Thursday, October 20, 2011

Providend Fund (PF) Balance through SMS

Employee Providend fund (EPF) is being deducted from employees and is being remitted with PF authorities and the PF authorities provide employees with annual statement slips.

Now this process has been simplified, employees can get their PF balances through SMS.  For this employees can visit


and provide their PF number and in a few minutes they can get their balance in their account through SMS.

However there are couple of catches here :
  1. The company should have filed their monthly / annual returns along with the payments for PF deductions
  2. The PF office should have updated the records
I tried my PF number which is in Tambaram (Tamilnadu) PF office, I got the balance upto 31.03.2010 within 15 mintues through SMS.   The issue here is my company has filed their annual returns upto 2011, whereas the PF office has not updated records upto March 2011. 

But still I feel this is a good initiative and it will be a matter of time before the data will become more uptodate.  I will encourage all of you to check your EPF balances online.

This online checking will ensure that employees monies are safe in the PF account.  I am reminded of the case of "Subshika retail" who has not remitted the PF dues of its employees



Wednesday, October 19, 2011

Tax Accounting Standards (TAS) - India

CBDT - Central Board of Direct Taxes has released a "Discussion paper on Tax Accounting Standards" and has requested comments / suggestions by 11th November, 2011.

Why Tax Accounting Standards

The income tax department is of the view that the accounting standards issued by ICAI are flexible which would enable an assessee to avoid payment of correct income tax.  Hence they felt that they should have seperate Tax Accounting Standards which will be notified under the Income Tax Act which ensures that correct income tax is assessed. 

Does this mean maintenance of two books of accounts

The discussion paper tries to clarify that there is no requirement to maintain two books of accounts.  Books of accounts can be maintained as per Accounting Standards of ICAI, only for purpose of tax calculation the "Tax Accounting Standards" should be referred to.  This means the profits as per books (maintained as per accounting standards of ICAI) and profit as per income tax calculation (Calculated as per Tax Accounting Standards) will be different, hence there needs to be a reconciliation presented in the financial statements between these two.

Conflict between Tax Accounting Standard & Income Tax Act

The discussion paper has expressly provided that in case of confict between Income Tax Act and provisions of Tax Accounting Standard then the provisions of Income Tax Act will apply

Currently Draft Tax Accouting Standards have been issued only for
  1. Construction Contracts
  2. Accounting for Government Grants
We can expect more to come

Full details of this discussion paper can be reached at
http://finmin.nic.in/reports/DiscussionPaper.pdf


Sunday, October 9, 2011

R&D Cess & Service Tax

Notification No.18/2002 dt.16.12.2002 exempts service tax on “Consulting Engineer Service” to the extent of R&D Cess payable under Research & Development Cess Act, 1986

Notification No.17/2004 dt.10.09.2004 exempts service tax on “Intellectual Property Service” to the extent of R&D Cess payable under Research & Development Cess Act, 1986

In both the above cases R&D Cess payable is 5% and hence service tax payable is 5.3% (10.3% - 5%)

There were quiet a number of interpretations as to when this R&D cess is payable in specific reference to service tax liability as payment of R&D cess reduces service tax liability as per the above mentioned notifications.

To put to rest all speculations the following 2 Notifications were issued

1. Notification No.46/2011 dated 19.9.2011 for “Consulting Engineer Service” and

2. Notification No.47/2011 dated 19.9.2011 for “Intellectual Property Service”

As per the above 2 notifications service tax is reduced to the extent of R&D cess only if the following conditions are satisfied.

• R&D Cess is paid within 6 months of booking of invoice

• R&D Cess is paid within 6 months of date of credit in books in case of associated companies

• In any case R&D Cess should be paid before payment for the service

In short R&D Cess has to be paid within 6 months & before payment of service charge to get exemption for service tax.

Import of Services - Payment of Service Tax from 18.4.2006

Section 66A of Finance Act 1994 provides for payment of service tax by recipient of services in case the provider of services is from outside the country and he has no permanent establishment in the country. There was enormous debate about first the constitutional validity of this and also the date of enactment of this Section.

Finally to set rest to all matters the CBEC has issued

SERVICE TAX INSTRUCTION [F. NO. 276/8/2009-CX-8A], DATED 26-9-2011

Which states that the date of enactment of 66A will be 18.4.2006 and not 1.1.2005 as earlier contested vide

F No. 275/7/2010-CX-8A, dated 30-6-2010



Sunday, October 2, 2011

Foreign Direct Investment (FDI) IN TRADING

Chapter 6.1 of Consolidated FDI Circular 2 of 2011 dated 1st October 2011, lists prohibited sectors for FDI, topping the list is

“Retail Trading (except single brand product retailing, where 51% FDI Is allowed)

Clearly no FDI is permitted in Retail trading (B2C) except the exception of single brand product trading. 

Does this mean FDI will not be allowed in trading at all?  The answer is NO.

As per Chapter 6.2.16 - 100% FDI is allowed in

“Cash & Carry Wholesale Trading / Wholesale Trading (including sourcing from Medium & Small Enterprises)”

Cash & Carry Whole Sale Trading / Wholesale trading means:

Sale to Retailers, industrial, commercial or professional business and not to consumers directly, in short All B2B transactions irrespective of the size or volume of sales”.

Salient Features of FDI in Cash & Carry Wholesale trade

1.      Wholesale trade should be made only to buyers who have either
a.      A VAT / Excise registration or
b.      A Trade licence under Shops & Establishments Act or
c.      A Trade licence for carrying out retail trading from Government Authorities or
d.      A certificate of Incorporation as a Trust or Society and materials purchased for their self consumption

2.      It is the responsibility of the FDI Venture to keep all details of the buyers and buyer’s compliance with any one of the points made in point 1 above

3.      Wholesale trade is not permitted among group companies beyond 25% of the total turnover of the FDI venture

4.      Under Wholesale Trade the FDI venture is free to extend credit for his sales subject to applicable regulations, if any

5.      Cannot open retail outlets

6.      Cannot sell to consumers directly only B2B allowed

Conclusion

100% FDI is possible in B2B ventures, 51% FDI is allowed in Single brand retailing

Share Buyback of Less than 10% of a Private Limited Company or Unlisted Public Company & if the shareholder is a Foreign Entity

Buyback of Shares is an elaborate process. The purpose of this article is to provide the steps required for buy back of shares in case of (all conditions cumulative): 
  1. The company is a Private Limited or Unlisted Public Company
  2. Buyback is of less than 10% of Equity shares
  3. The Shareholder is of a foreign national or a foreign company and
  4. The shares are not de-materialized
Relevant Legislations :   
  1. Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999
  2. Companies Act, 1956 – Specifically Section 77A, 77AA & 77B
  3. Income tax Act, 1961
  4. Foreign Exchange Management Act, 1999 (FEMA), rules and regulations thereunder
Company Law Implications

All provisions listed under Section 77A, 77AA & 77B of Companies Act, 1956 should be followed. Also provisions contained in Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999 should be adhered to.

To list major implications: 
  1. Buyback should be authorised by Articles
  2. Buyback should be less than 25% of total paidup capital and free reserves of the company
  3. Buyback should not exceed 25% of share capital in a year
  4. Debt Equity ratio should not be more than 2:1 after buyback
Income Tax Implications

Buy back whether Dividend? - Provisions of Section 2(22) of Income tax Act, 1961 is relevant

“Dividend does not include………any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956”
Transfer Pricing – The buy back transaction would be considered as International Transactions and it would attract Transfer Pricing regulations if the company buys back the shares and its non resident shareholders are part of the same group.

Capital Gains Tax - For the non-resident shareholders, If the shares are held for less than one year provisions of “Short Term Capital Gains” apply, incase shares are held for more than one year then provisions of “Long Term Capital Gains” apply

Applicability of Tax Treaty – To explore the taxable impact of Capital Gains tax a close reading of relevant Tax Treaties between the countries should be made (county in which the company is incorporated & the county in which the shareholder is incorporated), and if an exemption is available from payment of tax in India, then it is prudent to make an application under section 195(2) of the income tax Act for full clarity.

Filing of income tax return – the non resident shareholder should file an income tax return (see CBDT circular 91 of 2008 dated 28th August, 2008) to give an opportunity to the Revenue authority to examine the payment of Capital Gains Tax or the claim for exemption under Double Taxation Avoidance Agreement.

FEMA Implications

Transfer of Shares under Buy back from non residents is covered under Automatic route (No.A.P (Dir Series) Circular No.10 dated 30th August 2005). Hence prior approval of RBI is not required.

Share Valuation

If shares are not listed then valuation should be done using “Discounted Cash flow” method by either a SEBI registered Category I Merchant Banker or a Chartered Accountant

Secretarial Matters

  1. Hold Board Meeting (as buyback is less than 10%), and approve the proposal for buyback in the meeting
  2. The approval in the board should include the following
    1. Full & complete disclosure of all material facts
    2. The necessity of buyback
    3. Method of buyback
    4. Amount to be paid for this buyback along with valuation certificate
  3. Prepare and File “Offer Letter” with the Registrar of Companies in eform 62. The disclosures to be included in Offer Letter are clearly illustrated in Schedule II to “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
  4. The offer letter should contain “Declaration of Directors” as contained in clause xii of Schedule 1 of the “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
  5. The offer letter should contain “Report by Company’s Auditors” as contained in clause xiii of Schedule 1 of the “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
  6. Prepare “Declaration of Solvency” in Form 4A and file the same with Registrar of Companies in eform 62 along with letter of offer
  7. Despatch the Letter of Offer to Shareholders within 21 days of filing with the ROC (this preferably should be done through registered post or Speed Post or Certificate of Posting)
  8. The offer shall be kept open for 15 days and not more than 30 days from the date of despatch of offer letter
  9. In case the number of shares offered by shareholders exceed the total number of shares proposed to be bought back then the acceptance per shareholder will be on proportionate basis
  10. Within 15 days of closure of offer the offers received should be verified. The shares offered will be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of offer
  11. The company should open a “Special Bank Account” and deposit therein all the monies payable on this buyback
  12. Payment to shareholders should be made within 7 days from the date of 15 days of closure of offer (or 21 days from the date of communication of rejection)
  13. File eForm 4c (return in respect of buy back of securities) with ROC within 30 days after completion of buyback
RBI & Remittance Formalities

The following should be submitted to authorised dealers (banks) to remit out the proceeds of share buyback
  1. A2 Form in duplicate
  2. Board Resolution authorising the buyback
  3. Form 15CA & 15CB in duplicate
  4. Form FC-TRS in quadruplicate
  5. Offer letter to shareholders
  6. Consent letters from shareholders (for acceptance of buyback)
  7. Share valuation certificate
  8. Undertaking from Directors (clause xii of Schedule I as mentioned above)
One copy of FC-TRS counter signed by banker should be received back for company records

Destruction of shares

Once the shares are bought back, these shares should be destroyed and fresh share certificates should be issued (if required). Necessary Board resolutions need to be passed for this.

Maintenance of Registers

Share extinguishment register and Share buyback register should be maintained within 7 days of completion of buyback

Form 4B needs to be prepared and signed as per provisions of section 77A(9) of the
Companies Act, 1956

Stamp Duty implication

Buy back of shares does not come under the definition of “Transfer of Shares” under the Companies Act, 1956 and hence will not attract Stamp Duty.

Divident Distribution Tax - Section 115O – AY2012-13

Dividend is taxable in India under section 115O of the Income tax Act, 1961. Effective rate of Dividend Distribution tax from 1st April 2011 is 16.2225% (15% basic rate + 5% 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.

For remittance of dividend abroad (overseas), If dividend tax is paid before distribution of dividend, authorised dealers (banks) do not insist for Form 15CA & 15CB

If in case dividend is paid to your group company (headquarters) abroad (this will happen mostly in case of MNC’s) filing of annual income tax returns is mandatory for such companies. As a first step those companies should apply for and obtain PAN number.

Consolidated FDI Policy - India - October 2011

Ministry of Commerce & Industry, Department of Industrial Policy & Promotion has issued Consolidated "Foreign Direct Investment Policy" effective 1st October 2011. 

This consolidated FDI Policy provides all details relating to FDI into India. 

The detaild policy can we viewed at the link below.

http://dipp.nic.in/English/Policies/FDI_Circular_02_2011.pdf