Penny Stocks

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

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.

Liberty. Fraternity. Equity.

Fundoo Professor: Reflections on Indian Stock Market Levels Revisited

Fundoo Professor: Reflections on Indian Stock Market Levels Revisited

VALUE INVESTING: BUY A BUSINESS NOT THE SHARES

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

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

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

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

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

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

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.