(Fortnightly inputs for professionals and executives) Volume I Part 2 November 10, 2012
Volume I Part 2 November 10, 2012
1) 2) 3) 4) 5) 6) 7) 8) 9) 10) Corporate gifts: Bad governance - Dr S. Chandrasekaran Negotiating with a banker - Dr B. Yerram Raju Reforms and roadblocks - Bimbadhar Mishra Markets endorse reforms - Dr Sanjiv Agarwal March of the digerati - GBS Bindra Education abroad: Forex implications - G. Karthikeyan FDI in retail – Interview with Sriram Sridharan FDI in retail – Business leaders’ views Case laws update – V. K. Subramani Queries, Information
(Cover photos location: ITC Grand Chola, Chennai)
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Volume I Part 2 November 10, 2012 2 Business Advisor
Corporate gifts: Bad governance
Dr S. Chandrasekaran At the World Economic Forum (WEF) meet, several corporate heads participated including the Union Law Minister, voiced and appreciated the anti-corruption initiative, and have pledged to stamp out bribery in their organisations and across supply chains. India Inc. is focusing on setting ethical standards and concrete action plans for business to fight graft. It should be practised in all spheres by any means without leaving it to preaching alone. Comptroller & Auditor General of India who is in the limelight these days raised the question, why leave the tackling of corruption to government alone. Leaving it to the government has not succeeded, he said. A typical, unethical bad practice is being followed by corporate sector by offering gifts during the festival to people other than their employees and, more particularly, to bankers and government servants. Distribution of gifts by corporate entities during Deepavali can be construed as bribery. Corporates are artificial persons and distinct from normal human beings and do not have any friends and relatives to offer any gifts out of love and affection without any expectation in return. Celebration of festival by corporates should be through exchange of greetings and not by offering gift irrespective of its value. Corporate governance speaks about transparency and disclosure and throwing away such valuable gifts by corporates is not related to business activities and does not qualify for tax deductions. Corporates send valuable gifts to bank executives and employees and also to government servants. Several leading cash-rich companies do have separate treasury division; and bankers, mutual funds, in order to grab the lucrative finance business too offer gifts in different forms to the executives and staff of the treasury division of companies. Indian Banks Association should come out openly and strongly banning the giving or accepting gifts in any manner. A mechanism needs to be in place to check both accepting and giving gifts. It is customary for listed companies to throw gifts, gift coupons to small investors during annual general meetings, and the Ministry of Corporate Affairs has come out with a draft circular banning distribution of gifts at annual general meetings. Government should set an example by directing their employees not to accept gifts during festivals in the same lines as banning the giving of gifts to small investors. (The author is Senior Partner, Chandrasekaran Associates, Delhi)
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Negotiating with a banker: 7-point recipe
Dr B. Yerram Raju Most CFOs and CEOs of mid-corporates find it tough to negotiate a business deal with a bank. Some CFOs have an uncanny knack of having their way through. Look at Mr Ajay, a young CFO who joined Merkel and Co, a pharma franchisee with a Rs 100 crore turnover during the last three years. The chairman told Ajay on the day of joining that the company is looking to expand its brand image and improve its overseas sales by at least 150% in the next year and doubling it the year thereafter. Banks are shying away at the moment. The enterprise requires higher working capital and packing credit facilities. The challenge, he could see, is formidable. He thought he had a recipe and it worked. How did it work? Banks usually are tight-fisted in times of recession to grant enhanced limits. They also have full information of the enterprise, ecosystem in which it operates and the depth of the export markets. They also have a track record and credit record of the enterprise seeking to expand its operations.
But Ajay was sure that the banks would not like to lose a good client for another bank. Since Merkel is a company of proven track record he was hopeful of the deal for higher limits on both working capital and export packing credit. He took an appointment with the GM (mid-corporates) of the bank one fine morning. He did his homework well. He gathered full data of the enterprise; environment in which the entire industry has been working; the drug controls of both India and the Asian economies in which the company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress-testing of his projections. He presumed that in the first instance the bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that the depth of the officials on the areas requiring attention was not so high, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the bank. He awaited a call from the bank three days after
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Banks usually are tight-fisted in times of recession to grant enhanced limits. They have full information about the enterprise.
the first call. He went with his accounting team and with the required project proposal in the bank’s usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors’ individual guarantee to offer when absolutely necessary. Finally, when asked, he just mentioned that it was the company’s intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through. The recipe is simple 1) Do your homework well: know your own enterprise, its SWOT. a) Brainstorm possible implications of the proposal with the Board and internal management. b) Cushion the proposal with adequate collaterals and guarantees but keep it undisclosed. c) Go as a team for presentation with your confident technical and financial team for discussion. 2) Do not thrust yourself at inconvenient times for the banker. 3) Be transparent during negotiations. 4) Be humble. 5) Never hide the data. 6) Go with a vision and a future plan. 7) Give reasonable time to the bank to think and come back with their offer. (Dr B. Yerram Raju is Regional Director, PRMIA-Hyderabad www.prmia.org)
Volume I Part 2 November 10, 2012
Markets endorse reforms
Dr Sanjiv Agarwal If hike in diesel prices and controlled supply of subsidised cooking gas cylinders created a political furore all over, the other reform measures such as allowing FDI in retail, substantial reduction in taxes on overseas borrowings by Indian Companies from 20% to 5% and final announcement of Rajiv Gandhi Equity Scheme (RGES) as announced in Budget brought much awaited frenzy on the stock markets. It is also hoped that interest rates would also be reduced shortly resulting in surge in demand for loans and housing loans. The setting up National Investment Board will also help large projects and capital market. The boost in equity market as well as demand for money would also help government in suppressing the rising demand for gold. With more foreign capital coming in, Indian rupee will improve further against dollar. These reform measures and a will (at least now visible) to push some more reforms and the toughness reflected in the Prime Minister's rare recent address to the nation has enhanced the market and the investor's confidence. The markets have reacted positively, particularly in insurance, financial sector, infrastructure and capital goods sectors.
In Rajiv Gandhi Equity Savings Scheme (RGES), tax incentives will be given to firsttime investors in equities.
After almost half of the current financial year has gone by and the budget announced scheme of Rajiv Gandhi Equity Savings Scheme (RGES) has been notified now only. In RGES, tax incentives will be given to first-time investors in equities. REGS shall on one hand promote and rejuvenate the equity cult in the county and on the other, likely to become a tool for government to offload PSU stocks on proposed disinvestments. In fact, in some cases, it could be a win-win situation for both the ends. Conditions for Investment in RGES • Only individuals can apply and the scheme is not for corporate investors • Annual total Income in the year of investment should be less than Rs. 10 lakhs … (To read the complete article subscribe on http://bit.ly/ShriMagz)
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March of the digerati
G. B. S. Bindra As governments across countries grapple to understand the grand shifts taking place, the voice of a new generation bolstered by technology is redefining democracy. Fundamental to this shift is the power of the Internet and mobile telephony. Five hundred years back, it was the Gutenberg’s press which turned Europe upside down. It was the power of the printing press which was employed by our leaders during the struggle for Indian independence. Then, about a hundred years ago, radio waves were harnessed to send sound and images through the air. Through radio and then television, you could get a message to everybody. Whether you do that with broadcasting tower, wire-line or a printing press, it is an illustration of one-to- many messaging communication. Now, something new is announcing itself. We are in the midst of profound transformation. Some far-reaching technology changes are happening and that’s fundamentally changing the nature of our democracy. The Internet as a medium has inherent support for conversations. While radio and television allows one-to-many messaging, the Internet facilitates many-to-many messaging. We have had the Internet and mobile telephony in its public form for well over two decades now, but it has evolved all the time, as media has become more social and more people access Internet from mobile phones. This coupled with the fact that audiences can now also be producers and not only consumers of information, dramatically multiplies the influence of Internet. The same equipment, such as mobile phone and computer, not only lets you consume information but also simultaneously allows you to produce information. Internet is increasingly becoming part of everyday life of the middle-class and the democratic character of the Internet and social networking in particular, has been firmly established. By design, Facebook, Twitter and tools of similar kind are conducive to people coming together in a virtual civil society. Using these free, open and easy to use tools on the Internet is becoming a powerful way for the current plugged-in generation to demand change. Surely a government for the people and by the people requires more than Facebook and Twitter but the fact remains that social media is filling an important vacuum as it becomes the fabric of civil society. During Arab spring… (To read the complete article subscribe on http://bit.ly/ShriMagz)
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Education abroad: Forex implications
G. Karthikeyan Arya a graduate of IIT Delhi intended to pursue post graduate studies at the prestigious MIT, USA. Arya cleared the entrance and admission procedures with flying colours and was absolutely delighted to be offered a seat at MIT. Her parents, though equally delighted, were also concerned about the prospective financial outlay which would be required to make their daughter’s dream a reality. However, Arya’s parents were conscious of the honor that a seat at MIT constitutes and did not want their daughter to miss a golden opportunity. Thus, the admission process and planning started in 2011 and the financial outlay was envisaged based on the prevailing exchange rate of Rs 44 to Rs 45 per USD with a plus or minus 10% factor. Arya’s parents arranged requisite financing through an application for an education loan from a scheduled commercial bank and the bank agreed in principle to sanction the loan. The loan amount, which was arrived at based on prevailing exchange rates in 2011, fell short of the actual expenses of admission in 2012, thanks to the 30% depreciation in rupee value considering the current exchange rate of Rs 56 per dollar. Arya’s parents had no choice but to request additional financing, thus placing an extra burden of interest and repayment on them and on Arya herself should she choose to help repay the loan. Arya is also contemplating approaching her uncle in USA for a loan to tide over the tight situation.
Indian Income tax laws allow deduction of interest on education loans without any upper limit. However deduction of principal repayment is not allowed.
While the ever-increasing cost of education is worrying to all parents whose children pursue higher education, the concern is doubled if the child needs to go abroad for the same for the obvious reason that the price of an American dollar has increased by 30% over the last one year. The support of Indian banking industry in the last decade in terms of granting education loans and the provisions of Income tax laws for deduction of Interest have helped many foreign education aspirants. Indian Income tax laws allow deduction of interest on education loans without any upper limit… (To read the complete article subscribe on http://bit.ly/ShriMagz)
Volume I Part 2 November 10, 2012 8 Business Advisor
FDI in retail
Interview with Sriram Sridharan Sriram Sridharan, Co-founder of Gormei Market (FB: gormeisriram) took time off to answer a few questions on the topic that has been stirring quite some debate, ‘FDI in retail’. First, which side are you on - the ‘yes’ or the ‘no’ group - with regard to FDI in retail? I support allowing foreign direct investment in the Indian retail sector with some restrictions. Would you like to elaborate on the reasons for your stand? We have had an open economy for the past 20 years. Indian retail participants have had enough time to better serve their customers by investing more in infrastructure, by improving supply chain processes, and by enhancing their shopping experience. They have had enough time to work with our growers, support them in a win-win manner, and create sustainable eco-systems. They have had enough time to reduce wastage and eliminate layers of It is time we forged middlemen. They have had enough time to partnerships with create efficient systems and pass on the global participants to resulting cost savings to consumers. Looking at the current retail scenario, it is employ proven clear that none of these have happened. It is time we got some outside help. It is time we have access to global capital, processes and technology. It is time we forged partnerships with global participants to employ proven techniques in order to solve our fundamental challenges. What are your observations on India’s experiments with big-box retailing thus far? India’s big-box retail (or broadly, organised retail) has not delivered on its promises. The purported ‘efficient value chain’ did not become a reality, especially in food retail. The growers are not getting a better price; neither is
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techniques in order to solve our fundamental challenges.
the customer getting better quality produce in a consistent fashion. Organised retail has a long way to go in our country. There needs to be more focus on providing infrastructure and know-how to effectively store, supply and market high-quality goods as reasonable costs. Where can things go wrong when it comes to reaping the advantages of retail FDI? And what can we do about them? Couple of things can happen: The mom-and-pop shops might suffer in the short term; however, I suspect they will adapt and start adding value differently like home delivery, personalised service, being in the neighbourhood etc, and hence find a way to stay relevant. A bigger threat, especially in the food sector, is losing our food diversity in the name of efficiency. What will happen to our traditional millets and our numerous varieties of bananas? Will lab-engineered foods become our staple in the name of food security? Will we start seeing standard-issue bananas, which appear tasty, all over our markets? These are the questions that need pondering and scrutiny. Any other points of interest? FDI will act as a necessary destructive force to shake up bad practices, and create efficient systems in our retail landscape. We will need foreign direct investment to create a new order, to spur further growth in the retail sector, and subsequently boost our overall economy. But the policy needs to be implemented with abundance of caution so as to protect our eco-systems, support our growers, and still reap the benefits of global capital, processes and technology. D. Murali
Volume I Part 2 November 10, 2012
FDI in retail: Business leaders’ views
Somnath Pal, CEO, Citrus Check Inns Foreign direct investments in retail is an important phenomenon in Indian economy. While India is still reckoned as an agricultural economy, agriculture contributes only 17.2% of the country GDP. Services and Industry have overtaken agriculture with 56.4% and 26.4% GDP contribution respectively. FDI in retail not only promises job opportunities in urban and semi-urban areas of India, but holds promise to substantially improve agricultural supply chain like cold chains, logistics etc. This will plausibly enhance the earning potential of farmers; improve productivity, efficiency and open up wide scale employment and entrepreneurship. It is said that untenable storage facilities at terminal and retail markets cause more than 50% depletion of perishable and semi-perishable products before they reach the refrigerator of the consumer. Organised retail may bring down this wastage substantially, creating profit at multiple levels of agriculture business. FDI in retail will enhance standardisation and quality control which will add value to healthy civic life. This is over and above the anticipation of creating more than half a million jobs in urban & rural areas. Sachiin Joshi, CMD, Viiking Ventures Pvt Ltd I think FDI in retail is a good move. I back the government’s decision to allow FDI in multi-brand retail. The retail market will get much more organised and structured. Consumers will get better pricing of goods at affordable pricing with highquality assurance. It will benefit all stakeholders in the entire value and supply chain. The need of the hour is to urgently integrate the supply chain and remove the disparity between retail and farm prices. Moreover FDI in retail will not only benefit the entire Indian retail sector, but will also help generate employment opportunities and lead to higher income generation. This retail revolution will definitely improve the Indian economy in a big way. Mohan Mahajan, Founder Partner, Mahajan & Aibara The government last week allowed up to 51% FDI in multibrand retail. This policy change will have several benefits. It will generate employment for youth, contain supply side inflation, and benefit the farmers as well as the consumers.
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Farmers and consumers will benefit as the large chains will deal directly with the farmers instead of mandis and middlemen. Competition and efficiencies will drive down prices and help contain food inflation. These companies are expected to invest in backend infrastructure, cold distribution system and bring in modern management systems which will help in reducing wastage of farm produce. Hypermarkets particularly require huge amounts of capital and are unlikely to make any profits during the first 10 years of their operations. In fact, most of the hypermarkets in India are running at losses. Without the 1991 reforms and the opening up of the economy, we would never have had the middle-class revolution and achieved growth rates of 7 to 8% p.a. Even then some vested interests had opposed the economic reforms. FDI in retail in China was allowed 20 years ago even though it is a Communist country. Secondly, most of the big Indian houses are already in multi-brand retail. It is therefore difficult understand the logic in the argument that only foreign players will displace kirana stores. On the contrary, entry of foreign retail companies will increase competition and thus benefit the consumers by way of lower prices. Bijay Agarwal, Managing Director, Salarpuria Sattva FDI in retail will improve supply chain and ensure fair price to farmers. Esther Lennaerts, CEO, Pressto Dry Cleaning & Laundry Allowing foreign investment into retail is a good decision by the government. It will bring efficient farming, logistics and distribution to India and investment in infrastructure. More efficient management will help lower inflation too. It will take a few years to reach that stage but it is important to start now. The consumer will benefit as well since the choice and the quality of goods will increase/ improve and so will the service. K. Vaitheeswaran, Founder & CEO, Indiaplaza.com (@vaitheek) FDI in retail will be bit of this and bit of that, bit more of this and lot more of that. This being bad and that being good. @CAnand31 A sign for growth wrt back-end infrastructure, technology, and experience gap the industry is facing from unorganised players.
Volume I Part 2 November 10, 2012
Case laws update
V. K. Subramani Interest on loan borrowed before interest-free lending would prompt disallowance of interest CIT v. Harrison Malayalam Ltd (2012) 76 DTR (Ker) 335: When moneys are borrowed before giving interest-free advances to sister concern, the interest on moneys borrowed will have a direct nexus and if such advances were not given to that extent the interest expenditure would have been lesser. Hence, when a borrowing is made, and interest-free advances are given to sister concern, to the extent of the direct nexus between borrowing and interest-free advance, the Revenue is justified in disallowing such portion of interest. Even loan to subsidiary company cannot be treated as a loan out of commercial expediency and on that score also the interest on borrowals preceding such loan lending could be disallowed. Receipt by pass-through entity is eligible for tax refund even though such receipt was not forming part of its income Arvind Murjani Brands (P) Ltd v. ITO (2012) 76 DTR (Mum) (Trib) 252: Where the assessee received a payment meant for passing on the same to the actual recipient, the amount of tax deducted at source on the payment so made became eligible for tax credit even though the said amount did not form part of its income or turnover. The assessee received rental payment from a company net of TDS which was passed on to the real landlord subsequently. The payer as a matter of precaution deducted tax at source on the payment made. The assessee claimed credit for the tax deducted at source though no income had accrued in its favour. The tribunal held that the Revenue had to refund the amount which is not legitimately due to it in spite of the receipt not forming part of income / receipt of the recipient. Landing and parking charges paid to airport authority not liable for TDS under section 194-I but under section 194C CIT v. Singapore Airlines Ltd (2012) 76 DTR (Mad) 420: Landing and parking charges paid to airport authority is more in the nature of contract payment than towards rent. The amount paid towards various technical services could not be called as rent for landing of aircraft and such payment was held as liable for tax deduction at source under section 194C as contract payment. The court upheld the view of the tribunal and dissented from the
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decisions such as United Airlines v. CIT (2006) 287 ITR 281 (Del) and CIT v. Japan Airlines Co Ltd (2010) 325 ITR 298 (Del). Activity of deposit and lending amongst members, not banking Dy.CIT v. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd (2012) 76 DTR (Panaji)(Trib) 234: Where the assessee is engaged in accepting deposits and lending to its members only and when no part of the deposit / lending was from the public (non-members) it cannot be regarded as engaged in banking business in view of section 5(ccv) of Banking Regulation Act. Thus the proviso to section 80-P(4) will not apply. The claim of deduction under section 80-P hence would be available to such entity. Where the assessee has discharged his onus then the revenue has to disprove the same for applying section 68 Vishnu Jaiswal v. CIT (Appeals) 2012 76 DTR (Lucknow) (TM) (Trib) 265: Where the assessee had accepted unsecured loans and furnished bank statements of loan creditors, the onus of proving the receipt of loans is discharged. The onus would shift to the Revenue to prove the sufficiency of the creditworthiness of the lenders. Where the Revenue had not examined the loan creditors but merely rejected the evidences furnished by the assessee, the addition under section 68 could not be sustained. The Revenue cannot merely claim that the creditors Where the assessee could not have saved any money to had accepted advance the amounts without crossexamining them and bringing any other unsecured loans and evidence on record.
Ramesh D. Hariani v. WTO (2012) 76 DTR (Mum)(Trib) 297: Where the assessee has kept more than one house for his own residential purpose the assessee can value the house property as per third proviso to rule 3, Schedule III of the Wealth-tax Act, 1957 and valuation made as per second proviso by the Assessing Officer has to be ignored. The house property if not commercial or non-residential but meant for exclusive residential purpose it is adequate enough for applying third proviso to rule 3 was the dictum in CWT v. V.T.Ramalingam (1993) 201 ITR 839 (Mad). (V. K. Subramani, Chartered Accountant, Erode)
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furnished bank statements of loan creditors, the onus of proving the receipt of loans is discharged.
Third proviso to rule 3 of Schedule III will apply when more than one house is kept for self-occupancy
Queries & Replies
Service tax Query: I am one of the trustees of a trust having multiple activities. Our trust runs an educational institution and also a medical institution. In addition we are running a coordinating arm for business entities by advising them on their line specific activities. In the light of mega exemption vide Notification No.25/2012-ST dated 20.06.2012 please elucidate on the scope of exemptions or taxability in the context of service tax. Reply: The query is brief seeking an overall idea as regards taxability or exemption for various activities in the context of service tax. The term ‘charitable activity’ is defined in the Income-tax Act, 1961 to cover (i) relief of the poor; (ii) education; (iii) medical relief; (iv) other activities such as preservation of environment and monuments etc; and (v) advancement of any other object of general public utility. In service tax ‘educational services’ specified in clause (l) of section 66D is not a taxable service. However, it covers (i) pre-school education and education up to higher secondary school or equivalent; (ii) education as a part of a curriculum for obtaining qualification recognised by any law for the time being in force; and (iii) education as a part of an approved vocational education course. Therefore, running of schools is exempt from service tax. However, vocational training institutes do not provide education but provide only training which improve the chances of success of candidates who already have the required skill and hence are not eligible for exemption (vide Circular No.107/01/2009-ST dated 28.01.2009). As regards ‘medical services’ the mega exemption Notification referred above exempts (i) health care services by a clinical establishment, an authorised medical practitioner or paramedics; and (ii) services by a veterinary clinic in relation to health care of animals or birds. Hence, medical services rendered by the entity i.e. trust in this case is exempt from service tax. With regard to services rendered by charitable organisations other than those covered by the above-said two types of services, item No.4 of Notification No.25/2012-ST covers the same. It says ‘services by an entity
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registered under section 12AA of the Income-tax Act, 1961 by way of charitable activities’ is exempt from service tax. The term ‘charitable activity’ is defined in clause (k) of para (2) dealing with definitions which is inclusive of everything and somewhat overlapping with the definition given in the Income-tax Act, 1961. It covers medical, medical care service, advancement of religion or spirituality, preservation of forests and wildlife. It covers the expression ‘any other object of general public utility’ also and prescribes the liability to service tax by making reference to the monetary limit of Rs 25 lakh prescribed under the Income-tax law. No service tax liability is attracted in respect of the activity of ‘any other object of general public utility’ being pursued by the charitable organisation up to Rs 18,75,000 for the financial year 2011-12 provided the total value of such activities had not exceeded Rs 25 lakh during the financial year 201112. In respect of any other financial year the threshold limit would be Rs 25 lakh if the total value of such activities had not exceeded Rs 25 lakh in the preceding financial year. Thus enhanced threshold limit for service tax levy would be applicable for charitable organisations with regard to pursuance of objects of general public utility. Controversy: Insertion of rule 112E to Income-tax Rules, 1962 We all know that social activists and general public seek transparency in management of national resources and public money. The political parties enjoy tax exemption if they comply with certain basic legal requirements. Donation to political parties is deductible for the taxpayers in the recent times. In spite of having such liberal provisions and compliance requirements we come across unacceptable dealings and actions. Recently, the Central Government inserted rule 112E to the Income-tax Rules, 1962 the impact of which is given below: (i) The Assessing Officer is not to issue notice for assessment or reassessment for six years immediately preceding the assessment year in which the search is conducted in respect of the following cases: (a) Where as a result of search under section 132(1) or requisition under section 132A a person is found to be in possession of money, bullion, jewellery, or other valuable articles or things, whether or not he is the actual owner of such money, bullion, jewellery etc; and (b) where a search is conducted or requisition is made in the territorial area of an assembly or parliamentary constituency in respect of which a
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notification has been issued under section 30 read with section 56 of the Representation of the People Act, 1951 or where the assets are seized or requisitioned are connected in any manner to the on going election in assembly or parliamentary constituency. Effect: In respect of constituencies where election is held and any money, bullion etc is seized or requisitioned the tax consequence will be with reference to such search and seizure limited to that event only. No reopening of assessment of the preceding assessment years would be resorted to by the Department. In effect, the unexplained money (including jewellery etc.) would be taxed at flat 30% as per section 115BBE and the past assessments of such person who was searched and engaged in election work / campaign will not be disturbed. Why is such protection given for those persons who are engaged or connected to election campaign across the board in respect of all political parties? Why is such concessional treatment given to such persons when other taxpayers undergo the arduous process of search assessment as per the true letter and spirit of law? PIB Press Release dated 27.09.2012 Levy of Service Tax on Transportation of Goods by Rail from 1st October 2012 In compliance of the provisions contained in Finance Bill 2010 and subsequent notifications issued by Ministry of Finance, the Service Tax in case of transportation of goods by rail, which was exempted up to 30th September 2012, would now be levied on total freight charges with effect from 1st October 2012. Since an abatement of 70% has been permitted on freight for the taxable commodities by the Ministry of Finance, the Service Tax will be charged on 30% of the total chargeable freight inclusive of all charges (like busy season charges, development charge etc.,) would be calculated as follows: i) Service Tax of 12% will be charged on 30% of freight (equivalent to 3.6% on the total freight charges) ii) Education Cess of 2% on Service Tax will be added (equivalent to 0.072% on total freight) and iii) Higher Education Cess of 1% on Service Tax will also be added (equivalent to 0.036% on total freight) iv) Total Service Tax implication will be (i)+(ii)+(iii)=3.708% on the total freight charges.
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Certain commodities have been exempted from payment of service tax as per Ministry of Finance notification. The list of such commodities and further details on the modalities of levy and collection of Service Tax on transportation of goods by rail, may be ascertained from Indian Railways’ web site i.e. www.indianrailways.gov.in. The amount of Service Tax collected by Railways would be deposited with the Ministry of Finance as per prescribed procedure. PIB Press Release dated 27.09.2012 Levy of Service Tax on Railway Passengers Travelling in AC Class/First Class from 1st October 2012 In compliance of the provisions contained in Finance Bill 2012 and subsequent notifications issued by Ministry of Finance, the Service Tax in case of railway travel, which was exempted up to 30th September 2012, will be levied on the fare of passenger services in the following classes from 1st October 2012. (i) AC First Class, (ii) Executive Class, (iii) AC-2 tier Class, (iv) AC-3 tier class, (v) AC Chair Car class, (vi) AC Economy class and (vii) First Class. Since an abatement of 70% has been permitted on passenger services by Ministry of Finance, the Service Tax will be charged on 30% of total fare including reservation charge, development charge, superfast surcharge which would be calculated as follows:i) Service Tax of 12% will be charged on 30% of fare (equivalent to 3.6% on the total fare) ii) Education Cess of 2% on Service Tax will be added (equivalent to 0.072% on total fare) and iii) Higher Education Cess of 1% on Service Tax will also be added (equivalent to 0.036% on total fare) iv) Total Service Tax implication will be (i)+(ii)+(iii)=3.708% on the total fare. On Concessional value tickets/PTO tickets etc. service charge will be levied on 30% of the total fare actually being paid by the passengers. The Service Tax will also apply to tickets issued in advance for journeys to commence on or after date of implementation of Service tax. In the case of tickets already issued excluding service tax, the service tax on total fare including development charge, superfast surcharge, reservation fee, etc.
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date of implementation of Service Tax will be recovered either by TTEs in the train or by the Booking Offices before commencement of the journey by the passengers. Commercial Inspectors and TIAs have been instructed to visit all important stations and ensure that service tax is levied on tickets issued as per the revised rates. Commercial Officers have also been asked to make surprise checks at the stations and ensure that Service Charges are levied from date of implementation of Service Tax. The amount of Service Tax collected from passengers will be deposited with the Ministry of Finance as per procedure. Finance Departments of Zonal Railways have been instructed for proper accountal and remittance of Service Tax amount to the Government. In case of refund of passenger fare, if any, refund of Service Tax shall be claimed by the passenger from the concerned Service Tax authority. No refund shall be made by the Railways on this account. For the purpose of claiming refund, Chief Commercial Manager (CCM) office of concerned Zonal Railway shall issue a certificate to passenger detailing the amount of refunds to be signed by an Officer authorised by CCM, which shall be countersigned by the Dy. Chief Account Officer (DCAO) or officer authorised by them for this purpose.
List of contributors to this issue
Bimbadhar Mishra, Senior Manager, Andhra Bank, Hyderabad Dr B. Yerram Raju, Regional Director, PRMIA, Hyderabad Dr Sanjiv Agarwal, Partner, Agarwal Sanjiv & Company, Jaipur G. Karthikeyan, Chartered Accountant, Coimbatore V. K. Subramani, Chartered Accountant, Erode Dr S. Chandrasekaran, Senior Partner, Chandrasekaran Associates, Delhi G. B. S. Bindra, Chief Innovation Officer, Logica Plc Sriram Sridharan, Co-founder of Gormei Market Esther Lennaerts, CEO, Pressto Dry Cleaning & Laundry Pvt Ltd Sachiin Joshi, CMD, Viiking Ventures Pvt. Ltd Somnath Pal, CEO, Citrus Check Inns Mohan Mahajan, Founder Partner, Mahajan & Aibara K. Vaitheeswaran, Founder & CEO, Indiaplaza.com Bijay Agarwal, Managing Director, Salarpuria Sattva
Volume I Part 2 November 10, 2012 19 Business Advisor
On finance, accounting, controls, risk management, taxation, and more…
Published by: Shrinikethan, Chennai http://bit.ly/ShriMap Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk November 10, 2012 Volume I Part 2 November 10, 2012 20 Business Advisor