source Business standard
CS A Rengarajan
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Filing income- tax returns gets more complicated |
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Filing income- tax returns is not a pleasant job for most, even for those who have no income to show other than salaries. And, the continuous changes in the income- tax returns form, often, makes the filing process more complicated. One has to be extremely careful about filling the various boxes in the Income Tax Return ( ITR) form and ensure that it matches the details mentioned in the income certificates. And, with filing possible only online, there is no scope for any error, or else you can expect a notice from the income tax department. This year might be a challenge for those who earn more than ₹ 50 lakh. In addition to details of salary and various exemptions, these individuals also have to disclose the value of the non- financial assets they own. This value has to be the cost or acquisition value. The disclosures include particulars of assets like land, buildings, cash in hand, jewellery, bullion, aircraft, yachts and boats. Another change this year is that individual taxpayers also need to report the details of the passthrough income received from business trusts or/ and investment funds. The intention behind the disclosure of assets is not to know the income per se, but to know if people have assets that are disproportionate to their income. Details of income, the tax deducted and your financial investments are already available with the tax department since these are linked to the Permanent Account Number ( PAN). But the government now wants to know the value of your non- financial assets to rule out cases of disproportionate income. “ The government wants to know how you have acquired an asset,” says Amit Maheshwari, partner, Ashok Maheshwary & Associates, chartered accountants. Individuals are likely to face a challenge in determining cost of gifted assets ( such as jewellery), inherited assets and for assets purchased several years earlier where records have not been retained, points out Tapati Ghose, partner, Deloitte Haskins & Sells. “A threshold limit for each category of asset for disclosure purposes would provide an administrative relief in case assets below a prescribed threshold are exempted from disclosure requirement. For instance, in the past, only cash value in excess of ₹ 50,000 was required to be considered for wealth tax purposes,’’ Ghose adds. The challenge is that most people don’t maintain records of purchases. According to the rules, salaried or individual taxpayers are not required to maintain books of accounts. This is applicable only to those who have business income. Now, to show the value of your assets it might become necessary to maintain records of your purchases. It becomes even more challenging in case of ancestral property or gifts that you get through inheritance. How can you estimate the value of something that has been purchased years ago? The instructions say that in case of inherited assets, the value in the hands of the previous owner can be mentioned. In case that is also not known, then what value needs to be reported should be clarified, says Kuldip Kumar, partner and leader Personal Tax, PwC India. “It can happen that you inherit jewellery from your parents, but they had inherited the same from their parents. In such a case, it will become difficult to ascertain the value of the jewellery. As an alternative, the taxpayer should be allowed to state the market value of the jewellery when the taxpayer became the owner of such jewellery, similar to how it is allowed in case of calculating capital gains,’’ Kumar adds. If you have inherited the asset, then determination of the value would be difficult, according to Maheshwari . An alternative could be to show the value of the asset as ‘0’. In case of inheritance, as there is no tax, this alternative can definitely be exercised. If the asset was purchased or acquired before 1981, you can value it according to the inflation index of 1981. If it is acquired after 1981, you can give an estimate or approximate value. Again the procedure used in calculating capital gains. “The government’s primary motive is that people should not get away by non- disclosing. For instance, how can someone with an income of ₹ 10 lakh, own property worth ₹ 5 crore? The intent of the government is to come down heavily on the evaders. The message from the top seems to be that if you evade taxes, then you will be on our radar and can be called for scrutiny,” Maheshwari says. Given the robust system of tracing financial transactions, the government’s fears of mis- reporting of assets may be a bit exaggerated, Kumar says. “ The additional disclosure will only increase the obligation for existing high- income group tax- payers. Now such tax- payers will have to trace and/ or maintain records of all assets they buy, like jewellery, etc. What is required instead is to widen the tax base,’’ he adds. Another issue that requires clarification is how to avoid double disclosure of assets, points out Ghose. Currently, for residents and ordinarily residents, foreign assets have to be disclosed in aspecific schedule. But in the newly introduced assets and liability schedule, if these foreign assets have to be disclosed again, it will lead to duplication in reporting. Hence, a clarification is required that the new schedule should cover only domestic assets and liabilities. One positive consequence is that meeting the deadline of filing tax returns for financial year 2015- 16 will be easier as the income tax department has already notified the various ITR forms. This will allow tax- payers to file returns from April, well in time before the July 31 deadline. Those with annual income of more than ₹ 50 lakh will have to furnish a lot of additional details The ITR- 1 Sahaj form, meant for individual taxpayers, has a new reporting schedule titled Details of Asset and Liability CONFUSION OVER ASSET VALUE DECLARATION [1]The schedule mentions that the amount has to be mentioned at cost; experts suggest value at the time of acquiring the asset has to be mentioned [1]In the case of assets prior to 1981, one option is to declare the value at 1981- level because that is when the cost inflation index started [1]For assets purchased after 1981, an estimate has to be given of the value [1]In the case of inherited property, the value of the property when it was acquired by the previous owner has to be taken into account [1]If that is not known, an alternative is to assume the value as ‘ 0’ |
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A lesson on corporate governance in family business |
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The failure of KFA has severely hurt the otherwise successful UB group and its shareholders. The UB Group had launched the KFA in 2005 as a five star airline when the aviation industry was in a boom. KFA had set high standard of passenger services. In 2007, it acquired low- cost carrier Air Deccan, and later merged the same with it. Though, the real objective of the acquisition was to cross the legal hurdles of flying internationally quickly, KFA operated in both — LCC and premium segments. Experts believe that the acquisition of Air Deccan and operating in both the segments at the same time was a bad strategy, which caused its downfall. KFA never earned profit. It accumulated loss and debt. It went through two debt restructuring. It started defaulting. In 2012, the Directorate General of Civil Aviation suspended the scheduled operator’s permit resulting in grounding of the airline. KFA’s failure is attributed to many reasons, including high fuel cost, competition from LCCs and bad business strategy resulting in overinvestment and high operating costs. The KFA story highlights the governance philosophy of family- controlled business groups in India. Groups often build diversified portfolio of business to reduce the risk of family investment. Diversification strategies and other corporate strategies are decided at the family level, outside the board of the holding company or a group company. Those are often formulated based on family needs, such as succession plan, and reflect the aspirations of the family. The board simply approves the strategies placed before it. For example, the investment in KFA by the UB group reflects the aspirations of Mr Mallya. Some observed that the KFA model reflected his flamboyant personality. Every business family aims to protect and create family wealth. Therefore, the interests of stakeholders are protected. But, sometime, promoter’s exuberance and aspirations expose the company to unwarranted risks, the family focuses on empire building or family feud destroys wealth. It is utopian to expect independent directors to protect the company from undue risks arising from such exuberance and aspirations, family’s empire building initiatives or poor family governance. At best, the board is used as a sounding board, while the final decision remains with the family. Banks take promoter- director’s personal guarantee while approving debt restructuring. Recently, the government had advised public sector banks to invoke personal guarantee at an early stage of the recovery of debt that has become a nonperforming asset ( NPA). The promoter has no option but to put at stake his/ her personal wealth when the company passes through a financial crisis and seeks funding from banks. This is against the very basic principle of ‘ limited liability’, which connotes that the liability of a shareholder in a company is limited to the amount that s/ he commits to invest in the company. However, this is the reality. Promoter’s personal guarantee provides comfort to lenders that the promoter, in order to protect his/ her personal wealth, will not willfully mismanage the company or expose it to unwarranted risks. However, it might stifle the entrepreneurial spirit of the promoter. More importantly, this practice has given credence to the corporate governance philosophy that the family, not the board, is the highest decision- making body. In family- managed business groups, the monitoring role of independent directors is secondary and the advisory role is primary. It will remain so even if the law emphasises the monitoring role. Moreover, as in the case of KFA, independent directors, who have no stake in the company, prefer to resign from poorly governed or crisis- ridden companies, rather than continue and protect stakeholders’ interest. Resignation of a number of independent directors in a short span signals that a crisis is brewing in the company or the company is poorly governed. This information is valuable to stakeholders. We do not need a separate corporate governance model for family business. But we should limit our expectations from independent directors. Affiliation: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; and Chairman, Riverside Management Academy Private Limited. email: In familymanagedbusiness groups, the monitoring role of independent directors is secondary and the advisory role is primary ACCOUNTANCY ASISH K BHATTACHARYYA |
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Practising Company Secretary
Chennai
Mobile 93810 11200
CS A Rengarajan
Sebi
may soon revisit start- up listing norms
PRESS TRUST OF INDIA
New Delhi, 15 April
The Securities and Exchange Board of India ( Sebi) may soon review its framework for listing of start- ups, including ecommerce firms, while incorporating suggestions from various stakeholders to make this platform much more vibrant.
The Institutional Trading Platform ( ITP) is yet to see any start- up listing ever since an easier set of compliance and disclosure requirements was notified in August 2015.
These norms have been put in place to encourage Indian start- ups and entrepreneurs to remain within the country rather than go abroad for funds.
Under the rules, start- ups can list on the separate ITP of stock exchanges such as BSE and NSE.
The platform is open to only institutional investors and high networth individuals (HNIs), while retail investors have been excluded in order to safeguard small investors against a higher level of risks associated with this platform.
Many start- ups believe that the current listing norms are unattractive for them to list in India. Moreover, not a single company got listed on the relaxed ITP platform.
Now, Sebi is likely to review the ITP norms soon. It will also incorporate suggestions from various stakeholders to make this platform much more vibrant, sources said.
Sebis Primary Market Advisory Committee ( PMAC) has also suggested that norms should be reviewed as the matter progresses.
Under the notified rule, minimum trading lot and the minimum application size have been kept at ₹ 10 lakh so that only sophisticated and large investors come in.
CS A Rengarajan
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Order soon for ₹ 10k minimum wage for contractworkers |
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Hyderabad, 17 April The Centre will issue an executive order to ensure contract workers get a minimum wage of ₹ 10,000 per month, Union Minister of State for Labour and Employment Bandaru Dattatreya (pictured) said on Sunday. “It is the endeavour of the Central government to make reforms in labour laws and to proceed from minimum wage to universal wage. Because the Opposition is not cooperating in the Parliament, we will do it through an executive order,” Dattatreya told reporters here. “Because the Parliament is not functioning properly, we don’t want to wait and we want to go ahead with some executive orders for the welfare of the workers,” he said. He said the government has decided to make changes to rule 25 of the Contract Labour ( Regulation and Abolition) Central Rules. “We have framed this rule and sent to the law ministry ( for approval) and shortly a notification will come and after this all the state governments will implement this decision,” he said. Dattatreya said the Supreme Court had given a direction, keeping in view of Consumer Price Index and variation dearness allowance, to increase the minimum wage. “ In view of the apex court order, we are enhancing it first to ₹ 10,000 and then we want to go for universal minimum wage,” the minister said. All contractors must register with the labour ministry, he said, adding in Telangana and Andhra Pradesh over 100,000 sanitation workers ( those who get ₹ 8,500 per month) will benefit, besides crores of workers elsewhere, by the minimum wage rule. |
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What
spooks corporate India? |
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A survey, titled Are You Prepared for Corporate Reportings Perfect Storm?, on reporting standard quizzed 40- odd India- based chief financial officers ( CFOs) and financial controllers of large organisations. The survey found that the top priorities of Indian CFOs and finance controllers were to build a more collaborative relationship with the audit committee and board, upgrade the information technology infrastructure, and harness big data and analytics to enable better reporting. Accordingly, all the Indian respondents were expected to increase investment in reporting technologies over the next two years. The increase in India would also be significantly higher than at the global level — 70 per cent in India expect to increase spend by 20 per cent against 20 per cent globally. However, corporate India said the main external challenges for reporting were satisfying the differences in reporting standards, and the changing expectations around reporting formats. Indian business said over the past three years, they have experienced asignificant increase in attention on reporting from audit committee and boards, investors, including financial institutions and pension funds, analysts, and external regulators ( including SEC, FCA UKLA, FSA Japan and EU). In the survey, respondents said there was a need to improve the IT infrastructure to improve reporting. "The lack of integration, data quality and dated IT architecture are the main technology barriers," the survey said. Forty- eight per cent of the Indian respondents identified data consistency as a top challenge. Most Indian companies agreed they found it challenging to meet the demands of the audit committee members. Around 30 per cent of Indian respondents said they needed to improve the information shard with the audit committee. Pankaj Chadha, a partner in Indian member firm of EY Global, said corporate India was implementing multiple changes, auditor rotation, Ind- AS Accounting Standards, the goods and services tax etc. “ The stretch these changes have put on skills available with the finance teams is not the only concern for the boards, but they are also concerned with the lack of use of technological solutions that address these changes on a long- term basis,” he said. This was more so as boards duties and responsibilities in terms of corporate reporting have also become more onerous. “ This has resulted in directors having a sharper look at submissions to them and asking more questions.” The survey noted that Indian organisations needed to build strong and trusted relationships with audit committees and boards, and understand their needs. " It is important that Indian organisations strengthen relationship with the audit committee and board to create more confidence in the data provided," the survey said. According to Chadha, the key to building relationships with stakeholders was to work in a planned manner to ensure that attention to all stakeholders was suitably balanced, particularly when the magnitude of change in regulations and corporate reporting was so significant. "A well- laid- down communication plan for all stakeholders not only improves engagement but also makes such engagement more useful and effective," he added. EY SURVEY ON REPORTING STANDARDS SURVIVING THE CORPORATE REPORTING STORM The top drivers of effective reporting |Demands for greater transparency |Need for improved compliance and control |Need to meetnewreporting regulations |Increasing demands from investor community Main external challenges in the current external reporting environment |Satisfying differences in reporting standards |Changing expectations around reporting formats |Market developments |Changing expectations around frequency of reporting requirements |Pace of regulatory change |Satisfying national and supranational guidance and standards |Changes to technology Key Indian priorities from areporting perspective |Build a more collaborative relationship with the audit committee and board |Upgrade existing IT infrastructure |Harness big data and analytics to enable better reporting 100% Number of Indian companies to increase spend 70% Number of Indian companies that expect to increase their spend greater than 20% Indian companies to step up investment on reporting technologies Source: EY Survey on reporting standard In the survey, respondents said there was a need to improve the information technology infrastructure to improve reporting. Forty- eight per cent of the Indian respondents identified data consistency as a top challenge |
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BRIEF CASEN M J ANTONY |
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The recurring legal issue over the control of minerals between state governments and the Centre surfaced again when the Kerala government claimed rights over atomic minerals on the southern coast and the Supreme Court dismissed its appeal by majority with one judge dissenting. In this case, State of Kerala vs Kerala Rare Earths & Minerals Ltd, the state government granted licences to the firm but within 10 days stayed its own order for re- examining the environmental impact on the crowded area and the priority of public sector firms vis- a- vis private miners. Rare Earth challenged the state government’s action in the high court. It held that the state government was wrong. The government appealed to the Supreme Court, claiming right over the minerals. While dismissing the appeal, the court pointed out that the approval of the Centre was also required under the Mines and Minerals Development Regulation Act and it had approved of licences in this case. The judgment further pointed out that under the state mineral policy, it was bound to list the minerals, which it controlled and the boundaries of areas where they can be exploited. This has not been done. The court gave leeway to the state government on this point and if it takes necessary steps, it would have better claim for granting licences according to its discretion. Accepting rent does not extend lease Mere acceptance of rent and other payments by the lessor from a lessee does not mean the lease has been renewed automatically, the Supreme Court ruled last week in a case harking back to 1975. The Delhi High Court had held that acceptance of rent by the Delhi Development Authority ( DDA) pursuant to a demand made by it amounted to a renewal of lease. The tenant had also obtained perpetual injunction against the DDA on that ground. But, the Supreme Court rejected the high court’s view in its judgment, DDA vs Anant Raj Agencies Ltd. The original lease was made in 1952 to one Virmani. He had made alterations in the premises and the DDA had issued a showcause notice to him and the lease was not renewed. He later transferred the property to a firm, which obtained relief against the DDA all the way up to the high court. The DDA argued in appeal that Virmani, having no right or title in the property, could not have transferred it to the firm. The DDA also contended that deposit of rent by him and its acceptance by the DDA office was administrative in nature and was not acceptance of any right. These arguments were accepted and the orders of the courts below were held wrong and “miscarriage of justice”. The original lessee was in unauthorised occupation for 30 years and the new one for 17 years. The court allowed the DDA to take possession immediately and claim damages from the original lessee or his heirs and the new occupant according to the market rent. CMD to stand trial for bad cheques The Supreme Court last week allowed criminal proceedings to go on against the chairman and managing director of ashipyard firm and signatories of three cheques worth ₹ 200 crore, which bounced. The Bombay High Court had quashed the proceedings against the executive director and a whole- time director. In the appeal case, Standard Chartered Bank vs State of Maharashtra, the apex court set aside the high court order and let the proceedings go on against these two also, who were in charge of the day- to- day affairs of the company. The judgment asserted that under Section 141 of the Negotiable Instruments Act, the company and directors, who were in charge of the affairs of the company, were liable for cheque bounce. The directors had ‘ vicarious liability’ for the lapse. VAT claim against ABB dismissed The Supreme Court has dismissed the appeal of the Commissioner of Delhi VAT against the judgment of the Delhi High Court, which had granted tax exemption to ABB Ltd in its transactions with Delhi Metro Railway Corporation Ltd. The high court had reversed the movement of goods was in pursuance of the contract for the supply of goods used in the execution of the works contract between ABB, a company engaged in engineering and power distributions system. The high court had also ruled that the sales should be deemed to have taken place in the course of imports of the goods or inter- state trade and that such import/ movement of goods was integrally connected with the contract for their supply to Metro. On the basis of such findings, the high court had held that the transactions constituting inter- state trade and those constituting sale or purchase in the course of import were covered by the exemptions granted in the Central Sales Tax Act. Eveready denied tax incentives underdeveloped regions investing at least ₹ 111 crore, did not fulfil the conditions attached to the notifications. The benefits were given for six years for bringing in raw materials and machinery. The battery manufacturer did not meet the investment requirements during the assessment periods. The Supreme Court stated that exemption notifications required strict interpretation. In order to get benefit of any exemption, the assessee has to satisfy that it fulfils all the conditions contained in the notification. “ Once the conditions are satisfied and the assessee gets covered by the notification, for the purpose of giving benefit the notification has to be construed liberally,” the judgment clarified. > Eyes and ears decide trademark row Phonetic similarity alone is not enough to grant an injunction against a trademark of a rival, the Bombay High Court ruled last week while rejecting the prayer of a Sharjah firm in the judgment, International Foodstuffs Llc vs Parle Products. The Gulf company used ‘ London Dairy’ for its ice- cream and it opposed Parle using ‘ Londonderry’ for its boiled sweet. The court compared the trademarks and found that ‘ London Dairy’ had distinct design resembling London Bridge, while Parle pack showed a " winsome milkmaid in flowing dress." The price of the foreign company’s ice- cream was ₹ 80 while Parle sweet cost 50 paise, something often returned as “change at toll gates”. Moreover, “ when it comes to questions of similarity, the test is one of perception. Like beauty, it lies in the eye of the beholder; in trademark cases, that of the judge.” |
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A weekly selection of key court orders |
CS A Rengarajan
PRESS TRUST OF INDIA
Mumbai, 21 April
The Reserve Bank of India (RBI) on Thursday came out with a master direction for merger of private sector banks and also mergers between nonbanking finance companies (NBFCs) and banks.
In another master direction, acompilation which consolidates instructions on rules and regulations framed by RBI under various Acts, including banking issues and foreign exchange transactions, the central bank provided direction for issue and pricing of shares by private sector banks.
The scope of master direction on mergers will cover “ an amalgamation of two banking companies and amalgamation of an NBFC with a banking company”.
In both the cases, the voluntary amalgamation will become effective after RBIs approval.
According to the direction, the decision of amalgamation should be approved by respective boards by two- thirds majority and not just by members present and voting.
Also the draft scheme of amalgamation should have approval of shareholders of each banking company by a resolution passed by a majority representing two- thirds of the shareholders.
In case of an NBFC merging with a private sector bank, the master direction said that all accounts should be KYCcompliant as they would eventually become accounts of the banks after amalgamation.
In a separate direction, RBI said allotment of shares to the investors will be subject to compliance rule which requires investors to obtain specific prior approval of RBI if the proposed acquisition results in aggregate holding of five per cent or more of the paid- up capital of the bank. Amalgamation should be approved by the boards of these banks by two- thirds majority
CS A Rengarajan
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Panel gives bankruptcy law overseas ambit |
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New Delhi, 28 April Those filing for bankruptcy could find their assets in other countries assessed under Indian laws, if India implements the suggestions made by a parliamentary joint committee on the bankruptcy code. The joint committee on the insolvency and bankruptcy code has said since “ many corporate transactions and businesses today involve an international and crossborder element, the implications of crossborder insolvency cannot be ignored for too long.” The panel has suggested two new clauses and sub- clauses, which would require India to enter into agreements with foreign governments to enforce provisions of the code to debtors’ assets outside India as well. In its report, the panel said if a resolution professional or bankruptcy trustee decides that a debtor’s assets located abroad should be brought under the ambit of the law, then the adjudicating authority in the case should issue a letter of request to a court or an authority of the country in question. The draft bankruptcy Bill had no provision for cross- border insolvency, as the Bankruptcy Law Reforms Committee (BLRC) and the finance ministry representatives had called the issue quite “ complex” in their deliberations with the parliamentary panel. The draft Bill was made available in the public domain in November 2015, along with the report of the BLRC. It was presented in the Lok Sabha on the penultimate day of the winter session and immediately sent to a joint committee of both Houses. Jointcommitteecutstimelinefrom60to45days; suggestsshieldforemployees Turn to Page 18 >
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Export rule eased for medical device makers |
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New Delhi, 28 April The government has decided to increase the validity of free sale certificates required by domestic medical device manufacturers for exports. Now, these will expire only alongside the manufacturing licence. Free sale certificates valid for two years are issued to medical device manufacturers by state licensing authorities. To export medical devices, manufacturers need to register with the foreign country and obtain its regulatory approval. These authorities generally ask for a free sale certificate to allow imports. Under the provisions of the Drugs and Cosmetics Act, 1940, only 15 medical devices that are classified as drugs are regulated for import, manufacture and marketing in the country. The notification on free sale certificate validity will apply to these 15 devices only. “In order to bring uniformity in its implementation, you ( all state drug regulators) are requested to grant free sale certificates to manufacturers located under your jurisdiction with the validity of their manufacturing licence to promote exports,” said GN Singh, Drugs Controller General of India (DCGI), in his letter to state regulators. According to Rajiv Nath, secretary, Association of Indian Medical Device Industry ( AIMED), medical device exports decreased from $1.2 billion in 2014 to $ 1.1 billion in 2015. “Extension of validity of the free sale certificate has been a longstanding request to promote exports. The validity period of two years used to restrict registration in overseas countries. It also added to re- registration costs of overseas importers,” he added. Around 95 per cent of medical devices manufactured and sold in India remain unregulated. For medical devices not covered as drugs under the Drugs and Cosmetics Act, the certificates are issued by the Directorate General of Foreign Trade ( DGFT). “Many countries, especially in south and central America, are not satisfied with this certification. Their authorities desire the certificates be issued by the health ministry or our drug regulatory authority,” Nath said. A proposal was made by the AIMED to the Union health ministry to endorse the DGFT certificate. The health ministry is yet to take a decision on the issue. |Free sale certificates required for exports will now expire only alongside the manufacturing licence |Free sale certificates valid for two years are issued to medical device manufacturers by state licensing authorities | The notification on free sale certificate validity will apply to 15 devices classified as drugs |For medical devices not covered as drugs the certificates are issued by Directorate General of Foreign Trade KEY TAKEAWAYS |
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LIC: Lot of bank shares, few votes |
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New Delhi, 28 April On Friday, an Extraordinary General Meeting ( EGM) of public sector lender Bank of India ( BoI) will consider approval of a preferential issue of shares to Life Insurance Corporation of India ( LIC). LIC will get 1.6 million shares at ₹ 96.63 each, a slight discount to the market price of ₹ 97.95. Even so, theres arider. The bank has mentioned in the EGM notice that: “ The voting of LIC is restricted to 10 per cent of the total voting. Hence, issuance of fresh shares will not increase their voting right.” Regulation 12( 2) of the Banking Regulation Act said, “( 2) No person holding shares in a banking company shall, in respect of any shares held by him, exercise voting right [ on Poll] in excess of 10 per cent of the total voting rights of all the shareholders of the banking company.” Further in terms of Section 3 ( 2E) of the Banking Companies ( Acquisition and Transfer of Undertakings) Act, 1970, the voting right of LIC will be restricted to 10 per cent of the total voting right of all shareholders of a bank. BoI is not an isolated case. According to shareholding data compiled by the BS Research Bureau, of the 21 public sector banks where LIC has shares, it owns more than 10 per cent in 18. In Corporation Bank, it has its highest stake at 21.22 per cent, followed by India Overseas Bank, Allahabad Bank, Central Bank, IDBI Bank, UCO Bank, Vijaya Bank and Oriental Bank of Commerce, where it has over 14 per cent stake. In the remaining banks, it has between 10 and14 per cent. In some banks, the shares are held by LIC and its various schemes. After the proposed issue, LIC will hold 14.48 per cent in BoI. Thus, 95.52 per cent shares will be having effective voting rights. “Though restriction of voting rights of LIC is legally correct, it is not in the interest of fairness of unit holders/ policy holders of LIC, whose funds are invested by LIC in the bank,” said J N Gupta, managing director of Stakeholders’ Empowerment Services. The deprival also means an economic loss for LIC. Voting rights are valued at a premium by investors, as can be seen by differential pricing of DVRs ( shares with differential voting rights) traded in market. An e- mail seeking comments, sent to the LIC spokesperson on Monday, did not elicit any response. A comparison of prices of shares and DVRs of Tata Motors, Future Retail and Jain Irrigation showed the DVR traded at asubstantial discount to the shares. On April 21, the Tata Motor DVRs were trading at ₹ 300, a discount of 27.7 per cent to the shares which were at ₹ 411. In addition, the DVRs, which give the holder one vote for every 10 held, are eligible for five per cent additional dividend. If the voting rights meant nothing, the DVRs should have been trading equal to the share prices. But, this unrealised upside has been there for long and shareholders have not exploited it. Banking law caps voting rights at 10% and insurer’s holding is over this limit in 18 banks Corporation Bank 21.22 Allahabad Bank 14.50 Central Bank 14.50 IOB 14.50 Vijaya Bank 14.50 IDBI Bank 14.37 UCO Bank* 14.36 Oriental Bank 14.06 Punjab National Bank 13.85 Canara Bank 13.75 Bank of Maha 12.72 Bank of India* 12.54 United Bank ( I)* 12.12 Bank of Baroda 11.89 Dena Bank* 11.63 State Bank of India 11.49 Punjab & Sind Bank 10.49 Union Bank ( I) 10.24 Syndicate Bank* 9.16 Andhra Bank* 7.67 Indian Bank 3.14 %of holding *In Dec 2015; others in March, 2016 Source: Capitaline LIC’s OWNERSHIP |
CS A Rengarajan
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M& A lawyers see red in Sebi’s control test |
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New Delhi, 1 May Top law firms have expressed concern over the proposed move by the Securities and Exchange Board of India ( Sebi) to introduce a ‘Brightline’ test for determination of ‘control’ in the takeover code for listed companies. While some say the current definition should be retained, others say not giving exit options in situations where control is transferred by means other than acquiring a specified shareholding could go against the objective of the code. In March, Sebi had floated a discussion paper titled Brightline Tests for Acquisition of ‘ Control’ under its Takeover Regulations. In this paper, Sebi had discussed two options. The first was to prescribe a framework of protective rights, which would not amount to control. The second was to set a numerical threshold of 25 per cent and exclude other means such as special rights from open offer requirements. The discussion described the second option as one which would reduce “ uncertainty” and “bring clarity”. Business Standard reviewed some responses given by senior lawyers and merger & acquisition experts to Sebi and spoke to a few others to understand their positio. Most of them expressed concern over the proposed changes. In their official response to Sebi, Delhi- based Shardul Amarchand Mangaldas & Co ( SAMco) said, “ Ideally, the current definition of ‘ control’ as included in the Takeover Regulations should be retained, in line with recommendations by the Bhagwati committee and the Takeover Regulations Advisory Committee ( TRAC). The proposal to adopt a bright- line test based on either a numerical threshold or illustrative rights not amounting to ‘ control’, cannot be effectively applied as a blanket rule in all fact patterns and may lead to further ambiguities.” The firm’s response, drafted by senior partners Prashant Gupta and Shuva Mandal, added, “ If it is Sebi’s intent to adopt a brightline test, we recommend such a test be based on a hybrid of the two proposed options, to address the issues that may arise (as detailed above) if one of the two is adopted to the exclusion of the other.” Sebi has been tinkering with the threshold for making an open offer for providing an exit to public shareholders every few years. In the 1990s, the threshold was pegged at 25 per cent. In between, it became 15 per cent and has currently come back full circle. The current definition was based on a detailed review by the TRAC, chaired by the late C Achuthan, in 2011. According to Arindam Ghosh, partner, Khaitan & Co, if a numerical threshold is specified, “ It would be possible to easily overcome the requirement by acquiring slightly less than the specified percentage and yet retain de facto control. In such cases, the public shareholders providing an exit in such circumstances is one of the fundamental objectives of the Takeover Code.” The numerical threshold could even hamper the promoters and professionallymanaged firms in some cases. “Companies in capital- intensive sectors that continue to be run by the original promoters or professionally managed would be the most affected. This is because the investors, despite their holdings crossing specified thresholds due added. Some lawyers said each option could suit a specific group of stakeholders. Vikram Raghani, partner, JSA, said, “Control should always be tested on the facts and circumstances of each case. While the numerical threshold test will end the debate on whether shareholder rights such as veto rights amount to control, from a public shareholders, perspective, an indicative list of protective rights is a better and more logical option.” Raghani said this would allow investors to have a better say on governancerelated matters, yet protecting the public shareholders “ if control is transferred to a new shareholder in the garb of protecting a financial investment.” Ghosh of Khaitan & Co said finding a right balance with an illustrative list, read with a definition that captures the scope of the term control would be key. “Having a framework for protective rights, which is all inclusive, may be detrimental since there would be a tendency to bypass these with a view to avoid making an open offer. Not providing an exit to public shareholders would again result in the fundamental objectives of the Takeover Code taking a hit.” SAMco suggested a “ hybrid option to avoid situations where shareholders’ agreements are used to confer control artificially ( where the shareholding may otherwise be below a prescribed numerical threshold). It suggested special rights conferred on shareholders should be included in articles and should be made subject to a majority approval of shareholders not getting these rights. Further, SAMco said that adopting a bright- line test would have an impact on other provisions of the takeover code and other Sebi Regulations, such as the Issue of Capital and Disclosure Requirements. It wanted such impact to be assessed and appropriate exceptions/ clarifications must be introduced with respect to such regulations, particularly for institutional and financial investors which do not have any operational control in the company. |
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Paying the price of pendency |
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Consider these: Indian Oil Corporation, the state- owned oil marketing company, has around 9,000 cases pending in various courts across the country — bulk of them being five to 10 years old. “ An estimated ₹ 5,000-₹ 10,000 crore is stuck in these cases that include tax and commercial disputes,” says Deepak Dhawan, executive director ( legal), Indian Oil Corporation. There are around 30 million pending cases across the judicial system. Around 400 positions of judge in the Supreme Court and various high courts are waiting to be filled up. According to the 253rd Law Commission report, submitted in January last year, of the total 32,656 civil suits pending in the five high courts with original jurisdiction, a little more than half ( 16,884) or 51.7 per cent are commercial disputes. This is also reflected in India’s dismal track record in Ease of Doing Business Rank (2016) — the country is placed at the 178th position ( among 189 countries) when it comes to enforcing of contracts. In resolving insolvencies, India is at the 136th place. When quizzed on the impact of high pendency rate of cases in country’s courts, the India legal head of a US- headquartered multinational manufacturing company is quick to point out that “ litigation related to tax and intellectual property protection is among the biggest concerns from an MNC perspective.” A corporate lawyer, closely involved with cross- border M& A deals, concedes that most foreign clients consider getting entangled in the judicial system as “ big” business risk while investing in India. Most large corporate houses have seen sizable jump in their annual legal budget over the last four- five years. For instance, Sun Pharma’s annual legal budget ballooned almost five times — from ₹ 308 crore in 2012 to ₹ 1,424 crore in 2015. The legal expense of Reliance Industries has nearly doubled between 2012 (₹ 749 crore) and 2015 (₹ 1,242 crore). Both the executive and the judiciary —despite mutual differences — realise that desperate times call for desperate measures. To cut the long shadow of pendency of cases across the judicial system, there is a move to re- appoint retired judges on an ad hoc basis in high courts. The government is also in the process of expediting the appointment process of judges. Legislative measures —such as setting up of new commercial courts in various states, or amendments to the Arbitration and Conciliation Act, 1996 — are expected to infuse fresh blood into the overstretched judicial infrastructure. However, legal experts and corporate counsels say these measures are only expected to show results over the next two to three years. “ We need fasttrack courts to clear commercial disputes, along with special benches to tackle taxation disputes,” says Alok Prasanna Kumar, senior resident fellow, Vidhi Centre for Legal Policy. Corporate lawyers and legal counsels point out to the success of the twojudge Supreme Court bench of judges A KSekri and Rohinton Nariman that heard tax cases for almost whole of 2015. In 2015, the apex court gave out 197 judgements related to tax laws. This is almost as many as the court managed in the three years preceding 2015, notes Kumar. In 2013 and 2014, the apex court could give only 50 and 49 tax- related judgements, respectively. A look at the age of tax cases disposed of by the Supreme Court in 2015 is symptomatic of pendency malaise affecting the judicial system. Around 80 per cent of the cases were more than eight years old. The oldest case disposed of went way back to 1997. But the number of tax cases coming up before the Supreme Court has been growing over the years, point out legal experts. According to data collected by the Vidhi Centre for Legal Policy on tax cases filed in the Supreme Court in 2014 — 1,869 related to direct tax and 1,530 pertained to indirect tax. In addition, there were 646 arbitration matters, 539 related to mercantile law, commercial transactions and banking, and 327 to company law, MRTP and allied matters. Kumar points out that a special tax bench has a trickle- down effect on other pending tax litigation in different courts across the country. “ They set a precedent, clarifying several points of dispute,” he adds. Surya Prakash, fellow and programme director at Daksh, a not- forprofit agency working on the Rule of Law Project to study the problem of pendency of cases within the Indian legal system, says there is a need for special effort to tackle cases relating to petitions for winding up or dissolution of companies in high courts. “ Company petitions seem to take the longest in most high courts. For instance, in the Karnataka High Court the average pendency is six years, though such cases make up not more than one per cent of the total workload of the high court,” says Prakash. Similarly, tax cases too figure on the list of case types with the most pendency in high courts. For instance in the Karnataka High Court, tax cases on an average pend for four years. Tax cases, too, don’t make up more than one per cent of the total workload of the high courts, say tax experts. The way forward, suggest corporate counsels, is to train high court judges to deal with specialised disputes, especially those relating to taxes and intellectual property rights. “Just making improvements in legislation is not sufficient. There is a need to invest in physical judicial infrastructure and appoint more judges across courts” says Dhawan. Clearly, there are miles to go on the road to curtail the shadow of pendency of cases on businesses. judicial infrastructure to beat backlog and rising legal expenses MJ ANTONY About 60 per cent of cases pending in the courts involve the government and several appeals by the revenue authorities are outdated and frivolous. There has been a late realisation about this problem and circulars have been issued, like the one by the Central Board of Direct Taxes in December, fixing threshold limits for filing appeals (₹ 10 lakh for tribunals). The Central Board of Excise and Customs is also culling its files. A look at recent judgments delivered by the Supreme Court would show that a large number of appeals has/ have arisen from assessment years 20 years old. The assessee might have died or the companies are with the official liquidator. In one recent case, Shabina Abraham vs Commissioner of Central Excise, a show cause notice was sent in 1987 for duty and penalty. The trader in rubber died in 1989. However, the authorities pursued their demand against the widow and four daughters. The appeals found their way up to the apex court, which ruled recently that assessment against a dead person is impermissible and the Kerala high court ruling against the widow “ flies in the face of first principles.” In another case, the show cause notice was issued in 1998 and by the time the litigation reached the Supreme Court, the company (Brimco Plastic’) was in the hands of the official liquidator. The appeal of the commissioner of Central Excise was lying for eight years in the Supreme Court itself and it was dismissed in a two- page order recently with the remark that the “ obvious conclusion on reading of Section 4 of the Central Excise Act” was that the demand was illegal. Then why so many years to reach that final conclusion?— one might wonder. A ship carrying diving equipment entered the Sikka port and left for Abu Dhabi in 1998, leaving a cargo of litigation in India, up to the Supreme Court. The bundle of assumed issues was lying in the Supreme Court for eight years until now, when it declared in a short order that the show cause notice to the shipping company was “ uncalled for” (Commissioner of Customs vs Arcadia Shipping Ltd). These two cases and their likes only served the purpose of adding the litigation bill of the parties, taking advantage of the dysfunctional court. It is often the case that while the appeals are moving up the judicial ladder, starting from the sectoral tribunal, the law itself might have changed and Finance Acts might have tweaked the provisions concerned. In the case of Purolator India Ltd vs CCE, the valuation prior to 1973 amendment and yet another amendment in the year 2000 had some impact on the case. Though litigation started with a show cause notice in 2002, the Supreme Court has not answered the questions fully. Lawyers for both parties asked for an ‘ open- ended’ remand to the tribunal. The term is a tricky one coined by the legal profession, so the court itself explained that “ open- ended means one, namely, that both parties should be free to argue afresh on all points.” Another generation of judges are bound to see the case coming back to the court, brought by 4G lawyers. Even if the corporate litigants lose faith in the system and try the alternative disputes resolution mechanisms like mediation, conciliation and arbitration, the situation still would wet their eyes. The Reliance case for appointment of arbitrator in the KG Basin dispute is still mired in myriad issues for the past three years in the Supreme Court. The arbitrators have changed amid controversies, ONGC has objected to arbitration itself and the amendment to the Arbitration and Conciliation Act has altered the role of the Chief Justice of India. The ‘open- ended’ adjournments continue. Business family settlements, which fail, try the arbitration route and get stuck in Dickensian deadlocks, like the case of Rajni Sanghi vs Western Indian State Motors Ltd. The family patriarch died in 1961, and the heirs were engaged in a bitter legal battle. Arbitration started in 1984 and three high courts were involved even after that. It was only three months ago that the Supreme Court hopefully put an end to the disputes, with a caveat – if any party failed to comply with the arrangements, “ the aggrieved party will be free to initiate appropriate proceedings”. The situation has become so bad that for years lawyers have been seeking only an interim order from courts like a stay or status quo. Trade mark and patent suits are typical examples. Ads and designs on products change so fast that the victims run to the court for an injunction, and before it obtains an order the hit- andrun company has already achieved the target. Courts can follow the tracks and interpret law leisurely after years. The final judgment will carry only archival value, to be quoted in more cases or included in law school text books. How the cookie crumbles It is often the case that while the appeals are moving up the judicial ladder, starting from the sectoral tribunal, the law itself might have changed Some instances of delays in delivery of justice COST OF LITIGATION The loss of productivity due to attending courthearings because of wages and business lost comes to 0.48% of the India’s GDP ₹ 30,000 crore Average cost incurred by litigants in court cases in a year Enforcing of contracts: 178th place among 189 countries Resolving insolvencies: 136th position Source: Daksh Access to Justice Survey 2015- 16 Source: Daksh India ₹ 50,387 crore Annual average wage, business loss of litigants Average pendencyin high court Allahabad 4.5 years Karnataka 2.6 years Uttarakhand 0.86 year Average rate ofdisposal ofsome cases during 2014 and the firstquarter of 2015 in the High CourtofKarnataka India’s dismal trackrecord in Ease of Doing Business Rank( 2016) Average disposal ( in yrs) Writ petition 2.12 Writ appeal 2.48 Sales tax/ VAT revision petition 2.72 Sales tax/ Vat appeal 3.13 Income tax appeal 3.74 Up, up and away- A sample ofrising legal budgets of India Inc ( In ₹ crore) 308.38 417.55 480.72 749.0 506.0 504.0 421.0 779.0 52.31 67.04 653.2 767.29 124.4 89.74 45.25 876.0 Sun Pharma Reliance Ind Infosys Fortis Healthcare Videocon Ind 1,424.52 1184.0 1242.0 748.95
2012 2013 2014 2015 Compiled by BS Research Bureau Source: Capitaline |
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BRIEF CASEN [1] M J ANTONY |
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I- T exemptions for private varsities Private universities can claim income- tax exemption only on two conditions: Firstly, an educational institution or a university must be solely for the purpose of education and without any profit motive. Secondly, it must be wholly or substantially financed by the government. Both conditions must be satisfied under Section 10( 23C) ( iiiab) of the Income Tax Act before exemption can be granted, the Supreme Court ruled in the case, Visvesvaraya Technological University vs CIT. The university’s claim under this provision was rejected by the revenue authorities, leading to the appeal. The court noted that during a short period of a decade ( 1999- 2010) the university had generated a huge surplus of about ₹ 500 crore collecting fees under different heads. “ The expenditure incurred represented only a minuscule part of the fees collected,” the judgment observed. None of the benefits granted to the university has gone to the students. It expanded from 64 engineering colleges to 194. The government grants were meagre ( about one per cent), the Supreme Court said, concluding that “ the university is neither directly nor even substantially financed by the government so as to be entitled to exemption from payment of income tax.”
Time limit in cheque bounce cases If a complaint of cheque bounce is filed after the period of limitation, the magistrate must give reasons for condoning the delay; he cannot order prosecution as a matter of course, the Supreme Court stated while quashing the judgment of the Kerala High Court in the case, K S Joseph vs Philips Carbon Black Ltd. The company filed criminal cases under the Negotiable Instruments Act against the drawer of the cheques, which were not paid on his order to stop payment. The company issued notice on February 3 and the complaint was filed on May 24, after 62 days’ delay. However, the magistrate issued summons to the drawer in a “ short and summary” order. The high court dismissed his appeal. But on his second appeal, the Supreme Court directed the magistrate to pass a reasoned order for condoning delay after hearing the accused person Corruption lawcovers co- op managers The Supreme Court has ruled that a manager in a multi- state cooperative society is a ‘ public servant’ and could be tried for offences under the Prevention of Corruption Act. The trial court and the Madhya Pradesh court had held that the National Cooperative Consumers Federation of India Ltd, Jabalpur, was not a state entity and, therefore, its assistant manager was not a ‘ public servant’ coming within the scope of the anti- corruption law. Therefore, the CBI appealed to the Supreme Court. Setting aside the high court ruling in the case, CBI vs PG Jain, the Supreme Court noted that under the Multi- State Cooperative Societies Act, the Jabalpur society and the likes are listed in the schedule to the Act as “ national cooperative society” by Parliament. Moreover, the Centre owned 85 per cent of the shares in the society and, therefore, aided and controlled by it. The Supreme Court allowed the CBI to prosecute the manager. Probe into HPCL allotment of LPG Hindustan Petroleum Corporation Ltd (HPCL) has come in for severe criticism from the Supreme Court in the allotment of LPG distributorship for Hajipur in Bihar. In this case, Abhishek Kumar was the first in the merit list of candidates. But the company officers visited him and, reason; it was given to another person. Kumar moved the Patna High Court. The single- judge bench found the turnaround of HPCL strange and observed that it was “ largehearted” in some cases and “ blind” in others. It was “ either under pressure or obligation to accommodate another candidate”. The high court ordered investigation by the vigilance department into such aspects. The division bench, however, upheld the HPCL decision. On appeal, the Supreme Court restored the order of the single judge. It indicted the public sector undertaking for “ inventing new grounds for justifying the cancellation of the candidature of Abhishek from the merit list, which is totally impermissible in law. Test to levy excise on packing material Excise on packing materials like gunny bags, crates and cartons is a contentious issue arising in the tribunals. The test is in the terms of the agreement between the manufacturer, who send the goods, and the buyer. The Supreme Court dismissed the appeal of Tata Chemicals in a case in which the company claimed that there was an arrangement between it and the buyers of soda ash produced by it to the effect that sales made in gunny bags supplied by it could be returned and upon such return the value of the bags would be returned to the buyers. The judgment said that the law is that “if an arrangement exists between the seller and the buyer of excisable goods for return of the packing materials by the buyer to the seller, carrying an obligation on the seller to return the value of the packing materials to the buyer on such return, such value is not liable to be included in the assessable value of the finished product. Furthermore, if such an arrangement exists, the question of actual return is not relevant.” Such an arrangement could not be proved here. I- T notices to Alcatel group quashed The Delhi HC has quashed notices issued by the income tax ( I- T) authorities to AlcatelLucent group companies seeking to reopen assessments for periods from 2004 to 2009. Alcatel, a French company, supplies telecom equipment to Indian firms. It said that it has no permanent establishment here as the sales and payments were made outside India and no income arose that was taxable in this country. The HC, while allowing 16 writ petitions, stated that the taxmen “ merely repeated the words of the Income Tax Act that there has been a failure to disclose material particulars. This is certainly not sufficient as far as the legal requirement is concerned Jewellers’ association wins import case custom officers to disregard certificates issued by the Indonesian authorities and the confirmation given by the government- owned companies in Indonesia. The court asked the authorities to release the imported gold according to law, ignoring the circular. |
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A weekly selection of key court orders |
CS A Rengarajan
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NSE to launch platform for financing SMEs against bills |
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Mumbai, 3 May The National Stock Exchange (NSE) is planning to launch a new trading platform for bill discounting or trade receivables of micro, small and medium enterprises ( MSME). The country’s largest exchange has forged a joint venture with the Small Industries Development Bank of India ( Sidbi) for the new platform, which is likely to go live by the end of this calendar year, according to people in the know. The new electronic trading platform is aimed at easing the liquidity constraints of MSMEs. Bill discounting is a concept where a firm sells its accounts receivables to a bank or a factoring firm. Selling bills or accounts receivables helps the firm generate cash, which would otherwise have got realised at a future date. The Reserve Bank of India (RBI) had issued the final guidelines for setting up a Trade Receivables Discounting System in December 2014. NSE and Sidbi are planning to call the new platform ‘ trades exchange’, said a source. “This will be a new pioneering venture. We have already got the approval from the banking regulator on this and well be signing the formal agreement very soon,” said a senior official at Sidbi. NSE declined to comment on the matter. To participate on the platform, an MSME will have to sign agreements with the exchange that will provide the facility for electronically presenting and accepting bills. Besides providing the technical infrastructure, the exchange will also look into aspects such as registration and due diligence of corporate, on- boarding of financiers, technical requirements and business processes for dematerialisation of invoices, documentation etc. has been in practice for off in the market, and of MSMEs, because of buyer and the inability setup created for the purpose. While the platform ensures sufficient liquidity for all stakeholders, it has also some risk factors that need to be addressed. These include proper legal framework for supporting the model, discounting needs to be identified, provisions of registration requirements, default handing ,settlement of funds, etc. Likely to go live by the end of this calendar year |
CS A Rengarajan
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Eligible for settling? Details soon |
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Mumbai, 5 May The Securities and Exchange Board of India ( Sebi) is planning to change guidelines for settling violations under the socalled consent mechanism because there has been a sharp drop in settlement of cases under this route. Akin to out- of- court settlement, the consent mechanism allows an offender to settle charges without admitting or denying guilt by paying apenalty or undergoing a voluntary market ban or both. The framework does not allow settling of serious violations that have “ market- wide impact”. The regulator plans to change the regulation to define a market- wide impact. “We have clarified what is a marketwide impact through an internal guideline. However, there is demand that it be done through a regulation. We will be coming up with changes in our regulations,” said U K Sinha, chairman, Sebi, on the sidelines of the Thomson Reuters South Asia Risk Summit. “We conducted a study of our consent mechanism and found the number of cases has been coming down. Officers in Sebi as well as the advisory committee are not very sure ( on what is a market- wide impact),” he added. Some of the typical fraudulent and unfair trade practices are issue of securities by furnishing wrong information, misleading investors and mis- selling mutual fund schemes. The criterion for market- wide impact is significant impact on the market. It is not limited to one security and its investor. “This is a welcome move. This will ensure enforcement proceedings are concluded quickly and will also widen the ambit of the mechanism,” said Sandeep Parekh, founder, Finsec Law Advisors. “The regulator needs to provide clarity on settlement fees as the formula adopted is very complex,” said RS Loona, managing partner at Alliance Corporate Lawyers. Nonacceptance of the settlement amount leads to rejection of a consent application. The current process takes several months because it has to go through checks in three different Sebi committees before arriving at the final consent terms. Ideally, cases should be closed within a month, which can be done if Sebi sets up dedicated teams, experts feel. Experts believe the pending Reliance Industries insider- trading case may not be settled through the consent route even under the new framework. Besides the consent framework, Sinha said Sebi was working with global experts and regulators to frame guidelines for high- frequency trading. “ There is a race globally to bring down the latency and regulators are struggling to contain the risks. We have to be very careful in taking measures because one disruption could affect hundreds of people,” he said. On allowing futures trading in new commodities, he said, “ Sebi has been very careful in allowing trading in new commodities.” OUT OF COURT Number ofcases settled under the consentmechanism has dropped sharplysince FY13 2010- 11 359 177 72.21 2011- 12 272 105 16.50 2012- 13 193 65 14.73 2013- 14 121 46 4.22 2014- 15 108 41 3.57 No Cases settled Total of through amount applications consent (₹ cr) Sebi to consider ‘ market- wide impact’ to boost settlements for small offenders under consent mechanism Source: Sebi |
CS A Rengarajan
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Why govt deals are high- stakes game for IT firms |
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Bengaluru, 9 May In late March, after its refurbished portal had received a flurry of complaints, Ministry of Corporate Affairs ( MCA) Secretary Tapan Ray wrote a mail to Vishal Sikka, the CEO and MD of Infosys, the service provider for the project, to fix the snags. Ray got a reply immediately, in which Sikka committed that Infosys would do everything possible to ensure that the technical glitches do not cause any inconvenience to the users. He also assured that he would get his best people to fix it. Though India is a small fraction (around 3 per cent) of Infosys’ overall revenues, the quick action shows that the business is important for the company— important enough for the corner office to swing into action. While both MCA as well as Infosys claim that the system has more or less returned to normalcy, the contract has brought to the fore many pressing issues that IT vendors usually face while serving the government. None ( or quite rarely) of the tech contracts from the government bodies is profitable. Most of the times, the project’s scope and mandate are not well defined. Once signed, the project takes long to start. And during the course of the project, the service provider deals with a plethora of stakeholders at the ground level which often delays the process of knowledge and data transfer. Besides, payments getting delayed are common. This sometimes aggravates the situation as the service provider, which often works as a system integrator, is required to pay up- front its vendors for hardware, software and other technology requirements. “Another big issue with the Indian government clients is that building consensus among their various stakeholders is a bit challenging since they don’t have processes, compared to multinational clients,” says Sunil Padmanabh, independent advisor and thought leader, Digital Transformation and Enterprise Applications. The love for govt contracts Still, IT companies, large and small, fight bitterly to win government contracts, which are awarded to the lowest bidder, and are often decided by awafer- thin margin. That’s perhaps because government contracts are considered agreat branding tool for companies: they can take credit for playing a part in the digital transformation of India, impacting over a billion lives. It looks good on their CVs. Take the case of Mindtree. In July 2010, the Bengaluru- based company won a contract from the Unique Identification Authority of India ( UIDAI) to develop and maintain applications for the project. Even though it was quite small in size — worth just a few crores—, the company said it was more than just a contract for it. “The UIDAI certainly has given us a lot of visibility. More than anything else, it has given tremendous confidence to the whole organisation,” Krishnakumar Natarajan, executive chairman of Mindtree, had told Business Standard in an earlier interview. “ We are of the firm belief now that even in large projects where we have the competency, we can compete against the best in the world and win it.” Another factor, industry experts believe, that makes IT companies go after government contracts is that no other country in the world except China ( not a market for Indian companies) can give the scale which can test the robustness of any system. That’s the reason why India of late is often becoming the testing ground for many global as well as domestic technology companies. Fast catching up In comparison to many other large Indian and global IT services companies, Infosys started focusing on the domestic market quite late: it set up a separate business unit for it only in 2008. Since then, the company has bagged many marquee deals in the country both in the government sector and the private sector, though the balance tilts towards the government. Currently, Tata Consultancy Services ( TCS) and IBM have the largest share of the domestic IT market. Infosys, however, is fast catching up. In the government space, the Bengaluru- based company has executed many projects including the contract to set up and manage the central processing centre of the Income Tax Department and a contract from India Post to enable it to offer banking services. Infosys has also bagged a five- year contract of around ₹ 1,380 crore to build and maintain the technology network for implementing the proposed goods and services tax in the country. The MCA project came to Infosys in 2012 when the government decided to replace the original vendor, TCS. The five- year contract, worth around $ 50 million, required Infosys to fully automate all processes related to enforcement and compliance of the legal requirements under the Companies Act. Infosys came in the line of fire after it came to light that the users were finding it difficult to do online registration or were facing inordinate delays. Infosys, however, said that the issue cropped up just immediately after the launch of the new portal for a few days and it has since then addressed it. According to sources in the company, the problem happened primarily because of the lack of proper coordination between officials at various levels. “ As is the case with most government contracts, whenever there is a change in the management, there is always resistance at the lower level, as happened in this case,” say sources who do not want to be named. In this case, the new system was meant to challenge the authority of the Registrars of Companies which had been enjoying unbridled power as the primary regulator for company- related matters. “In my view, whether in the public sector or the private sector, if the customer application developed by one vendor is taken over completely and revamped by another vendor, some transition challenges can crop up. But to call it a failure is very harsh,” says Neel Ratan, Regional Managing Partner (north & management consulting and government leader), Price Waterhouse. Some experts, however, say that Infosys could have been more diligent on the execution side and the problems that surfaced could easily have been avoided by following some standard technicalities like performance testing or load testing. Even as government projects aren’t lucrative from a revenue perspective, companies fight with each other to bag the contracts Infosys Chief Executive and Managing Director Vishal Sikka. Infosys, the service provider for the Ministry of Corporate Affairs, recently drew flak for glitches on the ministry’s new website |
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Probe heat on firms with false tax claims |
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Mumbai, 9 May The income tax ( I- T) department is investigating 20 listed companies that have allegedly been used to falsely claim long- term capital gains exemption. It has written to the Securities and Exchange Board of India ( Sebi) seeking information on trading patterns of these companies, said sources. A senior I- T official, who did not want to be named, said about ₹ 100 crore of taxes had been evaded by manipulating shares of these 20 companies. Income from sale of shares for one year can be claimed as long- term capital gains exemption. “We have sought transaction details of the firms that appear to have misused the trading platform for evading tax,” said the I- T official. Typically, manipulators buy shares of shell companies, hold them over a year, ramp up stock prices, book gains and show these as legitimate income from stock markets. An email sent to the Sebi on the matter remained unanswered. “Proper surveillance is required to track such companies, as they are created solely for dubious transactions. There is no real on- ground activity,” said Sudhir Kapadia, national tax leader, EY. Operators select companies with low paid- up equity capital that trade at a low price. Eventually, the prices of such shares are ramped up by 30- 40 times. Once the price is hiked, operators give the shares to beneficiaries, along with back- dated bills, showing the sale of shares. The beneficiary sends shares to depositories for conversion into the electronic format. The shares are sold in the secondary market at artificially raised prices. “The back- dated entry allows the beneficiary to show the gain as a long- term capital gain and pay no tax on it,” said the official. Rahul Garg, leader, direct tax, PricewaterhouseCoopersIndia, said, “ Sharp practices like this create distortion in the market. I think any attempt to curb such undesirable practices is good for the space and it will also give a level playing field for genuine tax payers.” Recently, the Sebi debarred over 1,000 entities from capital markets after they were found to be misusing stock exchange platforms for tax evasion to the tune of more than ₹ 15,000 crore. I- T department is investigating 20 listed companies suspected to have falsely claimed long- term capital gains tax exemption An email sent to the Sebi on the matter remained unanswered |
CS A Rengarajan
Will the new Real Estate Act be a game changer?
The new Act will force more transparency and disclosure from builders and will encourage investments into real estate
Broadly, every state will set up regulatory authorities for oversight of real estate projects, all of which will be registered. Guidelines and timelines will be laid down for projects and penalties imposed if those are not adhered to. Instead of legal disputes being processed slowly through normal courts, Appellate Tribunals will adjudicate disputes with time limits of 60 days.
There are time limits for states to pass new laws and set up the boards, etc. The process will, if timelines are adhered to, take about a year or so. Most likely, since state-level governance is very uneven, this will work patchily. Some states will set up efficient Tribunals and Regulatory Boards; others will not.
Many politicians have interests in real estate. That could work both for, and against the concepts of the new Act. Some smart and not-so-crooked politicians will back the new act and use it to accelerate activity. Others will try to hold up the new legislation or subvert it.
The real estate sector has endemic issues. Recessive conditions in the past three years have made things worse. For one thing, actual prices and “official” prices are often wildly at variance, with huge amounts of black money kept off the books. Builders are perpetually cash-strapped. Banks have been cautious about lending to builders because the Reserve Bank of India demands very high-risk weightage since there are high chances that such loans will go sticky.
Rentals are generally low as a percentage of price, while prevailing interests rates are high. A property owner could sell it, park the proceeds in a fixed deposit and rent the property back with a comfortable margin of profit. This makes the landlord model less than attractive.
Many builders used to rely on the booking amount to fund projects. But, over-supply means that builders have not been able to raise sufficient booking amounts. That in turn, has meant incomplete projects. Distress caused by two drought years has also cut demand in the rural and semi-urban segment.
Builders also notoriously divert funds. The new Act envisages forcing builders to use at least 70 per cent of booking amount for the specific project where the booking has been done.
Finally, real estate is too expensive. This is true in absolute terms. Indian property prices match and often exceeds that of real estate in most First World countries. It is even more true in relative terms, considering low median incomes prevalent across India.
Nevertheless, this Act along with the development of financial vehicles such as Real Estate Investment Trusts (REIT) will encourage investments into real estate. The new Act should force more transparency and disclosure from builders. It may trigger a shakeout and consolidation where only builders with deep pockets will survive.
It will take a few quarters before the enabling legislation is written and implemented and there will be a sequence of messy defaults and mergers and acquisitions. Also, in all probability, prices will have to drop to realistic levels, or interest rates will have to sharply reduce, before the inventory starts to clear. But, this could, hopefully signal the bottom of the real estate market.
There is one last caveat. Good legislation doesn't necessarily lead to good outcomes. The Electricity Act 2003 was excellent, for example. But, it was never properly implemented for a variety of reasons including political reluctance. One hopes that this new Act does not go the same way
CS A Rengarajan
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Bankruptcy Code |
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New Delhi, 11 May The Rajya Sabha on Wednesday passed the Insolvency and Bankruptcy Code Bill, enabling a single law to deal with distressed companies, their promoters, creditors, employees and other stakeholders for the first time in India. The law— which will ensure a time- bound process of windingup acompany or limited liability entity, a ‘ Fresh Start’ for debtladen individuals under a certain threshold and temporary transfer of management of the troubled entity into the hands of resolution professionals — was passed by the Lok Sabha on Thursday. Speaking during the debate on the Bill in the Upper House on Wednesday, Minister of State for Finance Jayant Sinha called it a“ historic legislation”. “ We are changing the Indian economy. We will do so while protecting the people who matter most. The way this law is being set up, it protects the workers. We are trying to create a robust safety net.” The move was hailed by experts, dubbing it as an important reform measure of the Narendra Modi government. “This law rebalances the equation between the debtor and the creditor and puts the power back in the hands of the creditor,” said Cyril Shroff, managing partner at Cyril Amarchand Mangaldas. “After GST ( Goods and Services Tax), and land reforms, this is the most important regulation and the government deserves credit for this,” said Varun Gupta, partner at Deal Advisory, KPMG. “ It brings troubled companies into a common process. Earlier the promoter, creditors, shareholders, employees, everyone had to go through aseparate process. That has been streamlined.” Turn to Page 18 > Finance Bill sails through KAVITA CHOWDHURY & ARCHIS MOHAN New Delhi, 11 May The Rajya Sabha on Wednesday passed the Finance Bill, and hence the Budget, for 2016- 17. In his reply, Finance Minister Arun Jaitley expressed hope that the Upper House would pass the Goods and Services Tax (GST) Constitution Amendment Bill in the Monsoon session. He questioned the Congress’ opposition to the Bill, sought its help to either pass it or at least allow the House to pass the Bill. The Enforcement of Security Interest and Recovery of Debt Loss and Miscellaneous Provisions Amendment Bill was referred to a joint committee of the two Houses. The Lok Sabha session ended on Wednesday, two days before its scheduled closure, while the Rajya Sabha is scheduled to end after farewell speeches of 53 retiring members on Thursday. Lok Sabha Speaker Sumitra Mahajan commended members for ensuring that the session wasn’t adjourned because of disruptions even for a minute – a first for the 16th Lok Sabha. “THIS LAW REBALANCES THE EQUATION BETWEEN DEBTOR AND CREDITOR AND PUTS POWER BACK IN THE HANDS OF THE CREDITOR” CYRIL SHROFF Managing partner, Cyril Amarchand Mangaldas “THE BANKRUPTCY CODE WILL HELP IN FASTER RECOVERY OF DUES. BANKS HAVE TO BUILD SYSTEMS AND CAPACITY TO GET RESULTS” SMUHNOT Chairman and managing director, Bank of Maharashtra WHAT’S ON OFFER? |Law allows early identification of financial distress to help revive a company |75% of creditors have to agree on a revival plan |Individuals to be given a chance of ‘ Fresh Start’, where outstanding debt will be written off |Allows for insolvency regulator; says regulatory powers with govt till such body is set up |Specifies penalties for offences committed under corporate insolvency |Penalty will be imprisonment up to five years, or a fine up to ₹ 1 crore, or both. |Debt Recovery Tribunal mooted as adjudicating authority for individuals/ unlimited liability entities |National Company Law Tribunal to be adjudicating authority for companies/ limited liability entities Law to ensure time- bound winding up of entities > |
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CS A Rengarajan
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Dividenddisclosure policymaybemade mandatory |
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Mumbai, 12 May Upping the corporate governance ante, capital market regulator Securities and Exchange Board of India ( Sebi) plans to make dividend disclosure policy compulsory for listed companies. The move is aimed at helping ordinary shareholders understand how much dividend they can expect from a company. At present, it is not mandatory under any regulations for companies to declare dividends or to even have apolicy, although a handful of companies have voluntary formulated such a policy. Sebi has no plans to force any company to pay dividends, but would set broad policy terms for companies, said sources. The regulator wants companies to disclose circumstances and financial parameters under which they can or cannot pay dividends. Also, Sebi would ask companies to state what they intend to do with their retained earnings if they don’t wish to pay dividends, people with knowledge of the development said. Domestic companies have ad- hoc rules regarding dividends. For instance, in 2014- 15, Tata Motors, Reliance Power and Glenmark didn’t pay any dividends to shareholders, despite making decent profits. On the other hand, Vedanta, Tata Steel and state- owned MMTC paid dividends even as they made losses. “Declaration of dividend is the prerogative and business decision of the management. Such decision is typically dependent on a number of contingent factors. The management may have justifiable reasons for holding cash or deferring distribution,” said Akila Agrawal, partner, Shardul Amarchand Mangaldas. Although expecting a dividend is within the rights of minority shareholders, it is also justified for a company to retain cash by not paying dividend in order to re- plough it into the business or create a war chest for potential acquisitions. Sebi, at present, mandates companies to disclose a dividend policy at the time of an initial public offering . The regulator wants such a policy to be part of companies’ annual report. Turn to Page II, 3 > To cover all listed companies; Sebi might set minimum terms WHAT INDIA INC PAYS Dividend payments of select Indian firms PROFIT- MAKING COMPANIES NOT PAYING DIVIDENDS ( in ~ cr) Payout Dividend Profit (%) Tata 0 13,986 0 Motors InterGlobe 0 1,296 0 Reliance 01,028 0 Power Reliance 0 714 0 Comm Glenmark 0 475 0 Pharma LOSS- MAKING COMPANIES PAYING DIVIDENDS ( in ~ cr) Payout Dividend Profit (%) Vedanta 1,216 - 15,646 — Tata Steel 777 - 3,926 — Jubilant Life 48 - 58 — MMTC 25 - 42 — SterliteTech 24 - 3 — TOP 5 DIVIDEND PAYING COMPANIES ( absolute terms; in ~ cr) Payout Dividend Profit (%) Coal 13,075 13,727 95 India TCS 8,571 24,292 35 ONGC 8,128 18,334 44 Oracle 5,625 1,192 472 Financial Infosys 5,570 13,678 41 TOP 5 DIVIDEND PAYING COMPANIES ( intermsofpayout; in~ cr) Payout Dividend Profit (%) Tata Comm 157 1 12,151 Dalmia 19 3 633 Bharat Oracle Fin 5,625 1,192 472 Century 56 15 360 Textiles Tata Power 352 168 210 Note: FY15 data for BSE 500 companies Payout is dividend payment as per cent of profit Source: Capitaline Compiled by BS Research Bureau |
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Bankruptcy Code to boost ease of doing biz: FinMin |
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The Insolvency and Bankruptcy Code, 2016, which was approved by Parliament on Wednesday, " would take India from among relatively weak insolvency regimes to one of the worlds best insolvency regimes," it said. "History was created on Wednesday when the Rajya Sabha passed the Code. With the passing of this Bill, India has crossed an important milestone in becoming a world- class economy. The Lok Sabha had already passed the Bill on May 5 ( Thursday)," it said. Till now, India was lacking the legal and institutional machinery for dealing with debt defaults in line with global standards. Recovery proceedings by creditors either through the Contract Act, or laws such as the Recovery of Debts due to Banks and Financial Institutions Act, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, have not had " desired outcomes". Economic affairs secretary Shaktikanta Das said the governments effort would be to create all structures regarding Bankruptcy Code as " early as possible". "We are working on framing the rules and regulations and drawing guidelines (regarding Bankruptcy Code). We are also looking at administrative issues relating to the Bankruptcy Code," he said. Commenting on the Code, Misha, partner, Shardul Amarchand Mangaldas &Co, said the new law had various positive features, including the fact that it consolidates bankruptcy and insolvency laws for both corporate and individuals within an effective framework for timely resolution. "However, a major concern in the Code is the provision of handing over of the entire management and affairs of the company to insolvency professionals... This would dis- incentivise corporate debtors to voluntarily invoke the insolvency process under the Code," she said. —PRESS TRUST OF INDIA, New Delhi |
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Reserve Bank tweaks shareholding norms for pvt sector banks |
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Mumbai, 12 May The Reserve Bank of India (RBI) on Thursday issued new guidelines on ownership in private sector banks by bundling shareholding patterns into two broad categories of individuals (natural persons) and legal entities/ institutions but retained the cap on foreign ownership at 74 per cent. The new norms, which envisage diversified shareholding in private sector banks by a single entity or corporate entity or group of related entities, are aimed at helping them meet the additional capital under the Basel- III regulations and to rationalise the ownership limits, RBI said. RBI has stipulated separate limits for non- financial and financial institutions, which have been divvied into diversified and non- diversified institutions. “For all existing banks, the permitted promoter/ promoter group shareholding will be in line with what has been permitted in the February 22, 2013, guidelines on licensing of universal banks at 15 per cent,” it said. In case any promoter or a promoter group is eligible for higher shareholding as per the licensing guidelines, the same will apply and the limits prescribed for all shareholders in the long run will not apply. “In case of financial institutions that are owned to the extent of 50 per cent or more or controlled by individuals, the shareholding would be deemed to be by a natural person and the shareholding will be capped at 10 per cent,” RBI said. Under the new norms, RBI has retained the provision of seeking its prior mandate if someone wants to increase shareholding/ voting rights to five per cent or more. Similarly, it said the ‘ fit and proper’ criterion for acquisition of shareholding in a private bank beyond 5 per cent will continue to apply. Acquisition of shareholding in a private sector bank by foreign entities will continue to be subject to the extant foreign direct investment ( FDI) policy, and the aggregate foreign ownership through FDI, foreign institutional investment or non- resident Indians cannot exceed 74 per cent of paid- up capital. Under the new norms, the Reserve Bank of India has retained the provision of seeking its prior mandate if someone wants to increase shareholding/ voting rights to five per cent or more |
CS A Rengarajan
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No penalty for changing income head A recent court ruling says that penalty can’t be imposed on income whose classification has been changed during the course of assessment TAXING TIMES of your income that can back the disclosures you have made taxpayers need to be even |
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The Income Tax Act states clearly that if a taxpayer does not disclose part or whole of his income, or provides inaccurate details of his income in his returns, he can be penalised. The penalty can be a minimum of 100 per cent to from a maximum of 300 per cent of the tax unpaid. These have been changed in the latest Budget. Penalty will now be levied at 50 per cent in case of under- reporting of income or 200 per cent in case of misreporting. But what happens if a taxpayer’s income classification changes during the course of assessment? Can a tax officer levy a penalty even in such cases? Penalty despite full disclosure In a recent case that came up in the Bombay High Court, the taxpayer had disclosed all the income particulars while filing returns. However, during the course of assessment the tax officer changed the classification of acertain income. This led to an increase in the total taxable income. The taxpayer had declared his total income at ₹ 9.69 lakh. In his return, he also showed ₹ 1.62 crore as long- term capital gain on sale of shares and claimed exemption under Section 10( 38) of the Act. This section provides that any long- term capital gain on sale of equity shares held for a period of more than 12 months shall be exempt from tax. During the course of assessment, the taxpayer filed a revised return of income wherein the amount of ₹ 1.62 crore was offered as taxable income. While concluding the assessment proceedings, the tax officer also initiated penalty proceedings for claiming incorrect exemption. He imposed a penalty of ₹ 55.79 lakh on the taxpayer for having concealed particulars of income and for furnishing inaccurate particulars thereof. The case escalates The taxpayer filed an appeal against the penalty order at the first appellate level. He pleaded that the penalty ought to be deleted on the ground that the amount of ₹ 1.62 crore had been declared as capital gain in the original return of income. The first appellate authority accepted the taxpayer’s claim and deleted the penalty. It observed that sufficient evidence to conclude that the said amount can be attributed to longterm capital gain was produced before it during the course of proceedings. The taxpayer had produced broker notes, copy of balance sheet, copy of demat account, evidence of payment for shares, etc in support of his claim. Not happy with the result, the tax officer filed an appeal with the second appellate authority. At this level too, the authority ordered the deletion of penalty by the tax officer and observed that the taxpayer had disclosed the income of ₹ 1.62 crore in his returns but had claimed the same to be exempt. It also observed that if during the course of assessment proceedings, the tax officer changes the head of income, that should not attract a penalty. The order also noted that the taxpayer had agreed to offer the amount of ₹ 1.62 crore as business income instead of long- term capital gain during the course of survey proceedings only to buy peace. The tax department further filed an appeal against this order with the Bombay High Court. The tax officer argued that a change in head of income during assessment proceedings should attract a penalty if it has an impact on tax payable. The officer said that the entire income of ₹ 1.62 crore was claimed as exempt income. Only after the assessment the taxpayer agreed to file it as business income, thereby attracting tax at the applicable slab rate. Relying on a Supreme Court decision, the tax officer pressed that the taxpayer’s defence of offering income for taxation to buy peace and avoid litigation was not sound. Landmark ruling in favour of taxpayer The high court, while dismissing the tax officer’s argument, held that the taxpayer was under the bonafide belief that income from long- term capital gain is exempt from tax and had accordingly disclosed the said amount as tax- free income in his return of income. The court observed that all the lower appellate authorities had consistently concluded that the taxpayer had not concealed his income or filed inaccurate particulars attributable to capital gain in his return of income. It, therefore, found no reason to interfere with their decisions. The high court hence dismissed the case. This decision serves an excellent precedent for cases of penalty levied on taxpayers even when they have provided complete disclosure of facts in their return of income and backed it with proper documents and basis for opinion. In the case, the noteworthy fact is that the taxpayer was absolved from paying penalty even though the said income was recharacterised from tax- free to taxable. Penalty provisions are widely contested as tax officers have been found to levy penalty on additions made to income on the basis of change of opinion or re- classification of heads of income. With the change introduced by Budget 2016, penalty provisions have only become more complex. Taxpayers need to keep track of their income sources and ensure proper disclosure in returns. In fact, recently the Mumbai bench of the Income- Tax Appellate Tribunal ( ITAT) dismissed a penalty levied by income- tax officials for concealment of income in the hands of a salaried employee. The employee had enlisted the service of an online tax- return filing portal. While filing the returns, the portal committed a punching error, which resulted in under- reporting of salary income in the taxpayers I- T return. Tax official took the view that this was an attempt to conceal income and imposed a penalty on the taxpayer. The ITAT examined the fact of the case and dismissed the penalty on the ground that the assessee had no malafide intent to evade tax or claim refunds dubiously. The writer is founder of Arvind Rao and Associates |
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Practising Company Secretary
Chennai
Mobile 93810 11200
CS A Rengarajan
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Asset value math may hit black money window |
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New Delhi, 24 May In what could deter people from declaring black money during the four- month window beginning next month, the tax liability on the declared asset will be on the appreciated value. Although the government has tried to balance it by extending the capital gains tax benefit when the asset is sold later, it may still create cash flow problems in paying the tax on the appreciated asset within two months of the scheme closing on September 30. The scheme requires declaration of undisclosed assets at their fair market value on the date of commencement of the scheme, which is June 1, and will be regarded as cost of acquisition of the asset for any subsequent transfer. For instance, if an asset was bought for ₹ 10 lakh a decade ago is valued at ₹ 1 crore on June 1, the declarant will have to pay ₹ 45 lakh as tax (₹ 30 lakh), penalty (₹ 7.5 lakh) and a cess (₹ 7.5 lakh). The person disclosing the asset may not have ₹ 45 lakh to pay. “The issue is when a person makes a declaration, he may not have cash to pay taxes on the appreciated value because he has not disposed of the asset. Besides, there may not be a ready market for an asset to meet the cash outflow requirement. This may keep people away from the scheme,” said Rahul Garg, partner, PwC. Amarpal Chadha, partner, EY, said, “ Most likely, the fair market value of the property on June 1, 2016, will be higher than the cost of acquisition of the property. This may have an impact on the number of the people making declarations under the scheme.” “However, given the focus of the revenue authorities on undisclosed income, this is a good opportunity for people to come clean,” added Chadha. Experts also pointed out the government should allow for deferment of tax payment till the time the asset was sold. “ The income tax law has a provision that provides for postponement of payment of tax when capital assets are converted into stock in trade,” said another expert. JEWELLERY | Price such jewellery would fetch if sold in the open market on the valuation date |If value exceeds ~ 50,000, the declarant should get the report of registered valuer in respect of the price itwould fetch if sold in the open market on the valuation date PROPERTY | On the prevailing circle rate on the valuation date LISTED SHARES |On price prevailing in the stock market on the valuation date UNLISTED EQUITY SHARES |Determined by a merchant banker or an accountant according to the Discounted Free Cash Flow method Cloud over draft rules NSUNDARESHA SUBRAMANIAN New Delhi, 24 May
Tax consultants and experts
have observed various irritants in the draft rules on calculation off air market
value( FMV) for indirect share transfers. Though the draft adds some certainty to
taxation of Vodafone- like transactions, these flaws could lead to anomalies,
they said. One of the issues is the definition of the term“ book value of
liabilities”. The draft prescribes the manner in which FMV of the foreign target
company (FTC) shares and the underlying India company shares can be determined for
the purpose of indirect transfer taxation. Any transaction where the value of Indian
assets exceeds 50percentoftheFTCwould attract taxes in India. Explanation6( b)
requires such FMV to be determined without reduction of the concerned company’s book value of liabilities |
Practising Company Secretary
Chennai
Mobile 93810 11200