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(Fortnightly inputs for professionals and executives) Volume I Part 2 November 10, 2012
Business Advisor
Contents
1) 2) 3) 4) 5) 6) 7) 8) 9) 10) Corporate gifts: Bad governance - Dr S. Chandrasekaran Negotiating with a banker - Dr B. Yerram Raju Reforms and roadblocks - Bimbadhar Mishra Markets endorse reforms - Dr Sanjiv Agarwal March of the digerati - GBS Bindra Education abroad: Forex implications - G. Karthikeyan FDI in retail Interview with Sriram Sridharan FDI in retail Business leaders views Case laws update V. K. Subramani Queries, Information
(Cover photos location: ITC Grand Chola, Chennai)
But Ajay was sure that the banks would not like to lose a good client for another bank. Since Merkel is a company of proven track record he was hopeful of the deal for higher limits on both working capital and export packing credit. He took an appointment with the GM (mid-corporates) of the bank one fine morning. He did his homework well. He gathered full data of the enterprise; environment in which the entire industry has been working; the drug controls of both India and the Asian economies in which the company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress-testing of his projections. He presumed that in the first instance the bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that the depth of the officials on the areas requiring attention was not so high, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the bank. He awaited a call from the bank three days after
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Banks usually are tight-fisted in times of recession to grant enhanced limits. They have full information about the enterprise.
the first call. He went with his accounting team and with the required project proposal in the banks usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors individual guarantee to offer when absolutely necessary. Finally, when asked, he just mentioned that it was the companys intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through. The recipe is simple 1) Do your homework well: know your own enterprise, its SWOT. a) Brainstorm possible implications of the proposal with the Board and internal management. b) Cushion the proposal with adequate collaterals and guarantees but keep it undisclosed. c) Go as a team for presentation with your confident technical and financial team for discussion. 2) Do not thrust yourself at inconvenient times for the banker. 3) Be transparent during negotiations. 4) Be humble. 5) Never hide the data. 6) Go with a vision and a future plan. 7) Give reasonable time to the bank to think and come back with their offer. (Dr B. Yerram Raju is Regional Director, PRMIA-Hyderabad www.prmia.org)
Business Advisor
In Rajiv Gandhi Equity Savings Scheme (RGES), tax incentives will be given to firsttime investors in equities.
After almost half of the current financial year has gone by and the budget announced scheme of Rajiv Gandhi Equity Savings Scheme (RGES) has been notified now only. In RGES, tax incentives will be given to first-time investors in equities. REGS shall on one hand promote and rejuvenate the equity cult in the county and on the other, likely to become a tool for government to offload PSU stocks on proposed disinvestments. In fact, in some cases, it could be a win-win situation for both the ends. Conditions for Investment in RGES Only individuals can apply and the scheme is not for corporate investors Annual total Income in the year of investment should be less than Rs. 10 lakhs (To read the complete article subscribe on http://bit.ly/ShriMagz)
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Indian Income tax laws allow deduction of interest on education loans without any upper limit. However deduction of principal repayment is not allowed.
While the ever-increasing cost of education is worrying to all parents whose children pursue higher education, the concern is doubled if the child needs to go abroad for the same for the obvious reason that the price of an American dollar has increased by 30% over the last one year. The support of Indian banking industry in the last decade in terms of granting education loans and the provisions of Income tax laws for deduction of Interest have helped many foreign education aspirants. Indian Income tax laws allow deduction of interest on education loans without any upper limit (To read the complete article subscribe on http://bit.ly/ShriMagz)
Volume I Part 2 November 10, 2012 8 Business Advisor
FDI in retail
Interview with Sriram Sridharan Sriram Sridharan, Co-founder of Gormei Market (FB: gormeisriram) took time off to answer a few questions on the topic that has been stirring quite some debate, FDI in retail. First, which side are you on - the yes or the no group - with regard to FDI in retail? I support allowing foreign direct investment in the Indian retail sector with some restrictions. Would you like to elaborate on the reasons for your stand? We have had an open economy for the past 20 years. Indian retail participants have had enough time to better serve their customers by investing more in infrastructure, by improving supply chain processes, and by enhancing their shopping experience. They have had enough time to work with our growers, support them in a win-win manner, and create sustainable eco-systems. They have had enough time to reduce wastage and eliminate layers of It is time we forged middlemen. They have had enough time to partnerships with create efficient systems and pass on the global participants to resulting cost savings to consumers. Looking at the current retail scenario, it is employ proven clear that none of these have happened. It is time we got some outside help. It is time we have access to global capital, processes and technology. It is time we forged partnerships with global participants to employ proven techniques in order to solve our fundamental challenges. What are your observations on Indias experiments with big-box retailing thus far? Indias big-box retail (or broadly, organised retail) has not delivered on its promises. The purported efficient value chain did not become a reality, especially in food retail. The growers are not getting a better price; neither is
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the customer getting better quality produce in a consistent fashion. Organised retail has a long way to go in our country. There needs to be more focus on providing infrastructure and know-how to effectively store, supply and market high-quality goods as reasonable costs. Where can things go wrong when it comes to reaping the advantages of retail FDI? And what can we do about them? Couple of things can happen: The mom-and-pop shops might suffer in the short term; however, I suspect they will adapt and start adding value differently like home delivery, personalised service, being in the neighbourhood etc, and hence find a way to stay relevant. A bigger threat, especially in the food sector, is losing our food diversity in the name of efficiency. What will happen to our traditional millets and our numerous varieties of bananas? Will lab-engineered foods become our staple in the name of food security? Will we start seeing standard-issue bananas, which appear tasty, all over our markets? These are the questions that need pondering and scrutiny. Any other points of interest? FDI will act as a necessary destructive force to shake up bad practices, and create efficient systems in our retail landscape. We will need foreign direct investment to create a new order, to spur further growth in the retail sector, and subsequently boost our overall economy. But the policy needs to be implemented with abundance of caution so as to protect our eco-systems, support our growers, and still reap the benefits of global capital, processes and technology. D. Murali
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Farmers and consumers will benefit as the large chains will deal directly with the farmers instead of mandis and middlemen. Competition and efficiencies will drive down prices and help contain food inflation. These companies are expected to invest in backend infrastructure, cold distribution system and bring in modern management systems which will help in reducing wastage of farm produce. Hypermarkets particularly require huge amounts of capital and are unlikely to make any profits during the first 10 years of their operations. In fact, most of the hypermarkets in India are running at losses. Without the 1991 reforms and the opening up of the economy, we would never have had the middle-class revolution and achieved growth rates of 7 to 8% p.a. Even then some vested interests had opposed the economic reforms. FDI in retail in China was allowed 20 years ago even though it is a Communist country. Secondly, most of the big Indian houses are already in multi-brand retail. It is therefore difficult understand the logic in the argument that only foreign players will displace kirana stores. On the contrary, entry of foreign retail companies will increase competition and thus benefit the consumers by way of lower prices. Bijay Agarwal, Managing Director, Salarpuria Sattva FDI in retail will improve supply chain and ensure fair price to farmers. Esther Lennaerts, CEO, Pressto Dry Cleaning & Laundry Allowing foreign investment into retail is a good decision by the government. It will bring efficient farming, logistics and distribution to India and investment in infrastructure. More efficient management will help lower inflation too. It will take a few years to reach that stage but it is important to start now. The consumer will benefit as well since the choice and the quality of goods will increase/ improve and so will the service. K. Vaitheeswaran, Founder & CEO, Indiaplaza.com (@vaitheek) FDI in retail will be bit of this and bit of that, bit more of this and lot more of that. This being bad and that being good. @CAnand31 A sign for growth wrt back-end infrastructure, technology, and experience gap the industry is facing from unorganised players.
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decisions such as United Airlines v. CIT (2006) 287 ITR 281 (Del) and CIT v. Japan Airlines Co Ltd (2010) 325 ITR 298 (Del). Activity of deposit and lending amongst members, not banking Dy.CIT v. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd (2012) 76 DTR (Panaji)(Trib) 234: Where the assessee is engaged in accepting deposits and lending to its members only and when no part of the deposit / lending was from the public (non-members) it cannot be regarded as engaged in banking business in view of section 5(ccv) of Banking Regulation Act. Thus the proviso to section 80-P(4) will not apply. The claim of deduction under section 80-P hence would be available to such entity. Where the assessee has discharged his onus then the revenue has to disprove the same for applying section 68 Vishnu Jaiswal v. CIT (Appeals) 2012 76 DTR (Lucknow) (TM) (Trib) 265: Where the assessee had accepted unsecured loans and furnished bank statements of loan creditors, the onus of proving the receipt of loans is discharged. The onus would shift to the Revenue to prove the sufficiency of the creditworthiness of the lenders. Where the Revenue had not examined the loan creditors but merely rejected the evidences furnished by the assessee, the addition under section 68 could not be sustained. The Revenue cannot merely claim that the creditors Where the assessee could not have saved any money to had accepted advance the amounts without crossexamining them and bringing any other unsecured loans and evidence on record.
Ramesh D. Hariani v. WTO (2012) 76 DTR (Mum)(Trib) 297: Where the assessee has kept more than one house for his own residential purpose the assessee can value the house property as per third proviso to rule 3, Schedule III of the Wealth-tax Act, 1957 and valuation made as per second proviso by the Assessing Officer has to be ignored. The house property if not commercial or non-residential but meant for exclusive residential purpose it is adequate enough for applying third proviso to rule 3 was the dictum in CWT v. V.T.Ramalingam (1993) 201 ITR 839 (Mad). (V. K. Subramani, Chartered Accountant, Erode)
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furnished bank statements of loan creditors, the onus of proving the receipt of loans is discharged.
Third proviso to rule 3 of Schedule III will apply when more than one house is kept for self-occupancy
registered under section 12AA of the Income-tax Act, 1961 by way of charitable activities is exempt from service tax. The term charitable activity is defined in clause (k) of para (2) dealing with definitions which is inclusive of everything and somewhat overlapping with the definition given in the Income-tax Act, 1961. It covers medical, medical care service, advancement of religion or spirituality, preservation of forests and wildlife. It covers the expression any other object of general public utility also and prescribes the liability to service tax by making reference to the monetary limit of Rs 25 lakh prescribed under the Income-tax law. No service tax liability is attracted in respect of the activity of any other object of general public utility being pursued by the charitable organisation up to Rs 18,75,000 for the financial year 2011-12 provided the total value of such activities had not exceeded Rs 25 lakh during the financial year 201112. In respect of any other financial year the threshold limit would be Rs 25 lakh if the total value of such activities had not exceeded Rs 25 lakh in the preceding financial year. Thus enhanced threshold limit for service tax levy would be applicable for charitable organisations with regard to pursuance of objects of general public utility. Controversy: Insertion of rule 112E to Income-tax Rules, 1962 We all know that social activists and general public seek transparency in management of national resources and public money. The political parties enjoy tax exemption if they comply with certain basic legal requirements. Donation to political parties is deductible for the taxpayers in the recent times. In spite of having such liberal provisions and compliance requirements we come across unacceptable dealings and actions. Recently, the Central Government inserted rule 112E to the Income-tax Rules, 1962 the impact of which is given below: (i) The Assessing Officer is not to issue notice for assessment or reassessment for six years immediately preceding the assessment year in which the search is conducted in respect of the following cases: (a) Where as a result of search under section 132(1) or requisition under section 132A a person is found to be in possession of money, bullion, jewellery, or other valuable articles or things, whether or not he is the actual owner of such money, bullion, jewellery etc; and (b) where a search is conducted or requisition is made in the territorial area of an assembly or parliamentary constituency in respect of which a
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notification has been issued under section 30 read with section 56 of the Representation of the People Act, 1951 or where the assets are seized or requisitioned are connected in any manner to the on going election in assembly or parliamentary constituency. Effect: In respect of constituencies where election is held and any money, bullion etc is seized or requisitioned the tax consequence will be with reference to such search and seizure limited to that event only. No reopening of assessment of the preceding assessment years would be resorted to by the Department. In effect, the unexplained money (including jewellery etc.) would be taxed at flat 30% as per section 115BBE and the past assessments of such person who was searched and engaged in election work / campaign will not be disturbed. Why is such protection given for those persons who are engaged or connected to election campaign across the board in respect of all political parties? Why is such concessional treatment given to such persons when other taxpayers undergo the arduous process of search assessment as per the true letter and spirit of law? PIB Press Release dated 27.09.2012 Levy of Service Tax on Transportation of Goods by Rail from 1st October 2012 In compliance of the provisions contained in Finance Bill 2010 and subsequent notifications issued by Ministry of Finance, the Service Tax in case of transportation of goods by rail, which was exempted up to 30th September 2012, would now be levied on total freight charges with effect from 1st October 2012. Since an abatement of 70% has been permitted on freight for the taxable commodities by the Ministry of Finance, the Service Tax will be charged on 30% of the total chargeable freight inclusive of all charges (like busy season charges, development charge etc.,) would be calculated as follows: i) Service Tax of 12% will be charged on 30% of freight (equivalent to 3.6% on the total freight charges) ii) Education Cess of 2% on Service Tax will be added (equivalent to 0.072% on total freight) and iii) Higher Education Cess of 1% on Service Tax will also be added (equivalent to 0.036% on total freight) iv) Total Service Tax implication will be (i)+(ii)+(iii)=3.708% on the total freight charges.
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Certain commodities have been exempted from payment of service tax as per Ministry of Finance notification. The list of such commodities and further details on the modalities of levy and collection of Service Tax on transportation of goods by rail, may be ascertained from Indian Railways web site i.e. www.indianrailways.gov.in. The amount of Service Tax collected by Railways would be deposited with the Ministry of Finance as per prescribed procedure. PIB Press Release dated 27.09.2012 Levy of Service Tax on Railway Passengers Travelling in AC Class/First Class from 1st October 2012 In compliance of the provisions contained in Finance Bill 2012 and subsequent notifications issued by Ministry of Finance, the Service Tax in case of railway travel, which was exempted up to 30th September 2012, will be levied on the fare of passenger services in the following classes from 1st October 2012. (i) AC First Class, (ii) Executive Class, (iii) AC-2 tier Class, (iv) AC-3 tier class, (v) AC Chair Car class, (vi) AC Economy class and (vii) First Class. Since an abatement of 70% has been permitted on passenger services by Ministry of Finance, the Service Tax will be charged on 30% of total fare including reservation charge, development charge, superfast surcharge which would be calculated as follows:i) Service Tax of 12% will be charged on 30% of fare (equivalent to 3.6% on the total fare) ii) Education Cess of 2% on Service Tax will be added (equivalent to 0.072% on total fare) and iii) Higher Education Cess of 1% on Service Tax will also be added (equivalent to 0.036% on total fare) iv) Total Service Tax implication will be (i)+(ii)+(iii)=3.708% on the total fare. On Concessional value tickets/PTO tickets etc. service charge will be levied on 30% of the total fare actually being paid by the passengers. The Service Tax will also apply to tickets issued in advance for journeys to commence on or after date of implementation of Service tax. In the case of tickets already issued excluding service tax, the service tax on total fare including development charge, superfast surcharge, reservation fee, etc.
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date of implementation of Service Tax will be recovered either by TTEs in the train or by the Booking Offices before commencement of the journey by the passengers. Commercial Inspectors and TIAs have been instructed to visit all important stations and ensure that service tax is levied on tickets issued as per the revised rates. Commercial Officers have also been asked to make surprise checks at the stations and ensure that Service Charges are levied from date of implementation of Service Tax. The amount of Service Tax collected from passengers will be deposited with the Ministry of Finance as per procedure. Finance Departments of Zonal Railways have been instructed for proper accountal and remittance of Service Tax amount to the Government. In case of refund of passenger fare, if any, refund of Service Tax shall be claimed by the passenger from the concerned Service Tax authority. No refund shall be made by the Railways on this account. For the purpose of claiming refund, Chief Commercial Manager (CCM) office of concerned Zonal Railway shall issue a certificate to passenger detailing the amount of refunds to be signed by an Officer authorised by CCM, which shall be countersigned by the Dy. Chief Account Officer (DCAO) or officer authorised by them for this purpose.
Business Advisor
On finance, accounting, controls, risk management, taxation, and more
Published by: Shrinikethan, Chennai http://bit.ly/ShriMap Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk November 10, 2012 Volume I Part 2 November 10, 2012 20 Business Advisor