Key recommendations of expert committee on GAAR

Key recommendations of expert committee on GAAR The expert committee on GAAR, as constituted by the Prime Minister, has submitted its report. Inter-alia, the key recommendations of expert committee are as under: 1) GAAR should be deferred by three years; 2) GAAR should be applicable only if a tax benefit of Rs. 3 crore and above has been obtained by the taxpayer; 3) In case of deferral of tax benefit, present value of tax benefit should be considered; 4) Non-applicability of GAAR on a resident of Mauritius holding valid tax residency certificate; 5) GAAR should not be applicable if FII offers to be taxed under domestic laws; 6) GAAR should not be applicable if non-resident invests in listed securities through FIIs; 7) Abolition of tax on gains arising from transfer of listed securities (both capital gains and business income); 8) Grandfathering of existing structures or investment. In other words, only income arising after implementation of GAAR should be subject to provisions; 9) GAAR should not be allowed to over-ride the anti-avoidance provisions of treaties (i.e. limitation of benefit, etc.); 10) Onus should be on revenue to prove if a transaction is impermissible avoidance agreement; 11) Amendment to the Act to provide that only arrangements with sole purpose (and not one of the main purpose) of obtaining tax benefit should be covered under GAAR; 12) Tax consequences of 'impermissible avoidance arrangements' should be limited to the tainted part of the transaction; 13) Definition of 'connected person' under Sec. 99 should be restricted to 'associated person' and 'associated enterprise' only; 14) AAR should decide the GAAR cases within 6 months; 15) A 'negative list' for the purpose of invoking GAAR should be provided; 16) 'Tenure of arrangements, payment of taxes and an option to exit' should be given due weightage while deciding if arrangements lack commercial substance; 17) GAAR not to be invoked if taxpayer submits a satisfactory undertaking to pay tax along with interest in case GAAR provisions are made applicable in relation to the remittances; 18) Tax auditor should report the probable transaction which may accrue to the tax payer a tax benefit of Rs. 3 crore and above; 19) Extensive training of Assessing officer to be placed in the regime of International Taxation; and 20) Various illustrations have been given where GAAR will be considered as applicable or not applicable. (View report of Committee)

GAAR Comments Invited

Press Information Bureau
Government of India
Ministry of Finance

01-September-2012 15:41 IST

The Expert Committee Headed by Dr. Parthasarathi Shome on Gaar Submits the Draft Report; Comments from Stakeholders and General Public Invited by 15th September,2012

The Government had constituted an Expert Committee on General Anti Avoidance Rules (GAAR) to undertake stakeholder consultations and finalise the GAAR guidelines as well as a roadmap for implementation.

The Committee, chaired by Dr. Parthasarathi Shome, has submitted its draft report after analysis of the GAAR provisions and noting the concerns expressed by various shareholders. The draft report has recommended certain amendments in the Income-tax Act, 1961; guidelines to be prescribed under the Income-tax Rules, 1962; circular to clarify GAAR provisions along with illustrations; and other measures to improve tax administration specifically oriented towards GAAR matters.

The report of the Committee has been uploaded on the Finance Ministry's website (http://finmin.nic.in) for comments from stakeholders and the general public.

The comments and suggestions on the draft report may be submitted by 15th September, 2012 at the email address (jstpl2@nic.in) or by post at the address: Joint Secretary (Tax Policy & Legislation-II), Room No.152, North Block, Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, North Block, New Delhi – 110001 with "Comments on GAAR Committee" written on the envelope.

******

DSM/RS

 

PIB on TDS Returns

Press Information Bureau
Government of India
Ministry of Finance

10-July-2012 16:05 IST

Deductors Must Comply with their Obligations to Ensure Correct Credit to Persons from Whose Income Tax is Deducted at Source

All deductors other than Government deductors must file their quarterly TDS statement for the quarter ending 30th June 2012, on or before 15th July 2012 and Government deductors must file their statement on or before 30th July 2012. While submitting their statements, the deductors have to choose correct and relevant form, quote correct PAN against all entries and ensure that correct CIN/BIN is quoted in the TDS statement. Non-quoting of PAN or TAN in TDS statements or delay in filing of TDS statements may lead to levy of penalty.

Filing of TDS statement with correct PAN and CIN/BIN is important because under Rule 37BA of Income Tax Rules, 1962 credit for tax deducted at source is given to the deductees on the basis of TDS statement furnished to the Income-tax Department by the deductor. Filing of TDS statements with incorrect PAN or other details of the deductee would, therefore, cause inconvenience to the deductees (taxpayer).

In case the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee, the deductee must file a declaration with the deductor that credit for the TDS shall be given to the other person and not to the deductee. The declaration filed by the deductee must contain the name, address, Permanent Account Number of the person to whom credit is to be given and reasons for giving credit to such person. The deductor must, in the TDS statement, report the tax deduction in the name of such other person and also issue the TDS certificate in the name of the person in whose name credit is shown in the TDS statement.

TDS certificates for deductions on income other than salary income (Form 16A) for the quarter ending 30th June 2012 should be issued on or before 30th July 2012.

Finance Act 2012

Dear All,

The Finance Bill, 2012 has  been enacted and has become  Finance Act,
2012 w.e.f. 28.05.2012 ( Act No 23 of 2012 ) with president's assent
and all statutory provisions has applicable w.e.f. 28.05.2012 except
the provisions of negative list which will be applicable after
issuance of the Notifications which are expected around June 1, 2012.
In all liklihood, the other provisions may be made applicable from
July 1, 2012.

FM on IT Retrospective Amendments

Print

Press Information Bureau
Government of India
Ministry of Finance

30-May-2012 15:38 IST

Statement of Union Finance Minister, Shri Pranab Mukherjee Regarding Issues of Retrospective Amendment and Transfer Pricing

On the issue of retrospective amendment, Union Finance Minister, Shri Pranab Mukherjee has said that he had given a commitment in the Parliament with regard to retrospective amendments that CBDT will issue a policy circular to clarify that in cases where assessment proceedings have become final before first day of April, 2012; such cases shall not be reopened. Now CBDT has issued a circular in this regard, the Finance Minister has stated.

Regarding the issue of Advisory Group relating to transfer pricing and International taxation, the Finance Minister has said that he has constituted an advisory group to resolve various issues in the area of transfer pricing and International taxation. The group has held its first meeting on 25th May 2012 and on advice of group and NASSCOM, the Finance Minister has approved issue of a circular to avoid multilevel TDS on software u/s194J.This will remove hardship in case of software distributors.


*****

SS/SL

Press Information Bureau
Government of India
Ministry of Finance

30-May-2012 15:38 IST

Statement of Union Finance Minister, Shri Pranab Mukherjee Regarding Issues of Retrospective Amendment and Transfer Pricing

On the issue of retrospective amendment, Union Finance Minister, Shri Pranab Mukherjee has said that he had given a commitment in the Parliament with regard to retrospective amendments that CBDT will issue a policy circular to clarify that in cases where assessment proceedings have become final before first day of April, 2012; such cases shall not be reopened. Now CBDT has issued a circular in this regard, the Finance Minister has stated.

Regarding the issue of Advisory Group relating to transfer pricing and International taxation, the Finance Minister has said that he has constituted an advisory group to resolve various issues in the area of transfer pricing and International taxation. The group has held its first meeting on 25th May 2012 and on advice of group and NASSCOM, the Finance Minister has approved issue of a circular to avoid multilevel TDS on software u/s194J.This will remove hardship in case of software distributors.


*****

SS/SL

--

ODI Online

Overseas Direct Investments by Indian Party - Online Reporting of Overseas Direct Investment in Form ODI

A.P. (DIR Series 2011-12) Circular No. 131, dated 31-5-2012

Attention of Authorised Dealer Category-I (AD Category-I) banks is invited to A.P. (DIR Series) Circular No. 36, dated February 24, 2010, wherein ADs were advised about the operationalisation of the online reporting system of Overseas Direct Investments (ODI) with effect from March 2, 2010. The system, inter alia enables online generation of the Unique Identification Number (UIN).

2. Under the online reporting system, AD Category-I banks could generate the UIN online under the automatic route. However, reporting of subsequent remittances under the automatic route as well as the approval route was to be done online in Part II of form ODI, only after receipt of the letter from the Reserve Bank confirming the UIN.

3. It has now been decided to communicate the UIN in respect of cases under the Automatic Route to the ADs/Indian Party through an auto generated e-mail to the email-id made available by the AD/Indian Party. Accordingly, with effect from June 1, 2012 (Friday), the auto generated e-mail, giving the details of UIN allotted to the JV/WOS under the automatic route, shall be treated as confirmation of allotment of UIN, and no separate letter shall be issued by the Reserve Bank to the Indian party and AD Category - I bank confirming the allotment of UIN.

4. It may also be noted that the subsequent remittances under the automatic route and remittances under the approval route are to be reported online in Part II of form ODI, only after receipt of the e-mail communication/confirmation conveying the UIN.

5. The applications in form ODI for overseas direct investment under the approval route would continue to be submitted to the Reserve Bank in physical form as hitherto, in addition to the online reporting of Part I of the Form as contemplated in A.P. (DIR Series) Circular No. 36, dated February 24, 2010.

6. AD Category - I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

7. The directions contained in this Circular have been issued under section 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law.

Cost of Collection about 0.6%

Income Tax - Cost of Collection about 0.6%

• COST of collection showed a uniform trend of about 0.6 per cent during 2006-07 to 2010-11 except 2008-09 and 2009-10, where it was 0.7 per cent.

• The direct tax collection exceeded the budget estimates in all the years over the period 2006-07 to 2010-11 except 2008-09. The extent of actual collection exceeding the budget estimates ranged from 2.2 per cent in 2009-10 to 16.7 per cent in 2007-08.

• Direct tax collection increased by 94.2 per cent from Rs. 2,30,181 crore in 2006-07 to Rs 4,46,934 crore in 2010-11 whereas total Gross Domestic Product (GDP) has increased by 90.0 per cent from Rs. 41,45,810 crore in 2006-07 to Rs. 78,75,627 crore in 2010-11 indicating a significantly higher growth rate of tax collection over five years period. During the period 2006-07 to 2010-11, the average rate of growth of direct tax collection was 23.6 per cent. The annual rate of growth ranged from 6.9 per cent in 2008-09 to 35.6 per cent in 2007-08.

• In the case of the corporate assessees, net collection increased from Rs. 1,44,318 crore in 2006-07 to Rs. 2,98,687 crore in 2010-11 at an average annual rate of growth of 26.7 per cent and in the case of non-corporate assessees, net collection increased from Rs. 75,079 crore in 2006-07 to Rs. 1,40,042 crore in 2010-11 at an average annual rate of growth of 21.6 per cent.

• Voluntary compliance by assessees (pre-assessment stage) accounted for 81.4 per cent of the gross collections in 2010-11. The collection by way of voluntary compliance in 2010-11 was higher than 2006-07 but marginally lower as compared to 2007-08 to 2009-10.

• The assessee base grew over the last five years from 313 lakhs taxpayers in 2006-07 to 335.8 lakh taxpayers in 2010-11 at average annual rate of growth of 1.8 per cent.

• The pendency of scrutiny assessments increased from 2.8 lakh in 2006-07 to 3.9 lakh in 2010-11.

• At the end of 2010-11, as much as Rs. 2.9 lakh crore remained uncollected. This comprised demand of Rs. 2.0 lakh crore of earlier years and current demand (2010-11) of Rs. 0.9 lakh crore.

• Internal Audit completed 66 per cent of the targeted audits. Only 14.9 per cent of major findings raised by Internal Audit were acted upon by the assessing officers in 2010-11. Departmental response to Internal Audit was clearly inadequate.

Source: CAG's Report No. 27 of 2011-12 (Direct Taxes)

CURRENT ACCOUNT DEFICIT DOUBLES TO $19.6 b in Q3

CURRENT ACCOUNT DEFICIT DOUBLES TO $19.6 b in Q3

Widening trade deficit and slowdown in capital inflows are weighing down India's key macroeconomic indicators.

The country's current account deficit (CAD) jumped to 4.3 per cent of GDP in the October-December 2011 period (Q3) against 2.3 per cent in the corresponding year-ago period.

Current account deficit occurs when a country's total imports of goods, services and transfers exceed exports, making it a net debtor to the rest of the world.

In absolute terms, the current account deficit has widened to $19.6 billion in the reporting Q3 against $10.1 billion in Q3 of 2010-11.

According to economists, a widening deficit will weaken the rupee which, in turn, will have an inflationary impact (India imports almost 80 per cent of its crude oil requirement).

The rupee has depreciated by about 13 per cent (or Rs 5.75) against the dollar between April 1, 2011 and March 30, 2012.

On Friday, the domestic currency closed at Rs 50.85 to the dollar.

BOP: Experiencing Stress

During Q3, India's balance of payments (the difference between the amount of exports and imports, including all financial exports and imports, by a country) was significantly stressed.

The Reserve Bank of India attributed the stress to widening trade deficit and capital inflows falling short of financing requirement, resulting in significant drawdown of foreign exchange reserves.

In the April-December 2011 period too current account deficit rose to 4 per cent of GDP (3.3 per cent in the April-December 2010 period) to $53.7 billion ($39.6 billion), RBI data on Balance of Payments showed.

The RBI said the rise in current account deficit in the first nine months of the current financial year reflects higher trade deficit on account of imports of petroleum, oil and lubricants, and gold and silver.

The Finance Minister, Mr Pranab Mukherjee, in his Budget speech had said that one of the primary drivers of current account deficit has been the growth of almost 50 per cent in imports of gold and other precious metals.

Dr Brinda Jagirdar, General Manager (Economic Research), State Bank of India, said: "Nothing much can be done to reverse the slowing exports as globally demand is falling. So, current account deficit can be tackled by making gold imports unattractive and by attracting foreign capital via external commercial borrowings and non-resident deposits."

Source: Business Line

GDP Growth @ 6.1%

At 6.1%, economic growth hits 3-year low

Manufacturing, mining sectors drag; pressure may mount on RBI to cut rates

  

The Indian economy grew at the slowest annual pace in almost three years in the October-December quarter at 6.1 per cent, adding pressure on the Reserve Bank of India to go in for a cut in the Repo rate at the policy review meeting slated for March 15. The repo rate is the rate at which the RBI lends money to banks.

The third quarter GDP growth of 6.1 per cent compared poorly with the 8.3 per cent growth recorded in same quarter the previous year, and was also lower than the 6.9 per cent of Q2. The growth performance of the latest October-December quarter was weighed down by the sharp fall in manufacturing sector growth and a contraction in mining.

India's manufacturing sector grew just 0.4 per cent in the third quarter as higher input prices and the sharp jump in borrowing costs depressed output. The sector had recorded a robust 7.8 per cent growth in the same quarter the previous year.

The mining sector recorded a contraction of 3.1 per cent in October-December 2011 compared with the 6.1 per cent growth in same previous period. This is the second consecutive quarter the sector recorded a contraction. Agriculture recorded growth of 2.7 per cent, far lower than the 11 per cent in same quarter last year, official data released by the Central Statistics Office showed.

The latest growth data highlighting the faltering economy are likely to pose more problems for the UPA Government, already buffeted by a string of corruption scandals. Weaker-than-expected growth would also imply lower tax revenues for the Government in the current fiscal. Rising oil prices coupled with lower tax revenues may increase the country's economic pain in the months ahead, say economy watchers and analysts.

The data also reveal that gross fixed capital formation continues to shrink, indicating a bleak investment outlook, according to the Confederation of Indian Industry Director-General, Mr Chandrajit Banerjee. Industry has reiterated its demand that excise duty should not be raised in the current economic situation.

The RBI had last month indicated it was ready to cut interest rates to stimulate the economy. Bankers are betting that the RBI will go in for only a cut in the Cash Reserve Ratio on March 15. A CRR cut seems to be appropriate to infuse liquidity into system, Mr M.V. Nair, CMD of Union Bank, said.

Source : Business Line

FDI- Singe Brand

Hi,

Department of Industrial Policy and Promotion Ministry of Commerce and Industry notified the decision to allow 100 per cent FDI in Single brand retail today via Press Note No.1 (2012 Series). The Union Minister for Commerce Industry and Textiles said Cabinet took the conscious decision to liberalise policy for FDI in single brand retail. FDI in single brand has led to emergence of some global majors in Indian market. We have now allowed Foreign Investment up to 100 percent with the stipulation that in respect of proposals involving FDI beyond 51 per cent there will be mandatory sourcing of at least 30 per cent of the total value of the products sold would have to be done from Indian small industries/village and cottage industries, artisans and craftsmen, This step will provide stimulus to domestic manufacturing value addition and help in technical upgradation of our local small industry.

PPF-NSC- CHANGES

 

Interest rates on small savings have been hiked in the range of 4 per cent up to 8.6 per cent. The investment limit for Public Provident Fund (PPF) has also been increased by Rs 30,000 to Rs 1 lakh, as also the interest rate at 8.6 per cent from 8 per cent at present.

Announcing the new norms on Friday, the Finance Ministry said the new rates will be applicable from the date of notification which will be announced soon. From next year, the rates would be notified before April 1, it added.

The small saving schemes have been restructured on the basis of the recommendations of the Shyamala Gopinath Committee, which submitted its report in June.

The rate of interest on small savings schemes will be aligned with Government Securities rates of similar maturity, with a spread of 25 basis points with two exceptions. The spread on 10-year National Savings Certificates (new instrument) will be 50 basis points and on Senior Citizens Savings Scheme 100 basis points.

The maturity period for the post office Monthly Income Scheme (MIS) and National Savings Certificate (NSC) has been reduced to five years from six years at present.

AGENTS DISAPPOINTED

Although this is good news for small savers, collection agents are disappointed. According to an office memorandum issued by the Finance Ministry, payment of commission on PPF at the rate of 1 per cent and Senior Citizens Savings Scheme at the rate of 0.5 per cent will be discontinued.

Agency commission under all other schemes (except Mahila Pradhan Kshetriya Bachat Yojana) will be reduced by half, from the existing 1 per cent

National Manufacturing Policy

Press Information Bureau
Government of India
Ministry of Commerce & Industry

25-October-2011 14:59 IST

National Manufacturing Policy

The Cabinet approved the revised proposal of the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry to put in place a National Manufacturing Policy.

The Cabinet in its meeting held on 15" September 2011 considered the National Manufacturing Policy and directed that the policy may be considered by a Group of Ministers (GOM) for further harmonizing the differences in some inter-ministerial positions notably relating to Ministry of Labour and Employment and the Ministry of Environment and Forests. The GOM in its meeting held on 14th October 2011 has resolved the relevant issues. A revised note incorporating the recommendations of the GOM has been approved by the Cabinet today.

The major objectives of the National Manufacturing Policy are to increase the sectoral share of manufacturing in GOP to at least 25% by 2022; to increase the rate of job creation so as to create 100 million additional jobs by 2022; and to enhance global competitiveness, domestic value addition, technological depth and environmental sustainability of growth.

The policy has been formulated after detailed consultations with the industry; subject matter experts; State Governments and the concerned Ministries/Departments of the Government of India. The policy envisages specific interventions broadly in the areas of industrial infrastructure development; improvement of the business environment through rationalization and simplification of business regulations; development of appropriate technologies especially green technologies for sustainable development and skill development of the younger population.

Industrial infrastructure development is envisaged not only generally but also through the creation of large integrated industrial townships called National Investment and Manufacturing Zones (NIMZs) with state-of-the-art infrastructure; land use on the basis of zoning; clean and energy efficient technologies; necessary social and institutional infrastructure in order to provide a productive environment to persons transitioning from the primary to the secondary and tertiary sectors. The land for these zones will preferably be waste infertile land not suitable for cultivation; not in the vicinity of any ecologically fragile area and with reasonable access to basic resources.

It is envisaged to ensure compliance of labour and environmental laws while introducing procedural simplifications and rationalization so that the regulatory burden on industry is reduced. The interventions proposed are generally sector neutral, location neutral and technology neutral except the attempt to incentivize green technology for sustainable development No subsidies are proposed for individual units or areas. The basic thrust is to provide an enabling environment for tapping the potential of the private sector and the entrepreneurial skills of the younger population.

The contribution of the manufacturing sector at just over 16% of India's GOP is much below its potential and a cause of concern especially in the context of other Asian countries in similar stages of development. This also has its socio-economic manifestations and prevents India from fully leveraging the opportunities of globalization. India is a young country with over 60% of its population in the working age group. With over 220 million people estimated to join the work force in the next decade, the manufacturing sector will have to create gainful employment for at least half this number. With a view to accelerating the growth of the manufacturing sector, the manufacturing policy proposes to create an enabling environment suitable for the sector to flourish in India.


***

AD/SC/SK/LM

PPF Deposit Limit Increased

MODIFICATION IN PPF SCHEME : DEPOSIT LIMIT RECOMMENDED TO BE RAISED FROM RS. 70,000 TO RS. ONE LAC WHILE RATE OF INTEREST ON ADVANCES AGAINST DEPOSITS IN PPF SCHEME RAISED FROM 1 PER CENT TO 2 PERCENTAGE POINTS

PRESS RELEASE, DATED 6-9-2011

The Committee on Comprehensive Review of National Small Savings Fund (NSSF) headed by Deputy Governor, RBI has recommended revision of certain provisions of PPF Scheme, 1968 and benchmarking of interest rates on various small savings schemes with the secondary market yields on Central Government securities of comparable maturities with suitable spread.

The Committee has recommended increasing the deposit limit under PPF Scheme from existing Rs. 70,000 to Rs. 1 lakh per annum and fixing of rate of interest on advances against deposits in PPF scheme at 2 percentage points as against the prevailing interest rate on such advances at 1 per cent.

The Committee has further recommended benchmarking interest rate on small saving schemes to interest rate on Government securities of similar maturities with a positive spread of 25 basis points on all schemes except for 50 basis points for 10 year NSC and 100 basis point for Senior citizens Savings Scheme. Recommendations of the Committee have been referred to State Governments and concerned Ministries/Departments of Central Government for their comments.

This information was given by the Minister of State for Finance Shri Namo Narain Meena in a written reply to a question raised in Rajya Sabha today.

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FDI in LLP Approved

APPROVAL FOR FDI IN LLP FIRMS

Approval for FDI in Limited Liability Partnership firms

PRESS RELEASE, DATED 11-5-2011

The Cabinet Committee on Economic Affairs today approved the proposal to amend the policy on allowing Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP) firms.

The FDI in LLPs will be implemented in a calibrated manner, beginning with the 'open' sectors where monitoring is not required, subject to the following conditions :

(a) LLPs with FDI will be allowed, through the Government approval route, in those sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions.

(b) LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.

(c) LLPs with FDI will not be eligible to make any downstream investments.

There are also further following conditions relating to funding, ownership and management of LLPs :

I. Funding of LLPs:

(a) An Indian company, having FDI, will be permitted to make downstream investment in LLPs only if both the company, as well as the LLP are operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions.

(b) Foreign Capital participation in the capital structure of the LLPs will be allowed only by way of cash considerations, received by inward remittance, through normal banking channels, or by debit to NRE/FCNR account of the person concerned, maintained with an authorized dealer/authorized bank; and

(c) Foreign Institutional Investors (FIIs) and Foreign Venture Capital Investors (FVCIs) will not be permitted to invest in LLPs. LLPs will also not be permitted to avail External Commercial Borrowings (ECBs.)

II. Ownership and management of LLPs :

(a) For the purpose of determination of the designated partners in respect of LLPs with FDI, the term "resident in India" would have the meaning, as defined for "person resident in India", under section 2(v)(i)(A) & (B) of the Foreign Exchange Management Act, 1999 ;

(b) In case the LLP has a body corporate as a designated partner, the body corporate should only be a company registered under the Companies Act and not any other body, such as an LLP or a trust.

III. Conversion of a company with FDI into an LLP will be allowed only if the above stipulations are met and with the prior approval of FIPB/Government.

IV. The designated partners will be responsible for compliance with the above conditions and liable for all penalties imposed on the LLP for their contravention.

Presently, FDI is allowed in Indian companies. It is allowed in a firm or a proprietary concern, subject to certain conditions. FDI in a trust is also allowed with prior Government approval, provided it is a Venture Capital Fund (VCF).

The CCEA's approval will benefit the Indian economy by attracting greater FDI, creating employment and bringing in international best practices and latest technologies in the country.

The Limited Liability Partnership Act, 2008 (LLP Act) was notified in April, 2009. With the passage of this Act, a new hybrid entity, incorporating the features of a body corporate and a partnership, can now be formed for the purpose of undertaking business in India.

Enhancing microfinance -K. V. RAMANAND

---

Microfinance institutions need to be permitted to operate as a business or an industry with an objective to make profits and grow.

---

Currently, over Rs 20,000 crore is channelled by private sector MFIs amongst around 28 million borrowers.

"Give a man a fish, you feed him for a day. Teach him how to fish, you feed him for a lifetime," goes the Chinese saying. Microfinance is hailed by many as the panacea to alter the social fabric of rural India.

The depressing levels of poverty, particularly in rural India, motivated policymakers (such as the RBI and the Registrar of Cooperative Societies) to embark on the Self-Help Group (SHG), bank linkage programme to channelise the much-needed capital to the remotest parts of the country with the hallowed twin objectives of social and economic uplift.

SIDBI and NABARD, leading Indian financial institutions, played a stellar role by lending directly. They also paved the way for extensive private sector participation in this industry by funding private sector players.

The emergence of the concept of microfinance and private sector institutions was primarily to supplement and enhance the outreach of the traditional banking sector through the length and breadth of the country.

The benign objective was to protect the poor from the usury they were subjected to from unorganised moneylenders. Microfinance industry operates on the fundamental concept of small loans disbursed amongst a group of close knit people and subtly leverages on social and peer pressure to ensure full and timely repayment.

This industry has an envious record of loan recovery (almost 97 per cent). More importantly, the sector also seems largely immune to the global financial turmoil as it tends to operate on a regional basis. Therefore, it is highly susceptible however, to the regional issues and trends.

Organised phenomenon

What started as a local initiative by a few dedicated individuals with a social/community objective to mobilise and channel local resources has become a parallel organised banking phenomenon.

The style under which the entities operate ranges from for profit corporate entities such as NBFCs (non-banking finance companies to Section 25 companies and societies and trusts. Even the spectrum of regulators is widespread and ranges from the RBI to the Registrar of Cooperatives.

For long, this sector depended on the traditional sources of borrowed capital. There were many restrictions on free access to capital.

Public deposits were not available based on the nature of the entity and sources were primarily from the community and grants. Priority sector norms enabled microfinance institutions (MFIs) access to bank funds. Currently, over Rs 20,000 crore is channelled by private sector MFIs amongst around 28 million borrowers.

Lately, this sector has attracted funds from global development financial institutions and, more importantly, the global private equity funds. Private equity players have invested approximately $300 million in this sector in about 25 transactions since 2006.

This availability of capital in turn saw many socially-oriented entrepreneurs launching MFIs of their own. In all, over 3000 MFIs operate currently in India. This led many to draw comparisons between the credit-card boom for the middle class and the poor man's credit mechanism, the microfinance industry.

Key concerns

This rapid growth has led to many concerns being raised, primarily around the usage of funds by the borrowers and the rates charged by the lenders. In many cases, the lending rates range from an effective 25 per cent per annum to 32 per cent per annum.

Concerns were raised by activists whether this mechanism was fuelling rural consumerism by encouraging "unnecessary" spending by making credit easily available.

Is the credit being used for "productive" purposes? Is the credit going for measures that alleviate the impoverished status of the borrowers or is it meeting their short term consumption requirements? Other serious considerations are with regard to the systems and processes at the lending institutions to monitor and control disbursements and collections.

The MFIs have a requirement to strengthen their internal process and corporate governance standards. This is mandated by the rapid growth of the industry and also the need to operate from discrete and remote locations.

Considering the widespread presence of operations, many a times in remote areas with minimal access to communication networks, there is serious inherent risk in operations. Technology, therefore, will be a great enabler and can play an important role in the stability and growth of this industry by minimising risks and also significantly reducing costs.

We believe that the microfinance industry is a path breaking tool in achieving the stated twin objectives. The best and the most effective way of reaching there is by a judicious mix of active private sector participation with a calibrated approach of support and regulation by the Government and its agencies.

MFIs need to be permitted to operate as a business or an industry with an objective to make profits and grow. The regulatory set-up should be focused on prevention of any frauds or scams considering the high growth this sector is witnessing. The long-term growth of this industry is ensured if the MFIs practise self-regulation and direct the funds for productive purposes at a healthy margin without just being focused on growing the business by maximising (not optimising) disbursals at the highest possible rates of interest.

Sharing of information about borrowers and their payment track record/defaults will go a long way in preventing sizeable write-offs. This will also prevent multiple borrowings by the same borrower from multiple entities. In some instances, the new borrowings were apparently to service the old ones.

Regulatory supervision

The Government and other regulators should enable the MFIs to operate in an unhindered manner but with a clear and strict oversight. There has been a lot of debate about the need to regulate the interest rates on microfinance loans. The best that the regulators can do is to encourage this sector that enables multiple players to enter and participate aggressively, thereby increasing competition and the enhancing the need for efficiencies to survive and grow.

In a very positive development, leading players in this industry have come forward to set up a Microfinance Institutions Network (Mfin) that will interact on behalf of the industry with the regulators to ensure sustainable growth of the industry. It hopes to enhance information sharing amongst the members about the regulations, operational benchmarks and also borrower profiles and, more importantly, act as a self-regulating initiative.

While corporate diktats suggest a full-blown stress on growth and profits, the nature of the industry and the target segment it caters to position the players uniquely with the need for socioeconomic consciousness. This is a challenge for the captains of the entities that operate in this segment. However, we can be certain of one thing here — like some of the events that transformed the country, like the IT revolution, the concept of microfinance is destined to make a significant difference to the populace.

(The author is Executive Director, Corporate Finance, KPMG)

Transformation in lease classification -MOHAN R. LAVI

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The proposed amendments consider a 'right-of-use' model where both lessees and lessors record assets and liabilities arising from lease contracts.

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Classification of leases into operating and financial leases has not been very ambiguous, with clear rules for sometime now. But this is proposed to be radically altered by the International Accounting Standards Board (IASB), considering its revised Exposure Draft on International Accounting Standard 17 — Accounting for Leases.

Normally, a finance lease is one where the lease term exceeds the life of the asset, there is a transfer of title at the end of the lease term, an option to purchase the asset is built into the agreement or the present value of lease payments exceed a substantial portion of the fair market value of the asset.

Operating lease has been negatively defined — that is, one that is not a finance lease. It has been estimated that $640 billion of lease commitments do not appear on the balance-sheets of companies (as they are classified as operating leases and expensed), resulting in unclear financial leverage and gearing ratios.

Lessee

The proposed amendments consider a 'right-of-use' accounting model where both lessees and lessors record assets and liabilities arising from lease contracts. The assets and liabilities are recorded at the present value of the lease payments. They are subsequently measured using a cost-based method.

A lessee has acquired a right to use the underlying asset, and it pays for that right with the lease payments. A lessee would record: an asset for its right to use the underlying asset (the right-of-use asset), and a liability to pay rentals (liability for lease payments). The right-of-use asset would originally be recorded at the present value of the lease payments. It would then be amortised over the life of the lease and tested for impairment. A lessee (under IFRS) could revalue its right-of-use assets. The right-of-use asset would be presented within the property, plant and equipment category on the balance-sheet but separately from assets that the lessee owns.

Lessor

The accounting would reflect the exposure of the lessor to the risks or benefits of the underlying asset. When the lease transfers significant risks or benefits of the underlying asset to the lessee, the lessor would apply the de-recognition approach. When the lessor retains exposure to significant risks or benefits of the underlying asset the lessor would apply the performance obligation approach. The de-recognition approach requires the lessor to take part of the underlying asset off its balance-sheet (derecognise it) and record a right to receive lease payments. It is possible that a lessor could record a gain on commencement of the lease under this approach.

The performance obligation approach requires the lessor to keep the underlying asset on its balance-sheet and to record a right to receive lease payments and a liability to permit the lessee to use the underlying asset (a lease liability).

The lessor records income over the expected life of the lease. Many lease contracts include variable features.

For example, leases often include options to renew or terminate the lease, contingent rentals (for example, rentals that vary depending on sales) or residual value guarantees.

The proposals would require lessees and lessors to determine the assets and liabilities on the basis of the longest possible lease term that is more likely than not to occur. Lessees would always include contingent rentals but lessors would only include contingent rentals that they can measure reliably.

Lessees and lessors must also include estimates of residual value guarantees. Including these items informs investors about expected cash flows. Current requirements generally exclude such items, making it more difficult for investors to estimate future cash flows.

The proposed amendments would entail a revision to Indian Accounting Standard 19 on Leases since both differ conceptually. The frequent issue of revised standards by the IASB is forcing the Institute of Chartered Accountants of India (ICAI) to keep pace.

The ICAI is mulling whether to move over to the brand-new IFRS- 9 (Part 1 of 4 of which is now out) or to go ahead with IAS 39 on Financial Instruments from next year. A standard on financial instruments being extremely important, it would probably be better to implement IAS 39 and assess the impact instead of going in for a half-baked IFRS-9. The only constant in the accounting world these days is change.

(The author is a Bangalore-based chartered accountant.)

On markets and scams -D. MURALI

India's political and social structures have preserved entrepreneurs, if not exactly cut them loose, observes Raghav Bahl in Superpower? ( www.penguinbooksindia.com). Even as the state invested in big-ticket capital assets in the early decades after Independence, land continued to stay in private hands, he reasons in the chapter titled 'Entrepreneurs, consumers and English speakers'.

"India's sprawling rural economy has always been entirely 'capitalist' in its orientation. Even the urban economy allowed private enterprise to grow under a somewhat draconian regime of licences and approvals… The Bombay Stock Exchange (BSE) is among the oldest in Asia. Capital and credit have always been available, albeit for a 'price,' for private enterprise."

Harshad Mehta episode

Of interest to finance professionals is a section in the chapter, captioned 'the story of two stock markets,' opening with how Harshad Mehta, who, in his late thirties, 'pulled off a stock market scam in India which would have put Bernie Madoff to shame.' The year was 1992 and there was much excitement around a freshly minted, rapidly privatising economy, the author narrates.

"It was easy to spin get-rich-quick stories in an unregulated casino. For a man who had barely scraped through his accounting studies at college, Harshad Mehta was a deadly combination — a legendary crook and a master storyteller. He siphoned off a billion dollars from several Indian banks to rig the stock prices of ninety blue chips."

As some of you may recall, 'stocks doubled, trebled, quadrupled, and Mehta became the cult deity of wealth.' But his house of cards collapsed when the bubble burst. "He died in custody on the last day of 2001 as India's biggest defaulter, owing nearly $170 million to several banks. He also left behind an unsolved mystery of 2.7 million missing shares and seventy-two cases of conspiracy, cheating, and fraud."

Shock therapy

Looking back, Bahl says that the Mehta scam was a shock therapy for India's stock markets. Although over a century old, the BSE — set up under a banyan tree in 1875 — was little more than a privileged brokers' club in the early 1990s, he reminisces.

"It traded for barely a couple of hours every day on the outcry method. Shares were held in physical form, and trades were squared off once in fifteen days. Upcountry brokers were forced to transact on a rickety phone network. Companies could cancel share transfers on the flimsiest of excuses, like signatures not matching or papers lost in transit." As a result, the system was prone to delay, abuse, price fixing, insider trading and frequent breakdowns, informs the author.

Jolted by the scam, the government set up a tough securities regulator, but wealthy brokers continued to defy it, one learns. The breakthrough came in the form of NSE (National Stock Exchange), a digitally savvy exchange with equity put up by government financial institutions. The 'game changer,' which began trading in 1994, allowed the same equity instrument to be traded on both exchanges in the same city and across similar trading hours, and banked on dematerialised shares and electronic depositories.

"Over ten thousand terminals in over 400 cities gave instant trading access to members. In eleven months flat, the new exchange logged up higher trading volumes than its 120-year-old competitor. The transaction settlement period dropped from fifteen to two days. To survive, BSE had to set up its own electronic system." Bahl is proud that today the Indian stock market is among the largest in the world, next only to NYSE in terms of the number of shares listed, deals transacted and the size of retail investor participation.

Stock exchanges in China

What has been the story in China, where stock exchanges took birth around the same time that we were reinventing ours? The aim of the Shanghai Stock Exchange (SHSE) set up in December 1990, and the Shenzen Stock Exchange (SZSE), set up in April 1991, was to sell shares of State Owned Enterprises (SOEs), but 'an inexperienced China opted for a very complex system,' recounts the author.

Sample this, from his description: The same company could not list on both exchanges — it had to choose one. Five different types of shares could be issued: A-shares (sold in local Chinese currency to local individuals); B-shares (sold in either US or Hong Kong dollars to foreign investors); C-shares (issued to Chinese state institutions or departments, but tradable only 'over the counter' in institution-to-institution sales, rather than on the main exchanges); H-shares (equity issued by mainland companies on the Hong Kong stock exchange); N-shares (issued on the NYSE); and 'a sixth — and the strangest — category was 'non-tradable' shares held by the government or its agencies.'

Silos in markets

So, the majority of shares in early listed companies were not floated, with only the shares sold to the general public being tradable, and thus making for very thin volumes and huge price volatility, explains Bahl. Since China wanted to keep a tight control on its currency and foreign capital flows, it was forced to create these silos to isolate each currency, geography and class of investor, he notes.

"The early years were wracked by a dizzy gyration in stock prices… Contributing to the messy situation was a 'quota system' for selecting SOEs to float their shares; each province was given a fixed quota of companies they could bring to the market." What suffered was the quality of paper floated as an effect of 'the shadow of politics' or 'the unseen hand of political patronage,' which explains the non-failure of any initial float, and non-delisting of any publicly listed company.

'Grey' transactions

Such a fragmented structure created frictions at each margin, besides creating a playground for 'grey' transactions that illegally moved capital across prohibited boundaries to profit from price differences, finds Bahl. "A company with A, B and H shares today has three wholly different valuations; often, A-shares have traded at three times the value of B-shares or H-shares, puzzling investors."

He points out that while common sense dictates that B-shares should command a premium, as foreign investors have superior access to information and analytical skills, that is not the case, perhaps due to 'a speculative frenzy in China's domestic stock market that has taken A-shares to 'bubble' levels.'

The book cites Morgan Stanley's statistics that a third of reported corporate earnings in China in 2007 came from speculative gains in stock markets.

"For instance, the apparel company Youngor had earned nearly 99 per cent of its profits from subscribing to shares of China Life, Bank of Ningbo and Citic Securities. Although some norms have been tightened, banks in China have lent freely at very low rates to help companies build up their investment portfolios."

Five more crises

To those who dismiss the Indian bourses as unhealthy, post Harshad Mehta's scam in the early 1990s, it may come as a surprise that Indian markets have weathered five crises since then, as Bahl chronicles.

In 1995, the BSE was closed for three days after payment problems on a company which had crashed, he begins. "In 1997, a mutual fund closed shop after defrauding investors; in 1998, the president of the BSE was sacked for allowing prices of three companies to be manipulated; in 2001, another price-rigging scandal by another ambitious broker was busted; and finally, in 2005, thousands of fake accounts were unearthed, that were getting illegal allotments of newly floated shares under the quota reserved for individual investors." Stating that wherever there is a stock market, there will be a scam, Bahl avers that since 2005 no major scandal has erupted in India's stock markets.

What is the scene in China? It is still in the throes of a learning curve, grappling with frequent scams in its still maturing stock markets, he feels. An example cited in the book the November 2009 arrest of 39-year-old Huang Guangyu, the chairman of Gome Electrical Appliances, the country's biggest electronics retailer.

"Forbes had listed Huang as China's second wealthiest individual, estimating his worth at $2.7 billion. Caijing reported that Huang was detained for an alleged stock manipulation case involving a company controlled by his elder brother. He was eventually fined $120 million and handed a fourteen-year jail term…"

Engaging comparison of two countries, in crisply-written chapters.

 

Consolidated FDI Policy [1 Attachment]

Consolidated FDI Policy effective from 1st APril,2010- see attachment

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Attachment(s) from Ashwin Nagar

1 of 1 File(s)

fdi_circular_1_2010.pdf

IndianCAs: Dubai real estate facts

 

By Indranil Sen Gupta, Research Analyst

FORTY years earlier Dubai was a village on the edge of the Arabian Desert. Locals citizens lived in houses made out of mud shacks and the only vehicle for travel or moving was `The Ship of The Desert'.

After 40 years Dubai have created artificial islands full of luxury villas, the world's tallest tower, an underwater hotel and many more things which might make tails spin of one's eyes. Dubai is now the glittering crown of the Middle East. The gulf state is now being known for its tall skyscrapers, wall-to-wall shopping centers and luxury hotels.

But the whole glittering castle is of the boom in real estate was constructed on sand. Sand made of credit/borrowed money. But the leash of bubble got broken when the financial crisis broke off sending the prices of real estate to rock bottom levels.

Now prices in the real estate sector crashed where prices have fallen by up to 60%.

400 construction projects worth more than $300 billion have been shut down or postponed. The project cancelaation reveals demand havedried up and future outlook is also very bleak.

Even after the world economy tried to come out of the dark woods of recession the Dubai real estate sector struggles to survive. They are finding hard to find buyers even after prices came down by 60%.

Moreover the cost of living in Dubai has gone up like any thing.

All these will add the unemployment in Dubai. Most of the Asians are placed their and they might come back as Dubai have less to offer now and cost of living have goes up.

Foreigners have refused to buy the projects which have resulted further trap for inventory creation. This has resulted to default of payments of debt.

The fear in Western markets is that banks risk losing billions, which will damage their lending process and recovery of the economy too. Dubai World has a net exposure of debt of $59 billion of liabilities as of August. Where as the total debt of Dubai is $80 billion. So the Dubai World holds debt of 73.75% of Dubai's total debt. The Dubai Government announced that it is restructuring Dubai World, an investment company owned by the government, with immediate effect. It has asked creditors for a six-month standstill on its obligations until at least 30 May 2010. Nakheel, a real estate subsidiary of Dubai World, has a convertible bond due next months

The most of the fear of UK and US is that Dubai might go for sell of assets which they are holding in UK and US. If this breaks out then one might find cascading fall in the world equities.

The fall in the share prices of banks eroded £14 billion from the UK alone. As per Credit Suisse European banks could have an exposure of €40 billion (£36 billion) as loans to Dubai. Banks including HSBC and Royal Bank of Scotland have helped to finance Dubai's acquisitions and are now on the hook if the state cannot repay its debts. 
 

| Ashwin Nagar | FCA and SAP-FICO\SEM-BCS |

Success is not permanent and failure is not final

Ph: India: +91-98330-15352  US: +1-323-325-4111

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