Business standard updates

UKdid the same on retro tax changes, FM tells Osborne

BS REPORTERS & AGENCIES New Delhi/Mumbai, 2 April New Delhi today remained firm on its decision to amend the Income Tax Act retrospectively from 1962, even as the United Kingdom categorically conveyed to India that its proposed move would hurt the overall investment climate in the country. “We are concerned about the proposed Budget measure... Not just because of its impact on one company, Vodafone, but because we think it might damage the overall climate for investment in India,” the UK’s chancellor of the exchequer, George Osborne, told reporters after his meeting with finance minister Pranab Mukherjee. Officials said Osborne told Mukherjee UK investors were anxious as India proposed to amend the tax law even, as the Supreme Court had turned down a ~11,000-crore tax notice on Vodafone. Later, the apex court had also rejected a review petition filed by the ministry. Mukherjee, however, said retrospective amendments to tax laws were not unique to India, those in the know told Business Standard . Retrospective amendments were made worldwide and, in fact, a day before he presented the Budget on March 16, the UK had made such changes itself, he said. The UK recently changed rules to end a scheme used by Barclays that resulted in a tax liability of £500 million, Mukherjee is understood to have reminded Osborne. Turn to Page 14 >Pranab refuses to give any guarantee of rollback after UK counterpart warns of adverse impact on investments Govtfirm on taxing FIIs Indications from the finance ministry on subjecting participatory notes to taxation according to the changes brought in through the General Anti Avoidance Rule in the Budget suggest the government is not ready to budge on this count. 4 >...to make CILfall in line The government is likely to issue a presidential directive to CIL on fuel supply pacts on Tuesday. This would force the state-owned miner to sign fuel supply agreements with power companies at 80 per cent commitment level. The move will ramp up fuel availability for power projects of 30,000-Mw capacity. 4 >Finance minister Pranab Mukherjee with his UK counterpart George Osborne prior to a meeting of the India-UK Economic &Financial Dialogue in New Delhi on Monday. PHOTO: PTI

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UK did the same...

The development assumes significance in the backdrop of media reports on Prime Minister Manmohan Singh’s assurance to his British counterpart, Gordon Brown, in February 2010. Responding to Brown’s letters expressing concern over the taxation of Vodafone’s purchase of Hutchison Essar, Singh reportedly assured Brown that retrospective taxation was not the norm in India and Vodafone would have “full protection” of the law.

Osborne’s visit to India came a day after a letter of global industry associations warning Prime Minister Manmohan Singh that the proposed amendments had led companies to reconsider investment decisions was widely quoted in the media.

Mukherjee is understood to have told Osborne India could provide certainty of taxes, but not certainty of no taxes. He said retrospective amendments to the Income Tax Act were not Vodafone-specific, officials said. Mukherjee has been saying that India is neither a no-tax country nor a tax haven. Officially, he told reporters, “We had a very fruitful and effective discussion.” Meanwhile, Vodafones chief executive Vittorio Colao said retrospective taxation could tarnish Indias image as an investment destination in a letter written to Prime Minister Manmohan Singh. However, he also indicated the company had big plans in India, which included an initial public offer. The letter written a few days ago said the $11.2-billion (around ~52,00-crore) investment in Hutchison Essar was being given arbitrary and punitive treatment by the countrys tax laws.

“A retrospective obligation to withhold tax or retrospective designation of Vodafone as Hutchisons agent for tax purposes would be profoundly unjust. Vodafone cannot withhold tax from a sum paid then,” said the letter.

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Exchanges can list, but with stiff riders

BS REPORTER Mumbai, 2 April Market regulator Securities and Exchange Board of India (Sebi) today allowed the listing of shares of stock exchanges on other stock exchanges, subject to several conditions. It also laid down provisions to form an independent governance committee that will have a significant say in the regulatory functions of the exchange such as listing, trading and surveillance. The officials who handle these governance functions will have dual reporting to the managing director and chief executive officer of the exchange and the independent committee, according to the regulator. Independent directors would form the majority of the committee and one of them would head it. The moves came after Sebi considered the controversial Bimal Jalan committee report on market infrastructure institutions (MIIs), such as stock exchanges, clearing corporations and depositories, which among other things had advocated against the listing of such entities and recommended capping of their profits. Nearly 17 months after the report was submitted to Sebi, these two controversial proposals have been effectively dropped, which could see the two stock exchanges, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), start preparations to list. However, since the rules prohibit an exchange from listing on itself, they could explore options of listing on each other. Several marquee institutions, such as Goldman Sachs and Softbank Asian Infrastructure Fund, which have bought shares in the exchanges, will have an opportunity to unlock value. The listing will also help a number of broker shareholders, who hold significant chunks of BSE shares. Sebi has allowed bourses to list after three years from the date of getting its approval. Exchanges will not be allowed to list on themselves and will have to put in place mechanisms for tackling conflicts of interest,” Sebi said in a press release. Exchanges can... The regulator has mandated stock exchanges to transfer 25 per cent of their profits to the Settlement Guarantee Fund of the clearing corporation, where their trades are settled. In case of adepository, 25 per cent of the profits will have to be transferred to their Investor Protection Fund. According to the seven-member committees recommendations, Sebi has prescribed a net worth of ~100 crore for stock exchanges and depositories and ~300 crore for clearing corporations. The regulator, however, will give existing MIIs three years to achieve the net worth requirements. Shareholding structure In a decision, which will have a direct impact on MCX-SX, Sebi has said shareholding caps for investors will also include off balance-sheet items. “The shareholding limits prescribed for each category of investors shall be inclusive of all exposure of a shareholder to the MII that facilitates or permits equity or rights over equity at any future date,” the release said. To have diversified ownership, Sebi has said no single investor can hold five per cent in astock exchange, except public institutions, insurances companies and banks, which could hold up to 15 per cent. Exchanges will need to maintain 51 per cent public shareholding. In case of clearing corporations, a stock exchange will need to hold 51 per cent stake. Those exchanges holding more than the mandated 51 per cent shall be given three years to bring down their stake. Other institutions shareholding will be capped at five per cent and 15 per cent, like in the case of stock exchanges. “A stock exchange holding 51 per cent in a clearing corporation cannot hold more than 15 per cent in any other clearing corporation,” Sebi said. If any shareholder has exposure more than the prescribed limit of shareholding, it will have to be reduced to the permissible limit within a period which may extend up to three years from the date of Sebi approval. The voting rights of no shareholder will, however, exceed the prescribed maximum shareholding limit at any point in time. Turn to Page 14 >‘Stockexchange is

Stockexchanges are notprivate business’

Most of your recommendations have been accepted by Sebi, but the exchanges are not very happy. They feel it would lead to micro management. Your views? Ithink Sebi has done a fine job. This is the best it could have done to make every market infrastructure institution accountable and see that our financial markets grow at a fast rate and in line with the real economy. Sebi has followed due process and considered all aspects to arrive at a decision which will promote growth of financial markets and stock exchanges. It will show a clear path for these institutions. Stock exchanges (SEs) are not private business; they are meant to ensure efficient functioning of financial markets, and they should be seen in that light. Sebi has allowed the listing of exchanges after three years of approval, while our report had recommended five years. This is fine as far as surveillance and regulatory functions of the exchanges are separated. This is what we had said. Sebis view on allowing listing is consistent, as this has been made subject to certain conditions like paid-up capital and all. After these norms, SEs will work to the advantage of financial markets. No ESOPs or equity-linked incentives for key employees of SEs, which is followed by every other industry today. Forget structuring of variable pay packages, Sebi will have a say even in fixed pay. Will the move not make it difficult to attract talent? No. Sebi is not cutting back on pay, but is just saying one should go by industry standards and in accordance with the norms. In fact, there is a lot of criticism about fat pay packages in the US. We want reasonable salaries, as a company should not run in the interest of those who are operating it. And, Ithink everybody agrees on this point in our country. Will not the transfer of 25 per cent of profits of exchanges to various funds act like indirect cap on earnings? Icannot comment on this issue. But, when my report had come, many had said the same thing, that cap on profits is not justified. In terms of regulatory framework, if our economy is doing well, then this move will be in the interest of our country. Globally, exchanges are consolidating their business to become end-toend solution providers. Here, there is a view that industry growth will be restricted due to excessive regulations. Wont survival be difficult for existing exchanges? We must not look at SEs as aprivate property but as public interest infrastructure. We have laid down proper rules and these will not create hurdles, but will define a proper road. There is no limitation on the number of exchanges that can come, but they should act like instruments or platforms to promote trading, and not ends in themselves. The new rules will take care of the issue of conflict of interest and not prevent any institution from functioning. Be it depositories, stock exchanges or clearing corporations, they can be owned by the majority as per the stipulated norms set by stock exchanges. What is wrong with it? Wall Street is also thinking about more regulations and review, as it has been terrorised by recent crises. We have done it to safeguard our economy from crises and all these norms are subject to review. Sebis decisions seem reasonable in terms of transparency and accountability. When stringent norms were not there, where was the growth of the stock exchange industry some five to six years ago? Everything is subject to review, and our markets should work in the interest of retail investors. When will be the correct time to review these norms? Our report had recommended all these norms be reviewed after three years. It doesnt matter if it is done after two years. It is a constant process, as our markets are changing very fast, and we should make sure they work in the interest of investors and companies, which, in turn, are accountable to people investing in them. BIMALJALAN ,author of the report on the working of stock exchanges and other market infrastructure companies, expressed satisfaction over Sebi’s move to accept the recommendations made by him and his team. Edited excerpts of an interview with PalakShah : BIMALJALAN Author of the report on the working of stock exchanges and other market infrastructure companies

‘CST payable on sales if goods move from one state to another’

Irun an e-commerce company, located at Bangalore. Upon receiving an order from a customer living in India, I wish to package and ship goods directly from my supplier located at Dehradun, to customers anywhere in India. What kind of taxes, VAT, Octroi, CST, etc., need to be paid by me to the state governments of Karnataka and Uttarakhand? As per Section 3 of the Central Sales Tax Act, 1956, a sale or purchase of goods shall be deemed to take place in the course of inter-state trade or commerce if the sale or purchase: (a) occasions the movement of goods from one state to another; or (b) is effected by a transfer of documents of title to the goods during their movement from one state to another. Therefore, for all sales where goods move from Uttarakhand to other states, CST will be payable. For sales where goods move within Uttarakhand, local VAT will be payable. If the manufacturer fulfils the conditions of area-based exemption (notification no. 49/2003-CE or 50/2003-CE, both dated 10.06.2003), then excise duty is not payable. Octroi, entry tax etc., will depend on the local laws at the place of receipt. Do we have to pay 12 per cent excise duty on garments purchased against H form exclusively for exports? For exports to countries other than Bhutan, you can either pay duty and seek a rebate under Rule 18 of the Central Excise Rules, 2002 (notification no. 19/2004-CE(NT) dated 6.9.2004), or remove the goods without duty payment under Rule 19(1) of the said Rules (notification 42/2001CE(NT) dated 26.6.2001. For exports to Bhutan, the notifications 20/2004-CE(NT) dated 6.9.2004 and 45/2001CE(NT) may be referred to. Iam making payment of our credit card on instalment. The credit card bank is charging interest and service charge on interest. Can they charge service tax on interest? Credit card service providers usually put in a condition that if the amount paid towards dues on the credit card is less than the total amount due, service charges shall be levied on such outstanding (including but not limited to the EMI as above), as per the interest rate applicable. Since these are collected as service charges, service tax is payable and usually, these terms and conditions are communicated upfront. In wake of enhancement in excise duty on automotive components from 10 per cent to 12 per cent in the Budget, would production (not sold) up to March 16 midnight attract duty @ 10 per cent or 12 per cent? Twelve per cent excise duty is chargeable on all goods removed after midnight of March 16, 2012. After recent amendments to Rules 3(5) and 3(5A) of Cenvat Credit Rules, 2004, what is the status of used capital goods that are scrapped and the scrap is used as ‘melting scrap’ in the steel making induction furnace within the factory? The rules you refer to apply when you remove capital goods or scrap outside the manufacturing unit. For captive consumption, exemption notification 67/95-CE dated 16.3.1995 will apply. CHATROOM TN

Sebi spells out exit route for regional exchanges

BS REPORTER Mumbai, 2 April The Securities and Exchange Board of India (Sebi) today paved the way for closure of several defunct regional stock exchanges (RSEs) by allowing voluntary exits. An exchange without any trading at its own platform or where the annual trading is less than ~1,000 crore may apply for voluntary derecognition and exit, Sebi said in a statement after its board meeting. “If the stock exchange eligible for voluntary derecognition...does not apply for (this) and exit within a period of two years from the date of notification, Sebi shall proceed with compulsory derecognition and exit of such (an) exchange,” Sebi said. There are 16 Sebi-recognised RSEs in India, including the Ahmedabad Stock Exchange, Bangalore Stock Exchange, Calcutta Stock Exchange (CSE) and Delhi Stock Exchange. There is hardly any trading on any RSEs. Also, effectively defunct are the Inter-connected Stock Exchange and OTC Exchange of India. After the new norms, almost all RSEs will have to tie up with either the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) under Section 13 of the Securities Contract Regulation Act, if they want to survive, a senior official at one of the RSEs said. An agreement under Section 13 allows companies listed on an RSE to be traded on a national stock exchange and also permits its members to trade in shares of companies listed on a national exchange. The Madhya Pradesh Stock Exchange and CSE have tied up with both BSE and NSE. The Madras Stock Exchange has a tie-up with NSE. Turn to TSI Page 2 >EXIT ROUTE FOR DEFUNCT STOCKEXCHANGES |A stock exchange without any trading at its own platform or where the annual trading is less than ~1,000 crore may apply for voluntary de-recognition and exit |The mechanism of the dissemination board at the exchange is decided on the lines of the bulletin board with regard to an exit option to shareholders of exclusively-listed companies |Trading members of the de-recognised exchange will continue to avail of trading opportunities through its existing subsidiary company, which will function as a normal broking entity of a national exchange, such as BSE and NSE

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Sebi spells out exit...

Sebi has also given three years to stock exchanges to meet a minimum net worth of ~100 crore, an increased requirement. This, experts say, a lot of RSEs will find difficult to achieve.

On treatment of assets of derecognised exchanges, the Sebi board decided on certain conditions such as payment of statutory dues to Sebi/government and contribution of a certain percentage of the assets towards the Investor Protection and Education Fund.

Trading members of the derecognised exchange may continue to avail trading opportunities through its existing subsidiary company which will function as a normal broking entity at those exchanges having nationwide trading terminals.

Have foreign assets? File a newform

NEHAPANDEYDEORAS With the Union Budget asking Indian citizens to declare their assets abroad, even if only a trustee or nominee, the Income Tax department has introduced new filing forms to capture these. It will also be mandatory for such individuals to file returns online. As opposed to the old ITR-1 form, popularly known as Sahaj, such individuals will have to file returns through a changed ITR-2. In addition, all individuals with total annual income of over ~10 lakh will have to file e-returns. So, this financial year, all individuals exceeding this income limit will have to acquire digital signatures. This is applicable even if you have no assets abroad. The new form has an addition with clauses asking you to specify if you have (i) any asset (including financial interest in any entity) located outside India or (ii) signing authority in any account located outside India. This is a marked difference from the earlier ITR-2, meant for individuals where the total income did not include any chargeable under the head of ‘profits or gains of business or profession’. Says Sharad Shah, partner -tax advisory services, at BDO, “It is applicable retrospectively for assessment year 2013 or financial year 2012.” Foreign assets here mean bank accounts held in a foreign country, investments in stocks or mutual funds abroad or a representative or signing authority for any account located outside India. Importantly, such individuals will have to compulsorily file tax returns online using a digital signature or by transmitting the data in the return electronically and, thereafter, filing the I-T return verification form, also called ITR-5. The new amendment also says ITR-4S no longer applies to an individual deriving business income. Such income will be computed in line with the special provisions in Section 44AD and 44AE of the I-T Act for computation of business income, in the case of individuals having assets (including financial interest in any entity) outside India or are a signing authority in any account located outside India. These individuals will be required to file returns through ITR-3. Till now, ITR-3 was applicable to a partner in a firm and for income chargeable under the head of ‘profits or gains of business or profession’. Under the existing provisions of Section 44AB, every person carrying on business is required to get his accounts audited if the total sales, turnover or gross receipts in the previous year exceed ~1 crore. Section 44AE provides presumptive provisions for the assessee engaged in the business of plying, hiring or leasing up to 10 goods carriages in which a prescribed sum per vehicle is deemed the presumptive income of the assessee. Partnership firms with foreign assets, in turn, will be required to file returns through ITR-4. “Individuals who have to claim tax credit will now be required to provide extra details in the I-T return form, like when was the tax paid for which credit is being sought, in which country was it paid and so on,” says Homi Mistry, partner at Deloitte, Haskins and Sells. When individuals are deputed abroad and pay tax on that income in the foreign country, they are allowed tax credit in India if the country has a Double Taxation Avoidance Agreement with that other country. Also, taxpayers with annual income of ~10 lakh will have to file e-return forms, with new clauses for foreign asset holders RETURNS RECKONER |Individuals with total income exceeding ~10 lakh will only file e-returns | Individuals with foreeign assets will have to file tax returns electronically | Such individuals will now file returns thr rough ITR-2, instead of ITR-1 | Businessmen and partnership firms with foreign assets will file returrns via ITR-3 | Those claiming foreign tax credit will also need to furnish extra details while fili ing returns Partnership firms with foreign assets will be required to file returns through ITR-4

Sebi takes overregulation of private equity industry

BS REPORTER Mumbai, 2 April In a significant move that expands the scope and powers of the Securities and Exchange Board of India (Sebi) beyond the universe of listed companies, the market regulator today cleared the framework of the rules governing Alternative Investment Funds (AIF). “With a view to extending the perimeter of regulation to unregulated funds and ensuring systemic stability, increasing market efficiency and encouraging formation of new capital, the Board approved proposal to frame SEBI (Alternative Investment Funds) Regulations, 2012,” SEBI said in a press release. According to the rules, AIFs shall not be permitted to invest more than 25 per cent of the investible funds in one investee company and shall not invest in associate companies. AIFs shall also provide, on an annual basis, investors with financial information of portfolio companies as also material risks and how these are managed. The move will bring the private equity (PE) industry in India, which is at a nascent stage, under an independent regulator for the first time. Under the new regulations, Sebi has made registration compulsory for all AIFs, whether these are operating as PE funds, real estate funds or hedge funds. The funds will be registered under three broad categories. Funds enjoying certain incentives from Sebi or the central government will fall under Category I AIF. These include venture capital funds, SME funds, social venture funds and infrastructure funds. The second category includes private equity funds, debt funds and fund of funds. Both private equity funds and debt funds shall be close-ended, cannot engage in leverage and shall have a minimum tenure of three years. Funds, which seek more flexibility in strategy, such as hedge funds, fall under the third category. These are “considered to have negative externalities, such as exacerbating systemic risk through leverage or complex trading strategies”. The third category of funds can be open- or close-ended and may engage in leverage, subject to limits as may be specified by the Board, said the Sebi statement. Siddharth Shah of Nishith Desai Associates said, “The categorisation of funds has brought relief to the industry as it won’t be unnecessarily taking away the flexibility of investments.” The regulator has also stipulated conditions for the manager or the general partner of these funds. Accordingly, the manager or sponsor will have a continuing interest in the AIF of not less than 2.5 per cent of the initial corpus or ~5 crore, whichever is lower, and such interest shall not be through the waiver of management fees, said the regulator. Mahendra Swarup, president, India Venture Capital Association, said, “Sebi has done a good job by bringing more flexibility and removing uncertainty. The norms will encourage more domestic fund launches.” Sets compulsory registration, investment holding limit & norms governing managers THUS SAYS THE RULE BOOK |The fund or any of its scheme shall not have more than 1,000 investors |AIF shall not accept investment of value less than ~1 crore from an investor |AIF shall have a minimum corpus of ~20 crore |Not to invest more than 25% of funds in one investee company |AIFs shall not invest in associate companies |Launches under an AIF will be subject to filing of an information memorandum with Sebi |Funds to give investors financial information of portfolio companies |Units of AIF may be listed on stock exchanges subject to a minimum tradable lot of ~1 crore