Investment Strategy

Value investing: Can an individual investor match the skills of a professional institutional investor

Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

Strange as it may sound, but the answer is an emphatic YES. In fact, not only can an individual investor match the competence of a professional institutional investor, he can give the professional a run for his money.

The individual investor, being a consumer himself can have a direct feel of the market much before the market research team of an institution will inform the institution. To give an example, if you are a regular visitor to Archies Gallery, in no time you can judge if the popularity of Archies products is on the rise or not. Browsing through the store and looking at the profile of the buyers should give you sufficient clues about the growth of the company.
One of the key principles in value investing is understanding the business you are buying. Unless you can understand the nature of business of the company, better stay away from it. An investor should take a commonsense approach while buying the shares. He should ask himself if he would buy the whole business at the prevailing market rate of the share multiplied by the total number of issued shares of the company. If the answer is yes, he can go ahead and invest in the shares.

The concept of a circle of competence was presented by Phillip Fisher in his book, “Common Stocks and Uncommon Profits”. Warren Buffett was much inspired by this idea and he always stayed within his own circle of competence. He never ventured into buying a business he did not understand, preferring simple businesses over complex businesses, however exciting the latter might have looked to him. He remarked, “[W]e try to stick with businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change we’re not smart enough to predict future cash flows.”

Thus, while Buffett always admired Bill Gates, and even has Gates as a Director in his investment vehicle, Berkshire Hathaway, he never invested a dime in Microsoft, as Microsoft has a business model which Buffett does not understand. He would prefer to invest in companies like Coca Cola , American Express, Gillette and Washington Post whose business model are simple and can be easily understood by him. He makes substantial money out of his investment in insurance business, which though fairly complicated, is within his circle of competence.

One difficulty for individual investor is that of getting the information. Thanks to Internet, information is now not very difficult to locate. A visit to company’s web-site should give a great deal of information about the company. Financial newspapers like Hindu Businessline carry great amount of information about various companies, and such information could be a good starting point for your research. If you want to succeed in long term investing, you must have an ability to read the balance sheet and other financial statements. Understanding the annual accounts is easier than it seems to most of us, and buying an inexpensive book on how to understand financial statements would be one of the best investments you ever made.
A visit to the supermarket, or a look at your wife’s shopping preferences could give you great clues about changing tastes and preferences, much before any analyst would capture the data. If you spend just a fraction of time that you spend on buying a TV , on buying a long term investment, you would be rich many times over.
A value investor does not get carried by the terms ‘biotech’ or ‘InfoTech’ appearing in the name of a company. Unless you can understand biotechnology, or that area of information technology a particular company is working in, your investment would not be better than a bet. It does not mean that all the companies with these adjectives are not worth investing, it only means they may be out of your circle of competence.

Of course, not many people are born with a great circle of competence, and as a value investor you should work hard to increase your circle of competence. It could be an industry you have worked in, a product that you have been patronising for years, a company which you know inside out, or an industry that you can understand easily. Every investment idea you evaluate gives you a great chance to widen your circle of confidence, whether eventually you go ahead with the investment or not is immaterial, the knowledge would stay with you which can be put to use when there is an opportunity in that particular industry.

If during the visit to my doctor, the doctor discusses with enthusiasm that Cipla or Dr Reddy is doing well, it is worth further investigation, but if the doctor advises me to buy Jet Airways, I would rather take ‘tips’ from the nearest Panwallah, than from the doctor!


Dr. Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhDChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com

The Finance Act, 2005

An Exhaustive Analysis of the Finance Act, 2005
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com



Taxation of income from Zero Coupon Bonds: The Act provides that the income from transfer of zero coupon bonds shall be treated as income from capital gains. Zero coupon bonds have been defined in the newly inserted clause 48 to S. 2, to mean a bond:

1. issued by any infrastructure capital company or infrastructure capital fund or public sector company on or after the 1st day of June, 2005;


2. in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or public sector company; and


3. which the Central Govt may by notification in the Official Gazette specify in this behalf.

For the purpose of this provision, “infrastructure company” means such company as has made investments by way of acquiring shares or providing long term finance to an enterprise wholly engaged in business referred to in S. 80-IA(4), or a housing project referred to in S. 80IB(10) or an approved hotel or hospital project. An “infrastructure capital fund” means such fund operating under a trust deed, registered under the provisions of the Registration Act, 1908 established to raise monies by the trustees for investment by way of acquiring shares or providing long term finance to an enterprise wholly engaged in referred to in S. 80-IA(4), or a housing project referred to in S. 80IB(10) or an approved hotel or hospital project.

The definition of the term transfer , in relation to capital gains, given under clause 47 of section 2 has been amended by inserting a new clause (iva) to include the maturity or redemption of a zero coupon bond. Amendment has also been carried out in the definition of “short term capital asset” to include a zero coupon bond held by the assessee for a period of not more than 12 months. Provisions of S. 112 have also been amended to provide that where the tax payable in respect of long term capital gains on zero tax bonds exceeds 10% of the amount of capital gains before giving effect to the second provisio to section 48, then such excess shall be ignored for the purpose of computing the tax payable by the assessee, thus bringing it on parity with other securities. The effect of this is that the zero tax bonds will be taxed at 10% if the assessee does not claim the benefit of indexation.
In S. 194A(3) clause (x) has been inserted w.e.f 1st June 2005 to provide that no tax shall be deducted at source from the amount paid or payable in relation to zero coupon bonds issued on or after 1st June , 2005.


Deduction to the issuer of the zero tax bonds: Section 36 has been amended by inserting clause (iiia) to provide for deduction from income from business of profession of the assessee who issues the zero tax bonds, of the pro rata amount of discount on a zero tax bond having regard to the period of life of such bond. For this purpose the ‘discount’ has been defined to mean the difference between the amount received or receivable by the infrastructure capital company or fund or the public sector company issuing the bonds, and the amount payable by such company on maturity or redemption of such bonds. The period of life of the bonds, means the period commencing from the date of issue of the bonds and ending on the date of its maturity or redemption.

Standard Deduction eliminated:
Section 16(i) of the Act has been omitted w.e.f 1st April, 2006. The effect of omission of S. 16(i) is that the assessees deriving income from salaries shall not be entitled to the Standard Deduction w.e.f Asstt Year 2006-07.

“In connection with his voluntary retirement”:
In S. 35DDA of the Act, for the words, “at the time of his voluntary retirement” the words “in connection with his voluntary retirement” have been substituted. The effect of this amendment is that w.e.f Asstt Year 2004-05, if an assessee incurs an expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance of any scheme or schemes of voluntary retirements, 1/5th of such amount shall be deducted in computing his business income, and the balance shall be deducted in the four succeeding previous years.
Under the law as it stood before the amendment, where part payments were made on voluntary retirement, only the first part was allowed to be so amortised since only payments made “at the time of voluntary retirement” were referred to in this section. Now all payments made in any year shall be independently eligible for amortisation.


Elimination of tax rebates for senior citizens and women:
S. 88C and S. 88D have been eliminated w.e.f 1st April 2006, which means that from Asstt Year 2006-07, senior citizens and women shall not be entitled to the additional rebate or Rs.20,000 and Rs. 5,000 respectively that they were entitled to earlier. This has been done since the benefit to be given to the senior citizens and the women has been built into the tax structure, by providing the higher exemption limit of Rs. 1.50 lakhs for the senior citizens and Rs. 1.25 lakhs for women.

Changes in the provision of the law relating to deduction of amount spent on higher education:
S. 80E earlier provided for a deduction of Rs. 40000 for repayment of loan taken for the purpose of pursuing higher education, including interest on such loan. The section has been amended w.e.f Asstt Year 2006-07 as under:

1. The deduction allowable now is in respect of interest on loan, and not on principal and interest as was allowed earlier.


2. The loan should be taken from any financial institution, or any approved charitable institution for the purpose of pursuing higher education.


3. The deduction shall be allowed in the initial assessment year and seven subsequent assessment years, or until the interest has been paid off, whichever is earlier.


4. 100% of the interest paid shall be deductible.


5. Higher education has been defined to mean full time studies for any graduate or post graduate course in engineering, medicine, management, or for post graduate course in applied science or pure science including mathematics and statistics.

Exemption from TDS for truck operators:
Section 194C provides for deduction at source from payments made to contractors and sub-contractors. A proviso has been inserted to this section by the Finance Act to exempt a sub-contractor engaged in transportation activities, subject to the following conditions:

1. The sub-contractor is an individual;


2. The sub-contractor does not own more than two trucks at any time during the previous year;


3. The sub-contractor produces a certificate in the prescribed form and verified in the prescribed manner and within such time as may be prescribed;


4. The person responsible for paying the amount to such sub-contractor shall furnish to the prescribed authority, such particulars as may be prescribed in such manner and such form as may be prescribed.


5. This amendment is effective from 1st June, 2005.

Tax treatment of derivatives:
The law relating to taxability of derivatives has been changed substantially. Earlier, S. 43(5) provided that a sale and purchase of shares which was settled otherwise than delivery was deemed to be a ‘speculative transaction’ The transactions excluded earlier were transactions in the nature of hedging, jobbing or arbitrage. By inserting a new proviso to S 43(5) the law now provides for exclusion from the definition of speculative transactions, “an eligible transaction in respect of trading in respect of derivatives referred to in clause (aa) of section 2 of the Securities Contracts ( Regulation ) Act, 1956, carried out in a recognised stock exchange”

For this purpose an eligible transaction has been defined as a transaction carried out electronically on screen based systems through a stock broker or a sub-broker or such other intermediary registered under section 12 of the SEBI Act, 1992, in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, or the SEBI Act, 1992, or the Depositories Act, 1996 and the rules, regulations or byelaws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange, which is supported by a time stamped contract note issued by such stock broker or sub broker or such other intermediary to every client indicating in the contract note the unique client ID allotted under any Act and PAN allotted under the Income Tax Act.

This amendment is effective from Asstt Year 2006-07.

Furnishing of quarterly return in respect of payment of interest without TDS:
Newly inserted section 206A casts a responsibility on the banks, co-operative societies or public companies responsible for paying to any resident an interest ( other than interest on securities) not exceeding Rs. 5,000 , to prepare and furnish quarterly returns in the form and manner as prescribed in the law, every quarter before 30th June, 30th Sept, 31st Dec and 31st March on a computer readable media.
The apparent purpose of the new provision is to keep track of the depositors who keep small deposits, sometimes of undisclosed money, to avoid falling within the limits of TDS.
The section further provides that the Central Govt may, by notification in the Official Gazette, require any person other than the one mentioned above, who is liable to a resident any income liable for TDS, to prepare a similar return.
A new clause (l) has been inserted in S. 272A(2) to provide for a penalty of Rs. 100 for every day of default on the part of the authorities to furnish such quarterly return.

The amendment is applicable from 1st June 2005.

Set off of losses of a bank in a scheme of amalgamation:
This retrospective amendment effective from Asstt Year 2005-06 provides for carry forward and set off of accumulated losses and unabsorbed depreciation of a bank against the profits of another bank in a scheme of amalgamation, by way of introduction of a new Section 72AA. Section 47 of the Act has also been amended to provide that any transfer of capital asset by a banking company to a banking institution shall not be regarded as transfer for the purpose of capital gains. Amendment has also been carried out in S 49 in this regards. The whole scheme is discussed below:

1. Newly inserted clause (viaa) to section 47 provides that any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the central Govt u/s 45(7) of the Banking Regulation Act, 1949, of a capital asset by a banking company to a banking institution shall not be regarded as transfer for the purpose of capital gains.


2. An amendment to S 49 of the Act provides that where the capital asset becomes the property of the assessee in the mode described in clause (1) above, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of improvement of the assets incurred or borne by the previous owner or the assessee , as the case may be.


3. The newly inserted S 72AA provides that notwithstanding anything contained in sub clauses (i) to (iii) of section 72A(2)(1B), where there has been an amalgamation of a banking company with another banking institution , the accumulated losses and the unabsorbed depreciation of such banking company shall be deemed to be the losses or depreciation of the banking institution for the previous year in which the scheme of amalgamation was brought into force and all provisions of this Act relating to the set off and carry forward of loss and depreciation shall apply accordingly.


4. This should come as a real bonanza for the banks which recently made an acquisition of loss making banks, merging the latter with itself, for example, the recent merger of Global Trust Bank with Oriental Bank of Commerce. The brought forward losses of the bank shall be deemed to be the losses of the acquiring bank of the year of the merger. Retrospective application of the provision, might result in these banks claiming refund of the Advance tax paid.

Other amendments:

• S. 80 D repealed: The general exemption limit has been raised to Rs. 1 lakh, from the existing limit of Rs. 50,000. S. 80D provided that where the total income did not exceed Rs. 1 lakh, the assessee was entitled to a deduction from income tax, an amount equal to 100% of such tax, and where the income exceeded Rs. 1 lakh, a relief was provided on the marginal taxation if it exceeded the amount of income exceeding Rs. 1 lakh. This provision is no longer required since the basic exemption limit has been increased to Rs. 1 lakh, and has thus been eliminated.


• Speculative losses carry forward period curtailed: The law earlier provided for the carry forward of speculative losses for a period of 8 years. S 73(4) has been amended to provide that no speculative losses shall be carried for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. This amendment shall be effective from the Asstt Year 2006-07.


• Dredger to be treated as qualifying ship for the purpose of tonnage tax scheme: By deleting a ‘dredger’ from the list of exclusions provided under section 115VD, dredgers are now qualifying ships for the purpose of Tonnage Tax Scheme.


• Exemption of interest in Non-resident (External) Account to continue: S. 10(4)(ii) of the Act has been amended to provide that income by way of interest on moneys standing to the credit of individuals in a Non-Resident(External) Account shall continue to be exempt even after 31st of March , 2005.


• Exemption of interest on Foreign Currency Deposits to continue: S. 10(15)(iv)(fa) has been amended to provide for the continuation of exemption of interest to a non-resident or to a person who is not ordinarily a resident on deposits in foreign currency where the acceptance of such deposits is approved by the Reserve Bank of India, even after 31st of March, 2005.


• Extension of time limit for setting up of industries in Jammu and Kashmir U/S 80-IB: Terminal date for setting up of industrial undertaking and commencement of eligible business in the State of Jammu and Kashmir has been extended by two more years, to 31st March, 2007. According to sub-section (4) of S. 80-IB, industrial undertakings engaged in manufacture or production or operation of a cold storage plant set up in the State of Jammu and Kashmir are eligible for a deduction of 100% deduction of profits for a period of 5 years, followed by 25% deduction for the next 5 years. ( This deduction is 30% in case of companies)


• BOT tax benefits extended to Govt authorities also: Under the provisions of S. 80-IA, a company or a consortium of companies are eligible for a 100% deduction of profits for a period of 10 years in respect of the income from the activity of developing or operating and maintaining or developing , operating and maintaining any infrastructure facility. The section has been amended to include an authority or board of corporation or any other body established or constituted under a Central or State Act.

Banking Cash Transaction Tax

If there is one proposal that received the sharpest criticism of the House when the Finance Minister delivered the Budget, it was the proposal to levy tax on banking cash transactions. While there is another proposal equally illogical, that of taxability of fringe benefits, the full implications of the latter took some time to sink in. The uproar in the House was a reflection of the reaction the proposal was to receive from the public.

Later during the meetings with industrialists the Finance Minister admitted that the proposed law was poorly conceived, and that they were working on an alternative methodology to track the black money. This article attempts to analyse the inconsistencies in the proposed laws.

Proposal to tax certain banking transactions are contained in Chapter VII of the Finance Bill. This chapter extends to the whole of India and shall come into force on 1st June, 2005, and shall apply to taxable banking transactions entered into on or after the commencement of this chapter.

“Taxable banking transaction” has been defined to mean:

1. a transaction, being withdrawal of cash ( by whatever mode) exceeding ten thousand rupees on any single day by a person from scheduled bank; or


2. a transaction , being purchase of a bank draft or a banker’s cheque or any other financial instrument on payment of cash exceeding ten thousand rupees on any single day by a person from any scheduled bank; or


3. a transaction, being receipt of cash from any scheduled bank exceeding ten thousand rupees on any single day by a person on encashment of term deposit, whether on maturity or otherwise, from that bank.

Clause 95 provides that the amount for the purpose of the transaction of term deposit shall be the amount received on encashment of such deposit.

The proposed law provides for the taxability, after the date of commencement of this chapter, in respect of the taxable banking transactions, at the rate of 0.1% of the value of such transaction.

Sub-clause (2) of Clause 95 of the Finance Bill provides that the Banking Cash Transaction (BCT) tax shall be payable:

1. in respect of cash withdrawal, by the person who withdraws the cash;


2. in respect of purchase of draft or pay order, by the person who buys such instrument;


3. in respect of encashment of term deposits, by the person who encased such deposit;


4. in respect of withdrawal of cash exceeding ten thousand rupees, by the bearer of such instrument.

The proviso to the clause provides that no BCT tax shall be payable if the amount of term deposit is credited to any account with the bank.

While the above clause provides for the liability of payment, Clause 97 casts a responsibility on every scheduled bank to collect BCT tax from every person liable to pay such tax. The tax so collected shall be payable by the bank to the credit of the Central Govt before the 15th of the month following the month of the collection. If a bank fails to so collect the tax, it will still be the responsibility of the bank to pay such tax.

Clause 98 prescribes for furnishing of the return of BCT Tax by the bank within the prescribed time after the end of the financial year, and provides that where no such return has been furnished, the Assessing Officer may serve on the bank a notice to furnish such return. A revised return may also be submitted before the assessment is made.

Clauses 99 to 112 lay down the detailed procedure for assessment, and provides for interest, penalties, rectification of mistakes, appeals, etc.

ANALYSIS

The apparent purpose of the law is to track black money. The Finance Minister stated in his budget speech that he is concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amount of cash. These cash withdrawals leave no trail, and presumably become part of the black economy.

While the Finance Minister must be congratulated for a very pragmatic and growth oriented budget, one fails to understand what prompted him to propose a very illogical BCT law. I have discussed the key issues below.

1. When it is true that large amount of cash is withdrawn every day, some of the money may be withdrawn for no ostensible purpose, still it does not make it a case for taxing all cash transactions. There are many genuine purposes for which one has to withdraw cash. Take the example of a construction company which makes payment of lakhs of rupees at the construction site to the daily wage earners, the amount being paid to each of such worker being a small sum of money. Can they force the daily wage earner, who lives hand to mouth, to have a bank account where the amount would be credited after two days?


2. The law is applicable to all persons, including individuals, businesses, trusts, Governments and to all withdrawals whatever be the purpose of such withdrawal. It seems the Finance Minister believes that even in respect of withdrawal by the Government, black money is generated!

1. In a country where banks are closed on all religious ceremonies and festivals, and where bankers sometimes go on a strike, people often carry cash balance with them on such occasion so that the work is not hampered. Is it justified to tax such transaction?

1. When there is an unexpected medical emergency, and the hospital refuses to take cheque, or the payment for medicine has to be made in cash, does it look justified to charge transactions such as these to tax?

1. In an agrarian economy, where 70% population is dependent on agriculture, where the poor farmers often come to the nearby towns and cities to sell their produce, many of them don’t even have bank accounts, can a cheque payment be forced upon them? It may be worth mentioning here that even in respect of disallowance of payment in excess of Rs. 20000 not made through a crossed cheque, there are many exceptions provided under Rule 6DD, which recognise the difficulty in carrying on transactions through banking system. Unless a law is made making it compulsory to receive and give payments by cheques, it is not proper to assume that the economy would suddenly become a cashless economy. Large cash dealings will continue to be made, the only consequence of this law will be that the Govt would be richer by an estimated amount of Rs.4500 crores.

1. The law provides for taxability of BCT in respect of ‘scheduled banks’. Since co-operative banks have been kept out of the provision of the law, and since people need to withdraw cash for many purposes, this measure is likely to shift large balances to co-operative banks. The financial health of many of the co-operative banks is in a bad state, many of the co-operative banks are controlled by politicians, and do not have much credibility. This may result , on the one hand, in erosion of deposit of scheduled banks, and on the other in larger funds at the disposal of small co-operative banks with unhealthy track records.

1. The logic that a large amount of cash is withdrawn from the bank and it becomes a part of the black economy is a faulty one. The fact is that a substantial part of money remains in cash form and is never deposited in bank. The money in bank is substantially the declared or the white money, and if this proposal becomes a law, it would have the effect of taxing the honest money lying in the bank in lieu of the tainted money. The limit of Rs.10000 is set so low, that most of the middle class salary earners would also be covered in the law.

1. The Finance Minister wants this 0.1% tax to be a kind of tracking device, kind of a trail over the cash withdrawn from the bank. There are other measures, such as PAN, which the Govt has been using to track financial transactions, and the transaction of the nature proposed to be taxed under BCT law could have been easily brought within the ambit of the requirement of compulsory quoting of PAN. We boast of a very sophisticated level of computerisation being implemented in the Income Tax Department, the imposition of this tax only goes on to prove the inefficiency of the Government is making use of the potentials of computerisation. It is absurd the people should pay the price for Govt.’s inefficiency by way of a tax on withdrawal from bank.

1. The implementation of BCT tax would be an ordeal for the banks. Banks would have to collect tax, keep a record of tax so collected, and pay the tax to the Govt. every month. They would have to file an annual return and would have to get it assessed. The cost per transaction to the bank of doing this exercise is likely to be more than the tax collected in most of such transactions. In case of ATM withdrawals, the software would be required to be modified, so that the machines would pay 0.1% less than the amount requisitioned by the customer.

1. The law speaks of a transaction exceeding Rs. 10,000 on a single day. It is not clear whether this limit is in respect of a branch, or of the banking company. On plain reading of the provision, it seems the limit is in respect of ‘any schedule bank’, which means if more than Rs. 10,000 are withdrawn in aggregate from different branches of the same bank, the provision would be attracted. In a bank where branches are not networked, it would be impossible to monitor the transactions.

1. There will be considerable difficulties in implementing the withdrawals from ATM’s. If a customer withdraws Rs. 9,000 in the first transaction, and later withdraws an amount of more than Rs. 1,000, the tax would be required to be deducted on the whole amount. This is going to be a challenging job for the bank and the designers of the software. ATM’s work on the principle of redundant distributed processing, where the data is processed locally at the ATM, and is updated later in the central database. If somebody withdraws less than Rs. 10,000 per transaction, and before the central database is updated, makes another withdrawal from another ATM, he would be able to avoid tax, adding to the problems of the bank.

1. The Finance Minister has said that this tax has been inspired by the Brazilian model. However, in Brazil, the tax is on all withdrawals from bank, whether by way of cheque or otherwise. The Finance Minister decided to single out cash withdrawal transactions and put then under the tax net. The provision of Entry 82 of the Union List, (read with Article 246(1) of the Constitution) would have to be stretched too far for justifying the levy of tax on something which is neither income nor an expenditure in commercial sense of the term.

1. Taxable transaction is defined to mean, inter alia , a transaction of encashment of a term deposit of an amount exceeding Rs. 10,000. Proviso to Clause 95 says that no banking transaction tax shall be payable if the amount of term deposit is deposited to any account of the bank. It the intention is not to tax this amount, I wonder how this would be monitored, if the amount gets merged with the account of a person, and he makes a combined withdrawal from that account.

This proposed law is an example of illogical thinking and poor drafting. It certainly does not serve the purpose of tracking the cash transactions, but on the other hand, will be chaotic if implemented in the present form. It is only hoped that the provisions do not encourage people to keep money at home, or in non-scheduled banks, which would prove to be exactly contrary to the intentions of this law. Long queues at the banks, where people will withdraw less than Rs 10000 daily is also not ruled out.

Fringe Benefit Tax


Consequent upon the introduction of the fringe benefit tax, the following amendments have been made in section 2:

1. Definition of assessee to include an assessee in respect of fringe benefits tax also: Sec 7(a) has been amended to provide that assessee shall mean any person in respect of whom any proceedings under this Act has been taken for the assessment of his income or assessment of fringe benefits or the income of any other person in respect of which he is assessable, or of the loss sustained by him or by any such person, or the amount of refund due to him or to such other person. The effect of this amendment is that if a fringe benefit tax is payable by any person, and any proceeding has been taken under this Act for the assessment of the tax on fringe benefit tax, such person shall be an assessee for the purpose of this Act.


2. “Fringe benefits” formally defined: A new Clause 23B has been inserted in section 2, to define fringe benefits to mean any benefits referred to in section 115WB.

Clause 37 of the Finance Act 2005 has created the new law relating to taxability of fringe benefits, by inserting new sections 115W to 115WL in the Income Tax Act. Section 115W(a) defines an employer to be a company, a firm, an association of persons or a body of individuals, a local authority and every artificial juridical person, but excluding any fund or trust or institution eligible for exemption u/s 10(23C) or registered u/s 12AA . Section 115WA is the charging section which provides that there shall be levied a fringe benefit tax @ 30% on the fringe benefits levied or deemed to be levied by an employer to his employee. Clause (2) of section 115W clarifies that fringe benefit tax shall be payable by an employer even if he is not liable to pay income tax other wise. S. 115WB (1)defines the fringe benefits to mean any privilege, service, facility or amenity, directly or indirectly, provided by an employer , whether by way of reimbursement or otherwise, to his employees ( including former employee or employees); any free or concessional ticket provided by the employer for private journey of the employees or their family members; and any contribution by the employer to an approved superannuation fund of for employees.

Subsection 2 of s. 115WB provides that fringe benefit tax shall be levied even when activity is carried on, not with an intention of deriving profits or gains, and lists out the following 17 categories of expenses, and an employer shall be deemed to have been provided the fringe benefits if he incurs such expenses. The expenses specified are:

• entertainment;


• provision of hospitality of every kind by the employer to any person, whether by way of provision of food or beverages or in any manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include-


• any expenditure on, or payment for food or beverages provided by the employer to his employees in office or factory;


• any expenditure on or payment through paid vouchers which are not transferable and usable only at eating joints or outlets;

1. conference ( other than fee for participation by the employees in any conference)

For this purpose expenditure on conveyance, tour, travel, on hotel, or boarding and lodging in connection with any conference is also deemed to be an expenditure on such conference.

• Sales promotion including publicity. However this expenditure is excluding the following:


• expenditure, (including rental) on advertisement of any form in any print( including journal, catalogues or price list) or electronic media or transport system;


• expenditure on press conference, business convention, fair or exhibition;


• expenditure on the publication in any print or electronic media of any notice required to be published by or under any law or by order of a court or tribunal;


• expenditure on advertisement by way of signs, art work, painting, banners, awnings, direct mail, electric spectaculars, kiosks, hoardings, bill boards or by way of such other medium of advertisement;


• expenditure by way of payment of any advertisement agency for the purpose of clause (i) to (iv) above.


• employees’ welfare. For the purpose of this clause, any expenditure incurred or payment made to fulfil any statutory obligation or mitigate occupational hazards or provide first aid facilities in the hospital or dispensary run by the employer shall not be considered as expenditure on employee welfare.


• Conveyance, tour and travel ( including foreign travel);


• Use of hotels, lodging and boarding facilities;


• Repair, running ( including fuel) and maintenance of motorcars and amount of depreciation thereon;


• Repair, running ( including fuel) and maintenance of aircrafts and amount of depreciation thereon;


• Use of telephone ( including mobile phone) other than expenditure on leased telephone line;


• Maintenance of any accommodation in the nature of guest house other than accommodation used for training purposes;


• Festival celebrations


• Use of health club and similar facilities


• Use of any other club facilities;


• Gifts;


• Scholarships;

Sub-section. 3 of S. 115WB provides that for the purpose of sub section (1) the privilege, service, facility or amenity does not include perquisite in respect of which tax is paid or payable by the employee.

As per S. 115WC(1) the fringe benefit shall be the aggregate of the following:

1. In respect of free ticket the full value of ticket, in respect of concessional ticket, the full value reduced by the amount paid by or recovered from the employee;


2. Actual amount of contribution to superannuation fund;


3. 20% of expenses referred to in clause (A) to (K);


4. 50% of expenses referred to in (L) to (P);

Notes:

1. In the case of employer engaged in a hotel business, fringe benefit in respect of clause (B) shall be 5% instead of 20%;


2. In the case of employer engaged in a construction business, fringe benefit in respect of clause (F) shall be 5% instead of 20%;


3. In the case of employer engaged in a pharmaceuticals business, fringe benefit in respect of clause (F) shall be 5% instead of 20%;


4. In the case of employer engaged in a software business, fringe benefit in respect of clause (F) and (G) shall be 5% instead of 20%;


5. In the case of employer engaged in a motor transport business, fringe benefit in respect of clause (H) shall be 5% instead of 20%;


6. In the case of employer engaged in a air transport business, fringe benefit in respect of clause (I) shall be NIL


7. 
   

S. 115WD casts a duty upon every employer to furnish a return of income before the due date, which is prescribed as the same date, as prescribed U/S 139(1). The section also makes provision for issue of notice by assessing officer in case the assessee does not furnish a return of income, and also provides for the revised returns. Sections 115WE, WF, WG, and WH lays down a detailed procedure for assessment, best judgment assessment and assessment of fringe benefits escaping assessment.

S. 115WJ casts a duty on the assessee to pay an advance tax of 30% of the fringe benefit tax, quarterly, on or before the 15th of the month subsequent to the last month of the quarter, but the advance tax for the quarter ending 31st March shall be payable by the 15th of March! The assessee shall be liable to pay interest on the shortfall of the advance tax.

ANALYSIS:


Expenses on maintenance of guest house shall be taxable, though the employees of the company may or may not derive some collective benefits from the guest house maintained by the employer for his business purpose.

Provision of hospitality of every kind to any person is taxable. “Any person” need not be an employee of the company. Thus, the law presumes that even in respect of hospitality extended to the customers of a company, a benefit of personal nature seems to flow to the employees! Even in cases of hotels, 5% of all expenses incurred on provision of hospitality to its customers would be taxable as fringe benefits.

All conveyance, tour and travel expenses, expenses on running and maintenance of cars and aircrafts would be considered fringe benefits. This would be so even in cases of companies, which are in the business of providing travel services to its customers, though, the amount would be 5% in their case instead of 20%.

Fringe benefits are deemed to have been given to employees even in respect of depreciation on motor cars and aircrafts.


Individuals, HUF’s and Trusts spared:
The law is applicable to all employers, excluding an individual, an HUF and charitable trusts and institutions.. The earning of business income is not the criteria for taxability, the law clarifies that the tax would b levied on all activities whether or not such activities are carried on with the object of deriving income, profits or gains. The assessees who are not required to pay tax under the Income Tax Act since their income is exempt, and the assessees who do not have a taxable income, or have a loss during a year shall also be liable to pay the fringe benefit tax. While local authorities are also included in the definition, Governments have been excluded.

Contradicts with the Sections pertaining to Presumptive Taxation:
Section 44AD, AE, and AF provides for presumptive taxation of certain assessees, viz., civil contractors, transporters, and retail traders. In the cases of these three categories of assessees, income is presumed at a fixed rate, and the provisions of S. 44AA relating to the maintenance of books of accounts do not apply to such assessees, which means the assessee declaring his income under the Presumptive Taxation method, is not required to maintain books of accounts. Fringe benefit tax presumes maintenance of books of accounts, which contradicts with the wordings of these three sections of presumptive taxation.

An Act within the Act:
The fringe benefit tax is a self-contained law. Chapter XII-H, with Sections from 115W to 115WL, contain the definition section, the charging section, the procedure for filing of return, assessment, and payment of tax, interest etc. In effect, this is the creation of a whole new law, for taxing expenditure. The ostensible purpose of the law is to “adopt a two pronged approach to the taxation of fringe benefits under the Income-Tax Act. Perquisites which can be directly attributable to the employees will continue to b taxed in their hands in accordance with the existing provisions of section 17(2) of the Income-Tax Act and subject to the method of valuation outlined in rule 3 of the Income-Tax Rules. In cases, where attribution of the personal benefit poses problem, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been to the employees” ( Memorandum to the Bill).


No threshold limit, covers all and sundry:
The proposed law has not specified any threshold limit, and it covers all employers( except individuals, HUF’s and Trusts) irrespective of the number of employees. Since it is a deeming provision, even in a situation where there are no employees, if the amount is spent on the specified heads, the tax would be attracted.



Tax Treatment of Specified Savings

The Act has modified the law relating to taxability of certain specified savings completely, by deleting the existing section 88, and replacing it with S.80C. Changes at the point of accrual of income are also made by deleting S.80L. Consequential amendments have also been made in Ss.10, 54EC, 54ED, 80CCC, 80CCD, 295, and a new section 80CCE has been inserted.

The new S.80C:
The new Section provides a deduction not exceeding Rs. One lakh to an individual and an HUF, in respect of the following payments:

• payment of life insurance premium (including payment made in respect of spouse and children of the assessee and , in respect of HUF, any member of the family)


• payment made for a contract of deferred annuity(including payment made in respect of spouse and children of the assessee);


• payment by way of deduction from salary by the Govt. of an amount not exceeding 1/5th of the salary for the purpose of securing a deferred annuity to the employee;


• contribution to provident fund to which the Provident Funds Act, 1925 applies;


• contribution to any provident fund set up by the Central Govt and notified in the Official Gazette(including payment made in respect of spouse and children of the assessee and , in respect of HUF, any member of the family);


• employee’s contribution to a recognised provident fund;


• employee’s contribution to an approved superannuation fund;


• subscription to specified securities;


• subscription to savings certificates under Govt. Savings Certificates Act, 1959;


• contribution to ULIP(including payment made in respect of spouse and children of the assessee and , in respect of HUF, any member of the family);


• contribution to unit-linked insurance plan of the LIC Mutual Funds(including payment made in respect of spouse and children of the assessee and , in respect of HUF, any member of the family);


• annuity plans of LIC or other insurers;


• subscription to units of mutual funds notified u/s 10(23D);


• contribution to pension funds notified u/s 10(23D);


• subscription to deposit schemes and contribution to mutual funds set up by National Housing Bank;


• subscription to the deposit schemes of notified public sector housing finance companies, or authorities dealing with housing accommodation;


• tuition fees paid to any university, college or other educational institution situated within India( in respect of any two children of the assessee);


• any payment by way of the following payments in respect of house property :


• loan repayment of a housing development board or similar a housing authorities;


• repayment of loan to any company or a co-operative society of which the assessee is a member;


• repayment of loan borrowed from Central Govt, any State Govt, banks, LIC, or National Housing Banks, housing finance companies, housing finance societies, assessee’s employer in case of employees of the Govt, public companies, public sector companies, universities, colleges or local authorities;


• stamp duties, registration fee and other expenses incurred for transfer of the house property to the assessee.

However such eligible amount shall not include the following payments, namely,

1. membership fee of a co-operative society or a company;


2. the cost of repairs and renovation incurred after the completion of the house property, or its occupation;


3. any expenditure in respect of which a deduction is allowed under the provisions of taxability of income from house property;

1. subscription to eligible issues of capital by public companies;

Where an assessee terminates his life insurance policy within 2 years ( clause (i) ), or terminates his participation to unit-linked insurance plan within 5 years( clause (x) ), or transfers his house within 5 years of obtaining possession ( clause (xviii) ) , then no deduction shall be allowed under the relevant clauses, and the deduction so allowed in the preceding years shall be deemed to be the income of the previous year. Similarly when the equity shares or debentures on which the deduction has been allowed under this section are sold within a period of three years from the date of acquisition, the amount of deduction allowed earlier shall be deemed to be the income of the year of sale.

Ss. (7) clarifies that for the purpose of this section, investments referred to in S. 88(2) shall be eligible for deduction in the manner specified in this section.

A Section 80CCE is inserted to clarify that the aggregate amount of deduction under sections 80C, 80CCC, and 80CCD shall not exceed Rs. One lakh.

Section 80L of the Act stands omitted.

Higher deduction:
Section 88 provided for rebate from tax liability as under:

• where gross total income is Rs. 1,50,000 or less, 20% of such investments;


• where the income under the head “salaries” does not exceed Rs. 100,000 and the “salaries” income is not less than 90% of the gross total income, deduction eligible is 30% of such investments;


• where the gross total income is between Rs. 1,50,000 and Rs. 5,00,000, 15% of such investments;


• where the gross total income is more than Rs. 5,00,000, no deduction shall be available.

The new scheme provides for a deduction from income rather than from tax, and provides for a deduction of an investment of Rs. 1,00,000 irrespective of the income slab of the assessee. The effect of this is that while the earlier scheme provided for a deduction, which was lower as the gross total income of the assessee increased, the new scheme, in fact, provides a higher deduction for assessee having higher income. An assessee, who falls under lower tax slab would get less effective benefit than an assessee in higher tax slab.

Sectoral caps removed:
The earlier law provided for maximum qualifying amount in respect of many of the investments. Thus, it provided for a limit of Rs. 70,000 in respect of specified savings, which also included repayment of housing loans ( with a limit of Rs. 20,000) and tuition fees ( with a limit of Rs. 12,000 per child, with a maximum of 2 children) , and an additional limit of Rs. 30,000 in respect of infrastructure shares, debentures and bonds. The amendment does away with all internal limits, and provides that all specified investment shall be covered irrespective of the amount of each investment. For example, the assessee shall now have an option of utilising the full limit by making a payment of Rs. 1,00,000 towards PPF. This means a considerable flexibility for the taxpayers, and a great deal of simplicity in assimilating the provision. The only sectoral limit that now remains is in respect of the education expenditure being restricted to any of the two children.

Can we implement the EET system? :
The Memorandum to the Bill clarifies that ‘the existing provisions of Income Tax Act do not accord a homogeneous to the taxation of financial savings’. ‘There is a considerable variation in the taxation of the contributions made to savings schemes , the tax levied on the accumulation, and the tax treatment at the final stage of withdrawal.’ The Memorandum further explains that the desire of the Govt. is to remove this distortion and tax the income on EET basis. Under this scheme, the contribution to the specified savings is exempt from tax ( E), the accumulation is also exempt from tax(E), but the withdrawals from the savings are taxed(T)

The Memorandum confesses that ‘shift from the existing EEE method to EET method is likely to impose transitional administrative problems’. ‘It is therefore proposed to set up a committee of experts to work out the roadmap of moving towards the EET’. The proposed amendments to the law seem to be the first step in moving towards the EET. The deletion of S.80L, which had partially exempted the accrual, is another step in this direction. But whether an absolute shift to EET could be possible especially in respect of investments committed in the past is a difficult question to answer.
Some of the savings are made with a longer time horizon, and under the existing laws, they enjoy exemption from taxes on withdrawal. For example, S. 10(10D) exempts from tax all sums received from LIC. If an attempt is made to put this sum to taxable, it would amount to taxing the amount which, was spent by the assessee when the law provided for exemption on withdrawals. It is not possible to apportion the amount between the amount, which was paid when the EEE scheme was prevalent, and the amount paid during the existence of EET regime. Any attempt to put the old investment to tax would mean a breach of promise on the part of the Govt.

If a scheme like EET is to be implemented within the framework of the existing laws, the law would be required to be amended to provide that the specified savings made after the specified dates, would fall under the tax net. Payments made in respect of policies contracted earlier would continue to be under the EEE scheme. Even when implemented on this pattern, it would entail a detailed record keeping by the assessees, lest it results in a mix-up causing confusion. This is not easy to implement. Until then the taxpayer can have his cake and eat it too.

Old wine in old bottle:
This method of taxation of specified savings is not new. The savings were taxed till 1990, under the same S.80C which was omitted by the Finance Act, 1990. The apparent reason which seems to have prompted the shift to this method is, ‘ a large number of countries have adopted this method and many countries are moving towards it’. However , it seems the implementation issues may make the shift to EET difficult, which may mean a bonanza for the taxpayer: he would continue to get higher deduction, with no tax being put on withdrawal.

“Out of his income chargeable to tax”:
The Finance Bill had proposed that the deduction u/s 80C shall be allowable only if the amount deposited was ‘out of his income chargeale to tax’ . On second thought the lawmakers decided to delete these words, as it could have led to frivolous litigations. The Act does not require the amount invested to be out of income chargeable to tax.

How NOT to stay healthy and fit forever

How not to stay healthy and fit for life

Tejinder Singh Rawal
tsrawal@tsrawal.com



Eat drink and be merry, for tomorrow you may die. In fact, if you eat indiscriminately without watching for the type of food and the serving size, you are going to die soon. Who cares, it always makes more sense to live a quality life that is short than to live long eating salads and vegetables. It is the quality of life that is more important than the quantity. The fast food is the greatest blessing of this century. How convenient it is to pig out on a burger when you are in a hurry. And of course, the chocolate that melts in your mouth is indeed irresistible! Why should you resist it in the first place? It has been invented for connoisseurs like you! An extra bar of chocolate cannot harm you much.

Never say no to desserts. A great dessert after a hearty meal is like heaven. People keep telling you carbs are bad for your health, and that food loaded with carbs will cause insulin resistance and is sure to lead you to diabetes, but that should not be a cause of concern for you. In a country which has the dubious distinction of having the highest number of diabetics in the world, it would not make any difference if you also join the diabetic club!

When at dinner table, always add salt to the salad and food even before tasting the food. Similarly, do not forget to add extra sugar to the cup of tea. You are an expert and can tell without even eating the food that it needs more salt or sugar.

There is no better way of watching TV than with a bowl of potato wafers or fingers by your side. If you can wash it with a glass of beer, it will be even better. Alcohol gives instant energy, and is a super-fuel for your body. Moreover, it is a great stress-buster; you deserve it after that stressful meeting. Of course, you know it very well that alcohol in moderation acts as a tonic for your heart. While you do not heed to other advice of your doctor, this particular piece of advice you are very happy to follow, though you are yet to precisely define what ‘moderation’ is.

When tired, do drink a cup of coffee. This caffeine-laden drink gives you great relief. Caffeine does you more harm than good, but who cares as long as the drink is refreshing. When caffeine does not help, my advice to you is to smoke a cigarette. Nicotine in cigarette is bound to give you pleasure. You know smoking is bad, you read it on the packet every time you buy a new pack that smoking is injurious to health, but if it were that bad, the Government would have taken steps to ban it. Such warnings are not to be taken seriously, they have been on the cigarette packets since as long as you can remember, and you know it well, they have lost their efficacy.

Drink gallons of aerated drinks. The fact that the drink is loaded with caffeine and empty carb calories should not deter you. The silver lining is that now with the discovery of pesticides in such drinks, it actually cleanses your belly of all harmful insects! While you know it very well that drinking 8-10 glass of plain water is essential for your survival, you also know that it is out of fashion to drink plain water.

Buy more of packaged food, and less of fresh fruits and vegetables, which are so abundantly available in our country. Of course, cooking is messy, and why should you do that when you can just open a packet and microwave it! Do not read the labels on the packaged food you buy. You know well such food can be loaded with carbs, and cholesterol-increasing trans-fats, but you also know that they are delicious. With fast food being delivered to you in guaranteed 20 minutes right at your door, it is foolish to carry an inventory of all those innumerable ingredients that go into cooking the home cooked food. Moreover, kids love the junk, give them what they like the best.

Do not exercise regularly. Exercise if for the professional athletes, and sportsmen. You are a successful person living a cosy life, why should you sweat. Did you work so hard in life and succeed so that you will keep sweating when you can sit comfortably in from of the TV and enjoy the soap? Do not park your car away from the shopping mall, but keep circling the mall parking closest to the place you want to go, until you are able to locate a vacant parking slot.

Morning walk is too boring. And of course, you should not run fast, you may risk your ankles and knees. It is better to let your waistline grow than to develop a permanent non-curable knee-pain. Swimming is equally bad for your body. Of course, it may help you shed weight, and make your body more flexible, but the cost of doing it is high! You catch cold too fast, and swimming aggravates the process. Moreover, swimming makes your skin tanned and dark. Better, stay away from water. Weight loss is not as important as having a glowing skin and a dry nose!
In fact, you are able to do sufficient exercise by turning the wheel of your car, opening its door and walking to your office with a brief case in your hand, not forgetting the calories you consume when you bathe, brush your teeth, and comb your hair!

I can assure you, if you follow the advice given in this article, you will stay young forever: since you will die before the old age sets in(


Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISMChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com

Analysis of Taxation Laws (Amendments) Ordinance , 2005

Analysis of Taxation Laws (Amendment) Ordinance, 2005
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
The President of India recently promulgated the Taxation Laws (Amendment) Ordinance, 2005 ( No. 4 of 2005, dated 31-10-2005) ostensibly to remove the glitches that were noticed during the implementation of the Finance Act, 2005. This article makes a detailed analysis of the amendments. The Ordinance takes effect immediately and the amendments are effective from the dates specified against various clauses.
Avoidance of grossing up of tax on lease rental of aircrafts, date changed:
Section 10(6BB) provides for avoidance of grossing up of tax paid by an Indian aircraft company in the following case, where:
     (i)  In the case  of the Government of a foreign State or a foreign enterprise
     (ii) deriving income from an Indian company engaged in the business of operation of aircraft,
      (iii) as a consideration of acquiring an aircraft or an aircraft engine

1. other than payment for providing spares, facilities or services in connection with the operation of leased aircraft


2. on lease under an agreement entered into after the 31st day of March, 1997 but before the 1st day of April, 1999 or entered into after 31st day of September, 2005 and approved by the Central Government in this behalf  


3. and taqx on such income is payable by such Indian company under the terms of that agreement to the Central Government


4. Explanation to the section provides that for the purposes of this clause, the expression "foreign enterprise" means a person who is a non-resident;

The Finance Act 2005 had extended the date from 30th Sept 2005 to 31st March 2005. Now Taxation Laws (Amendment) Ordinance, 2005 has changed this date to 31st of March, 2006.
The effect of this amendment is that with effect from 1st day of April, 2006, the assessee shall be able to avoid the grossing up of the tax paid in respect of agreements entered into after 31st March 2006 and approved by the Central Government.
Exemption from tax in respect of receipt of lease rental of aircrafts, date changed:
The existing S. 10(15A) provides for exemption from tax in respect of

1. any payment made, by an Indian company engaged in the business of operation of aircraft,


2. to acquire an aircraft or an aircraft engine


3. other than a payment for providing spares, facilities or services in connection with the operation of leased aircraft


4. on lease from the Government of a foreign State or a foreign enterprise under an agreement


5. not being an agreement entered into between the 1st day of April, 1997 and the 31st day of March, 1999


6. and approved by the Central Government in this behalf.


7. The Explanation to the section provides that for the purposes of this clause, the expression "foreign enterprise" means a person who is a non-resident;

The existing section provided that nothing contained in this clause shall apply to any such agreement entered into on or after the 1st day of October, 2005.  The Ordinance has extended this date to 1st day of April 2006

New subsections introduced in S. 10.

The Ordinance has inserted the following three sub-sections in section 10.

S. 10(39): Income from international sporting event in India
The newly inserted S. 10(39) provides for exemption from tax any specified income arising from international sporting events held in India. Details of the section are as under:

1. The exemption is in respect of any specified income; The Explanation to the section defines   “the specified income” to mean the income, of the nature and to the extent arising from the international sporting event, which the Central Government may notify in this behalf;


2. arising from any international sporting event;


3. held in India;


4. The exemption being available to person or persons notified by the Central Government in the Official Gazette;


5. Such sporting event should be approved by the international body regulating the international sport relating to such event;


6. Such sporting event should have participation by more than two countries; and


7. Such sporting event should be notified by the Central Government in the Official Gazette for the purpose of this clause.

The other two amendments pertain to a company engaged in the business of generation, transmission, or distribution of power as under:
Income of subsidiary company of a power company:
Newly inserted clause (40) of section 10 exempts from tax any

1. income of any subsidiary company by way of grant or otherwise received from an Indian company,


2. being its holding company engaged in the business of generation, transmission of distribution of power


3. if such receipt is for settlement of dues in connection with reconstruction or revival of an existing business of power generation


4. Provided that the provisions of this clause shall apply is reconstruction or revival of any existing business of power generation is by way of transfer of such business to the Indian company notified under sub-clause (a) of clause (v) of sub-section (4) of section 80-IA;

Income from transfer of capital assets of power companies exempt:
Newly inserted Clause (41) provides for exemption of any income arising from

1. transfer of a capital asset,


2. being an asset of an undertaking engaged in the business of generation, transmission of distribution of power


3. where such transfer is effected on or before the 31st day of March, 2006 to the Indian Company notified under sub-clause (a) of clause (v) of sub-section (4) of section 80-IA.’.

Section 80-IA, extended to a company set up for reconstruction of a power generating unit:
Section 80 IA has been amended to extend the concession under section 80-IA to an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant.
The amendment inserts the clause (v) in sub-section 4 of section 80-IA as follows:

1. The existing Sub-section 4 of section 80-IA lists the undertakings to which section 80-IA applies. The new clause has included in this list an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant,


2. If such Indian company is formed before the 30th day of November, 2005, with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant and such India company is notified before the 31st day of December, 2005 by the Central Government for the purposes of this clause;


3. And such undertaking begins to generate or transmit or distribute power before the 31st day of March, 2007.


4. This amendment shall apply with effect from the 1st day of April, 2006

Amendment to the provisions pertaining to Fringe Benefits Tax
Section 115W, as it originally stood, defined “employer” in clause (a) as under:
115W. In this Chapter, unless the context otherwise requires,—

• “employer” means,—


• a company;


• a firm;


• an association of persons or a body of individuals, whether incorporated or not, but excluding any fund or trust or institution eligible for exemption under clause (23C) of section 10 or registered under section 12AA;


• a local authority; and


• every artificial juridical person, not falling within any of the preceding sub-clauses;


• “fringe benefit tax” or “tax” means the tax chargeable under section 115WA.

With effect of 1st April, 2006, the sub-clause (iii) has been amended. The original sub-clause included in the definition of employer, an association of persons or a body of individuals, whether incorporated or not, but excluding any This definition now stands modified to delete the exclusion of any fund or trust or institution eligible for exemption under clause (23C) of section 10 or registered under section 12AA. S. 10(23C) contains the list of educational, medical and other institutions whose income is exempt from tax. Section 12AA provides the procedure of registration of trusts and institutions. With this amendment, such institutions are apparently also brought within the ambit of FBT.
However the new Proviso to the section exempts such institutions by providing that any person eligible for exemption under clause (23C) of section 10 or registered under section 12AA or a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951) shall not be deemed to be an employer for the purposes of this Chapter

Amendment pertaining to Banking Cash Transaction Tax
The definition section of the Banking Cash Transaction Tax is section 94. This section stands amended with effect from 1st June, 2005 as under:
Insertion of new clause (3A) to section 94 defines a banking company, which was not defined in the original law. A “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank referred to in section 51 of that Act;’
Clause (4A) now defines a  “co-operative bank” to  have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);

Inter-bank transactions excluded:
New section 112A has been  inserted in Chapter VII of the Finance Act, 2005. “112A. The effect of this amendment is that the  provisions of the law pertaining to Banking Cash Transaction Tax  shall not apply to, or in relation to, the taxable banking transactions entered into on or after the 1st day of June, 2005, between a scheduled bank and a banking company or a co-operative bank; or between a scheduled bank and another scheduled bank. This is to remove the practical difficulties that the banks were facing in inter-bank transactions.

Margin of Safety Benjamin Graham's grestest investment tool

Value Investing: Margin of Safety

Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

A value investor always looks for stocks available at a throwaway price, thus buying at a “margin of safety”. This concept central to the discipline of value was pioneered by the father of value investing, Benjamin Graham. The concept has been so important for the Warren Buffett that he remarked, “The three most important words in investing are “margin of safety”, which means always building a 15,000 pound bridge if you’re going to be driving 10,000 pound trucks across it.”

Graham was the first person to realize that the basic truth about stock market investing is the price: you should pay considerably less that the real worth of share when you buy a share. The price of a share keeps hovering around its intrinsic value, at times the price would rise much higher than its value, and at times, the price would plummet to a ridiculously low figure. If the price falls, sooner or later the market is bound to realize that the share is a bargain, and this would bring the price close to its intrinsic value, sometimes the momentum, may take it further up. The real skill of an investor lies in finding the stocks that are selling much below their real worth, thus creating a “margin of safety” for the investor.

Graham would explain this concept in his lectures by telling the parable of a fictitious Mr. Market. Mr. Market is a whimsical character. He keeps approaching you everyday, and keeps quoting the prices of shares you own or intend to buy ( With the live quotations ticking on your computer screen, Mr. Market actually keeps quoting prices every moment). Even if the company may have a very stable business, unfortunately the quotations of Mr. Market are anything but stable. He has severe emotional problems; at times he becomes euphoric and can see only favourable factors affecting company. In that mood, he quotes a very high price. At times, his mood is very depressed, and he is pessimistic about the shares. He quotes a ridiculously low figure when in a bad mood, thinking that the sky is going to fall. The more manic-depressive his behaviour is, the better it is for you since you can find a great bargain.
One good thing about Mr. Market is that he does not mind being ignored. His job is to quote the prices, to buy or not to buy is purely your decision. If he shows up one day in a very foolish mood, you would do well to take advantage of him, but it could be disastrous for you if you succumb to his influence. In order to strike the right deal, you should be better in the art of valuation than Mr. Market. If you can’t understand the business better than Mr. Market, please don’t play the game. You should have the ability to know when he makes a stupid move and you should be able to capitalize on that.
“Margin of safety” being the difference between the price and the value, it gives you a cushion. With a high margin of safety, you pay, so to say, Rs. 50 for a 100 rupees note.
Buying in that situation heavily stacks the odds in your favour. On the other hand buying a stock without adequate margin of safety, or zero margin of safety exposes you to great risk, and makes your investment no better than a bet or a gamble. This would be so even if the company you have invested is a blue chip company. The underlying company would do well but the investor would still burn his fingers.

Graham always looked for companies which were so battered and neglected that they were sold even below their net working capital. He created a Net Current Asset Value (NCAV) model to find such bargains. Calculate the net working capital of the company, which is the excess of current assets over current liabilities. Subtract from this all the debts whether short term or long term. Divide the resultant figure by the number of issued shares of the company. If this per share value is less than the current market price of the share, you have a margin of safety. And, you are getting the whole of fixed assets free of cost. Graham looked for shares that offered at least 1/3rd margin of safety. While it may not be possible to find many shares meeting criteria of this high margin of safety, there are certainly some shares which pass through this screen. I often come across shares that meet these criteria and sometimes wonder why none else noticed it before.
A larger margin of safety also takes care of your judgmental errors, and the window-dressing by the companies. While it may not be possible to calculate the exact margin of safety, (if it were an exact science, investors would have already squeezed the shares dry of the entire margin) an intelligent approximation would do the job well. “To use a homely simile,” said Graham, “it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age, or that a man is heavier than he should be without knowing his exact weight.”
A few caveats: First, even if you fancy on a particular share with a high margin of safety, don’t bet your whole fortune on it; it may be possible that you made an error of judgment, or that the market may fail to recognize the real worth of the share during the period you hold the share. The solution is diversification. Graham recommended ideally keeping 30 companies in your portfolio. This number could be less or more depending on how active an investor you are. Secondly, be patient. In the short term the stock price may dip even further. Third, when in doubt, stick to quality. Look for good quality management.
In conclusion, my advice to all serious investors is to read Graham and Dodd’s Security Analysis. If you were to read only one book on investment, this is the book. It ought to be read and re-read many times over during an investor’s lifetime. The low priced Indian edition, at Rs. 350 is the best investment you would have ever made.
Dr. Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhDChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com

Investing for Long Term

How Long Is Long Term?

Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

The first lesson in value investing is to stay invested for a long term. This is based on the premise that in the long run, the intrinsic value of the security will be recognised by the market, thus enabling the value investor to reap the rewards of his patience. Long term time frame, also smoothens the effect of fluctuations. If you were unlucky to have bought a script at the peak of trade cycle, and though your investment is fundamentally sound, you will still find the price of your investment heading south. If you are convinced about the fundamental value of your shares, and are confident that the value has not deteriorated in between, you may have to wait for the market to recognise the potentials of your script. This process may take quite some time.
The fall in prices of fundamentally sound shares should give you an opportunity to buy rather than sell, provided, of course, that you have done your homework well, and know that the market price is deviating  from the true value creating a Margin of Safety for you, a concept central to the disciple of value investing.
If your answer to any of the following two questions is in the affirmative, you are probably not a long term investor:

• Do you believe you can time the market—buy when prices are low and sell when prices are high?


• When the market starts to decline, do you sell your investments to try to lock in gains?

If tickers drive you crazy, with every price rise causing a sense of ecstasy, and every red quotation, heartburn, then value investing is not your cup of tea.

Staying invested for long term has other benefits too. Many short-term traders make more money for their brokers than they make for themselves. Many a time they would be losing money while the brokers make all the money that is there to make. While the brokerage may look like a small figure to you, constant buying and selling adds to a whopping sum. Add to this the cost of many hours spent in keeping track of the live market quote, and it does not look like a worthwhile proposition.

You pay zero tax when you sell of your investment after a period of one year from the date of purchase. This is the greatest reward the Income Tax department gives you for staying invested for long.

Now the million-dollar question, how long is the long term?. You ask ten investors and you are likely to get ten different answers. Strangely enough, barring the day traders, and pure speculators, most players in the market are likely to say that they are long term investors, without even giving a thought to what time horizon they are talking about. For many investors the long term is one year, the statutory minimum the Income Tax Act specifies for the purpose of calculating the tax on long term capital gains.. This period was three years earlier, and this class of investors perhaps think that the Government also thought three years to be too long, and has decided to curtail the period to one year.
For disciplined value investors, the long term is an entirely different concept. It is time sufficient for the market to recognise the true value of a particular script, and this may sometimes take many years, some times a couple of major crashes and booms!
It is said that more money is made in being static rather than by being hyperactive in the market. Daily fluctuations should not bother a long term investor. The average holding period of investors like Warren Buffett has been 10 -12 years. Remember, this is the average, some of the investments they would hold on to for 20 or 25 years or more. Focusing on the short-term aspects of a company including both business and price fluctuations is contradictory to the value investment philosophy, and Buffett rightly said. “Most of our large stock positions are going to be held for many years, and the scorecard on our investment decisions will be provided by business results over that period, not by prices on any given day.”
It is like being wedded to your stock- for life. Unless there is a change in company’s economics, for worse, you would continue to hold the share for eternity. It follows that when you are evaluating a company, you must give due weightage to the quality of management as well. Warren Buffett explained this factor by observing that you should choose the President of the company (that is, evaluate the quality of the management) the way you would choose your son-in-law.
If you have chosen your company properly, and the share grows at a rate substantially higher than the cost of money it would be wiser to stay invested in the company for a fairly long period of time. A company which you bought in a depressed condition, and which keeps growing at a CAGR or 20% is likely  to outperform the market for as long as the company maintains the growth rate. If the rate of growth is an accelerating growth, you would do well to stay invested in that company for life, though not many companies would qualify through this filter perpetually.

Compound interest is one of the most powerful forces in the financial world, and if you stay invested for a long term period of time, you are bound to see the magic of compounding at its fullest.

When the most influential economist John Maynard Keynes said, “In the long run we’re all dead” he was certainly not referring to the stock market. He was referring to the counter-cyclical demand management policies that the governments ought to be following in the short run.

The bottom-line is that since it is impossible to predict whether you are now at the top of a bull run, or at the beginning of a long period of depressed market, it always makes more sense to stay invested for a sufficiently long period of time. Historically the longer the period of investment in equity, the higher is the return and the lower is the risk of losing your capital. If you are likely to need money within 5 years, stay away from the stock market. Like the fabled tortoise that beat the hare in the race, the investor who stays in for the long term is more likely to achieve his goals than the investor who chases “hot tips” for quick profits in the stock market.

Dr. Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhDChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com

Right to Information Act, a great step forward

Right to Information Act, a great step forward
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

The Right to Information Act, passed recently is a milestone in India’s progress as the biggest democracy in the world. The law recognises the fact that the right to access the information collected by the Government, and lying in the records of the Government is a fundamental right of the citizens of India. Such information is collected by public servants for public good, using public money and the new law recognises the fact that the public has every right to know what lies buried within the red tape. The right is no less than the citizens’ fundamental right.

India enjoys the dubious distinction of being one of the most corrupt countries in the world, and this law may be considered the first major step in the direction of making the working of the Government more transparent, and accountable to the real power: the common man.

The Object: The purpose of the Act, as stated in the preamble is “to provide for setting out the practical regime of right to information for people to secure access to information under the control of public authorities, in order to promote transparency and accountability in the working of every public authority, the constitution of a Central Information Commission and for matters connected therewith or incidental thereto.”


Freedom of Information Act, 2002 repealed: The Act replaces the Freedom of Information Act(FOI Act), which was passed in 2002 and received the Presidential accent in January, Unfortunately, the FOI Act did not have enough teeth. Moreover, no date of commencement of the FOI Act was provided, as a result the provisions of FOI Act were never implemented, and it remained a non-starter. The National Advisory Council deliberated on the issue and suggested certain important changes to be incorporated in the FOI Act to ensure smoother and greater access to information. The Government examined the suggestions made by the National Advisory Council and others and decided to make a number of changes in the law.
The important changes proposed to be incorporated, inter alia, include establishment of an appellate machinery with investigating powers to review decisions of the Public Information Officers; penal provisions for failure to provide information as per law; provisions to ensure maximum disclosure and minimum exemptions, consistent with the constitutional provisions, and effective mechanism for access to information and disclosure by authorities, etc.
In view of significant changes proposed in the FOI Act, the Government decided to repeal the Freedom of Information Act, 2002. The new Act comes into force 120 days after its enactment, which is quite an achievement, considering the fact that the FOI Act did not specify any date for its own commencement, and thus never saw the light of the day.

The Act declares unequivocally that subject to the provisions of this Act, all citizens shall have the right to information. ( S.3) One far reaching effect of the Act is to reduce the force of the Official Secrets Act, a Act which has existed since 1923, and which should have been scrapped at the time India became independent of the British rule, and established a democratic system of Government.
The Act declares that the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in the Official Secrets Act, 1923, and any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act. Moreover, no court shall entertain any suit, application or other proceeding in respect of any order made under this Act and no such order shall be called in question otherwise than by way of an appeal under this Act.

Right to information defined: The Act defines ‘right to information’ to mean the right to information accessible under this Act which is held by or under the control of any public authority and includes the right to--
(i) inspection of work, documents, records;
(ii) taking notes, extracts, or certified copies of documents or records;
(iii) taking certified samples of material;
(iv) obtaining information in the form of diskettes, floppies, tapes, video cassettes or in any other electronic mode or through printouts where such information is stored in a computer or in any other device;

The definition is vast enough to cover inspecting the work, obtaining the certified copies, samples, and also the digital copies. The terms, ‘information’ and ‘record’ have also been suitably defined.

The Act casts an obligation on Public Authorities to maintain all its records duly catalogued and indexed in a manner and form which facilitates the right to information under this Act and ensure that all records that are appropriate to be computerised are, within a reasonable time and subject to availability of resources, computerised and connected through a network all over the country on different systems so that access to such records is facilitated. (S. 4(1)(a)

A great deal of spadework shall have to be done  before the commencement of the Act: The Act shall commence 120 days after its passing. The Government machinery shall have to work overtime to gear up for the responsibilities the Act places on it in respect of providing the right to information to citizens. It  casts an obligation on Public Authorities u/s 4(1)(b) to publish before the commencement of this Act, a great deal of information including the particulars of its organisation, functions and duties,  the powers and duties of its officers and employees, the procedure followed in the decision making process, including channels of supervision and accountability, the norms set by it for the discharge of its functions, the rules, regulations, instructions, manuals and records, held by it or under its control or used by its employees for discharging its functions, a statement of the categories of documents that are held by it or under its control, the particulars of any arrangement that exists for consultation with, or representation by, the members of the public in relation to the formulation of its policy or implementation thereof, the particulars of facilities available to citizens for obtaining information, including the working hours of a library or reading room, if maintained for public use,  the names, designations and other particulars of the Public Information Officers etc

The Act does not stop at that, and exhorts the public authorities that it shall be a constant endeavour of every public authority to take steps to provide as much information suo motu to the public at regular intervals through various means of communications so that the public have minimum resort to the use of this Act to obtain information, and every such information shall be disseminated widely and in such form and manner which is easily accessible and comprehensible to the public.
All such materials shall be disseminated taking into consideration the cost effectiveness, local language and the most effective method of communication in that local area and the information should be easily accessible, to the extent possible in electronic format with the Public Information Officer, available free or at such cost of the medium or the print cost price as may be prescribed.

Appointment of Public Information Officers (PIO’s):
The Act provides that every public authority shall, within 180 days of the enactment of this Act,  designate as many Public Information Officers  as may be necessary to provide information. Such officers are also required to be designated at every sub-divisional or sub-district level. ( S.5)

Procedure for obtaining the Information
Request for obtaining information (S.6): A person who desires to obtain any information shall make a written or electronic request in English or in the official language of the area, to the PIO or the Assistant PIO. The Act even provides that the PIO shall render the assistance for reducing the request in writing the person making the request, where such person is not able to make the request. The person making the request is not required to give the reason for making the request, nor his personal particulars, except the contact information. It the application is made to one pubic authority and the matter falls more clearly within the jurisdiction of another authority, within 5 days such application shall be transferred to the proper authority.
Disposal of request (S.7): The PIO shall, on receipt of request for information, provide the requested information as expeditiously as possible, but in any case, within 30 days, on payment of the prescribed fees or of he cannot so provide, reject the request for reasons specified in the following paragraph. Provided that where the information sought for concerns the life or liberty of a person, the same shall be provided within forty-eight hours of the receipt of the request. Failing to providing the information within the time specified shall amount to the refusal to provide the information. An information shall ordinarily be provided in the form in which it is sought unless it would disproportionately divert the resources of the public authority or would be detrimental to the safety or preservation of the record in question
Exemption from disclosure of information: The Act has excluded certain items from disclosure, like, information, the disclosure of which would  prejudicially affect the sovereignty and integrity of India, security, strategic, scientific or economic interest of the State, relation with foreign State; or  lead to an incitement to commit an offence;  information, which has been expressly forbidden to be disclosed by any court of law or tribunal or the disclosure of which may constitute contempt of court;  information, the disclosure of which may result in a breach of privileges of Parliament or the Legislature of a State; information, including commercial confidence, trade secrets or intellectual property, the disclosure of which would harm the competitive position of a third party. Provided that such information may be disclosed, if the Public Information Officer is satisfied that a larger public interest warrants the disclosure of such information; information which relates to personal information, the disclosure of which has no relationship to any public activity or interest or which would cause unwarranted invasion of the privacy of the individual:
     The guiding rule is that an information which cannot be denied to Parliament or Legislature of a State shall not be denied to any person. A public authority may, notwithstanding the exemptions specified above, allow access to information if public interest in disclosure of the information outweighs the harm to the public authority.
Limitation: The Act provides for a limitation of 20 years. Thus, information relating to any occurrence, event or matter which has taken place or occurred ten years before the date on which any request is made shall be provided to the person making the request under that section:
Appeal:  Any person who, does not receive a decision within time or is aggrieved by a decision of the PIO, may within 30 days prefer an appeal to such officer who is senior in rank to the PIO. The second appeal lies to the Information Commission.  In any appeal proceedings, the onus to prove that a denial of a request was justified shall be on the public authority which denied the request. An appeal shall be disposed of within 30 days or within such extended period not exceeding a total of 45 days from the date of filing thereof ,for reasons to be recorded in writing. An appeal against the decision of the Central Information Commission shall lie in the High Court on any point of fact and law.
Penalties provisions watered down: The original draft proposed that any Public Information Officer who is in default shall be liable on conviction to fine which may extend to rupees twenty-five thousand or a term of imprisonment which may extend to five years, or with both. However the provision of imprisonment has been removed and instead the Act now provides for a departmental proceeding against the erring officer.
Intelligence and security organisations excluded: The Act shall not apply to the intelligence and security organisations specified in the Second Schedule. Provided that the information pertaining to the allegations of corruption, and human rights violations shall not be excluded under this provision..
Only citizens have the right to information: The Act declares that ‘all citizens shall have the right to information’. This means incorporated bodies, like limited companies, trusts and other institutions shall not have any right to information under the Act. Moreover, non-citizens, which would also include foreign nationals living in India, would also not be entitled to information under the Act.
State Authorities also covered:  The original draft of the bill applied it only to the public authorities belonging to the Central Government. Perhaps they thought it more expedient to leave the State Governments make their own respective laws in respect of the right of information of the citizens in respect of the public authorities belonging to the States. However the law as passed has been extended to State authorities also. The non-Governmental organizations substantially funded, directly or indirectly, by the public funds also fall within the ambit of this Bill
It means that States, like Maharashtra, Tamilnadu, Karnataka, Goa, Jammu Kashmir,  which have already enacted similar laws in respect of right of information from State authorities shall now have to scrap such laws.

Dr. Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhDChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com