Bobby's Musings

Penny Stocks

2006-04-25T23:12:00.000-07:00

Penny Stocks: You Get What You Pay For
Dr. Tejinder Singh Rawal
tsrawal@gmail.com

Circa 1995: Soundcraft Industries , a “multicrore” turnover company engaged in “diamond trading” business unveils a massive expansion plan. The Press Release, issued by the company, and widely circulated in media, says, “Soundcraft Industries, which is engaged in exports and trading of diamonds, precious stones, granites and garments, is planning a major diversification into waste-to-energy projects. The company hopes to invest Rs 1,700 crore in these projects where it would manage solid waste of 8,000-10,000 tpd.” Most investors notice the company for the first time. The Press Release is followed by a series of Press Releases and advertisements claiming that the company is embarking upon the state-of-the-art technology which would revolutionise the solid waste management in the country, and is in the process of tying up with major Municipal Corporations. You get a ‘tip’ from an ‘insider’ and you decide to invest. The share price rises exponentially, and is unstoppable, you buy more shares, and price rises further. Total appreciation is a whopping 600%, then one day the company vanishes into thin air. To your shock, you discover the fact was that peons, drivers and clerks were the directors of the company, and the registered office of the company was a car garage. By the time you discover that you have been cheated, Rs.50 crores of investors’ wealth has gone into thin air. The promoter of the company Raj Basantani is absconding.
Circa 2004: Company: Kolar Biotech Promoters: Same Investors: Same Strategy: Same Investors burn their fingers again and this time it is Rs. 200 crores that has gone down the drain. Raj Basantani is absconding again. Those who do not understand history are condemned to repeat it.

With market touching the 12K mark, too much “irrational exuberance” prevails in the market. As the market gets overheated valuations get stretched up. While the momentum drives the quality stocks to dizzy heights, stocks with dubious track records are also not left behind. In September 2005 SEBI intensified market surveillance and analysed about 1000 penny stocks for unusual movement in share prices during a short span of time. Some of the companies, like Eltrol Lltd, Database Finance Ltd, G Tech Infotraining Ltd, Shukun Constructions Ltd, Island Industries, TSL Ltd, Rashel Argo Ltd Betala Global Ltd, Mantra Online, Bottom Properties had risen by 500% to 6000% in a few months’ time. Most of these companies had no track records, they were operating from fake office addresses, but were witnessing huge trading volumes. As a result of the probe the prices of such shares went down faster than they had gone up, before the poor investor could get an opportunity of it. They would never rise again. The promoters would jettison the companies and shall come back in a new avatar.

With so many quality stocks available, it surprises me why investors should ever think of getting into something that is akin to playing a lottery. Most of these stocks are danger pure and simple. The highest that one can pay, based on the valuation of such shares, is usually ZERO. 90% of penny stocks are junk. While you may beat the market by identifying some good scripts out of the remaining 10%, it is not worth the effort. Some people get into penny stocks on the logic that the stake is small so the loss could be equally small. What the investors don’t realise is that while per share price of a penny stock may be low, the total quantum of loss may be substantial: You will lose 100% of your capital invested in penny stocks.
Manipulation of penny stocks is a huge problem that shows no signs of letting up. Unscrupulous brokers shamelessly "pump" small-cap stocks, using their informal channels to spread the “inside information”. They come by phone, through e-mail spam, or through a friendly sub-broker. In many cases, a carefully crafted and fostered ' rumour mill' alerts you to a penny stock through a friend who knows a friend of a director.... As the “inside information” gets some footing, they start issuing press releases about the spectacular growth of the company.
The financial fraud known as “pump and dump” is the usual strategy that manipulative promoters adopt. It involves artificially inflating the price of a penny stock in order to sell at the inflated price. Unwitting investors purchase the stock in droves, creating high demand and pumping up the price. If you are lucky, you will pass on the stocks to a ‘greater fool’, the greater fool may offload it to a ‘still greater fool’. Very soon the ultimate fool will be found out, the man who will be holding the shares at high price for which there is no buyer. And while you all were indulging in passing the parcel the smart promoter was dumping his shares, and was getting ready for a trip to Geneva to invest the booty.
Penny stocks are very thinly traded and are valued at their penny levels for a reason.....they aren't worth much. In Indian context I would consider shares trading at less than par value to be penny stocks ( Less than Rs. 10 shares) . I would also include in the definition shares of companies having meager market capitalisation of, say, less than 10 crores, which are easy to manipulate.

Avoid “Z” category and T2T stocks. With a view to forewarn investors planning to make an investment in the securities of the companies, which have violated provisions of the Listing Agreement or have large investors complaints pending against them, BSE shifts all such securities to a separate category called "Z" group. At times, the trading and settlement in scripts is placed by the Exchange on Trade to Trade (T2T) basis because of Surveillance reasons. Stay away from them. They lack liquidity.

If the company doesn't have revenues, look no further. Don’t go by the promising future. How can a company which is operating from a garage have wherewithal to invest Rs. 1200 crores in a new bio-tech venture? Make sure that the company has been generating revenues for a few years, and is not a fly-by-night operator who has window-dressed a balance sheet and passing it off as an attractive investment. Essentially, when evaluating small companies for investment, the ability to generate cash is important. I would rather play it safe when it comes to such companies, and I strictly follow the ‘margin of safety’ principle here. If you are getting something at a discount to its asset value, then only it can be considered. Take future promise with a grain of salt, buy the present value.

Never buy shares whose liquidity is low. If the trading volume is low it makes it very easy for other traders and market makers to manipulate the stock as they see fit and believe this, it will not be in your interest when they do this. This is the chief reason I advice you to avoid companies with low market capitalisation.

Never invest in a company without first reading its financial statements. Thanks to Internet, such information is easily accessible. SEBI’s website http://sebiedifar.nic.in/ is a great repository of the financial statements of companies. A visit to SEBI’s website, before you decide to invest is a must. Investment does require hard work, but it is worth the efforts.

Finally, not all penny stocks are bad. Most successful companies start as penny stocks and work their way up to success. However, you should be sceptical of “the future Infosys” and “the future TCS”. While one of the companies may become an Infosys in future, there will be a hundred which would get wounded in their journey. You would be making the error of what is called the “survivorship bias”, if you start looking at every small-cap as a future Infosys.

If the baker comes to you with hot cross buns, one a penny, two a penny, hot cross buns, grab them. They are too tempting to resist. If you have no daughters give them to your sons, but please, for God’s sake, don’t buy one a penny two a penny stocks, however strong the source of your information may be.

(The author is an eminent Chartered Accountant. He invites comments at tsrawal@gmail.com )

A fool and his money

2006-04-19T23:55:00.000-07:00

A fool and his money will soon be invited everywhere: The folly of market timing
Dr. Tejinder Singh Rawal
tsrawal@tsrawal.com

There is a way to make a lot of money in the market; unfortunately it is the same way to lose a lot of money in the market.
Peter Passell and Leonard Rose
The share market continues to surprise all. In recent past it has surprised even the most optimistic bull operators by giving a better than expected return. Invariably every person I come across asks a question, "What's the market going to do next? How high (or low) will it go?". I feel this question is not relevant. The relevant question ought to be: “What does my long term investment strategy call for in present market conditions?”
It is every investor’s dream to get in the market when the market is low and sell when it is high. People employ all kind of strategies to find where the market would be tomorrow or the next month. A successful market timer does not have to do much homework since market timing alone delivers handsome returns for him, which makes him confident of his own strategy. This payoff to timing the market makes him an easy victim for the next market-timing strategy.

Market timers have a wide range of tools available at their disposal. Some of them are apparently spurious; others may give an impression of an exact science. Some people consider macroeconomic variables – like interest rates and GDP growth- to predict that you must buy shares when interest rates are low. While low interest does lead to higher economic growth, it may fail to lead to higher share prices if the growth was less than what was anticipated by the market. Some people would use the feel good indicators (opinion of the experts on CNBC, speech of the Finance Minister, and RBI Governor), while some rely on the opinion of cocktail party chatters! I even came across an economic model built trying to predict the stock market direction on the basis of the prevailing trend in the hemline of women’s skirts!( Believe me, there is a theory called Hemline Effect Theory to be found in Financial management). The argument is that, rising hemline denotes boldness and fashion consciousness which comes from confidence that you get from a buoyant economy, and is an indicator of a stronger market, while increasing length of the skirts denotes a conservative and cautious approach!

Market timing refers to an attempt to time investing decisions so as to invest in assets which are expected to go up in the near term and divest from assets which are expected to go down in the near term. The simplest implementation may be to shift one's assets between cash and stocks generically in order to take advantage of anticipated stock market movements. Market timers are the ultimate “buy low and sell high” traders. Day traders, who move in and out of positions in minutes or hours, are the extreme market timers. They look for small profits each day by capitalising on swings in a stock’s price.

I strongly advice against market timing in its various forms. Many a time when you try to time the market you end up doing a reverse timing, and you end up buying when you should be selling, and selling when you should be buying. It is `time in' the market and not `timing' the market that is important. The long-term stock investor prospers because he owns shares in businesses that are a part of one of the fastest growing economies in the world. The important thing is not so much when you buy, but that you buy and continue to buy and hold.

A great strategy in a volatile market could be what is called a rupee-cost averaging. The strategy is to invest a fixed sum of money periodically, say every month, over a long period of time in fundamentally strong shares. This evens out fluctuations arising out of short term ‘noise’ and long term trade cycles. To start with you may identify a basket of , say, 10 scripts. You keep investing a fixed amount in this basket, for a period of five years. An example will clarify the approach. Suppose you invest Rs. 2000 every month in Reliance Industries (RIL) shares over a period of 5 years. When the price of RIL was Rs. 500, you bought 4 shares, when the price fell down to Rs. 400 you bought 5 shares, when it shot up to 800, you could buy only 2 shares ( and utilise balance Rs. 400 in buying another share from your basket) . If next month should the price fall to 600, you would automatically up your investment in the company. The obvious advantage of this strategy is that you are automatically buying more shares when the market falls and fewer shares when the market rises. This automated strategy could be more suitable for the investors who do not have the time or the expertise in identifying value buys. The strategy, these days popularly called Systematic Investment Plan (SIP) could also be utilised by passive investors for buying Mutual Funds over a period of time.

Economist William F. Sharpe, wrote in an article, "Likely Gains from Market Timing," in Financial Analysts Journal "... unless a manager can predict whether the market will be good or bad each year with considerable accuracy, (e.g., be right at least seven times out of ten), he probably should avoid attempts to time the market altogether." If a Noble laureate like Sharpe could not make money by timing the market, since he knows that he cannot be right at least seven times out of ten, needless to say, market timing is a strategy to be avoided by investors.

"The long, sad history of market timing is clear: Virtually nobody gets it right even half the time. And the cost of getting it wrong wipes out the occasional gain of getting it right. So the average investor's experience with market timing is costly. Remember, every time you decide to get out of the market (or get in), the investors you buy from and sell to are the best of the big professionals. (Of course, they're not always right, but how confident are you that you will be 'more right' more often than they will be?) …Charles Ellis, Winning the Loser's Game. What is more, every time you get out of or in a share, you may brokerage, and also pay short term capital gains tax of 10% on the profits booked.

Looking back at market history, there have been far fewer successful market timers than successful stock selectors, and it is not clear whether even the few successes that can be attributed to market timing are more attributable to luck. Why is it so difficult to succeed at market timing? First, it is not possible to predict the future. Market is the sum total of the behaviour of the individual players. While at times market may behave rationally, more often that not it does not do so. It is the rational behaviour that alone can be the base for the science of prediction. Fitting something that does not behave rationally to a scientific straightkacket can lead to disastrous consequences. A far better solution is: not to be bothered about the direction of the market, but to approach the investment using a bottom-up approach. Identify a fundamentally strong script, which is trading at a price lower than its value, thereby giving you a comfortable margin of safety, and invest in such stock. You are likely to come across such stocks in all market conditions, bullish as well bearish. And if you don’t find any such investment, it would be a prudent decision to sit on cash, rather than invest. Warren Buffett’s investment vehicle, Berkshire Hathaway is known to be sitting on a large pool of cash when it cannot find safe investment opportunities.
Put the watch down, and relax, you can't time the market. Invest whenever you are ready. A wise investor is patient, disciplined, and focused on long-term goals.

(The author is an eminent Chartered Accountant. He invites comments at tsrawal@gmail.com )

Liberty. Fraternity. Equity.

2006-04-08T01:13:00.000-07:00

Liberty. Fraternity. Equity.

Fundoo Professor: Reflections on Indian Stock Market Levels Revisited

2006-04-08T00:44:00.000-07:00

Fundoo Professor: Reflections on Indian Stock Market Levels Revisited

VALUE INVESTING: BUY A BUSINESS NOT THE SHARES

2006-03-27T03:50:00.000-08:00

VALUE INVESTING: BUY A BUSINESS NOT THE SHARES

Dr. Tejinder Singh Rawal

Chartered Accountant

tsrawal@tsrawal.com

A value investor should look upon share investment as buying a part of a business. Investors should take the same approach to buying shares as they would if they were buying a business. The only difference is that instead of buying the whole of the business, they are only buying a tiny share.

A first year student of accountancy can tell us that when you buy shares of a company, you become part owner of the business to the extent of your shareholding in the company. We know all too well that this principle is at best a theoretical reality, and a minority shareholder may not have much right in a company’s management. We thus tend to treat this piece of law as ineffective piece of legislation. However, the fact that a shareholder is a part owner of business should not be ignored when valuing a business, since what an investor gets in lieu of the money he pays to buy a share is essentially a proportionate piece of the corporate ownership cake. And if you treat a share as a security existing in isolation, and not a proportional piece of the corporate cake, you would be doing so at your peril.

I have seen many , with finance professionals and Chartered Accountants being no exception, falling in the trap of thinking of shares as a piece of investment to be looked at independently without any reference to the fundamental business of which the share is a miniscule representation. Individual investors assume the research is beyond their level of competence and the professional investor is more keen to ride on the momentum rather than probe into the fundamentals of the company.

Finance professionals hold this view because of a firm belief embedded in their minds that the share price at any point of time is a perfect representation of its actual net worth, and the price deviation is either because of ‘noise’ or is a mere short term price discovery mechanism. These investors subscribe to what is known as Efficient Market Hypothesis, and would believe that since the market is efficient, the combined wisdom of the market determines the true market price, hence fundamental analysis has no role to play in such a market. But empirical evidence proves otherwise. Market price need not hover around the true value, and one may discover the divergence between the two in respect of many securities. It is this divergence, where the market prices a share considerably below its value, which the value investor is keenly looking at. In order to discover the divergence, you must have an ability to value the business of the company. While it is not an easy job to value even the business that you understand, it is well nigh impossible to value something that you don’t understand at all.

A prudent investor never buys a business that he does not understand. Similarly, a prudent share investor should never buy shares in a company, whose business he does not understand. Before buying shares, think of yourself as a business and find out whether you would have paid the same price per share for buying the business lock, stock and barrel.

Warren Buffett explains this concept very aptly in the following words:

“We 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. Incidentally that shortcoming doesn’t bother us.”

Keynes also realized the importance of the knowledge of the company you are investing in when he said the following, “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about …”

Knowing a company involves research as well as personal experience and successful investors approach share investment the way that they would the purchase of a business.

They buy a business in an industry area that they know or that they have learned about, they investigate the financials, they look at how the business operated in the past, they weigh up future potential, and they then make a reasoned decision to buy at the price offered or not buy.

One difficulty for the individual investor is getting this information. Investors can track through a series of company reports and financial and other announcements and do their own summaries and analysis. Other investors may choose to simplify their approach and get the summarised information from an investment advisory. Thanks to the Internet now information is not the prerogative of the select few, but now even an individual investor has load of information at his command by a mere click of the mouse. Most companies maintain a section in their web-sites where they keep details of the annual, half-yearly and quarterly results, and provide other information relevant for the investors. Websites such as www.capitalmarket.com , www.icicidirect.com , www.sharekhan.com www.myiris.com , www.kotakstreet.com and www.moneycontrol.com also contain summarised financial information of the listed companies. Websites of BSE and NSE also contain invaluable information for investors.

Anecdotal evidence and personal experience can also be useful to an investor. There are investors who would not buy shares in a company unless they have visited the company facilities, and are personally satisfied with the credentials of the company. Some would even meet the key management personnel to ascertain their outlook and decide upon the quality of management. While this method may be impractical for most of the investors, at least researching into the published information, and enquiring about the company credentials from people who know the industry should help.

Phil Fisher calls this ‘the scuttlebutt method”. He likes to interview the people who may have first hand information about the company. He thus likes to talk to the employees, vendors, customers, and even people living in the local community of a company’s manufacturing facilities.

Ben Graham disliked the idea of interviewing the management. He felt that most of the presentations made by the management would consist of nothing more than a sales talk. Graham preferred to rely more on the published information that the interaction with the management.

Peter Lynch advises the investors to develop a childlike inquisitiveness to enquire about the companies that you come across in your day to day life, and build a story around those companies. He says that he would pay a close attention to the shopping bag that his wife brings home from the supermarket to judge the changing consumer tastes and preferences. This way, his research is more relevant and faster than that being done by any other research organisation, because his starting point is the consumer loyalty and preferences, something that is not easy for professional research organisations to focus on with so much confidence.

Lynch goes a step further to advice investors to filter out such companies from their list, as the investor cannot relate to on hearing the name of the company. He says that if the theme of a company cannot be explained with crayons, it is not worth investing in.

Whatever method suits your attitude and professional expertise, the message of all the experts is clear: don’t invest in a company unless you know the business well.

In conclusion, it may be said that, since your area of competence is different from my area of competence, the confidence that I have about a particular business may not be at the same level as you. Hence, it is quite logical that I concentrate on businesses that I understand, and apply the ownership principle while evaluating and valuing it.

Dr. Tejinder Singh Rawal

M.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhD

Chartered Accountant

E 13, Anjuman Complex, Sadar,

Nagpur 440 001 India

Ph: +91 712 2582923 Fax +91 712 2583522

Email: tsrawal@tsrawal.com

What is Freemasonry

2006-03-22T23:33:00.000-08:00

What is Freemasonry

A paper addressed to non-masons

by Bro. Tejinder Singh Rawal

Master, Lodge Corinth 1122 EC Nagpur, India

What did George Washington, Winston Churchill and Benjamin Franklin have in common with Goethe, Mozart, and Voltaire? And with Motilal Nehru and Swami Vivekanand? They all belonged to the biggest and the oldest fraternal organisation in the world. . And so did Edwin E. Aldrin, the first astronaut to land on moon, Sir Author Conan Doyle, the celebrated writer of “Sherlock Holmes” fame, Edward VII - King of England, George VI - King of England, Sir Alexander Fleming who invented Penicillin, many of the Presidents and Vice-presidents of America, many prime ministers of Canada, Henry Ford, pioneer automobile manufacturer, King C. Gillett of the Gillett Razor Co., Rudyard Kipling, the famous writer who lived in India, Sir Thomas Lipton, the Tea Man.

Churchill and Roosevelt both were freemasons

Freemasonry, spread across four corners of the globe, has thousands of men who are of rank and opulence. Monarchs and kings have always taken keen interest in Freemasonry, and have with great enthusiasm worked for furtherance of its objectives. Did you know that Royal Society was started as a virtually a Masonic Lodge subsidiary, before becoming an independent body? Those of you who know Masonic symbolism will never fail to notice them on the USA $1 bill.

Without any doubt included in the list of Masons have been people who changed the course of history. However, the organisation they all belonged to remains the least understood organisation among public. It has always perplexed outsiders, and has always been an organisation shrouded in mystery. People lack even the rudimentary knowledge about Masonry, and ignorance results in confused ideas and spread of misinformation. It has a fair share of critics, and detractors, and baseless allegations have often levelled against it. Freemasonry has a long history of not answering to the critics, and this has been the reason why so many misconceptions exist about Freemasonry.

Speak of Freemasonry to a common man, and you find his mind is filled with many unanswered questions: Is Freemasonry a religion? Is it a political organisation? Isn’t Masonic Lodge a Secret organisation? How can one become a Mason? In this short article, I have tried to explain what Freemasonry is, what are its objectives, what do Masons do, and have tried to deal with some misconceptions that surround Freemasonry.

Freemasonry is a society of men concerned with moral and spiritual values. Its members are taught its precepts by a series of ritual dramas, which follow ancient forms and use stonemasons' customs and tools as allegorical guides. The fundamental ritual consists of a drama of building of King Solomon’s Temple, and the fate of its master architect. Using this allegory, moral lessons are taught. Since the story concerns building of a temple, Masonic rituals are replete with the tools of masons like level, plumb-rule, square, compasses and so on. Some of the Masonic terminology has found its way to the dictionary, and ‘on the level’ and ‘on the square’ are no longer exclusive Masonic clichés.

Every Freemason believes in God, and asserts this belief. His way of worshipping may be different, and it is never discussed in a Masonic Lodge (“ Lodge” is the place where Masons meet). What is important is the belief in God. Freemasonry is a brotherhood, and the basic premise for the brotherhood of men is the fatherhood of God. In order to agree to the fatherhood of God, one must agree that there is one Supreme Being controlling our thoughts and actions. It is this philosophy that makes it a prerequisite that Masons have a firm belief in the Supreme Being.

How a man worships God is purely his private affair. Masonry is not a religion, but it certainly is about God, since it wants you to affirm your belief in the Almighty. Since it does not interfere with the way you worship, it stands firmly for the freedom of religions. On the sacred pedestal in the Lodges in India it is customary to place with reverences the Holy Books of all the faith members subscribe to.

However Masonry is not a substitute for religion. Its essential qualification opens it to men of many religions and it expects them to continue to follow their own faith. It does not allow religion to be discussed at its meetings. Since Masonry is not a religion, it does not offer a pathway to salvation. That is the area of religion. It constantly reminds you of the duty that you owe to the Almighty and to your fellow-men, and expects you to follow the path shown by your religion to attain that. Because religion and politics often drive people apart, they are never discussed in a Masonic Lodge. Masonry also provides an avenue for charity, since Masonic Lodges do a great deal of Charity, it being one of the three tenets of Freemasonry.

While freemasonry expects a member (“brother”) to be active, it also makes it explicitly clear to him that a Mason must never put his duties and responsibilities to Freemasonry ahead of his duties to his family, to his God and to his country.

Freemasonry tries to induct good men into its Order, and strives to make better men out of them, by constantly reminding them of the duty they own to their family, friends, neighbours, to people in distress, and to the Almighty.

There is only one essential qualification for admission into and continuing membership of a Masonic Lodge: Belief in a Supreme Being. Membership is open to men of the age of 21 and above, of any race or religion who can fulfil this essential qualification and are of good repute. The greatest condition, the belief in Supreme Being, is asserted before one is initiated into the Lodge, and before one takes the Masonic Oath. It is required to be asserted much before that, at the time when one applies for the membership of a Lodge. How to become a Freemason? Traditionally, a Mason would not invite a friend to join, but would wait for the friend to ask "of his own free will". If you want to join Freemasonry, you may contact another Freemason, of may get in touch with the Masonic Lodge in your city. Freemasonry in India is firmly established and has been there for 275 years.

For many years Freemasons have followed three great principles: Brotherly Love, Relief and Truth. Every true Freemason will show tolerance and respect for the opinions of others and behave with kindness and understanding to his fellow creatures, pouring his brotherly love over him. By relief Masons mean relief to the community from their sufferings. When a candidate is initiated in the Lodge, he is reminded of this duty he is expected to fulfil to those who need his help. Freemasons are taught to practise charity, and to care, not only for their own, but also for the community as a whole, both by charitable giving, and by voluntary efforts and works as individuals. Moreover, charity need not be a financial charity alone; a Mason is expected to practice charity of thought. Needless to say the charity expected of a Mason is an absolutely voluntary contribution. Freemasonry has seldom publicised its charitable activities, though Masons do a great deal of charity through its institutions spread all over the world. From its earliest days, Freemasonry has been concerned with the care of orphans, the sick and the aged. This work continues today. In addition, large sums are given to national and local charities. Freemasons strive for truth, requiring high moral standards and aiming to achieve them in their own lives. Freemasons believe that these principles represent a way of achieving higher standards in life.

Freemasonry demands from its members a respect for the law of the country in which a man works and lives. Its principles do not in any way conflict with its members' duties as citizens, but should strengthen them in fulfilling their public and private responsibilities.

The use by a Freemason of his membership to promote his own or anyone else's business, professional or personal interests is condemned, and is contrary to the conditions on which he sought admission to Freemasonry. His duty as a citizen must always prevail over any obligation to other Freemasons, and any attempt to shield a Freemason who has acted dishonourably or unlawfully is contrary to this prime duty.

Allegations have often been levelled on Masonry that is a secretive organisation. Let me clarify, it is not a secret society, but is a society with secrets. The secrets of Freemasonry are concerned with its traditional modes of recognition. It is not a secret society, since all members are free to acknowledge their membership and will do so in response to inquiries for respectable reasons. Its constitutions and rules are available to the public. There is no secret about any of its aims and principles. Thousands of books have been written about various aspects of Masonry by both Freemasons and non-Masons, and they are easily accessible to the general public. Search the Internet and you will find thousands of pages giving all the information about different aspects of Freemasonry. People are often invited to visit the Masonic Lodge buildings to see the place where Masons meet. Like many other societies, it does regard some of its internal affairs as private matters for its members. A visit to the United Grand Lodge of England is a treat for the Masons as well as non-Masons, and they welcome you to a guided tour. How can an organisation with so much public presence be called a Secret Organisation?

A Freemason is encouraged to do his duty first to his God (by whatever name He is known) through his faith and religious practice; and then, without detriment to his family and those dependent on him, to his neighbour through charity and service. While none of the ideas Masons follow are exclusive to Freemasonry, and there may be many organisations which have similar objectives, what is however, unique about Freemasonry is the allegorical drama in which the principles are presented to the members, and the constant reminders that the Masonic rituals give to the members to help them remember the duties that people often tend to forget.

A Critical Study of What India Gains from WTO Hong Kong Ministerial Meeting

2006-03-20T22:53:00.000-08:00

A Critical Study of What India Gains from WTO Hong Kong Ministerial Meeting

Dr. Tejinder Singh Rawal

Chartered Accountant

tsrawal@tsrawal.com

We are living in a world today where lemonade is made from artificial flavours and furniture polish is made from real lemons.

Alfred Newman

India and other developing countries have secured significant gains in the Hong Kong Ministerial meeting of the World Trade Organisation (WTO). Agreement on duty free and quota free market access for 97 per cent of exports produced by the world's poorest nations and developed countries eliminating all forms of export subsidies in agriculture by 2013 could be considered to be the major achievements of the six-day meeting that concluded on December 15, 2005.

That developing countries were able to forge groupings such as G-20, G-33 and the much larger G-110 has been considered a great achievement at Hong Kong. What is of greater relevance is the fact that these groupings seem to have been held in the face of some intense negotiations and counter proposals from the developed countries. India proved its importance by assuming leadership of the developing world.

However, some members of G-110 and some anti-WTO campaigners have alleged that what could not be achieved in earlier rounds of negotiations by the US and EU , could be pushed through this time by them by winning India and Brazil to their side by way of doling out goodies to them and playing a typical divide and rule policy. India and Brazil played a large role in pressuring other developing countries to go along with what is essentially the US and EU’s agenda.

In this article an attempt is made to critically examine where we stand after the Hong Kong meet.

Down ,Down, WTO! : The meeting was held in the background of protests coming from many quarters. On December 11th, thousands of locals organized by the Hong Kong People’s Alliance marched along Causeway Bay carrying signs like “Migrants are Not For Sale,” “WTO Means Death for Thai Farmers” and “Down, Down, WTO!” In spite of a local media campaign designed to instill fear of foreign anti-WTO protesters, groups like the Indonesian Migrants Workers Union, the Philippines Domestic Helpers General Union, and the Hong Kong Confederation of Trade Unions still managed to recruit thousands of marchers for a colorful and joyous trek.

Right in the middle of WTO Director General Pascal Lamy’s opening speech two days later, dozens of people associated with the global Our World Is Not For Sale network – sporting a giant orange banner that read “No Deal Is Better Than a Bad Deal” in 10 different languages – jumped up and chanted “No More Lies, Lamy!”

Also on the opening day, a group of about 100 Korean fishermen jumped into the freezing Hong Kong bay, bobbing their message that the WTO’s negotiations on fisheries would devastate family fisher-folk in favour of giant-scale corporate fishing.

Water activists from Bolivia, Canada, the Philippines, Uruguay, and others unfurled a giant Water Out of the WTO banner in the main conference lobby. At a press conference launching an international campaign of the same name, leaders of the African Trade Network revealed how private companies in Ghana continued to cut drinking water service during a cholera epidemic that killed hundreds of people in his country, sighting this as the cruel outcome of rampant globalisation.

Star protesters were the Korean farmers and trade unionists. Each day they organized a different colourful, vibrant action, mostly in matching outfits and with militant discipline, such as the day they dressed up in similar long robes, took three steps, bowed and prayed, took three steps, bowed and prayed, over 1,000 times. The image of hundreds of outraged Koreans that had been plastered all over the local media was suddenly transformed into a compelling portrait of grief and reverence for life, beseeching trade bureaucrats not to negotiate away their futures. But after protesting peacefully every day, the Koreans promised they would ratchet things up later in the week. On December 18th, farmers and workers from the People’s Action Against Neoliberalism and Globalization from South Korea pressed up physically against police barricades and managed to get within a few hundred feet of the Ministerial meeting.

Standing off with police for hours just outside the convention centre, a few dozen finally managed to break through and scrambled towards the doors. Suddenly, the mood shifted. Police batons quickly reasserted power over unarmed protesters. Hundreds of people were beaten, and well over a thousand people from all over the world were tear gassed while peacefully standing in an intersection. In the end, more than 1,000 people were arrested, most of them in the dead of night.

The breakthrough: The stories of negotiations and protests reveal certain lessons about the meaning of Hong Kong. United States and European Union are so invested in maintaining the current model of corporate globalization embedded in the WTO, that they were willing to do anything to get a declaration signed and prevent a “failure.”

The WTO has failed to successfully conclude even one round of negotiations since its founding in 1995. It is still in the midst of a round begun in 2001 and named after the city Doha, in Qatar, where it was launched. The “Doha Round” was to have been completed last year, but negotiators acknowledge that they have yet to finish even the general parameters or “modalities.” The WTO’s goal in Hong Kong was to complete the “modalities” – while the protesters wanted the negotiations to collapse, as they did in Cancun in 2003.

In Hong Kong, a declaration was eventually signed. While WTO proponents have admitted that the declaration does not get them much closer to concluding the round, the declaration does mandate a number of harsh concessions from developing countries that will have serious implications for the their future development. And it keeps WTO negotiations hobbling along, at a time when the entire model of corporate globalization is experiencing a serious legitimacy crisis.

The following were agreed to in Hong Kong with respect to agriculture:

1. An end-date of 2013 for European export subsidies in agriculture;

2. A Development Package on key issues such as subsidies on cotton, market access for the Least Developed Countries (LDC’s), or development aid;

3. The US and European Union give huge subsidies to their agricultural sectors, subsidies which gives their products an unfair advantage in the world market and depress global prices, wreaking havoc on farming communities worldwide. Agricultural exporters like Brazil and Argentina have been battling for a reduction in US and European domestic and export subsidies by 2010, so Brazilian and Argentine soy, citrus, sugar, and beef could be sold in the US and EU markets on a level playing field. This greatest-distorting subsidy of all should have been eliminated many years ago, and no price should have been asked for it.

4. The US made what appear to be significant offers on agriculture, and tried to shift the blame onto the Europeans. It seemed like the Ministerial was going to break down over the EU’s lack of willingness to reduce its massive export subsidies by a fixed date. But at the last hour, having extracted as much in return for it as he could, the EU Trade Commissioner Peter Mandelson agreed to a target date of 2013 for export subsidies, leaving the issue of much larger domestic subsidies undecided.

5. The G20, the group representing agriculture-exporting developing countries that opposed the US and EU offer in Cancún, took the offer rather than allow another failed Ministerial to be blamed on them. And then they helped pressure other poor countries to go along with the deal.

6. One should not forget that most developing countries are net food importers, and are more concerned about protecting their base of farmers from subsidized foreign imports than gaining access to other countries’ markets. These countries have been advocating for a designation called Special Products, which would allow them to place certain restrictions on food items based on food security, livelihoods, and rural development.

7. Another key issue for some of the poorest developing countries is cotton. US cotton subsidies to agro-industrial producers so distort the market that millions of farmers in India, Burkina Faso, Mali, Benin, and Chad lose out on billions of income because of the artificially low prices. They have demanded an end to US domestic subsidies by 2006. They got a vague promise that the US would reduce its subsidies “over a shorter period of time than generally applicable.” Nothing more than crumbs, on an issue that costs farmers their livelihoods every day.

8. In the draft declaration, developed countries could decide which type of products to protect in this manner, but developing countries were going to have to allow the WTO to decide it for them, with many restrictions. They finally gained the right to “self-designation” of Special Products at Hong Kong, but this is extremely vague, as only an “appropriate number” of products – to be determined through future negotiations in Geneva – will be allowed for designation.

This may seem like a complex, insignificant detail. But when farmers from South Korea and other countries are killing themselves to protest the WTO, and farmers represent over half the population in most developing countries, it’s no small matter.

What India stands to gain?:

In spite of all the negotiation tactics employed by the US and EU to extract their pound of flesh in respect of the concessions which they were even otherwise obliged to concede; India and the developing nations do stand to gain a lot from the Hong Kong round.

In respect of agriculture, India has gained in that the deal not only ensures that there would be no restraint on the government's ability to provide domestic support for farmers, it also permits the developing nations to protect farmers against unfair competition from imports. The government could raise import duties on farm produce either because of surge in imports or because the import price was too low.

In the longer run the elimination of subsidies to farm produce from the developed world would end the artificialities of world prices. This declaration can be seen as a reversal of the perpetuation of the inequities of global trade.

India has also gained from the fact that the deal calls for intensified discussions to be completed by June this year on geographical indications and biological diversity. While the former will mean that India will be able to prevent others from using labels like Basmati rice or Darjeeling Tea, the latter will enable the government to do more to protect the rights of communities over genetic material and traditional knowledge in areas like ayurveda.

The phasing out of export subsidies on agricultural products by 2013 is claimed to be the biggest single concession wrested from the developed countries. For this to be effective, certain loopholes that allow hidden subsidies in export-credit and food aid will have to be plugged. The phase-out is a small but important step but much needs to be done in the area of domestic support, where only the broad modalities for subsequent negotiations have been arrived at.

Even the deal on cotton, expected to benefit some of the poorer African countries - is subject to an agreement being reached on eliminating all export subsidies by the end of 2006. Under this arrangement, while the U.S. will abolish export subsidies on cotton this year. India and other developing countries can retain higher tariffs to protect their farmers and ensure that food and livelihood concerns are met. Their need for a special safeguard mechanism based on price and volume trigger has been recognized.

In Non-Agriculture Market Access (NAMA), developing countries are not required to cut tariffs to the same extent as the developed countries. While the principle of "less than full reciprocity" has been recognized, there is no agreement on the exact mechanics for such reductions. Only subsequent discussions will bear out whether the developing countries have given away too much under NAMA in return for concessions in agriculture.

The EU finally agreed to do away export subsidies on agricultural products by 2013 thereby contributing to the most visible result. India and Brazil, two large countries deeply involved in agricultural issues, led the discussions on behalf of all developing countries. Again in agriculture trade, developing countries were able to ensure that a mechanism will be created to counter low priced agri-imports that can hurt the interests of their farmers. This major safeguard could not have been institutionalized, but for the widespread support from many other countries.

The smaller developing countries actually showed tremendous resistance and alliance-building efforts during the negotiations. Keep in mind, about 30 developing countries don’t even have the resources to field permanent staff in Geneva, where the WTO negotiations are ongoing – so the challenge to even know how the negotiations will affect your country can be overwhelming. A huge group of 110 countries met in Hong Kong to coordinate positions, in what is probably the largest meeting of developing countries within WTO history.

Conclusion: But a final agreement is a long ways off. And as the credibility of the entire model of corporate globalization continues to erode, based on its failure to promote growth and development, it can still be stopped.

A careful reading of the Hong Kong Ministerial text shows that despite days of hype about development being at the core of the Doha agenda, the relevant paragraph 38 literally is a “cut and paste” of language from the original 1994 WTO agreement! After ten years of negotiations at the WTO, developing countries have given enormous concessions, but in return they have gained a restatement of the WTO’s charter agreement.

This means that developing countries were pressured to trade the privatization of their services and industrial future for a 2013 target date to eliminate export subsidies that should have been abolished long ago, and a promise of future development aid, most of which is actually designed to “aid” countries in restructuring their domestic economies to accommodate the privatization of their services and the selling off of their industrial futures.

UNION BUDGET 2006-07 CHARITABLE TRUSTS

2006-02-28T23:45:00.000-08:00

ANYNYMOUS MAGNANIMITY FAILS TO IMPRESS THE FM :PROPOSED S. 115BBB
By proposing to put to tax at maximum marginal rate the anonymous or pseudonymous donations given to charitable institutions, the Finance Minister plans to plug a misuse of the Income Tax provisions. However, the proposal is likely to cause hardship in genuine cases.
The proposed amendment
In chapter XII of the Income Tax Act, after section 115BBB the following section 115BBC is proposed to be inserted with effect from the 1st April, 2007.
‘115BBC (1) Where the total income of an assessee, being a person in receipt of income on Anonymous behalf of any University or other educational institution referred to in sub-clause (iiiad) or sub-clause donations to (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred’ to in sub-clause (v) of clause (23c) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of-
(i) the amount of income-tax calculated on the income by way of any anonymous donation, at the rate of thirty per cent; and
(ii) the amount of income tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause(1)
(2) The provisions of sub-section (1) shall not apply to any anonymous donation received by-
a) any trust or institution created or established wholly for religious purposes;
b) any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.
3. For the purposes of this section, “ anonymous donation” means any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.
Clause 6 has proposed to amend section 13 by inserting the following sub section 7:-
“ Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof, any anonymous donation referred to in section 115BBC on which tax is payable in accordance with the provisions of that section”
ANALYSIS
Definition of ‘Anonymous donation”; The proposed amendment defines anonymous donation to mean any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.
The proposed amendment applies to the following categories of assessees:-
a. any university or other educational institution existing solely for educational purposes an not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed or
b. any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority
c. any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, if the aggregate annual receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed,
d. any hospital or other institution for the reception an treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, other than those mentioned in sub-clause(iiiac) or sub-clause (iiiae) and which may be approved by the prescribed authority.
e. any other fund or institution established for charitable purposes which may be notified by the Central Government in the Official Gazette, having regard to the objects of the fund or institution and its importance throughout India or throughout any State of States;
f. any trust including any other legal obligation or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be notified by the Central Government in the Official Gazette, having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof;
g. any trust or institution referred to in section 11 of the Act.
TAX CALCULATION
If an institution referred to in the above paragraph is in receipt of an income which includes an anonymous donation, the income tax payable shall be calculated as follows
i. The amount of Income Tax on the amount of anonymous donation shall be calculated @ 30%.
ii. The amount arrived at after reducing the amount which has been charged @ 30% shall be chargable to Tax at the normal rate.
EXCLUSION
The provisions of sub section (1) shall not apply to the following institutions
i. Anonymous donation received by a wholly religious trust
ii. Anonymous donation received by a trust created wholly for religious and charitable purposes. This will however, not include donations made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.
Thus donations to partly religious and partly charitable trusts are proposed to be taxed only if the donation is specifically for an educational or medical purpose. One fails to understand the logic that would have gone into concluding that donations meant for educational or medical purpose are prone to misuse while donations not given specifically for medical or educational purpose are better quality donations.
Obviously the Finance Minister did not want to invite the wrath of religious bodies by proposing a maximum marginal tax on donations made to religious trusts and so decided to stay away from it.
The definition of anonymous donation is ambiguous and is likely to cause confusion and hardship in genuine cases. The proposed definition casts a responsibility on the part of the person receiving the donations to maintain the record of the identity indicating the name and address of the person making the contribution and such other particulars as may be prescribed. From a plain reading of the definition it seems that if the person making the contribution gives false particulars or fails to give proper particular, the trust would be penalized, such income being charged to tax at maximum marginal rate.
Section 13 provides for cases where section 11 shall not apply . Proposed sub section (7) of section 13 provides that nothing contained in section 11 or section 12 shall have an effect of excluding from the total income of the previous year, any anonymous donation referred to in section 115BBC on which tax is payable in accordance with the provisions of that section. It seems this amendment has been proposed as a measure of abundant precaution, lest any provision in section 11 or 12 should operate against the provisions of the proposes section 115BBC. This amendment will take effect from 1st April 2007 and will accordingly apply in relation to the assessment year 2007-08 and subsequent years.

UNION BUDGET 2006-07 TDS AND TCS

2006-02-28T23:44:00.000-08:00

PROPOSED AMENDMENTS PERTAINING TO TDS & TCS
The existing provisions
Under the provisions of section 201(1A) if the person responsible for deduction of tax at source does not do so, or after deducting fails to pay the tax to the government, he is liable to pay simple interest @ of 12% per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Similarly section 206 C (7) provides that if the seller does not collect the tax or after collecting the tax fails to pay it as required under this section, he shall be liable to pay simple interest at the rate of one percent per month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which the tax was actually paid.
THE AMENDMENT
Clause 42 seeks to insert in sub section (1A) after the words” such tax is actually paid”, occurring at the end, the words, brackets and figures “ and such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section(3) of section 200”, with effect from 1st June, 2006. Similarly clause 47 seeks to amend sub section 7 of section 206C as under:-
After the words “ tax was actually paid:, occurring at the end, the words, brackets and figure and such interest shall be paid before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section (3) shall be inserted with effect from the 1st day of June, 2006.
INTERPRETATION
The proposed amendments mandate payment of interest on delayed payment on self assessment basis. It shall be obligatory on the part of the person deducting or collecting taxes to pay interest on default amount before furnishing the quarterly statement for each quarter in accordance with the provisions of section 200(3) and section 206C (7).
For the word “ seller” the words “ person responsible for collecting tax” is proposed to be substituted with effect from 1st April, 2007 in section 206C.
ANNUAL TDS AND TCS RETURNS NOT TO BE FURNISHED

Section 206 provides that every person responsible for deducting tax at source shall within the prescribed time after the end of each financial year prepared and delivered to the prescribed Income Tax Authority, such returns as may be prescribed. Section 206C contains a similar provision in respect of tax collected at source.
It is proposed in the Finance Bill to do away the requirement of furnishing the annual returns of TDS and TCS in respect of tax deducted or collected on or after 1st April,2005. Consequential amendment has been proposed in the penal provision of section 272A. failure to furnish the annual return for tax collection or deduction before 1st April, 2005 shall continue to attract penalty U/s 272A.
With the amendments proposed in section 139A, 272A, 206, 206C & 203A, it is proposed to fully replace the existing system of filing of annual return by the system of furnishing of quarterly returns. It is proposed by way of an amendment to section 272A that the penalty leviable for failure to deliver the statements shall not exceed the amount of tax collectible or deductible as the case may be.
Under the existing provisions contained in the said section under the existing provisions contained in the said section, failure to furnish a return in due time under section 206 or section 206C renders the person, who fails to furnish the return, liable for penalty of a sum of one hundred rupees for every day during which the failure continues.
This amendment will take effect retrospectively from 1st April 2006 and will accordingly apply in relation to the assessment year 2006-07 and subsequent years.
It is proposed to insert a new sub section (6A) so as to deem any person responsible for collecting tax in accordance with the provisions of the said section as assessee in default if such person does not collect the whole or any part of the tax or fails to pay such tax after having collected the tax.
It is further proposed to provide that no penalty shall be charged U/s 221 from such person unless the Assessing Officers is satisfied that the person has without good and sufficient reasons failed to collect or pay the tax.
QUOTING OF PAN AND TAN ON QUARTERLY STATEMENTS TO BE MANDATORY
The existing section 139A (5B) provides that where any tax has been deducted, every person deducting the tax shall quote the PAN of the person to whom the amount has been paid in annual return of TDS furnished U/s 206. Sub section 5D provides for a similar quoting of PAN of every buyer in respect of tax collected U/s 206C, in the annual return of TCS. With the proposed doing away of the annual returns of TDS and TCS, clause 32 of the Finance Bill 2006 proposes to amend the said sub sections 5B & 5D to provide for compulsory quoting of PAN and TAN in all quarterly statements prepared and delivered in accordance with the provisions of section 200(3) or the provisions of section 206C(3).
While the amendments relating to dispensing with the annual returns of TDS and TCS are proposed to be effected from 1st April, 2006, the amendments in sections 139A & 272A shall be effected from 1st June, 2006.

DEMAT TDS & TCS DEFERRED
The existing provisions
Section 203 provides for issue of certificate by the deductor to the person in respect of whose income such payment of tax has been made, specifying the amount so paid the rate at which the tax has paid and such other particulars as may be prescribed. Sub section 3 provides that where tax has been deducted on or after 1st April, 2006, there shall be no requirement to furnish such certificate. This provision intended to create a paperless regime by dematerialising the TDS & TCS certificate. These provisions were to come in-force with effect from 1st April, 2005 but Finance Act 2005 deferred the enforcement by one year and provisions were to come in force in respect of TDS and TCS collected or paid on or after 1st April, 2006.
As a consequence of this amendment sub-section (3) was inserted in section 199 to provide that where any deduction is made in accordance with the foregoing provisions of this chapter on or after the 1st day of April, 2006 and paid to the central Government, the amount of tax deducted and specified in the statement referred to in section 203AA shall be treated as tax paid on behalf of the persons referred to in sub-section(1) or, as the case may be, sub-section (2) and credit shall be given to him for the amount so deducted in the assessment made under this Act for the assessment year for which such income is assessable without the production of certificate.
Consequently section 139(9) was amended to provide that the return of income shall not be deemed to be defective if it was not accompanied by proof of tax deducted.
THE AMENDMENT
It is proposed to defer the commencement of dematerialisation provisions by two years and make such provisions applicable for tax deducted or paid U/s 203(3) or collected U/s 206C on or after 1st April, 2008. Clause 41, 43, 45 & 47 have proposed amendment in sections 199(3), 203(3), 203AA & 206C respectively, and clause 31 proposes an amendment to section 139, to give effect to this deferment.
FAILURE TO PUSH THE TECHNOLOGY THROUGH
The provisions of dematerialisation were introduced with great enthusiasm in 2005. The avowed objective of such amendment was to make the life of the taxpayer easy by introducing certificates in DEMAT format, so that the credit for taxes could be given not on the basis of documentary evidence procured by the assessee with great difficulty, but on the basis of an electronic entry in the data base which could be easily verified and cross checked by the click of a button. The On Line Tax Accounting system (OLTAS) was supposed to handle this mundane task with the help of PAN and TAN. However, it seems the Department has not been able to overcome the love for paper work, and is not yet able to create a reliable and robust data base which would obviate the need of documentary compliance.
The shift to dematerialized system shall not be possible unless a system to verify the data including PAN and TAN is in place. The financial Minister confesses that in many places quoting of falls TAN or PAN have resulted in getting the taxes deducted or collected or paid getting credited to the suspense account. Unless all transactions are matched in the OLTAS, and complete information is populated in the deductees’ or collectees’ accounts dematerialisation shall remain a far cry.

UNION BUDGET 2006-07 MAT

2006-02-28T23:40:00.000-08:00

PROVISION PERTAINING TO MINIMUM ALTERNATE TAX (MAT)

Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
The existing provisions
The existing provisions of section 115 JB provides that in case of a Company, if the Income Tax payable on the total income as competent under this Act in respect of any previous year relevant to the assessment year commencing on or after 01,04,2001 is less than 7.5% of its book profits, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee for such previous year shall be 7.5% of such book profit
The Explanation to sub section (2) of section 115 JB defines ‘book profit’ to mean the net profit as shown in the profit and loss account for the relevant previous year prepared in accordance with parts II and III of schedule VI to the Companies Act 1956 and as increased or reduced by certain adjustments as specified in the said Explanation.
Sub section 1 of section 115 JAA provides that where any tax is paid under section 115 JA by a Company for any assessment year the credit in respect of the tax so paid shall be allowed in accordance with the provisions of the said section 115JAA. Sub-section (1A) of section 115JAA provides for a similar provision with regard to any amount of tax paid under section 115JB for the assessment year commencing on 1st April, 2006 and any subsequent year. Sub section (2) of section 115JAA provides that the tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment year under section 115JA of section 115JB, as the case may be, and the amount of tax payable under the normal provisions of the Income –tax Act. Sub- section (3) of section 115JAA provides that the amount of credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-sections (4) and (5) of the said section, but such carry forward shall not be allowed beyond the fifth assessment year immediately succeeding the assessment year in which the tax credit become allowable under sub-section (1) of the said section.
THE PROPOSED AMENDMENT
a. Sub section (1) of section 115JB is proposed to be amended by clause 24 to substitute the words 10% in place of 7.5%, with the result that if the Income Tax payable on the total income as computed under the Income Tax Act in respect of any previous year relevant to the assessment year 2007-08 is less than 10% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the relevant previous year shall be 10% of such book profit.
b. The definition of book profit as provided in Explanation to sub section (2), under clause (f) of the Explanation, provided for adjustment relating to amount of expenditure relatable, inter alia, to section 10(23G). Clause 24 of the Budget proposes to omit the reference to ‘other than the provisions contained in clause (23G) thereof ‘ from clause (f) and clause II of the Explanation to section 115 JB. This proposed amendment is consequential to proposed omission of clause (23G) of section 10, by clause 4 of the finance bill.
c. DEPRECIATION
Clause 24 proposes to amend the definition of ‘book profit’ has provided an Explanation to section 115 JB by insertion of a new clause (g) which provides that for the purpose of this section book profit shall be increased by the amount of depreciation debited to the profit and loss account. Further, it is proposed to insert a new clause (iia) in the Explanation so as to provide that the amount of depreciation claimed in the books of account, excluding the claim of depreciation arising on account of revaluation of assets, shall be reduced from the book profit. Read together, the implication of these two proposals is to allow depreciation incurred in the normal course of business, and exclude depreciation arising out of revaluation of assets. It is also proposed by way of insertion of a new clause (ii b) in the said Explanation to provide that the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets, shall be reduced from the book profit. This last amendment is proposed with a view to avoiding double taxation on this account.
d ENHANCED PERIOD FOR CARRY FORWARD OF MAT CREDIT
Clause 23 of the Finance Bill proposes to amend section 115 JAA to provide that the amount of Tax credit for MAT paid under section 115JB for the assessment year 2006-07 and later shall be allowed to be carried forward and set off for seven assessment years immediately succeeding the assessment year in which the Tax credit becomes allowable under the said section
The amendments pertaining to section 115JAA and section 115JB shall take effect from 1st April 2007 and accordingly shall apply in relation to assessment year 2007-08 and subsequent years.

PROPOSED AMENDMENT IN PROVISION PERTAINING TO SELF ASSESSMENT AND INTEREST
The Existing provisions
The existing provisions of section 140A provides that where any tax is payable on the basis of any return required to be furnished under section 115WD or section 115WH or section 139 or section 142 or section 148 or section 153A or as the case may be section 158B after taking into account the amount of tax, if any already paid under any provision of this Act the assessee shall be liable to pay such tax together with interest payable under any provision of this Act for any delay in furnishing the return or any default or delay in payment of advance tax, before furnishing the return and the return shall be accompanied by proof of payment of such tax and interest.
Sub section (1A) of section 140A provides that for the purpose of sub section (1 )interest payable under section 234A shall be computed on the amount of the tax on the total income as declared in the return as reduced by the advance tax, if any paid and any tax deducted or collected at source.
THE PROPOSED AMENDMENT
The Finance Bill 2006 seeks to provide a relief to the assessee in the form of credit for MAT and Tax paid in a country or specified territory outside India for the purpose of calculating interest under section 140A. It seeks to amend sub section (1) as under after taking into account:-
i. the amount of tax, if any, already paid under any provision of this Act.
ii any tax deducted or collected as source;
iii any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India;
iv any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section; and
v any tax credit claimed to be set off in accordance with the provisions of section 115JAA;
Similarly in sub section (1A) the following clause is proposed to be substituted under section 234 shall be computed on the amount of the tax on the total income as declared in the return as reduced by the amount of:-
a. advance tax, if any, paid;
b. any tax deducted or collected at source;
c. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India;
d. any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section; and
e. any tax credit claimed to be set off in accordance with the provisions of section 115JAA;
The Explanation to section 140A is also proposed to be amended, to define ‘Assessed Tax’ as tax on total income as reduced by the amount of TDS, TCS, relief of Tax or deduction claimed under section 90, 91 or 90A, and MAT and section 115JAA
INTERPRETATION
This proposed amendment comes as a major relief to the assesses paying MAT or taxes of a foreign country. The proposal recognizes that such taxes are no different from taxes deducted at source, collected at source or paid in advance, and hence should receive similar treatment for the purpose of levy of interest. The Finance Minister seems to have adopted a pragmatic approach while proposing this concession.

CREDIT FOR MAT AND FOREIGN TAXES FOR THE PURPOSE OF INTEREST U/Ss 234A, 234B & 234C
Similar amendments have been proposed in sections 234A, 234B & 234C, to provide for reduction of Tax credit allowed to be set off under section 115JAA from the tax on total income, and reduction the amount of relief of tax allowed under sections 90 & 90A and deductions from Indian Income Tax allowed under section 91, from the tax on total income, for the purpose of levy of interest for defaults in furnishing return of income (section 234A), interest for defaults in payment of advance tax (234B), and interest for deferment of advance tax(234C).
As said in the case of propose amendment in section 140A, the inclusion of MAT and foreign taxes for the purpose of sections 234A, 234B and 234C would also come as a major relief to the taxpayers.
These amendments will take effect from 1st April 2007 and will accordingly apply in relation to the assessment year 2007-08 and subsequent years.

Budget 2006-07

2006-02-28T23:38:00.000-08:00

A Good Budget
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

INTRODUCTION
The Budget was good because it was not bad. The speech of the Finance Minister was over abruptly, and he left the viewers wondering about what was in store for them. Since the Budget did not give any news, did not levy any new taxes, it was good news. There was a marked difference between this Budget and the last year’s budget in that last year the Finance Minister had introduced measures like FBT which had far reaching effect.

The Finance Minister P. Chidambaram decided to adopt a minimalist approach while proposing changes pertaining to Direct Taxes. Correctly so, because when the engines of the economy are running in full steam fiddling with Tax Provisions just for the sake of changes is certainly not the right approach. The Finance Minister followed the American adage, ‘ When it ain’t broke, why mend it?’ Even a cursory look at the report card of the economy proves that just maintaining the status quo in a momentum driven vibrant economy is enough to generate higher revenue. For example the economy grew at an impressive rate of 7.5%, with the manufacturing sector growing at whopping 8.1%. More importantly at current market prices, gross domestic saving increased to 29.1% of GDP and rate of gross capital formation was as high as 30.1% of GDP.
On reading the provisions pertaining to Direct Taxes one finds that most of the amendments proposed aim at including the structure of the law and removing anomalies and ambiguities rather than raising more revenue. The Finance Minister knows it well by now that since the economy is buoyant and vibrant, it makes no sense to fiddle with the structure which has been delivering impressive results. The Finance Minister did not even touch the provision of section 80C, on which he had spent a considerable amount of time in his previous budget speech, where he had tried to impress the need for introduction of an EET Tax regime in respect of investments.

Train to Pakistan

2006-01-24T05:04:00.000-08:00

Train to Pakistan
Tejinder Singh Rawal
tsrawal@tsrawal.com

Jis ne Lahore nahi wekhya o jamya hi nai (One who has not seen Lahore is not yet born: your life is worthless if you have not seen Lahore) goes an old Punjabi saying. These words were constantly echoing in my mind when I received an invitation from the Institute of Chartered Accountants of Pakistan (ICAP) for participating in a conference in Lahore. It was an invitation too difficult to resist.

Pakistan is a very special place for me, as it is for every member of the huge displaced Punjabi community, which suffered the pangs of the partition and settled in India, becoming refugees in their own country. I am born and brought up in India, of parents who hailed from that part of India, which is now Pakistan. My father and grandfather once lived in a small village called Akora Khattak in Nowshera in NWFP, while my mother and her relatives lived near Rawalpindi. So when ICAP extended an invitation to me to participate in a Conference in Lahore, I was so excited. For me a visit to Pakistan was a visit to my motherland, my matrabhumi, and I applied for the visa immediately.The first setback I received when the visa application was not accepted for processing by the Pakistan Embassy on the ground that they had not yet received the clearance from Ministry of Interiors. I live in Nagpur, a city in the central part of India, far off from Delhi. The planned day of my departure was 13th January and until 11th, the clearance of the Ministry of Interiors had not been received. I was in a tight corner: I could not book my air tickets or bus ticket since I did not have visa issued to me. I thought of giving up, but the desire to visit the place where my parents once lived was so great, I was determined to go. When I enquired about the bus service, I was told that the bus was booked fully until the 20th; in any case, they would not book my ticket unless I had a visa granted to me. Indian Airlines flies twice a week to Lahore and the days were not suitable to me.

I boarded a train to Delhi without a visa in my hand on 11th night. I instructed my travel agent to apply for visa again on 12th morning. I kept calling my agent from my cell during my journey and her reply was in the negative, every time I called, she would tell me that visa was yet to be processed. I reached Delhi, called her, she asked me to meet her in her office, and she expected the visa to be delivered by the time I reached there. Reaching her office, my joy knew no bounds when I found that my passport had been stamped with a visa to visit Pakistan. I had already my train ticket booked for Ludhiana by 8 PM train from Old Delhi station, and rushed there to board the train in time.
Next morning I was at Wagah border proudly showing my papers, when I received another setback: "Sorry sir, you can't cross the border on foot unless you have a foreign passport, or unless you have a special permission from Ministry of External Affairs" I vaguely remembered one of the delegates was talking about obtaining the permission, but since I was in time for the train at Atari, I decided to travel 5 kilometres to Atari and board the train, Samjhota Express, from there. Though subsequently the permission from the Ministry was received, I preferred the rail journey for the return trip also. I was wondering why they should give special privileges to foreign passport holders? I met an NRI, an American passport holder who proudly walked through Wagah whereas we lesser mortals are required to go through the ordeal of the train journey.The Indian officer at Atari gave me a strange look when he found a Sikh travelling to Pakistan, and looked at my visa with suspicion. Obviously, people who travel by Samjhota are the people in India and Pakistan who have relatives on the other side of the border. And there are only a handful of Sikhs who live in Pakistan. The visa read, 'Indian Delegation' and he enquired about the rest of the members of the delegation, I replied that he might consider me as a one-man delegation. He was certainly not amused. I then had to tell him politely that it was none of the business of the Indian authorities to look into the reason why the visa was granted, it was for the Pakistani authorities to look into that. The officer advised me to remove my disemarkment form from Passport and keep it safely elsewhere, since the officers on the other side were likely to throw it away, and I would have difficulties on return. I asked him, are they bad on us, his reply was, "Assi unha nu taan bilkul hi nahi bakshde, oh saanu kyoun bakshange?" ( "We certainly don't spare them, why would they spare us?") I noticed a similar attitude across the border also when I asked a Pakistani officer whether people sometimes cross the border illegally. "Tusi tapde ho, assi nahi" [ "You (guys) jump ( the border) we don't ], then added that it was 10 years ago at the height of the Punjab border, now it doesn't happen. I later realised that this hostility exists only at both side of the border, and is non-existent as you travel in the countries. Sparing these two incidences, I did not come across any other occasion when anybody spoke bad about people on the other side of the border.
The train journey is the most traumatic experience. This journey deserves an entry in the Guinness Book of World Records as the slowest train journey in the world. It may take you more than 12 hours to travel 60 kilometres!! First, nobody at the station will ever tell you when the train is likely to arrive. Time for the start of the train from Lahore is 8 AM, it reaches Wagah, the Pakistani side of the border where, all 400 odd passengers alight for immigration and customs clearance, the train restarts after all the passengers have been cleared, which usually happens in late afternoon. The train arrived at 3 PM, and we boarded the train. I found 3 more delegates at the station and we now became a delegation in true sense of the term. Having boarded the train, I congratulated myself thinking that it was only an hour more for me to reach Lahore!! When I asked the officers when the train reaches Lahore, everyone smiled, and like always were non-committal. The train, guarded by Indian army men, who rode on horseback to see off the train to Pakistan border, entered Pakistan, and soon we were at Wagah station, not knowing that we had to go through another frustrating experience. There were two immigration officers and two customs officers and they were supposed to clear more than 400 travellers. People travelled with so much baggage, as if they were moving house! Baskets of paan ( betel) leaves, yards of clothes, mixer-grinder, kitchen appliances were being carried by most of the passengers. I was also told that some of them even dissemble bicycles and carry them in their baggage, since the price of a bicycle in Pakistan is Rs 3000! The attitude of the officers was that of callousness and indifference. One officer would shout at people at the top of his voice, when I sarcastically told him he had a very impressive voice, he proudly said that when he shouted the BSF jawans at the Indian border could also hear him!

Samjhota Express, was an obsolete looking train and truly justified the name samjhota, compromise! Pakistan still manages with the technology that is at least 3 decades old. The train stopped a few kilometres before Lahore, since a Toyota van had obstructed the track! We finally reached Lahore in the middle of the night. To our pleasant surprise, our hosts were eagerly waiting for us at the railway station. Throughout our trip the hosts made sure that we were comfortable and showed great hospitality to all the Indian delegates. We were transported to our hotel at Mall Road. I had heard a lot about Lahore from my parents and grandparents, and was obviously not interested in sleeping, but would rather like to visit places even if it was the middle of the night. When I told this to Major Ajmal Masoon, Asstt Manager Admn, ICAP, he readily obliged, and took us straight to the Food Street at Gawalmandi. It is a pedestrians' lane, well lit, surrounded by pre-partition Indian architecture. It offers the choicest of Mughlai, Lahori, Pakistani and bar-be-cue cuisine at a very reasonable price. Even at such odd hours I could see so many people glutting, indeed Lahoris are voracious eaters whose lives revolve around food!Next morning we began our trip in the alleys and lanes of Anarkali, a place I had heard a lot bout from my parents and grandparents. Of all the bazaars in Lahore, Anarkali is most fascinating. You name anything and you get it here, whether it is leather goods, or handicrafts, or ethnic wears, or anything else under the sun. Legend has it that the bazaar was named after Anarkali who was Akbar's courtesan . She, according to legend was put to death by Emperor Akbar for having a love affair with prince Salim, later known as Jehangir. Anarkali is the place to discover the old world charm, the glib-talking shopkeepers who obviously enthused to see Indians visiting them, would not let you go without buying their stuff. The Food Street in Anarkali was a connoisseur’s delight. With a wide variety of food, it is sure to add inches to your waistline. It was a delight to see such dishes as katlamma, exotic kebabs and biryanis.What is most amazing is the attitude of the people in Pakistan. I being a turban wearing Sikh am too conspicuous to be ignored. "Sardarji Sat-sri-akal" the greetings followed me wherever I went. And I would reply to them with the same enthusiasm. People stopped us for no reasons just to greet us. "Assi twade tabedaar haan, tusi saade mulk aaye ho" ( “We are grateful to you for having come here”) was what was echoed everywhere we went. The offer to have a cup of tea with them was difficult to refuse, with the result that every few minutes I would be found sipping a cup of tea with a stranger who would narrate his experiences with great enthusiasm and would suggest that the border should be thrown open for the public of both countries to visit each other without restrictions. The shopkeepers would refuse to take money for the goods bought saying that they will not take any money from their guests. One small shop owner selling imarti was in tears when I offered him the money for a few pieces of piping hot imartis I had bought from him , “Tusi saade mehman o, assi Lahoriye pyaar de pukkhe haan, paise de nai” ( “You are our guests, we Lahoris want your love not money”) Even the autorikshaw-wallah would accept the fare only after much insistence!!
One of the most prominent structures in Lahore is the massive Lahore Fort which was built by Akbar in the 1560s, and which towers over the old city of Lahore. Then there is the famous Minar-e-Pakistan, where the Muslim League first passed a resolution for a separate Muslim nation. Opposite the Lahore Fort is the samadh of Guru Arjan Dev, who lost his life while fighting near here in the waters of the Ravi River, which used to flow past the Fort walls those days. Samadhi of Maharaja Ranjit Singh is located outside Lahore Fort.
More than the prominent historical buildings and structure, it is the bright dresses, beautiful women, warm hospitality, the hustle and bustle of the city and a happy-go-lucky attitude of people with genuine love for their own brethren from India, which left me spellbound. Despite what politicians on both sides of the border say!
Speaking of politicians, the Chief Guest in the ICAP Conference was Omar Ayub Khan, Minister of State for Finance , Pakistan, son of the ex-Foreign Minister Gohar Ayub and the grandson the the ex-President Field Marshall Ayub Khan. A very impressive young man Omar Ayub Khan spoke at length about the state of Pakistan economy and the rapid pace of progress of the country under the regime of the President Musharraf. A very impressive speech it was from a very learned Minister. However the topic suddenly changed to Kashmir and he advised the Indian guests to “pressurise your government” to solve the Kashmir problem. It was a quick aside, and the Minister quickly resumed his earlier discussion. Obviously, the politician had not forgotten that he would not be able to justify his existence to many unless he touched upon the Kashmir issue. Later in private conversation with the Minister, I found that he had great love for the Sikhs, ostensibly because his room-mate for 4 years during his University studies in the USA was a Sikh.
On my return journey a wise old Lahori smiled and remaked, “Tussi hun jum paye ho” ( “You are now born, having visited Lahore” How true!!

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

Amendments to S 80 HHC

2006-01-24T04:43:00.000-08:00

Amendments in respect of Export Profits u/s 80HHC
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

Introduction: The Amendment in respect of exports profits comes on the basis of the recommendations of the Economic Advisory Council to the Prime Minister which has Dr.C.Rangarajan, (former Chairman, 12th Finance Commission) as Chairman, and prominent economics such as Dr.Suresh Tendulkar (former Director, Delhi School of Economics), Dr.G.K.Chadda, (Vice-Chancellor, Jawaharlal Nehru University), Dr.Govinda Rao (Director-General, National Institute of Public Finance & Policy) and Dr.Saumitra Choudhuri, (Economic Adviser, ICRA) as members.

Apart from advice on policy matters referred to the Council by the PM from time to time, the EAC prepares a monthly report on economic developments at home and abroad for the Prime Minister. It also monitors economic trends on a regular basis and brings to the PM’s attention important developments at home and abroad and suggest suitable policy response.
Exporters were expecting that the Government would not go entirely by the recommendations of the Prime Minister's Economic Advisory Council on this issue. Faced with equally convincing but opposing arguments from the exporting community and the Revenue Department on the issue of taxation of income arising from sale of DEPB licences, the Prime Minister, Dr Manmohan Singh, had in early April referred the issue to his Economic Advisory Council. He had asked the council to look into all legal aspects relating to the taxation of profits arising from transfer of DEPB licences.

While concurring with the contention of the Revenue Department, the Prime Minister's Economic Advisory Council had suggested that the pain of taxation should be reduced for small exporters by specifying a threshold (Rs 10 crores) below which recovery proceedings are not to be initiated by the Tax Department.

The Existing Section:
The existing section is explained below, and the amendment has been explained below it. Kindly note that no deduction under section 80HHC is available from the assessment year 2005-06.

Deduction in respect of export profits (Section 80HHC)

The deduction under this section is available to an Indian company or to a person other than company, who is resident in India;

While computing the total income of above assessee a deduction of the profits derived by the assessee from the business of exports of goods or merchandise, shall be allowed if certain conditions are satisfied. Essential conditions for claiming deductions u/s 80HHC

(a) there must be export out of India;
(b) export must be of any goods or merchandise other than (i) Mineral oil and (ii) mineral and ores (other than processed minerals and ores specified in the Twelfth Schedule) of the Income-tax Act.
(c) the sale proceeds of the goods or merchandise exported should have been received in or brought into India by the exporter in convertible foreign exchange.
(d) The sale proceeds should have been received in or brought into India within a period of six months from the end of the financial year in which the export was made or within such further period as the competent authority may allow in this behalf. For this purpose the competent authority means the RBI or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign exchange.
(e) The assessee should furnish a report in the prescribed form (Form No. 10CCAC) from a Chartered Accountant, certifying that the deduction has been correctly claimed. The report must be attached along with the return of income. Category of assessees: For the purpose of deduction under this section, assessees have been divided into two categories:
(I) Direct exporter: A Direct exporter can be of three types:
(a) Manufacturer exporter i.e. an exporter who exports the goods/merchandise manufactured or processed by him.
(b) Trading exporter Le. an exporter who exports the goods/merchandise manufactured or processed by others.
(c) Manufacturer as well as trading exporter Le. an exporter who exports goods manufactured or processed by him as well as goods manufactured or processed by others.
(II) Supporting manufacturer: Supporting manufacturer is a person who manufactures or processes goods/merchandise, but does not export such goods/ merchandise himself and sells them to any person who is holding Export house certificate or Trading house certificate and such Export house or Trading house has issued a certificate to the supporting manufacturer to enable him to claim a deduction under this section.

The amendment:
The Taxation Laws (Second Amendment) Act, 2005 has amended S. 80-HHC as under:
In section 80-HHC of the Income-tax Act, -
(i) in sub-section (3) -
(A) after the proviso, the following provisions shall be inserted and shall be deemed to have been inserted, with effect from the 1st day of April, 1998, namely : -
'Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent. of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee :
provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that, -
(a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme; and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme :
Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent. of any sum referred to in clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that, -
(a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being Duty Remission Scheme; and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowance under the duty Free Replenishment Certificate, being Duty Remission Scheme.
Explanation - For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free replenishment Certificate, being Duty Remission Scheme calculated in the manner as may be notified by the Central Government.':
(B) after the fourth proviso as so inserted, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1992, namely : -
"Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent. of -
(a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or
(b) any sum referred to in clause (iiid) or clause (iiie) as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third proviso or the forth, as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.";
(ii) in the Explanation occurring at the end, with effect from the 1st day of April 1998,-
(I) in the proviso to clause (ba), for the word, brackets, figures and letter "and (iiic)", the brackets, figures, letter and word "(iiic), (iiid) and (iiie)" shall be substituted and shall be deemed to have been substituted;
(II) in clause (baa), in sub-clause (I), for the word, brackets, figures and letter "and (iiic)", the brackets, figures, letter and word "(iiic), (iiid) and (iiie)" shall be substituted and shall be deemed to have been substituted.

Analysis:

As per the amendment, an explanation has been introduced below the proviso to Section 80HHC(3) to allow the deduction even in case of loss. As per this proviso, in case there is a loss under clause (a), (b) or (c) of sub-section 3 of Section 80HHC, such loss shall be set off against 90% of the export incentive, meaning thereby that in case of negative profit, 80HHC deduction will be allowed. Ostensibly the amendment has been brought to over-rule judgement of Bombay High Court in the case of ‘Rohan Dyes & Intermediates P.Ltd’, (2004) 270 ITR 350 (Bom)and Kerala High Court in Commissioner of Income Tax v. A. M. Moosa, Bharath Sea Foods’, [2005] 272 ITR 29 (Ker)

Further any profit on transfer of Duty Entitlement Passbook Scheme (DEPB) and any profit on transfer of Duty Free Replenishment Certificate shall also be considered as export incentive eligible for deduction under Section 80HHC in case of those exporters whose export turnover does not exceed Rs.10 crores during the previous year.

However, in the case of exporters whose turnover exceeds Rs.10 crores the benefit of DEPB and Duty Free Replenishment Certificate shall be allowed only when the exporter as per the scheme had an option to choose either the duty drawback or DEPB and the rate of the drawback credit attributable to Customs duty was higher than the rate of credit allowable under the DEPB.

Thus, full benefit of 80HHC deduction will be available to those exporters with turnover not exceeding Rs.10 crores whereas those exporters with turnover exceeding Rs.10 crores will not be able to claim benefit of DEPB in case they fail to fulfil the above two conditions.

The amendments have been made retrospective, with effect from April 1, 1998.

The original Section allows an exporter, while computing total income, a deduction to the extent of profits derived from such exports. "Export turnover," as per 80 HHC, means sale proceeds received in or brought into India by an assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of any goods or merchandise to which the section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the Customs station as defined in the Customs Act, 1962.

No penalty/interest in respect of the fresh demand:
Circular No.02 /2006, DATED 17-1-2006 has been issued to provide that no penalty shall be levied or interest shall be charged in respect of any fresh demand raised consequent to the enactment of Taxation Laws (Amendment) Act, 2005, on account of variation in the returned/assessed income attributable to profits on sale of DEPB credits or DFRC. The Circular reads as under:
“Section 80-HHC read with section 28 of the Income-tax Act, 1961 has been amended by the Taxation Laws (Amendment) Act, 2005. The section 80-HHC so amended, inter-alia, provides that
Profits on sale of Duty Entitlement Pass Book Scheme (DEPB) credits or Duty Free Replenishment Certificate (DFRC) will be treated at par with duty drawback for the purposes of proportionate increase of profits derived from exports computed under clause (a) or clause (b) or clause (c) of sub-section (3) of section 80-HHC in the case of,-
(i) an exporter having export turnover not exceeding Rs.10 crores;
(ii) in the case of an exporter having export turnover exceeding Rs.10 crores if-
(a) he had an option to choose either duty drawback or duty entitlement pass book scheme; and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under duty entitlement pass book scheme.
OR
(c) he had an option to choose either duty drawback or duty free replenishment certificate; and
(d) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under duty free replenishment certificate.
2. The amendments relating to Duty Entitlement Pass Book Scheme and Duty Replenishment Certificate have been brought into the statute with retrospective effect. Therefore, it has been decided that no penalty shall be levied or interest shall be charged in respect of any fresh demand raised consequent to the enactment of Taxation Laws (Amendment) Act, 2005, on account of variation in the returned/assessed income attributable to profits on sale of DEPB credits or DFRC. Further, in such cases where assessments have already been completed and,-
(i) interest has been charged, the Chief Commissioner of Income-tax shall waive the interest relating to claim of profit on sale of DEPB credits or DFRC for deduction u/s 80-HHC;
(ii) penalty has been levied, the Chief Commissioner of Income-tax shall waive the penalty relating to claim of profit on sale of DEPB credits or DFRC for deduction u/s 80-HHC; or
(iii) penalty relating to claim of profit on sale of DEPB credits or DFRC for deduction u/s 80-HHC, has been initiated but not levied, the penalty proceedings shall be dropped.
3. Further, it is also directed that such demand shall be recovered over a period of 5 years. For this purpose, every Assessing Officer raising such a demand will maintain the details of such demand in a separate register so that the information can be furnished to the Board as and when required. These registers shall be kept in the custody of the Assessing Officers who will hand it over to their successors at the time of their transfer.”

Discriminatory: The amendment to levy tax on exporters who have exported goods over Rs 10 crores is discriminatory, particularly the decision to tax only those who had opted for DEPB/DFRC route of incentives and exempting others who had opted for drawback facility. It is a sound principle of law that a retrospective amendment which is detrimental to the interest of the assessee, should not be made. Had the exporters been aware that their opting for the DEPB scheme would negate the exemption under Section 80 HHC, they would have taken a conscious decision to opt out of the alternative scheme available at that time.

The Amendment brings legal validity to the Income-Tax Department's efforts to recover income-tax on retrospective basis on the profits earned by exporters from transfer of DEPB licences from 1997.

The Amendment has made it clear that profits earned on the transfer of DEPB licences should be treated as business income.
Exporters with annual export turnover of Rs 10 crore or less would not be required to fork out any tax on such profits, as they would be entitled for the Section 80HHC benefits without having to meet any conditions.

For exporters with annual export turnover exceeding Rs 10 crore, the Section 80HHC deduction would be available so long as the exporter conforms to two specific conditions:

a) he had an option to choose the duty drawback or DEPB scheme for his export item and

(b) the rate of drawback credit attributable to the customs duty was higher than the DEPB credit allowed for the exported product or item.

Conclusion: The article can be summed up in the words of a Rajya Sabha member C. Ramachandraiah who raised the issue in a debate in Rajya Sabha on 20th Dec 2005, “ This section of 80HHC deduction would be available so long as exporter conforms to these two conditions. One is that he has an option to choose the duty drawback of DEPP schemes for his export. Second, the rate of drawback attributed to the customs duty, which is higher than the DEPP rate, for the items exported. Sir, in my opinion, more than 90 per cent of the exporters having turnover of Rs.10 crores would not be able to comply with these two conditions. They would, therefore, be required to pay tax on profits on transfer of DEPP licences. Moreover, the limit of Rs. 10 crores would affect a large number of small and medium industries.”

Review of the Economy

2006-01-18T22:24:00.001-08:00

Review of the Economy on the Eve of Budget 2006-07
Challenges Before the Finance Minister

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

Come February 28, and the Finance Minister, P Chidambaram, who has been named the finance minister of the year 2005 for Asia by 'Banker' magazine for pushing reforms and reining in fiscal deficit, will be presenting another reform Budget for the year 2006-07. The Finance Minister’s job is not an easy one, and balancing the desire to be progressive with the pressure from the coalition partners of the Government is a tight rope walk for him.

The Budget is not merely a statement of projected income and expenditure of the Government. It explains the direction the Finance Minister wishes the economy to take during the coming year, and explains the deviation in the policy in comparison to the existing policies. Second, policies on various expenditure items also come under the scanner. The Finance Minister will, no doubt, be expected to spell out details of his divestment proposals, or at least such of them as remain after the gruelling negotiations with the Left.

Alarming Fiscal Deficit: While the engines of the economy are working a full speed, and the economy is accelerating at an impressive pace, fiscal deficit at 8.3 percent of gross domestic product is alarming. Let us understand the implication of fiscal deficit. There is a limited pool of savings available in the country for the Centre, the states and the private enterprise to borrow from. In order to meet the deficit the Govt has to access this pool. As long as there is a comfortable liquidity situation in the country, there is no problem, but when the liquidity deteriorates, borrowing by the Government has an effect of increasing the interest rates, which might throw out of gear the efforts of the Government to keep inflation under control.

One may argue that there is nothing wrong in the borrowings by the Government, if there is nothing wrong in private enterprises borrowing money from the market. This situation would have been comfortable if the Government borrowings had resulted in the creation of new capital investments, thus providing an impetus to growth. However, when the borrowings are used to finance the revenue spending, it defies all norms of financial prudence. Already 22 paisa of every rupee the Government earns towards meeting interest obligation of the debts contracted by the Government.

Implement FRBM Act: The Finance Minister has decided to keep in abeyance the implementation of the Fiscal Responsibilities and Budget Management Act 2003 (FRBM Act), which Act was conceived with a view to eliminating the revenue deficit. FRBM Act had provided for the gradual reduction in deficit to zero by 2007-08, the Finance Minister had deferred this date to 2008-09, so that, he argued, it is conterminous with the term of the present Government. The Finance Minister now knows that meeting this target is not possible. He confesses of having “pressed the pause button to the FRBM Act”. What is apprehended is that it might turn out to be the ‘stop’ button instead of the ‘pause button’
While effective steps have been taken to attack the problem of deficit by increasing revenue, more efforts are required on the expenditure side. Government needs to address issues of downsizing itself, tighter control on Governmental spending, and reduced allocation to certain sectors. For example, the budgeted expenditure on defence last year was a whopping Rs. 83,000 Crores, out of which Rs.34,000 were budgeted to go towards capital expenditure. Defence consumes as much as 14 paisa of every rupee earned by the Government. It certainly makes a case of improving relationship with our neighbour, rather than spending more of defence budget, since defence allocation has been eating into the resources of our as well as our neighbouring country’s not-so-healthy economy.

If the commitment the Government has made under FRBM Act is to be honoured, the Revenue Deficit will have to be reduced by Rs.90000 in three years, which is a Herculean task. It means a reduction of Rs. 30000 every year: this is something unheard of in Indian economy: only twice in last 20 years has the deficit fallen in comparison to the previous figures in absolute terms, on both occasions the reduction was less than Rs. 1000 crores.

The Left Factor: The greatest stumbling block in India’s progress has been the stand its Leftist coalition partners have been taking on various items of the reform agenda. Last year they made it difficult for the Prime Minister to go full stream with his reform process, disinvestment of many profitable PSU’s had to be kept in abeyance, the decision to allow FDI in important sectors had to be postponed.

Subsidies account for nearly nine per cent of government spending. It is an open secret that the subsidy ,more often than not , does not reach the people it is intended for, with the result that while it is big burden to the exchequer, it does not benefit the target clientele: something the country can ill afford, with a huge fiscal deficit. Successive governments have talked about scaling down subsidies but have always shied away from implementing it, lest they lose populist support. There is no escaping the fact that the exchequer has to pay for every concession, every subsidy the Budget offers.

The Finance Minister's success as a Budget-maker will be tested by his resoluteness in resisting the temptation to offer too many freebies. Mr. Chidambaram has a difficult task on his hands, given the demands of infrastructure and the compulsions of coalition politics, in framing a Budget that will please most, if not all, and help take the nation forward on a path of sustained economic growth with stability.

Particularly depressing is the scenario on petroleum prices, with his own ministerial colleague sticking to his stand that the rise in international prices should not be passed on to the public. This has serious repercussions in form of lower dividend payments by oil companies and thus affects the revenue deficit directly. While rise in petroleum prices affects everyone badly, and the opposition comes from all quarters, the Government shall have to learn to pass on the additional cost to the people. Actually, the inability to do so stems from the past blunders of the Government. In the past the Government did not let the citizens enjoy the benefits of reduced prices when there was a drop in international prices. Obviously, now they don’t have the nerve to displease the voter by loading him with additional cost burden. An unsustainable Budget is no good, however many sops it offers. There is no escape from the economic lesson that the exchequer has to pay for every concession, every subsidy that the Budget offers.

One bone of contention between the Finance Minister and the Left partners is the issue of disinvestment of the PSU’s.. While some progress has been made in getting the concurrence of Left partners in regard to profit-making navaratnas, there are still great many hurdles which the Government will have to clear using the process of political bargaining.

Learn from the neighbour: The Finance Minister needs to convey to his coalition partners the lessons of the Chinese experience with the divestment of stakes in Chinese State-owned banks in recent months. Massive divestment has taken place in China through the giant-sized initial public offerings in respect of its State-owned banks. China, which still wears the garb of a communist nation is now more laissez faire than many of the supposedly market driven economies. India needs to learn the lessons of free enterprise from its Communist neighbour!

Nurture the IT superpower: We need to remember the fact that India' is becoming one of the most important players of the world in the IT sector and it is the fastest growing foreign exchange earner for the country. Several US and European companies have located their back office operations in Bangalore, Chennai, and Pune. Abundant supply of labour, low wages, cheap satellite communications and the internet have been instrumental in the decision of foreign firms to establish their back office operations in India. Such operations create job opportunities in Indian cities and help lower costs for the foreign companies. These range from billing to payroll handling, from credit appraisal to airline reservations, and from inventory management to answering customer complaints. Data transcription and transmission for hospitals in the US and telemarketing for US firms is also being undertaken by Indian companies based in various Indian metropolitan cities.
The Government will have to do more for this industry, by creating the required infrastructure in the country. The government needs to support basic science and R&D in this sector to some extent because India has world-class engineers and scientists that have already brought it ahead in an important way and could keep it in the very forefront of this new technology. We had missed the bus of industrialisation in the sixties and seventies when the Western world which wholeheartedly climbed the bandwagon of industrial revolution. India had been able to make up for that by being a front runner in the IT race, it becomes imperative for the government to provide the right environment for the sector to flourish.

Labour Laws: Labour law reforms are critical as India has signed several free trade agreements with neighbouring countries. India has never succeeded in becoming the manufacturing hub for the world despite it being a low cost producer, because of archaic labour laws. But reform of rigid labour laws, which make it hard for firms to sack workers, is unlikely, given the expected fierce opposition from Communists and trade unions. Without labour reforms, competitiveness of the small and medium enterprises will be hurt, which in turn could impact export and industrial growth. It is time political parities think in terms of economics and not politics, if India is to usher into the league of developed nations.

Tax reforms: The regime of Manmohan-Chidambaram has been that of tax reforms. Tax collection has been higher than ever before, system more transparent and administration more conducive. However, in his over-enthusiasm, the Finance Minister seems to have treaded into controversial territories. One such example is the Fringe Benefit Tax (FBT). No other tax provision in recent times has caused so much dissatisfaction in recent times as FBT. FBT as implemented is indirectly a tax on expenditure. Moreover, the administration mechanism of the tax is complicated and confusing. The Constitutional validity of the law is being challenged at various Courts. The Finance Minister will have to completely re-write the law if he wishes it so serve as a logical instrument of tax revenue.

The Stock Market: The stock market has been on fire for quite some time, with indices scaling unprecedented heights. This is thanks to the inflow of huge foreign money on the strength of a buoyant economy. FII money will stay in only if the reform process continues, more FDI opportunities open up, and the GDP not only continues to grow, but grows at a pace faster than other emerging markets. This will also depend on the extend to which India is able to integrate itself with the global economy.

The $700 bn Indian economy, Asia`s third-largest, is expected to grow 7.0-7.5 per cent in the fiscal year ending March 31 but India needs to grow at sustained double-digit levels to reduce mass poverty. China`s economy has grown at about nine per cent a year for the past decade while India`s economy has averaged about six per cent. Tough reforms aimed at downsizing the Government, reducing the cost of governance, streamlining the bureaucracy, curtailing the financial deficit, coupled with labour reforms will be needed to give India the much needed growth rate of 10 per cent by the end of the decade.

The Macroeconomic Implications of Budget 2005-06

2005-12-24T03:50:00.000-08:00

The Macro-economic Implications of the Budget 2005-06
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

This Budget is presented at a time, when, to quote the Finance Minister, “all engines are running at full speed.” In the area of foreign exchange management, during the last three years India has experienced a surplus in both Current Account and Capital Account, and we are faced with a very unfamiliar problem: the problem of managing this surplus to maximize its contribution to the GDP. The tax-GDP ratio has been above 10% for the first time ever. Compound Annual Growth Rate of tax revenue has been 18% during the past three years while the CAGR of corporate tax has been as high as 30%. GDP has grown at the rate of 6.9% while the rate of Industrial growth has been an impressive 8.9%, which is no small achievement for an economy, which was on the brink of a virtual bankruptcy in not-too-distant past.

While the GDP growth has been high, we are still way behind China, which has overtaken our economy in terms of growth, absolute as well as in percentage term, in a very short period after the opening up of its economy. Economists have predicted that this rate of growth will be sustainable in the year 2005-06 also, with GDP growth being predicted at 6.5-7%. While industrial growth is likely to slow down to 7%, chiefly because the growth last year was on a smaller base, inflation is likely to hover around 5-5.5%

While the engines are certainly running at full speed it becomes all the more important that due attention is paid to the meters on the dashboard. One danger alarm that has been constantly flickering is that of revenue and fiscal deficit. During this year, the fiscal deficit declined marginally from 4.5% to 4.3%. This decline was marginal only because borrowings of Rs. 29000 Crores have been transferred from the Centre to the State. But for this exercise, the figure would have been over 5.1%. Combined fiscal deficit of the Centre and the states has been a whopping 10% of GDP. This has been a major cause of concern to the economists and international agencies. Credit rating agencies have been reluctant to give a higher rating to India because of this one factor.

The revenue deficit figures are even more alarming. . In the previous budget the Finance Minister had projected that he would bring revenue deficit down to 1.8% in 1905-06. The actual figures are 2.7%. This is 31777 crores higher by Rs. 31777 Crores: too alarming to be ignored. Therefore, while the slippage on fiscal deficit is only 0.2% or Rs. 10600 crores, slippage on revenue deficit is 0.9%, which means that the capital account has once again been sacrificed to feed insatiable monster called the Government’s revenue expenditure. The revenue expenditure is up by 15% while capital expenditure is down by 43%

Let us understand the implication of fiscal deficit. There is a limited pool of savings available in the country for the Centre, the states and the private enterprise to borrow from. In order to meet the deficit the Govt has to access this pool. As long as there is a comfortable liquidity situation in the country, there is no problem, but when the liquidity deteriorates, borrowing by the Government has an effect of increasing the interest rates, which might throw out of gear the efforts of the Government to keep inflation under control.

One may argue that there is nothing wrong in the borrowings by the Government, if there is nothing wrong in private enterprises borrowing money from the market. This situation would have been comfortable if the Government borrowings had resulted in the creation of new capital investments, thus providing an impetus to growth. However, when the borrowings are used to finance the revenue spending, it defies all norms of financial prudence. Already 22 paisa of every rupee the Government earns towards meeting interest obligation of the debts contracted by the Government.

The Finance Minister has taken a U-turn in the implementation of the Fiscal Responsibility and Budget Management (FRBM) Act 2003. FRBM Act had provided for the gradual reduction in deficit to zero by 2007-08, the Finance Minister had proposed this date to be 2008-09, so that it is conterminous with the term of the present Government. The Finance Minister knows that meeting this target is not possible. He confesses of having “pressed the pause button to the FRBM Act”. What is apprehended is that it might turn out to be the ‘stop’ button instead of the ‘pause button’

If the commitment the Government has made under FRBM Act is to be honoured, the Revenue Deficit will have to be reduced by Rs.90000 in three years, which is a Herculean task. It means a reduction of Rs. 30000 every year: this is something unheard of in Indian economy: only twice in last 20 years has the deficit fallen in comparison to the previous figures in absolute terms, on both occasions the reduction was less than Rs. 1000 crores.

While effective steps have been taken to attack the problem of deficit by increasing revenue, more efforts are required on the expenditure side. Government needs to address issues of downsizing itself, tighter control on Governmental spending, and reduced allocation to certain sectors. For example, the expenditure on defence has been upped from the Rs. 77,000 Crores to Rs. 83,000 Crores, out of which Rs.34,000 would go towards capital expenditure. Defence consumes as much as 14 paisa of every rupee earned by the Government. It certainly makes a case of improving relationship with our neighbour, since defence allocation has been eating into the resources of our as well as our neighbouring country’s economy.

If FRBM commitments are to be honoured, the Revenue deficit will have to be reduced by Rs 90000 in three years time, which means a reduction of 30000 every year. This is something unheard of in Indian economy: only twice in last 20 years has the deficit fallen in absolute terms, and that too by less than 1000 crores each time!

The Finance Minister and the Prime Minister seem to be serious about the reforms. The FRBM Act is only the beginning of the reform process, and shall have to be backed by actions. Moreover, similar financial prudence will have to be defined and implemented for the state governments. Only then can we think of competing with China, which the Finance Minister talked about in his Budget speech.

Investment Strategy

2005-11-28T06:55:00.000-08:00

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

2005-11-22T03:55:00.000-08:00

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:

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

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

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:

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

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

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.

100% of the interest paid shall be deductible.

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:

The sub-contractor is an individual;

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

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

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.

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:

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.

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.

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.

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:

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

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

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:

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

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

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

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.

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?

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!

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?

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?

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.

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.

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.

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.

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.

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.

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.

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.

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:

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.

“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;

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:

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;

Actual amount of contribution to superannuation fund;

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

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

Notes:

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

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

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

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%;

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

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

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,

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

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

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

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

2005-11-16T03:09:00.000-08:00

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

2005-11-08T05:22:00.000-08:00

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

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

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

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

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

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

to acquire an aircraft or an aircraft engine

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

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

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

and approved by the Central Government in this behalf.

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:

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;

arising from any international sporting event;

held in India;

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

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

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

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

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

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

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

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

transfer of a capital asset,

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

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:

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,

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;

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

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

2005-11-07T21:20:00.000-08:00

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

2005-11-07T05:52:00.000-08:00

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

2005-11-07T03:32:00.000-08:00

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

At a recent Masonic Lodge function

2005-11-05T03:55:00.000-08:00

This is my picture!

2005-11-05T03:47:00.000-08:00

Value Investing: An Introduction

2005-11-04T23:58:00.000-08:00

An introduction to Value Investing
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

Stock market is a crazy world. Different players enter the market with different time-frame, and with different intentions. Some look for quick bucks, and would cash on the market momentum, totally ignoring the market and stock fundamentals, while for some it is a casino, where they would make or lose money as if by a flip of coin, these people usually day-trade, as they look for quick results. Then there is a small, albeit committed tribe of value investors, who would invest only when they find that a share is being traded at a price below its intrinsic value. Value investors believe that the efficient market hypothesis is not valid, and more often than not, there would be a divergence between the real value of a share, and its quoted price. The wining strategy lies in finding the true net worth of a share, and buy a share only if there is , what the great-father of value investing Benjamin Graham referred to as, the Margin of Safety in the deal.

This article is an introduction to the discipline of Value Investing, as developed by Benjamin Graham, and successfully practised by great investors like Warren Buffet, and Peter Lynch. This approach is more scientific than any other approach, and is more suited for the academic and professional backgrounds of Chartered Accountants and other finance professionals, since it requires a detailed knowledge of the financial statements, and an ability to calculate the real net worth of a company. In the following paragraphs, we discuss the Value Investment strategy.

Invest for the long term. When Keynes said, in the long run we are all dead, he was certainly not referring to the stock market. The success in stock market largely depends upon your ability to stay invested for a long period. It is strange few people heed this advice! Most investors in Indian markets continue to be short-term investors, and speculators. Day trading is an important characteristic of Indian stock markets. Short-term investment is nothing more than a speculation, and you can rather try your luck at horse races, or at casinos where the probability of success is higher!

Do not time the market. A Value Investor does not try to predict the direction the market is going to take. You should not wait for the market to rise or fall before you decide to invest. Since as a long-term investor you will be focussing on the value of individual share, rather than the frenzy of the market, market direction should not be a cause of concern, as long as you are sure that the investment you are making is attractive, and has a sufficient margin of safety built into it. As a long-term investor, you should not hold your cash, waiting for the market to fall, so that you can invest when the prices are low. You should know the time value of money, which means that the early you invest the higher will be your return. Moreover, if you invest regularly, you are able to take advantage of ‘rupee averaging’, which takes care of market fluctuations.

Do your homework. As a value investor you should know the fundamental value of the share you are buying. Remember that PE ratio is not the acid test of investment. Low PE ratio does not on its own make a particular company worthy of investment, and high PE , per se, does not make a share less attractive. Other factors like the quality of management, break-up value of the share, debt-equity ratio, interest coverage ratio are equally important.

Do not invest in penny stocks. Penny stocks and junk scripts look attractive to the investor when the indices are rising, since the price of these shares usually rise faster than the rise in prices of other shares. However, then the market falls, the investor is left with junk, which has no value. As a matter of principle, you should invest in stock of the only such companies whose fundamentals are known to you. Do not depend on tips , however reliable the source of tip may be. Most of the tips are generated by people with vested interest. Even when the source of the tip is genuine, the time frame the issuer has in mind may be different. If you are tempted to act on a tip, study facts before you decide to go ahead.

Do not panic. This is very important. More money is made in stock market by remaining inactive. It is foolish for a long-term investor to be excited or subdued by the market ticker. CNBC channel is for the short-term traders and day-traders, do not let the opinions expressed there affect your investment decision. If you are confident your investment is fundamentally strong, every fall should give you an opportunity to buy rather than sell. Of course, while you do that keep in mind the principle I have narrated in the next paragraph.

Don’t pull your flowers and water your weeds. This strong advice comes from Warren Buffet, the most successful disciple of Ben Graham. The greatest mistake most investors make is to sell the shares that have appreciated, and hold the ones, which are giving a negative return. The investment strategy should be the other way round; you should sell the losers and let the winners ride. I do not mean that you should sell every share that has depreciated. The right course is to keep pruning your field regularly to identify the weed so that they could be removed, and to identify the flowers that should be watered as long as their fundamental value is below the prevailing market price.

Do not invest in the company and sector whose business you do not understand. If you can understand a business and you find value there, invest. Do not be tempted to invest in industry about which you do not have much idea. While there is so much money to be made in technology shares, yet if you do not understand the business, it is better you do not go into it. My personal investment philosophy is to invest in the business, which I would be comfortable running on my own. I apply the same principles even when my investment is as low as 10 shares.

Do your own research. Security analysis is not as difficult as it may seem. You do not have to be a qualified analyst to do the analysis. When I say that more money is made by being inactive in the market, I certainly do not mean that you should invest and forget. On the other hand, you should keep reviewing the performance of the company you have invested in. If there is a fundamental change in the situation of your company, which has altered the premise based on which you had bought the shares, decide if the change warrants a change in your portfolio.

These principles have been perfected by masters and are time-tested technique for long-term investment in the market. While this is not the only way one can invest, this method is more scientific and if applied consistently, it would make the process of investment a less risky proposition with higher margin of safety.

Suggested reading:
Security Analysis by Benjamin Graham
Beating the Street by Peter Lynch
One Up on Wall Street by Peter Lynch
The Intelligent Investor by Benjamin Graham
Common Stocks & Uncommon Profits by Philip A. Fisher
Buffettology by Mary Buffett

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

Installation

2005-11-04T05:10:00.000-08:00

11th is Installation of Lodge Penchvale, I am being installed as the WM.

my first post

2005-11-04T04:27:00.000-08:00

This is my intro to the world of blog. Lets see how things take shape...