Wednesday, November 11, 2009

GST from 1.4.2010 - A quick glance

Finally Goods and Service Tax (GST) sees some light of day. A discussion paper has been released yesterday by the Government, and there is a talk of implementing GST from 1.4.2010 (5 months from now, this is a doubtful date but I am sure from 1.4.2011).

What is GST? – it is a combined tax. It means that:

From 1.4.2010 (or 1.4.2011), there will be no Excise Duty, no VAT, no service tax, no additional duty of customs and no countervailing duty in customs (however basic customs duty will stay).

All these taxes will be unified into one tax called “GST”. (Though this seems simple there are some complications like Central GST, State GST, Interstate GST, which I will not elaborate now).

This GST will have impact on raw material prices & pricing to customers.

Rates of GST & some legislation are yet to be pronounced.

Monday, October 19, 2009

Interest Rate, Currency Update

Dated : 19th October, 2009

India

Bank Rate - 6.00%
Repo Rate - 4.75% (Rates at which banks borrow from RBI)
Reverse Repo Rate - 3.25% (Rates at which RBI borrow from banks)
CRR - 5.00%
SLR - 24.00%
PLR - 11% to 12%
Savings Bank Rate - 3.5%
Deposit Rates - 6.5% to 7.75%
Call Rates - 2.0% to 3.30%
182 days Treasury Bills - 4.05%
BSE Sensex - 17195

Major Exchange Rates

INR vs USD - 46.20
INR vs Euro - 68.69
INR vs GBP - 75.55
INR vs SGD - 33.18
INR vs JPY - 0.508

World Interest Rates

JPY - 0.1%
USD - 0.25%
Euro - 1.0%
GBP - 0.5%
AUD - 3.25%
NZD - 2.5%

Outlook

US recovery is seemingly round the corner, but is it true or we are seeing the effects of stimulus package. If it is as a result of the stimulus package then it would be interesting to see what happens when the money’s are being returned to the Government.

As regards US Dollar the currency is still weak and depreciating against major currencies in the world. Indian Rupee will remain strong due to higher foreign exchange reserves and higher foreign currency inflow.

Tuesday, October 13, 2009

Divident Distribution Tax - Section 115O

Dividend is taxable in India under section 115O of the Income tax Act, 1961. Effective rate of Dividend Distribution tax from 1st April 2007 is 16.995% (15% basic rate + 10% surcharge + 2% education cess and 1% higher education cess). This tax cannot be avoided on payment of dividend, even if no income tax is payable by the company on its total income.

This dividend distribution tax (DDT) should be paid within 14 days of declaration of dividend or distribution of dividend or payment of dividend whichever is earlier.

This dividend distribution tax has bigger implications for attraction of foreign investments given that ultimately the effective tax rates on profits work out to 50% considering income tax of 33% and dividend tax of 16.995%. There is a strong case to reduce / remove this DDT if India has to emerge as a major destination for attracting foreign investments.

Outlook on Rupee for the Medium Term of 6 months

During the last 5 years INR has been in a range of 44-46 except for a few patches of 38 in 2008 and above 50 during beginning of 2009. Currently in October it is back again into the familiar territory of 46.

Outlook for INR vs USD looks bullish and would remain in the territory of 44-46 upto March 2010. This view is driven by the fact that India has a strong forex reserve of USD 280.3 billion (for the week ended 2nd October, 2009) and higher dollar inflows from overseas. Further IIP for August showed robust growth of 10.4% and a healthy stock market which has crossed 17,000 points also paints a rosy picture for the currency market. The above factors will weigh down the import demand for Dollars and Dollar recovery overseas due to the talk of end in economic recession in the US. Though there is talk about increase in interest rates in the US, it may not see the light of the day soon, and hence there is a strong case for rupee appreciation or staying put at levels of 44-46 upto March 2010.

Forward Premium is at 0.13% for 1 month (quoting at 46.70) and 1.48% for 6 months (quoting at 47.33) which reflects the sentiment that rupee will be in a short range and there are strong indications of the same appreciating.

Monday, October 12, 2009

Major Interest Rates in India and World

Date : 12th October, 2009 - Monday

India
Bank Rate - 6.00%
Repo Rate - 4.75% (Rates at which banks borrow from RBI)
Reverse Repo Rate - 3.25% (Rates at which RBI borrow from banks)
CRR - 5.00%
SLR - 24.00%
PLR - 11% to 12%
Savings Bank Rate - 3.5%
Deposit Rates - 6.5% to 7.75%
Call Rates - 2.15% to 3.35%
182 days Treasury Bills - 3.8%
BSE Sensex - 16642

Major Exchange Rates
INR vs USD - 46.53
INR vs Euro - 68.50
INR vs GBP - 73.73
INR vs SGD - 33.36
INR vs JPY - 0.517

World Interest Rates
JPY - 0.1%
USD - 0.25%
Euro - 1.0%
GBP - 0.5%
AUD - 3.25%
NZD - 2.5%

Outlook
With the global economy showing signs of revival (or that is what being predicted), time will not be far away to see firming up of interest rates again.

Sunday, July 26, 2009

Changes in TDS rates - Budget 2009-10

In budget 2009 TDS rates are sought to be amended from 1.10.2009

Section 194C – Payment to Subcontractor
1% in case of Individual or HUF & 2% in case of others.

Section 194I – Rent
2% in case of machinery and 10% in case of land or building.

New Section – 206AA
A new section 206AA is being inserted to ensure PAN compliance.

It provides that any person who is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB shall furnish his PAN to the person responsible for deducting such tax.

If there is a failure, then tax has to be deducted at the higher of the following rates:

(i) At the rate specified in the relevant provisions of this Act; or
(ii) At the rate or rates in force; or
(iii) At the rate of 20%.

So PAN is being made mandatory independently.

Now the question is on payment to foreign companies for whom TDS may be payable, if they do not have PAN should we deduct TDS at the highest rates? Most of them will not have PAN, so what will be the implications? Should they go in for PAN?

MAT - Minimum Alternate Tax - 115JB Income Tax Act, 1961

Section 115JB of Income Tax Act, 1961 sets out provision for calculation of Minimum Alternate tax.

If a company whose tax payable works out to less than 15% (amended in Finance Act, 2009 from 10%) of book profit then the company has to pay tax at 15% of book profit. For example if a company has Rs.100 crores as taxable income and its liability is to pay 33.99% tax (after adding surcharge) which works out to Rs.33.99 crores. However if for this company the book profit is Rs.600 crores and 15% of this Rs.600 crores is Rs.90 crores. Then the company is liable to pay Rs.101.97 crores (effective rate of MAT is 16.95% after adding surcharge and cess on 15%) as income tax and not Rs.33.99 crores.

For purpose of arriving at book profit section 115JB comes out with specific guidelines for addition, and ofcourse creates innumerable complications.

To add to these set of complications in this budget of 2009-10 a new amendment has been carried out in section 115JB retrospectively from 1.4.2001 (to negate a Supreme court judgement in CIT Vs HCL Comnet Systems and Services Ltd. (2008) 305 ITR409), under which “any amount set aside as a provision for diminution in the value of any asset would also be added back for calculation of book profit” – meaning thereby any provision for bad debts would require to be added back while calculating book profit.

Question which comes to every one’s mind is – why give all the exemptions, and then try to tax companies which avail of these exemptions? Is this efficient tax administration? On top of taxing allowing them to avail credit of this tax for next 10 years when they have actual taxable income more than 15% of book profit!!

Are these value additions!! I have serious doubts as this leads to innumerable interpretations and takes time away from the courts.

Reverse Mortgage

Reverse Mortgage
Reverse mortgage is a model created for securing income for senior citizens, utilizing asset in his possession. The operation of this scheme is quite simple. Senior citizen who is the owner of a house can mortgage his house with a bank and either avail a loan either as a lumpsum amount or deferred payment on a periodic basis (monthly / quarterly / yearly). This amount can be either utilized to pay off old debts or to manage running expenses.

This mortgage amount should be repaid if the senior citizen decides to sell his home. Otherwise on his death the bank will sell this property and recover the mortgage amount. There is an option left with the inheritors of this property, they can settle the mortgage and retain the house

This is an excellent tool for senior citizens to have liquidity as well as retain their asset. However till now this scheme has met with limited success in India, due to lack of awareness and Indian culture of passing on property and not debt to the next generation.

Saturday, July 25, 2009

Appointment of Whole Time / Managing Director

Section 269 of the Companies Act provides for appointment of Whole Time Director.

Section 316 of the Companies act prohibits a person to be Managing or Whole Time Director in more than one company. If he desires to be a Managing Director in another Company then the company should pass a special resolution in the board meeting for such appointment and all directors present in the meeting should provide their consent. At times Central Government by order permint any person to be appointed as Managing Director in more than 2 companies if they are satisfied and it is necessary for the companies proper working to have a common managing director (ie) companies in the same group can have one managing director.

Should I File Return if taxable income below taxable limit

Section 139(1)(b) states that any person having a taxable income to file returns.

Section 139(1)(b) also states that even though a person does not have taxable income but is in possession of any of the following :

1) An immovable property
2) A car
3) A cellular Phone
4) Has travelled to a foreign country on his own expense
5) Has a credit card (not a "add-on" card)
6) is a member of a club whose entrace fees is more than Rs.25000

Should file a return.

So check your stauts and file the return as required by law.

Friday, July 24, 2009

Gift Tax in India - Section 56(2)(vii) of Income Tax Act, 1961

Gift Tax in India a brief run down

History
Gifts were taxed under The Gift tax Act, 1958 which was made in-operational from 1.10.1998. In the finance act 2004 a new section 56(2)(v) was introduced in the Income Tax Act, 1961, under which Gift if they are more than Rs.25,000 are taxable as “Income from Other Sources”. For the period 1.9.2004 to 1.4.2006 this was applicable. From 1.4.2006 Gift worth more than Rs.50,000 were taxed as “Income from Other Sources” under section 56(2)(vi) of The Income Tax Act, 1961.

Features of Gift Tax
  • This provision applies only to individuals and HUF (Hindu Undivided Family) (ie) only these category of assesses need to pay Gift Tax.
  • Gifts from Relatives are 100% exempt – meaning this provision applies only for gifts from non relatives. Relative means :
    o Spouse of the individual;
    o Brother or sister of the individual;
    o Brother or sister of the spouse of the individual;
    o Brother or sister of either of the parents of the individual;
    o Any lineal ascendant or descendant of the individual;
    o Any lineal ascendant or descendant of the spouse of the individual; and
    o Spouse of the person referred to in clauses (ii) to (vi).
  • Gifts received at the time of marriage from a relative or non relative is exempted
  • Gifts received under these special circumstances from non relatives are also exempt. The Special circumstances are as under

    o Gift received under a Will or by way of inheritance;
    o Gift in contemplation of death of the donor;
    o Gift from any local authority;
    o Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C); and
    o Gift from any trust or institution, which is registered as a public charitable trust or institution under Section 12AA.
  • Gifts in kind are exempted upto 1.10.2009 (ie) only gift received in cash was taxed upto 1.10.2009 – from 1.10.2009 a new section has been introduced 56(2)(vii) in The Income Tax Act, 1961 under which the following gifts exceeding value of Rs.50,000 are also taxable

    (i) immovable property being land or building or both;
    (ii) shares and securities;
    (iii) jewellery;
    (iv) archaeological collections;
    (v) drawings;
    (vi) paintings;
    (vii) sculptures; or
    (viii) any work of art;
Now the challenge has commenced, how to value these gifts? So separate valuation rules need to be prescribed. So more work for lawyers and tax payers….

Income Tax Returns - AY 2009-10

Want help to file income tax returns ITR1 & ITR2, a simple and efficient way to do is to log into Economic times website http://economictimes.indiatimes.com/etonlinetaxfile.cms they have a online free software which helps you fill in ITR1 or ITR2 as per your requirement and also allows you to print the forms.

This online form is very user friendly and I can guarantee that you can finish your returns in 30 minutes.

Please have a try "Happy Income tax Returns!!"

Section 26A of Customs Act, 1962 – Refund of Import Customs Duty on Defective imported goods

Chapter IV of Finance (No.2) Bill, 2009 has proposed a new section 26A in The Customs Act, 1962. This new amendment proposes to refund the import customs duty on rejected imported goods. Refund of import duty will be allowed if :

a. the imported goods are found to be defective or not in conformity with the specifications and they should not have been reworked or repaired or used after import
b. the defect / wrong specification should be identified to the satisfaction of the Assistant or Deputy Commissioner of Customs
c. the importer should not claim any drawback on this import
d. the goods should be exported back or destroyed in presence of proper officer or abandoned it at customs within 30 days of approval by Assistant or Deputy Commissioner
e. Application for refund should be made within 6 months of the relevant date (ie) the date on which exported or destroyed or abandoned.


This is a welcome provision, as hitherto the importers were losing the customs duty when they received defective materials.

Special Additional Tax - Uttar Pradesh VAT

Uttar Pradesh State Government in order to augment revenue from VAT has issued a Notification No.K.A.NI-2-1169 dated 29.05.2009 directing payment of a new tax “Special Additional Tax” of 0.5% for Schedule 2 items (VAT 4%) and “Special Additional Tax” of 1% for Schedule 5 items (VAT 12.5%). This “Special Additional Tax” SAT is payable from 1.6.2009 and should be shown separately in the invoice as this SAT is eligible for VAT credit.

Governments are caretakers of people and the society and hence they are the best judges to decide on quantum of revenue required, but when they act with a little or no planning is what affects the business community at large. The notification for the new tax was issued on 29.05.2009 which is a Friday to be implemented from 1.6.2009 which is a Monday.

We being honest tax payers will like to follow all regulations to the last word. But a new tax, a separate line item in the invoice, is it possible to change over the weekend? Further this notification was issued and there was no publicity for the same, we have to come to know from our lawyers? What is the necessity to carry out this amendment with just 2 days lead time? Can not the Government plan ahead or can it not give 1 month notice and commence from 1.7.2009.

These short notice changes leave companies scurrying for changes in their software, working methods. These days with network softwares like SAP it is not easy to change it has its own lead time and cost involved.

Tax authorities please take note of these practical difficulties before changing legislations.

Tuesday, July 7, 2009

Indian Union Budget 2009-10 Significant Changes

1. Personal Income tax rates have gone down by 3% (10% surcharge removed), so tax will be lower by Rs.10,000 per month (GBP 140 per month)

2. Income tax exemption limit increased by Rs.25,000 for senior citizens and by Rs.10,000 for all others

3. Deduction under section 80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with severe disability being raised from the present limit of Rs.75,000 to Rs.1 lakh.

4. No change in corporate tax rates

5. Wealth tax exemption limit increased from Rs.15 lacs to Rs.30 lacs from 1.4.2010

6. Uniform GST (Goods and service tax) will be introduced from 1.4.2010 – so one tax all over India (simplification?)

7. No change in excise or customs duties – so no change in price of products at the moment – some small cosmetic changes (corrections) have been carried out

8. FBT abolished (Fringe Benefit Tax) – but to see from when this has been removed. We have paid advance tax in June – how to get refund?

9. Service tax unchanged – Service tax levied introduced on movement of goods through rail, inland waterways, Legal advice & consultancy (from a firm & not individual practisioners), Cosmetic and Plastic surgeries

10. MAT – Minimum Alternate tax increased from 10% to 15% - there are companies which show profit in the books, but show loss to the taxman – due to various exemptions, these companies are taxed using this MAT. Companies are crying hoarse on this as their tax goes up.

Thursday, July 2, 2009

Remittances to Non Residents - Section 195 - Form 15CB & 15CA

Remittances to Non Residents – Section 195

Vide file No.142/19/20007-IPL Ministry of Finance has issued revised procedures for furnishing information regarding remittances being made to non residents.

This revised procedure comes into effect from 1.7.2009, which states as follows :

Form 15CB – the remitter of funds should get a certificate from an auditor in Form 15CB

Form 15CA – is to be filled in and transmitted electronically in website http://www.tin-nsdl.com/

Form 15CA should contain details as contained in Form 15CB

As soon as form 15CA is transmitted, this form 15CA should be printed, this print out will contain an automatically generated acknowledgement number.

Form 15CA should be signed by the authorized signatory and should be submitted in duplicate along with form 15CB to RBI through authorized dealer (bank)

RBI / Authorised dealer will forward one copy to the income tax Assessing Officer

Instructions for filling up form 15CA & form 15CB are available in website http://www.incometaxindia.gov.in/

Format of Form 15CA & Form 15CB are available in website http://www.tin-nsdl.com/

Tax Reforms - GST Rollout

Union Government as part of providing stimulus to the manufacturing sector reduced excise duty from 14.42% to 10.3% and then subsequently to 8.24%. Whether this has the desired effect on the economy with increased demand due to lower prices of manufacturing products is debatable as there was no substantial changes in economic growth. On the other hand lower excise duty has affected revenue of the Central government as lower collections on excise front has increased fiscal deficit for the year. With union budget around the corner on 6th of July there is lot of talk on increasing excise duties again. I do not think this increase in excise duty will affect manufacturing industries as price increase due to increase in excise duty will not have a negative effect on demand and consumption as this will be quite marginal to an effect of 2% to 4%.

The challenge facing manufacturing industry due to these frequent tax changes is changes in their software handling billing, accounting, legal compliance etc. There will be a huge transactional cost on this front and this again will have to be passed on to the consumers.

Last month the UP government introduced a new component in their VAT tax called SAT of 0.5% over and above the VAT rates. This needed immediate change in software of all manufacdturing companies, again added to costs.

Urgent need of today is not tinkering with tax rates but tax reforms in a large scale like immediate implementation of GST so that tax management is simple and cost efficient for corporates and they do not pass on this cost to consumers.

Tax Reforms will bring down costs and not Tax Tinkering.

Wednesday, July 1, 2009

New TDS Changes Notification 31/2009

Government of India, Ministry of Finance, issued Notification No.31/2009 dated 25.3.2009 amending provisions of Rules 30, 31, 31A and 31AA of the Income tax Rules, 1962. The salient features of this notification are as follows.

1. Electronic payment of tax is compulsory. Online payment through RBI or SBI or any authorised bank allowed. Debit and Credit card payment also allowed.
2. A new Form 17 has been notified (instead of the earlier form No.281). This form has among other things space for a “UTN” (Unique Transaction number) which is generated automatically for every TDS deduction online. This UTN has to be mentioned in form 16 or 16A to claim deduction
3. TDS certificates should be issued in the new notified form 16 or form 16A (as required). The new notified forms have space for “UTN” and this number is compulsory to be mentioned in form 16 / form 16A
4. A new TDS compliance statement in 24C should be filed quarterly, 15th July, 15th October, 15th January and 15th June for the quarter ending March 31st.
5. Statements in form 24Q (Salary), 27Q (Foreigners), 27Q (all other TDS) should hereinafter filed annually on or before 15th July following the financial year

Effective Date of this notification was earlier set at 1.4.2009 which was postponed to 1.7.2009. However Press Release dated 30.06.2009 has postponed indefinitely operation of this notification.

Thursday, June 25, 2009

TDS on overseas Salary - Eli Lilly & Company case law

Multinationals depute their employees into India to exclusively provide service (work) for the Indian enterprise. These employees (foreign nationals) so deputed to India will be paid part of the salary in India (INR) and partly in their home country (Foreign currency). The salary which is paid in India is usually paid by the Indian enterprise in Indian Rupees and TDS is deducted on the same. The foreign portion of the salary is paid by the parent company in foreign currency directly to the foreign employee. As the foreign employee deputed in India does service exclusively for India and by virtue of his employment spends most of his time in India and thereby reaching the status of “Resident and Ordinarily resident” he pays advance tax on the portion of the salary earned by him in the foreign country.

Now, in a landmark judgement the supreme court in Commissioner of Income-tax, New Delhi vs. M/s Eli Lilly & Company (India) Pvt. Ltd [Civil Appeal No. 5114 / 2007 – Supreme Court] has held that, the salary paid by the foreign company is for services to be rendered in India and no work was performed for the foreign company. Therefore the Indian company is liable to deduct tax at source on the overseas income.

This judgement in short, requires the Indian company to deduct tax at source and pay monthly (as done for the Indian salary portion) on foreign incomes of employees deputed in India for performing services to the Indian company.

Tuesday, June 23, 2009

Effective Service Tax Rates in India

Effective Service tax rates (including surcharge) in India are as follows.


Effective ST Rates Effective Dates

5% - 16.08.2002 to 13.05.2003
10% - 14.05.2003 to 09.09.2004
10.20% - 10.09.2004 to 17.04.2006
12.24% - 18.04.2006 to 10.05.2007
12.36% - 11.05.2007 to 23.02.2009
10.30% - 24.02.2009 onwards

Monday, June 22, 2009

AS11 Amendment and implications on Corporates and Accounting

Ministry of Corporate Affairs (Central Government) under recommendation of National Advisory Committee on Accounting Standards (NACAS) amended AS11 as per powers vested on it in Section 642(1) & Section 211(3c) of the companies Act, 1956, on 31st March, 2009. The crux of the amendment is as follows, if a foreign currency monetary item (borrowing) is long term (ie) more than 12 months.

1) for Accounting period commencing from 7.12.2006 and ending with 31.03.2011 at the option of the enterprise, the enterprise can account for "Unreal" exchange gain or loss of the foreign currency monetary item at the balance sheet date (statement of financial position) in the manner set out in below

a) if the foreign currency monetary item is acquired for purchase of a depreciable capital asset then the "unreal" loss or gain accrued due to flucuation in forex rates will be capitalised along with the depreciable capital asset. The amount so capitalised should be amortised over the life time of the asset or before 31st March 2011, whichever is earlier

b) if the foreign currency monetary item is acquired for any other purpose like "Working Capital" etc then the "unreal" loss or gain accrued due to fluctuation in forex rates will be accumulated in a specific account named "Foreign Currency Monetary item Translation Difference Account" The amount so accumulated should be amortised over the life time of the foreign currency monetary item or before 31st March 2011, whichever is earlier.


This is a retrospective amendment from 7.12.2006, hence all “unreal exchange losses” booked on foreign currency monetary items prior to 7.12.206 should be treated as per clause (a) and (b) above. Changes in prior period profits due to this should be adjusted in the current year in the retained earnings. These changes should be amortised over the life time of the foreign currency monetary item or before 31st March 20011.

Impact for Enterprises
Enterprises through this amendment are being insulated from the sharp depreciation of the Rupee, which was at levels of 40.55 in June 2007, 42.8 in June 2008 and currently at levels of 48.20 against the US Dollar, this is a sharp drop of 19% since 2007 and 13% since 2008. This depreciation of Rupee was pushing up the cost of foreign currency monetary item (as repayments are more in Indian Rupee terms) impacting profitablity of the enterprises significantly. Through this amendment the Government intends to spread the impact of currency depreciation over a number of years rather than taking a hit or profit in a single year and thereby enabling enterprises to show better profit and earnings per share.
As per this amendment, impact of currency flucutions will be removed from the profit and loss account and hit directly in the networth of the company for the period prior to the current accounting year (from 17.12.2006 till 31.12.2008), and for the current year (2008-09 onwards) the impact will be spread over till 2011 and thereby improving profitability and earnings per share (stimulus to the stock market?).

For example if for the year 2006-07 unreal currency loss accounted in the books was Rs.1 crore and for the year 2007-08 it was Rs.2 crores, and for the year 2008-09 it was estimated to be Rs.1.5 crores, the accounting entry will be as follows (if the foreign currency monetary item is towards other than purchase of capital asset).

Dr. Foreign Currency Monetary item Translation Difference Account - Rs.3crores
Cr. Retained Earnings -Rs.3crores
(Being the currency loss for the prior periods of 2006-07 & 2007-08 adjusted in retained earnings)

Dr. Foreign Currency Monetary item Translation Difference Account -Rs.1.5crores
Cr. Exchange Loss -Rs.1.5crores
(Being the currency loss for the current period transferred to translation difference account as per amendment to AS11)

If in the above example if the foreign currency monetary item is towards purchase of a capital asset then the entry would be :

Dr. Fixed Assets - Rs.3crores
Cr. Retained Earnings - Rs.3crores
(Being the currency loss for the prior periods of 2006-07 & 2007-08 capitalised and adjusted in retained earnings)

Dr. Fixed Assets - Rs.1.5crores
Cr. Exchange Loss - Rs.1.5crores
(Being the currency loss for the current period transferred & capitalized to fixed assets as per amendment to AS11)

Disclosure in financial statements


ASB of ICAI has issued guidelines for disclosure of the amendments to AS11. ASB recommends that the “Foreign currency monetary item translation difference account” should be shown as a line item in the balance sheet (treatment similar to deferred tax). In case of debit balance should be shown under “investments” and if credit balance should be shown after the item “unsecured loans” as a separate line item.

Sunday, April 12, 2009

Gross Margin - The warning message - Part II

Gross Margin analysis becomes vital for every organisation as it helps us to track activities across various spectrum of the organisation. Movement / Changes in Gross Margin occur mainly due to :

  1. Change in Raw Material / Packing Material purchase price
  2. Change in rates of Sub-contractors who helps company to sub-contract certain manufacturing process
  3. Change in manufacturing costs - direct overheads
  4. Change in Selling price
  5. Change in product mix when compared to previous period
  6. Change in customer mix when compared to previous period
  7. Change in logistics costs for both inward rawmaterials and outward finished goods
  8. Abnormal activities in purchasing like "Air-Freight", "One off purchase at high cost", "purchase of alternative material at high cost due to non-availability"
  9. Abnormal activities in manufacturing like "Higher operation costs due to power cuts", "lower yield duirng the month"
  10. Abnormal activities in sales like "one-off quantity discount to a customer", "offer price to a large volume customer", "non moving sales"
  11. Abnormal cases where management takes a strategic decision on either a particular raw material or production process or particular customer at a different price structure
In Short, Gross Margin analysis runs through the entire length and breath of the organisation, it tracks movements in purchasing, sub-contracting, manufacturing, logistical points, sales point & management decisions. If an accountant tracks the gross margin movement of products he will have on his palm top data on all the activities of the organisation, with which reports can be generated so that decisions can be taken on them.
Gross margin analysis is the fulcrum which helps an accountant to provide management with vital details about profitability and hence is a very important and indispensible tool.

Thursday, April 2, 2009

Gross Margin - the warning message

Gross Margin is an excellent yard stick of business and its mirrors the effectiveness of the management team. Gross Margin is the difference between the selling price and cost of the of the product (before fixed expenses). The brute message is keep pusing up the selling price while keeping your direct raw material and direct fixed costs (selling & manufacturing costs) at the lowest possible. If gross margins drop then alarm bells should start ringing and action should be immediately initiated either to correct selling price or reduce direct fixed costs. Failure to act with determination and speed will lead to erosion of profits and in the long run losses. Sales people will resist increase in selling prices and purchase people will resist brining down prices from vendors as it means lot of extra work for them, but we accountants being the watchdog of groos margins should keep on shouting from the roof top to both sales & purchase so that gross margins do not slip away to dangerous levels. Usually in most of the manufacturing companies gross margins are sacrificed when considering higher sales at lower costs this will have a ripple effect when there is a bad patch in sales like in the period from 3rd Quarter of 2008 to till date in 2009. Now sales have dropped significantly and if gross margin is also low nothing can be done about it at the moment and there will be a double effect of lower sales and lower gross margin meaning thereby lower profits and higher related problems - including problems in cashflow.

I would equate gross margin to the way ants save for their winter. Let us keep gross margin levels even in goods years and do not sacrifice the same for sake of sales. Gross margin is within our control, whereas sales may not be within our control as there are many external factors.

TamilNadu VAT G.O Ms.No.35 dt.30.03.2009

As per the GO issued by the TN Government - VAT if paid through electronic mode there are extra 2 days for filing of monthly returns.