidelines etc.
SUBSIDIARY COMPANY
The common practice is to set up a subsidiary company in Australia, carry on operations, pay taxes and have the dividends repatriated to the parent company in India. However, the choice of entity could vary, if one examines the benefit of taxation on the subsidiary company versus a branch office at Australia. Purely from a taxation point of view, the following facts deserve consideration. Let us say, the profit of the Australian entity is Rs 100, and assuming that the tax rate is 35 per cent, the profit after tax is Rs 65 in both situations (the subsidiary model and branch model in Australia).
If the subsidiary company declares this profit of Rs 65 as dividend, the Indian parent company needs to pay a tax of Rs 20 (at 30 per cent tax rate in India), and thus the outflow of tax in total would be Rs 55. Whereas, if it is a branch model, the Indian company will have to include the profit of the Australia branch viz. Rs 100, and pay a tax of Rs 30 (at 30 per cent). Since India and Australia have signed a Double Taxation Avoidance Agreement, the Indian Head Office can take credit of the extent of taxes already paid in Australia by the branch office.
Thus, the Indian Head office takes credit to the extent of taxes payable in India i.e. Rs 30, and the effective outflow of tax in total is limited to Rs 35. It must be remembered that though the Australian branch has paid Rs 35, the credit cannot result in refund in India. Thus, the effective tax rate for the branch model is 35 per cent, as against the subsidiary model, at a formidable 55 per cent. It will be very relevant to consider the taxation aspects, in addition to the some other factors for the entity selection.
COMPLIANCES
Having decided the entity, Sudhir needs to plan for compliances with RBI/FEMA regulations. The Reserve Bank of India has simplified the foreign investment procedure to the extent that its designated authorised dealers (specific branches of commercial banks) may allow customers remittances abroad without prior permission upto US$ 200,000 per fiscal year, per person, including a minor. The provisions of FEMA do require that the applicant should have maintained the bank account with the bank for a minimum period of one year, but the said branch, at its discretion, based on the declaration, proof of funds and Income Tax returns of the applicant, can affect outward remittance.
Sudhir's initial requirement of investment is one million dollars. The plan is to carry this out with the help of his family members, with each of them investing $200,000, without seeking specific permission of the RBI. The second phase of investment would be done via the five persons in the next financial year, viz after the month of April. Sudhir's company also has the choice of investing abroad from the balance lying in its EEFC account (Exporter Earner's Foreign Currency Account). The company can invest up to 400 per cent of its net worth abroad without prior RBI approval. The ceiling doesn't apply if the investment is made out of balances held in EEFC account.
Sudhir will have certain reporting duties as well. Sudhir would need to receive a share certificate as evidence of investment, repatriate dues receivable to India and submit an Annual Performance Report for the subsidiary to RBI, through the authorised dealer. In cross-border transactions, it is equally important to comply with various regulations, to be within the framework of the law.
(The author is a Coimbatore-based chartered accountant.)
Keywords: Sudhir Rao, Exporter Earner's Foreign Currency
Friday, January 20, 2012
vadafone case
The Supreme Court today ruled in favour of Vodafone in the $2 billion tax case saying capital gains tax is not applicable to the telecom major. The apex court also said the Rs 2, 500 crore which Vodafone has already paid should be returned to Vodafone with interest. (Click here for case timeline)
The decision, experts said, will be a big boost for cross-border mergers and acquisitions here. The Income tax department’s contention, if upheld, would have rendered standard transaction structures too risky forcing foreign companies to weigh potentially new litigation and insurance costs.
Nearly five years after the Indian taxman issued the first notice to Vodafone international on September 2007 for failure to withhold tax on payments made to Hutchison Telecom, Chief Justice of India SH Kapadia and Justice KS Radhakrishnan pronounced their judgement.
Vodafone had argued India doesn't have jurisdiction to tax the Hutchison deal because it was structured as a transaction between two overseas entities. The tax department had said it has authority because the underlying asset was Indian.
The verdict would also impact several other companies, including AT&T of the US and Britain's SABMiller PLC, are fighting similar tax claims and Indian authorities have been handing out tax notices to other companies, deal lawyers say.
In the Vodafone case, the transaction was between Vodafone and Hong Kong-based Hutchison, which sold its shares in the Indian company through a holding company based in an offshore destination. The I-T department has been of the view that it was immaterial whether the transaction took place outside India.
According to the I-T department, what counts for the purpose of taxation was whether capital gains were generated in India. Therefore, tax has to be paid in India if the overseas sale of shares had resulted in a change of ownership of the Indian company, it has argued.
The Bombay high court had earlier said tax authorities could unbundle different rights conferred through shareholding to tax aspects relevant to India. According to lawyers, this judgement would be difficult to implement as unbundling the value of a company’s assets arising from ownership of shares is bound to be messy.
In May 2007, Vodafone bought Hutchison Telecommunications International Ltd’s 66.98% stake in Indian telecom company Hutch Essar Ltd for $11.2 billion (around Rs.52,300 crore). Hutchison controlled its Indian telecom subsidiary through a Cayman Island company called CGP. CGP’s shares were sold to Vodafone, which consequently became majority owner of the Indian telecom firm.
Tax consultants and lawyers were not sure how tax authorities can unbundle the value of assets of a company arising from shareholding.
The issues that were argued before the SC include the transfer of shares resulting in transfer of underlying assets, the extra-territorial applicability of section 195, income chargeable to tax under section 9, but the crux of the argument was whether the transaction was designed to avoid tax.
The verdict would have implications for cross border M&A activity and similar pending cases before various courts.
Madhu S, Project Associate with ADR Centre, Centre for Policy Research has said the Vodafone tax case threw an interesting question on the taxability of a non resident company acquiring shares of a resident company through an indirect route. This is a landmark case, as it is for the first time that the tax departments had sought to tax a company through a mechanism of tracing the source of acquisition.
The judgment will have direct impact on transactions of major acquisitions like SABMiller-Foster and Sanofi Aventis-Shanta Biotech. Similar transactions that existed earlier are Sesa Goa, AT&T and General Electric. British firm Cairn Energy has already agreed to pay tax in India as well as the UK on selling its stake in Cairn India to Vedanta Resources from $6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax liability could range between $868 million and $1.1 billion. The judgment would definitely throw a cautious note to major investors and M&As in India; however, it does not have that great an impact to curtail the investment flow to an emerging destination like India.
--
The decision, experts said, will be a big boost for cross-border mergers and acquisitions here. The Income tax department’s contention, if upheld, would have rendered standard transaction structures too risky forcing foreign companies to weigh potentially new litigation and insurance costs.
Nearly five years after the Indian taxman issued the first notice to Vodafone international on September 2007 for failure to withhold tax on payments made to Hutchison Telecom, Chief Justice of India SH Kapadia and Justice KS Radhakrishnan pronounced their judgement.
Vodafone had argued India doesn't have jurisdiction to tax the Hutchison deal because it was structured as a transaction between two overseas entities. The tax department had said it has authority because the underlying asset was Indian.
The verdict would also impact several other companies, including AT&T of the US and Britain's SABMiller PLC, are fighting similar tax claims and Indian authorities have been handing out tax notices to other companies, deal lawyers say.
In the Vodafone case, the transaction was between Vodafone and Hong Kong-based Hutchison, which sold its shares in the Indian company through a holding company based in an offshore destination. The I-T department has been of the view that it was immaterial whether the transaction took place outside India.
According to the I-T department, what counts for the purpose of taxation was whether capital gains were generated in India. Therefore, tax has to be paid in India if the overseas sale of shares had resulted in a change of ownership of the Indian company, it has argued.
The Bombay high court had earlier said tax authorities could unbundle different rights conferred through shareholding to tax aspects relevant to India. According to lawyers, this judgement would be difficult to implement as unbundling the value of a company’s assets arising from ownership of shares is bound to be messy.
In May 2007, Vodafone bought Hutchison Telecommunications International Ltd’s 66.98% stake in Indian telecom company Hutch Essar Ltd for $11.2 billion (around Rs.52,300 crore). Hutchison controlled its Indian telecom subsidiary through a Cayman Island company called CGP. CGP’s shares were sold to Vodafone, which consequently became majority owner of the Indian telecom firm.
Tax consultants and lawyers were not sure how tax authorities can unbundle the value of assets of a company arising from shareholding.
The issues that were argued before the SC include the transfer of shares resulting in transfer of underlying assets, the extra-territorial applicability of section 195, income chargeable to tax under section 9, but the crux of the argument was whether the transaction was designed to avoid tax.
The verdict would have implications for cross border M&A activity and similar pending cases before various courts.
Madhu S, Project Associate with ADR Centre, Centre for Policy Research has said the Vodafone tax case threw an interesting question on the taxability of a non resident company acquiring shares of a resident company through an indirect route. This is a landmark case, as it is for the first time that the tax departments had sought to tax a company through a mechanism of tracing the source of acquisition.
The judgment will have direct impact on transactions of major acquisitions like SABMiller-Foster and Sanofi Aventis-Shanta Biotech. Similar transactions that existed earlier are Sesa Goa, AT&T and General Electric. British firm Cairn Energy has already agreed to pay tax in India as well as the UK on selling its stake in Cairn India to Vedanta Resources from $6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax liability could range between $868 million and $1.1 billion. The judgment would definitely throw a cautious note to major investors and M&As in India; however, it does not have that great an impact to curtail the investment flow to an emerging destination like India.
--
Master circulr on External Commercial borrowings and trade credits
---------- Forwarded message ----------
From: WMC
Date: Sat, Jan 21, 2012 at 2:09 AM
Subject: FEMA Update regarding Master Circular on Compounding of Contraventions under FEMA, 1999 and Master Circular on External Commercial Borrowings and Trade Credits.
To:
Dear Friends,
Please find herewith latest FEMA Update regarding Master Circular on Compounding of Contraventions under FEMA, 1999 and Master Circular on External Commercial Borrowings and Trade Credits.
RBI/2011-12/357
Master Circular No.8 /2011-12
(Updated as on January 20, 2012)
July 01, 2011
Master Circular on Compounding of Contraventions under FEMA, 1999
The compounding of contraventions under Foreign Exchange Management Act (FEMA), 1999 is a voluntary process by which an applicant can seek compounding of an admitted contravention of any provision of FEMA, 1999 under Section 13(1) of the FEMA, 1999.
2. This Master Circular consolidates the existing instructions on the subject of "Compounding of Contraventions under FEMA, 1999" at one place. The list of underlying circulars / notifications, consolidated in this Master Circular, is furnished in the Appendix.
3. This Master Circular is being issued with a sunset clause of one year. This circular will stand withdrawn on July 1, 2012 and be replaced by an updated Master Circular on the subject.
RBI/2011-12/356
Master Circular No. 09 /2011-12
(Updated as on January 20, 2012)
July 01, 2011
Master Circular on External Commercial Borrowings and Trade Credits
External Commercial Borrowings and Trade Credits availed of by residents are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 3/ 2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, dated May 3, 2000, as amended from time to time.
2. This Master Circular consolidates the existing instructions on the subject of "External Commercial Borrowings and Trade Credits" at one place revised upto January 05, 2012. The list of underlying circulars / notifications, consolidated in this Master Circular, is furnished in the Appendix.
3. This circular will stand withdrawn on July 1, 2012 and be replaced by an updated Master Circular on the subject.
--
With regards,
Manoj Pandey
Wisdom Management Consultancy Private Limited
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Reg. Office: B-94/9, Dharni Chamber, Joshi Colony, IP Extension, New Delhi-110092.
+91-9313649750 [Cell]
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This message and any attachment are confidential and may be privileged or otherwise protected from disclosure. If you are not the intended recipient, please telephone or email the sender and delete this message and any attachment from your system and permanently destroy any copies or printouts thereof. If you are not the intended recipient you must not copy this message or attachment or disclose the contents to any other person. Although this email and its attachments are believed to be free of any virus or other defect that might affect any computer system into which it is received and opened, it is the responsibility of the recipient to ensure that it is virus free and Wisdom Management Consultancy Private Limited does not accept any responsibility for any loss or damage arising in any manner whatsoever from its use. Wisdom Management Consultancy Private Limited is a limited liability company incorporated in India under number U74900DL2011PTC219663. The company's registered office is at B-94/9, Dharni Chamber, Joshi Colony, IP Extension, New Delhi-110092
From: WMC
Date: Sat, Jan 21, 2012 at 2:09 AM
Subject: FEMA Update regarding Master Circular on Compounding of Contraventions under FEMA, 1999 and Master Circular on External Commercial Borrowings and Trade Credits.
To:
Dear Friends,
Please find herewith latest FEMA Update regarding Master Circular on Compounding of Contraventions under FEMA, 1999 and Master Circular on External Commercial Borrowings and Trade Credits.
RBI/2011-12/357
Master Circular No.8 /2011-12
(Updated as on January 20, 2012)
July 01, 2011
Master Circular on Compounding of Contraventions under FEMA, 1999
The compounding of contraventions under Foreign Exchange Management Act (FEMA), 1999 is a voluntary process by which an applicant can seek compounding of an admitted contravention of any provision of FEMA, 1999 under Section 13(1) of the FEMA, 1999.
2. This Master Circular consolidates the existing instructions on the subject of "Compounding of Contraventions under FEMA, 1999" at one place. The list of underlying circulars / notifications, consolidated in this Master Circular, is furnished in the Appendix.
3. This Master Circular is being issued with a sunset clause of one year. This circular will stand withdrawn on July 1, 2012 and be replaced by an updated Master Circular on the subject.
RBI/2011-12/356
Master Circular No. 09 /2011-12
(Updated as on January 20, 2012)
July 01, 2011
Master Circular on External Commercial Borrowings and Trade Credits
External Commercial Borrowings and Trade Credits availed of by residents are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 3/ 2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, dated May 3, 2000, as amended from time to time.
2. This Master Circular consolidates the existing instructions on the subject of "External Commercial Borrowings and Trade Credits" at one place revised upto January 05, 2012. The list of underlying circulars / notifications, consolidated in this Master Circular, is furnished in the Appendix.
3. This circular will stand withdrawn on July 1, 2012 and be replaced by an updated Master Circular on the subject.
--
With regards,
Manoj Pandey
Wisdom Management Consultancy Private Limited
-----------------------------------------------------------------------
Reg. Office: B-94/9, Dharni Chamber, Joshi Colony, IP Extension, New Delhi-110092.
+91-9313649750 [Cell]
-----------------------------------------------------------------------
This message and any attachment are confidential and may be privileged or otherwise protected from disclosure. If you are not the intended recipient, please telephone or email the sender and delete this message and any attachment from your system and permanently destroy any copies or printouts thereof. If you are not the intended recipient you must not copy this message or attachment or disclose the contents to any other person. Although this email and its attachments are believed to be free of any virus or other defect that might affect any computer system into which it is received and opened, it is the responsibility of the recipient to ensure that it is virus free and Wisdom Management Consultancy Private Limited does not accept any responsibility for any loss or damage arising in any manner whatsoever from its use. Wisdom Management Consultancy Private Limited is a limited liability company incorporated in India under number U74900DL2011PTC219663. The company's registered office is at B-94/9, Dharni Chamber, Joshi Colony, IP Extension, New Delhi-110092
Vadafone Sc Judgement
Vadafone Case Source Indian Corporate law blog
Friday, January 20, 2012
Vodafone: Key Points
The Supreme Court’s judgment today in Vodafone is of enormous importance to a number of branches of Indian law. The majority judgment has been delivered by the Chief Justice and Swatanter Kumar J. A concurring judgment delivered by K.S. Radhakrishnan J. in some respects goes even further. A copy of the judgment is available on the Supreme Court’s website. A detailed analysis of the judgment will follow. This post reproduces key extracts from the two judgments with brief comments, on some of the issues before the Court.
1. Azadi Bachao Andolan and McDowell
Both judgments hold that Azadi Bachao Andolan is good law. The Chief Justice holds that there is no conflict between Azadi and McDowell because the observations of Reddy J. are confined to cases in which a colourable device is used. Radhakrishnan J. appears to have gone even further and has expressly said that the “ghost” of the Duke of Westminster has not been exorcised. We will analyse this in detail in the coming days.
CHIEF JUSTICE
[para 64] The words “this aspect” [ed: referring to the majority’s observation that they “on this aspect” agree with Reddy J.’s judgment] express the majority’s agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to “legitimate avoidance of tax liability” (paras 7-10, 17 & 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the “Westminster” and tax avoidance – these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.
JUSTICE K.S RADHAKRISHNAN
[paras 110, 112] Justice Reddy has, the above quoted portion shows, entirely agreed with Justice Mishra and has stated that he is only supplementing what Justice Mishra has spoken on tax avoidance. Justice Reddy has also opined that the ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of McDowell and cannot be and remains merely an opinion or view. 112. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with Justice Mishra and has only supplemented what Justice Mishra has stated on Tax Avoidance, therefore, we have go by what Justice Mishra has spoken on tax avoidance
2. Corporate Veil
Both the Chief Justice and Radhakrishnan J. hold that the existence of a holding-subsidiary relationship is no reason to suppose that the two entities are not separate in law. The Chief Justice sets out circumstances in which the Revenue may appeal to India’s “judicial anti-avoidance rule”. Justice Radhakrishnan cites with approval Adams v Cape Industries.
THE CHIEF JUSTICE
[paras 67, 68] However, the fact that a parent company exercises shareholder’s influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides
In the application of a judicial anti-avoidance rule, the Revenue may invoke the “substance over form” principle or “piercing the corporate veil” test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant…the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device
JUSTICE K.S. RADHAKRISHNAN
[paras 58, 61] Legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors
3. Shareholders’ Agreements and Rangaraj
Justice Radhakrishnan has expressed the view that Rangaraj v Gopalakrishnan, which we have discussed on several occasions, may have been wrongly decided because shareholders have the freedom to contract unless there are specific restrictions in legislation.
[paras 63, 64] The nature of SHA was considered by a two Judges Bench of this Court in V. B. Rangaraj v. V. B. Gopalakrishnan and Ors. (1992) 1 SCC 160 … This Court has taken the view that provisions of the Shareholders’ Agreement imposing restrictions even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, a view we do not subscribe
64. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the Articles of Association. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company
4. Controlling Interest and Extinguishment
Both the Chief Justice and Justice KS Radhakrishnan have held (on this aspect affirming the legal conclusion of the Bombay High Court in the impugned judgment) that “controlling interest” is not a distinct capital asset.
THE CHIEF JUSTICE
[para 88] As a general rule, in a case where a transaction involves transfer of shares lock, stock and barrel, such a transaction cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights
JUSTICE K.S. RADHAKRISHNAN
[para 144] Further, the High Court failed to note on transfer of CGP share, there was only transfer of certain off-shore loan transactions which is unconnected with underlying controlling interest in the Indian Operating Companies. The other rights, interests and entitlements continue to remain with Indian Operating Companies and there is nothing to show they stood transferred in law
5. Section 9
THE CHIEF JUSTICE
[para 71] Hence, it is not necessary that income falling in one category under any one of the sub-clauses [ed: of section 9] should also satisfy the requirements of the other sub-clauses to bring it within the expression “income deemed to accrue or arise in India” in Section 9(1)(i)… The said sub-clause consists of three elements, namely, transfer, existence of a capital asset, and situation of such asset in India. All three elements should exist in order to make the last sub-clause applicable [emphasis added].
JUSTICE K.S. RADHAKRISHNAN
[paras 171-174] Section 9, therefore, covers only income arising from a transfer of a capital asset situated in India and it does not purport to cover income arising from the indirect transfer of capital asset in India. Section 9 has no “look through provision” and such a provision cannot be brought through construction or interpretation of a word ‘through’ in Section 9. In any view, “look through provision” will not shift the situs of an asset from one country to another. Shifting of situs can be done only by express legislation
6. Situs of the CGP Share
Although both the Chief Justice and Justice K.S. Radhakrishnan hold that the situs of the CGP share is the place of incorporation/register of shares, they appear to have adopted different approaches: the Chief Justice applies the Indian Companies Act, while Justice KS Radhakrishnan applies the well-known conflict of laws rules on situs of shares. This will be discussed in more detail in a subsequent post.
THE CHIEF JUSTICE
[para 82] Be that as it may, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of the CGP share was recorded in the Cayman Islands, where the register of members of the CGP is maintained.
JUSTICE K.S. RADHAKRISHNAN
[para 127] Situs of shares situates at the place where the company is incorporated and/ or the place where the share can be dealt with by way of transfer. CGP share is registered in Cayman Island and materials placed before us would indicate that Cayman Island law, unlike other laws does not recognise the multiplicity of registers
SCconnects with Vodafone, hopes soarforotherMNCs
BS REPORTERS
New Delhi/Mumbai, 20 January
Senior advocate Harish Salve was grinning from ear to ear before appearing in front of TV cameras this afternoon. The Vodafone counsel had enough reasons to feel happy: After nearly five years, the UK telecom major had today won the ~11,000crore legal battle with the Income Tax Department over payment of tax made to Hutchison Telecom.
While settling the dispute, the three-judge Supreme Court Bench, headed by Chief Justice S H Kapadia, also raised hope among a host of multinationals facing similar tax demands from the government. At least eight other companies, including AT&T, SAB Miller, GE, Cadbury, Sanofi and Vedanta, are involved in similar cases.
The tax department is keeping its cards close to its chest. While Central Board of Direct Taxes Chairman MC Joshi told Business Standard the government would examine the judgment before deciding a future course of action, a finance ministry official said the only option available with the government at this point was seeking review of the judgment.
Turn to Page 16 >UK telecom major wins ~11,000-cr tax battle; govt may amend law prospectively SC JUDGMENT
KEY TAKEAWAYS
|Bombay High Court judgment asking Vodafone to pay ~11,000-crore income tax set aside |Tax authorities do not have jurisdiction on an overseas transaction between companies incorporated outside India |I-T department asked to return ~2,500 crore deposited by Vodafone within two months, along with 4% interest from the date of withdrawal of the money by the department |Supreme Court registry asked to return the bank guarantee of ~8,500 crore given by Vodafone within four weeks
VODAFONE CASE IMPACT
Vodafone judgmentwill have a directbearing on other M&A deals thathave been under the I-T departmentscanner
Various judgments on several M&A deals pending in courts across India SC AXES THE TAXES
THE CASE TIMELINE
2007
FEB Vodafone buys 67% stake in Hutchison India for $11.5 billion
SEPTEMBER Income Tax dept issues showcause notice to Vodafone
2010
8SEPTEMBER Bombay HC delivers verdict in favour of I-T department
2012
20 JANUARY In two separate but concurring judgments by a threejudge bench headed by Chief Justice S H Kapadia, the SC says no tax liability for Vodafone No capital gains, as both buyer and seller are foreign entities
>$150-million Idea Cellular-AT&T deal: Bombay HC
>$500-million GE-Genpact deal: Delhi HC
>$981-million Mitsui-Vedanta deal in Sesa Goa: Goa HC
>SABMiller-Fosters 2006 deal: Bombay HC
>$770-million Sanofi Aventis-Shantha deal: Bombay HC
“We are a committed long-term investor. We have made it clearwe have faith in the Indian judicial system”
VITTORIO COLAO
Vodafone Group CEO
“Policycertaintyis crucial for taxpayers (foreign investors, too) to make rational economic choices
SH KAPADIA
Chief Justice of India
COMPANIES 2 >>Vodafone an easy target: Sarin
>Big blowto taxdepartment
>Good news forinvestment
>Vodafone IPO on a speed dial
ECONOMY 5 >>CJI scores hat-trickin a day
>This is a first: Harish Salve
GRAPHIC: SAMIR KUMAR, ILLUSTRATION: AJAY MOHANTY
________________________________________
Click here to read more...>
SC connects ...
Some experts said the legal precedent may be short-lived. The Direct Taxes Code (DTC), due to be implemented in 2013, has provisions designed to make transactions similar to Vodafone’s liable to be taxed. Sandeep Ladda, executive director, PwC India, said, even as the judgment settled a prolonged litigation, DTC contained aproposal to tax similar transactions. “So, this ruling may have limited relevance after implementation of DTC,” he added.
For the moment, however, all is well. The Supreme Court said the government could not seek capital gains tax from Vodafone’s purchase of Hutchison’s wireless assets in 2007, because the transaction took place between foreign companies. The court also directed the government to return the ~2,500-crore deposit that Vodafone made on the contested tax bill, plus four per cent interest.
The decision ends the uncertainty whether investors based outside the country could use offshore holding companies to avoid paying Indian taxes. Vodafone, seeking to expand in one of its fastestgrowing mobile-phone markets, had said the case was one of the key issues that had to be resolved in the region before the company could consider publicly listing its local unit.
Vodafone and Hutchison conducted their transaction offshore, with Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, acquiring CGP Ltd, a Cayman Islands holding company controlled by Hong Kong-based Hutchison, and maintained that since the share transfer was carried outside India, authorities here had no jurisdiction to tax its deals.
However, the tax department in September 2007 sought capital gains tax, saying Vodafone should have withheld that amount from its payment to Hutchison. But the apex court today ruled that “such imposition of tax amounts to capital punishment on capital investments”. Vodafone Group CEO Vittorio Colao said: “We are a committed longterm investor in India and we have made it clear all along that we have faith in the Indian judicial system.” He said the company would continue to grow its Indian business, including making significant investments. Vodafone stock rose 1.60 per cent till the time of going to the press on the London Stock Exchange.
The Bombay High Court had ruled in December 2008 against Vodafone’s challenge of the tax bill. The carrier’s appeal to the Supreme Court was dismissed in January 2009. At that time, the Supreme Court had allowed Vodafone to present its challenge over the jurisdiction of the transaction to the tax department.
Experts said the judgment would give amajor boost to foreign investors looking at buying out stakes in Indian companies. Hemant Joshi, partner, Deloitte Haskins & Sells, said the telecom sector had been plagued by various uncertainties. With this decision, a strong signal goes out to investors regarding the predictability and certainty of tax laws in the country.
Nishith Desai, the head of Nishith Desai and Associates, an international law firm, said the freedom to go ahead with such transactions had now been established. “It makes a lot of difference. We spend around 25-30 per cent of our dealmaking time in negotiating tax indemnities. Now, that will come down,” he said.
FROM PAGE 1
Big blow to tax dept, but FinMin may amend law to tax such deals in future
VRISHTI BENIWAL
New Delhi, 20 January
The government may have to take a hit of ~11,000 crore in tax revenue, with the Supreme Court’s ruling in favour of Vodafone in a longpending tax dispute. The revenue loss may go up if the verdict has a bearing on similar deals pending before various courts. But the government could introduce amendments to tax laws, negating impact of this decision on future deals.
Prospective investors may not benefit from the Vodafone case, as provisions under the proposed Direct Taxes Code (DTC) make income from such cross-border deals liable to tax in India. As the DTC rollout is likely to be delayed, experts say the finance ministry may make some provisions in the Income-Tax Act itself in the upcoming Budget, to bring such income to taxation in all future transactions.
“While the ruling sets back the tax authorities in their quest for getting a bigger share of revenue in India, the victory may be short-lived, as they have other aces up their sleeves. The General AntiAvoidance Rules and amendments to the tax law can be expected to be brought in the Budget 2012 itself,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.
PwC India executive director Sandeep Ladda said since DTC contained a proposal to tax similar transactions, this ruling might have limited relevance after its implementation.
Some experts said though tax revenue from other similar cases pending before courts might not be huge, a retrospective amendment to the law to tax past transactions could not be ruled out.
“There are several grey areas which will come into play. One cannot rule out an amendment with retrospective effect,” said Hitesh Sharma, tax partner, Ernst & Young.
Tax on cross-border deals is levied in the range of 10 to 20 per cent. Idea Cellular-AT&T deal of $150 million, GEGenpact ($500 million), Mitsui-Vedanta ($981 million), SABmiller-Fosters and Sanofiaventis-Shantha Biotech ($770 million) are some other disputed cases.
The decision was a setback to the finance ministry, grappling with an expected shortfall in revenue collections. Immediately after the verdict, finance minister Pranab Mukherjee met law minister Salman Khurshid and senior officials of the ministry. A core group, comprising senior officials from the tax department, has been formed to examine the judgment.
“We obviously need revenue for the government’s important programmes and the other thing is the certainty in law — we have to examine both areas,” Khurshid told reporters after the meeting.
While Central Board of Direct Taxes chairman M C Joshi told Business Standard
that the government would examine the judgment before deciding a future course of action, another finance ministry official said the only option available was to seek a review of the judgment.
Pranay Bhatia, associate partner, Economic Laws Practice, however, said the process of seeking a review could take long and even if the government chose to take that recourse, the possibility was that even a larger bench might not take a different view.
After the Bombay High Court passed an order in 2010, asking Vodafone to pay ~11,000 crore to the Income Tax department, the tax authorities got confident that they had acted lawfully in the matter. Besides, Vodafone’s decision in July 2011 to withdraw its petition before a tax authority — contesting its liability to pay withholding tax of about ~3,500 crore on the purchase of stake in Vodafone Essar from its joint venture partner, Essar Group —made the government confident of a victory in the main case, too.
While Vodafone had given a bank guarantee of ~8,500 crore, it had already paid ~2,500 crore to the tax department, which will now be returned within two months with four per cent interest.
Prospective investors maynotbenefitfrom the Vodafone case, as provisions under the proposed DTCmake income from such cross-border deals liable to taxin India. PHOTO: PTI
Good news for investment
KATYAB NAIDU
Mumbai, 20 January
For those tax lawyers and accountants who have been struggling to convince foreign companies to invest in India, the Vodafone judgment might be a blessing from the Supreme Court.
Rajiv Luthra, founder and managing partner of Luthra & Luthra, believes the judgment will lend clarity to the matter that has hitherto been blurred by uncertainty on the working of the system.
With many such test cases from which the Income Tax Department has been trying to claim tax, foreign investors have been confused on ways to work around the country’s tax code. Eighty per cent of foreign companies in India are facing huge tax litigation, and this move could be a game changer. “Tax efficiency created through such structures, which now have the ultimate legal blessing, will surely provide a fillip to foreign direct investment into India,” says Sanjay Sakhuja, CEO, Ambit Corporate Finance.
Nishith Desai, the head of international law firm Nishith Desai and Associates, says the court verdict has now helped establish the freedom to go ahead with such transactions.
Foreign investors, experts say, demand certainty in law. There has been a lot of ire against the tax claim also because the claim was sought retrospectively. “Foreign companies are also perturbed it was from the purchaser — and not the seller — that tax was demanded,” notes N C Hegde, partner (direct taxes), Deloitte.
Corporate tax lawyer H P Ranina believes the verdict could work to the advantage of India, since many countries, especially China, have tax transactions done by foreign entities involving domestic assets.
The cheer, however, could come to an end, if the proposed amendment in the Direct Taxes Code goes through. Ketan Dalal, joint leader of tax practice at PricewaterhouseCoopers, says the court decision puts to rest the issue of taxability of offshore transactions of offshore companies. “Therefore, it should apply to past and future transactions.” Accounting firms and legal experts alike hope any such amendment should be prospective and not retrospective in nature.
Vodafone Plc will now go ahead with the initial public offer (IPO) of its Indian business. “Though the IPO of the Indian entity and the tax burden of the parent company are a different matter, the tax claim would have been an overhang, if it were going for an IPO,” said Alok Shende, principal analyst and cofounder of Ascentius Consulting. While there has been talk about Vodafone appointing investment bankers for an IPO, the company has refused to comment on it. “It (an IPO) is conditional to a number of factors,” said Simon Gordon, a spokesperson of Vodafone Plc. Vodafone IPO on aspeed dial
Sebi gets cracking on listing day price manipulations
BS REPORTER
Mumbai, 20 January
The capital markets regulator, Securities and Exchange Board of India (Sebi), today announced several measures aimed at checking manipulators and reducing wide fluctuations in the share prices of companies making their stock market debut.
At present, there is no limit on share price movements on the day of listing of shares following a public offer. This was allowed to enable price discovery but also leads to huge fluctuations on either side. From day two onwards, the circuit filters which cap stock movements to five per cent, 10 per cent or 20 per cent, depending on the size, come into play.
Sebi now plans to introduce this circuit filter on listing day itself. The new rules, to take effect four weeks from now, will include extending the ‘pre-market call auction’ window on listing day and delivery-based trading for the first 10 days.
“In light of the high volatility and price movement observed on the first day of trading, it has been decided to put in place a framework of trade controls for Initial Public Offer (IPO) and re-listed scrips,” said the regulator in a circular.
Further, for issues of ~250 crore or less, only deliverybased trades will be allowed for the first 10 days after listing. The pre-open call auction window, which currently is used for Nifty and Sensex stocks, will be used for arriving at an equilibrium price on the first day of trade of an IPO and relisting stocks. However, unlike index stocks, where the window is for 15 minutes, IPO stocks will have a one-hour window between 9 and 10 am. The first 45 minutes will be for order entry, modification and cancellation, the next 10 minutes for order matching and trade confirmation, and the remaining five minutes shall be the buffer period to facilitate transition from preopen session to the normal trading session.
In case the equilibrium price is not discovered for relisted stocks, all orders shall be cancelled and the scrip shall continue to trade in the call auction mechanism until the price is determined. For IPO scrips with issue size of less than ~250 crore and re-listed scrips, a 100 per cent margin shall be required for the order to be eligible in the pre-open session.
Under normal trading, stocks with issue size of less than ~250 crore will trade in a price band of five per cent of the equilibrium price. For issues greater than ~250 crore, the price band will be 20 per cent of the equilibrium price. In case the equilibrium price is not discovered in the call auction, similar price bands linked to the issue price will be applicable.
Market experts said the move would definitely help reduce volatility. Arun Kejriwal, director at Kejriwal Research and Investment Services, said, “These were much-need steps. Introduction of trade-to-trade on issue size of below ~250 crore will help in reducing manipulation considerably, if not totally,” “The immediate impact will be fewer issues. All operatordriven IPOs will be out,” said Pavan K Vijay, chairman, Corporate Professionals. “The process of trade to trade will hurt the market. No jobber will come. That will affect liquidity in the stock. Brokers who participate in IPO funding will also take a hit .”
Regulator introduces circuit filters and pre-open call auction for IPO stocks and relisted scrips on Day One
Undernormal trading, stocks with issue size of less than ~250 crore will trade in a price band of five per cent of the equilibrium price
Friday, January 20, 2012
Vodafone: Key Points
The Supreme Court’s judgment today in Vodafone is of enormous importance to a number of branches of Indian law. The majority judgment has been delivered by the Chief Justice and Swatanter Kumar J. A concurring judgment delivered by K.S. Radhakrishnan J. in some respects goes even further. A copy of the judgment is available on the Supreme Court’s website. A detailed analysis of the judgment will follow. This post reproduces key extracts from the two judgments with brief comments, on some of the issues before the Court.
1. Azadi Bachao Andolan and McDowell
Both judgments hold that Azadi Bachao Andolan is good law. The Chief Justice holds that there is no conflict between Azadi and McDowell because the observations of Reddy J. are confined to cases in which a colourable device is used. Radhakrishnan J. appears to have gone even further and has expressly said that the “ghost” of the Duke of Westminster has not been exorcised. We will analyse this in detail in the coming days.
CHIEF JUSTICE
[para 64] The words “this aspect” [ed: referring to the majority’s observation that they “on this aspect” agree with Reddy J.’s judgment] express the majority’s agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to “legitimate avoidance of tax liability” (paras 7-10, 17 & 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the “Westminster” and tax avoidance – these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.
JUSTICE K.S RADHAKRISHNAN
[paras 110, 112] Justice Reddy has, the above quoted portion shows, entirely agreed with Justice Mishra and has stated that he is only supplementing what Justice Mishra has spoken on tax avoidance. Justice Reddy has also opined that the ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of McDowell and cannot be and remains merely an opinion or view. 112. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with Justice Mishra and has only supplemented what Justice Mishra has stated on Tax Avoidance, therefore, we have go by what Justice Mishra has spoken on tax avoidance
2. Corporate Veil
Both the Chief Justice and Radhakrishnan J. hold that the existence of a holding-subsidiary relationship is no reason to suppose that the two entities are not separate in law. The Chief Justice sets out circumstances in which the Revenue may appeal to India’s “judicial anti-avoidance rule”. Justice Radhakrishnan cites with approval Adams v Cape Industries.
THE CHIEF JUSTICE
[paras 67, 68] However, the fact that a parent company exercises shareholder’s influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides
In the application of a judicial anti-avoidance rule, the Revenue may invoke the “substance over form” principle or “piercing the corporate veil” test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant…the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device
JUSTICE K.S. RADHAKRISHNAN
[paras 58, 61] Legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors
3. Shareholders’ Agreements and Rangaraj
Justice Radhakrishnan has expressed the view that Rangaraj v Gopalakrishnan, which we have discussed on several occasions, may have been wrongly decided because shareholders have the freedom to contract unless there are specific restrictions in legislation.
[paras 63, 64] The nature of SHA was considered by a two Judges Bench of this Court in V. B. Rangaraj v. V. B. Gopalakrishnan and Ors. (1992) 1 SCC 160 … This Court has taken the view that provisions of the Shareholders’ Agreement imposing restrictions even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, a view we do not subscribe
64. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the Articles of Association. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company
4. Controlling Interest and Extinguishment
Both the Chief Justice and Justice KS Radhakrishnan have held (on this aspect affirming the legal conclusion of the Bombay High Court in the impugned judgment) that “controlling interest” is not a distinct capital asset.
THE CHIEF JUSTICE
[para 88] As a general rule, in a case where a transaction involves transfer of shares lock, stock and barrel, such a transaction cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights
JUSTICE K.S. RADHAKRISHNAN
[para 144] Further, the High Court failed to note on transfer of CGP share, there was only transfer of certain off-shore loan transactions which is unconnected with underlying controlling interest in the Indian Operating Companies. The other rights, interests and entitlements continue to remain with Indian Operating Companies and there is nothing to show they stood transferred in law
5. Section 9
THE CHIEF JUSTICE
[para 71] Hence, it is not necessary that income falling in one category under any one of the sub-clauses [ed: of section 9] should also satisfy the requirements of the other sub-clauses to bring it within the expression “income deemed to accrue or arise in India” in Section 9(1)(i)… The said sub-clause consists of three elements, namely, transfer, existence of a capital asset, and situation of such asset in India. All three elements should exist in order to make the last sub-clause applicable [emphasis added].
JUSTICE K.S. RADHAKRISHNAN
[paras 171-174] Section 9, therefore, covers only income arising from a transfer of a capital asset situated in India and it does not purport to cover income arising from the indirect transfer of capital asset in India. Section 9 has no “look through provision” and such a provision cannot be brought through construction or interpretation of a word ‘through’ in Section 9. In any view, “look through provision” will not shift the situs of an asset from one country to another. Shifting of situs can be done only by express legislation
6. Situs of the CGP Share
Although both the Chief Justice and Justice K.S. Radhakrishnan hold that the situs of the CGP share is the place of incorporation/register of shares, they appear to have adopted different approaches: the Chief Justice applies the Indian Companies Act, while Justice KS Radhakrishnan applies the well-known conflict of laws rules on situs of shares. This will be discussed in more detail in a subsequent post.
THE CHIEF JUSTICE
[para 82] Be that as it may, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of the CGP share was recorded in the Cayman Islands, where the register of members of the CGP is maintained.
JUSTICE K.S. RADHAKRISHNAN
[para 127] Situs of shares situates at the place where the company is incorporated and/ or the place where the share can be dealt with by way of transfer. CGP share is registered in Cayman Island and materials placed before us would indicate that Cayman Island law, unlike other laws does not recognise the multiplicity of registers
SCconnects with Vodafone, hopes soarforotherMNCs
BS REPORTERS
New Delhi/Mumbai, 20 January
Senior advocate Harish Salve was grinning from ear to ear before appearing in front of TV cameras this afternoon. The Vodafone counsel had enough reasons to feel happy: After nearly five years, the UK telecom major had today won the ~11,000crore legal battle with the Income Tax Department over payment of tax made to Hutchison Telecom.
While settling the dispute, the three-judge Supreme Court Bench, headed by Chief Justice S H Kapadia, also raised hope among a host of multinationals facing similar tax demands from the government. At least eight other companies, including AT&T, SAB Miller, GE, Cadbury, Sanofi and Vedanta, are involved in similar cases.
The tax department is keeping its cards close to its chest. While Central Board of Direct Taxes Chairman MC Joshi told Business Standard the government would examine the judgment before deciding a future course of action, a finance ministry official said the only option available with the government at this point was seeking review of the judgment.
Turn to Page 16 >UK telecom major wins ~11,000-cr tax battle; govt may amend law prospectively SC JUDGMENT
KEY TAKEAWAYS
|Bombay High Court judgment asking Vodafone to pay ~11,000-crore income tax set aside |Tax authorities do not have jurisdiction on an overseas transaction between companies incorporated outside India |I-T department asked to return ~2,500 crore deposited by Vodafone within two months, along with 4% interest from the date of withdrawal of the money by the department |Supreme Court registry asked to return the bank guarantee of ~8,500 crore given by Vodafone within four weeks
VODAFONE CASE IMPACT
Vodafone judgmentwill have a directbearing on other M&A deals thathave been under the I-T departmentscanner
Various judgments on several M&A deals pending in courts across India SC AXES THE TAXES
THE CASE TIMELINE
2007
FEB Vodafone buys 67% stake in Hutchison India for $11.5 billion
SEPTEMBER Income Tax dept issues showcause notice to Vodafone
2010
8SEPTEMBER Bombay HC delivers verdict in favour of I-T department
2012
20 JANUARY In two separate but concurring judgments by a threejudge bench headed by Chief Justice S H Kapadia, the SC says no tax liability for Vodafone No capital gains, as both buyer and seller are foreign entities
>$150-million Idea Cellular-AT&T deal: Bombay HC
>$500-million GE-Genpact deal: Delhi HC
>$981-million Mitsui-Vedanta deal in Sesa Goa: Goa HC
>SABMiller-Fosters 2006 deal: Bombay HC
>$770-million Sanofi Aventis-Shantha deal: Bombay HC
“We are a committed long-term investor. We have made it clearwe have faith in the Indian judicial system”
VITTORIO COLAO
Vodafone Group CEO
“Policycertaintyis crucial for taxpayers (foreign investors, too) to make rational economic choices
SH KAPADIA
Chief Justice of India
COMPANIES 2 >>Vodafone an easy target: Sarin
>Big blowto taxdepartment
>Good news forinvestment
>Vodafone IPO on a speed dial
ECONOMY 5 >>CJI scores hat-trickin a day
>This is a first: Harish Salve
GRAPHIC: SAMIR KUMAR, ILLUSTRATION: AJAY MOHANTY
________________________________________
Click here to read more...>
SC connects ...
Some experts said the legal precedent may be short-lived. The Direct Taxes Code (DTC), due to be implemented in 2013, has provisions designed to make transactions similar to Vodafone’s liable to be taxed. Sandeep Ladda, executive director, PwC India, said, even as the judgment settled a prolonged litigation, DTC contained aproposal to tax similar transactions. “So, this ruling may have limited relevance after implementation of DTC,” he added.
For the moment, however, all is well. The Supreme Court said the government could not seek capital gains tax from Vodafone’s purchase of Hutchison’s wireless assets in 2007, because the transaction took place between foreign companies. The court also directed the government to return the ~2,500-crore deposit that Vodafone made on the contested tax bill, plus four per cent interest.
The decision ends the uncertainty whether investors based outside the country could use offshore holding companies to avoid paying Indian taxes. Vodafone, seeking to expand in one of its fastestgrowing mobile-phone markets, had said the case was one of the key issues that had to be resolved in the region before the company could consider publicly listing its local unit.
Vodafone and Hutchison conducted their transaction offshore, with Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, acquiring CGP Ltd, a Cayman Islands holding company controlled by Hong Kong-based Hutchison, and maintained that since the share transfer was carried outside India, authorities here had no jurisdiction to tax its deals.
However, the tax department in September 2007 sought capital gains tax, saying Vodafone should have withheld that amount from its payment to Hutchison. But the apex court today ruled that “such imposition of tax amounts to capital punishment on capital investments”. Vodafone Group CEO Vittorio Colao said: “We are a committed longterm investor in India and we have made it clear all along that we have faith in the Indian judicial system.” He said the company would continue to grow its Indian business, including making significant investments. Vodafone stock rose 1.60 per cent till the time of going to the press on the London Stock Exchange.
The Bombay High Court had ruled in December 2008 against Vodafone’s challenge of the tax bill. The carrier’s appeal to the Supreme Court was dismissed in January 2009. At that time, the Supreme Court had allowed Vodafone to present its challenge over the jurisdiction of the transaction to the tax department.
Experts said the judgment would give amajor boost to foreign investors looking at buying out stakes in Indian companies. Hemant Joshi, partner, Deloitte Haskins & Sells, said the telecom sector had been plagued by various uncertainties. With this decision, a strong signal goes out to investors regarding the predictability and certainty of tax laws in the country.
Nishith Desai, the head of Nishith Desai and Associates, an international law firm, said the freedom to go ahead with such transactions had now been established. “It makes a lot of difference. We spend around 25-30 per cent of our dealmaking time in negotiating tax indemnities. Now, that will come down,” he said.
FROM PAGE 1
Big blow to tax dept, but FinMin may amend law to tax such deals in future
VRISHTI BENIWAL
New Delhi, 20 January
The government may have to take a hit of ~11,000 crore in tax revenue, with the Supreme Court’s ruling in favour of Vodafone in a longpending tax dispute. The revenue loss may go up if the verdict has a bearing on similar deals pending before various courts. But the government could introduce amendments to tax laws, negating impact of this decision on future deals.
Prospective investors may not benefit from the Vodafone case, as provisions under the proposed Direct Taxes Code (DTC) make income from such cross-border deals liable to tax in India. As the DTC rollout is likely to be delayed, experts say the finance ministry may make some provisions in the Income-Tax Act itself in the upcoming Budget, to bring such income to taxation in all future transactions.
“While the ruling sets back the tax authorities in their quest for getting a bigger share of revenue in India, the victory may be short-lived, as they have other aces up their sleeves. The General AntiAvoidance Rules and amendments to the tax law can be expected to be brought in the Budget 2012 itself,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.
PwC India executive director Sandeep Ladda said since DTC contained a proposal to tax similar transactions, this ruling might have limited relevance after its implementation.
Some experts said though tax revenue from other similar cases pending before courts might not be huge, a retrospective amendment to the law to tax past transactions could not be ruled out.
“There are several grey areas which will come into play. One cannot rule out an amendment with retrospective effect,” said Hitesh Sharma, tax partner, Ernst & Young.
Tax on cross-border deals is levied in the range of 10 to 20 per cent. Idea Cellular-AT&T deal of $150 million, GEGenpact ($500 million), Mitsui-Vedanta ($981 million), SABmiller-Fosters and Sanofiaventis-Shantha Biotech ($770 million) are some other disputed cases.
The decision was a setback to the finance ministry, grappling with an expected shortfall in revenue collections. Immediately after the verdict, finance minister Pranab Mukherjee met law minister Salman Khurshid and senior officials of the ministry. A core group, comprising senior officials from the tax department, has been formed to examine the judgment.
“We obviously need revenue for the government’s important programmes and the other thing is the certainty in law — we have to examine both areas,” Khurshid told reporters after the meeting.
While Central Board of Direct Taxes chairman M C Joshi told Business Standard
that the government would examine the judgment before deciding a future course of action, another finance ministry official said the only option available was to seek a review of the judgment.
Pranay Bhatia, associate partner, Economic Laws Practice, however, said the process of seeking a review could take long and even if the government chose to take that recourse, the possibility was that even a larger bench might not take a different view.
After the Bombay High Court passed an order in 2010, asking Vodafone to pay ~11,000 crore to the Income Tax department, the tax authorities got confident that they had acted lawfully in the matter. Besides, Vodafone’s decision in July 2011 to withdraw its petition before a tax authority — contesting its liability to pay withholding tax of about ~3,500 crore on the purchase of stake in Vodafone Essar from its joint venture partner, Essar Group —made the government confident of a victory in the main case, too.
While Vodafone had given a bank guarantee of ~8,500 crore, it had already paid ~2,500 crore to the tax department, which will now be returned within two months with four per cent interest.
Prospective investors maynotbenefitfrom the Vodafone case, as provisions under the proposed DTCmake income from such cross-border deals liable to taxin India. PHOTO: PTI
Good news for investment
KATYAB NAIDU
Mumbai, 20 January
For those tax lawyers and accountants who have been struggling to convince foreign companies to invest in India, the Vodafone judgment might be a blessing from the Supreme Court.
Rajiv Luthra, founder and managing partner of Luthra & Luthra, believes the judgment will lend clarity to the matter that has hitherto been blurred by uncertainty on the working of the system.
With many such test cases from which the Income Tax Department has been trying to claim tax, foreign investors have been confused on ways to work around the country’s tax code. Eighty per cent of foreign companies in India are facing huge tax litigation, and this move could be a game changer. “Tax efficiency created through such structures, which now have the ultimate legal blessing, will surely provide a fillip to foreign direct investment into India,” says Sanjay Sakhuja, CEO, Ambit Corporate Finance.
Nishith Desai, the head of international law firm Nishith Desai and Associates, says the court verdict has now helped establish the freedom to go ahead with such transactions.
Foreign investors, experts say, demand certainty in law. There has been a lot of ire against the tax claim also because the claim was sought retrospectively. “Foreign companies are also perturbed it was from the purchaser — and not the seller — that tax was demanded,” notes N C Hegde, partner (direct taxes), Deloitte.
Corporate tax lawyer H P Ranina believes the verdict could work to the advantage of India, since many countries, especially China, have tax transactions done by foreign entities involving domestic assets.
The cheer, however, could come to an end, if the proposed amendment in the Direct Taxes Code goes through. Ketan Dalal, joint leader of tax practice at PricewaterhouseCoopers, says the court decision puts to rest the issue of taxability of offshore transactions of offshore companies. “Therefore, it should apply to past and future transactions.” Accounting firms and legal experts alike hope any such amendment should be prospective and not retrospective in nature.
Vodafone Plc will now go ahead with the initial public offer (IPO) of its Indian business. “Though the IPO of the Indian entity and the tax burden of the parent company are a different matter, the tax claim would have been an overhang, if it were going for an IPO,” said Alok Shende, principal analyst and cofounder of Ascentius Consulting. While there has been talk about Vodafone appointing investment bankers for an IPO, the company has refused to comment on it. “It (an IPO) is conditional to a number of factors,” said Simon Gordon, a spokesperson of Vodafone Plc. Vodafone IPO on aspeed dial
Sebi gets cracking on listing day price manipulations
BS REPORTER
Mumbai, 20 January
The capital markets regulator, Securities and Exchange Board of India (Sebi), today announced several measures aimed at checking manipulators and reducing wide fluctuations in the share prices of companies making their stock market debut.
At present, there is no limit on share price movements on the day of listing of shares following a public offer. This was allowed to enable price discovery but also leads to huge fluctuations on either side. From day two onwards, the circuit filters which cap stock movements to five per cent, 10 per cent or 20 per cent, depending on the size, come into play.
Sebi now plans to introduce this circuit filter on listing day itself. The new rules, to take effect four weeks from now, will include extending the ‘pre-market call auction’ window on listing day and delivery-based trading for the first 10 days.
“In light of the high volatility and price movement observed on the first day of trading, it has been decided to put in place a framework of trade controls for Initial Public Offer (IPO) and re-listed scrips,” said the regulator in a circular.
Further, for issues of ~250 crore or less, only deliverybased trades will be allowed for the first 10 days after listing. The pre-open call auction window, which currently is used for Nifty and Sensex stocks, will be used for arriving at an equilibrium price on the first day of trade of an IPO and relisting stocks. However, unlike index stocks, where the window is for 15 minutes, IPO stocks will have a one-hour window between 9 and 10 am. The first 45 minutes will be for order entry, modification and cancellation, the next 10 minutes for order matching and trade confirmation, and the remaining five minutes shall be the buffer period to facilitate transition from preopen session to the normal trading session.
In case the equilibrium price is not discovered for relisted stocks, all orders shall be cancelled and the scrip shall continue to trade in the call auction mechanism until the price is determined. For IPO scrips with issue size of less than ~250 crore and re-listed scrips, a 100 per cent margin shall be required for the order to be eligible in the pre-open session.
Under normal trading, stocks with issue size of less than ~250 crore will trade in a price band of five per cent of the equilibrium price. For issues greater than ~250 crore, the price band will be 20 per cent of the equilibrium price. In case the equilibrium price is not discovered in the call auction, similar price bands linked to the issue price will be applicable.
Market experts said the move would definitely help reduce volatility. Arun Kejriwal, director at Kejriwal Research and Investment Services, said, “These were much-need steps. Introduction of trade-to-trade on issue size of below ~250 crore will help in reducing manipulation considerably, if not totally,” “The immediate impact will be fewer issues. All operatordriven IPOs will be out,” said Pavan K Vijay, chairman, Corporate Professionals. “The process of trade to trade will hurt the market. No jobber will come. That will affect liquidity in the stock. Brokers who participate in IPO funding will also take a hit .”
Regulator introduces circuit filters and pre-open call auction for IPO stocks and relisted scrips on Day One
Undernormal trading, stocks with issue size of less than ~250 crore will trade in a price band of five per cent of the equilibrium price
Saturday, January 7, 2012
General lein of the borrowers goods even though amount paid but he should as guarantor
Neither a borrower nor a guarantor beS. Murlidharan Share · print
· T+ The AP High Court has ruled that a bank is not obliged to
return pledged goods even on the borrower repaying a loan if the
former had other claims against the borrower.
The court was disposing of a writ petition filed by V. Srinadha Reddy,
who had pledged some gold ornaments to obtain a loan and,
additionally, had stood guarantee to another borrower availing himself
of a loan from the same bank.
The borrower for whom the petitioner had stood guarantee for repayment
failed to repay the loan.
The bank after invoking the guarantee refused to part with the jewels
pledged earlier on the ground they are required to be retained as a
‘lien', even though the petitioner himself had repaid his jewel loan.
The court was interpreting Section 171 of the Indian Contract Act that
gives banks among other institutions, a general lien over goods
belonging to their borrowers lying in their possession, till the
latter paid off other dues unless there is an express agreement to the
contrary between the two.
General lien
The relevant section under the heading ‘General lien of bankers,
factors, wharfingers, attorneys and policy brokers', reads as follows:
“Bankers, factors, wharfingers, attorneys of a High Court and
policy-brokers may, in the absence of a contract to the contrary,
retain as a security for a general balance of account, any goods
bailed to them; but no other persons have a right to retain, as a
security for such balance, goods bailed to them, unless there is an
express contract to that effect.”
The court held that the broad sweep of such general lien against a
borrower extends to goods lying in banks' possession against amounts
owed in respect of guarantees extended against third-party loans that
had fallen due.
Mired in controversy
Third-party loan is mired in controversy, with the Debt Recovery
Tribunal adjudicating on the dispute still seized of the matter.
The bank contended that till such time the dispute is finally
resolved, the gold ornaments will not be returned.
(The author is a Delhi-based chartered accountant.)
(This article was published in the Business Line print edition dated
December 20, 2011--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
I-708,Mantri Tranquil,Subramanyapura Post,
Bangalore-560061
Karnataka,India.
+91 80 42011024
· T+ The AP High Court has ruled that a bank is not obliged to
return pledged goods even on the borrower repaying a loan if the
former had other claims against the borrower.
The court was disposing of a writ petition filed by V. Srinadha Reddy,
who had pledged some gold ornaments to obtain a loan and,
additionally, had stood guarantee to another borrower availing himself
of a loan from the same bank.
The borrower for whom the petitioner had stood guarantee for repayment
failed to repay the loan.
The bank after invoking the guarantee refused to part with the jewels
pledged earlier on the ground they are required to be retained as a
‘lien', even though the petitioner himself had repaid his jewel loan.
The court was interpreting Section 171 of the Indian Contract Act that
gives banks among other institutions, a general lien over goods
belonging to their borrowers lying in their possession, till the
latter paid off other dues unless there is an express agreement to the
contrary between the two.
General lien
The relevant section under the heading ‘General lien of bankers,
factors, wharfingers, attorneys and policy brokers', reads as follows:
“Bankers, factors, wharfingers, attorneys of a High Court and
policy-brokers may, in the absence of a contract to the contrary,
retain as a security for a general balance of account, any goods
bailed to them; but no other persons have a right to retain, as a
security for such balance, goods bailed to them, unless there is an
express contract to that effect.”
The court held that the broad sweep of such general lien against a
borrower extends to goods lying in banks' possession against amounts
owed in respect of guarantees extended against third-party loans that
had fallen due.
Mired in controversy
Third-party loan is mired in controversy, with the Debt Recovery
Tribunal adjudicating on the dispute still seized of the matter.
The bank contended that till such time the dispute is finally
resolved, the gold ornaments will not be returned.
(The author is a Delhi-based chartered accountant.)
(This article was published in the Business Line print edition dated
December 20, 2011--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
I-708,Mantri Tranquil,Subramanyapura Post,
Bangalore-560061
Karnataka,India.
+91 80 42011024
combining income from exempt sources
Combining income from exempt sources
V. K. SUBRAMANI
SHARE · PRINT · T+
A taxpayer having income from exempt source, and also from chargeable source, resorts to combine both of them, either consciously or otherwise. Expenses which are attributable to an exempt source minimise the income which is otherwise taxable. This has been the scenario for long and lawmakers brought in a specific provision to remedy the situation — section 14A. The fallout of this amendment, in addition to addressing the intended purpose, bestows some advantages to the taxpayers as well. Where the taxpayer has income from exempted source in addition to sources of income chargeable to tax, he is expected to exclude the expenses incurred in relation to exempted source.
I-T RULES
However, where the tax officer isn't satisfied with the correctness of the claim of the taxpayer with regard to expenditures allocated to exempt incomes, he is entitled to invoke rule 8D of the Income-Tax Rules, 1962. Where the tax officer is satisfied with the correctness of claim towards chargeable income, or exclusion of expenses related to exempt income, he needn't take recourse to rule 8D. Rule 8D has three limbs. The first one seeks identification of any expenses directly attributable to earning exempt incomes. The second one is intended to allocate only interest expenditure with regard to exempt income, and the third one is ad hoc 0.5 per cent of the average value of investments meant towards indirect expenses. The aggregate of all the three is liable for disallowance under section 14A.
LEGAL DECISIONS
The apex court in CIT v. Walfort Share & Stock Brokers (P) Ltd 326 ITR 1 (SC) has held that for attracting section 14A, that is, disallowance of expenses attributable to exempt income while computing chargeable income, there has to be a proximate cause for disallowance. Earlier, in CIT v. Winsome Textile Industries Ltd (319 ITR 204), an extended interpretation of section 14A was made by the court, which held that only where the taxpayer makes a claim for some tax exemption, section 14A could apply. Where there is no exempt income, section 14A couldn't be invoked.
Recently, in Siva Industries & Holdings Ltd v. Asst. CIT (ITA No.2148/Mds/2010), it was held that for applying section 14A there must be (i) income taxable under the Act for the relevant assessment year; and (ii) there should be income which doesn't form part of total income (i.e.) exempt income. If either of them is absent, section 14A couldn't be applied.
In Sankar Chemical Works v. Dy. CIT 47 SOT 121, the taxpayer deployed funds in various investments fetching tax-free incomes. It paid interest on capital contribution made by the partners. It was held that section 40(b) regulates payment of interest to the partners and is subservient to section 36(1)(iii). To the extent the capital of the firm or partners is deployed towards earning exempted income, provisions of section 14A would apply.
Also, such disallowance wouldn't reduce the taxable interest income of the partners, since the disallowance made under section 14A is different from the disallowance eligible for exclusion envisaged in the proviso to section 28(v). Also, it is possible that such disallowance made before computation of book profit of the firm may partly be exposed to tax burden, in case the working partner salary absorbs the other part of disallowance made under section 14A in an indirect manner.
In Hoshang D. Nanavati v. Asst. CIT (ITA No.3567/Mum/07), it was held that depreciation is neither a loss nor an expenditure, nor a trading liability, and hence provisions of section 14A couldn't be applied for disallowing a portion of depreciation, as attributable to earning exempt income. The tribunal applied Nectar Beverages P Ltd v. Dy. CIT (314 ITR 314) to hold that section 14A contemplates only disallowance of expenditure incurred by the taxpayer, and as depreciation is an allowance, it wouldn't fall within its ambit. It was discussed if the claim of deduction under Chapter VI-A, could be disallowed by applying section 14A. The taxpayer paid health insurance premium which was sought to be disallowed by applying section 14A. It was held that such expenditure wasn't incurred for earning any income, and after the income had accrued in favour of the taxpayer, such payment was made, which was inherently a personal expenditure. Thus, it was held that the claim cannot be disallowed.
Expenses that are attributable to an exempt source minimise the income which is taxable.
(This article was published in the Business Line print edition dated December 19, 2011)
V. K. SUBRAMANI
SHARE · PRINT · T+
A taxpayer having income from exempt source, and also from chargeable source, resorts to combine both of them, either consciously or otherwise. Expenses which are attributable to an exempt source minimise the income which is otherwise taxable. This has been the scenario for long and lawmakers brought in a specific provision to remedy the situation — section 14A. The fallout of this amendment, in addition to addressing the intended purpose, bestows some advantages to the taxpayers as well. Where the taxpayer has income from exempted source in addition to sources of income chargeable to tax, he is expected to exclude the expenses incurred in relation to exempted source.
I-T RULES
However, where the tax officer isn't satisfied with the correctness of the claim of the taxpayer with regard to expenditures allocated to exempt incomes, he is entitled to invoke rule 8D of the Income-Tax Rules, 1962. Where the tax officer is satisfied with the correctness of claim towards chargeable income, or exclusion of expenses related to exempt income, he needn't take recourse to rule 8D. Rule 8D has three limbs. The first one seeks identification of any expenses directly attributable to earning exempt incomes. The second one is intended to allocate only interest expenditure with regard to exempt income, and the third one is ad hoc 0.5 per cent of the average value of investments meant towards indirect expenses. The aggregate of all the three is liable for disallowance under section 14A.
LEGAL DECISIONS
The apex court in CIT v. Walfort Share & Stock Brokers (P) Ltd 326 ITR 1 (SC) has held that for attracting section 14A, that is, disallowance of expenses attributable to exempt income while computing chargeable income, there has to be a proximate cause for disallowance. Earlier, in CIT v. Winsome Textile Industries Ltd (319 ITR 204), an extended interpretation of section 14A was made by the court, which held that only where the taxpayer makes a claim for some tax exemption, section 14A could apply. Where there is no exempt income, section 14A couldn't be invoked.
Recently, in Siva Industries & Holdings Ltd v. Asst. CIT (ITA No.2148/Mds/2010), it was held that for applying section 14A there must be (i) income taxable under the Act for the relevant assessment year; and (ii) there should be income which doesn't form part of total income (i.e.) exempt income. If either of them is absent, section 14A couldn't be applied.
In Sankar Chemical Works v. Dy. CIT 47 SOT 121, the taxpayer deployed funds in various investments fetching tax-free incomes. It paid interest on capital contribution made by the partners. It was held that section 40(b) regulates payment of interest to the partners and is subservient to section 36(1)(iii). To the extent the capital of the firm or partners is deployed towards earning exempted income, provisions of section 14A would apply.
Also, such disallowance wouldn't reduce the taxable interest income of the partners, since the disallowance made under section 14A is different from the disallowance eligible for exclusion envisaged in the proviso to section 28(v). Also, it is possible that such disallowance made before computation of book profit of the firm may partly be exposed to tax burden, in case the working partner salary absorbs the other part of disallowance made under section 14A in an indirect manner.
In Hoshang D. Nanavati v. Asst. CIT (ITA No.3567/Mum/07), it was held that depreciation is neither a loss nor an expenditure, nor a trading liability, and hence provisions of section 14A couldn't be applied for disallowing a portion of depreciation, as attributable to earning exempt income. The tribunal applied Nectar Beverages P Ltd v. Dy. CIT (314 ITR 314) to hold that section 14A contemplates only disallowance of expenditure incurred by the taxpayer, and as depreciation is an allowance, it wouldn't fall within its ambit. It was discussed if the claim of deduction under Chapter VI-A, could be disallowed by applying section 14A. The taxpayer paid health insurance premium which was sought to be disallowed by applying section 14A. It was held that such expenditure wasn't incurred for earning any income, and after the income had accrued in favour of the taxpayer, such payment was made, which was inherently a personal expenditure. Thus, it was held that the claim cannot be disallowed.
Expenses that are attributable to an exempt source minimise the income which is taxable.
(This article was published in the Business Line print edition dated December 19, 2011)
Tax evasion via shell companies
Tax evasion via shell companies
MOHAN R. LAVI
SHARE · PRINT · T+
MOHAN R. LAVI
Enron showed the world the trick of hiding accounting losses in special purpose vehicles (SPV). Subsequent accounting standards have ensured that interests in SPVs are at least disclosed if not morphed into the accounts of the company that controls the SPV. It was not long before the ingenious conjured up ways of using SPVs as a tax planning vehicle. SPVs had an unlikely ally in double tax avoidance agreements (DTAA) which did their best to ensure that income from cross-border transactions are taxed only in one country. Difficulties arose in deciding which.
The Authority for Advance Rulings (AAR) recently ruled on the tax impact on what they perceived to be a shell company created with the lone purpose of enabling an acquisition.
Muriex Alliance (MA) and Groupe Industrial Marcel Dassault (GIMD) were two French companies that joined hands to create a subsidiary named “ShanH”.
MA got into a Share Purchase Agreement (SPA) to acquire the shares of Shantha Biotechnics Ltd, based out of India with ShanH being the permitted assignee. Share transactions were continued with GIMD acquiring 20 per cent of the shares from MA in ShanH. Soon, they found a partner to offload their stake in ShanH to a French multinational Sanofi.
After the kerfuffle created by the Vodafone case, GIMD decided to play it safe and approached the AAR for a ruling on whether the sale of shares would be taxable in India or France.
Normal logic coupled with the provisions of the DTAA would give an impression that the transaction would be taxable in France since all the companies involved were in France. They did not consider the fact that the underlying asset is an Indian company.
AAR Ruling
The AAR summed up the issue at hand. A company in France, invests in acquiring shares in an Indian company. Ultimately it acquires a controlling interest.
For this purpose, it creates a fully-owned subsidiary. The shares are taken in the name of the subsidiary. Subsequently, another company also comes in and acquires a part of the shares in the subsidiary. The only asset of the subsidiary is the shares in the Indian company. It has no other business.
The two shareholders of the subsidiary then decide to sell the shares of the subsidiary to another company.
By that process, what really passes is the underlying assets and the control of the Indian company. This transaction generates a profit.
By repeating the process, the control over the Indian assets and business can pass from hand to hand without incurring any liability to tax in India, if the transaction is accepted at face value. It ruled that a DTAA has to be construed on its terms.
Transfer of shares
A literal construction of paragraph 5 of the DTAA would lead to the position that the transfer of shares of ShanH, in this case, can be taxed only in France.
The contention of the Revenue was that the situs of the underlying assets cannot be ignored and the underlying assets and controlling interest are that of a company incorporated in India and a resident of India. The AAR found that what is involved in this transaction, is an alienation of the assets and controlling interest of an Indian company.
It will logically follow that the transactions gone through are part of a scheme for avoidance of tax and the scheme has to be ignored, that the gain from the transaction is taxable in India. A literal interpretation of the DTAA would show that it is not the alienation of the shares of an Indian company but a purposive construction of the said paragraph of the treaty that led the AAR to the conclusion that the capital gains arising out of the transaction is taxable in India.
The essence of the transaction takes within its sweep, various rights including a change in the controlling interest of an Indian company having assets, business and income in India.
The AAR concluded that the capital gains would be taxed in India, though the privileges of the DTAA would not be denied. The decision of the AAR will be a wake-up call to entities that use shell companies as investment vehicles.
The age-old accounting rule of substance over form will come into play and one can no longer quote liberally from the ratio of the decisions of the Supreme Court in McDowell and Co Ltd and Azadi Bachao Andolan which blessed tax planning measures as long as they are within the four corners of the law. Entities interpreted both the tax planning measures and the four corners of the law very liberally.
While it would be appropriate to interpret the former liberally, the latter has to be interpreted extremely rigidly.
MOHAN R. LAVI
SHARE · PRINT · T+
MOHAN R. LAVI
Enron showed the world the trick of hiding accounting losses in special purpose vehicles (SPV). Subsequent accounting standards have ensured that interests in SPVs are at least disclosed if not morphed into the accounts of the company that controls the SPV. It was not long before the ingenious conjured up ways of using SPVs as a tax planning vehicle. SPVs had an unlikely ally in double tax avoidance agreements (DTAA) which did their best to ensure that income from cross-border transactions are taxed only in one country. Difficulties arose in deciding which.
The Authority for Advance Rulings (AAR) recently ruled on the tax impact on what they perceived to be a shell company created with the lone purpose of enabling an acquisition.
Muriex Alliance (MA) and Groupe Industrial Marcel Dassault (GIMD) were two French companies that joined hands to create a subsidiary named “ShanH”.
MA got into a Share Purchase Agreement (SPA) to acquire the shares of Shantha Biotechnics Ltd, based out of India with ShanH being the permitted assignee. Share transactions were continued with GIMD acquiring 20 per cent of the shares from MA in ShanH. Soon, they found a partner to offload their stake in ShanH to a French multinational Sanofi.
After the kerfuffle created by the Vodafone case, GIMD decided to play it safe and approached the AAR for a ruling on whether the sale of shares would be taxable in India or France.
Normal logic coupled with the provisions of the DTAA would give an impression that the transaction would be taxable in France since all the companies involved were in France. They did not consider the fact that the underlying asset is an Indian company.
AAR Ruling
The AAR summed up the issue at hand. A company in France, invests in acquiring shares in an Indian company. Ultimately it acquires a controlling interest.
For this purpose, it creates a fully-owned subsidiary. The shares are taken in the name of the subsidiary. Subsequently, another company also comes in and acquires a part of the shares in the subsidiary. The only asset of the subsidiary is the shares in the Indian company. It has no other business.
The two shareholders of the subsidiary then decide to sell the shares of the subsidiary to another company.
By that process, what really passes is the underlying assets and the control of the Indian company. This transaction generates a profit.
By repeating the process, the control over the Indian assets and business can pass from hand to hand without incurring any liability to tax in India, if the transaction is accepted at face value. It ruled that a DTAA has to be construed on its terms.
Transfer of shares
A literal construction of paragraph 5 of the DTAA would lead to the position that the transfer of shares of ShanH, in this case, can be taxed only in France.
The contention of the Revenue was that the situs of the underlying assets cannot be ignored and the underlying assets and controlling interest are that of a company incorporated in India and a resident of India. The AAR found that what is involved in this transaction, is an alienation of the assets and controlling interest of an Indian company.
It will logically follow that the transactions gone through are part of a scheme for avoidance of tax and the scheme has to be ignored, that the gain from the transaction is taxable in India. A literal interpretation of the DTAA would show that it is not the alienation of the shares of an Indian company but a purposive construction of the said paragraph of the treaty that led the AAR to the conclusion that the capital gains arising out of the transaction is taxable in India.
The essence of the transaction takes within its sweep, various rights including a change in the controlling interest of an Indian company having assets, business and income in India.
The AAR concluded that the capital gains would be taxed in India, though the privileges of the DTAA would not be denied. The decision of the AAR will be a wake-up call to entities that use shell companies as investment vehicles.
The age-old accounting rule of substance over form will come into play and one can no longer quote liberally from the ratio of the decisions of the Supreme Court in McDowell and Co Ltd and Azadi Bachao Andolan which blessed tax planning measures as long as they are within the four corners of the law. Entities interpreted both the tax planning measures and the four corners of the law very liberally.
While it would be appropriate to interpret the former liberally, the latter has to be interpreted extremely rigidly.
Tuesday, January 3, 2012
business standard updaates
Online refund of tax on 18 services
BS REPORTER
New Delhi, 3 January
As exports face adverse conditions amid a slowdown in growth, the government today came out with a mechanism to provide online refunds of tax paid on 18 services used beyond factory gate for outbound shipment of goods. Upbeat exporters exuded confidence that they can tackle the difficult situation ahead in the current calendar year, if the government continues to be proactive in supporting their cause.
Earlier, the Central Board of Excise and Customs (CBEC) issued a notification to provide average rates of service tax refund, ranging from 0.03 per cent to 0.20 per cent of the freight-on-board value of exports. This average rate of refund is in respect of 18 services used beyond the factory gate like those provided by an insurer, transporters from inland container depots to ports and by ports among others.
The finance ministry said service tax refund would be credited to the accounts of exporters directly.
“As in the case of payment of duty drawback, the service tax refund will be enabled by the Indian customs electronic data interchange (EDI) system resulting in the amounts getting directly credited into the exporters’ bank accounts within a few days of confirmation of export without additional export documentation,” the statement added.
Customs officers have separately been vested with powers of central excise and service tax for this purpose. A proposal to this effect was part of Finance Minister Pranab Mukherjee’s Budget speech for this fiscal.
The ministry had said the scheme limits public interface as well as reduces transaction costs in obtaining refunds.
The Federation of Indian Export Organisations said refunds through EDI would save both transaction time and costs, as there will be no requirement of application. “There will be reduced documentations once the facility to track status online will be available,” its president Ramu S Deora noted.
He said the government’s continued proactive measures would facilitate exporters to sail through in 2012, when they look set to face numerous challenges.
The idea was first mooted by the committee that was formed under minister of state for commerce and industry Jyotiraditya Scindia in December 2009 with the aim of reducing the transaction cost by 10 per cent of the export value.
Currently, the duty drawback is directly credited to accounts of exporters maintained at customs houses, but exporters have to file claims separately to get service tax refunds. This leads to severe delays in refund and loss of time, as it entails a plethora of complex paperwork.
Facing external adverse conditions, India’s merchandise exports grew just 3.9 per cent in November 2011-12 yearon-year, against a whopping up to 80 per cent rise in the earlier months of this fiscal. Exports reached only 192.7 billion dollars in the first eight months, prompting experts to disbelieve the prospect of meeting a target of $300 billion set for the current financial year.
Promoter-heavy companies allowed placement route
BS Reporter / Mumbai January 04, 2012, 0:50 IST
Promoters holding above 75% can also use exchange window to pare stake.
In a move that will help the government's divestment programme, the Securities & Exchange Board of India (Sebi) on Tuesdasy introduced two new methods— institutional placement programme (IPP) and offer for sale of shares through the stock exchange — to help companies comply with the minimum public shareholding norms
Under the Securities Contracts Regulation Rules (SCRR), all listed companies should have a minimum of 25 per cent of public shareholding.
Using the IPP route, companies can increase public shareholding by as much as 10 per cent either by way of fresh issue of capital or dilution by the promoters through an offer for sale. Under IPP, shares can only be issued to qualified institutional buyers, while 25 per cent of the offer should be reserved for mutual funds and insurance companies. According to the rules, every IPP issuance should have at least 10 allottees and no single investor shall receive allotment for more than 25 per cent of the offer size. Further, companies planning to raise money under IPP will have to file a red herring prospectus with Sebi along with the Registrar of Companies and stock exchanges.
Under the sale of shares through stock exchanges, companies through a separate window offered by the stock exchange will be able to offer at least one per cent of the paid-up capital, subject to a minimum of Rs 25 crore. This facility can be availed by only those promoters who are active and eligible for trading. The promoter or the promoter group of the company will not be permitted to bid for the shares.
These new routes will help the government pare its stake in PSUs. Promoters of private companies like Wipro, DLF and Mundra Port & SEZ will also be able to reduce their stake to 75 per cent through these routes
BS REPORTER
New Delhi, 3 January
As exports face adverse conditions amid a slowdown in growth, the government today came out with a mechanism to provide online refunds of tax paid on 18 services used beyond factory gate for outbound shipment of goods. Upbeat exporters exuded confidence that they can tackle the difficult situation ahead in the current calendar year, if the government continues to be proactive in supporting their cause.
Earlier, the Central Board of Excise and Customs (CBEC) issued a notification to provide average rates of service tax refund, ranging from 0.03 per cent to 0.20 per cent of the freight-on-board value of exports. This average rate of refund is in respect of 18 services used beyond the factory gate like those provided by an insurer, transporters from inland container depots to ports and by ports among others.
The finance ministry said service tax refund would be credited to the accounts of exporters directly.
“As in the case of payment of duty drawback, the service tax refund will be enabled by the Indian customs electronic data interchange (EDI) system resulting in the amounts getting directly credited into the exporters’ bank accounts within a few days of confirmation of export without additional export documentation,” the statement added.
Customs officers have separately been vested with powers of central excise and service tax for this purpose. A proposal to this effect was part of Finance Minister Pranab Mukherjee’s Budget speech for this fiscal.
The ministry had said the scheme limits public interface as well as reduces transaction costs in obtaining refunds.
The Federation of Indian Export Organisations said refunds through EDI would save both transaction time and costs, as there will be no requirement of application. “There will be reduced documentations once the facility to track status online will be available,” its president Ramu S Deora noted.
He said the government’s continued proactive measures would facilitate exporters to sail through in 2012, when they look set to face numerous challenges.
The idea was first mooted by the committee that was formed under minister of state for commerce and industry Jyotiraditya Scindia in December 2009 with the aim of reducing the transaction cost by 10 per cent of the export value.
Currently, the duty drawback is directly credited to accounts of exporters maintained at customs houses, but exporters have to file claims separately to get service tax refunds. This leads to severe delays in refund and loss of time, as it entails a plethora of complex paperwork.
Facing external adverse conditions, India’s merchandise exports grew just 3.9 per cent in November 2011-12 yearon-year, against a whopping up to 80 per cent rise in the earlier months of this fiscal. Exports reached only 192.7 billion dollars in the first eight months, prompting experts to disbelieve the prospect of meeting a target of $300 billion set for the current financial year.
Promoter-heavy companies allowed placement route
BS Reporter / Mumbai January 04, 2012, 0:50 IST
Promoters holding above 75% can also use exchange window to pare stake.
In a move that will help the government's divestment programme, the Securities & Exchange Board of India (Sebi) on Tuesdasy introduced two new methods— institutional placement programme (IPP) and offer for sale of shares through the stock exchange — to help companies comply with the minimum public shareholding norms
Under the Securities Contracts Regulation Rules (SCRR), all listed companies should have a minimum of 25 per cent of public shareholding.
Using the IPP route, companies can increase public shareholding by as much as 10 per cent either by way of fresh issue of capital or dilution by the promoters through an offer for sale. Under IPP, shares can only be issued to qualified institutional buyers, while 25 per cent of the offer should be reserved for mutual funds and insurance companies. According to the rules, every IPP issuance should have at least 10 allottees and no single investor shall receive allotment for more than 25 per cent of the offer size. Further, companies planning to raise money under IPP will have to file a red herring prospectus with Sebi along with the Registrar of Companies and stock exchanges.
Under the sale of shares through stock exchanges, companies through a separate window offered by the stock exchange will be able to offer at least one per cent of the paid-up capital, subject to a minimum of Rs 25 crore. This facility can be availed by only those promoters who are active and eligible for trading. The promoter or the promoter group of the company will not be permitted to bid for the shares.
These new routes will help the government pare its stake in PSUs. Promoters of private companies like Wipro, DLF and Mundra Port & SEZ will also be able to reduce their stake to 75 per cent through these routes
Monday, January 2, 2012
business standard and business line updates
PROFESSIONALTAX
Cap may go up by three times
.VRISHTI BENIWAL
New Delhi, 2 January
After more than two decades, the government is planning an over three-fold increase in the ceiling on professional tax levied by states. A Cabinet note is being prepared to amend the Constitution so as to provide for increase in the cap from ~2,500 per annum at present to ~8,500 a year. The issue will be discussed next week at a meeting of the Empowered Committee of State Finance Ministers.
Article 276 of the Constitution empowers the states to levy tax on professions, trades, callings and employments. But, state legislatures are free to decide the tax amount, subject to a ceiling of ~2,500, and the professions they want to tax under their respective laws on professional tax. This will not be subsumed in the proposed goods & services tax (GST).
The cap was last increased in 1988 — from ~250 a year originally given under the Constitution. Some states have now proposed to the finance ministry to increase the limit further to ~8,500. The ministry has invited comments from various stakeholders. Once the Empowered Committee discusses the matter at its meeting in Bhopal on January 9, it will seek Cabinet nod to table a Constitutional Amendment Bill in Parliament.
Finance ministry officials say the idea is to enable state governments and local bodies increase their revenues by directly levying tax on professionals. Maharashtra, with an annual revenue of about ~250 crore from tax on roughly 60 professions, is the biggest proponent of a higher ceiling, according to one official.
Apart from Maharashtra, states such as Andhra Pradesh, Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu and West Bengal also have their Acts governing tax on professionals. The slabs and professional tax rates vary from state to state. For instance, Maharashtra levies a monthly professional tax of ~200 on income above ~10,000, while West Bengal collects the same amount of tax when the payer’s monthly income breaches ~40,000.
Professional tax is a kind of direct tax collected by local municipal bodies in addition to the income tax levied by the Centre. It is collected from businessmen, working individuals, merchants and people involved in various occupations.
SEBI board meet: PSU bank's fund-raising tops agenda business line
Mumbai, Jan. 2:
The board of stock market regulator SEBI is set to meet on Tuesday, confirmed sources.
The most prominent item on the agenda is the process by which PSUs may be allowed to raise money through the auction route.
Discussion on buyback of PSU shares is also on the agenda.
Another issue on the agenda could be the direct entry of qualified foreign investors (QFI).
“It would be interesting to see how the regulator goes about implementing its steps to curb round tripping of funds through the QFI route,” said a Vice President-IPO distribution of an Indian Financial services firm.
NRIs and OCBs were banned from directly entering Indian capital market after the Ketan Parekh scam broke out.
The government has spelt out the procedure for QFI investments in India.
Investment is restricted to QFIs who belong to countries that are signatories of the International Organisation of Securities Commissions', Financial Action Task Force (FATF) recommendations.
FATF is an inter-governmental policy making body that has published 49 recommendations, focussing on prevention of money laundering and terrorist financing.
raghavendrarao.k@thehindu
Foreign individuals can invest in public issues source business line
Our Bureau
New Delhi. Jan 2:
A foreign Individual, a foreign pension fund or even a foreign trust can invest in initial public offerings (IPOs) or follow-on public offers (FPOs) of Indian companies.
The Government on Monday clarified that such ‘qualified foreign investors' (QFIs) will be allowed to invest in public offers. The clarification followed Sunday's announcement allowing QFIs direct entry into the Indian equity market.
A senior Finance Ministry official said, “QFIs can invest under the retail category in an IPO or FPO.” It means such an investor can make application up to an amount of Rs 2 lakh which is threshold for retail investor. The market regulator prescribes a minimum of 35 per cent of total shares offered under an issue for retail investors.
Meanwhile, Sunday's announcement failed to excite the stock market on the first trading day of 2012. The benchmark BSE Sensex index index witnessed a movement of 185 points before settling at 15,517.92 with a gain of just 63 points over its previous close.
Talking about voting rights for QFIs, the official said that the matter was “under discussion.” He hoped that details about such an issue will be part of the market regulator Securities and Exchange Board of India's (SEBI) notification on QFIs' investment in the equity market. The notification is expected to be out by January 15.
Meanwhile, Mr R Gopalan, Secretary, Department of Economic Affairs, said, “This (allowing QFI to invest directly) is a very significant step. We were looking at how to increase inflows in the market... the good thing is that unlike FII money, which is deemed to be hot money, people will put money in this for a longer period of time.”
He also said the government was looking at ways to dispense with the need for an income tax permanent account number (PAN) for foreign investors investing money in the equity market, as required under the existing ‘KnowYour Customer' (KYC) and regulatory norms.
“We are looking at the situation where they can dispense with PAN, but as of, now they will have to use PANs,” Mr Gopalan said.
Meanwhile, four out of eight applications for depository participant for QFI have been cleared. They are Kotak, HSBC, Citibank and Deutche Bank. QFIs can open demat accounts with these DPs.
Shishir.s@thehindu.co.in
Cap may go up by three times
.VRISHTI BENIWAL
New Delhi, 2 January
After more than two decades, the government is planning an over three-fold increase in the ceiling on professional tax levied by states. A Cabinet note is being prepared to amend the Constitution so as to provide for increase in the cap from ~2,500 per annum at present to ~8,500 a year. The issue will be discussed next week at a meeting of the Empowered Committee of State Finance Ministers.
Article 276 of the Constitution empowers the states to levy tax on professions, trades, callings and employments. But, state legislatures are free to decide the tax amount, subject to a ceiling of ~2,500, and the professions they want to tax under their respective laws on professional tax. This will not be subsumed in the proposed goods & services tax (GST).
The cap was last increased in 1988 — from ~250 a year originally given under the Constitution. Some states have now proposed to the finance ministry to increase the limit further to ~8,500. The ministry has invited comments from various stakeholders. Once the Empowered Committee discusses the matter at its meeting in Bhopal on January 9, it will seek Cabinet nod to table a Constitutional Amendment Bill in Parliament.
Finance ministry officials say the idea is to enable state governments and local bodies increase their revenues by directly levying tax on professionals. Maharashtra, with an annual revenue of about ~250 crore from tax on roughly 60 professions, is the biggest proponent of a higher ceiling, according to one official.
Apart from Maharashtra, states such as Andhra Pradesh, Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu and West Bengal also have their Acts governing tax on professionals. The slabs and professional tax rates vary from state to state. For instance, Maharashtra levies a monthly professional tax of ~200 on income above ~10,000, while West Bengal collects the same amount of tax when the payer’s monthly income breaches ~40,000.
Professional tax is a kind of direct tax collected by local municipal bodies in addition to the income tax levied by the Centre. It is collected from businessmen, working individuals, merchants and people involved in various occupations.
SEBI board meet: PSU bank's fund-raising tops agenda business line
Mumbai, Jan. 2:
The board of stock market regulator SEBI is set to meet on Tuesday, confirmed sources.
The most prominent item on the agenda is the process by which PSUs may be allowed to raise money through the auction route.
Discussion on buyback of PSU shares is also on the agenda.
Another issue on the agenda could be the direct entry of qualified foreign investors (QFI).
“It would be interesting to see how the regulator goes about implementing its steps to curb round tripping of funds through the QFI route,” said a Vice President-IPO distribution of an Indian Financial services firm.
NRIs and OCBs were banned from directly entering Indian capital market after the Ketan Parekh scam broke out.
The government has spelt out the procedure for QFI investments in India.
Investment is restricted to QFIs who belong to countries that are signatories of the International Organisation of Securities Commissions', Financial Action Task Force (FATF) recommendations.
FATF is an inter-governmental policy making body that has published 49 recommendations, focussing on prevention of money laundering and terrorist financing.
raghavendrarao.k@thehindu
Foreign individuals can invest in public issues source business line
Our Bureau
New Delhi. Jan 2:
A foreign Individual, a foreign pension fund or even a foreign trust can invest in initial public offerings (IPOs) or follow-on public offers (FPOs) of Indian companies.
The Government on Monday clarified that such ‘qualified foreign investors' (QFIs) will be allowed to invest in public offers. The clarification followed Sunday's announcement allowing QFIs direct entry into the Indian equity market.
A senior Finance Ministry official said, “QFIs can invest under the retail category in an IPO or FPO.” It means such an investor can make application up to an amount of Rs 2 lakh which is threshold for retail investor. The market regulator prescribes a minimum of 35 per cent of total shares offered under an issue for retail investors.
Meanwhile, Sunday's announcement failed to excite the stock market on the first trading day of 2012. The benchmark BSE Sensex index index witnessed a movement of 185 points before settling at 15,517.92 with a gain of just 63 points over its previous close.
Talking about voting rights for QFIs, the official said that the matter was “under discussion.” He hoped that details about such an issue will be part of the market regulator Securities and Exchange Board of India's (SEBI) notification on QFIs' investment in the equity market. The notification is expected to be out by January 15.
Meanwhile, Mr R Gopalan, Secretary, Department of Economic Affairs, said, “This (allowing QFI to invest directly) is a very significant step. We were looking at how to increase inflows in the market... the good thing is that unlike FII money, which is deemed to be hot money, people will put money in this for a longer period of time.”
He also said the government was looking at ways to dispense with the need for an income tax permanent account number (PAN) for foreign investors investing money in the equity market, as required under the existing ‘KnowYour Customer' (KYC) and regulatory norms.
“We are looking at the situation where they can dispense with PAN, but as of, now they will have to use PANs,” Mr Gopalan said.
Meanwhile, four out of eight applications for depository participant for QFI have been cleared. They are Kotak, HSBC, Citibank and Deutche Bank. QFIs can open demat accounts with these DPs.
Shishir.s@thehindu.co.in
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