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Few Investment Instruments for Maximum Returns

Choosing the right investment avenues is not an easy task and the choice depends on a lot of factors. We all prefer investing in instruments that offer high returns, but with better returns, there is always an element of risk involved. Higher the returns, the more is the risk here are few investment instruments for maximum returns.

So, where should you invest your hard-earned money to enjoy high returns with minimum risk? Is there such an investment option in India? With gold and silver prices falling and the value of rupees appreciating, which are the best places to invest?

Here, we touch upon some of the best investment avenues for earning great returns, which should answer all these questions.

Invest in stocks

The idea of investing in stocks when the market is at its peak and there is a lot of risk associated with the same might sound absurd to you. You should know that you still can invest in the stock market, despite its conditions, and watch your investment thrive.

Look for stocks with low beta value. This value helps measure the volatility of a particular stock when compared to the Sensex. When you choose to invest in low beta value stocks, the risk reduces in regard to other stocks, especially when the market is at its peak.

Invest in mutual funds

Investing in SIPs is the best way to overcome volatilities in the market, which is why you should consider investing in top performing mutual funds to enjoy good returns. However, avoid investing a large sum of money through lump sum investments in case of equity mutual funds.

If you do have a large sum to invest, you can consider balance funds, liquid funds, debt funds, and ultra short term funds instead.

There is a class of equity mutual funds that helps in tax saving. These are a part of equity linked saving scheme (ELSS). By investing in these, you can enjoy tax benefits under IT Act, section 80C.

Other Tax Saving Options

Apart from ELSS, there are other tax-saving options you can consider as well. Some of these include Public Provident Fund (PPF), 5-year tax-saving Fixed Deposit schemes, and National Saving Certificates (NSCs).

PPF is the best investment option for small business owner and salaried people. PPFs are operated by the government and offer 99% security. NSC is popular in rural India as the minimum investment amount is Rs.100, and has a lock-in period of 5 or 10 years. The current rate of interest is 8.10%.

For eg: If you purchase an NSC worth Rs.100 now, you’ll get Rs.147.61 back after a period of 5 years.

If you’re above 60 years, consider opting for a Senior Citizen Scheme (SCS), the current interest rate of which is 8.6%.

Invest in Fixed Deposits/ Recurring deposits

While stocks and mutual funds have a lot of excitement associated with them, it might be wise to consider fixed income options like FDs. Fixed Deposit interest rates in India vary from institution to institution, and are higher than usual saving accounts. This method of investment is safe and, if you choose the best Fixed Deposit scheme, you’ll be able to earn decent returns too. The benefits of investing in Fixed Deposit are many, like:

– Most banks and NBFCS offer a wide choice of tenures, starting from 12 months to 60

– Some of these institutions offer partial withdrawal of your money and there is a loan facility available, where you can take out a loan of up to 90% of the principal amount

– You can avail the interest on a monthly, quarterly, half-yearly, or yearly basis, or choose to reinvest this amount in an FD and earn additional interests

Invest in gold bonds

Gold bonds have come into the scenario recently, and are yet another choice that you can invest in. These bonds are best for long-term investments. The value of gold bonds is directly linked to the rate of gold. Thus, you’ll get better returns when the price of gold escalates. Also, you’ll be eligible to earn interest on these bonds.

There is, of course, a risk of gold price fluctuations, but going by history, gold prices are likely to go up in the near future as prices tend to rise with inflation.

Invest in IPOs

This investment instrument is for people who have an appetite for high-risk ventures. In India, IPOs continue to be one of the most popular choices as they offer one of the best returns.

Whether you’re looking for short term returns or long term, it is important to diversify your investment portfolio. Diversification will help in negating the possibility of a big loss.

An equity laden portfolio can offer a high return but the risk of loss is also high. By investing in secured options like PPF or FDs, the loss in one can be neutralised by the gain in another, which is why you should make sure that you have a balanced portfolio to earn high returns.

This article is for educational purposes only invest at your own risk and carefully research these different investment avenues and make your selection based on what suits your finances and risk appetite.

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Amendment in SEBI LODR Regulations

Amendment in SEBI LODR Regulations

SEBI, with the intent of investor protection and enabling them to take better and well informed investment decisions, has vide its Circulars dated 25th May 2016 and 27th May 2016 brought in certain amendments to the LODR Regulations (primarily Regulations 33 & 52). With these amendments SEBI has put in place a mechanism to review the audit qualifications contained in the audit reports of the listed entities.

These Regulations pertain to the requirements of submitting Financial Results of the Company. As per the extant provisions, alongwith the Audited results for the financial year, Form A/ Form B were needed to be submitted, depending upon there being any Auditors’ Qualifications or not.

Now, vide the above mentioned Circulars, it has been decided to do away with the requirement of filing Form A/ Form BThe listed Companies are now required to disseminate the cumulative impact of all the audit qualifications in a separate format, simultaneously, while submitting the annual audited financial results to the stock exchanges.

The provisions of the said Circulars are applicable for all the annual audited standalone / consolidated financial results submitted by the listed entities for the period ending on or after March 31, 2016. That is to say, even for the results for the FY 15-16-either already submitted or under the process of being submitted.

A brief gist of the said Circulars is as under:

1.The requirements of filing Form A/ Form B along with the annual financial results has been dispensed with.

  1. In case of Audit Reports with modified opinions (i.e. Qualified Audit Reports), a Statement on Impact of Audit Qualifications is needed to be submitted.
  2. The management of the listed entity shall have the option to explain its views on the audit qualifications
  3. Where the impact of the audit qualification is not quantified by the auditor, the management shall make an estimate. In case the management is unable to make an estimate, it shall provide reasons for the same. In both the scenarios, the auditor shall review and give the comments.
  4. Further, the said Statement is also needed to be given in the Company’s Annual Reports.
  5. Further, in case of audit reports with unmodified opinion(s), the listed entity shall furnish a declaration to that effect to the Stock Exchange(s) while publishing the annual audited financial results.
  6. Schedule VIII of the LODR Regulations has been deleted.
  7. These requirements are applicable for both listed equity shares and also listed NCDs/ NCRPSs.

Format of Statement on Impact of Audit Qualifications (for audit report with modified opinion) submitted along-with Annual Audited Financial Results – (Standalone and Consolidated separately)

Statement on Impact of Audit Qualifications for the Financial Year ended March 31

[Under Regulation 33 / 52 of the SEBI (LODR) (Amendment) Regulations, 2016]

I. Sl. No. Particulars Audited Figures (as reported before adjusting for qualifications) Adjusted Figures (audited figures after adjusting for qualifications)
1 Turnover / Total Income
2 Total Expenditure
3 Net Profit/ (Loss)
4 Earnings Per Share
5 Total Assets
6 Total Liabilities
7 Net Worth
8 Any other financial item(s) (as felt appropriate by the management)
II. Audit Qualification (each audit qualification separately):
a. Details of Audit Qualification:
b. Type of Audit Qualification : Qualified Opinion / Disclaimer of Opinion / Adverse Opinion
c. Frequency of qualification: Whether appeared first time / repetitive / since how long continuing
d. For Audit Qualification(s) where the impact is quantified by the auditor, Management’s Views:
e. For Audit Qualification(s) where the impact is not quantified by the auditor:
(i) Management’s estimation on the impact of audit qualification:
(ii) If management is unable to estimate the impact, reasons for the same:
(iii) Auditors’ Comments on (i) or (ii) above:
III. Signatories
CEO/Managing Director
CFO
Audit Committee Chairman
Statutory Auditor
Place:
Date:

 

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Capital Gains – Complete Guide

Capital gains was first introduced in 1946 and was in operation only for a short period, that is, in respect of capital gains which arose during the period from 1st April, 1946 to 31st March, 1948. Later it was modified and reintroduced for the purpose of alleviating economic inequalities by the then Finance Minister Shri T.T. Krishnamachari in November 1956 by imposing a tax on capital gains made on or after the 1st April, 1956.

Capital gains is one of the import sources of income under the income tax law. In case of income from salaries, house property, business or profession or other sources where a reasonable understanding of the provisions is sufficient to arrive at income from these heads. However, for computing income from capital gains, a thorough understanding of the provisions is essential:

  • Amalgamation [Section 2(1B)];
  • Capital asset [Section 2(14)];
  • Demerger [Section 2(19AA];
  • Demerged Company [Section 2(19AAA];
  • Fair Market Value [Section 2(22b)];
  • Long Term Capital Asset [Section 2(29A)];
  • Long Term Capital Gain [Section 2(29B)];
  • Resulting Company [Section 2(41A)];
  • Short Term Capital Asset [Section 2(42A)];
  • Short Term Capital Gain [Section 2(42B)];
  • Slump Sale [Section 2(42C)];
  • Transfer [Section 2(47)];
  • Zero Coupon Bonds [Section 2(48)]; etc.

The provisions of Income Tax Act or Rules has not covered various types of transactions that are taking place recently. In such cases apart provisions of income tax law, we need to have understanding of latest judgements.

Formulae of capital gain = Capital Asset x Transfer:

Chargeability of a transaction to capital gains as per section 45(1) arises only on its conformity to the above formulae. That means, the asset transferred [Section 2(47)] is a capital asset [section 2(14)] which results into capital gains under section 45.

Note: Amalgamation and demerger are special cases and are to be dealt separately.

Transactions not regarded as transfer: Section 47 of the Income Tax Act provides for certain transaction though transfers, but not regarded as transfers chargeable under section 45(1).

Year of chargeability: Capital gains is chargeable to tax in the previous year in which the capital asset has been transferred. The exception or the special cases where the chargeability or its payment differs to some other previous years are provided in section 45(1A), section 45(2) and section 45(5).

Type of capital assets: There are two types of capital assets. They are:

  • Short Term capital asset; and
  • Long Term capital asset.

The gain / Loss on transfer of a short term capital asset is treated in the income tax law as short term capital gain. Which is chargeable to tax at normal rates except in case of listed securities and chargeable to tax at a special rate of 15% as per section 111A. In same manner the gain / loss on transfer of a long term capital asset is treated as long term capital gain. Which is chargeable to tax at special rate of 20% as per section 112.

The inputs required for computation of capital gains. The below important information is required for computation of capital gains:

  1. Cost of acquisition [Section 48];
  2. Cost of improvement [Section 48];
  3. Period of holding [Section 2(42A)] for the purpose of indexation of long term capital asset;
  4. Indexed cost of acquisition [Section 48];
  5. Indexed cost of improvement [Section 48];
  6. Full value of consideration [Section 49] read with section 50C / section 50D;
  7. The amount of exemptions u/s 10 and deduction as per sections 54 to 54H, if any.

Real estate transactions

There are no vivid provisions in the income tax law to deal with development agreements entered by the land owners with the developers of properties. Sub-clause (v) of section 2(47) just says “any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882”.

Though land owner transferred only certain share of land to the developer, it is in practice by the tax payers to consider total extent of land as transfer and landowner’s share of superstructure value (that is going to build) as per stamp value authority on the date of development agreement, as full value of consideration. It is good to exchequer, if this practice is voluntary and taxpayers made the payment consciously. Such mode of computation is presented by tax authorities to the tax practitioner who in turn insist upon their clientele to comply accordingly. This computation is very unfair upon the tax payers as they compelled to pay tax though they do not receive any money. As no money received by the taxpayers, they have no opportunity to avail the benefits under sections 54 to 54H.

The reason for this anomaly is because of the capital gains provisions of the income tax law are incomprehensive to deal with. The law does not provide for what extent of land amounts to transfer i.e. share allocated to developer or total extent of land. Also, there is no clarity on full value consideration, whether share of superstructure value or land value (both as per stamp value authority). Considering superstructure value is punitive step upon the tax payer. This lacuna is unnoticed for the past several years. Hope its rectification in the years to come.

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All About LLP

All About LLP (Limited Liability Partnership Firms)

here you will find all about LLP (Limited Liability Partnership), it is a corporate entity formed under the Limited Liability Partnership Act, 2008 and one of its important characteristics is that its partners have limited liability (unlike partnership firms registered under the Indian Partnership Act, 1932). Though a partnership, an LLP has perpetual succession and separate legal existence from its members. Thus, an LLP is a corporate structure that combines benefits of both, a company and a partnership firm. As the compliance cost for a LLP is much lower than other forms of business and because of its greater flexibility, LLP can be a good option for foreign entities to start business in India. This form of business is best suited to service industry, as well as small and medium scale enterprises.

Salient Features Limited Liability Partnership (LLP)
minimum number of partners 2 Designated partners. . At least one of designated partners must be resident in India
Compliance Requirements Annual Return Filing in-form 11. No Board Meetings
Conversion Cannot be converted into a Company
Statutory Audit IF turnover is more than 40 lakhs or contribution is more than 25 lakhs
Tax Audit If turnover is more than 1crore
Closure/dissolution Can be initiated voluntarily, • By the Partners, or • By the Order of the Tribunal

For foreign investors:

Compliances under FEMA, 1999: It should be noted that foreign investment is permitted in an LLP only if the LLP is engaged in activities where (a) 100% foreign equity ownership is permitted under automatic route and (b) there are no performance conditions prescribed under the FDI  Policy. For example, an LLP engaged in construction development or industrial parks will  not be eligible to receive foreign direct investment (FDI) since there are “FDI-linked performance conditions” for the sector even though 100% FDI under automatic route is permitted in the sector.

Therefore, an intending foreign investor must go through all the conditions subject to which a LLP can be formed in India.

Steps for incorporation:

 Approving Authority: Registrar of Companies (RoC) and Reserve Bank of India (RBI)

  1. Obtaining DSC (Digital Signature Certificate) of proposed partners from any licensed Certifying Authority.
  2. Obtaining and Registering DIN (Director Identification Number)/ DPIN (Designated Partner Identification Number) of proposed partners: It is mandatory for proposed partners to obtain DIN/ DPIN under the Companies Act, 2013. DIN/ DPIN can be applied electronically in Form DIR-3 on the website of Ministry of Corporate Affairs (MCA), along with required documents and filing fee. As per General Circular No. 44/2011, the Ministry, vide notification dated 5th July, 2011, had integrated the Director’s Identification Number (DIN) with Designated Partnership Identification Number (DPIN)

III. Applying for availability of name: The fore most step in formation of an LLP is to apply for availability of name in Form 1 which has to be filed with MCA for reservation of name of the proposed LLP along with Details of business activity and Proposed monetary value of partner’s contribution.

  1. Filing of incorporation documents: Once the name of proposed LLP has been approved, incorporation documents, which include subscriber’s statement including consent, details of partners, Registrar’s reference number for name approval, Proof of address of registered office of LLP etc. are required to be filed in e Form 2.
  2. Drafting and execution of LLP agreement: LLP Agreement is one of the most crucial documents as it governs the rights and duties of partners. It may be drafted as per the convenience and mutual understanding among partners of LLP. Various aspects covered under the agreement may include amount and manner of contribution, rights and duties of partners, description of business of proposed LLP, etc.
  3. Drafting & Filing of LLP agreement: LLP is formed once the Form 2 is approved by the Ministry. LLP agreement governs the rules regulating the actions of the members of the LLP setting out the powers of the LLP. Various aspects covered under the agreement may include amount and manner of contribution, rights and duties of partners, description of business of proposed. It should be then filed within 30 days of incorporation of LLP in Form 3.

Post incorporation compliances (immediately after incorporation)

Foreign Exchange Management Act (FEMA), 1999

  1. Obtaining FIRC (Foreign Inward Remittance Certificate): As soon as the amount of consideration from foreign investor is received in India, authorised dealer bank will issue FIRC
  2. Reporting to the Reserve Bank of India (RBI): LLP is then required to report to RBI (through its authorised dealer) in Form FOREIGN DIRECT INVESTMENT-LLP(I), along with other documents, within 30 days of the receipt of amount of consideration.

Quick Easy Approach For Foreign Companies And Citizens

Often a foreign company / citizen or Non-Resident Indian wishes to start operations in India very quickly. Delays in getting digital signature and DIN lead to the company incorporation process getting delayed. During such times, it may be a good option to follow the following steps:

  • Two Indian resident-citizens (A and B) who already have PAN and DIN incorporate an

Indian company with the name, objects and authorized capital as required by the promoter based abroad.

  • A and B are the initial directors of the new Indian company.
  • As and when the foreign promoter has completed all the formalities related to DIN etc., A and B transfer all shares held by them in the new company to the foreign promoter.
  • After transfer of shares, new directors are appointed. Immediately thereafter, both A and B resign as directors.
  • In case it is so required, either A or B can continue as a Director to comply with the requirements of resident director.

Either A or B or both can continue to hold one share each of Rs. 10 as long as so required by the foreign promoter.

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Practical Guide to Consolidation of Accounts

Did you know?

– Before Companies Act 2013, only listed company was required to do Consolidation. AS 21 says that if a company is required to do consolidation then consolidation is required to be done as per criteria set up in AS 21. hence here is the practical guide to Consolidation of Accounts.

– Earlier only listed companies was required to do consolidation as listing agreement required the same but with companies act 2013, sec 129 has defines financial statement to include CFS.

Consolidation requirement under Companies Act, 2013 (‘Act, 2013’)

Section 129 (3) read with Rule 6 of the Companies (Accounts) Rules, 2014 (Rules) provides manner of consolidation of financial statements of subsidiaries pursuant to Schedule III of the Act, 2013 and the applicable Accounting Standards.

As per AS 21, Consolidated Financial Statement (CFS) is required to be prepared only for a‘group’ of enterprises under the control of a parent.

As per the scope of AS-23 and AS-27 the application of equity method/proportionate method for consolidation of accounts of associate/ joint ventures respectively is required only when a company prepares consolidation under AS 21

The term ‘group’ has been defined in AS 21 as follows:

‘A group is a parent and all its subsidiaries.

The explanation to Section 129 (3) clearly states that for the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture

Therefore, as per Section 129 of the Act, 2013 read with rules thereof, consolidation of financial statement is required in case a company is having subsidiary or associate or joint-venture company.

There is another view which believes that CFS is not required if there is no subsidiary as Sec 129 requires consolidation to be done as per AS 21, but as per our view the applicability of CFS is governed by Sec 129 and not AS 21, AS 21 only prescribes the method once CFS is required to be done under any statute.

In this regard, MCA had come with notification no. G.S.R 723 (E) dated October 14, 2014and introduced the Companies (Accounts) Amendment Rules, 2014. As per the rule the consolidation requirement was exempted for a company not having subsidiaries but having associates or joint ventures (‘JVs’). However, the said exemption was only for the financial year 2014-15. Accordingly, such companies come within the purview of consolidation from FY 15-16 onwards.

AS 21 : Consolidation of Accounts

Definition – Scope

  • Preparation and presentation of Consolidated Financial Statements for a group of enterprises under the control of a parent.
  • Accounting for investment in subsidiaries in the separate financial statement of a parent.

Definition of Control

When one entity

Directly or indirectly through subsidiary, owns more than 50% of the voting power. OR

Has power to control the composition of Board of Directors of another company for economic benefits.

Minority Interest

– It is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent.

– In other words, it is that portion of results and net assets which are not owned by the Holding Company

Consolidation Procedure: Minority Interest Computation

Minority interests in the net income of consolidated subsidiaries for the reporting period should be identified and adjusted against the income of the group in order to arrive at the net income attributable to the owners of the parent; and

Minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated balance sheet separately from liabilities and the equity of the parent’s shareholders.

Example
Suppose company B is having Net worth of Rs 10 lac, company A purchases 75% of share of company B, then remaining 25% i.e. Rs 2.5 lacs becomes minority interest.

Presentation as per Schedule III
The CFS prepared in the same format as that of Separate Financial Statements, i.e, Schedule III of Companies Act 2013

Exclusion of Subsidiaries from Consolidation
The Holding Company shall consolidate the financial statements of all the subsidiaries, domestic or foreign other than:

Temporary Investment – When the shares are held in subsidiary company for disposal in near future.

Severe Restriction -Where there are long term restrictions on fund transfer from subsidiary to parent Company

Different financial year of Subsidiary
It will prepare an additional set of financial statement in accordance with financial year of holding

Consolidation Procedure: Goodwill Computation

At the date of acquisition

Any excess of the cost to the parent of its investment in a subsidiary over the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, should be described as goodwill to be recognised as an asset in the consolidated financial statements

Cost to parent > Parent’s portion of Equity = Goodwill

When the cost to the parent of its investment in a subsidiary is less than the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference should be treated as a capital reserve in the consolidated financial statements

Cost to parent < Parent’s portion of Equity = Capital Reserve

Consolidation Procedure: BS & P&L Consolidation
All assets, liabilities, income and expenses should be consolidated on line by line basis.

Line by line basis – combine assets, liabilities, income and expenses

Intra-group transactions and balances

  • Profits and losses on transactions between group members should be eliminated
  • Profits which are reflected in the value of assets to be included in the consolidation should be eliminated

Uniformity of accounting policies

  • Uniform accounting policies should be used for all entities included in the consolidation for like transactions and other events in similar circumstances
  • If there is mid-year acquisition then the mid-year financial statement as on date of acquisition is required for partial consolidation after acquisition.

Sale of Subsidiary

  • Consolidation process to be followed till the date parent subsidiary relationship ceases to exist
  • Recognition of difference between sale proceeds and Equity on the date of disposal in the consolidated profit and loss account and Capital Reserve / Goodwill to be reversed

Disclosures…

  • List of all subsidiaries including name, country of incorporation, proportion of ownership interest and, if different, the proportion of voting power held
  • Under the Companies Act, 2013: – To comply with Instructions given for preparation of balance sheet and statement of profit and loss in Schedule III –
  • Entity-wise “amount of net-assets” and % of the same w.r.t. consolidated net assets –
  • Entity-wise “amount of share in profit & loss and % of the same w.r.t. consolidated profit & loss –
  • The above details to be further bifurcated into parent, subsidiary, joint –venture and also into Indian and Foreign
  • Effect of acquisition and disposal of subsidiaries on the financial position at the reporting date, the results for the reporting period and on the corresponding amounts for the preceding period
  • Names of the subsidiaries of which the reporting dates are different from that of the parent and the difference in reporting dates
  • Nature of relationship between parent and subsidiary, if parent does not own one-half of the voting power

AS-23 – Accounting for Investment of Associates in CFS

Significant influence may be exercised in several ways:

  • Representation on the Board of directors
  • Participation in policy making process
  • Material intercompany transactions
  • Interchange of managerial personnel
  • Share ownership – 20 %  or more

Consolidation method- Equity method

  • Under the Equity Method – investment is initially recorded at cost, identifying any goodwill / capital reserve arising at the time of acquisition and
  • the carrying amount is increased or decreased to recognise the investor’s share of the profits or losses of the investee after the date of acquisition
  • Elimination of unrealised profit / loss to the extent of investor’s interest Exclusion from CFS / Cessation.

Adjustments of carrying amount

Adjustments to the carrying amount of investment in an associate arising from changes in the associate’s equity that have not been included in the statement of profit or loss should be directly adjusted in the carrying amount of investment without routing it through the consolidated statement of profit and loss. The corresponding debit /credit should be made in the relevant head of the equity interest in the consolidated balance sheet

AS-27 – Financial Reporting of Interests in Joint Ventures

  • A jointly controlled entity is a joint venture which involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other enterprises, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity.
  • A jointly controlled entity maintains its own accounting records and prepares and presents financial statements in the same way as other enterprises in conformity with the requirements applicable to that jointly controlled entity.
  • Joint control is the contractually agreed sharing of control over an economic activity
  • Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.
  • Accounting of partnership firm/AOP in separate and consolidated financial statements
  • Proportionate Consolidation is a method of accounting and reporting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer’s financial statements.
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Deferred tax analysis

The  concept  of  Deferred Tax  is not a simple to understand  and  many  get  confused  while applying it in the books. So, we shall try to go through simple and lucid manner to understand the whole concept and its application in the books through entries. here is the complete deferred tax analysis.

The word Deferred is derived from the word “Deferments” which means arranging for something to happen at a later date. Thus, deferred tax is the tax for those items which are accounted in Profit & Loss A/c but not accounted in taxable income which may be accounted in future taxable income & vice versa. The deferred tax may be a liability or assets as the case may be.

“As per AS 22,

Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period.

Deferred tax is the tax effect of timing differences.

Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.”

Deferred tax is brought into accounts to make the clear picture of current tax and future tax. If  we take some advantage of Income Tax sections and pay less tax in current year, we may have to pay tax in future on that advantage being reverse. In the same way if we have to pay more tax by not allowing any expense in current year, it will be allowed in future and in that year tax will be reduced. So, we may get some benefit or loss on account of  difference in book profit and taxable profit.

Expenses amortized in the books over a period of years but are allowed for tax purposes wholly in the first year. (e.g. substantial advertisement expenses to introduce a product, etc. treated as deferred revenue expenditure in the books). Expenses paid without deducting TDS will not be allowed for tax purpose and will be allowed after deducting TDS on that. Expenditure of the nature mentioned in section 43B (e.g. taxes, duty, cess, fees, etc.) accrued in the statement of profit and loss on mercantile basis but allowed for tax purposes in subsequent years on payment basis. If we make provision of  bonus payable, provident fund contribution, Provision for staff leave encashment,  etc. but do not pay before filing of return they are disallowed in that year but will be allowed in the year of payment. If we make part payment out of this before filing of return that amount actually paid will be allowed for tax purpose and the remaining amount will be allowed in the year of payment. This is called temporary timing difference. But if we pay cash above Rs.20000/- this expense will not be allowed for tax purpose any time. So this is permanent difference.

We should keep in mind that Deferred Tax Liability or Deferred Tax Assets are created only for temporary timing difference. For permanent difference it is not created as they are not going to be reversed.

The book entries of  deferred tax is very simple. We have to create Deferred Tax liability A/c or Deferred Tax Asset A/c by debiting or crediting Profit & Loss A/c respectively.

The Deferred Tax is created at normal tax rate.

[1] Profit & Loss A/c   Dr
To Deferred Tax Liability A/c

[2] Deferred Tax Asset A/c
To Profit & Loss A/c

Please, note that both the entries are not passed but only liability or asset is created for net amount of deferred tax.

If  book profit is greater than taxable profit, create deferred tax liability.

If book profit is less than taxable profit, create deferred tax asset.

If there is loss in the books of accounts but profit as per income tax and the difference (e.g. disallowance of exp.) subject to adjustments in future,  create deferred tax asset.

If there is profit in the books of accounts but loss as per income tax and carry forward of loss is allowed, (we have to pay MAT), create deferred tax liability.

Thus it is understood that, Deferred Tax Asset and Liability arising on account of timing differences and which are capable of reversal in subsequent periods are recognized using the tax rates and laws that have been enacted or substantively enacted as of Balance sheet date. Deferred Tax Asset is not recognized unless there is virtual certainty that sufficient future taxable income will be available which such deferred tax asset will be realized.

In other words, DTL is recognized for temporary differences that will result in taxable amount in future years, Whereas DTA is recognized for temporary differences that will result in deductible amounts in future years and for carry forwards. It is to be noted that DTA is created in case of certainty only.

Example to understand Deferred Tax concept.

But the calculation is more important. Let us take one simple example of Depreciation difference in books of accounts and taxable income.

Suppose, one company purchases a machine costing Rs. 300000/- on 1ST April. The salvage value is assumed at zero. The working life is assumed at 3 years. The company uses straight line method for depreciation in books of accounts but this machine is of that type which can be depreciated fully in the first year for tax purpose. Suppose tax rate is 30% for 3 years. For simplification profit before depreciation and tax is assumed Rs.500000/-.

YEAR I II III
PROFIT BEFORE DEPRECIATION AND TAXES 500000.00 500000.00 500000.00
DEPRECIATION IN BOOKS OF ACCOUNTS 100000.00 100000.00 100000.00
PROFIT BEFORE TAXES 400000.00 400000.00 400000.00
TAXABLE INCOME
=PROFIT – ALLOWABLE DEPRECIATION
(500000-300000, 500000-0, 500000-0)
200000.00 500000.00 500000.00
CURRENT TAX @ 30 % ON TAXABLE INCOME 60000.00 150000.00 150000.00
DEFERRED TAX LIABILITY 60000.00 0.00 0.00
DEFERRED TAX ASSETS

(BEING REVERSAL OF LIABILITY)

0.00 30000.00 30000.00
TAX EXPENSE
= 30% OF PROFIT BEFORE TAXES
OR  CURRENT TAX+DTL-DTA
120000.00 120000.00 120000.00
NET TIMING DIFFERENCE 200000.00 100000.00 0.00
BALANCE OF DEFERRED TAX LIABILITY 60000.00 30000.00 0.00

ENTRIES FOR THIS EXAMPLE :

In year I     

Profit & Loss A/C                      DR 60000/-
To Provision for Income Tax A/C   60000/-
(Being provision made for tax payable for current year)

Profit & Loss A/C                      DR 60000/-
To Deferred Tax liability A/C   60000/-
(Being Deferred Tax liability created on account of timing difference)

In Balance sheet Deferred Tax liability will be reflected by Rs.60000/-

In year II

Profit & Loss A/C                      DR 150000/-
To Provision for Income Tax A/C   150000/-
(Being provision made for tax payable for current year)

Deferred Tax Asset A/C             DR 30000/-
To Profit & Loss A/C                      30000/-
(Being deferred tax liability reduced on reversing timing difference)

In Balance sheet Deferred Tax liability will be reflected by Rs.30000/-

In year III

Profit & Loss A/C                      DR 150000/-
To Provision for Income Tax A/C   150000/-
(Being provision made for tax payable for current year)

Deferred Tax Asset  A/C            DR 30000/-
To Profit & Loss A/C                      30000/-
(Being deferred tax liability reduced on reversing timing difference)

Deferred Tax liability is zero so there is no question to reflect it in Balance sheet.

Please note that net of  deferred tax liability and asset will be reflected in Balance Sheet.

There are so many reasons for which allowable depreciation for tax purpose and depreciation booked in accounts differs. The rate of depreciation may differ in law and in books. The method of depreciation may differ in law and in books. The method of calculation may differ as in books we may depreciate the assets individually account wise whereas for tax purpose depreciation may be calculated block wise.

First time introduction of Deferred Tax in Books of accounts.

(Transitional Provisions)

As per AS 22 “On the first occasion that the taxes on income are accounted for in accordance with this Standard, the enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated prior to the adoption of this Standard as deferred tax asset/liability with a corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in case of deferred tax assets (see paragraphs 15-18). The amount so credited/charged to the revenue reserves should be the same as that which would have resulted if this Standard had been in effect from the beginning.”

To introduce deferred tax first time in the books, we have to find Difference between the Value of Assets as per Books of Accounts and the Value of Assets as per Income Tax Act. To simplify if we have fixed assets in the books as gross block Rs.250 lacs and accumulated depreciation Rs.150 lacs, the net value in the books is Rs.100 lacs. Suppose,  the net block value as per Income Tax calculation (as per tax audit) Rs.80 lacs. It means that in future we shall calculate depreciation on Rs.100 lacs whereas as per Income Tax Act, the depreciation will be calculated on Rs.80 lacs. This will result in less allowable depreciation creating more tax liability in future. Therefore, we have to create Deferred Tax liability for this future Tax liability. The timing difference is Rs.20 lacs on which we have to create Deferred Tax Liability of Rs.6 lacs at the assumed I.tax rate of 30%. In the same way we have to introduce for all differeciating assets and liabilities.

Suppose, a firm has the following positions  as on 31st March,

Asset / Liability as per books as per I.tax. difference DTL (+)
DTA (-)
@ 30%
Assets :
Net fixed assets-written down value.

( In future more tax has to be paid on less allowable depreciation as per tax law)

100.00 80.00 20.00 6.00
Liabilities:
Provision for gratuity

(when paid in future it will reduce tax at that time)

40.00 0.00 -40.00 -12.00
Provision for staff  leave encashment

(when paid in future it will reduce tax at that time)

30.00 0.00 -30.00 -9.00
Total -50.00 -15.00

The entry to be passed in books for Rs. 15.00 lacs DTA newly introduced.

Deferred Tax Asset A/C             DR 1500000/-
To Revenue Reserve A/C                  1500000/-

ANNUAL CALCULATION

It may be noted that we don’t have to calculate deferred tax on each and every transactions related to it. The Deferred Tax is calculated annually from comparison of book profit and taxable profit. The Deferred Tax Liability or Deferred Tax Asset is derived from the comparison of  Profit & Loss A/c of Balance sheet and Computation of Total Income for Income Tax purpose. If any amount is expensed out in Profit & Loss A/c but not deducted for Income tax purpose, it will create Deferred Tax Asset. If  any amount claimed in Income Tax is more than expensed out in Profit & Loss A/c, it will create Deferred Tax Liability.

The net difference of DTA / DTL is computed and transferred to Profit & Loss A/c. The Balance of Deferred Tax Liability / Asset is reflected in Balance sheet. For that the following simple statement may be used.

For the above example, Suppose in next year, the firm makes payments from provision and makes new provisions from P/L A/c.

Details P/L A/c Computation of Income difference DTL(+) /
DTA(-)
@ 30%
Opening balance of
DTL(+) / DTA (-)
-15.00
Comparison  of P/L A/c and Computation of Income
payment of staff leave encashment from provision 10.00 10.00 3.00
payment of gratuity from provision 15.00 15.00 4.50
new provision for staff leave made from P/L A/c 5.00 -5.00 -1.50
new provision for gratuity made from P/L A/c 5.00 -5.00 -1.50
depreciation as per books and tax audit 20.00 16.00 -4.00 -1.20
Total of comparison 3.30
Closing Balance of  DTL(+) / DTA (-) -11.70

Or using Balance sheet approach also we can derive same figure as under :

The closing balance of  assets assuming depreciation rate of 20% will be Rs.80 & 64 lacs respectively. The closing balance of Gratuity provision will be 40-15+5=30 lacs and for Provision of Leave Encashment will be 30-10+5=25 lacs. The calculation will be as under.

Asset / Liability as per books as per I.tax. difference DTL (+)
DTA (-)
@ 30%
Assets :
Net fixed assets 80.00 64.00 16.00 4.80
Liabilities:
Provision for gratuity 30.00 0.00 -30.00 -9.00
Provision for staff  leave encashment 25.00 0.00 -25.00 -7.50
total -39.00 -11.70

Last year Deferred Tax Assets were of Rs. 15 lacs which arrived at 11.70 lacs current year. So there is a deferred tax liability of  Rs. 3.30 lacs for current year.

The only one entry will be passed in books for Rs. 3.30 lacs DTL newly calculated.

Profit & Loss A/C                 DR 330000/-
To  Deferred Tax Liability A/C   330000/-

The balance of  RS 11.70 lacs DTA will be reflected at asset side in Balance sheet.

As per revised schedule VI, DTL/DTA will be shown under “ Non Current Liabilities / Non Current Asset ”.

For Financial Institutions, the application of deferred tax on Special Reserve created under section 36(1)(viii) of the Income Tax Act, 1961

As per section 36(1)(viii) of Income Tax Act 1961

in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head “Profits and gains of business or profession” (before making any deduction under this clause) carried to such reserve account:

Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.

Explanation.—In this clause,—

(a) “specified entity” means,—

(i) a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956)

(ii) a financial corporation which is a public sector company;

(iii) a banking company;

(iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;

(v) a housing finance company; and

(vi) any other financial corporation including a public company;

(b)  “eligible business” means,—

[(i)  in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for –

(A) industrial or agricultural development;
(B) development of infrastructure facility in India; or
(C) development of housing in India;]

(ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and

(iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India;

(c) “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;

(d) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of

(e) “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes;

(f) “public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);

(g)  “infrastructure facility” means—

(i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of
(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of
(iii) an undertaking referred to in sub-section (10) of

(h) “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;]

The eligible entities are getting deduction on Special Reserve created under this section by resulting into reduction of tax liability.

As we know that authorities like RBI & NHB  have asked to create Deferred Tax Liability of Special Reserve Created u/s 36(1)(viii) of Income Tax Act,1961.

In this connection, I would like to invite some logical representations on some queries related it.

As per AS 22,

Deferred Tax is the tax effect of timing differences.

Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which Income tax payable (recoverable) is determined.

Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving.

It is clearly written that accounting income / loss is the net profit / loss before tax effect. There is no differentiation of above line or below line entries. Profit before tax is to be considered as accounting income. And one more important view should be taken into account that Deferred Tax is to be calculated on the items which are the main cause for difference between accounting and taxable income. If a particular item reflects the same numerical value in both workings then that item cannot be treated as item creating difference between both income. We have to consider two main parts of Timing difference. First is that there should be difference between both calculation and that difference can be reversal in future at any point of time. If there is no difference between both calculation why should we create deferred tax on such item ?

Now take an example for this.

Profit & Loss Account :
Profit before tax and provisions   10 lacs

Less provisions :

Depreciation on fixed assets        2 lacs
Special reserve u/s 36(1)(viii)       2 lacs
Leave encashment provision        2 lacs
———
Profit before tax                          4 lacs

Computation of Income :

Profit before tax                          4 lacs
Add :
Depreciation as per books            2 lacs
Special Reserve as per books      2 lacs
Leave encashment provision        2 lacs
——-            6 lacs
——–
Total                                                              10 lacs

Less :

Allowable deductions :

Depreciation as per I.tax Act             3 lac
Special Reserve allowable                2 lac
Leave encashment paid amount        0.5 lac
——-          5.5 lacs
——–
Taxable Income                                               4.5 lacs

In this case, deferred tax liability on depreciation and deferred tax asset on leave encashment is to be created and because of no differentiation between special reserve booked and special reserve allowable, there will not be any deferred tax. The detailed calculation look like this :

Assuming tax rate of 30%                                                                                   Rs in lacs

Details Profit and Loss Account Computation of Taxable Income difference DTL (+)
DTA (-)
@ 30%
Opening balance of
DTL(+) / DTA (-)
0.00
depreciation as per books and tax audit 2.00 3.00 1.00 0.31
special reserve u/s 36(1)(viii) 2.00 2.00 0.00 0.00
staff leave encashment provision / payment 2.00 0.50 -1.50 -0.46
Closing balance of
DTL(+) / DTA (-)
-0.15

Tax on book profit will be 4 lacs * 30% = 1.20 lacs which will be divided into two parts :
Current tax on taxable income will be 4.50 lacs * 30% = 1.35 lacs
Deferred tax Assets as per above                                 -0.15 lacs
So, net tax effect will be 1.35-0.15=1.20 lacs.

In other words Deferred tax is the bridge between tax on book profit and current tax on taxable income. In the above example taxable income is more than book profit by 0.50 lacs on which we have paid more tax say 0.50 * 30%= 0.15 lacs which will be reversed in future. But if any item shows same value both in books and in taxable income , there should not be any deferred tax. Whether it is reversible or not is the second question, first question is that is there any difference creating item between both income.

Special reserve created under s/c 36(1)(viii) of Income Tax Act,1961  becomes taxable in the year of reversal (withdrawn). In the year of withdrawal  it will be reflected both in books as well as in taxable income and will be taxed in that year.

Now, considering the guidelines issued by authorities if we create deferred tax liability on the advantage taken as deduction this year, what will be the actual position . The result is itself unremarkable !

The deferred tax liability on Special Reserve in the above example will be 2 lac * 30% = 0.60 lac. Which will increase tax liability this year. On the other hand the current tax liability was also decreased by 0.60 lac only on account of creation of special Reserve. So, if we create deferred tax liability on special reserve, the actual benefit of reduced current tax  creating this reserve , will be washed out by increase of deferred tax liability by the same amount.

Now, if we assume that deferred tax liability on special reserve is created the tax effect will be,

Tax on book profit will be 4 lacs * 30% = 1.20 lacs :
Current tax on taxable income will be 4.50 lacs * 30% = 1.35 lacs
Deferred tax liability as per above                                    +0.45 lacs
( 0.31 on dep.+ 0.60 on spl.res. – 0.46 lv.enc )

So, net tax effect will be 1.35+0.45=1.75 lacs. Which is more by 0.60 lacs in comparison of tax of 1.20 lacs on book profit.

This if against the main objective of creating deferred tax to bridge the book profit and taxable income.

So, if provision created u/s 36(1)(viii) is the same as being deducted in taxable income there is no need to create deferred tax on it.

If provision created u/s 36(1)(viii) is the more than being deducted in taxable income there is no need to create deferred tax on it. As additional created special reserve will be added to taxable income and will be taxed in current year which is permanent difference.

if provision created u/s 36(1)(viii) is lower than allowable deduction in taxable income there is no need to create deferred tax on it as actually allowed deduction will be lower amount and surplus allowable will be ignored.

It may be noted that if Special Reserve is created through appropriation from Net Profit and not routed through Profit & Loss A/c then Deferred tax is to be created on it. But if this Special Reserve is routed through Profit & Loss A/c and provided before Net Profit , if we calculate Deferred Tax on it , Effective Tax Rate will not become zero.

Views in the article:

The readers are requested to consult their Tax Consultant before implementing. The writer does not take any responsibility for personal views reflected in the article. The remarkable comments from consultants will be highly appreciated.

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Refund of SAD

Refund of SAD

The intention of levying Special Additional Duty (‘SAD’) of Customs also known as Counter Value Duty (‘CVD’) U/s 3(5) of the Custom Tariff Act is to encourage domestic market and counter balance local sales tax/ Value Added Tax (‘VAT’) leviable on like products at the time of sale , which would have been levied if procured from domestic market.

However, where the imported goods are subsequently resold, exemption from 4% additional duty is provided in the form of refund vide Custom Notification No. 102/2007 dated 14.09.07, provided the conditions prescribed in the said notification is fulfilled.

The following conditions are required to be fulfilled:

1) all the applicable duties including additional duty has been paid at the time of import by importer;

2) at the time of issuing invoice, importer shall specifically indicate in invoice that no credit of additional duty shall be admissible;

3) the importer shall file refund claim of the said additional duty of customs paid on the imported goods with the jurisdictional customs officer;

4) the importer shall pay appropriate sales tax or VAT on sale of the said goods;

5) the importer shall, inter alia, provide copies of the following documents along with the refund claim:

(i) document evidencing payment of the said additional duty;

(ii) invoices of sale of the imported goods in respect of which refund of the said additional   duty is claimed;

(iii) documents evidencing payment of appropriate sales tax or value added tax, as the case may be, by the importer, on sale of such imported goods.

Procedure and clarification for claiming refund has been given in Circular No. 06/2008 Cus dated 28.04.2008 and Circular No. 16/2008 dated 13.10.2008 read with Notification No. 102/2007 Cus dated 14.09.2007.

Check list for filing refund application

S.No Particulars
1. Refund Application
2. Calculation/ Working sheet
3. Original Bill of Entry
4. Original TR-6 Challan
5. Copy of Import invoice/ packing list
6. Original Sales Invoices with declaration mentioning that no additional duty has been passed on
7. True copy of VAT/ CST challan and return
8. Authority letter
9. Ledger Account

Points to be cautious:

  1. Time limit for filing refund claim is one year from the date of payment of the additional duty of Customs. In view of the above, importer should be specific in filing refund claim within the stipulated time else the refund amount would lapse.
  2. Amount of SAD refund shall be restricted proportionate to sales made (quantity wise) and appropriate sales tax or VAT has been paid. Hence unsold stock would not be eligible for refund.
  3. The importer can file monthly claim irrespective of number of bill of entries. Single claim against a particular bill of entry is allowed and whereas refund claim for part quantity is not allowed except where necessary at the end of one year.
  4. One of the condition,inter-alia,requires that invoice should contain a declaration that no credit of the additional duty of customs levied under sub-section (5) of section 3 of the Customs Tariff Act, 1975 shall be admissible. In the absence of which, department rejecting the claim cannot be ruled out.
  5. Certificate from a statutory auditor / CA who certifies the final accounts, correlating VAT paymentvis-a-vis4% SAD amount and unjust enrichment. A certificate from any independent Chartered Accountant would not be acceptable.
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A study on income declaration scheme 2016

A study on income declaration scheme 2016

The scheme is basically brought as a last opportunity to declare black money and the wealth to see a black money free economy in our country in the coming time. The scheme proposes reasonable taxation of 45 % which is only 15 % more than the highest slab prevailing in the country. The rules and regulations of the scheme is yet to come out and the success of the scheme mostly depends on the practical point of view of aspirant, immunity warranty, friendly behavior of the department, the role of advisors and the consultants, set of FAQ covering all types of assessee having different asset class and standing etc and the practical workability from each level. The submission here may be summarized as under:

  • HIGHLIGHTS OF THE SCHEME
  • OBSERVATIONS ON THE SCHEME
  • LIKELY PROBLEMS
  • DOUBTS OF THE ASPIRANT OF THE SCHEME
  • SUGGESTIONS

Read More

Highlights of India-Mauritius DTAA amendment

 

 

  1. On 10thMay 2016, the Government of India has issued a press releaseannouncing the Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius (DTAA). This protocol was signed by both the countries on 10th May 2016 at Port Louis, Mauritius. This amendment follows on Finance Minister Arun Jaitely’s announcement in the budget for 2016-14 to implement General Anti Avoidance Rules (GAAR) from April 1, 2017.

 

A brief Glimpse of Amendment in DTAA with  Mauritius is as follows:

Q1. What was the reason to amend tax treaty (DTAA) with Mauritius?

  • Any Capital Gains arising in Mauritius were not taxed
  • This made an attractive “post box address” for foreign investors to route investments into India
  • Indians with a intention of avoiding taxes set up shell companies in Mauritius, concealing identities and channeling cash or stock market investments through “round tripping”.

 

Q2. When was the amendment made?

10th May 2016

 

Q3. What is the essences of the amendment?

Taxing a transaction “based on the source” rather than “based on residence” (Part of BEPS initiative)

 

Q4. What are the major amendments • Taxing of capital gains (CG) arising to a Mauritian resident from sale of share of a company resident in India.

  • If Such shares are acquired on or after 1stApril 2017
  • Shares acquired upto 31stMarch 2017, are ‘grandfathered’ meaning, any sale of such shares in future are tax-protected i.e. not taxed and its effect is prospective.
  • Taxed at 50% of reduced tax rate on CG arising between 01/4/2017 and 31/03/2019 on investment made on or after 1stApril 2017, subject to Limitation of Benefits (LoB)
  • LoB mentions the Mauritian companies have to spend expenditure of more than INR 27 Lakhs in preceding 12 months, if not spend then CG taxed at full rate.
  • LoB applies till 31stMarch 2019, thereon CG is taxed at full rate

 

 

Q5. What are the impacts of amendment?

  • Surge in investments in India until 31stMarch 2017, to take advantage of ‘grandfathering’ window.
  • The window period will give sufficient time to investors to plan their investment structures.

 

Q6. What are the limitations of amendment?

  • Applicable only to ‘shares’ of a company in India. Does not apply to other financial instruments (FI)such as debentures, derivatives, Interest in LLP etc., these FI can go without taxing.
  • No clarity on issue of shares by Indian company after April 2017, in pursuant to transactions such as right issues, bonus issue etc.
  • No clarity on impact of amendment on India-Singapore treaty, since tax on CG under the two treaties are co-terminus
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Know Everything about Filing of Advance Ruling under Central Excise Act,1944

INTRODUCTION AUTHORITY FOR ADVANCE RULINGS CENTRAL EXCISE

Advance rulings enable foreign investors to know in advance into certainty their indirect tax duty liability on production and manufacture of goods in India.2. Relevant provisions for obtaining an advance ruling are contained in Chapter IIIA in the Central Excise Act, 1944;

2.1. The Central Excise (Advance Rulings) Rules, 2002 notified vide notification Nos. 28/2002-C.E. (N.T.) dated 23rd August, 2002 and amended vide notification Nos. 59/2003-C.E. (N.T.) dated 23rd July, 2003 and notification Nos. 16/2007-C.E. (N.T.) dated 6th March, 2007 provide for the format to be used for filing application.

2.2. Procedure Regulations of the Authority (AARUL CESTAT) have also been notified vide notification No. 1/2005-AAR dated 7th Jan., 2005.

  1. The scheme of Advance Rulings allows a non-resident investor setting up a joint venture in India in collaboration with a non-resident or a resident; or a resident setting up a joint venture in India in collaboration with a non-resident; or a wholly owned subsidiary Indian company, of which the holding company is a foreign company; or a joint venture in India; or a resident falling within any such class or category of persons as notified by the Government of India in this behalf , to seek in advance, a ruling from the Authority for Advance Rulings.
    Advance rulings can be sought in respect of –

(a) Classification of goods under the Central Excise Tariff Act, 1985;

(b) Principles of valuation under the Central Excise Act, 1944;

(c) Applicability, of notifications issued in respect of duties under the Central Excise Act, 1944 and Central Excise Tariff Act, 1985 and any duty chargeable under any other law for the time being in force in the same manner as duty of Central Excise leviable under the Central Excise Act.

(d) Admissibility of input-tax credit under Central Excise law.

(e) Determination of the liability to pay duties of excise on any goods under this Act.

  1. The relevant provisions are as follows;-

PROVISIONS OF CENTRAL EXCISE ACT, 1944 ON ADVANCE RULINGS

CHAPTER IIIA OF CENTRAL EXCISE ACT, 1944

ADVANCE RULINGS

SECTION 23A.Definitions. In this Chapter, unless the context otherwise requires, –

(a) activity means production or manufacture of goods and includes any new business of production or manufacture proposed to be undertaken by the existing producer or manufacturer, as the case may be;

(b) advance ruling means the determination, by the authority of a question of law or fact specified in the application regarding the liability to pay duty in relation to an activity proposed to be undertaken, by the applicant;

(c) applicant means –

(i) (a) a non-resident setting up a joint venture in India in collaboration with a non-resident or a resident; or

(b) a resident setting up a joint venture in India in collaboration with a non-resident; or

(c) a wholly owned subsidiary Indian company, of which the holding company is a foreign company, or which, as the case may be, proposes to undertake any business activity in India;

(ii)a joint venture in India; or

(iii) a resident falling within any such class or category of persons, as the Central Government may, by notification in the Official Gazette, specify in this behalf, and which or who, as the case may be, makes application for advance ruling under sub-section (1) of section 23C;

Explanation. For the purposes of this clause, joint venture in means a contractual arrangement whereby two or more persons undertake an economic activity which is subject to joint control and one or more of the participants or partners or equity holders is a non-resident having substantial interest in such arrangement.

(d)application means an application made to the Authority under sub-section (1) of section 23C;

(e) Authority means the Authority for Advance Rulings, constituted under sub-section (1), or authorised by the Central Government under sub-section (2A), of section 28F of the Customs Act, 1962 (52 of 1962)];

(f)non-resident, Indian company and foreign company shall have the meanings respectively assigned to them in clauses (30), (26) and (23A) of section 2 of the Income-tax Act, 1961 (43 of 1961).

SECTION 23B.Vacancies, etc., not to invalidate proceedings. No proceeding before, or pronouncement of advance ruling by, the Authority under this Chapter shall be questioned or shall be invalid on the ground merely of the existence of any vacancy or defect in the constitution of the Authority.

SECTION 23C.Application for advance ruling. (1) An applicant desirous of obtaining an advance ruling under this Chapter may make an application in such form and in such manner as may be prescribed, stating the question on which the advance ruling is sought.

(2)The question on which the advance ruling is sought shall be in respect of, –

(a)classification of any goods under the Central Excise Tariff Act, 1985 (5 of 1986);

(b) applicability of a notification issued under sub-section (1) of section 5A having a bearing on the rate of duty;

(c) the principles to be adopted for the purposes of determination of value of the goods under the provisions of this Act;

(d) notifications issued, in respect of duties of excise under this Act, the Central Excise Tariff Act, 1985 (5 of 1986) and any duty chargeable under any other law for the time being in force in the same manner as duty of excise leviable under this Act;

(e) admissibility of credit of service tax paid or deemed to have been paid on input service or excise duty paid or deemed to have been paid on the goods used in or in relation to the manufacture of the excisable goods.

(f) determination of the liability to pay duties of excise on any goods under this Act.

(3)The application shall be made in quadruplicate and be accompanied by a fee of two thousand five hundred rupees.

(4)An applicant may withdraw an application within thirty days from the date of the application.

SECTION 23D.Procedure on receipt of application. (1) On receipt of an application, the Authority shall cause a copy thereof to be forwarded to the Commissioner of Central Excise and, if necessary, call upon him to furnish the relevant records :

Provided that where any records have been called for by the Authority in any case, such records shall, as soon as possible, be returned to the Commissioner of Central Excise.

(2)The Authority may, after examining the application and the records called for, by order, either allow or reject the application :

Provided that the Authority shall not allow the application where the question raised in the application is, –

(a)already pending in the applicants case before any Central Excise Officer, the Appellate Tribunal or any Court;

(b)the same as in a matter already decided by the Appellate Tribunal or any Court :

Provided further that no application shall be rejected under this sub-section unless an opportunity has been given to the applicant of being heard :

Provided also that where the application is rejected, reasons for such rejection shall be given in the order.

(3)A copy of every order made under sub-section (2) shall be sent to the applicant and to the Commissioner of Central Excise.

(4)Where an application is allowed under sub-section (2), the Authority shall, after examining such further material as may be placed before it by the applicant or obtained by the Authority, pronounce its advance ruling on the question specified in the application.

(5)On a request received from the applicant, the Authority shall, before pronouncing its advance ruling, provide an opportunity to the applicant of being heard, either in person or through a duly authorised representative.

Explanation. – For the purposes of this sub-section, authorised representative shall have the meaning assigned to it in sub-section (2) of section 35Q.

(6)The Authority shall pronounce its advance ruling in writing within ninety days of the receipt of application.

(7)A copy of the advance ruling pronounced by the Authority, duly signed by the Members and certified in the prescribed manner shall be sent to the applicant and to the Commissioner of Central Excise, as soon as may be, after such pronouncement.

SECTION 23E.Applicability of advance ruling. (1) The advance ruling pronounced by the Authority under section 23D shall be binding only –

(a)on the applicant who had sought it;

(b)in respect of any matter referred to in sub-section (2) of section 23C;

(c)on the Commissioner of Central Excise, and the Central Excise authorities subordinate to him, in respect of the applicant.

(2)The advance ruling referred to in sub-section (1) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced.

SECTION 23F.Advance ruling to be void in certain circumstances. (1) Where the Authority finds, on a representation made to it by the Commissioner of Central Excise or otherwise, that an advance ruling pronounced by it under sub-section (6) of section 23-D has been obtained by the applicant by fraud or misrepresentation of facts, it may, by order, declare such ruling to be void ab initio and thereupon all the provisions of this Act shall apply (after excluding the period beginning with the date of such advance ruling and ending with the date of order under this sub-section) to the applicant as if such advance ruling had never been made.

(2)A copy of the order made under sub-section (1) shall be sent to the applicant and the Commissioner of Central Excise.

SECTION 23G.Powers of Authority. (1) The Authority shall, for the purpose of exercising its powers regarding discovery and inspection, enforcing the attendance of any person and examining him on oath, issuing commissions and compelling production of books of account and other records, have all the powers of a civil court under the Code of Civil Procedure, 1908 (5 of 1908).

(2)The Authority shall be deemed to be a civil court for the purposes of section 195, but not for the purposes of Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974), and every proceeding before the Authority shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purpose of section 196, of the Indian Penal Code (45 of 1860).

SECTION 23H.Procedure of Authority. The Authority shall, subject to the provisions of this Chapter, have power to regulate its own procedure in all matters arising out of the exercise of its powers under this Act.

MINISTRY OF FINANCE
(Department of Revenue)

Notification No.28/2002-Central Excise (NT)
New Delhi, the 23rd August,2002

CENTRAL EXCISE (ADVANCE RULINGS) RULES, 2002

G.S.R.594 (E).- In exercise of the powers conferred under Section 37 read with sub-sections (1) and (3) of section 23C, sub-section (7) of section 23D of the Central Excise Act, 1944 (1 of 1944), the Central Government hereby makes the following rules, namely :

  1. Short , extent and commencement .

(1)These rules may be called the Central Excise (Advance Rulings) Rules, 2002.

(2)They extend to the whole of India

(3)They shall come into force on the date of their publication in the Official Gazette.

  1. Definitions- In these rules, unless the context otherwise requires,-

(a) “Act” means the Central Excise Act, 1944 (1 of 1944).

(b) Authority means the Authority for Advance Rulings(Central Excise, Customs and Service Tax) constituted under section 28F of the Customs Act, 1962 (52 of 1962).

(c) Form -Application for Advance Rulings (Central Excise) means the form appended to these rules.

(a) “Act” means the Central Excise Act, 1944 (1 of 1944).

(b) “??Authority” means the Authority for Advance Rulings(Central Excise, Customs and Service Tax) constituted under section 28F of the Customs Act, 1962 (52 of 1962).

(c) “Form -Application for Advance Rulings (Central Excise)’?? means the form appended to these rules.

(d) Words and expressions used and not defined herein but defined in the Act shall have the meanings respectively assigned to them in the Act.

3.Form and manner of application.

(1) An application for obtaining an advance ruling under sub-section(1) of section 23C of the Act shall be made in Form Application for Advance Rulings (Central Excise).

(2) The application referred to in sub-rule (1), the verification contained therein and all relevant documents accompanying such application shall be signed,-

(a) in the case of an individual, by the individual himself, or where the individual is absent from India, by the individual concerned or by some person duly authorized by him in this behalf; and where the individual is a minor or is mentally incapacitated from attending to his affairs, by his guardian or by any other person competent to act on his behalf;

(b) in the case of Hindu undivided family, by the Karta of that family and, where the Karta is absent from India or is mentally incapacitated from attending his affairs, by any other adult member of that family;

(c) in the case of company or local authority, by the principal officer thereof authorized by the company or the local authority, as the case may be, for such purpose;

(d) in the case of a firm, by any partner thereof, not being a minor;

(e) in the case of an association, by any member of the association or the principal officer thereof; and

(f) in the case of any other person, by that person or some person competent to act on his behalf.

(3) Every application shall be filed in quadruplicate and shall be accompanied by a fee of two thousand five hundred rupees.

4.Certification of copies of the advance rulings pronounced by the Authority A copy of the advance ruling pronounced by the Authority for Advance Rulings and duly signed by the Members to be sent to each of the applicant and to the Commissioner of Central Excise, under sub-section (7) of section 23D of the Act shall be certified to be true copy of its original by the Commissioner, Authority for Advance Rulings, or any other officer duly authorized by the Commissioner, Authority for Advance Rulings, as the case may be.

FORM- AAR (CE-I)

[Application for Advance Ruling (Central Excise)]

(See rule 3 of the Central Excise (Advance Rulings) Rules, 2002)

BEFORE THE AUTHORITY FOR ADVANCE RULINGS

(CENTRAL EXCISE, CUSTOMS AND SERVICE TAX)

NEW DELHI

(Form of application for seeking Advance Ruling under section 23C of the Central Excise Act,1944)

Application No.of.

1. Details of Applicant  
  (i) Full name  
(ii) Complete address  
(iii) Telephone number( with STD/ISD code)  
(iv) Fax number (with STD/ISD code)  
(v) E-mail address  
(vi) Postal address ( to be provided if different from (ii) above)  
2. Status of the Applicant(Tick whichever is applicable)  
i. (i) a non-resident setting up a joint venture in India in collaboration with,-  
ii. (a) a non-resident; or  
iii. (b) with a resident;  
iv. (ii) a resident setting up a joint venture in India in collaboration with a non-resident;  
v. (iii) a wholly owned subsidiary Indian company, of which the holding company is a foreign company;  
vi. (iv) a joint venture in India;  
  viii. (v) a resident falling within any such class or category of persons, as the Central Government may, by notification in the Official Gazette, specify in this behalf(mention notification number).  
3. Basis for claim as a proposed joint venture [ref. 2(i) & (ii) above] (furnish copy of following).  
  (a) Memorandum of Understanding; or  
  (b) Letter of Intent; or  
  (c) Articles of Association etc.; or  
  (d) Any other document.  
4. Details of proposed joint venture  
  (i) Full name  
  (ii) Complete address  
  (iii) Telephone number( with STD/ISD code)  
  (iv) Fax number (with STD/ISD code)  
  (v) E-mail address  
  (vi) Postal address( to be filled if different from (ii) above)  
5. Details of resident/non-resident party other than the applicant forming the Joint Venture  
  (i) Full name  
  (ii) Complete address  
  (iii) Telephone number( with STD/ISD code)  
  (iv) Fax number (with STD/ISD code)  
  (v) E-mail address  
  (vi) Postal address( to be filled if different from (ii) above)  
6. In case of a wholly owned Indian Subsidiary Company furnish the following details:-  
A. (i) Name of Foreign holding company  
(ii) Complete address  
(iii) Telephone number( with STD/ISD code)  
(iv) Fax number (with STD/ISD code)  
(v) E-mail address  
(vi) Postal address ( to be provided if different from (ii) above)  
B. Percentage of Foreign holding in the Indian Subsidiary Company.  
7. In case of a joint venture [ref. 2(iv) above]  
  (i) The persons forming the joint venture/ constitution of joint venture.  
  (ii) Status of constituent persons, i.e. resident/non-resident.  
  (iii) Existing activities if any.  
8. Nature of activity proposed to be undertaken.  
9. Present status of activity.  
10. Registration number of the applicant as mentioned at serial number 1 under rule 9 of the Central Excise Rules, 2002 (if any).  
11. Permanent Account Number (Income Tax) of the applicant (if any).  
12. Question of Law or fact on which Advance Ruling required (Tick whichever is applicable and provide details against ticked item):-  
  (i) classification of goods under the Central Excise Tariff Act, 1985( 5 of 1986);  
  (ii) applicability of a notification issued under sub-section (1) of section 5A of the Central Excise Act,1944, having a bearing on the rate of duty;  
  (iii) the principles to be adopted for the purposes of determination of value of the goods under the provisions of this Act;  
  (iv) notifications issued, in respect of duties of excise under the Central Excise Act,1944, the Central Excise Tariff Act, 1985 and any duty chargeable under any other law for the time being in force in the same manner as duty of excise leviable under this Act;  
  (v) admissibility of credit of excise duty paid or deemed to have been paid on the goods in or in relation to the manufacture of the excisable goods (CENVAT);  
  (vi) determination of liability to pay duties of excise under this Act.  
13. Statement of relevant facts having a bearing on the question(s) raised.  
14. Statement containing the applicants interpretation of law and/or facts, as the case may be, in respect of the aforesaid question(s) (i.e. applicants view point and submissions on issues on which the advance ruling is sought).  
15. Whether the question(s) raised is pending in the applicants case before any officer of Central Excise, Appellate Tribunal or any Court of Law? If so, provide details.  
16. Whether a similar matter as raised in the question(s) by the applicant has already been decided by the Appellate Tribunal or any Court?  
17. Concerned Commissioner(s) of Central Excise having jurisdiction in respect of the question referred at serial number 12.  
18. List of documents/statement attached, (attach the list on a separate sheet, if necessary.  
19. Particulars of account payee demand draft enclosed with the application  

 

(Applicants signature)

VERIFICATION

I, ____________________ (name in full and in block letters), son/daughter/wife of ___________________ do hereby solemnly declare that to the best of my knowledge and belief what is stated above and in the annexure(s), including the documents are correct. I am making this application in my capacity as ___________________ (designation) and that I am competent to make this application and verify it.

  1. I also declare that the question (s) on which the advance ruling is sought is/are not pending in my case before any Central Excise Authority, Appellate Tribunal or any Court.
  2. Verified this.day..of.200 at .

(Applicants signature)

ANNEXURE I

Statement of the relevant facts having a bearing on the question(s) on which the advance ruling is required

Place ..

Date

(Applicants signature)

ANNEXURE II

Statement containing the applicant”s interpretation of law and/or facts, as the case may be, in respect of the questions(s) on which advance ruling is required

Place ..

Date

(Applicants signature)

Notes:

1. The application must be filled in English or Hindi, in quadruplicate.
2. The application must be accompanied by an account payee demand draft of Indian Rupees two thousand five hundred drawn in favour of Authority for Advance Rulings(Central Excise, Customs & Service Tax), payable at New Delhi. Particulars of the draft should be entered in the column pertaining to item number 19.
3. The number and year of receipt of the application will be filled in by the office of the Authority for Advance Rulings.
4. If the space provided for answering any item in the application is found insufficient, separate sheets may be used for this purpose. Each sheet must be signed at the bottom by the applicant.
5. In reply to item number 2 the applicant must state its status i.e. whether an individual, Hindu undivided family firm, company, firm association of persons, wholly owned subsidiary, Joint Venture or any other person.
6. For item number 5, the reply must be given in the context of the provisions regarding “residence” in India, non resident, Indian Company, and Foreign Company as per the Income Tax Act, 1961(43 of 1961).
7. In reply to item number 9, the applicant must state the present status of the business activity in respect of which advance ruling has been sought i.e. the stage to which it has progressed.
8. Regarding item number 12, the question(s) should be based on the activity proposed to be under taken; hypothetical questions will not be entertained.
9. In respect of item number 13, the applicant must state in detail the relevant facts and also disclose the nature of proposed activity and the likely date and purpose of the proposed activity(s). Relevant facts reflected in document submitted along with the application must be included in the statement of facts and not merely incorporated by reference.
10. For item number 14, the applicant must clearly state his interpretation of law or facts in respect of the question(s) on which the advance ruling is being sought.
11. The application, the verification appended thereto, the Annexures to the application and the statements and documents accompanying the Annexures 1 and 2 must be signed on each page by the applicant.