Taxation in India

IFAC President Bob Bunting on IFRS Adoption

2010-04-01T13:11:00.003+05:30

IFAC President Bob Bunting: "IFRS Adoption Is Necessary to Keep U.S. Businesses Competitive"

By CALEB NEWQUIST

Image source: IFAC

International Financial Reporting Standards (IFRS) will continue to be more prevalent in the accounting landscape. Regardless of the SEC's strategy of procrastination, it is the opinion of many that it's a matter of "when" the standards will ultimately be adopted by public companies in the United States, not "if."

There are many questions that accountants have related to this important issue. Accordingly, we're opening a dialogue with experts of all opinions about IFRS so that you may be better prepared for this monumental development in financial reporting.

Bob Bunting is the President of the International Federation of Accountants (IFAC). Mr Bunting is former Chairman of the AICPA Board of Directors and the former Chairman and CEO of Moss Adams, serving in that role from 1982 to 2004. He currently serves as the lead partner for Moss Adams' International Services Group.

Do you support the adoption of International Financial Reporting Standards in the United States? Please explain why or why not.

We definitely support the ultimate adoption of IFRS for publicly listed companies in the United States. Our principal trading partners, including Europe, Canada, China, India, Brazil, and Mexico, have already either adopted IFRS or are well on their way to a mandatory adoption date. Most U.S. public companies have at least some exposure to foreign markets and will have to grapple with IFRS even if it's not the U.S. standard. The cost of conversion to IFRS in the United States will pale in comparison to the long-term costs of dealing with a dominant world standard (IFRS) for out-of-country reporting and having to maintain U.S. GAAP systems and reports for U.S.-only reporting.

What's the most common argument you hear against IFRS?

There are a number of myths associated with IFRS. One is that it's a "foreign" standard. In fact, the United States has been a dominant force in the International Accounting Standards Board (IASB) from its inception, and the convergence process between the IASB and the U.S. FASB has profoundly affected the shape and direction of IFRS for many years. Another complaint is that IFRS might not be "robust" enough for the U.S. market. This comes in part from the fact that IFRS is principles-based and U.S. GAAP is rules-based. Codified U.S. GAAP runs approximately 17,000 pages of text because of its rules orientation, whereas IFRS runs fewer than 3,000 pages. Since the FASB and IASB have been on a path to converging the two standards for more than six years, it's hard to argue that one standard is more robust than the other.

If I'm a client that is skeptical of IFRS how do you convince me that A) it's the best thing for my company from a financial reporting perspective and B) it's the best thing for my company from a cost perspective?

IFRS may not be the best near-term option for a purely domestic U.S.-based company. However, companies with substantial international footprints have found that the cost of operating under two standards is far greater than operating under one. This cost will seem increasingly burdensome if the United States becomes the only country in the world not using IFRS.

Does it make a difference if the United States follows one set of rules and the rest of the world follows another set of rules?

It could make a huge difference, as the U.S. banking industry discovered in the early stages of the financial crisis. A good illustration of this is the debate over fair value. Multinational companies compete for capital globally. If U.S. and international standards require different approaches to fair value, it's highly likely that either U.S. companies or their foreign competitors may find that their respective financial performance looks better or worse under one set of standards than the other. Companies reporting under the more attractive standard may report better results. In extreme cases those results could be the difference between apparent success and technical violation of lending covenants or even bankruptcy.

It's a big challenge for accounting professionals to keep up with the rules that they currently follow. Is it reasonable to expect them to prepare for a switch to standards that will drastically change their methods?

We recognize that many accountants might be tempted to make this argument. However, as capital, trade, and even small companies become more global, an ever-larger portion of the accounting profession has been forced to learn at least two standards (IFRS and U.S. GAAP). This large and growing portion of the accounting workforce recognizes that one standard is a lot easier to keep up with than two. As IFRS grows in its dominance—and make no mistake, it's overwhelmingly the dominant standard—U.S. accountants run the risk of having their skills marginalized and their job prospects limited by their desire to avoid change.

Only a small number of colleges and universities are implementing international rules and standards in their curriculum. How will higher ed catch up?

I visit with many U.S. accounting professors in my role as president of IFAC. Virtually all that I have met with are introducing IFRS content in their accounting curriculum. Most seem to accept that IFRS is an eventual certainty, and they would love to have better guidance from the regulators so that they can plan for transition better. Additionally, financial reporting is only one part of an accounting education. Integrating IFRS into a curriculum should involve three or four classes out of dozens that accounting students are required to take.

How would you respond to the argument that the only people that will benefit from the conversion to IFRS are the partners in large public accounting firms?

While adoption of IFRS in the United States will create new revenues for some accounting firms, they won't be the principal beneficiaries. I'm pretty sure that the SEC commissioners did not confirm the IFRS road map to enrich accountants of any stripe. IFRS adoption is ultimately necessary to keep U.S. businesses competitive in the global contest for capital and investors. U.S.-based multinational companies have been strong supporters of IFRS adoption as a means of reducing their financial reporting costs and ensuring a level playing field with their foreign competitors. This ultimately benefits U.S. investors, and this is whom the SEC commissioners are charged with protecting.

The SEC remains cautious with regard to IFRS. What is your reaction to their recent announcement?

The SEC is charged with protecting U.S. investor interests. They've expressed concern about the lack of investor input during the comment period following the original publication of the road map. They've committed to gathering further input from investors as part of the new work plan. The fact that the commissioners recommitted to the road map, with some changes, suggests that they think adoption of IFRS is more likely than not to be in investors' best interests. It seems prudent to be cautious and seek more input, but we doubt that the outcome of this process will do much to change the commissioners' decision

Source: goingconcern.com

10% SERVICE TAX ON RAIL FREIGHT DEFERRED TILL JULY 1

2010-03-31T15:48:00.000+05:30

10% SERVICE TAX ON RAIL FREIGHT DEFERRED TILL JULY 1

The finance ministry today decided to defer the levy of 10 per cent service tax on railway freight by three months. The levy had to come into effect from April 1. It would now be in force from July 1. "Service tax on railway freight has been deferred till July 1 because inflation rate has not come down to the desired level. Prices of items like coal, cement and steel may go up further if a tax is levied on their transportation by the railways. This may fuel inflation," a senior finance ministry official, who did not wish to be identified, told Business Standard. The wholesale price based inflation stood at a 15-month high of 9.89 per cent in February. The official added the finance ministry would review the situation in June and decide whether the conditions were favourable to levy the tax.

The railways had last week raised freight rate on iron ore meant for exports by Rs 300 a tonne. In Budget 2009-10 as well, the government had proposed a 10 per cent service tax on goods carried by the railways to provide a level-playing field to transport of goods by road. However, it exempted rail freight from service tax in September 2009. In Budget 2010-11, Finance Minister Pranab Mukherjee announced that the exemption from service tax would be withdrawn. The service tax, however, attracted an abatement of 70 per cent of the gross value of freight charged on goods (other than exempted goods). This translated to a tax on only 30 per cent of the value of transported goods. The move to defer the levy of tax came after Railway Minister Mamata Banerjee put pressure on the government to waive off service tax as it had done in the previous year. Rail ministry officials had also written to the finance ministry seeking withdrawal of service tax on rail freight. "New projects need Rs 80,000 crore. There are pending projects. If there is service tax, it will be very difficult to implement them… It will be difficult to go for new lines. The Budget has levied Rs 6,000 crore as service tax," Banerjee had told Parliament during Question Hour recently.

– www.business-standard.com

IFRS - The Road Ahead

2010-03-27T18:35:00.002+05:30

IFRS – THE ROAD AHEAD

By Jameskutty Antony FCA, DISA, CISA

Introduction

The financial reporting in India is formulated based on the accounting standards issued by the Institute of Chartered Accountants of India. The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonize the diverse accounting policies and practices in use in India. After the much debated adoption of liberalization and globalization as the corner stone‘s of Indian economic policies in early 90’s and the growing concern about the need of effective corporate governance of late, the Accounting Standards have increasingly assumed importance.

While formulating accounting standards, the ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country. The ASB has also given due consideration, while formulating the Accounting Standards, to the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS), to the extent possible, considering the conditions and practices prevailing in India.

ICAI has issued 32 Accounting Standards so far. These Standards are mandatory in nature and has also been recognized by Section 211 (3C) of the Companies Act, 1956. The mandatory status forces the business entities to adhere to these standards vis-à-vis the accounting and disclosure of financial information. The auditors are also required to give adequate disclosure in their audit report, if there is any deviation from standards by the auditee.

Why IFRS?

With globalisaiton and the foreign direct investment in India and foreign investments by Indians abroad, the concept of ‘open economy’ has come into being. Movement of capital and investment from one country to another has become a common phenomenon. So the question of ‘readability’ or compatibility across two financial statements prepared two different countries has become more significant, in the recent days. Thus arose the need for a financial reporting language which can be universally read and understood.

The use of international financial reporting standards (IFRS) as a universal financial reporting language is gaining momentum across the globe. Over a 100 countries in the European Union, Africa, West Asia and Asia-Pacific regions either require or permit the use of IFRS.

Most of the Europe adopted IFRS in 2005. India and Canada plan to converge in 2011, Brazil in 2010 and USA in 2014

IFRS – A bane or a boon?

Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be rewarding. There are different opinions on whether Indian corporates are likely to reap significant benefits from adopting IFRS. The European Union’s experience highlights many perceived benefits as a result of adopting IFRS.

The areas such as corporate governance, revenue recognition, use of financial statements, budgeting, management reporting etc. is going to witness a sea-change, on the adoption of IFRS.

IFRS assists in cross border transactions and with business spread across geographies as consistency can be achieved in financial statements.

Following are some of the benefits perceived for companies converging to IFRS, in the Indian context:

For multinational companies, it will be easier to prepare accounts according to IFRS especially if subsidiaries or branches are located in countries which have adopted IFRS.

Companies can obtain easy and cheap finance from the international markets if they have prepared their accounts based on IFRS as IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe. US Securities and Exchange Commission (SEC) recently permitted foreign companies listed in the US to present financial statements in accordance with IFRS. This means that such companies will not be required to prepare separate financial statements under Generally Accepted Accounting Principles in the US (US GAAP). Therefore, Indian companies who are listed in the US or who are planning to tap the investment market in US would benefit from having to prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and compliance costs

The financial statements of all the companies in countries adopting IFRS will be comparable. This will result in more transparent financial reporting of a company’s activities which will benefit investors, customers and other key stakeholders in India and overseas.

The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements. This, in turn, will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements.

However, there may be a few drawbacks; some companies may face certain setbacks such as disruption in the day to day business, shortage of accounting professionals who are trained in IFRS etc. In addition, IFRS will probably affect tax accounting and reporting in terms of deferred taxation, tax filing etc.

So, what is different in IFRS?

One of the major differences between IFRS and Indian GAAP is that the IFRS lays more emphasis on the balance-sheet disclosures than the profit & loss account.

IFRS is a new concept that in many cases is vastly different from the manner in which it treats the accounting of items in a company’s profit and loss account and the balance sheet. Since some of these reporting standards are market sensitive, they sometimes have material impact on reported results which could lead to stock price volatility. The impact is also on the tax and operating structures, which could alter once IFRS comes into place.

IFRS carries a “Global Approach” compared to the “Indian Approach” of Indian GAAP. It is based on ‘Fair Value Accounting’ rather than ‘Historical Cost’ Accounting’. It is more concerned about the ‘Group of Entities’ rather than the ‘Individual or stand alone entities’.

It follows the concepts of Substance Over Form, Principles Over Rules And The Entity Over Company.

Convergence to IFRS – Major Issues

It will be a grave mistake to presume convergence as a mere technical accounting exercise.

But the biggest challenge in convergence with IFRS is that our chartered accountants and finance professionals will have to unlearn all that they have spent the past 20-30 years practicing. This puts a big emphasis on training.

Surprisingly, the stakeholders have given the tax impact of conversion of Indian GAAP financial statements to IFRS financial statements little or no importance. Conversion to IFRS could have a significant impact on all aspects of the tax lifecycle - tax planning, provisioning, tax compliance and litigation. It could also have a combined impact on various accounting policies and change the way accounting income is determined. This, in turn, would alter the face of the balance sheet.

The most important area where corporates would be locking horns with the taxmen will be the fair value accounting is that it gives rise to the recognition of unrealised profits and losses. The difficulty for companies would arise when unrealised profits & losses on account of fair value accounting are brought to tax without the company having the cash to pay for it.

For instance, real estate companies would have to take a re-look at their construction agreements for the purposes of revenue recognition. Under IFRS, a company would be able to recognise revenue with reference to stage of completion, if and only if, the agreement transfers control to the buyer, as well as the significant risks and rewards of the ownership of the work.

The Roadmap to Convergence

The Institute of Chartered Accountants of India (ICAI) has recently a concept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India with effect from April 1, 2011. The Ministry of Corporate Affairs (MCA) issued a press release on 22nd January 2010, detailing the roadmap and the plan of convergence of Indian GAAP to IFRS, confirming the agenda for convergence with IFRS in India by 2011. It is known that there will be two sets of accounting standards under Section 211 (3C) of the Companies Act, 1956.

The agenda for convergence is made in a phased manner as below:

Applicable to entities	Form
§ NIFTY Companies § SENSEX Companies § Companies whose securities are listed outside India § Entities with Net Worth is more than Rs.1000 Crores [Companies (private or public) or other entities – whether listed or not]	Opening Balance Sheet as at 1st-April-2011 [Financial Year 2011-12]
§ Entities with Net Worth is more than Rs.1000 Crores [Companies (private or public) or other entities – whether listed or not]	Opening Balance Sheet as at 1st-April-2013 [Financial Year 2013-124]
§ All listed companies § Specified SME’s*	Opening Balance Sheet as at 1st-April-2014 [Financial Year 2014-15]

* There will be a separate set of IFRS for SME’s.

Separate road map will be notified for Banks and Insurance Companies. However, there is no clarity yet as to the applicability of IFRS to NBFC’s.

Applicable IFRS’s

There are 8 International Financial Reporting Standards (IFRS) and 29 International Accounting Standards (IAS) which are collectively called the IFRS in common parlance.

The list of IFRS is as follows:

1. IFRS 1: First time adoption of IFRS

2. IFRS 2: Share based Payment

3. IFRS 3: Business Combinations

4. IFRS 4: Insurance Contracts

5. IFRS 5: Non-current Assets held for Sale and Discontinued Operations

6. IFRS 6: Exploration for and Evaluation of Mineral Resources

7. IFRS 7: Financial Instruments: Disclosures

8. IFRS 8: Operating Segments

The 29 IAS are:

1. IAS 1: Presentation of Financial Statements.

2. IAS 2: Inventories

3. IAS 7: Cash Flow Statements

4. IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

5. IAS 10: Events after the Balance Sheet Date

6. IAS 11: Construction Contracts

7. IAS 12: Income Taxes

8. IAS 14: Segment Reporting

9. IAS 16: Property, Plant and Equipment

10. IAS 17: Leases

11. IAS 18: Revenue

12. IAS 19: Employee Benefits

13. IAS 20: Accounting for Government Grants and Disclosure of Government Assistance

14. IAS 21: The Effects of Changes in Foreign Exchange Rates

15. IAS 23: Borrowing Costs

16. IAS 24: Related Party Disclosures

17. IAS 26: Accounting and Reporting by Retirement Benefit Plans

18. IAS 27: Consolidated Financial Statements

19. IAS 28: Investments in Associates

20. IAS 29: Financial Reporting in Hyperinflationary Economies

21. IAS 31: Interests in Joint Ventures

22. IAS 33: Earnings per Share

23. IAS 34: Interim Financial Reporting

24. IAS 36: Impairment of Assets]

25. IAS 37: Provisions, Contingent Liabilities and Contingent Assets

26. IAS 38: Intangible Assets

27. IAS 39: Financial Instruments: Recognition and Measurement

28. IAS 40: Investment Property

29. IAS 41: Agriculture

Impact of Convergence

The age-old nomenclature of Balance Sheet will give way to “Statement of Financial Position” (SOFP) and the Profit and Loss Account will give way to “Statement of Comprehensive Income” (SOCI).

The ‘Rule Driven’ Indian GAAP and US GAAP will change to the ‘Principle Driven’ IFRS.

As per the Indian GAAP, the concept is of ‘True and Fair’ presentation of the financial statements. But in IFRS the concept is whether the accounts are ‘IFRS compliant’. Henceforth there will not be any qualified audit report or disclaimer of opinion. Audit report has to state that whether the accounts are IFRS complaint or not. The gimmicks

However, major impacts are expected in processes and systems, operations, taxation planning, treasury and forex operations, debt covenants, compensation plans, revenue contracts, joint ventures and alliances and investor communications.

Conclusion

The roll over to IFRS is time and cost consuming and needs extensive planning and detailing. Conversion is much more than a technical accounting issue. IFRS adoption may significantly affect company’s day-to-day operations and may even impact the reported profitability of the business itself. Conversion brings a one-time opportunity to comprehensively reassess financial reporting and take “a clean sheet of paper” approach to financial policies and processes.

In the tax planning front, companies need to start identifying the differences that will arise and consider what the potential tax implications maybe. With the deadline fast approaching , IFRS conversion should be taken as an opportunity to align the tax provisioning and reporting processes.

Correct implementation will ensure that IFRS convergence results in tangible benefits, whereby financial statements prepared using the converged Indian framework are useful to meet all relevant purposes within and outside India.

Visit my blog at www.indiataxes.blogspot.com

2010-03-25T20:57:00.001+05:30

BUDGET 2010

– NEW SERVICE ADDED TO SERVICE TAX –

HEALTH SERVICES

Executive Summary

1. New Service called ‘Health Services’ is brought in by the Finance Bill, 2010. This will be applicable from a date to be notified.

2. This service covers the payment received by a hospital from a business entity in respect of health checkup or preventive care of its employees or payment received by a hospital from a health insurance company in respect of any health checkup or treatment of its clients. The provision will not cover in cases where payments are received from individual patients.

3. Hospital has to collect service tax @ 10.30% on the gross amount received from the business entity or health insurance company and remit to the Government

Legal Provisions

1. The Finance Bill 2010 has introduced a new service called ‘health Services’ into the ambit of Service tax levy by incorporating a Section 65 (105) (zzzzo). As per the said subsection (zzzzo), ‘health services” is defined as ‘any services provided by to be provided by any hospital, nursing home or multi-specialty clinic, -

i) to an employee of any business entity, in relation to health check-up or preventive care, where the payment for such check-up or preventive care is made by such business entity directly to such hospital, nursing home or multi-specialty clinic; or

ii) to a person covered by health insurance scheme, for any health check-up or treatment, where the payment for such health check-up or treatment is made by the insurance company directly to such hospital, nursing home or multi-specialty clinic;

2. Annexure- A to JS (TRU-II) D.O. letter dt. 26-2-2010 by Joint Secretary, TRU-II explains the above provisions as follows:

“2. Health services undertaken by hospitals or medical establishments for the employees of business organizations and health services provided under health insurance schemes offered by insurance companies.

2.1 With the change in the style of functioning of the business organizations, health check up is a routine facility provided by the employers to their employees. The main purpose is to ensure that the productivity of the organization is not adversely affected due to ill health of its employees. Such activities, commonly known as corporate health check up schemes, are undertaken by designated hospitals in order to detect any medical indicator or to ensure timely diagnosis of any disease so that prophylactic measures can be taken. In such cases, the hospital providing these services charge the employer i.e. the business organization and it constitutes expenditure for the latter. In certain cases (for example, in case of flight crew) pre-flight check ups are conducted not only to test the fitness levels but also to rule out the possibility of the flying crew being under intoxication. Such health check up schemes is being brought within the ambit of service tax under the new service.

2.2 A large number of health insurance schemes are being offered by the insurance companies under which charges for hospitalization, surgery, post-surgical nursing etc. are generally paid by the insurance company. Such insurance policies, which fall under the category of general insurance service, are already taxable. Under general insurance service, an insurance company is a service provider to its clients. Under the proposed new service, tax is also being imposed on the medical charges paid by the insurance companies to the hospitals on behalf of a business entity for its employees. As such, the insurance company would be the service receiver and the tax paid by the hospital would be available to the insurance companies as credit.

2.3 The tax on the above mentioned health services would be payable only if and to the extent the payment for such medical check up or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment. Any additional amount paid by the individual (i.e. the employee or the insured, as the case may be) to the hospital would not be subjected to service tax. This is to ensure that an individual is not required to pay a tax for which he cannot take credit.”

3. The term “business entity” has been defined in Section 65(19b) as “business entity” includes an association of persons, body of individuals, company or firm but does not include an individual;

Coverage of patients

4. The new provision covers health checkup and preventive care to employees of business entities and health checkup and treatment of persons covered by a health insurance policy.

5. It may be noted that business entity does not cover central or state government or local authority. Hence the provisions are not applicable to central/state/ local authority employees are involved.

6. If the employee is paying the hospital first and then claims a reimbursement from the business entity or insurance company, it will not attract service tax

7. Any payment made by an employer in respect of any treatment of its employee, directly to the hospital will not be covered under Service Tax. In the case of payments received from employer, any health check up or preventive care alone are covered and not the treatment.

8. Similarly, if the health insurance company pays any sum in respect of any preventive care of the insured, it will not be subjected to Service tax.

Service Provider and Service Receiver

9. From the Finance Act and the explanatory letter cited above, it can be seen that the new services is applicable only when a hospital renders any service to an employee of a business entity and the business entity or insurance company directly pays the amount to the hospital and not the employee. Even if some additional amounts are paid by the individual to the hospital, it would not be subjected to service tax.

10. However, the question arises is, when an insurance company pays for the treatment of an individual covered under a medical insurance scheme, who not an employee of any business entity, whether such payment is covered under service tax? Even though the Annexure- A to JS (TRU-II) D.O. letter dt. 26-2-2010 states that it is applicable to an employee of a business entity, a plain reading of clause (i) of Section 65 (105) (zzzzo) gives the impression that it is applicable to any person covered by a health insurance scheme. In this kind of non-compatibility, the provisions of the Act will have validity.

11. Hence, it is seen that, the new provisions are applicable only in two cases as described below:

Any health checkup or preventive care where the payments for such services are made by such business entity to the hospital in respect of employees of a business entity.

any health check up or treatment, where payment for such services is made by the insurance company to the hospital in respect of any person.

12. Hence it is seen that the Hospital will be the service provider and the business entity whose employees are availing the health services or the insurance company who pays the bill for health services in respect of the insured, will be the service receiver.

13. The following points may be noted:

The service provider is defined as ‘hospital’, ‘nursing home’ or ‘multi-specialty clinic’. However, these terms are not defined under the Act. Hence we have to take the meaning in the common parlance for the same. Moreover, the taxable services provided in any other types of places are not covered under the law.

Various disciplines are applied for rendering health care and treatment services. Service tax will be applicable to all methods including Allopathic, Ayurveda, Homeopathy, Unani, Yoga, Naturopathy, Siddha etc.

Value of Taxable Services and tax rate

14. Service Tax is levied on the value of services rendered. However in the case of health services, generally, there is no practice to identify value of such goods in the bill raised. The amount charged covers both viz. value of goods used and various other services rendered. In view of this, as a result of the proposed provision, value of goods will also be subject to ST indirectly.

15. As the provisions are silent on payments for services other than treatment, like hospitalization, room rent etc, which are included in the bill and is collected from the business entity or insurance company, as the case may be, it will be safer to collect service tax on that amounts also.

16. The hospital has to collect service tax @ 10.30% (10% service tax and 3% Cess) on the gross amount charged on the Business Entity or the Health Insurance Company as the case may be and remit it to the credit of the Central Government on a monthly basis before 5^th of next month. They have to file the half yearly returns in the prescribed format.

17. If the Hospital is not registered with the Service tax Department, the Hospital has to apply for and take registration under Service tax law. If the Hospital is already an assessee, the Hospital has to amend your registration certificate to include the ‘Health Services’ along with your existing services.

Date of application of the Provisions

The above said new provisions has not made effective as on date and will be will come into effect from a date to be notified, after the enactment of Finance Bill, 2010.

Conclusion

18. From the above discussion, the following table gives a probable permutation and combination of the scenarios and its taxability:

Matrix showing applicability of the proposed Service Tax provisions on health care services
Health services rendered by :		hospital, nursing home or multi-specialty clinic
Payment for services by:		Employer (Business Entity)	Health Insurance Companies	Others (e.g. directly by the patient)
*Payment for Employee of*	Type of services covered
Company, Firm, Association of Persons, Body of Individuals	Health Care	Yes	Yes	NA
	Preventive Care	Yes	No	NA
	Treatment	No	Yes	NA
Central / State Government, Local Authorities	Health Care Preventive Care Treatment	NA	NA	NA

19. Hence, from a practical point of view, the Hospital has to collect the following information immediately a patients registers his name at the hospital:

A. If he is an employee of any business entity

i. Whether he is an employee of an entity other than Central / State government or Local Authority

ii. If yes, whether he wants a health checkup or preventive care

iii. if yes, whether the employer will pay the bill directly

iv. If yes, Service Tax will be applicable

B. If he is not an employee of a business entity

i. Whether he is covered by a health insurance scheme

ii. If yes, whether he wants a health checkup or treatment

iii. If yes, whether he wants a ‘cashless facility’

iv. If yes, service tax will be applicable

SAFE KEEPING RECEIPTS

2009-08-12T12:05:00.001+05:30

Safekeeping is where an asset owner elects to place that asset in the care of an Agent, usually a Bank or a Financial Institution and receives an acknowledgement from the Bank as to their "Safekeeping" of that asset. The asset owner may elect to have such an acknowledgement sent to a third party. A fee may be required for these services. The various assets that can be held in such arrangements range from share, stock or bond holdings to Real Estate Titles, and Precious Metals.

Where an acknowledgement is required it is typically referred to as a Safekeeping Receipt.

It is usually a negotiable, bank-issued certificate representing ownership of stock/ securities by an investor outside the country of origin. Eg. An international depository receipt, or IDR, is the non-US equivalent of an American Depository Receipt. These instruments have been used since the 1970's to facilitate international trading in securities. The securities backing the receipt remain in the custody of the issuing bank or a correspondent bank.

A negotiable or non-negotiable bank-issued certificate representing the holding or ownership of an asset, such as art, precious metal, jewelry, mining rights, specific certified rights, everything a bank can hold is also called SKR. In a negotiable form typically issued for cash value market assets, in a no negotiable form for documentary purpose issued without a value assignement, the bank usually certifies what they hold, the terms and conditions of the holding and for whom they are holding, which insurance is covering risks and their own liability towards the beneficiary.

The issuer of a Safekeeping Receipt does not have any financial responsibility for the asset apart from the duty of care in the act of safekeeping. If the owner of the asset, directs that another financial institution be advised of the safekeeping role, and uses such advise to raise a loan against the held asset, it is the responsibility of the asset owner, now borrower, to satisfy all aspects of the debt when required by the lending financial institution.

In the event of default in loan repayment, the holder of the Safekeeping Receipt will request the issuer of the Safekeeping Receipt to forward the held assets to their legal representatives, for them to liquidate the assets. If there is a shortfall after liquidation, the lender will pursue the former asset owner, now borrower for any balance of debt remaining. The institution issuing the Safekeeping Receipt has fulfilled all its obligations by releasing the held documents or goods to the Safekeeping Receipt Holder.

Cannons of Taxation

2008-08-27T22:06:00.003+05:30

Cannons of Taxation

The noted 18th century English economist, Adam Smith, had enunciated the cannons of taxation in his much acclaimed book “An Inquiry into the Nature and Causes of the Wealth of Nations” which was popularly called as “Wealth of Nations”. According to Smith there are four basic cannons of taxation, which are based on the concepts of equality, certainty, convenience and economy.

1. Is should be Equitable – It means equal treatment of similarly situated taxpayers. The equity is horizontal and vertical. Horizontal equity - all purchasers of the same equity pay the same tax. Vertical equity: unequally situated taxpayers being taxed on their ability to pay as per progressive taxation philosophies.

He says: 'The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities that is in proportion to the revenue which they respectively enjoy under the protection of the state.' This canon embodies the principle of equity or justice and lays down the moral foundation of the tax system. 'It is not unreasonable that the rich should contribute to the public expense not only in proportion to their revenue but something more than that proportion,' Smith had written in his Wealth of Nations. Thus, tax should in proportion to the ability to pay.

2. It should be Convenient – a tax should be readily and easily assessed, collected, and administered.

The cannon of convenience states that every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it.

3. It should be Certain – the consistency & stability in the prediction of taxpayers' bills and the amount of revenue collected over time.

The canon of certainty is highlighted in the following statement by Smith: "The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person. Where it is otherwise, every person subject to tax is put, more or less, in the power of tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of each aggravation, some present or perquisite to himself." Certainty is needed not only from the point of view of the tax payer but also from that of state.

4. It should be Economical – compliance and administration of a tax should be minimal in terms of cost.

Finally the cannon of economy dictates that every tax ought to be so contrived as both to take out and to keep out of the pocket of the people as little as possible, over and above what it brings into the public treasury of the state.

He also propagated three additional criteria:

1. Adequacy - a tax should have the ability to produce a sufficient and desired amount of revenue to the taxing authority.

2. Achievement of social and economic effects - the use of taxes to reallocate resources to achieve various specific social and economic objectives.

3. Neutrality - a tax should not encourage inefficient allocation of resources by being so extreme that taxpayers make counterproductive economic decisions.

Some later economists subsequently added a few more canons to Smith's four described above. Among these are: elasticity, flexibility, simplicity and diversity.

If we try to weigh the taxation practices in India in the balance of Adam Smith’s above cannons, we may perhaps see we are moving in the opposite direction of Adam Smith. In India, where rich escape from paying taxes by hook or crook, the les privileged is forced to shoulder the burden of nation building. In many cases, the ability to pay taxes is inversely proportional to the tax they actually pay!

The convenience, consistency, stability, certainty etc. are words unknown to the authorities. Taxation statutes are seemed to be high school laboratories where the mandarins of the south blocks learn the art of ‘Tinkering’.

If you look at the economy, we see crores spend to collect lakhs. On the other side, Government is collecting easy money in the form of taxes like FBT, Dividend Tax etc.

Our ancient Economist and Philosopher “Kautilya” wrote in ‘Arthasasthra’ that the collection of taxes from the people should be like a bee collecting honey from a flower without disturbing the flower.

Wishful thinking in India, isn’t it?

2008-08-24T10:20:00.000+05:30

Rajat Tulli and Rahul Anand of the Delhi-based Happily Unmarried hawks gift goodies across states. They’ve been at it for six years now but still dread the three-letter ‘TAX’ word. And here’s proof—‘Taxes Must Be Simple’—that’s the high-hanging plaque hugging the low-faux ceiling of their Okhla office, with no strings attached.

“Our biggest problem is Form ‘C’, which is issued by the Sales tax Department to all traders that in turn need to be handed over to anyone they buy their stocks from,” says Tulli. “It’s impossible to lay your hand on Form ‘C’ without bribing. Transparency is a joke in the Sales Tax Department,” he smirks. His disdain is valid. Taxation laws in India were meant to be followed, not understood. If you run a small business in India, you probably agree whole-heartedly with the above statement.

For any business, big or small, ensuring tax compliance is a major challenge. Old taxation thresholds have not been revised in decades and wars continued to be waged in court over several conflicting and opaque provisions in the law. Nitin Shingala, managing director, TMF Services India Private Limited puts tax audits on top of his list. “Tax audits are a hassle for professionals and emerging companies today. Under Section 44 of the Income Tax Act, professionals with gross receipts of Rs 10 lakh annually and businesses with gross receipts of Rs 40 lakh annually, have to get a tax audit done every year by a chartered accountant. These limits were fixed in 1994 by the government and have not been revised since, which has resulted in major headaches for the small entrepreneur,” says Shingala. The counter-argument here is that smaller companies aren’t conscientious about maintaining their books of accounts, and compulsory tax audits force them to do so. “But when the Government has embarked on a ‘trust the taxpayer’ regime, is this still relevant?” Shingala questions.

Hiring a foreign architect to landscape your office? You have to contend with our service tax laws. Today, the government has identified over 100 services that are liable to pay ST, which is charged at an effective rate of 12.36%. The biggest complaint here is that there isn’t enough clarity among the services listed, which leads to confusion. Take, for example, a small company that engages the services of a foreign architect to landscape its office. If the architect had been Indian, he would be paying 12.36% as ST to the government. But in case of one who is a foreign resident, the company has to bear the brunt of ST. Not just that, for tax purposes, the company has to register with the Service Tax Authority under the category of ‘Architect’ before making the payment. This is true for most foreign resident professionals hired by Indian companies. Silly? Its true! According to Section 10A of the Income Tax Act, new undertakings in a free trade zone are eligible for various concessions.

The Delhi-based chartered accountant firm Jaikumar Tejwani & Co’s CEO Jaikumar Tejwani says, “However, seeking exemption by the government is a challenge for a manufacturing unit setting up a plant in an SEZ because the government mechanism is still not in place and it’s not easy to derive tax benefits for novice enterprises in an SEZ.” Similarly, there are many issues related to tax deducted at source, fringe benefit tax, dividend distribution tax which make achieving compliance an extremely tricky proposition. Messy compliance rules are not good for any business that is still in the initial growth phase. Wading through the ponderous formalities involved costs valuable time and energy, which would be better invested in the core business. Shingala recalls, “Our firm recently handled compliance for a Singapore-based firm. The rules were so clear that I only had to visit the company a couple of times a month; the rest of it was done by me right here in Mumbai.” Startups that are venture-funded are often handheld through the initial compliance stages. Says Pravin Gandhi, managing partner of Seed Fund, “We need to make sure that there is sufficient awareness about tax issues. If there is no internal expertise in the form of a CFO or legal team, we connect the company to a third party firm that will help them get over tax compliance related challenges.”

It all stems from inadequate or inaccurate domain knowledge of the promoters. “When you’re a startup, you have less domain knowledge owing to inexperience, and tax consultants and authorities exploit this ignorance of newcomers,” contends Anil Bhardwaj, secretary-general of Federation of Indian Micro and Small & Medium Enterprises (Fisme). Take the case of Ranjan Roy of the Rs 6-crore Mumbai-based Aeon Medical. Though he’s been into the business for two years now, he fears the tax framework so much that he goes out of his way to comply with the statutory requirements. “To stay away from trouble, we pay advance tax at the cost of profitability,” he says. And like many others, Aeon is not in a position to afford tax consultants. “The corporate tax rules for large and small companies should be different because their needs and aspirations are different,” he emphasizes.

A small entity has to meet several compliances in the course of its business in India. Some of such compliances are laid out under Income Tax Act, 1961. Now for the law: An entity carrying on business or profession whose total sales, turnover or gross receipts are, or is likely to exceed Rs 5,00,000 in any previous year and who has not been allotted any permanent account number (PAN), is obliged to obtain a PAN. Then, an assessee is liable to withhold taxes at specified rates from specified payments, which it has to make and deposit with the authorities within a prescribed time period. “The entity is required to maintain details regarding name, address and PAN of the payee and issue the certificate for such payments and also file detailed returns periodically about these payments, which take a lot of time and adds to the operating cost of the entity,” says FoxMandal Little’s tax consultant Ajay Gupta. The entity is also required to file an annual income-tax return, along with detailed financial statements and several other annexures. This takes a lot of time to fill up as all the financial figures and other details have to be filled in a prescribed format. Fringe benefits, as outlined in Section 115WB of the Income-tax Act, 1961 (“IT Act”), means any privilege, service, facility or amenity, directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment. They also include reimbursements made by the employer, either directly or indirectly, to the employees for any purpose, contributions by the employer to an approved superannuation fund etc. The employer is liable to pay tax at the rate of 30% on a notional value of 5%, 20 % or 50% of the expenses incurred for the aforesaid purposes. “This tax is actually a hardship on the company as the expenses which could otherwise be claimed as deduction from profits, becomes chargeable to the fringe benefit tax. The entity is also required to maintain a detailed record of these calculations, and at times, the compliance cost is more than the amount of revenue it generates for the government,” says Gupta.

A business, whose total turnover for the accounting year or years relevant to the assessment year exceed Rs 40 lakh, is required to get his accounts compulsorily audited by a chartered accountant. This is in addition to the statutory audit or any other audit that might have been conducted for the company. Besides, availing of credit as such becomes difficult if the credit of services rendered and availed of are in different periods. Service Tax assessees are required to file a half-yearly return in Form ST-3 or ST-3a in triplicate to the Superintendent, Central Excise, dealing with Service Tax work. The return is to be filed within 25 days from the last day of the half-year it relates to and should be accompanied by copies of all T.R.6 challans issued in the half-year. Phew, and if that weren’t enough, assessees filing returns for the first time are also required to furnish to the department a list of all the accounts maintained by them relating to Service Tax. With such hard nettles to grasp, consider the US-returned Yogesh Bansal’s newbie social networking site ApnaCircle.com. A year into the trade, and he’s thrown in the towel bamboozled by the country’s gargantuan tax structure. “Tax laws in India are hazy and the time consumed on tax compliance here creates further barricades to business.” That’s when the flat ornamental tablet with the ‘Taxes Must Be Simple’ message at Happily Unmarried suddenly starts sinking in.

Source: ET

Multipicity of Statutes - a common man's nightmare

2008-08-23T09:40:00.000+05:30

India is known for its cumbersome, complicated and multiple enactments which can be deciphered and interpreted by an expert only. For an ordinary business man who want to set up a small business will find time only to deal with various statutory formalities, rather than doing business. He has to get his company registered, if he go in for a incorporated body structure. Or he has to draft a partnership deed if he enters into a partnership. Then comes the list of statutory formalities to be complied with:

License from local authority
License under Shops & Establishment Act
PAN
TAN, if he is going to deduct tax
IE Code, if he going to import or export
Central Excise Registration, if he is manufacturing something
Service Tax Registration, if he is providing any service out of 100 and odd specified services
VAT Registration
CST Registration
Industrial License
Factories & Boilers Registration
Package Commodities Act - Registration
Standard Weights & Measures Act - Registration and stamping of all measuring apparatuses
License under Prevention of Food Adulteration Act, if you deal in any food items
If you sell any insecticides and pesticides, get a license for that
If you sell any kind of OTC medicines, get a license
PF
ESI
Labour Welfare Fund
Minimum Wages Act
Payment of Gratuity Act
Payment of Bonus Act
Contract Labour Abolition Act
Payment of Wages Act
Maternity Benefits Act
Industrial Establishments (National & Festival Holidays) Act

These are the list of statutes coming into mind. But actual compliance requirements are in fact more. All these statutes require maintenance of specific registers and records, which are in most of the case duplication of work. The same data has to be recorded in more than one registers to satisfy different statutes.

In many cases, still, maintenance of registers in electronic mode is not permitted.

Intricacies and interpretation of individual statutes and resulting confusion and chaos can not be explained here. It has to be experienced!

Over the top of all, the bureaucracy and the inspection raj and related extra legal affairs!

If you want to do business amidst this, even god cannot save you from bankrupsy!

MY FIRST POST

2008-01-26T06:34:00.000+05:30

Hi

I am James Antony, a Chartered Accountant (Certified Public Accountant) from Cochin, India. This blog is dedicated to the discussion on taxation laws in India.

India is known for its cumbersome, complicated and multiple enactments which can be deciphered and interpreted by an expert only. Even experts find it difficult too!

We have in India, there are two types of taxation, mainly. One is Direct Taxes and Indirect Taxes. There can be another classification - Federal taxes and State Taxes.

Direct Taxes

Main taxes coming under direct taxes are Income Tax, Wealth Tax (Federal Taxes) and Agricultural Income Tax ( State Tax)

Indirect Taxes

Under the indirect taxes, there comes Central Excise, Customs, Service Tax (Federal Taxes) and Value Added Tax (State tax).

There are a lot of other taxes also, but the incidence to them are small and hence I am not elaborating on it more.

(Any comments, querries and suggestions welcome)

James Antony FCA