Monday, December 22, 2008
Can Fair value and true and fair go together?
Cost based accounting:
Advantages:
1) Cost of an item can be computed with reasonable certainty
2) It represents the outgo of resources or present obligation of outflow of resources
3) It can be verified to a large extent and the fairness of it can be commented upon
Disadvantages:
1) It does not reflect the changing values
2) They do not portray the strength or weakness of the organization
Fair value accounting:
Advantages
1) They reflect the changing values
2) They clearly portray the financial position
3) More useful to users
Disadvantages
1) Its hard to arrive at fair values for illiquid assets
2) Lots of subjectivity involved and offers scope for manipulation
3) Its very difficult to conclude on the fairness of the values
Subjectivity hardly instills investor confidence. Ascertaining the fair value requires looking into the future and making a lot of assumptions. The introduction of accrual basis of accounting itself has brought in a certain amount of subjectivity.
Hence fair value accounting though it might satisfy a set of readers might still give rise to far significant issues. Those accounts still have to be certified as true and fair.
Hence a call needs to be taken whether we want relevant financial statements (Fair value accounting) or reliable financial statements (Cost based accounting).
Tuesday, December 9, 2008
Whether pension received post retirment through superannuation scheme is taxable?
(i) on the death of a beneficiary; or
(ii) to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or
(iii) by way of refund of contributions on the death of a beneficiary; or
(iv) by way of refund of contributions to an employee on his leaving the service in connection with which the fund is established otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement, to the extent to which such payment does not exceed the contributions made prior to the commencement of this Act and any interest thereon; "
It is evident from the above that superannuation received at the time of death, retirement, incapacitation prior to retirement is exempt to tax and superannuation received at the time of resignation is chargeable to tax. This section explicitly states that commuted superannuation at the time of retirement is exempt from tax. Now the question that arises is when the employee decides not to commute his superannuation and opts to receives it in monthly/quarterly/halfyearly/annual streams, whether shelter under the aforesaid section can be taken? In this context, the interpretation of words "to an employee in lieu of or in commutation of an annuity on his retirement " assumes importance. Can it be construed that receiving superannatioen - pension in monthly/halfyearly/quarterly/annual streams is in lieu of commutation? There are no decided case laws on this point.
Employer contribution to Superannuation is not subject to tax in the hands of employees but is subject to FBT(exceeding Rs.1 Lakh). Any payment made by a company to a approved superannuation fund is an eligible deduction.
However employee contribution to Superannuation is subject to deductin u/s 80CCC. (limit of Rs.1 Lakh read with 80C). Section 80CCC is also specific on the point that any pension received by employees post retirement out of superannuation contributed earlier, and claimed as deduction is chargeable to tax. In many companies superannuation is only contributed by the employer and does not have any employee contribution.
A favourable interpretation of 10(13) would render the non-commuted superannuation (after retirement) exempt and 80 CCC (employee contribution alone) renders it taxable.
However going back to FM's speech during 2005-06 at the time of scrapping rebate u/s 88 and introducing 80C, the concept of EET (Exempt Exempt tax) was emphasised. Approaching this issue with the concep of EET in mind
-Employer contribution is tax deductible (subject to FBT) and hence escapes corporate tax
-Employee contribution is exempt u/s 80CCC (additions to the fund by way of interest is also exempt)
Extending the corollary of 80CCC to employer contribution, it is obvious that the legislative intent is not to exempt superannuation income post retirement (non - commuted).
However why commuted superannuation is exempt from tax is still a paradox.
Monday, December 8, 2008
Highlights - Companies Bill 2008
1)Number of sections have been reduced from 642 to 462
2)The reduction in number of sections has been achieved by:
-Consolidating various individual sections into single section and
-Increasing the number of sub sections
3)All definitions have been put in one single place in the bill whereas under the Companies Act, 1956 (the act) they are under the respective sections.
Major changes effected in the bill:
-Central government approval which was earlier required under various sections has been dispensed with.
-Shareholders democracy has been insisted upon
-Very heavy penal provisions have been introduced
-Ceiling for Managerial Remuneration has been removed
-Self regulation has been insisted upon throughout the bill
-Public deposits cannot be accepted (only from the members )
-Electronic voting permitted
-All communication to the shareholders need to sent only through registered post
In many clauses (sections) the word prescribed has been used and rules are yet to be framed. The bill is "Heart without a beat"without the rules
Taxability of salaries received in UAE
R and OR
R but not OR
NR
However foreign income is taxable only in the hands of R and OR. Assuming an R and OR for a particular financial year goes to UAE for taking up an employment in a company incorporated in UAE. As per section 5 and section 9 of the income tax act the same is taxable in India. But India – UAE treaty also needs to be taken into account. As per the treaty remuneration received in UAE is taxable in India only if all the conditions stated below are satisfied:
The individual stays in UAE for a period less than 183 days AND
Remuneration is paid by a company which does not have a PE / fixed base in UAE and
Remuneration is paid by or on behalf of a company which is not a resident of UAE
As per CIT vs. Kulandangan Chettiar (SC 2004) DTAA prevails over the act.
Hence the salaries of employees who leave India for taking up employment in UAE based companies can take advantage of DTAA and their salaries will not be taxable under the Indian Income tax act. However they have to file their return of income and claim relief under section 90 of the act.
The President Elect’s task is cut out
On the other hand, Economists have confirmed that the global economy has slipped into recession but our Harvard educated FM says India is yet to get into recession. What a paradox!!!
Friday, November 21, 2008
Reverse mortgage demystified:
These products are gaining importance as the percentage of aged people in the total population is steadily increasing and the migration from joint families to nuclear families.
Reverse mortgage is a scheme wherein the borrower (60 years or more) pledges his/her house and derives a monthly/quarterly/half yearly/annual income for a maximum period of 15 years or a lump sum payment. Loans will be given at 40%, 55% or 60% of the market value depending upon the age of the borrower. These loans do not require any repayments as long as the “principal resident” lives in the house but should be repaid when he/her dies, sells the property or moves away. Looking at the way this product is structured it would be useful to aged people who:
a) have houses in posh localities but are not cash rich ,
b) Do not have children or
c) Deserted by their children (rare phenomenon in yester years but increasingly gaining ground)
The finance minister has also clarified that the amounts received from Reverse Mortgage is not taxable as the same represents receipt of loan. However capital gains would arise on sale of the property by the borrower himself or his legal heirs.
After the expiry of the mortgage period preference will be given to the owner or his heirs to repay the loan along with interest and get the mortgage released. Lender can retain only amount lent by him and interest, any surplus over and above it will be paid to the legal heirs. All reverse mortgages have a “non recourse feature” wherein the amount owed exceeds the market value of the house then the lender has to absorb the loss.
From the lender’s perspective there are a few concerns:
a) Amount paid will be received after a period of 15 years and so will the interest.
b) Accounting for reverse mortgages – on cash or accrual basis.
c) Securitisation act does not cover reverse mortgages
Indians are emotionally attached to their properties and want to pass it on to the next generation hence this product would be the last resort. However this would be a good option for elderly couples who do not have children and wouldn’t want to depend on others for their financial needs.
Suggestions required at the drop of the hat: (November 18, 2008)
Minimal cash outflow with respect to taxes i.e., cash is preserved
Changes that are requested do not require the consent/approval of the parliament
(Act cannot be amended)
Bullet number 2 being the deciding criteria, it lead us to the following questions:
1) Whether rules could be changed without passing through the parliament?
2) What are the tax planning / Cash preserving avenues in those rules?
(Answered only from Direct tax standpoint)
Section 295 provided us with necessary answers. Central Board of Revenue was permitted to change the rules regarding certain items. Most important of them being depreciation. So a request could be lodged to the Minister for increase in depreciation rates. (Additional depreciation of 20% is mentioned in the act itself and hence basic depreciation needs to be altered!!!). Apart from the above we could find nothing that could be done without touching the act.
Another general suggestion was regarding adjusting of refunds receivable for various against the advance tax payable for the III quarter as nothing explicit is mentioned in the act or the rules.
All the above points were incorporated and a note was put up to the MD for his discussion with the Finance Minister.
Post the heated discussion when we reworked the advance tax payable for the III quarter based on revised profit forecasts for the year we understood that MAT had become applicable and due to heavy advance tax paid in the first 2 installments no advance tax becomes payable in the III quarter (Advance tax expecting profits as per normal provisions of the income tax was paid in the first and second installments). Our suggestions if accepted and implemented ASAP by the ministry would definitely benefit the Indian Corporates and sadly would be useless to us.
Refund of TDS Deducted – Non Resident payments
As per Section 195A of the Income tax act, 1961 (earlier Circular 155 dated 21-12-1974) specifies that under any arrangement if the tax chargeable on any income referred to the TDS provisions are borne by the person by whom the income is payable then for the purposes of deduction of tax, the income shall be increased by such an amount that the net amount payable after deduction shall be the amount payable under such arrangement.
For instance, Technical fees payable is Rs.100 and the applicable TDS rate is 10% then the technical fees shall be grossed up by Rs.11.11 (100*100/90) and Rs.11.11 shall be the TDS amount. Rs.100 shall be paid to the vendor/party.
Implications of the above:
The TDS grossed up is the cost of the payer and
The above TDS paid can be claimed as business expenditure.
Instead of taking the cost, better way would be to advise the US Company to claim tax credit in US for the tax deducted and remitted in India which is allowed in Article 25 of the Indo US treaty.
Special Economic Zones
The Chinese objective behind setting up of SEZs was not profits but investment promotion and world class infrastructure. There is also a vital difference in tax incentives provided by the two countries. Chinese tax incentives are based on foreign direct investments unlike India wherein they are based on export revenues.
However there are some issues with regard to SEZs in the Indian arena:
Violent farmer agitations against acquisitions of land and their political backing
Cap on acres of land to be given to SEZs (5000 acres)
Rush by various developers to acquire land for creation of SEZs. State governments are confused over the quality of investment and activities.
IT industry wants the lions share in the SEZs. The industry already has had a decade of tax holiday and an IT SEZ will create power, water shortages and also traffic congestions.
SEZ is an avenue to receive kickbacks for politicians
It is of primary importance that the above issues are sorted out and SEZ achieves its full potential an enables India to get into the “Super Powers” list.
An inspiring address
Dot 12.00 P.M the MD walked in and was dressed up in the company’s uniform. It sent across a strong message that he was one among the employees and was not sitting on an ivory tower. He commenced his address by the reasons which he perceived to be responsible for current liquidity crisis:
§ US economy – Sub prime mortgages
§ Credit Default Swaps – another US phenomenon (Buffet described it as “Weapons of mass financial destruction”)
§ Speculation money in Commodity and Money markets
He was of the opinion that India and China were still the bright spots in the global economy and the success stories these countries were sculpting were only “interrupted” and medium/ long terms were still intact.
He expressed that the company had been a little over ambitious in planning for capex, acquisitions, diversifying into adjacent businesses over the past 3/ 4 years amidst the boom. Those activities were still on but the pace at which the progress need to happen in the forthcoming years were to be relooked at and there is a burning need to get into non cyclical businesses and also to make it a major part of the business to survive in these kinds of scenarios in future.
Moving forward the company would focus on the following:
Spending on Product development (no cutting corners in this regard)
Uttarkhand project
Slow down on further investments. Be more prudent and “nimble footed”.
Nissan Joint venture
Efficiency in Frugality
He also elaborated on the 1998-1999 slowdown and said that following steps had been taken and the company had emerged successful:
Cash was preserved.
Brakes were jammed on capex and current assets were reduced to acceptable levels.
No corners cut in Product development costs
He ended his address by saying that lots of things could be learnt from the competitors such as TATA motors launching the Indica programme in the midst of the 98-99 gloom. It also had taught that evolving new models in the midst of the slowdown helps one to come out strongly after it and create demand for such products.
When he expressed that he wanted to have lunch with the new recruits it just turned out to be the icing on the cake.
One week into the big bad world of business
§ An address by the MD at the beginning of such programme definitely eggs on the confidence of the new joiners and we expected the popular MD to do so. But to our dismay the day started with a dull and drab introduction by an HR person.
§ Each and Every speaker stressed on the fact (with enormous amount of pride) that this company had been making profits since inception and declaring dividends. Great track record but which is better? Unbroken trend of profitability for the past 60 years coupled with static number 2 position in the vehicles segment or a 5-10 years of loss due to high finance other costs arising out due to aggressive buys/ decisions and becoming the market leader? Depends on the tone at the top. My opinion is that this is a very risk averse company. It also made us wonder whether the layoffs, wage cuts were really required or was it done to maintain profitability? This company sits on a lot of cash even in extremely good times!!!
§ We were looking forward to a session by strategic sourcing department. Wow what a department! To our disappointment, strategic sourcing department was none other than the purchase department!!!
§ All the presentations had lots of pie diagrams, graphs etc which were in most cases very difficult to comprehend and all simple processes had been jargonized beyond anyone’s imagination. Why not keep simple things simple? (How would one feel if depreciation is substituted by “non cash revenue charge on the fixed assets of the company”?) What is the problem in using narratives? Does the IITian way of doing things give people a satisfaction of doing sophisticated work? A psychiatrist should be able to answer this.Due to the training I missed this month’s tax executives forum . A huge price to pay for an ill structured training.
Disclosures/ Presentation – Meant for whom?
But why make it even more complex that it makes even the accountants see stars. One of the AS/IFRS experts remarked that 30 page financial statements will grow to 150-200 pages. Though this will contribute to financial transparency and better analysis (for capital market experts) a few other aspects also needed to be looked into:
Amount of compliance costs. India is one of the countries in the world having high compliance costs.
Small and medium companies also need to comply with these standards. Is it really necessary? (Currently relaxations available under Indian AS are not very encouraging) Apart from compliance, educating them could eat into the time of audit firms.
Since IFRS is more rule based and complex, audit will become a compliance ritual a last thing this esteemed profession warrants.
Though globally accepted standards might be the need of the hour for a rapidly developing economy like ours, convergence is the only feasible option than copying verbatim.
ICAI terms it as “Convergence with IFRS” but issuance of last few standards stands as testimony to the contrary.
Recession – an employer’s perspective
An economist remarked “Cash is the oil of the 21st century”. Corporates are faced with plummeting sales, piling up of inventories, increasing input costs and to add fuel to the fire, interest rates are sky rocketing.
Sales not improving the only measure left with the corporates are to cut the costs. As Mr.Azim premji has remarked all discretionary costs need to be cut. But what are they? Foreign travel, lavish parties, entertainment costs, certain staff welfare costs and last but not the least employee costs. From an employer’s perspective this looks extremely logical. Employees need to stand by their employers during these trying times rather than throw stones at them. Remember employees benefited the most during the boom.
It’s the darkest before dawn and tough people stay, tough times don’t!!!!
Thursday, October 9, 2008
Blog on a “blog”
I had been to the
Near the Meenakshi or Sundarar shrine (not very sure which one) is the Mahalakshmi shrine (not very popular) there is a board (“blog” in the title) where it is believed that
one could write his/her on it and it would be granted by the goddess.
Three fourth of the board had the words “Laabam” which translates to Profit and balance one fourth had “Sugam” which means peace/ well being.
This leads us to one logical conclusion which is majority of people are self centered or materialistic (going by law of statistical regularity).
God/Goddess is being looked upon as a security, Money lender (all his loans are NPAs!!!) and a troubleshooter.
How many people pray for a terrorism free world, pollution free environment and a guileless society? Answer is Aryabhatta’s discovery.
This needs to change.
“The Comeback Man” bids farewell
This is bad. The Prince of Kolkata has announced his retirement. Fab 4 is down to Fab 3.
Couple of years back name any SMS joke this guy would feature in it. He was mocked at. Every one of us played the mudslinger. He was written off as a spent force and one who placed himself above the team.Defying all odds, this great cricketer set an example for “when the going gets tough; the tough get going”. He came back and with a bang and did exceptionally well against the Pakistanis / Aussies in tests as well as ODIs. Still one cannot fathom why the
Let’s not forget this man built a team from the debris (remember the Indian team that toured
Prelude
This concept of blogging is something I have known for; say last one year and which I perceived to be a waste
of time. Perceptions change over a period of time and now I feel that blogs could be a vent for one’s thoughts.
This concept of “blogging” could also help in analyzing one’s thought process over a period of time.
I wish to write in this blog (is the grammar correct???) not about myself, my hobbies, my likes, dislikes etc and
I also wish to keep my blogs short.
My heartfelt thanks to two young future chartered accountants of my team for arousing an interest in this
blogging stuff.