Convergence with IFRS would require adopting fair value accounting by the Indian Companies. Fair value accounting would call for “marking to market” which would mean historical cost convention would be done away with and unrealized losses and gains would be recognized and will be through Profit and Loss Account. This is against the age old prudence concept wherein unrealized gains will not be accounted for, till they are recognized. To get a better understanding pros and cons of Cost based accounting and Fair value accounting are analysed
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).
Monday, December 22, 2008
Tuesday, December 9, 2008
Whether pension received post retirment through superannuation scheme is taxable?
As per Section 10(13) of the Income tax act "any payment from an approved superannuation fund made -
(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.
(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
A few salient features of the bill are:
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
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
Taxability of individuals mainly depends upon their residential status and place of accrual/receipt of income. Indian income is taxable for all three categories of individuals:
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.
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
The world’s smartest bank is getting bailed out. $ 320 in the form of government guarantees and $ 20 cash injection constitute the bailout package. This is in addition to the Bear Stearns and AIG bailout. Consumer spending has come down drastically, unemployment rate has soared to an all time high and to add fuel to the fire companies are issuing pink slips to its employees left right and centre. Regulatory system stands exposed. The Afro-American president will inherit the worst economic mess during the last 50 years. The vital thing is to get the recovery package on the road, get money into the pockets of the middle class, increase consumer spending and to get USA worked up again. The Legal eagle has already got a team to tackle the crisis with Mr.Geithner , President of New York Federal Reserve Bank at the helm. USA has been the epicenter for this crisis. Sub prime loans, CDS were all products of your greed and “nothing will go wrong” attitude. Post 1929 this is one of the worst recessions. Mr. Obama your task is cut out and we sincerely hope “You can”. Get the main street working and give us a thriving wall street.
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!!!
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!!!
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