Congress MLA Ram Nivas Rawat protested over the demand of Rs 6 crore on advertisement budget for the rest of the month (only 10 days). He said the state government had proposed the supplementary budget to earn publicity through media as it was impossible for the government to use the budget to highlight its achievements.

The state public relation department has demanded a total of Rs 7.44 crore of the supplementary budget. Of this, Rs 2.50 crore is meant for advertisement and publicity and a similar amount for publicity through information and publicity.

“This should have been avoided as public money will go waste with only 10 days left for the financial year to end,&” Rawat said. He also said the Comptroller and Auditor General of India had raised objections over misuse of funds.

“Your government spends 45 per cent of the annual budget in 11 months of the financial year and the rest is used in March,&” Rawat pointed out.

Replying to these concerns, State Finance Minister Raghavji skipped a direct reply to the advertisement budget question, but said, “The state government is making prudence but whenever it is necessary in the interest of the poor and the common man, budgetary provisions are made.&” Later, the budget was cleared through a voice vote.

At present, the RBI appoints auditors for SBI in consultation with the Government. If and when the Bill is passed, the RBI will have to cede this power to SBI. “The Government is doing to SBI what has already been done for other public sector banks,” banking industry sources said.

The proposal is in line with the autonomy package already awarded to public sector banks in 2008-09. Under this package, the senior management of public sector banks was empowered by the Government to decide on the auditors.

The latest move is a blow to the Institute of Chartered Accountants of India (ICAI), which has been saying that it is not a practice for directors of a bank to appoint auditors as it impinges on auditor independence. The ICAI has been making a case for auditor appointments in banks to be centralised with the RBI.

“This is obnoxious. Again bank managements are trying to take this (power to appoint auditors) into their own hands. It will only dilute the independence of auditors. This may not serve the cause of public interest. Autonomy in policy decisions like setting of interest rates can be allowed. But there is also greater need for checks and balances. Auditor appointment from outside provides such checks and balances,” Mr Amarjit Chopra, ICAI President, told.

Recently, Mr Chopra had, in the context of public sector banks, called for a reversal to the earlier system where the RBI makes the auditor appointment. “We must go back to the system where the RBI decides on the auditors for state owned banks,” Mr Chopra had said.

The State Bank of India (Amendment) Bill 2010 was introduced by the Finance Minister, Mr Pranab Mukherjee, in the Lok Sabha on Monday

In its application, the foreign company asked AAR for two clarifications: One, whether it is subject to pay capital gains tax if it sells shares of its Indian subsidiary and two, whether it would need to pay tax in the event of buy back of shares of its local subsidiary. KSPG has also sought exemption from AAR on payment of capital gains tax, citing the India-Netherlands Double Taxation Avoidance Agreement (DTAA), which provides for exemption if the gains earned from India arise from a transfer of shares of an Indian company to a non-resident firm.

The AAR held that tax is not payable in India on the sale of shares of an Indian company by a non-resident entity to another non-resident firm. AAR said the issue of payment of tax in India in the event of the buyback of these shares can be dealt in a separate application.

Shefali Garodia, partner, BMR Advisors, told: “The ruling discusses principle of beneficial ownership in the context of tax treaties. But AAR’s reasoning for not ruling on the taxability in the event of buy back is not convincing.”

A few years ago, KSPG had bought 100% stake of German firm Pierburg in Pierburg India. KSPG had made further investment in Pierburg India, post the transaction. In the course of its argument at AAR, the Income-Tax department said that the transaction was carried out for the purpose of avoiding tax in India and therefore it does not merit tax exemption. It said the Indo-German tax treaty should be applicable in this case, as it the German firm Pierburg that gained from the transaction. Under the Indo-German tax treaty, tax is payable in India for such transactions, the I-T department said. The AAR did not agree with the department’s view. It pointed out that the Dutch company was a distinct legal entity with separate board of directors.

An individual is taxed based on his residential status in India. The residential status, in turn, is determined based on the physical stay of an individual in the relevant financial year (tax year) as well as preceding ten tax years. This is particularly relevant in respect of Indians working overseas or having income/income earning assets outside India.

RESIDENTIAL STATUS

Broadly, and individual could be a resident or a non-resident in a particular tax year. Once an individual’s residential status is determined to be a resident, it is further examined whether he is an ordinary resident or not an ordinary resident in India.

PHYSICAL STAY – BASIC TEST

An individual is said to be a resident in India if he fulfils any of the following two conditions. First, if he is present in India for a period of 182 days or more in that tax year OR second, if he is present in India for a period of 60 days or more during the relevant tax year and at least 365 days or more during the four preceding tax years. In case an individual does not satisfy any of the above two basic conditions, then he is said to be a non-resident.

CONCESSION FOR NRI’S

In the case of a citizen of India, who leaves India in any tax year for the purposes of employment outside India, the above said period of 60 days is substituted by 182 days. This is particularly beneficial for individuals going and working overseas in a particular tax year.

Similarly, in the case of a citizen of India or a person of Indian origin who being outside India, comes on a visit to India in any tax year, the above said period of 60 days is substituted by 182 days. This is helpful for non-resident Indians who visit India for family or other purposes.

ADDITIONAL TEST – NOT ORDINARY RESIDENT

In the case of an individual who is a resident, it is to be further determined whether he is an ordinary resident or not an ordinary resident. A person is said to be not ordinary resident if he satisfies any of the following additional conditions. First, if he has been a non-resident in India in nine out of the 10 previous years preceding the relevant tax year OR second, if he has been in India for 729 days or less in the seven tax years preceding the relevant tax year. If none of the above two conditions are satisfied, then a person is said to be an ordinary resident.

TAX INCIDENCE

An individual who is an ordinary resident is taxable on his worldwide income, irrespective of the place of receipt or accrual of such income. Thus, broadly speaking, rental income, business income, interest, dividends, capital gains etc. earned / received overseas would be taxable in India.

In the case of a person who is not Ordinarily Resident, any income other than income accruing or arising outside India is taxable in India. However, in the case of such income that accrues or arises outside India is derived from a business controlled in or a professional set-up in India, then the same would also be taxable in India.

In case an individual is a non-resident, then only income received / deemed to be received or accrued / deemed to be accrued in India is taxable in India. Thus, broadly speaking, his overseas income would not be taxable in India, provided it is first received outside India.

DOUBLE TAXATION AVOIDANCE AGREEMENTS – IMPORTANT

It is also important to examine the conditions laid out under the respective Double Taxation Avoidance Agreements (DTAAs), also know as treaties, which India has entered into with other countries to finally determine the taxability or otherwise for any particular source of income.

Generally, the DTAAs provide for taxability of income in one country. Else, if the income is subject to tax in both the countries, then credit could be claimed for tax paid in the other country, subject to the prescribed conditions.

The Reserve Bank of India’s Reference Rate on March 11, 2010

for the US Dollar is Rs. 45.47

for Euro is Rs. 62.02

The corresponding rates for the previous day (March 10, 2010) were Rs. 45.41 and Rs. 61.75 respectively.

For starters, it may help to know why there is a growing interest among all capital market participants, including the SEC in the US, for accepting a single set of robust accounting standards. Many multinational companies and national regulators and users support global standards because they believe that the use of common standards in the preparation of public company financial statements will make it easier to compare the financial results of reporting entities from different countries, explains Ghosh, in the course of a recent interaction with Business Line over the phone and email.

“They believe it will help investors to understand opportunities better. Large public companies with subsidiaries in multiple jurisdictions would be able to use one accounting language company-wide and present their financial statements in the same language as their competitors. Interestingly, 90 per cent of the respondents to an IFAC survey in 2007 said IFRS adoption is very important or important for economic growth ( www.ifac.org).”

What worries Ghosh is that many countries that claim to be converging to international standards may never get to full compliance. “Most reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability — the very issue that IFRS seek to address.”

Excerpts from the interview:

Globally, is the IFRS debate getting caught up in rhetoric? Is there disharmony in the understanding of the terms associated with international financial reporting?

Possibly, the fair value measurement of assets and liabilities is not appropriately perceived. In particular, there is confusion about the methodology to be adopted for fair value measurement of non-traded financial assets at initial recognition; and subsequent measurement is not properly understood.

Nevertheless the IFRS concept gets adequate acceptance. Of course, in many jurisdictions the critical issue is the diminishing role of the national standard-setters in the post-IFRS adoption era. In the case of convergence, the national standard-setters can retain their roles and responsibilities.

Of course, there are certain serious conflicts such as the regulatory minimum depreciation versus accounting depreciation, or prudential provisioning versus accrued loss approach for provisioning. There is the fear of under-depreciation or under-provisioning.

International standard-setters have the concern of over-conservatism. National regulators could avoid this debate by creating regulatory reserve. Dividend distribution policy can easily be regulated taking care of the desired level of retention.

To add to our woes, there is also confusion about the term convergence. Malaysia wishes to converge to IFRS by 2012 but “convergence with IFRS means full compliance with IFRS as a basis for financial reporting system in Malaysia.” On January 28, 2010, the Brazilian Federal Council of Accounting and the Brazilian Accounting Pronouncements Committee signed a memorandum of understanding (MoU) with the IASB that sets end-2010 as the target date for full convergence with IFRS and establishes a framework for future co-operation between the organisations.

The Korean Accounting Standards Board (KASB) has adopted IFRS as Korean IFRS (K-IFRS) which are completely identical to IFRS except for the timing differences for newly-published IFRS. K-IFRS are proposed to be kept up-to-date as IFRS change.

K-IFRS will be required for all listed companies in Korea from 2011. Unlisted companies may elect to use K-IFRS. All listed companies other than financial institutions can apply K-IFRS as early as 2009 on a voluntary basis. This alternative is somewhat as in India except that the Indian Accounting Standards Board has been engaged in a lengthy process of reissuing exposure drafts on a globally exposed set of accounting standards for Indian convergence.

What is your view on India’s approach towards IFRS?

India is pursuing a convergence approach. Convergence implies allowable differences in presentation, measurement, recognition and disclosures. Of course, it is not yet clear whether there will be full compliance or not. But the recent press release of the Ministry of Corporate Affairs signals divergence. It seems India will not apply IFRS 1, ‘First-time Adoption of International Financial Reporting Standards,’ in the convergence process. There is already announcement of exemption from providing comparatives in the IFRS convergence, which is contrary to the requirement of IFRS 1.

Also, there is an announcement regarding the issuance of the revised Schedule VI. The IAS 16, ‘Property, Plant and Equipment,’ on the contrary, requires depreciation charge based on estimated useful life, residual value and major components of an asset.

Unlike Malaysia and Canada, India has not yet signalled full convergence.

How has been the record in the implementation and adoption of national accounting standards in India? Do you expect that many of these issues will be ironed out in the post-IFRS era?

There are three issues — conflicting regulatory framework, divergent view of the national standard-setter on many accounting issues, and procedural delays.

Time lag in adopting a new accounting approach is very high in India although all Indian accounting standards are based on the IAS/IFRS. Improvement in the presentation of financial statements has been delayed because of regulatory framework. There is resistance to deregulate the format of the financial statements.

AS 16 to AS 29 were issued after an average time lag of five years. The time lag was due to ideological resistance. There has been very low acceptability of segment reporting, consolidation, and deferred taxation.

India does not have national standards on investment property, agriculture, share-based payment, non-current assets held for sale, etc.

Existing standards are not updated. Here, procedural delays may be major reasons rather than serious ideological differences. For instance, there could be no reason for revising conditions for revenue recognition or accepting the concept of operating segment. There could be no ideological difference in accepting balance-sheet liability method of deferred taxation.

AS 30 to AS 32 are issued but not implemented, which are major divergent areas. Understandably there is implementation difficulty. But it was the responsibility of national standard-setter to replace in a timely manner the orthodox investment accounting standard, which is another extreme of the application of historical costs ignoring the available fair market value of a financial asset.

As a result, almost all Indian standards have become divergent over the years.

Given the proposition of converged set of accounting standards, I don’t think the situation will improve. The converged set of standards will become divergent in no time given the adaptation time lag in India.

In what areas of IFRS transition do you foresee Indian corporates facing difficulties?

Difficult areas are many, of which the important ones are: componentisation of property, plant and equipment and making depreciation charge; recreation of cost records of property, plant and equipment for IFRS adoption or determining fair value which will be the deemed costs; measurement of amortised cost of financial liabilities and financial assets having scheduled cash flows; creation of tax base of assets and liabilities; decomposing compound financial instruments; and application of impairment analysis on loans and receivables in place of standardised provisioning.

Interestingly, any retrospective application of change in accounting policies and rectification of errors will cause considerable difficulties in the post-IFRS era. Local accounting software should be effective enough to capture retrospective application and retrospective restatement.

Any other points of interest.

Major issue is global harmonisation of financial reporting necessitated by the cross-border listing and fund-raising; this seems to be forgotten in the convergence process. Uniformity in financial reporting would be feasible through IFRS adoption, not through convergence with differences. The G-20 leaders also emphasised on global financial reporting standards.

Second, instead of reproducing a converged set of standards with differences or full convergence, it could be appropriate to list the IFRS clauses which India does not wish to accept and provide additional guidance wherever the national standard-setters think appropriate. This would help the issuer of financial reports and users to reconcile the divergences.

Initially, FDI up to 49% may be allowed in LLPs in select sectors such as manufacturing, a DIPP official told.

This could help make this form of business organisation more popular. So far, only 914 LLPs have been registered in the country. “We are ready with a discussion paper on the FDI framework for LLP,” the official, who did not wish to be named, said. The current thinking within the government is to allow FDI in LLP selectively and cap it at 49% even in sectors where companies can have 100% foreign investment, he added.

LLPs are business entities that are a hybrid between companies and partnership firms. As the name suggests, partners’ liability is limited to the extent of their stake in the LLP.

Unlike private limited companies where number of shareholders is limited to 50, an LLP can have unlimited number of partners. Besides, LLPs are not burdened with cumbersome compliance such as meetings and maintenance of statutory records. The DIPP will soon call a joint meeting with other ministries, departments and regulators including the RBI to discuss the paper and finalise the foreign investment regime for LLPs.

“Any move to ensure that LLPs have a level playing field will help the structure takeoff,” said Aseem Chawla, partner, Amarchand & Mangaldas adding that it was important that regulators in various services industry recognised this structure.

However, Akash Gupt, executive director, PwC felt more was needed for this structure to take off. “While allowing FDI in LLPs there is also a need to address sector regulatory issues that prohibit these entities from carrying on a particular activity,” he added. LLPs, for instance, cannot bid for a road project as per guidelines of the National Highway Authority of India.

Currently, FDI is not permitted in partnerships firms, but is allowed in companies subject to sectoral caps. In a number of manufacturing sectors 100% FDI is allowed through the automatic route.

Sole proprietorship firms can also get non-resident investment on a non-repatriable basis. Many countries allow 100% foreign investment in LLPs though they may not be allowed to undertake certain sectoral activities. The official said the 49% cap on FDI will ensure that control in LLP rests in Indian hands.

RBI had written to the finance ministry and the DIPP that FDI should be allowed in all sectors for LLPs but capped at 49%. It had also favoured mandatory Foreign Investment Promotion Board clearance for any FDI in LLPs.

The government had notified the LLP Act on April 1, 2009. But the taxation of LLPs, which is akin to partnership firms, could be clarified only in the July budget 2009-10. The budget for 2010-11 proposes to exempt capital gains on account of transfer of assets from on conversion of a company into an LLP from tax if the total sales, turnover or gross receipts of the company does not exceed Rs 60 lakh in any three preceding years.

The revenue deficit has been projected at Rs 3,941.81 crore for 2010-11. The fiscal deficit is estimated at 3.59 per cent of GSDP in 2010-11, which is within the prescribed limit of four per cent, the finance minister said.

The main constituents of the deficit spending were Rs 2,600 crore burden of salaries, Rs 1,570 crore of arrears (due to implementation of the Sixth Pay Commission recommendations), Rs 2,900 crore of power subsidy, Rs 2,000 crore of urban development charges and Rs 300 crore of mining fee.

Keeping infrastructure development as the focus of budgetary allocation, the finance minister allocated Rs 4,642.71 crore to the power sector, Rs 1,142 crore to the transport sector, Rs 1,616.49 crore to the irrigation sector, Rs 1,297.69 crore to the water supply and sanitation and Rs 1,447.14 crore to urban development. In order to facilitate urban local bodies with better fund mobilisation, the state has imposed a surcharge of 0.25 per cent to 0.7 per cent on different value-added tax slabs.

According to the finance minister, out of the total collections from the surcharge, 80 per cent would be given to the urban local bodies and 20 per cent would be given to the village panchayats.

The surcharge on VAT would provide the state an additional revenue of Rs 300 crore.

An allocation of Rs 713.79 crore has been made under the stimulus package for the projects involving construction and repair of institutional buildings.

The agriculture and allied sector, which contributes 19.8 per cent of the Gross State Domestic Product (GSDP), has been allocated Rs 1,073.62 crore.

The state economy registered a growth of 18.4 per cent in the GSDP over the previous year at current prices.

The state got a cushion in the form of greater devolution of funds under the 13th Finance Commission, which revised the figure from Rs 8040.44 crore to Rs 19,470 crore this year over the previous year.

The budget has proposed a thrust on the synergy between the private and government sectors for the improvement in physical and social infrastructure.

The finance minister proposed to set up the Haryana Infrastructure Development Board as a nodal agency for conceptualization, financing, implementation, maintenance and operation of PPP projects in the state and also as a special purpose vehicle to take up major infrastructure projects funded out of state resources and other levies and charges.

An express corridor at a cost of about Rs 2,000 crore under the PPP mode with a mixed model of BOT (toll) and BOT (annuity) to provide access to the hinterland has also been proposed.

The finance minister also proposed a joint venture company with Delhi Metro Rail Corporation for linking more parts of Haryana in the NCR with the national capital.

The finance minister also proposed to formulate a policy for engaging the voluntary and NGO sectors as development partners for faster implementation and transparency in social sector projects.

On the sidelines of his presentation, ‘Objectives and Framework of Monetary Policy in India,’ Mr Deepak Mohanty, Executive Director, RBI, said there seems to be reluctance on the part of many State governments to route payments through banks, but eventually it would happen. Mr K.R Ananda, Regional Director, RBI, said with social security programme payments made through the no-frills accounts, it is estimated that about Rs 1 lakh crore would come under the banking system. To enable banking facilities reach the rural poor, the central bank had asked public sector banks to open no-frills accounts that require no balance to be maintained.

The RBI has set a target to reach banking facilities to 6,000 villages with habitants of 2,000 people by 2011 through the ‘business correspondent’ model, using smart cards.

Collateral-free loans up to Rs 50,000 can be obtained by the no-frills account holder — this is another incentive held out to make the accounts active, Mr Mohanty said.

It would now be mandatory for foreign companies that wish to invest in telecom, defence and security services in India to provide details of all directors. Till now, while it was a desirable criterion for the companies seeking FIPB approval, the norm was mandatory only for telecommunications. However, in its new portal to be hosted for launching electronic filing of FIPB applications, this criterion would be mandatory for all applicants in these sectors.

Officials added that after conducting a test drive, the ministry had formally decided to launch online filing of FIPB applications. A separate website was being launched for FIPB exclusively. Till now, FIPB was hosted on the site of the finance ministry, along with other departments.

Besides, the requirement for furnishing details of all directors in foreign companies seeking to invest in India has been made mandatory for all sectors if the company has Chinese or Hong Kong registration or links.

It has also been specified that under the new facility, objections or issues also can be communicated electronically through this site. This website, along with the e-filing facility, would be formally launched on March 12.

Explaining this, officials said if either an Indian company which is a joint venture partner or a foreign company had any issue regarding the other, these could be flagged through the site. These may pertain to Press Notes 1, 2 or 3, or others.

Press Note 1 of 2005 pertains to objections of an Indian partner with the foreign partner or vice versa if the other one proposes to pursue the same line of business separately or with another partner, different from the existing one. Press Notes 2, 3 and 4 define the new mode of calculation for foreign direct investment through direct or indirect holding.

“There is no specific reason why the inflows in January dipped,” an official told. When asked, he further said India’s total FDI by the end of 2009-10, will not be more than last fiscal’s.

In January 2009, FDI inflows were $2.73 billion.

India attracted foreign direct investment of $2.33 billion in October 2009, about 56 per cent up over the same month last year, while in November FDI surged by 60 per cent to $1.73 billion.

The FDI increased by 13 per cent to $1.54 billion in December from $1.36 billion in the year-ago period.

In 2008-09, India received $27.3 billion FDI, higher than $24.5 billion in 2007-08.

During April-January 2009-10, the foreign inflows declined by about 4 per cent to $22.96 billion from $23.86 billion in the corresponding period last year, the official said.

“The major sectors that received FDI include services, computer software and hardware, telecommunications and housing and real estate,” the official said.

CRISIL’s Principal Economist D K Joshi also maintained that “it would be difficult for the country to attract more FDI than what it received during 2008-09″.

TPA is an intermediary between hospitals and insurance companies and helps cashless claim settlement. Insurance companies blame TPAs for fraudulent claims in the health space, where the claim ratio is 130 per cent.

Senior executives of the four insurers said working with lesser number of TPAs would help insurers monitor their work better and work on reducing fraudulent claims. These four account for 60 per cent of the market share and 70-80 per cent of the business of TPAs.

“The intention behind rationalisation is to have better control over management of claims. The outgo in the health segment is high compared to the premium income, and the only way to be present in this segment will be increasing the premium rate, if not controlling TPAs. We have been working with 10 TPAs for some time and it has yielded good results,” said S Gopalakrishnan, general manager of New India Assurance.

“We are reviewing the performance of TPAs. We will work with those who deliver good results and get us better business. We will reallocate business after that,” said a senior executive of United Insurance Company. For one of the four insurers, the total inflow into health insurance was around Rs 1,400 crore while the outflow was around Rs 1,800 crore.

On the other hand, TPAs see this as a threat to the industry, especially the smaller players. A senior executive of Paramount TPA said, “If PSUs cannot accommodate the TPAs, it will be difficult for everyone to survive.”

Insurers say the regulator is also issuing any number of licences, and since the capital requirement is low, more and more players are getting into the business. TPAs expect the rationalisation process to lead to consolidation among smaller players. At present, there are 27 players in this space. Last year, the Insurance Regulatory & Development Authority had increased the minimum capital requirement for TPAs from Rs 1 crore to Rs 5 crore. At the time of the inception of TPAs in 2002-03, the government had suggested that an insurance company could appoint two TPAs per region. According to TPAs, the number of players was less at that time and the limit should be revised. In the last eight years, business volume has grown six times.

Public sector insurers are working on an in-house network of TPAs so that they can monitor the process better to bring down the high loss ratio in this segment. They have submitted a report to KPMG, which will come up with the final report within 16 months of receiving the mandate.

According to separate statements issued by the three exchanges, all commodities except agricultural items will be allowed to trade between 10.00 am and 11.30 pm from Monday to Friday.

At present, trading is on till 11.55 pm.

The change in trade timings will be effective from March 15 for all the three exchanges.

However, the timing for agro commodities stays unchanged between 10 am and 5 pm while on Saturdays all commodities will be traded between 10 am to 2 pm.

The daylight-saving time begins in the US this weekend and it makes the days seem longer and pave the way to spring and summer.

The Union cabinet’s decision to raise the tax-free gratuity limit from Rs 3.5 lakh to Rs 10 lakh is likely to become a tool for companies to retain employees.

In 2008, when the government implemented the Sixth Pay Commission for central government employees, it was with effect from 2006. This helped employees reap rich benefits. The decision to increase the limit for private sector employees brings them at par with government employees in terms of gratuity benefits.

However, employees wanting to take advantage of this decision need to be aware of a few things. One, salary negotiations will become critical as it makes sense to ask for a higher basic salary, especially if he is planning to stay with the company for long. Also, job-hoppers stand to lose money which is deducted from their salary under the gratuity head.

“To have a cost-optimum structure, the basic salary should be 40-50 per cent of the pay,” says Vikas Vasal, executive director, KPMG. This ensures that a person strikes a balance between the taxes he has to pay, his take-home salary, and exemptions and deductions available under the Income-Tax Act.

While negotiating for a new job, it is best if you ask for a higher basic pay. This will help you accumulate a good gratuity, or “accrued benefit,” as it is called. “After this announcement, employees should be more concerned with the basic salary than the cost to company, especially the middle class, for whom Rs 10 lakh is a significant sum,” said K Pandia Rajan, managing director, Ma Foi Randstad, citing the example of the US, where the basic salary is 70 per cent of the total.

In India, many employers keep the basic pay low, say tax experts. In such cases, employees should take a re-look at their basic salaries. If the basic salary as a percentage of the overall salary is low, the person should ask the employer to bring it to the 40-50 per cent level. “In small organisations, there is a scope for such negotiations,” said a tax expert. Knowing the method of gratuity calculation will clarify this point. The calculation is based on the current basic salary multiplied by the number of years, and further multiplied by 15/26.

If an employee with a basic monthly salary of Rs 20,000 has resigned after completing five years of service, he will get Rs 57,692 as gratuity. For someone who is retiring after 30 years and has a basic salary of Rs 60,000, the gratuity will be Rs 10,38,461. Of this, the person does not need to pay tax on Rs 10 lakh. The remaining Rs 38,461 will attract tax. The taxpayer needs to add the excess amount to his income to calculate his tax liability.

In future, an employee will be able to save tax on gratuity if he invests the amount in an annuity plan. “The draft of the Direct Tax Code has made a provision for such an investment,” said Vasal. In the Budget speech, the finance minister said the government was likely to implement the Direct Tax Code from April 1, 2011.

Any organisation with more than 10 employees needs to make provision for gratuity payouts according to the Payment of Gratuity Act, 1972. An employer makes this payment at the time of retirement, resignation, and death or disablement due to an accident or a disease.

In the private sector, only manufacturing companies have low employee churn. In other sectors, attrition rates are quite high.

Many feel that employees in the private sector do not give importance to gratuity as they rarely work in a company for long. “Young employees today look at cash-in-hand more than long-term benefits like gratuity,” said a human resource head of a large company.

To be eligible for gratuity, an employee needs to put in a substantial number of years in the job. While the Payment of Gratuity Act, 1972, pegs this at five years, many companies have set higher limits.

The tax will come from vehicles plying on a 5,434 km stretch, Road Transport and Highways Minister Kamal Nath said.

Nath said if truckers were evading toll tax in any particular state, the state government should take immediate measures to check it. “We are holding talks with various stake holders on different issues pertaining to toll tax,” he said.

Pointing out the infrastructure deficit especially in the road sector which impacted agriculture, trade and industry, he said there was a need to bridge the gap by taking adequate measures.

The Commerce Ministry has proposed that the Direct Taxes Code should bring in “grandfathering provisions” exempting Special Economic Zones from its purview so that the developers and units of these tax-free enclaves can continue to enjoy the tax benefits as offered by the present regime.

Contending that it is “unfair” to take away tax benefits promised to SEZ developers and units through DTC norms with retrospective effect, the Commerce Secretary, Dr Rahul Khullar, told that the tax regime that the new code proposes, if need be, should be applicable only to new SEZs.

“Even when the new code comes in, you can have saving provisions that grandfather everything that happened up to that point of time. This means, if the Direct Taxes Code so decides, you could have a different regime for all prospective SEZ developers and units. But you cannot take away the promises that you gave to SEZs that came into existence prior to the coming into force of the new law,” Dr Khullar said.

The new tax code, in the long run, proposes to move from an exemption-based tax incentive system to an investment-based one. The Finance Ministry is yet to take a call on how SEZs should be treated under the new code.

In the Budget, the Government had committed to ensure continued growth of SEZs to draw investments and boost exports and employment.

“This commitment is a positive signal indicating that all issues arising in the new tax code regarding SEZs would be taken care of and benefits in the SEZ Act would be continued,” said Dr L.B. Singhal, Director General, Export Promotion Council for EOU and SEZs.

Mr Tapan Sangal, Senior Manager, PricewaterhouseCoopers, said, “The new code should allow continuation of these exemptions for SEZ developers as well as units. If it discontinues exemptions only for units but retains it for developers, then it will be difficult for developers to attract more units to SEZs. It will attract lots of litigation if the Government takes away the promises based on which huge investments have been made.”

Current SEZ regime offers several tax benefits. The SEZ developers are exempt from corporate tax for any consecutive 10 years of the first 15 years from the date of notification of the SEZ. Units are exempted from tax on export profits for the first five years and get 50 per cent exemption on the same for the next five years.

SEZ developers and units are exempted from the Minimum Alternate Tax. SEZ developers are perpetually exempted from the Dividend Distribution Tax, though units have to pay this tax.

A recent PwC study said the Centre’s overall tax earnings from SEZs, excluding State taxes, were Rs 65,540 crore.

The Government has approved 575 SEZ proposals of which 348 have been notified and 105 have commenced export.

SEZs have attracted investments of around Rs 130,000 crore and generated direct employment for about 490,000 people. During April-December 2009, exports from SEZs were worth Rs 1,52,092.68 crore.

Calling the annual Budget a circus has some justification. With tax rates becoming more or less stable, the annual Budget of the Union government is now largely about expenditure allocation in tune with the policy priorities of the finance minister and the political leadership at the Centre.

Has the government spent more on infrastructure? Could the finance minister reduce the fiscal deficit a little further? The curiosity that the Budget continues to arouse on the taxation front should also disappear next year when the proposed direct taxes code is in place and the goods and services tax becomes part of the country’s indirect tax regime.

Why should the annual Budget then still be a major media event? Similarly, what would then be the justification for continuing with the series of minor events now held, with great fanfare, to analyse the various proposals the finance minister announces in his speech? Indeed, there are no rational explanations.

Take a look at the annual Budget of any developed country or even an emerging economy. There is no such hype, excitement or a series of events around the government’s annual budget exercise. This is purely an Indian innovation. The annual Budget is now a mega event in which the finance minister revels as much as his team of senior officials.

In many ways, the transformation of the annual Budget into a mega national event is a post-reforms phenomenon. Economic reforms definitely ensured that more and more Indians got interested in the Budget. Since reforms also meant lower taxes and duties in addition to simplification of the taxation regime, the annual Budget exercise created an inevitable feel-good factor. No finance minister could let go such an opportunity to wax eloquent on what his Budget was going to mean for an individual’s pockets and for the economy’s growth.

What aided that hype and excitement was the emergence of several new television news channels in the 1990s. In the last decade or so, the number of television channels has only increased and their interest in the Budget has risen, contributing further to the hype and excitement of the finance minister’s annual exercise. The print media has not lagged behind. Newspapers too have realised that there is a lot of merit in exploiting the Budget and its content for offering more to the readers. Undoubtedly, competition among newspapers and television channels has provided a further boost to this annual Budget circus.

Finance ministers too seem to have played along with this transformation. Over the years, the finance minister’s Budget speech has become longer. Increasingly, finance ministers have spent more time on announcing minute details of tax rate changes, even though merely tabling the papers on the tax rate change would have served the purpose. Yashwant Sinha’s decision to present the Budget at around noon, instead of at 5 pm, also made sure that the government had a longer time to hog the limelight before the event became a day old.

Finance ministers have also shown the tendency to announce a list of reformist measures in areas not monitored by their own ministry, a move that, on many occasions, has boomeranged because other ministries never implemented those decisions. However, these were only minor setbacks. The mind space a finance minister grabs by making those grand policy announcements is a big enough gain to compensate for the embarrassment caused by the failure to implement those decisions later. Senior officials of the finance ministry have also benefited from the annual Budget circus, flitting from one television channel studio to the other and sharing with the viewers their understanding of the new fiscal policy initiatives.

In such a scenario, where everybody seems to be benefiting, there is little chance of the annual Budget circus returning to its old sedate form and shape. The tax policy may become more stable and the government’s expenditure priorities may soon lose their ability to spring a surprise year after year. However, it will take a brave finance minister to reduce the Budget to a short and simple exercise without the current hype and excitement. Most significantly, no finance minister can possibly strike a blow at the formidable alliance of beneficiaries of the annual Budget exercise.

Make no mistake that the media is one of those formidable beneficiaries. For the media, the Budget is not just an opportunity to present and analyse the government’s fiscal policy initiatives. It has now become an important annual revenue source. So, even if the Budget becomes predictable and the finance minister decides to avoid being part of an annual circus, the media will do its best to ensure that the circus continues to prosper as long as it can. Is there anybody who thinks otherwise?

The depreciation rates should also be indicative and not prescriptive as is the case now, Mr Amarjit Chopra, President of Institute of Chartered Accountants of India (ICAI), has said.

Also, the Centre should set up working groups to decide on separate depreciation rate for regulated industry sectors such as power, oil and gas and telecom, says Mr Chopra.

Currently, depreciation rates are specified under the Company Law through Schedule XIV, which is rule-based. Schedule XIV rates specify the minimum rates in the sense that companies can adopt rates higher than those prescribed, but with enough justification.

However, companies today are not permitted to adopt rates lower than the Schedule XIV rates even if the bonafide technological evaluation makes a case.

If indicative rates are spelt out, a company would have the flexibility to adopt either a lower or higher rate.

Under the scheme of the proposed company law, the depreciation rates are to be delegated to the rules.

So every time the rates are to be changed, the Government need not go for Parliament approval, sources said.

Sticking to timeline

Meanwhile, the ICAI President also said that the CA institute will stick to its earlier timeline of April 1, 2011 for making the accounting standards on financial instruments mandatory. The existing accounting standards AS 30, AS 31 and AS 32 are now recommendatory in nature.

On international financial reporting standards (IFRS), Mr Chopra said that the CA institute will in the next three months converge its current accounting standards with the IFRS and send it to the National Advisory Council for Accounting Standards (NACAS) for its approval.

India is looking to converge its Generally Accepted Accounting Principles (GAAP) with that of IFRS from April 1, 2011 over three phases.

The finance minister said in his Budget speech that the new direct taxes law could be rolled out from April 1, 2011. The government is veering around to the view that the existing regime with regard to taxation of capital gains should be continued, told a finance ministry official privy to discussions.

Long-term capital gains are taxed at concessional rates while short-term gains are taxed at the marginal rate of the tax payer and could be as high 30% for those in the highest slab. The tax treatment of shares is different from other assets. Currently, any stock market asset held for more 12 months is considered long-term capital assets but for all other assets have to be held for more than 36 months to be considered a long-term asset.

Moreover, shares held for the long-term attract only the securities transactions tax while others assets are levied a long-term capital gains tax of 10%.

The draft direct taxes code has proposed to tax capital assets irrespective of the period of holding. The entire capital gains of the assessee is proposed to be added to his income and taxed at the marginal rate.

The Central Board of Direct Taxes, the apex direct taxes body, that examined the code threadbare has also favoured continuing with the current framework with regard to capital gains tax.

Finance Minister Pranab Mukherjee has asked the CBDT to rework the draft code based on the feedback received from stakeholders before it is introduced in the Monsoon session.

“There is surely an advantage to have different tax rates for long-term and or short, but that may not be the sole factor for an investor while undertaking a commercial transaction. Different factors including market conditions, requirement of funds, future expected realisations may have an over-arching impact on financial decision,” said Vikas Vasal, executive director, KPMG.

However, in case of stock market transactions, concessional rate of tax has been in place for some time now and long-term gains could be completely tax free except for small amount on STT.

Even industry chambers have advocated continuing the existing regime for taxation of capital gains.

“We will introduce the legislation sometime in the monsoon session. We have had discussions with all stakeholders and based on it I want to prepare a draft and place it for public comments once again before I introduce it,” Mr Mukherjee had told earlier.

The Reserve Bank of India’s Reference Rate on March 10, 2010

for the US Dollar is Rs. 45.41

for Euro is Rs. 61.75

The corresponding rates for the previous day (March 9, 2010) were Rs. 45.54 and Rs. 62.01 respectively.

PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY

PART – 11, SECTION 3, SUB-SECTION (i)]

GOVERNMENT OF INDIA

MINISTRY OF CORPORATE AFFAIRS

Notification

New Delhi, 10′ day of February, 2010.

G.S.R. 68 (E) – In exercise of the powers conferred by sub-section (1) of section 642 read with section .10B of the Companies Act, 1956, the CentralGovernment hereby makes the following rules further to amend the Companies (Central Government’s) Gen eral Rules and Forms, 1956, namely: -

1. (1) These rules may be called the Companies (Central Government’s) General Rules and Forms (Amendment), 20 10.

(2) These rules shall come into force on the 14′ day of March, 2010.

2. In the Companies (Central Government’s) General Rules and Forms, 1956, in Annexure ‘A,’ for Form No. 32, the following Form shall be substituted, namely:-

Form 32

Renuka Kumar,

Joint Secretary.

Note: The principal rules were published vide number G.S.R. 432A, dated the 18th February, 1956 and were last amended vide number G.S.R 649 (E) dated 8th September, 2009.

[ PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY PART - 11,

SECTION 3, SUB-SECTION (i)]

GOVERNMENT OF INDIA

MINISTRY OF CORPORATE AFFAIRS

Notification

New Delhi, 5th March , 20 10.

G.S.R. 177 (E). – In exercise of the powers conferred by sub-section (1) of section 642 read with sub-section (1) of 610B of the Companies Act, 1956, the Central Government hereby makes the following rules further to amend the Companies (Central Government’s) General Rules and Forms, 1956, namely: -

1.  (1) These rules may be called the Companies (Central Government’s) General Rules and Forms (Second Amendment), 20 10..

(2) They shall come into forcewith effect from the day of March, 2010.

2. In the Companies (Central Government’s) General Rules and Forms, 1956, herein after referred to as the said rules,

(i) After rule 20F, the following rule shall  be inserted, namely:-

“20G (1) An application for rectification of mistakes made while filing Form No. 1, Form No. 1A and Form No. 44 electronically, on the Ministry’s website, shall be made to the Registrar of Companies in Form No. 68 and such application shall be accompanied by fee of rupees one thousand for rectification of mistakes in Form No. 1 and Form No. 1A and rupees ten thousand for rectification of mistakes in Form No. 44 respectively;

(2) An application in Form No. 68 complete in all respects shall be made to the Registrar within a period of three sixty’five days from the date of approval of Form No. 1, Form No. 1 A and Form No. 44 respectively by the Registrar:

Provided that the provision relating to the rectification of mistakes as is referred to in sub-rule (1) shall also be made applicable to the Form No. 1, Form No. 1A.and Form No. 44 filed and approved electronically on the Ministry’s website, prior to the 14′day of March, 2010.

(3) After receiving the application for rectification of mistakes, the Registrar shall examine the said application based on the relevant documents filed and available on record and there after approve the application and intimate the mistakes rectified to the applicant within a period of sixty days from the date of filing of the said application:

Provided that the rectification of mistakes shall be allowed only once in respect of one company.”

(ii) in Annexure ‘A7, after Form No. 67, the following Form shall be inserted, namely:-

Form 68

Renuka Kumar ,

Joint Secretary.

Note: The principal rules were published vide number S.R.O. 432A, dated the 18th February, 1956 and was last amended vide number G.S.R. 68(E), dated the 10th February 2010.

ITAT, BENCH `D’, CHENNAI

K. K. S. K. Leather Processors (P.) Ltd.

v.

ITO

ITA No. 826 & 827/Mds./2009

RELEVANT EXTRACTS:

7. We have considered the rival contentions, relevant record and various decisions relied upon by both the parties. The undisputed factual position emerging out of the record is that in the case of first assessee in ITA Nos.826 & 827/09 the return of income for the assessment year 2003-04 was filed on due date but the return of income for 2005-06 was filed after the due date as prescribed under section 139(1) of Income-tax Act. Similarly in the case of the second assessee in ITA Nos.828 & 829/09 the return of income for the assessment year 2003-04 was filed on due date and for the assessment year 2005-06 was filed after due date. In the case of third assessee in ITA No.832/09 the return of income was filed on due date. In the case of the fourth assessee in ITA Nos.833 to 836/09 all the returns for the four assessment years were filed on due dates. As far as the entitlement of higher rate of depreciation on windmill as per Appendix I to Rule 5(1A) is concerned, there is no dispute that the assessee is entitled because the Revenue has not disputed the entitlement on merits. But the claim was disallowed by the Assessing Officer1 on the ground that the assessee did not exercise the option as prescribed under Second Proviso to Rule 5(1A). The two questions arising for consideration and determination in the facts of these cases are.

(i) whether the claim made in the return of income along with audit report showing the claim of the assessee regarding depreciation of windmill would amount to exercising option as required under Second Proviso to Rule 5(1 A) of Income-tax Rules?

(ii) whether the return filed on the due date of Tiling the return of income under section 139(1) would be considered as exercising of option before due date as prescribed in the Second Proviso of Rule 5(1 A)

Before discussing these two questions, it is appropriate to discuss the relevant provisions for depreciation provided under Section 32 of Income-tax Act as well as Appendix (I) & Appendix (1A) to Rule 5(1A) of Income- tax Rules. For better understanding we quote sub-clause (i) & {it);..’$ft Section 32(1) which is as under:

32. (1) In respect of depreciation of-

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;

(ii) – (in the case of- any block of assets, such percentage on the written down value thereof

as may be prescribed:

As per clause (i) of sub-section (1) of Section 32 the depreciation on the assets of an undertaking engaged in generation or generation and distribution of power is at a percentage as prescribed as per rates on the actual cost thereof. Thus sub-clause (i) of sub-section (1) of Section 32 provides the depreciation at a prescribed rate on the assets of specified undertaking on the actual cost instead of written down value. Explanation 5 to sub-section (1) of Section 32 makes it clear that the provisions of sub-section (1) to section 32 of Income-tax Act shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income. We quote? Explanation 5 winch is as under:

“For the removal of doubts, it is hereby declared that the provisions of this subjection shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; “

From the provisions of sub-section (1) of Section 32 along with the Explanation 5, it is dear that “the Assessing Officer is duty beyond and under obligation to allow the deduction of depreciation as per the provisions of sub-section (1) of Section 32. Since two rates of depreciation are prescribed as per Appendix (1) as well as Appendix (1A) to Rule 5 of Income-tax Rules in respect of assets of the undertaking engaged for generation and distribution of power. Thus to make it dear and to facilitate the Assessing Officer has to see which of the rates provided under two different Appendixes of..depreciation shall be allowed, second proviso to Rule 5(1A) requires the assessee to exercise its option that depreciation be allowed as per Appendix 1. Though the proviso of that if such option is exercised before the due date of furnishing the ‘return of income under sub-section (1) of Section 139 of the Income-tax Act, in our view the second proviso to Rule 5(1A) is only to facilitate the Assessing Officer in discharging of its obligation as per Explanation 5 to sub-section (1) of Section 32 of Income-tax Act so that the depreciation shall be allowed as per the option of the assessee and not on the discretion of the Assessing Officer. The Assessing Officer is otherwise under obligation to allow the depreciation but because the depreciation specified under two different Appendixes (1) & (1A) and the choice is given to the assessee in respect of the assets specified under clause (1) of sub-section (1) of

“Section 139 of the Act” Therefore the provisions contained in the Rules cannot override the provisions contained in the statute and the requirement of option under proviso to Rule 5(1A) cannot be held in the nature that on failure of the same would be so fatal that the very object c’ the provision for providing higher rate of depreciation is defeated. When there is no specific form or method prescribed for exercising the said option then the claim made in the return of income as well as reflected from the books of account and audit report filed along with return of income is more than the exercise of the option as required under second proviso to Rule 5(1A).

8. In the case of CIT vs. Shivanand Electronics (209 1TR 63), the Hon’ble Bombay High Court has held at page 71 as under: “The requirement of filing the audit report “along with the return of income” is directory and if the assesses complies with the same before completion of the assessment and offers a satisfactory explanation for his failure to submit the same in time, the Income Tax Officer may consider the same and examine the claim of the assessee for deduction under section 80] on the basis of such report, We, however, do not subscribe to the view taken by the Tribunal-that it is the duty of the Income Tax Officer to the assessee that as, he had not submitted the report of audit required by sub-sect/on (6A), his claim would not be allowed and to give him an opportunity to file the same.”

Therefore even if option is not exercised within the stipulated time as per second proviso to Rule 5(1A), the same cannot have a serious consequence of total denial of the claim of the assessee. There is no doubt in our mind that when there is no prescribed procedure or mode of exercising option prescribed in the Rules then the option exercised by the assessee by way of making a claim in the return of income along with the audit report is definitely more than the requirement of the second proviso.

Even otherwise the question of exercising the option in the return of income is not seriously agitated by the Revenue, as per the order of the lower authorities the depreciation claimed has been rejected on the ground that option has not been exercised before the due date. Therefore the second question whether the filing of the return on due date is exercising of option before due date or not is of importance. In the case of CIT vs. G.R.Govindarajulu ‘and Sons Charities (271 ITR 145), the Hon’ble Jurisdictional High Court has held as under at page 152;

“The other ‘contention raised by learned counsel for the appellant is that the assessee failed to exercise the option as contemplated under section 11(2) of the Act In a prescribed form, namely, Form No. 10. But the said contention was rightly rejected by both the Commissioner (Appeals) and the Tribunal There is no mandatory requirement under section 11(1) of the Act requiring the assessee to exercise the option when he seeks relief under section 11(1) of the Act, as It is enough for the assessee to submit a statement along with the return to exercise such option. “

Further in the case of CTT vs. Adar Tea Products Company (314 ITR 38), the Hon’ble Jurisdictional High Court has held at page 46 as under:

“The Supreme Court has held that if a provision is made in the context of a law providing for concessional rates of tax for the purpose of encouraging an industrial activity, a liberal construction should be put upon the language of the statute -vide CIT k Straw Board Manufacturing Co. Ltd. (1989) 5upp 2 SCC523.

The items in an exemption notification are to be strictly construed, but once the goods in question fall even narrowly in one of the exempted categories, then the exemption notification has to be construed broadly and widely – vide Bombay Chemical Pvt. Ltd. v. CCE, AIR 1995 SC1469.

The table includes energy saving device in the context and for the purpose of encouraging industries to adopt energy saving measures. While it was possible, in the context. of, encouraging industrial activity, to bring within’ the net of exemption, manufacture of products which may even be remotely considered as “paper”; we cannot adopt the same reasoning here, since the table indicates its intention to afford depreciation at the rotes mentioned only to the specifically listed equipments. It is not even proved that a drier of the kind mentioned herein is an energy saving device. “

In our view, the requirement of second proviso to Rule 5(1A) is satisfied if the option is exercised before the expiry of due date of filing of return of income under -section 139(1) of the Income-tax Act. The meaning of the term before due date shall be understood as it is understood by a man of ordinary prudence. Before due date simply refers and means that not after the expiry of due date. If the requisite act is done before the last day expires then it will be simply said that before due date; when the time of filing the return is available to the assessee till the test moment of the due date then the whole of that day is available to the assessee and due date expires only when the last day is expired; as such the option exercised on the due date is nothing but before the due date as the same is not after the due date, In the case of CIT vs. Vijaya Hirasa Kalamkar (HUF), (229 ITR 772), the Hon’ble Bombay High Court has held at pages 774 & 775 as under:

“Having regard to the object of the Ordinance and the words used in section 3(1), it seems to as that the declaration received on January 1, 1976, was well within time. In the whole context, the word “before” will have to be construed as “upto” or as “not after”. There are various provisions in the Income-tax Act. wherein the ex-pression “before” has been used (sections 139(l)(a)(i), section 139(l)(b); section 184, section 212). The ex-pression has always been taken to mean “upto Section 3 specified the period before which a declaration in respect of income has to be made for the purposes of getting a benefit under the Ordinance It provides a period of limitation within which certain benefits are available. In case of ambiguity the construction which preserves the right to the one which defeats it, has to be preferred. After all, this is a taxing statute which m case of doubt should be interpreted in favour of a taxpayer. Had the legislative intention been to make December 31, 1975. The last day for making the declaration, it could have clearly-said so in the proviso. The very fact that the date January 1, 1&76. Is in terms mentioned indicates that the time limit was up to that date. That in a given case the word “before” in the context of the time can be construed as “not after” is well settled.

1. Sahara India Financial Corporation Ltd. (tax payer) had entered into an agreement with IMG Canada, a foreign company through IMC India for sponsorship of the international cricket tournament between India and Pakistan to be played in Canada.

2. The sponsorship benefits inter-alia included:

• the right of renaming of the tournament as “Sahara Cup”;

• incorporation of the Sahara logo as the official logo of the tournament; and

• “Sahara” logo to be prominently displayed at both ends of the cricket ground, stumps, score boards and clothing of the players.

3. The tax payer made a lump sum payment to the foreign company for the above sponsorship benefits.

4. The revenue authority was of the view that the payment for sponsorship right is in the nature of royalty payment. However, the Appellate Tribunal held that the payment to IMG Canada could not be called as royalty as contemplated under Article 13(3) of the India-Canada Tax Treaty.

Contentions of the Revenue

1. The payment made by the tax payer to the foreign company is in the nature of royalty under Article 13(3)(c) of the Tax Treaty between India and the Canada.

2. The expression “payment of any kind including rentals”, has a very wide meaning and, therefore, it includes the payment for “any” rights.

A Rediff India Abroad feature:

I have been a non-resident Indian for the last 21 years working in Africa. My income in India comes from various sources: Interest on Non Resident Ordinary account deposits, short-term capital gains and long-term capital gains on sale of shares through demat account and on mutual funds. All these investments started three to four years ago. As you may be aware, the gains are taxed at source and the balance is paid as net of WHT. During the last couple of years, I suffered — like everybody — substantial losses both on shares and mutual funds. I have not yet submitted my income tax return in India but am quite keen to do so in order to take advantage of the provision in the IT Act concerning setting off losses and/or carrying forward the same for some years. Is it possible to obtain the necessary information to submit my IT return using any of the regulatory authorities electronically, since I have a Permanent Account Number card?

– Dr Y G Rao

In India, the fiscal year ranges from April to March, the income tax return for which has to be filed by July 31. Therefore, for FY 2009-2010, you will have to file the return by July 31, 2010. Short-term capital losses may be set off against short-term or taxable long-term capital gain.

Any long-term loss on sale of shares or mutual funds cannot be set-off since any long-term gain from those sources is tax-free. You may file your return electronically if you so desire. The detailed procedure for the same can be found on https://incometaxindiaefiling.gov.in/portal/index.jsp

My father, 83, is an NRI and also an Overseas Citizen of India under the provisions of section 7A of Citizenship Act, 1955. He has recently sold some Indian agricultural land which was given to him by his father. What would be his tax implications? Can he purchase with the same sale amount any other Indian housing or agricultural property in his own name or in the name of his wife who is Indian national or in the names of his NRI children? If yes, what are the limits? Can he, being an OCI, operate resident bank accounts in India, if he spends 182 days or more in India during a fiscal year?

– Anil Kumar

1. Any agricultural land would be treated as a capital asset if it is situated within the jurisdiction of a municipality — whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name — or a cantonment board and which has a population of not less than 10,000 according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

Further, the scope for this purpose is extended to lands situated within 8 km from the local limits of these municipalities or cantonment boards and the federal government has notified such extended areas. Consequently, sales made of such agricultural lands would attract tax as capital gains. [CIT versus Shubhlata & Others 13TCR91 (1998)].

2. If he is exigible to the tax, he can make it exempt under Section 54F by purchasing a residential house in his own name. It is he who has earned the capital gains and not his wife or his NRI children. If the cost of the house is equal to or more than the sale proceeds of the agricultural land, then the entire tax will be exempt. If the cost is less, he can claim proportional benefit.

The tax on all long-term capital gains which are chargeable to tax can be saved by investing within 6 months the amount of capital gains in infrastructure-related bonds of the National Highways Authority of India or REC under Section 54EC. The lock-in period is 3 years. The current interest rate is around 5.5 percent and this is fully taxable. The ceiling on this investment is Rs 5 million per fiscal year.

3. There is a possibility that he can also earn exemption under Section 54B by buying another agricultural land. An NRI is not allowed to purchase any agricultural property in India. An OCI too is ultimately a Person of Indian Origin and hence not eligible to purchase agricultural land. However, the law is not clearly worded in this regard.

4. If he stays in India for 182 days or more he becomes a resident, and he will have to re-designate his NRI-related accounts into resident accounts.

My son had opened a Public Provident Fund account which is maturing next year. Last year he got his British passport. Can his PPF account be extended for the first block of 5 years? Can I deposit money in this account?

– Santo

GSR 592(E) states that all NRIs — including PIO like your son — are not eligible to open PPF accounts.

The accounts opened prior to all these dates are allowed to run up to their maturity but no extension or renewal can be made.

As and when the irregularity comes to the notice of the authorities, the money will be returned to you without any interest.

In the interim, NBFCs that want to convert themselves to LLP firms will have to obtain a no-objection certificate from the central bank.

LLPs refer to a corporate structure introduced and actively promoted by the ministry of corporate affairs. They are gaining in popularity because they have easier winding up procedures and the liability of a partner is limited to the extent of his or her contribution to the LLP.

LLPs also do not have a minimum capital requirement in contrast to a private company which requires a minimum paid-up capital of Rs 1 lakh.

RBI wants to ensure that the easier rules and regulations governing LLPs do not encourage unhealthy practices among NBFCs.

Additionally, there is no mandate under current RBI rules to regulate an entity termed an LLP. The apex banking regulator has called for a meeting with the corporate affairs ministry’s LLP team to frame sufficient guidelines and rules to incorporate LLP within the existing regulatory structure of RBI.

In addition to RBI, stock exchange regulator Securities and Exchanges Board of India and the Foreign Investment Promotion Board are also coordinating with their administrative ministries to amend existing rules to bring LLPs under their regulatory purview.

As on January 16, RBI had permitted 314 NBFCs across the country to accept public money.

According to a survey by leading consultancy firm Tower Watson, half of the Indian companies now provide gratuity purely in line with the Payment of Gratuity Act, 1972 – that is a maximum of Rs 350,000 per employee. Thirty per cent of the firms – mostly big companies – had no ceiling on the gratuity amount.

The remaining 20 per cent of the companies follow different methods of calculating gratuity. The survey covered 210 gratuity schemes covering 350,000 employees.

The PG Act has laid down the guidelines for payment for gratuity, under which employees with a minimum of five years experience are entitled to around half month’s salary per year. Under the Act, companies have to provide for this “accrued liability” up to a maximum of Rs 350,000.

Companies typically put this money in their own trusts or with the Life Insurance Corporation of India or other insurance companies.

For instance, Infosys has an Infosys Technologies Limited Gratuity Fund Trust under which the trustees administer the contributions made to the trust and ensure that they are invested in instruments permitted by the law.

At present, contributions made by a company to an approved gratuity trust up to a maximum of 8.33 per cent of annual wages attracts a tax rebate at the hands of the company.

Now the increase in the limit to Rs 10 lakh will force companies to keep aside higher amounts, not just for employees who have already accrued a benefit of Rs 350,000 but also for those who will exceed the limit in future due to expected salary growth. As a result, the report also expected a dramatic increase in their profit and loss provisioning.

However, there could be some breathing space for companies. Despite the government’s decision, there has to be an amendment in the PG Act to permit companies to pay more. After that, the Income Tax Act has to be amended so that the exemption limit can be increased to Rs 10 lakh.

Till these laws are amended it is not clear whether the new limit will be effectively restrospectively or prospectively, though experience suggests the latter. For instance, while accepting the Sixth Pay Commission’s recommendation of raising the gratuity limit from Rs 350,000 to Rs 10 lakh for central government employees, the government had implemented it in retrospect from 2006.

If a similar provision is made, companies will have to provide for the service that an existing employee has already rendered. Also, if an employee had reached the Rs 350,000 limit a few years ago and the company had stopped provisioning for the gratuity expense, it will have to make the provision in retrospect.

“In this year’s P&L, the main impact will come through the recognition of expense related to ‘vested past service record’ and any recognition of ‘non-vested past service record’,” the report added.

The report said since most big companies already have no ceiling for the gratuity amount they would be able to give a higher tax-free benefit to employees. “Over 90 per cent of the BSE-100 companies hold this expense in separate assets,” said Kulin Patel, head, employees benefit practice, Tower Watson.

Big companies are quite bullish about this. Yasho Verma, vice president (human resources) LG, South-East Asia, said “This enhanced limit could be a good tool for employee management and retention.”

Also, there could be a change in the salary structure for employees. “An employee’s compensation is a composite of short-term and long-term benefits. This change is progressive and would have a salient effect on retiral/terminal benefits, both on account of additional gratuity eligibility as well as enhancing cash in hand,” added N S Rajan, Partner and Global Leader, Human Resource Advisory, Ernst & Young.

According to Patel, 40 per cent of companies with less than 1,000 employees have not fully funded their gratuity schemes, which means they will incur a higher liability now. Rajan said the funded liability of companies could increase because they have to make provisions for an increased gratuity payout.

“By bringing housing under the service tax net, the government has given a clear signal that we have to increase prices. In addition, input costs will also go up due to the increase in excise duty on cement. I am certain there will be a price rise in the realty sector across India as developers are not going to bear the brunt,” DLF executive director Rajeev Talwar said.

He refused to measure the increase in percentage terms, but said any rise in prices would “depend on each project as input costs varied from city to city”.

‘Archaic laws’

Talwar also stressed on the fact that a lot of policy changes were needed as the laws governing the realty segment were archaic. “We need to understand that there have been no initiatives to facilitate realty development in this country. We are still ruled by archaic laws and this needs to change – fast,” he said.

Logix Group chairman and CEO Shakti Nath also said it was unfortunate that service tax had been levied on the housing segment even as input costs were expected to rise because of the excise duty on cement. “We expect prices in the housing sector to go up 5-7 per cent,” he said.

‘Business to take a hit’

Realtors like TDI Infrastructure feel any announcement of an increase in prices will dampen the affordable housing business at a time when realtors already face razor-thin margins.

“It is quite sad that the housing sector has come under the service tax net. We have to see how much of it can be borne by us. On the whole, we believe prices are sure to increase, as inputs costs are going to increase for developers,” TDI Infrastructure executive director (Marketing) Kunal Banerji said.

Consultants in the industry are also of the view that, sooner or later, developers will have to hike prices. The overall impact of service tax on housing will be around 3.5 per cent for developers and consultants believe this is going to be a key factor in the increase of prices in the realty segment.

However, they add, the quantum of such a hike will depend on how much of the additional costs the developers are willing to bear themselves.

Leading real estate consultancy Jones Lang LeSalle Meghraj’s CEO (Operations) Santosh Kumar said: “With the increase in excise duty on cement and higher fuel prices (which will impact transportation costs of construction material), the developers will face higher input costs. We have to wait and watch when the developers decide to increase prices. But, it seems very likely that prices will go up.”

One of the fresh tax reliefs that has come as an outcome of the budget 2010 is the deduction allowed for investing upto Rs 20000 in the infrastructure bonds. Many articles and the FM have said that this is a very positive thing. But how can the same thing be positive for every individual. If not negative it should at least be neutral for many.

Else life would be so boring. This article will try to look the pros and cons of investing in Infrastructure bonds for the sake of tax saving. The analysis will be from the perspective of the different “tax groups” post budget 2010.

• Tax group 1: Taxable income Rs. 1.6-5 lakhs

• Tax group 2: Taxable income Rs. 5-8 Lakhs

• Tax group 3: Taxable income above Rs. 8 lakhs

Parameters

To understand the pros and cons of any tax saving investment we need to look at 4 major parameters

Actual tax saving (let’s take the highest saving possible).

Returns from the investment (during the lock in period at the least).

Opportunity cost (what if the same money had been invested in some other investment?).

Effect of Inflation on the returns on investment (what would the worth of your investment be when it comes to redeem/encash it?).

Assumptions

For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios – 3 year lock-in and 5 year lock-in

Let’s assume the rate of return on infrastructure bonds = 5.5% per annum.

Let’s consider overall rate of inflation to be 8%. (Food inflation itself is currently at 18 %).

For people in the 1.6- 5 lakh taxable income group, as per the new norms the income will be taxed at a rate of 10%.

Savings

Parameter 1: Actual tax saving: 10% of Rs 20,000 = Rs 2000 (if you invest Rs 20000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10% benefit)

Parameter 2: What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20000 would fetch an income of Rs. 3484. When added to the tax saved we get an effective return of Rs 25485 (Rs 20000 + 3484 + 2000) on our investment.

Parameter 3: If this same amount were to be invested in a market instrument that fetched a return of 15% (which is very reasonable considering that the benchmark Sensex and many mutual funds have given comparatively higher returns on a long period.) the investment would fetch an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15% per annum for 3 years).

Countering Inflation

Parameter 4: What would be the minimum amount required to counter inflation at 8%? The amount would be Rs 25, 194.

Thus we see that for a person in the slab of 1.6-5 lakh the benefit out of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.

Click here to see the benefits for each segment as well as for a scenario where the lock in period is 5 years.

As seen from the table, it makes sense for people in the >Rs 8 lakh taxable income slab to use the infrastructure bonds as a tax saving instrument. For the people in the 5-8 lakh bracket it would be advisable to invest in infrastructure bonds if the period of investment is 3 years but not for five years and for those in the 1.6-5 lakh bracket it would be an absolute no-no to invest in Infrastructure bonds for tax saving purpose.

“Total number of pending refund returns (up to January 2010 is 49 lakh. The statutory time limit to process the return and issue refund in financial year 2009-10 is March, 31, 2011,” minister of state for finance SS Palanimanickam informed the Rajya Sabha in a written reply.

Normally after receipt of returns, processing of returns and issuance of refund is completed in due course, he said, addding however, difficulties are encountered in some cases due to various reasons like wrong PAN, illegible recording of address, incorrect particulars about bank account etc.

Pointing out that processing of refund is a continuous process, he said, the returns received during 2008-09 would be processed by March 31, 2010.

Guidelines have been issued by CBDT to process all returns and issue refunds expeditiously.