Tax is payable on import of all software, even if the sale does not involve exercise of copyright, according to a Delhi tax tribunal order in a case relating to Microsoft.

While the order, passed on October 28, is significant in terms of the liability to withhold tax from payments made while importing software, the Delhi Income-Tax Appellate Order (ITAT) attracted the attention of tax professionals on account of its observation that questioned the sanctity of tax treaties.

In the order, which may spark multiple litigations, the division bench of ITAT observed that it is not necessary that provisions of tax treaties always override the provisions of domestic tax laws. In a situation, where a provision in the domestic tax law is incorporated after the signing of a Double Taxation Avoidance Agreement (DTAA), it is the domestic law that will override DTAA. According to the existing position, if there is a conflict between domestic tax laws and treaty provisions, the latter is supreme.

This is the first time that a judicial body or quasi judicial body has observed that domestic law can override treaty provisions. This observation was made while holding that royalty is payable by Microsoft. The ITAT has for the first time challenged the superiority of DTAAs India has signed with many countries.

The order says, “Assuming there was a conflict between the Act and the DTAA, the proposition that DTAA will prevail over the Act is not infallible. Later domestic tax legislation can override treaty provisions if there is an irreconcilable conflict (Gramophone India case).”

While the judgement assumes importance because of its offbeat approach on the sanctity of tax treaties, the order has a direct bearing on the software industry in India which now has to pay tax on all imports of software, irrespective of whether the purchase is a copyright or not. Currently, there are some judgements in favour of the assessee, if the software is a single user licence for use by oneself. In such cases, the licence was tantamount to a copyrighted product and, hence, should not suffer withholding tax because there is no exploitation of copyright in the licence. The Delhi ITAT order changes this.

Vispi Patel of Vispi T Patel & Associates said,”The Delhi bench has quoted Supreme Court order in the case of Gramophone India. The contexts in both the cases are different and, therefore, it is not right in applying the same yardstick in the case of Microsoft.”

“The order is a significant departure from how payments for purchase of off-the-shelf software have been viewed by the appellate authorities earlier. It holds that such payments would be for use of a copyright (and not for use of copyrighted article) and would be taxable on a gross basis. The far reaching implications of this proposition apart, the judgement speaks of a treaty override by a subsequent domestic legislation if there is an ‘irreconcilable conflict’.

Taxing Times

• Delhi ITAT order questions the sanctity of tax treaties
• Tribunal rules that provisions of tax treaties need not always over ride domestic tax laws
• Against current practices, if a domestic tax law is incorporated in a DTAA, the former will override the latter
• Software industry will have to pay tax on all software imports, whether the purchase is a copyright or not

The income tax department raided contractors and firms at 60 locations across India in connection with alleged irregularities in Commonwealth Games (CWG) contracts, an official said.

“The raids are being conducted on the premises of some contractors and firms as part of a probe to detect alleged financial irregularities in the organisation of the Commonwealth Games,” said an income tax official.

The raids took place in New Delhi, Kolkata, Bangalore, Mumbai and Jharkhand.

“The probe will specifically look into the contracts awarded by the Games Organising Committee (OC) and the role of its officials and contractors, including charges of bribery,” the official said.

The Commonwealth Games took place here from Oct 3 to 14 involving more than 7,000 athletes and officials from 71 countries and territories. The Games have been marred by allegations of shoddy work and corruption.

The Reserve Bank of India is expected to raise interest rates for the sixth time this year on Tuesday to battle stubborn inflation that remains well above its comfort zone of 5-6 per cent.

Most economists expect the Reserve Bank of India (RBI) to raise key rates by at least 25 basis points at its quarterly review on Nov. 2 and another quarter percentage point before the fiscal year ends in March.

The RBI’s key lending rate, or the repo rate, at the end of March 2011 is seen at 6.5 per cent, from 6 per cent now, while the reverse repo rate, or borrowing rate, is seen at 5.5 per cent, from 5 per cent now.

The RBI is expected to pause in its tightening cycle after the current fiscal year ends.

Central bank officials have been flagging their discomfort over persistent price pressures, but are expected to follow a slow-but-steady approach towards tightening policy. Deputy governor Subir Gokarn said on Tuesday that surging food prices were structural and will put upward pressure on interest rates.

Headline inflation was in the double-digits for six months through July. The annual wholesale price index for September, the last key data point before the central bank’s Nov. 2 review, rose 8.62 per cent compared with 8.5 per cent in August.

Annual food price inflation eased to 13.75 per cent in mid-October but remains high, in part because of rising demand as incomes increase.

The economy of the world’s second most populous country is on track to grow 8.5 per cent this fiscal year.

Market Impact: The market has largely factored in quarter point rate rises on Tuesday. The focus will be on clues in the RBI’s commentary on further policy action as well as its liquidity outlook.

If there is indication of a pause in tightening, then the benchmark bond yield may ease to around 8.04 per cent from around 8.11 per cent, but if the statement suggests continued worries about inflation, then it could rise to 8.20 per cent.

Disgraced Satyam chief B Ramalinga Raju could be ruing his fate after the Supreme Court on Tuesday cancelled his bail but the apex court’s directive has brought a smile on the face of the state prison chief. The state prisons department is toying with the idea of using Raju’s expertise in handling operations at the country’s first prison BPO unit, which is all set to start operations on Nov 1.

Though on a trial basis for now, prison officials hope that the BPO project would benefit IT from IT czar Raju’s experience, in making such projects a profitable venture. Well, this is assuming that his health permits him to stay behind bars and not in a hospital.

“We will use his ideas to improve the existing infrastructure and also seek his opinion on how best to utilize manpower available at our unit,” said C N Gopinatha Reddy, director-general of prisons. This would also keep Raju occupied, he added. As of now, the BPO unit has its hands full with projects and looks good to work on a few big assignments after the inauguration. Having bagged the census data compilation project and the manual digitization work, talks are on with a few big names in the banking sector to get work for jailbirds manning the BPO.

Department officials said getting associated with projects in the banking sector would involve BPO workers verifying scanned cheques and related documents. The prison department is in talks with some banking firms in Canada to grab its first international project. The BPO workers for this project will be required to examine scanned documents in various categories. Needless to say, these documents would be of a non-confidential nature, so that there’s no scope of tampering by BPO workers, who are all convicted prison inmates. “It will all be done under the supervision of our people, the idea being to make the entire process foolproof,” said Reddy.

With talks having been finalized between Tata Consultancy Services (TCS) and Radiant Technologies (the IT firm setting up the investing money to set up the BPO), to provide the hardware support for the prison BPO, the authorities are now eyeing a formal inauguration of this unit. The guest list for the inauguration, slotted sometime in November, would include Union home minister P C Chidamabaram, among others. Raju, who masterminded one of the world’s biggest corporate scams, could well turn into the prison’s best “inhouse” expert to study financial documents.

The involvement of as many as 30 judges in the multi-crore provident fund scam has shaken the confidence of people in the judiciary, attorney general G E Vahanvati told the Supreme Court on Thursday while arguing for CBI’s application seeking transfer of the trial from Ghaziabad to Delhi.

“If there is a case in last two or three years which has shaken the confidence of people in judiciary, it is this case,” the AG told SC and said since six accused district judges, including three who later become judges of the Allahabad High Court, and witness judges officiated at some point of time in Ghaziabad, it needed to be shifted to Delhi to make proceedings free from any doubt. “In this case, justice should not only be done but seem to be done,” he pleaded before a Bench.

A panel formed by the insurance council will probably recommend that domestic healthcare systems such as ayurveda , unani and siddha should be treated on par with allopathy when it comes to medical insurance, said a person familiar with the committee’s thinking.

“The department of Ayush has approached the General Insurance Council for looking at the possibility of accepting claims under the non-allopathic means of treatment,” said a person familiar with the development at the Council. “They made a presentation to council members, who in turn, have formed a three-member committee to look into the matter.”

The committee comprises chief executive officers from Star Health, Max Bupa and Apollo, the person said. It would examine the merits and demerits of the proposal and recommend processes to implement if it is convinced that these types of medicines should also be covered under health insurance. The Insurance Regulatory & Development Authority will take a call on the issue.

A large section of India’s more than a hundred crore population takes alternative means of treatment which is recognised by the government, but not so far by the insurance industry. Insurers where most of them are in a joint venture with a global company, say there is not an established way to verify these claims and no data to rely on.

“Under allopathic means of treatment, there are scientific studies and we know how long a treatment will take, how much will it cost,’’ said TA Ramalingam, head of underwriting, Bajaj Allianz General Life Insurance.

“But under the alternative means like homeopathy, we do not have enough data to cover them. For example, curing an ailment under homeopathy may take years, we would not have a structured way of looking at data. But under allopathic means of treatment, it’s more immediate, and hence, easily manageable.”

There is no registration for practitioners of alternate means of treatment either. There is no one body that recognises the institutes/hospitals that treat patients.

But the health and family welfare ministry is pushing hard for it as it is affordable and the majority of the population makes use of the domestic expertise in these areas. Allopathic medicines are expensive even for those who are in urban centres.

The Department of Indian Systems of Medicine and Homeopathy was created in March 1995 and re-named as Department of Ayurveda, Yoga & Naturopathy, Unani, Siddha and Homoeopathy, or Ayush, in November 2003 to develop education & research in those fields.

The government today clarified the policy concerning the transfer of used capital goods into special economic zones (SEZ) from outside of the enclaves, stating that a company can shift the equipment to set up units into the SEZs. However, the value of such second-hand goods should not exceed (20 per cent) to avail of the tax benefits.

This comes after a spate of incidents happened concerning some of the large-scale information technology (IT) companies such as Wipro, Mphasis and Geometric. In some of these cases, the development commissioner (DC), in charge of the SEZs, permitted the transfer of the goods from the STPI (Software Technology Parks of India) unit to SEZ and issued a letter of approval, which was later cancelled.

“There are no provisions in the SEZ Act/Rules preventing such a transfer of goods. The only deterrent for transfer of such goods is not getting the exemption under the Income Tax Act when the value of the used goods exceed 20 per cent of the total capital goods installed by the unit in a year,” the department of commerce said in a notification today.

According to tax consultants and experts, the clarification would provide a much-needed relief to SEZ developers, as well as the units located in them. “Due to lack of clarity in the policy, a lot of IT companies were facing problems in shifting their units from STPIs to SEZs. The law was interpreted differently by the companies and the DCs concerned. With this clarity, hopefully, the DCs would now be able to issue the approval letters without any problem,” said Kalpesh Maroo, partner, BMR Advisors.

The ministry of commerce and industry had issued such a clarification pertaining to this particular law earlier. It had said prior approval of the DC of that zone would be required before such a transfer takes place.

“The government had earlier said 80 per cent of the equipment should be new and the new unit (SEZ) should not be formed by reconstruction or splitting of the existing undertaking (STPI). This was done to encourage investment. This provision is old and already exists in law in some form or the other and will have no impact on the IT companies. It has now only been made explicitly clear,” said Anil Chanana, chief financial officer, HCL Technologies. In the backdrop of a global economic downturn, several IT companies had been pushing for relaxation in the laws pertaining to procurement of used capital goods from domestic tariff area (DTA) to SEZ units in order to ease the cost burden. “The Department of Commerce has only clarified on the way this directive is to be implemented as there were interpretation issues. In case of large projects, special equipment needs to be moved from the STPIs to SEZs and this operational issue has been now clarified,” said Nasscom President Som Mittal.

After cashing out of the recent stock market rally, investors aren’t ploughing their money into just initial public offerings (IPOs), bonds or real estate. The feel-good factor has prompted many of them to splurge on luxury cars, exclusive holidays and designer brands.

Sample this: luxury car manufacturers BMW, Mercedes and Audi have seen a significant increase in sales in the second quarter, according to Society of Indian Automobile Manufacturers data. BMW doubled sales to 1,701 cars in the previous quarter, while Mercedes and Audi reported 70 and 60 per cent sales increases, respectively.

“The stock market is a major enabler for pushing sales,” said Debashish Mitra, head of sales & marketing at Mercedes-Benz in India. The company recently introduced the R Class, priced at Rs 60 lakh, thanks to upbeat buyer sentiment.

“Luxury products are driven by a penchant for exciting products. Companies need products that meet buyers’ fancy when they have funds. Else, they will reinvest the funds,” Mitra explained.

One of the country’s top travel operators said the industry had witnessed better growth in luxury travel than group travel in the last quarter. “Group travel bookings grew a mere 7 per cent, whereas luxury travel bookings posted 12 per cent growth,” said an official with the tour operator. A luxury package to Europe costs a minimum of Rs 12 lakh a person, six times the price of a group tour.

Genesis Luxury, a high-end retailer that markets brands such as Satya Paul, Canali and Jimmy Choo, has also seen around 40 per cent growth in the past quarter, according to Managing Director Sanjay Kapoor.

Rajesh Chakrabarti, assistant professor of finance at Indian School of Business, explained: “After such profit bookings, investors tend to use the money for consumption. In volatile or uncertain market conditions, many investors even give consumption priority, as the value of money can erode on correction.”

That’s precisely why Delhi-based lawyer Anirudh Bobde swapped his Octavia car for an Audi, using the windfall from selling shares as down payment. “I could have done an all-cash deal at an over Rs 2-lakh discount. However, I need the money to change the interiors of the house and a family visit to the US. The vacation has been pending for the past two years,” said Bobde.

Mumbai based small investor Srinivas Deo redeemed his mutual funds to foreclose his housing loan. “I am planning to buy a bigger second house in the same locality (Thane). It will be a safe investment, as real estate prices in Mumbai rarely go down,” said Deo.

These are just two among many, who sold their equity investments when the Sensex breached the 20,000-level last month. In equity mutual funds alone, investors redeemed Rs 7,011 crore in September. Since the beginning of the financial year, individuals have sold over Rs 25,000 crore worth of shares and mutual funds, according to data from Association of Mutual Funds of India and stock exchanges.

These investors are now looking to build hard assets. “Investors who cashed out in the current rally are looking to invest a portion of their funds in asset classes such as real estate and gold, for the potential upside,” said Amitava Neogi, executive director at Morgan Stanley Private Wealth Management.

When markets neared the all-time high, several investors exited, reversing the losses incurred during the correction of 2008. “Many of these investors are looking at safe and conservative investments,” said Mohit Batra, group CEO at Alchemy Capital Management.

Response to the Rs 1,000-crore State Bank of India (SBI) bond issue bears out Batra’s views. On the very first day, investors were ready to pour in Rs 17,000 crore.

This was a second feat for SBI. “When equity investors cashed out last month, we saw inflows of Rs 6,000 crore in a single product – the 555-day term deposit – in about a month,” said a senior SBI representative. He also admitted that the 7.50 per cent offered on the deposit was attractive enough to warrant such attention.

Puneet Matta, head of wealth management at Credit Suisse, felt wealthy investors have been holding on to cash to invest in public offerings of government companies Coal India, IOC and ONGC.

Retail investors were in a frenzy to subscribe to the Coal India IPO this month. The company collected over Rs 27,500 crore from individuals, if you consider everyone applied at the lower price band. At the upper end, the company collected almost Rs 30,000 crore.

However, funds may not return to the secondary market anytime soon. “Unless there is a clear upside trend on the stock market, investors will stay away,” said Chakrabarti.

Inflation is in the double-digit territory and bank FDs are, at best, fetching merely 7-8 percent interest per annum. So, the real return from bank deposits is negative, which has led to lot of people making a beeline for company FDs that offer a slightly higher return than bank FDs. Company FDs have seen a renewed interest and higher flows from investors in the past one month.

The Sensex has moved from 8000 to 19000, unexpected windfall for many investors, making them a bit nervous about the future course of the market in the process. This has prompted some investors to book profits and invest the money in safe and simple products like company FDs.

The problem with company FDs is the presence of dubious players who enter the market time and again. There are companies, mostly on the verge of shutting down, that enter the market with the promise of extremely higher returns. Just because some companies offer better interest than banks, you shouldn’t rush to invest your entire corpus in company FDs.

Investors should not put all money in a single company. It makes sense to diversify by spreading deposit across a number of companies and industries to reduce risk.

High inflation is eating into the real rate of return from FDs, forcing many investors to opt for company deposits. Typically, an AA-rated company offers around 2 percent higher interest than a bank FD. Always opt for an AA or AAA-rated company, as companies rated below could be risky.

Shishir Bhate, Swedish home furnishing retail giant Ikea, which had put on hold its $1-billion India investment plans in 2009, wants to take a relook at India’s retail growth story if the government allows 100 per cent foreign direct investment in multi-brand retail, said Union Commerce and Industry Minister Anand Sharma on board the prime minister’s aircraft on way to Hanoi from Kuala Lumpur.

The minister said that “Ikea’s proposal for allowing 100 per cent FDI in multi-brand retailing was under the government’s consideration.”

The $31-billion company, which sources around 30 per cent of its global consumption from India, had also criticised the Indian government for not opening foreign direct investment in single brand retailing, especially for companies whose presence in India would not affect the mom-and-pop stores.

India allows 51 per cent FDI in single brand retail but the foreign company must have an Indian partner. New Delhi does not allow any foreign investment in multi-brand retail.

Ikea had decided to dump India from its investment plans, rubbishing the Indian retail growth story saying that the country was not ready for big retailers.

Sharma said that Ikea could create hundreds of jobs if it sets up shop in India.

The commerce ministry had earlier this year made a strong case for opening up the multi-brand retail sector for foreign investment. The Department of Industrial Policy and Promotion, which is part of the ministry of commerce, has been pushing for the easing of FDI norms in retail.

The DIPP had come out with a discussion paper on the contentious issue earlier this year and had solicited the opinions of all stakeholders.

Allowing FDI in retail could also assist in bringing technical know-how to set up efficient supply chains, which can act as models of development. It would also assist in lowering consumer prices and inflation, the DIPP had said.

The Indian retail market is estimated to be over $350 billion and has attracted a lot of homegrown organised retailers including, Bharti, Reliance, Future Group, Aditya Birla Group, as international players wait for FDI relaxation and announce cash-and-carry operations like Wal-Mart.

The Reserve Bank of India’s Reference Rate on October 29, 2010

for the US Dollar is Rs. 44.54

for Euro is Rs. 61.81

The corresponding rates for the previous day (October 28, 2010) were Rs. 44.49 and Rs. 61.56 respectively.

ICAI

Contribution to the Question Bank of CPT

The Common Proficiency Test (CPT) is an entry level test meant for 10+2 students to the Chartered Accountancy Profession having multiple choice objective questions. The level of knowledge expected is basic knowledge with the objective to develop conceptual understanding of the subject concerned. With a view to augment the Question Bank in the Subjects of …

ICAI President Amarjit Chopra’s Message – November 2010

Dear All, “India stands at a crucial stage. All across the globe there is interest in India as an emerging global power… We have to be able to compete with the finest minds in the world. In this, education occupies a crucial position,” so said Hon’ble President of India Smt. Pratibha Devisingh Patil recently. I …

Income Tax

Delhi ITAT: Tax payable on import of all software

Tax is payable on import of all software, even if the sale does not involve exercise of copyright, according to a Delhi tax tribunal order in a case relating to Microsoft. While the order, passed on October 28, is significant in terms of the liability to withhold tax from payments made while importing software, …

Results of delay in filing income tax returns

The penalty for late filing is actually not much. But it is important that the details are all there and without error As we all know, the last date for filing the tax return is July 31. What if you were unable to file your return in time? Even then, there is no cause to …

Sale of Esops Shares can be taxing

With the stock market nearing its all-time high, the best way out is to sell them in tranches. Employee stock option plans, or Esops, are touted as one of the best tools to create long-term wealth. These are the shares an employee gets of his/ her employer at a discounted rate to the current market price. …

IT expects Rs 5000 cr from CWG as TDS

The Income Tax department is expecting to collect Rs 5,000 crore (Rs 50 billion) as taxes from the payments and salaries relating to award of contracts and payments made by various agencies in the Commonwealth Games. The department will get this revenue from under tax deducted at source category as ‘payment to contractors in pursuance …

Interest uss 234A to 234C is payable only up to the s. 245D(1) order

Brij Lal vs. CIT (Supreme Court – 5 Judge Bench) While interest uss 234A to 234C are applicable to settlement commission proceedings, it is payable only up to the s. 245D(1) order and cannot be levied us 154 In the light of the divergent judgements of the Supreme Court in Anjum Ghaswala 252 ITR 1, …

Vodafone asked to pay Rs 11,218 crore

The government on Friday asked Vodafone to pay Rs 11,218 crore (Rs 112.18 billion) in taxes within a month for the acquisition of Hutchison’s stake in the telecom joint venture in India in 2007. “The IT department on Friday issued an order raising a tax demand of Rs 11,217.95 crore on Vodafone International holdings BV …

DTC

S S Palanimanickam: DTC to be implemented from April 1, 2012

Union Minister of State for Finance S S Palanimanickam today said the Direct Taxes Code would be implemented on April 1, 2012. “It will be implemented on April 1, 2012. There is no change in that…”, he told reporters. In August, the Government delayed the implementation of the DTC to next fiscal. The Direct Taxes Code Bill was supposed to be implemented by April 1, 2011.

GST

When will GST rollout?

India’s march towards an integrated Goods and Services Tax (GST) regime appears to have considerably slowed down since the Union government’s failed attempt to introduce in Parliament a Constitution amendment Bill needed to bring about the proposed reform in indirect taxes across the country. The finance ministry, the chief architect of the proposed GST regime, …

Dasgupta asks Centre to do away with GST council

In what could delay further the implementation of Goods and Services Tax (GST), state panel chief Asim Dasgupta has asked the Centre to do away with GST council and the dispute settlement body in the constitutional amendment bill. “Empowered Group of State Finance Ministers Chairman Asim Dasgupta recently met Union Finance Minister Pranab Mukherjee and …

Service Tax

SC approves Service tax on leasing services

The Supreme Court has held that banks and financial institutions, including non-banking financial companies, are liable to pay service tax on transactions of leasing and hire purchase of moveable goods. While bringing such services within the service tax net, a Bench headed by chief justice SH Kapadia has upheld the levy of service tax on …

Company Law

LLP may not get access to cheap overseas funds

Limited liability partnerships in the country may not get access to cheap overseas funds, which could discourage big firms from switching to this form of business that combine the features of companies and partnerships. The finance ministry and the Reserve Bank of India have opposed changes in the external commercial borrowings (ECB) policy to allow …

SEBI

Related companies disclosure norms to be tighten: SEBI

Market regulator SEBI indicated that it could tighten the disclosure norms for transactions between related companies. “There is a scope for improvement…,” SEBI Chief C.B. Bhave said when asked if the measures taken by SEBI so far with respect to disclosure of related party transactions were enough. Related party transactions typically involve deals between group …

IFRS

RBI may accept IFRS but won’t totally give up prudential norms

Accounting regulator the Institute of Chartered Accountants of India (ICAI) today said that the Reserve Bank of India (RBI) may accept global accounting practice IFRS but will not give up prudential norms completely as they saved Indian banks from global financial meltdown. Prudential norms imply regulations framed by RBI to avoid defaults by banks.

FEMA

Reasons for not allowing FDI in retail

Ahead of US President Barack Obama’s maiden visit to India in his official capacity, Planning Commission Deputy Chairman Montek Singh Ahluwalia has firmly supported foreign entry into multi-brand retail in India. Currently, only 51 per cent foreign direct investment (FDI) in single-brand retail is allowed in India.

General

Satyam scam trial to begin from Nov 2

The trial in the multi-crore Satyam Computer fraud case will begin from November 2, nearly 22 months after its founder B Ramalinga Raju admitted in January last year to fudging the company’s accounts to the tune of Rs 7,200 crore. Subsequent findings by the CBI revealed that the total size of the accounting scam was …

IRDA: Stop selling ULPs till Nov 4

In the face of alleged violations in sale of universal life policies, insurers would stop selling these products from Saturday till November 4 in accordance with a stiff direction by regulator IRDA. ULPs are basically hybrid products, having the flexibility of unit-linked products and traditional plans. “The authority has received several complaints on the sale …

IT raids CWG contractors, 60 locations across India

The income tax department raided contractors and firms at 60 locations across India in connection with alleged irregularities in Commonwealth Games (CWG) contracts, an official said. “The raids are being conducted on the premises of some contractors and firms as part of a probe to detect alleged financial irregularities in the organisation of the Commonwealth …

Govt clarifies the policy on Capital goods transfer in SEZs

The government today clarified the policy concerning the transfer of used capital goods into special economic zones (SEZ) from outside of the enclaves, stating that a company can shift the equipment to set up units into the SEZs. However, the value of such second-hand goods should not exceed (20 per cent) to avail of the …

The Indian budgetary system has become more transparent over the years, with the government providing significant information on the Budget, a survey has said.

According to the Open Budget Survey 2010, released by the International Budget Partnership, India’s open budget index (OBI) score improved from 53 in 2006 to 67 in 2010. The survey is released every two years and India’s OBI score in 2008 was 60.

“Several relatively low-income countries such as India, Sri Lanka and Ukraine provided significant information,” it said.

The survey showed South Africa, with an OBI score of 92, provided the most information on its Budget, followed by New Zealand (90), the UK and France (87 each), Norway and Sweden (83 each) and the US (82).

Apart from India, Chile, Brazil, South Korea, Slovenia, Germany, Sri Lanka, Peru, Poland, Spain, Czech Republic, Ukraine and Colombia provided significant Budget information, with their OBI scores ranging 61-72.

In a fresh blow to microfinance institutions, banks are refusing to lend them even a sanctioned line of credit, following recent controversies over opaque corporate governance and  interest rates.

The ensuing liquidity crisis has prompted many MFIs to seek a moratorium on loan repayment to banks. MFIs raise 75-80 per cent of their funds via bank borrowings, 15 per cent from equity and another 10 per cent from other sources like cash securities.

Interest rates charged by MFIs vary between 18 per cent and 32 per cent, bankers said.

Asit Pal, executive director at Corporation Bank, confirmed: “We are not sanctioning fresh loans to MFIs, and the line of credit is also on hold.”

Another senior executive from a south India-based private bank said: “We also find that MFIs are resorting to an ‘ever-greening’ strategy, which means extending loans to defaulters to repay existing loans. We have kept disbursements in abeyance until further clarity from the regulator emerges.”

Some MFIs played down the impact. While admitting that banks have stopped giving them loans, they expect normalcy to return soon.

“No new loans have been sanctioned in the last couple of weeks. Banks had expressed anxiety over lending to MFIs and this led to many discussions. But after the finance ministry and Andhra Pradesh High Court intervened, things are returning to normal,” said Vijay Mahajan, chairman of Bangalore-based MFI Basix.

P N Vasudevan, managing director at Equitus, said, “Since no bank has told us that they are not going to lend, we assume they will continue to.”

Bankers said they were awaiting clarity from the report of the Y H Malegam committee, which was appointed by Reserve Bank of India last week to study the sector and suggest ways to make interest rates charged by MFIs reasonable.

At least three MFIs, including Share, one of the largest in the country, are planning to pitch for a moratorium on repayment for three months.

“Banks are shying away from giving loans, and we are asking for a three months’ moratorium for repayment of instalments through (microfinance industry body) MFIN,” said Udaia Kumar, chairman & managing director of Share.

MFIN, or Microfinance Institutions Network, will discuss the moratorium at a meeting soon and take up the matter with a newly-revived forum of MFI lenders, led by Small Industries Development Bank of India, which in turn is expected to take up the matter with the Indian Banks’ Association, said a source close to the development.

“Other bigger MFIs have no option but to seek a moratorium as their cash flows are weakening,” said a source involved at the field level study for MFIs.

R Ramachandran, chairman & managing director at Andhra Bank, said his bank “has a limited exposure to the MFI sector.

“MFIs are shifting from a monthly to a weekly repayment model, which might require some rebalancing. So far, we have not received any request for a moratorium, but if we get one, we will evaluate the proposal.”

An MFIN spokesperson refused to comment on the issue. “I would not comment on the matter now, as the situation is very fluid,” said Alok Prasad, chief executive officer of MFIN.

After the Andhra Pradesh High Court allowed MFIs to resume operations yesterday, weekly collections fell to as low as 10-20 per cent in a few pockets in the state.

“All roads are blocked for MFIs, and they have no option but to comply with the norms. People have started refusing to make repayments.

“The entire system is set to collapse and the liquidity conditions of MFIs are so bad that if they don’t get the moratorium, some will not be able to even pay salaries,” said Narendra Prasad, an analyst working with MFIs in Andhra Pradesh.

Overall, MFIs could collect as much as 50 per cent of dues. This is a stark contrast to the roughly 99 per cent recovery in general in the sector, according to MFIs.

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Revenue through Direct Tax collection rose by 17.2 per cent to around Rs 2.02 lakh crore as on September 30, 2010, which is 47 per cent of the finance ministry’s budgetary target for the current fiscal, Sunil Mitra, revenue secretary, ministry of finance, said.

Speaking to reporters after participating in an interactive session on Direct Taxes Code, organised by Confederation of Indian Industry here, he said tax collection (both direct and indirect) target for the current fiscal is Rs 7.45 lakh crore. “Of this, Rs 3.15 lakh crore will be through indirect tax and Rs 4.30 lakh crore through direct tax”, he said.

Looking at the current growth and scenario in the country, tax collection in the current fiscal would increase by around 19 per cent compared to last year, he said.

Mitra said direct tax net collection stood at Rs 2,02,121 crore as on Sept 30 this year, a 17.2 per cent increase compared to last year.

Revenue from Customs between April and September 2010 was Rs 62,747 crore compared to Rs 37,907 crore last year, an increase of 65.5 per cent.

Central Excise collection stood at Rs 60,360 crore, as against Rs 43,234 crore, a 39.6 per cent increase. Service tax collection rose by 16 per cent to Rs 26,889 crore from Rs 23,188 crore, he said.

Earlier speaking to industry representatives on the DTC draft Bill, Mitra said the department has so far received 1,600 comments from stakeholders on the bill, which was put on the public domain last year.

The main issues are MAT on gross assets, shift from exempt-exempt-exempt (EEE) system to exempt-exempt-tax (EET) and capital gains.

“The DTC Bill is likely to be introduced in the Monsoon session,”, he added.

The Supreme Court has held that banks and financial institutions, including non-banking financial companies, are liable to pay service tax on transactions of leasing and hire purchase of moveable goods.

While bringing such services within the service tax net, a Bench headed by chief justice SH Kapadia has upheld the levy of service tax on hire purchase and leasing transactions, notwithstanding that the same transactions are chargeable to the sales tax (now VAT). The decision in effect has upheld the double taxation of the same transaction of hire purchase and leasing to both the service tax as well as the VAT.

“These are services rendered to their customers which comes within the meaning of the expression ‘taxable services’… the taxable event under the impugned law is the rendition of service. The impugned tax is not on material or sale. It is on activity/service rendered by the service provider to its customer,” the court said.

It further added that as far as the taxable value in case of financial leasing including equipment leasing and hire-purchase is concerned, the amount received as principal is not the consideration for services rendered. “Such amount is credited to the capital account of the lessor/hire-purchase service provider. It is the interest/finance charge which is treated as income or revenue and which is credited to the revenue account. Such interest or finance charges together with the lease management fee/processing fee/documentation charges are treated as considerations for services rendered and accordingly they constitute the value of taxable services on which service tax is made payable,” the judgement stated.

The decision has come on a batch of petition led by Association of Leasing & Financial Service Companies which alleged that the service tax imposed by Section 66 of the Finance Act 1994 on the value of taxable services referred to in sections 65(105)(zm) and 65(12) relating to financial leasing services including equipment leasing and hire purchase was beyond the legislative competence of Parliament by virtue of Article 366(29A) of the Constitution.

The firms said that when sales tax was already paid for the transfer of the right to use the goods particularly when such transfer is a deemed sale, it is not open to Parliament to impose service tax on the same transaction once again.

]]> http://www.forum4finance.com/2010/10/28/sc-approves-service-tax-on-leasing-services/feed/ 0 http://www.forum4finance.com/2010/10/28/llp-may-not-get-access-to-cheap-overseas-funds/ http://www.forum4finance.com/2010/10/28/llp-may-not-get-access-to-cheap-overseas-funds/#comments Thu, 28 Oct 2010 13:53:49 +0000 admin http://www.forum4finance.com/?p=36668

Limited liability partnerships in the country may not get access to cheap overseas funds, which could discourage big firms from switching to this form of business that combine the features of companies and partnerships.

The finance ministry and the Reserve Bank of India have opposed changes in the external commercial borrowings (ECB) policy to allow overseas borrowings by LLPs, while responding to a discussion paper on this form of business put out by the department of industrial policy and planning (DIPP), the policymaking body on foreign investment.

The ECB regime should be identical to the one applicable for partnerships, the finance ministry said in response to the paper. The finance ministry is of the view that while FDI can be allowed in this form of business entities, but not overseas debt, said a government official privy to the discussions.

“It is a business structure largely aimed at professionals and small businesses, which do not require overseas debt that comes with its own risks,” he said.

The current policy allows companies to raise ECBs, but sole proprietorship firms and partnerships are prohibited from accessing such debt. Though, LLPs combine features of the corporate form of business and partnerships, they are closer to partnerships. The central bank is also reluctant to open the external borrowings window more in the face of growing capital inflows. Net investment by foreign institutional investors has already reached $24.48 billion this financial year. These inflows, which exceed financing requirements of the current account deficit, have caused the rupee to appreciate.

“ECB is a cost-effective means of financing large capital expenditure and projects. Not permitting LLPs to raise ECBs can adversely impact their ability to execute large projects on a sustainable basis,” said Punit Shah, executive director at consulting firm KPMG.

The restrictive regime would mean that any capital intensive activity would be difficult under an LLP structure . Unlike private limited companies where number of shareholders is limited to 50, an LLP can have unlimited number of partners, but do not have to meet compliances related to meetings and maintenance of huge statutory records. This makes LLPs a cost efficient way of doing business, extremely popular in many countries.

The concept has, however, failed to take off in India despite the obvious benefits it provides. So far only 2,500 LLPs have been registered in the country, most of them in business consultancy and advisory services.

Market regulator SEBI indicated that it could tighten the disclosure norms for transactions between related companies.

“There is a scope for improvement…,” SEBI Chief C.B. Bhave said when asked if the measures taken by SEBI so far with respect to disclosure of related party transactions were enough.

Related party transactions typically involve deals between group companies, companies involved in joint ventures or between a holding company and subsidiaries.

Since the value of the transactions between related parties or associate enterprises may be doctored to avoid or reduce tax liabilities, it becomes imperative for the revenue authorities responsible for collecting both direct and indirect taxes to have principles in place for valuation of such transactions.

Speaking to newsmen here, Mr. Bhave also said there is no proposal as yet to separate the offices of the chairman and managing director in listed companies as prescribed in the voluntary corporate governance guidelines issued by the Corporate Affairs Ministry in December last year.

“They (the MCA’s corporate governance guidelines) are voluntary. Even now, Clause 49 (of SEBI’s Listing Agreement) says Chairman and Managing Director is the same… At this stage, we are not contemplating any change,” he said.

Mr. Bhave was attending the Organisation for Economic Cooperation and Development (OECD) Asian Roundtable on Corporate Governance organised by the Institute of Company Secretaries of India (ICSI).

The Reserve Bank of India on Tuesday hinted at another round of monetary policy tightening at its upcoming review meet on November 2, with Deputy Governor Subir Gokarn asserting that it is a challenge to keep inflation in check.

“Persistent price increases in commodities for which there are less effective substitutes, with other things remaining equal, will raise the potential rate of inflation over a period of time.

“India’s challenge is to keep inflation under check,” Gokarn said while delivering a speech at the India Gandhi Institute of Development Research in Mumbai on Tuesday.

Inflation inched up to 8.62 per cent in September from 8.5 per cent a month ago – well above the RBI’s comfort zone – on higher food prices.

Earlier during the day, Finance Minister Pranab Mukherjee, at an Economic Editors’ Conference in Delhi, said, “I will try to bring it (inflation) down through whatever mechanism we have. . . It would be ideal if we have 4-5 per cent, but may be difficult.

“But I do feel that the annualised inflation rate would be around 6 per cent.”

Food prices were expected to cool following a normal monsoon and improved supplies, but the continued upward spiral in prices has belied that optimism.

The RBI is widely expected to continue with policy- tightening measures at its review meeting on November 2, with a 0.25 per cent hike in key short-term rates on the cards.

The current inflation scenario is a cause for concern, as the inflation rate is well above the upper band of the comfort zone, he said. India’s annual food inflation slowed to 15.53 per cent in the first week of October from 16.37 per cent in the previous week.

“As regards food, the pressures in the Indian economy are predominantly domestic. Our Green Revolution in the 1960s raised the production of cereals dramatically, which increased availability and stabilised prices,” Gokarn said.

“However, what we are seeing today is the impact of increasing affluence on the demand for a variety of food items that go far beyond cereals.

“As people become more affluent, their diets diversify,” he added.

Blaming high food inflation on the changing food habits, he said there has been an enormous increase in the demand for various food items beyond cereals.

The demand for high protein foods like pulses, milk, meat, fish and eggs has surged and so has the appetite for sugar, fruits and vegetables.

“A rise in income has increased the share of proteins in people’s diet. Increasing demand for protein appears to be an inevitable consequence of rising affluence. Rising affluence has also led to an increase in demand for proteins and nutrition,” Gokarn said, adding that one option to bring down prices would be to import pulses.

The Supreme Court on Tuesday cancelled the bails granted to Satyam Computer Services founder B Ramalinga Raju, his brother B Rama Raju and four others by Andhra Pradesh High Court in the Rs 14,000-crore (Rs 140-billion) accounting fraud.

Hearing the Central Bureau of Investigation plea, a Supreme Court bench comprising Justices Dalveer Bhandari and Deepak Verma on Tuesday cancelled the bails and asked all six persons to surrender by November 8.

Observing that the case involved the biggest scam in the history of India, which had affected large number of shareholders, banks and financial institutions, the bench said that the high court order of grating bail cannot be sustained.

The SC also directed the special court in Hyderabad, which is conducting the trial in the Satyam case, to conclude its proceedings by July 2011.

Earlier this month, the bench had issued a notice to Raju, directing him to file his reply on CBI’s plea.

In its petition for cancellation of the bail granted to Raju by the Andhra Pradesh High Court, CBI had said that Satyam’s founder and former chief ‘misused’ the bail by meeting one of the witnesses in the case and tried to ‘influence’ him.

CBI had filed the chargsheet running into over 10,000 pages, naming more than 250 witnesses.

Such a huge volume was criticised by the court in the last hearing on October 19.

Besides the two Raju brothers, the high court had granted bail to the four employees of the IT firm, namely Srinivas, Ramakrishna, Venkatapathi and Srisailam.

CBI had approached the apex court on September 13 and said that Raju might influence the witnesses majority of whom were his former employees.

The high court on August 18 allowed Raju’s bail on the ground that all other accused in the case, including his brother Rama Raju, former Satyam CFO V Srinivas and three other former IT company employees G Ramakrishna, Venkatapathi Raju and Srisailam were granted bail by it.

The apex court observed that the trial was pending in a special court and detailed reasons for granting bail have not been given by the high court.

“Normally, the apex court does not interfere in such cases where bail has been granted by the high court, but the facts of the case indicate demand that we should interfere,” the bench said.

Raju, who was arrested on January 9 last year in connection with the biggest ever corporate fraud in Indian history, and is currently undergoing treatment for liver infection in the state-run Nizam Institute of Medical Sciences, was ordered by the court to appear before the trial court after being discharged.

A special court has been created by the Andhra Pradesh government for the trial in November 2009 and a judge has been appointed in February 25 this year.

The government said on Tuesday it is not mulling a regulator for microfinance institutions, but wanted them to evolve a code for themselves, even as these lenders draw criticism over their exorbitant interest rates and coercive recovery methods.

At Economic Editors’ Conference in New Delhi, Finance Minister Pranab Mukherjee said he has suggested to the Andhra Pradesh government to address some stringent provisions of its recently promulgated ordinance to rein in MFIs.

“I am not currently thinking of appointing any regulator right now. . . As we expect there should be a code evolved by the institutions themselves where rate of interest are not abnormally high and there should not be a coercive mechanism to recover the money,” Mukherjee said.

There have been speculations that Nabard could be appointed as regulator for MFIs, as they do not come under separate regulation as of now.

Industry chamber Assocham has asked the government to set up an effective regulating body and put a cap on the interest rates charged by MFIs.

“The confidence of the people in microfinance model of development has shaken by the practices of unscrupulous microfinance institutions functioning in the rural areas of the country,” Assocham said.

Andhra Pradesh government recently promulgated an ordinance to check MFIs, after a number of suicides were reported in the state, allegedly due to strong-arm tactics of MFIs for recovery of loans.

The ordinance makes it mandatory for all MFIs in Andhra Pradesh to register with the district Registering Authority, the project director of District Rural Development Agency for rural areas and PD of MEMPA for urban areas.

Now, MFIs will have to specify the area and system of their operations, the rate of interest and recovery mechanism while registering with the Registering Authority.

The registering authority may at any time either suo moto or upon receipt of complaints by self-help groups or the general public can cancel the registration of the MFI after assigning sufficient reasons.

The finance minister said, “In respect of the ordinance which the Andhra Pradesh government has issued. . . I had a talk with chief minister over phone and suggested certain corrections in the ordinance. . .to see that the harsh provisions are taken care of.”

He said MFIs should ensure that the borrower is in a position to pay back the money and as such lending should be mainly directed towards the productive borrowing not so much towards consumption.

The RBI has also constituted a sub-committee to look into the functioning of MFIs.

The Reserve Bank of India’s Reference Rate on October 28, 2010

for the US Dollar is Rs. 44.49

for Euro is Rs. 61.56

The corresponding rates for the previous day (October 27, 2010) were Rs. 44.52 and Rs. 61.47 respectively.

The Common Proficiency Test (CPT) is an entry level test meant for 10+2 students to the Chartered Accountancy Profession having multiple choice objective questions. The level of knowledge expected is basic knowledge with the objective to develop conceptual understanding of the subject concerned.

With a view to augment the Question Bank in the Subjects of Accounting/Mercantile Laws/General Economics/Quantitative Aptitude of Common Proficiency Test, it has been decided to invite questions from Chartered Accountants/Subject experts working in various Colleges/Universities/Public/Students pursuing Chartered Accountancy Course etc.

The contributor can contribute as many questions as he/she can, but in a lot of minimum of 20 questions in the subjects of Accounting/Mercantile Laws/General Economics/Quantitative Aptitude in the following manner:-

The questions should be of objective with four probable answers for each question. The correct answer for each question is also required to be given.

Fill in the blanks having four alternative answers.

Small paragraph containing two to three lines followed by a question having four alternative answers.

Numerical having four alternative answers (in Fundamentals of Accounting, Mathematics and Statistics).

Simply worded Case studies involving multiple concepts be also prepared. The case study could be something like a practical situation described in 3-4 lines in simple language with application of single/multiple concepts and requiring students to choose one answer from amongst four answers whereby the analytical/logical ability and intelligence of the students is tested.
 
Since the CPT is an entry level Test meant for 10+2 students, the level of knowledge expected is basic knowledge and the questions should be aimed at testing the conceptual understanding and fundamentals of the subject than merely testing the memory of candidates. The difficulty level of the questions should be of 10+2 level and capable of being answered/solved in less than one minute.

While framing the questions, the questions be framed in such a manner that each one of the four answers given for a particular question, per se, appear to be the right answer thereby requiring the candidate to use his analytical ability to find the correct answer.

The language of the questions to be sent should be English only and is clear, correct, unambiguous and free from any doubt. The language conveys the same meaning as was intended by you.

The copyrights of the questions so submitted shall vest with the Council of the Institute. The contributor of the questions shall ensure that the questions so submitted to the Institute are not parted with by him/her to any other Body/Person and shall be meant only for the exclusive use by the Council of the Institute.

It may please be noted that the questions framed by you should be original and not already published in some books or journals or study material of the Institute or reference/text books available in the market or also from question papers of any other examinations or material distributed by any coaching institution. The requirement is the questions that are original and framed with the meticulous care and genuinely.

For each question framed and forwarded and accepted by the Council of the Institute for augmentation of the Question Bank of CPT, Rs.100/- per question selected/accepted will be paid as honorarium. In addition to honorarium payable towards questions selected, Rs.100/- (fixed) will be paid for other services also. The questions may be sent in a sealed envelope superscribed “Question Bank – CPT” to Dr.T.Paramasivan,Sr.Deputy Director(Exams),The Institute of Chartered Accountants of India, Indraprastha Marg, New Delhi – 110002 by name or by e-mail to tparamasivan@icai.in While sending the questions by post/mail, please mention your name and complete postal address alongwith contact details including mobile number. All correspondence on the subject should be treated as secret. 

Interested persons may kindly contribute to the Question Bank of CPT.

(Dr. T. PARMASIVAN)
SR.DEPUTY DIRECTOR (EXAMS.)

Dear All,

“India stands at a crucial stage. All across the globe there is interest in India as an emerging global power… We have to be able to compete with the finest minds in the world. In this, education occupies a crucial position,” so said Hon’ble President of India Smt. Pratibha Devisingh Patil recently. I am delighted to inform you that we had the honour to meet this visionary and inspiring first woman President of the country at the Rashtrapati Bhawan recently. During the meeting, the undersigned, along with Vice President CA. G Ramaswamy, Council Member CA. S.B. Zaware and a member from Pune CA. M.S. Jadhav updated her about our Institute and our contribution as an important partner in Nation Building. We also requested her to be the Chief Guest at the mega high-profile International Conference being organised by us on 4-6 January 2011, details of which have been published elsewhere in the journal. Her Excellency Smt. Patil showed keen interest in the activities and role of the Institute in the growth and development of national economy in particular and society in general. We fervently hope that she will kindly give her consent to grace our International Conference.
 
Meanwhile, as readers will recall, we basked in the glory of Commonwealth Games 2010 by winning a record number of medals. We got medals in events we were not hopeful at all. We did not mind being at second position, but we rejoiced performing better than England. Reasons for celebrations were many. There is a remarkable trend emerging slowly but distinctly, which is very keen on engulfing all spheres of human existence: our female sportspersons have performed unexpectedly better in many events of the Commonwealth Games. Ironically, Haryana having the lowest sex ratio probably has the largest share of medals earned by female sportspersons. We personally have observed that, of late, female students have been performing better in CA examinations too. In fact, they have been doing better in all other fields of education. Anyway heroes, philosophers, or great men can exist, if we have intelligent and educated women in society.

It is time to learn a lesson, as it is never too late to do so: women deserve equal treatment and respect from our society. Initially, we may have to start with some adjustment in order to accommodate them with equality. Let us take a pledge to respect them in our family, first, as we know: charity begins at home. This will bring a sea change in not just the form and composition of our society but also in the quality of our own existence. To quote our adorable President of India Hon’ble Pratibha Devisingh Patil: “Empowerment of women is particularly important to me as I believe this leads to the empowerment of the nation”. American lawyer and political activist Bella Abzug rightly observed: Women are changing the stream, making it clean and green, and safe for all. There is a definitive connection between women’s rights and development, and socio-economic development and peace of a state.

Now let you be updated on some important developments over the last month.

MCA Delegation to Moscow

ICAI Vice-President CA. G. Ramaswamy with the Director, Board of Studies, Shri Vijay Kapur was in Moscow recently as part of the MCA delegation led by the MCA Secretary Shri R. Bandyopadhyay. Other members of the Indian delegation were ICWAI President Shri B. M. Sharma and ICWAI Central Council member Shri A. N. Raman. Agenda of the delegation was to interact with the government functionaries and accounting professionals in Moscow. The Institute of Professional Accountants of Russia (IPAR) showed keen interest in our activities. On the initiatives of our Vice-President, the IPAR responded positively by coming forward with a proposal for mutual areas of cooperation regarding implementing IFRS, auditing and quality control standards, and internal audit standards, etc. We have invited the IPAR President Mr. Vyacheslav V. Skobara and Chair of the IPAR International Affairs Ms. Svetlana M. Bychkova to attend our International Conference to be held in January 2011. The delegation also met Mr. Sergey D. Shabalov, State Secretary, Deputy Finance Minister of Russian Federation.

Roundtable Conference on Commerce and Accountancy Education in India

We recently organised ICAI’s first ever Roundtable Conference on Commerce and Accountancy Education System in India in New Delhi to exchange thoughts on various areas of academic and practical interest in the field of commerce and accountancy education in India. It was inaugurated by Shri Jitesh Khosla, Additional Secretary and Officer on Special Duty, Indian Institute of Corporate Affairs, who was keen on us leading in enhancing the financial literacy and the basic knowledge of the accountancy amongst the people of India. Eight Vice-Chancellors, namely Prof. Manoj K. Mishra of University of Lucknow, Prof. K. K. Deka of Dibrugarh University, Prof. A. D. Sawant of University of Rajasthan, Prof. Binayak Rath of Utkal University, Prof. R. Venkata Rao of National Law School, Bangalore, Prof. I. V. Trivedi of Mohanlal Sukhadia University, and Prof. J. L. Gupta (former Vice-Chancellor) of Bilaspur University, attended the Conference. More than 55 Heads, Deans of Commerce and Management Department, and faculty members representing various management institutions and universities of India also participated. The undersigned also participated in the Conference with Central Council colleagues CA. Vinod Jain, Chairman, Board of Studies, CA. Jaydeep N. Shah, CA. Bhavna Doshi, CA. Rajkumar S. Adukia and CA. S. B. Zaware. Presentations were made by Prof. Ashish Bhattacharyya from IIM, Kolkata, Dr. Avinash Chander, Technical Director of ICAI and Shri Vijay Kapur, Director, Board of Studies of ICAI.

We wish to inform that the discussions held provided a good platform for exchange of views amongst the leading accounting educators of India. Quite rightfully, everybody requested us to bring out uniform reading material on Indian Accounting Standards converged with IFRS in a simplified and illustrative manner for university students. They also desired that the Institute could frame model course curriculum meant for the Indian universities. Representatives of some universities even offered us the space for building up reference libraries and classrooms for imparting education through e-learning mode. During the discussions, the participants also stressed the need to bring transparency and accountability in examination system. We are very confident that a synergy between the Institute and the universities can produce better results.

ICAI Offers Support to Shri Nandan Nilekani for UID Project

During the meeting recently held with Shri Nandan Nilekani, Chairman of the Unique Identification Authority of India (UIDAI), the undersigned, on behalf of the Institute, extended a promise of complete support to the ambitious UID project of our country with all possible resources of the Institute. We suggested to him that ICAI can play important role in development and implementation of this project, while actively working with the Government. We showed our willingness to offer the manpower of vast base of ICAI members located across the country to be used in the implementation of the project, which will result in the issuance of Unique IDs to all citizens of India. We also informed Shri Nilekani that our members having experience in endeavours such as PAN card, e-governance and facilitation centres for sales tax and excise could be well-suited to be a part of this project. During the meeting, we also discussed the use of IT system in Goods and Service Tax among other issues of our mutual interest. Mr. Nilekani promised to utilise the services of Chartered Accountants in the GST project.

ICAI Briefs Media on IFRS Convergence

We would like to remind our members that we are committed to meet our deadline of the convergence of the Indian Accounting Standards with the International Financial Reporting Standards (IFRSs) effective April, 2011 in select entities as per the roadmap laid down by the Government. Let us also recall that, to spread awareness and popularise the convergence of our accounting standards with the IFRSs, we have launched a nationwide campaign. As part of this very initiative, we recently organised an interactive session with the representatives of Indian media, basically to brief them on the IFRSs-related developments and convergence, and to help them print objective and authentic information in this regard in the media. This whole exercise was aimed at encouraging and helping the media in supporting our efforts to spread mass awareness about IFRSs and to highlight the comprehensive benefits that convergence is going to provide to society in general and our economy in particular.

Draft of ASLB on Presentation of Financial Statements Ready

In the direction of establishing a single set of high quality financial reporting standards for Local Bodies further, the Committee on Accounting Standards for Local Bodies (CASLB) has recently finalised the draft of ASLB on ‘Presentation of Financial Statements’ to prescribe the manner in which general purpose financial statements should be presented. This would help the Local Bodies immensely in presenting their financial statements in a comparable and consistent manner. Also, drafts of Standards on ‘Inventories’ and ‘Segment Reporting’ will soon be finalised.

New Group to Respond to Parliamentary Standing Committee

A Special Group was constituted for formulating ICAI’s views/response to the various recommendations made by the Parliamentary Standing Committee on Finance on Companies Bill 2009. The Group has met and deliberated on the Report in detail. The views/ suggestions as formulated are getting finalised for sending our response.

ICAI Probe into Auditing/ Accounting Violations in IPL

We are planning to send notices to six IPL franchisees seeking more information from the companies owning the teams. These franchisees are – Kings XI Punjab, Delhi Daredevils, Rajasthan Royals, Chennai Super Kings and Deccan Chargers. The investigations into alleged violations of auditing and accounting norms by the auditors are not yet complete due to the non-availability of the required information in these companies. This investigation is part of a multi-agency probe launched by the Government of India, e.g. I-T Department is probing tax evasion, ED money laundering, MCA sources of funding and shareholders’ patterns, etc. Surprisingly, there is no published financial information with Kolkata Knight Riders and Royal Challengers.

Project Parivartan

Project Parivartan, a journey embarked on to bring about a paradigm shift in the working of our Institute and conceived with an idea of taking the Institute to a qualitatively new way of working, aims to create a single tightly-integrated system for catering to the entire community of chartered accountants and students, irrespective of their geographical locations, through the Internet. It also aims to create a truly next-generation Institute through IT-revolution. The journey so far in this direction has been quite successful and the Project is at the execution of next level of IT maturity. The ground covered so far includes the EoI for infrastructure and software applications, to onboard our IT partners. We have witnessed good traction and interest from major players in the market. The Project Management Office is working on closely with all other departments to complete our requirements for the tenders that we plan to float towards the end of this month. Despite the tedious process, we assure everybody that our institute is committed to transformation. We will keep you updated of the progress as we make from time to time.

CBDT Takes Positive Action Following ICAI Representaion

As you will be aware, an amendment to Rule 12 of the Income-tax Rules, 1962 vide notification no. 49 dated 9th July, 2010 made it mandatory for all Companies (including foreign companies) filing ITR-6 to digitally sign the Income-tax return for the AY 2010-11. Thereafter, certain procedural changes were effected. The Institute was given to understand that as per the changed requirements made applicable w.e.f. 1.08.2010, where the signatory to the return is not the same as the signatory in the immediately preceding year, the system required that the DSC also contains the PAN encryption therein. The said revised procedure was creating practical difficulties in case of Foreign Companies whose directors being non-residents were not required to obtain a Permanent Account Number in India due to which a PAN encrypted DSC could not be immediately available. Hence, a representation posing the difficulty being faced by Foreign Companies was made by the Institute to the Central Board of Direct Taxes. In view of the same the Central Board of Direct Taxes has relaxed the requirement of using encrypted PAN on DSC for non-resident signatories of Foreign Companies. Accordingly, the signatory may register with a non-PAN DSC from CCA, India and use the same jurisdiction while uploading the return. This facility is available only for all foreign Companies under the jurisdiction of respective International Taxation wards or circles of Income Tax Department.

ICAI Wants Power to Act Against Erring Firms

It is quite affirmative now for the Institute to be ready for seeking power from the law to take action against erring CA firms. In this light, as per the Act, the Institute can take disciplinary action against its members but not against the firms. At the same time, it is becoming extremely important to curb the wrongful and illegal acts committed by the firms. So, for the first time, the ICAI has decided to recommend to the Government of India that power to act against an erring firms be given to the Institute after necessary amendments in the Act. Action against the firms are proposed to be initiated in rarest of rare circumstances and in the cases in which there are continuous and repetitive acts of negligence, jeopardising of public interest or proved collusion in perpetration of fraud. Generally the action is contemplated only against individual members. We definitely need more powers to ensure that big corporate scandals do not occur in future.

International Competition Law Conference

The Institute played a crucial role as Knowledge Partner for a highprofile International Competition Law Conference organised by Competition Law Bar Association in national capital recently. Corporate Affairs Minister Mr. Salman Khurshid was the Chief Guest while Union Minister of Law and Justice Mr. M Veerappa Moily was the Guest of Honour at the well-attended conference. Other speakers included Chief Justice of India Mr. Justice S.H Kapadia, Chairman Competition Appellate Tribunal Dr. Justice Arijit Pasayat and Competition Commission chairman Mr. Dhanendra Kumar. The undersigned also addressed the conference from professional perspective. The global competition law scenario vis-à-vis India, and various aspects of newly enforced Competition Law were discussed in the conference.

Asia-Oceania Standard Setters Group Meeting

We recently attended the second annual meeting of the Asia-Oceania Standard Setters Group (AOSSG), which was formed last year as a forum for the countries in the region to exchange their ideas and have a joint voice in matters relating to IFRSs. The undersigned, along with Council Member and the Chairman, Accounting Standards Board, CA. Manoj Fadnis and the Technical Director, Dr. Avinash Chander, put forth India’s approach and perspective on various issues of mutual interest that were discussed and decided at the meeting in Tokyo. We are happy to inform you that at the meeting it was decided to establish a new working group for IAS 41, Agriculture, which will be led by the ICAI. The meeting was attended by 24 accounting standard setting bodies from countries and jurisdictions in the Asian-Oceania region, representatives from the International Accounting Standards Board (IASB) and a Trustee of the IFRS Foundation.

Initiatives for Members
Unique Code (UCD) for Members in Practice Soon:

We are planning to introduce a unique code numbers to check the increasing instances of fraudulent practices including forged attestations, as part of our ongoing Project Parivartan initiated to change our operational processes to meet global benchmarks. Modalities are being worked out. We are being assisted by the software giant Infosys in this endeavour. Then, we would like our banks to insist upon this UCD, as people file different balance sheets for different purposes without the knowledge/approval of our members. Similarly, there are instances when financial statements filed in the tax department are different from the ones sent to banks or registrar of companies. Since the CA membership numbers are in public domain, introduction of UCD will certainly help in protection of our members.

Special Loan Scheme of Corporation Bank for CAs:

We take pleasure to inform our members that the Committee for Capacity Building of CA Firms and Small & Medium Practitioners has helped the Institute in going into an MoU with the Corporation Bank for providing financial assistance in form of liberalised loan scheme called Corp CA for our members and firms. Comptroller and Auditor General of India Shri Vinod Rai, Chairman & Managing Director of Corporation Bank Shri Ramnath Pradeep and Executive Director of Corporation Bank Shri Asit Pal were present on the occasion. This scheme will cater to various financial needs of members of the CA profession including cost of furniture/fixture/office equipments contributing in the working capital for building their profession. We sincerely hope that a large number of members would be benefited by this landmark scheme. We must acknowledge the hard work of the Committee Chairman, CA. Sanjeev Maheshwari behind this accomplishment. The details of the scheme have been hosted on our website and also published elsewhere in the journal.

New Group to Consider Provisions for Physically Challenged CAs:

We are happy to inform you that a Group has been constituted to consider and prepare a draft paper on the various concessions that one can have for physically challenged Chartered Accountants vis-à-vis the openings available in PSUs or in the private sector. The Group shall comprise CA. Vinod Jain, Chairman, Board of Studies (Convenor) and CA. Pankaj I. Jain, Chairman, Professional Development Committee. The said Group will submit as early as possible the aforestated draft paper to the Professional Development Committee and Board of Studies for consideration and making recommendations to the Council. The members of the Council may also be requested to give their suggestions/inputs for consideration by the Professional Development Committee/Board of Studies.

Tie-Up with United Stock Exchange for Currency Derivatives Awareness:

It is quite satisfying to inform you that we have operationalised the MoU signed last year with the United Stock Exchange (USE) of India Limited, newest stock exchange for currency derivatives, to impart comprehensive knowledge of financial markets to our members. Following this, the USE will sponsor our members by organising seminars, paneldiscussions, workshops on financial markets and corporate governance. We would provide institutional support and facilitate interactions with our members. At least two such programmes are proposed to be organised with them before the end of this year. On this occasion, Managing Director and CEO of the USE Shri T. S. Narayanasami expressed his ‘pleasure to be associated with ICAI’ and desired ‘to build knowledge about financial markets especially sophisticated instruments like currency derivatives in India.’ We are sure that this would be enriching experience for both the organisations.

IICA-ICAI Joint Workshop on IFRS:

We recently organised a special workshop on ‘IFRS – Issues in Transition’ jointly with Indian Institute of Corporate Affairs (IICA). The workshop dwelt on managing transition to IFRS that poses a great challenge to the makers and users of financial statements and to the reporting authorities, i.e., the practical implication of IFRS. Prominent personalities who shared their views in the workshop included Secretary, MCA Shri R. Bandyopadhyay, Shri Jitesh Khosla, Additional Secretary to the Government of India and Officer on Special Duty (OSD), IICA, Ms. Renuka Kumar, Joint Secretary MCA, Shri Pawan Kumar, Director (Tax Policy), Department of Revenue, Ministry of Finance, Ms. Gargi Ray of Infosys technologies, Past Presidents of ICAI CA. N. P. Sarda and CA. Ved Jain and Council members CA. Jayant P. Gokhale and CA. Bhawana Doshi. The undersigned highlighted the various steps taken by the ICAI in the process of convergence of Indian Accounting Standards with IFRS including the capacity building and other related initiatives. About 70 CEOs, Directors, CFOs, Auditors, representatives from regulatory bodies, fellow members of the ICAI and ICAI’s CA employees attended the workshop.

Four-Day Training Workshops on Audit Excellence:

Auditing standards issued by our Institute are both best practices and performance benchmarks for our profession, and the quintessential features of our very existence and supremacy in the auditing profession. To give an impetus to our awareness creation initiatives, four-day Training Workshops on Audit Excellence will be launched soon by the Auditing and Assurance Standards Board (AASB) of ICAI for imparting training on implementation of the Standards on Auditing issued under the Clarity Project. The details are available elsewhere in the Journal.

Resources on Auditing Standards:

A Guide containing practical guidance and ready-to-use templates on application of auditing standards to audits of small entities will soon be published to help with the understanding of auditing standards and promoting implementation of Standards. As another measure to promote the understanding of auditing standards, the AASB is also developing a Manual of Presentations on Standards on Auditing & Other Engagement Standards that will act as a quick reference for an overview of the requirements of auditing standards. This can be effectively used by the audit firms as well in training their audit staff on auditing standards.

Convocation Ceremony in Jaipur:

The convocation programme for the newly enrolled Associate Members of the Institute from Central Region (covering the states of Rajasthan and Madhya Pradesh) was successfully held at Jaipur on October 5, 2010. It was a time of celebration and of acknowledgement of our students’ hard work. The undersigned inaugurated the function and conferred the certificates of merit to the deserving and newlyenrolled members in the presence of Past President CA. Sunil Goyal, Central Council colleague CA. Anuj Goyal, past Central Council colleague CA. P. P. Pareek and Jaipur Branch Chairman CA. C. L. Yadav among others. While stressing the need of having effective communication skills, the undersigned informed the members about the growing recognition of Indian CAs internationally, and noted with appreciation the rising ratio of female members.

Certified Filing Centre Registration till November 2010:

We want to inform all members of our community that the registration process under the Certified Filing Centre (CFC) scheme is valid till November 30, 2010. We have received 271 CFC applications (88 new application and 183 applications for renewal of existing CFCs) from the members till date.

Students’ Initiatives
Residential Programme on Professional Skills & Development:

A six-week residential programme on Professional Skills and Development has been conceived by the Board of Studies for the benefit of our students and newly-qualified chartered accountants. All students who have passed PCC/IPCC/PE-II examinations and who are pursuing last year of the article training or those who are newly-qualified chartered accountants will be eligible for the programme and, therefore, are invited to join it. This will offer a unique opportunity to develop skills in communication, leadership and personality in general including the technical skills for effective functioning in profession. The programme will start on December 1, 2010, at the Centre of Excellence of ICAI in Hyderabad. In fact, more than 50 students have already been enrolled for this programme. In the meantime, a three-month residential programme shall commence from December 6, 2010, at National Institute of Financial Management in Faridabad. We sincerely hope to witness a large number of participants and we are sure they will use this opportunity to become better professionals. Such an active participation will encourage us further to hold similar and better programmes for them in future.

Online Articles Placement Portal:

We are glad to inform that the Board of Studies has introduced an optional Campus Placement Scheme for selection of Articled Assistants by CA Firms. The Pilot Campus Placement Programme was held at Delhi in August 2010 for the CA firms having their HOs/ Branch Offices in Delhi/New Delhi and for eligible students who would like to service their articles in the CA Firms in Delhi/New Delhi. Considering the good response, positive feedback and requests received from both CA Firms and Students, it has been decided to start an Online Articles Placement Portal – http://bosapp.icai.org from 5th October, 2010 to facilitate placement of Articles in CA Firms on pan India basis. We request both eligible candidates and CA firms to avail of this facility and register themselves online through the portal. The candidates shortlisted by CA Firms would be informed by e-mail through the Portal, to appear for interviews/interactions at their respective Offices, at the designated date and time.

CPT Online Examination results:

The results of CPT online examinations held on 18th and 19th September this year were declared recently and we are happy to inform you that the results (28.40 per cent) have been satisfactory. What is more satisfying is that our online examinations are slowly-but-steadily gaining popularity among new-age students and this portends well for our vision to make our examination system hi-tech and futuristic.

New Members Nominated on 21st Council of ICAI

We welcome Dr. T. V. Somanathan, Joint Secretary, Ministry of Corporate Affairs, New Delhi, and Ms. Usha Sankar, Director General (Commercial), Office of the Comptroller & Auditor General of India, New Delhi, as nominated members on the 21st Council of our Institute for the remaining term of the Council or till further orders. They have replaced Ms. Renuka Kumar and Shri K. P. Sasidharan respectively. We sincerely hope to get their complete help and support in all endeavours for progress of our Institute. We also place on record the valuable contributions made by Ms. Kumar and Mr. Sasidharan in the Council.

Meanwhile, we have submitted our comments/suggestions on Draft International Standard ISO 26000 (Guidance on Social Responsibility) and on Applicability of Foreign Direct Investments in LLP to the Ministry of Corporate Affairs (MCA).

Deepawali, the pious festival of lights, is the celebration of the victory of good over evil. The underlining message of this festival is that the evil and falsehood may appear to be mightier and more resourceful but it is only the truth and good that prevails in the end. Let’s imbibe the spirit of this festival and take a vow to lead the world from darkness to light, from falsehood to truth, and from wrong to right. Let us vow to live each day in the most pious, God-conscious way. This Deepawali let us give thanks for all we hold dear: Our health, our family, our friends and to the grace of God which never ends. May this Deepawali fill your life with prosperity and peace, and love and joy which doesn’t cease. May the festival of lights be the harbinger of growth of our profession.

CA. AMARJIT CHOPRA
President, ICAI
October 25, 2010

The finance ministry expects to overshoot its indirect tax collection target by Rs 15,000 crore. For 2010-11, the government had set an indirect tax collection target of Rs 315,000 crore.

“We may exceed our original target…It (indirect tax mop-up) could be around Rs 330,000 crore this year,” V Sridhar, chairman of Central Board of Excise and Customs, said.

He said the growth would be driven by a good show seen in excise and customs collections, which are likely to exceed the budgetary target of Rs 132,000 crore and Rs 115,000 crore, respectively. Service tax collections, on the other hand, may just meet the target of Rs 68,000 crore.

Sridhar said excise and customs collections increased mainly on account of partial rollback of the excise duty and increase in duty on petroleum, while there was no duty rollback in case of services. He said the impact of taxation on eight new services, introduced with effect from July 1, would be seen in collections in the coming months.

In its Budget in February, the government had restored the basic duty of five per cent on crude petroleum, 7.5 per cent on diesel and petrol, and 10 per cent on other refined products. It had also enhanced the excise duty on petrol and diesel by Re 1 per litre.

In 2009-10, the government had to revise its budgetary target of indirect tax receipts to Rs 244,447 crore from Rs 268,000 crore. The revenue department managed to mop about Rs 2,000 crore more at Rs 246,000 crore.

The government has budgeted an overall tax mop-up of Rs 746,000 crore for 2010-11. Indirect tax collections increased 44.4 per cent to Rs 150,686 crore in first six months of this financial year. The mop-up was 48.1 per cent of the indirect tax Budget Estimates for 2010-11.

Direct tax collections, on the other hand, increased 19.09 per cent to Rs 181,758 crore in the first half of this year, against Rs 152,625 crore in the corresponding period last year. The mop-up was 42.27 per cent of the budgetary target of Rs 430,000 crore for 2010-11.

Finance Minister Pranab Mukherjee said gross tax revenue had so far grown by 27.3 per cent, compared to an 11.6 per cent fall last year and 17.9 per cent growth estimated for 2010-11.

Total revenue receipt increased 85 per cent, mainly on account of telecom spectrum auctions and robust growth in excise and customs duty receipts of 43 per cent and 60 per cent, respectively. Total expenditure grew 30.4 per cent, as against 22.8 per cent last year.

Ahead of US President Barack Obama’s maiden visit to India in his official capacity, Planning Commission Deputy Chairman Montek Singh Ahluwalia has firmly supported foreign entry into multi-brand retail in India.

Currently, only 51 per cent foreign direct investment (FDI) in single-brand retail is allowed in India. The Department of Industrial Policy and Promotion (Dipp) has floated a discussion paper exploring the probability of also opening FDI in multi-brand retail and the Planning Commission, along with the agriculture ministry, has supported the proposal.

“Today the policy of the country allows modern retail formats. We are not opposed to that. Therefore, in my view, there is absolutely no reason why FDI (in multi-brand retail) should not be allowed,” said Ahluwalia at the Economic Editors’ Conference.

Stating the medium-term macroeconomic prospects as robust, Ahluwalia further said India needed to sustain its demand-driven growth to complement the growth on the supply side. “On the supply side, we can grow by over 9 per cent, but we need to create demand to complement the growth,” added Ahluwalia.

He said investments, particularly in the infrastructure sector, needed to be enhanced to sustain growth in India, given the fact that there were anticipation of slack external demand as the global economic recovery was fraught with uncertainties.

On two issues, the Planning Commission is expected to move the Cabinet in the coming months. One is the Integrated Action Plan for stimulating development in districts affected by Naxal violence and the issue of lag in environmental clearances for key infrastructure projects.

“We are preparing recommendations for the Cabinet Committee on Economic Affairs for environment clearances, especially for the coalfields. We have asked for the views of the ministries concerned, after that we will give our final recommendations on the issue,” Planning Commission member B K Chaturvedi said on the sidelines of the conference.

On the issue of lack of storage space for essential foodgrains, which led to rotting of around 50,000 tonnes of wheat in Punjab recently, Planning Commission member Abhijit Sen conceded that the government had not done much on the storage front, while stating that “a certain amount of caution” had resulted in excessive procurement by the government leading to acute shortage of storage.

Sen further said agricultural growth for the Eleventh Plan period (2007-12) will marginally fall short of the target of 4 per cent at 3-3.5 per cent.

Microfinance institutions (MFI) today got some support from Finance Minister Pranab Mukherjee.

The finance minister ruled out any immediate move to regulate these entities and also disclosed that he had suggested to the Andhra Pradesh government that some of the harsher provisions of the Ordinance promulgated by the state be amended.

Mukherjee said he had discussed the Ordinance with the Andhra Pradesh chief minister and also conveyed that certain harsh provisions in the legislation were amended. The finance ministry is of the opinion that the Ordinance requires MFIs to seek the state government’s permission for various things which are not feasible. Even in case of registration, some relaxation has been suggested.

The finance minister told the Economic Editors’ Conference that the government did not want to immediately step in to regulate MFIs and instead wanted these entities to evolve a code of conduct on interest rates and recovery norms.

“We expect that a code of conduct is evolved through which the rate of interest (charged by MFIs) is not abnormally high and there is no use of coercive mechanism to recover (dues from borrowers),” he said in response to a question.

Mukherjee also said that for improving the repayment capacity, the government wanted MFIs to lend mainly for productive purposes and not for meeting consumption needs of the borrowers.

In recent weeks, governance issues at MFIs have come to the fore and there is debate over the interest rate charged by them. The Andhra Pradesh government has also promulgated an Ordinance that requires these lenders, who cater to the needs of the under-banked or unbanked population, to register with designated agencies. Besides, MFIs have to specify the area and system of their operations, the rate of interest and recovery mechanism while registering.

The Centre has been working on a Bill to regulate the MFI business for the last three-four years.

Apart from the action initiated by the Andhra Pradesh government, the Reserve Bank of India (RBI) has also set up a panel to look into various issues related to MFIs. Mukherjee said RBI and the National Bank for Agriculture and Rural Development were working with MFIs to evolve a code of conduct.

With RBI setting up the committee, the government is likely to wait till the recommendations are received. In addition, it wants to wait and watch how MFIs move on self-regulation.

With less than six months to go before the nation moves towards a globally-recognised accounting system, the government plans to dilute some key provisions relating to foreign exchange differences and overseas borrowings which will make global investors suspect Indian accounting, say three people closely associated with the development.

In the case of accounting for foreign exchange differences that rise because of currency derivatives taken by firms, the government is looking at an option where companies need not provide for any loss in the profit and loss statement but rather just carry forward the value as at the end of March 2011, according to a ministry of corporate affairs official, who declined to be named as he is not authorised to talk with the media.

Also, the National Advisory Committee on Accounting Standards (NACAS), an advisory body for the corporate affairs ministry, is in favour of allowing companies not to provide for mark-to-market (MTM) losses on their foreign currency convertible bonds (FCCBs), says a member of the advisory board.

MTM is an accounting principle where the value of the contract is marked at current exchange rate for currency derivatives and current bond price for FCCBs.

Both dilutions will be major departures from what the International Financial Reporting Standards (IFRS) prescribe. It has huge upside for India Inc in the short term by helping it to avoid reporting such MTM losses prescribed by IFRS. But it may work to its detriment in the long term by making companies unattractive to global investors.

“Our books (of account) will not be respected by the outside world (if we make such dilutions),” says V Balakrishnan, chief financial officer of Infosys, India’s bellwether information technology stock. “The whole approach is wrong. We should have adopted IFRS instead of converging.”

When companies first adopt IFRS, the standards lay out a procedure on how to treat the foreign exchange differences. It gives two options — the first is to reduce it from the profits and the second is to revalue all the assets in the balance sheet and adjust the loss arising from exchange differences with the reserve created from such revaluation.

Both will have a negative impact — one will reduce the profits and the other would shrink the balance sheet. So, companies have sought dilution of the provision. “We are now considering a third option where the companies will be allowed to carry forward whatever their values at the end of March 2011 to the next financial year when implementing IFRS,” says the MCA official.

“Allowing companies to carry forward the value of foreign exchange derivatives will ensure there is a permanent difference between Indian IFRS and IFRS,” says Jamil Khatri, executive director with KPMG, an audit and advisory firm.

The whole issue of accounting for changes in foreign exchange rates came to the forefront during global financial crisis, after Lehman Brothers collapse.

Many exporters and foreign loan holders took cross-currency derivatives to hedge their exposure not just to protect them from currency movements but also to make profit from such bets. They placed their bet on so-called safe currencies like Japanese yen or Swiss franc. But when the crisis was at the peak, both the yen and the franc moved in ways not seen for years. Japanese yen fell below 100 mark against the dollar for the first time.

The extent of losses are not known, but the Reserve Bank of India in its submission to the Orissa High Court stated the mark-to-market losses for customers who bought these derivative products were estimated at Rs 37,719 crore in December 2008. Further, it said 22 banks that sold complex derivative products lost Rs 756 crore as of December 2008.

With the stock market nearing its all-time high, the best way out is to sell them in tranches.

Employee stock option plans, or Esops, are touted as one of the best tools to create long-term wealth. These are the shares an employee gets of his/her employer at a discounted rate to the current market price.

With the stock market nearing its all-time high, there are chances that selling your shares granted under Esops will give you handsome returns, unless you are an employee at a telecom company.

Experts say employees should sell off their Esops if they have a liquidity requirement such as buying a house or emergency cash. It is because Esops are a part of a person’s equity portfolio. You need to stay invested in equities for at least five years to benefit from the investment.

However, if you want to book profits, the entire transaction depends on taxes.

Sachin Mahajan, an employee of a listed bank, is facing a similar dilemma. Two years ago, when he joined the bank, he was allotted 900 shares under his Esop. Mahajan has an option of buying 300 shares every year from the employer at a discounted price of Rs 995 a share. At present, he can pay Rs 6 lakh to get 600 shares. The current market value of these shares is Rs 14 lakh, a straight profit of 130 per cent.

Taxes involved in this transaction are at two different levels. If Mahajan exercises the option, his employer will transfer the shares to his demat account, and he will then need to pay a perquisite tax. To compute the perquisite tax, he needs to calculate the difference between the current market price (Rs 14 lakh) and the price at which his employer has offered the stock (Rs 6 lakh). The amount will be added to his income, and he will be taxed according to the relevant slab. For Mahajan, the amount totals Rs 8 lakh, and he will fall under the 30 per cent tax bracket.

The second part of taxation will arise if he decides to sell the shares. For stocks held for less than one year, one needs to pay a short-term capital gain tax of 15 per cent on the profits booked. For shares held for more than a year, there is no tax. An investor also has an option to offset the short-term capital gains against short-term capital loss.

Govind Pathak, director, Acorn Investments Advisory Services, suggests that Mahajan should exercise and sell the shares to the extent where both his buying price and taxation are covered. He can sell the remaining stocks after a year or use them to fund the next lot of 300 shares that he will get under his Esop next year.

“Before selling Esops, you should be clear about your objective, as to what you are going to do with the money,” says Surya Bhatia, a certified financial planner.

If you have an appetite for equities, use the money to diversify your portfolio into other stocks. “The portfolios of many investors, who get Esop options, tend to be skewed towards one company and one sector. If you are booking profits, use the opportunity to diversify in other stocks,” says Rajesh Saluja, CEO and managing partner, ASK Wealth Advisors.

For sectors such as telecom, where the current market prices are lower than the prices granted under the Esop, you can forego the option. If you believe in the sector and the company, you can still buy the shares in the open market at a cheaper rate.

When the markets rally, many companies increase the scope of their Esops from senior employees to lower down. If you get an Esop at the current level, you don’t need to worry about a price correction later.

“Every employer provides two-three years on average for an employee to exercise the Esop at a pre-determined price. This is the best part: there is no downward risk in Esops. If the employee feels the price is not right, it’s better not to exercise the option,” says Tarun Gulati, founder and CEO of Just Esops, a consultancy that helps companies design Esop schemes.

The Reserve Bank of India’s Reference Rate on October 27, 2010

for the US Dollar is Rs. 44.52

for Euro is Rs. 61.47

The corresponding rates for the previous day (October 26, 2010) were Rs. 44.43 and Rs. 62.07 respectively.