With westernization of the Indian society various financial products from the west relating to social security like Reverse Mortgage are making their entry into India.
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.
Friday, November 21, 2008
Suggestions required at the drop of the hat: (November 18, 2008)
Direct and indirect taxes teams were ushered into the CFO’s room today. We were informed that the MD (representing the Indian Corporates) had a meeting with the Finance Minister regarding the omnipresent liquidity crunch. In India any activity done has to be looked through the tax lens. One of the representations to the minister was to request changes in direct tax as well as indirect tax front for the current year (till March 2009) satisfying the following criteria:
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.
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
Working in the taxation department of an automobile major has its own advantages. An interesting issue on TDS popped up. The company had deducted and remitted TDS on a non resident payment under Article 12 “Fees for technical services” to Indo – US tax treaty. However the recipient refused to accept the net of tax amount as he contended that any payments to third parties (including tax department) need to be borne by the payer and he demanded a refund of the deducted TDS. As a result of which the issue on TDS applicability on refund of TDS arose.
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.
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
SEZs are earmarked geographical zones which can be developed by a private sector or public sector developer. They come with direct and indirect tax holidays and is great for countries that want to attract foreign investments. The SEZ concept was a great success in China and brought heavy foreign direct investments into that country. However there is a difference between the Chinese and Indian model of SEZ, in China the government acts as the developer whereas in India it is either the private sector developers or public sector developers.
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.
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
A mail was circulated to all the executives of the India’s automobile major informing that MD will address on the current economic scenario and company’s plans for the future at the state of the art conference room.
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.
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
Induction programme was announced by the India’s second largest automobile major for its new recruits. Around 65 of us from various cross functions gathered at the state of the art conference room. When the programme coordinator started explaining about the week’s schedule etc the tone of his led us to a logical question? Was it an induction programme for its executives or a high school classroom? Latter looked the obvious answer. Such things apart, a few observations emanating out of the training are:
§ 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.
§ 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?
The article written by the President of Bombay Chartered Accountants Society in the September 2008 issue was a thought provoking one. Was the world’s most respected, prestigious and trustworthy profession communicating in a form which was becoming increasingly complex? It is true that entire financial statements cannot be conveyed in a manner that can be understood by everyone. Every profession has its own hieroglyphics.
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.
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
The saying that “When America sneezes the whole world catches cold” has once again proved to be correct. Wall Street giants fell like a pack of cards. We were assured by our Harvard educated Finance Minister that India was insulated from such catastrophes and also from the resultant recession. But in India Astronomical salaries, business class travel, luncheons at five stars have paved way to cost cutting, hiring freeze, lay offs and pay cuts. Recently a newspaper carried an article which read that a company had stopped purchasing toilet paper as a cost cutting measure. This leads us to a logical question? Is the situation that bad to warrant such drastic measures or is it a knee jerk reaction from the corporates? A million dollar question.
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!!!!
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!!!!
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