Different Impairment approaches

Impairment - we are used to this term being used for fall in value of fixed assets below their carrying amount in books. Soon, Impairment would be the "word" to be careful of for the company's preparing financial statements. Of course that means, we auditors will have honeymoon period rather a prolonged one. We have our BADA friends who will threaten their clients and if possible general public!! Coming why it is going to be such an important factor in the future. Now, impairment will be require to be tested for financial assets as well.

There are variety of approaches that IASB deliberated. To name them, (i) expected loss approach, (ii) incurred loss approach, (iii) fair value based approach and (iv) IAS 36 based - value in use approach. Finally, they have decided to go ahead with expected loss method, as practically incurred loss is not line with framework, while fair value and value in use concepts require undue costs and efforts on the entity to comply with.

Now, the question is how to determine expected loss. The important variable in determining what expected loss is, is the consideration of conditions surrounding the assets. The conditions that existed through the cycle of similar assets, determination based on conditions of past and existing situations and third appropriate alternative is to have consideration to all reasonable and supportable informations and conditions - may be termed as 'full scope - expected loss method'.

The task is going to get tougher. But the deliberations before standard comes helps in understanding the concepts in better light. Isn't it??

Stone melts - partially though

I have never been so loving, so affectionate, so caring, so compassionate, so kind-hearted, so tolerant, so warm, so understanding and can include any other good thing expected of a person. This is certainly a change in me that those close to me have noticed. For others its just how a normal human being is supposed to be. Whatever, I have changed rather I have started to live my life the way others want to.

Why is this change so important in my life? Why is it, I have lived life the way I wanted to so long without considering that there are others who are living the way I want it? How is it going to affect people around me? How is it going to affect me? These are the questions that float around having realized that I have changed. Well, I need to find answers for that and fortunately I have found out.

This change makes me a part of society. This change makes me an human being who can be impactful. A person who will be missed. A person who can think what others feel. Larger portion of my life (touch wood) I believe is yet to happen. Larger to mean both in terms of depth and longevity. Obviously the benefits I would reap will be much more and so I have not missed much due to my erratic nature.

My past in many ways attributing to my ego has been glorious past. I was so egoistic and self centered that I cared a damn about what others feel. I can never empathize. I can never console a person. I can never feel that somebody will feel bad if I shout at them. I was so selfish that I have never worried about tears in others eyes – whether in front of me or outside my vicinity. I was so used to these qualities I never felt that I was odd man out. I never realized that I should be loved and taken care of. I saw everyone as selfish and those who do their duties. Similarly felt that I have a duty to do material things I receive. I never felt the intangibles of friendships or relationships. I never realized I was losing out on friendships. Still, I should say I am fortunate to have a bunch of friends who I can proudly hold out as friends to anybody in this world.

The people around me are important part of me as I realize. Its not going to be possible to live in isolation. I need love, affection, attention, care of people around me. I need to essentially be eligible to receive these. Only way I can be eligible is to give whatever I expect.
I am the ultimate beneficiary. There is certainly an argument from within me that I changed because of my realization that I need to benefitted more than what I possess today. I have again been selfish. I have changed by compulsion. But the fact is I needed to realize it. And the ultimate fact is I realized it. Well, I was made to realize.

I have changed. A word of caution for myself though is I have not changed for all.

Why my baloon?

I have never believed that one could fail in an examination when he has put in the necessary efforts. Also one can never pass an examination without putting in what is necessary. This has always been my inner thought. There have been no pity whatsoever for those who had failed the examination. And now I am in a precarious situation. I am utterly under prepared. Confidence quotient also seems to be lower this time. The time I would get for my three subjects from now on seems to be 2 days (a Sunday included) – I have already got 2 days. This would easily be my worst preparation ever for an examination. What fascinates me the most was that people around me have taken things for granted? There is this inexplicable feeling amongst them that I will be passing any case. I was never offered leave for my three exams. But there will be week of absence for a single day exam. This is the pinch of truth when you become a professional. You can never expect to be treated as a child. It is upto us to take care of the needs and demands. The world around you will be ruthless. The rules are set to be flexible where you always feel that you are at the loose end with no flexibility. Considering the demands at this stage of the career, imagining a similar situation few years down the line is a nightmare. Enjoying your space as a student is important. The days will never come back. Your mom will never wake you up with a coffee for you to study. Your dad will never stop watching TV for your studies. Your relatives and friends will never hesitate to trouble you while you study. And there will be other group of people seeking your attention depending on the stage of your life. It is important to be out of student age at the appropriate time. But also its important that you are not into professional life at very early stage. You always want somebody to pamper you when you are into professional life early. But when that doesn’t happen you feel let down and disappointed. The sum and substance is “be a student when you are supposed to be and be a professional when you are expected to be”. The 'X' factor is also missing for this exam - I am to blame for it.

Lease of land

Growth in industries, both manufacturing and services has been the prime focus of the Governments – Central and State. To sprout the growth, State Governments have been offering land or land and buildings on a long-term lease to companies to set up units. These long-term leases are typically for a period of 99 years. Most cases leases will be that of a land rather than land and buildings together. These leases are characterized by lump-sum payments upfront, either refundable or non-refundable. Various accounting and taxation concerns are around these models, which are discussed in the following article.

The GAAP for companies comprise Accounting Standards notified u/s 211 (3C) of the Companies Act, 1956 and requirements of Schedule VI to the Companies Act, 1956. Present provision of Accounting Standards excludes leases from its scope. The accounting has to comply with the requirements of Schedule VI.

Model I

Lets comprehend with an example. A company takes land on lease from SIPCOT for a period of 99 years by payment of non-refundable premium of Rs. 10 Crores. The company cannot transfer the land to any third party during the lease period unless it is under a business combination. If the land is handed back to SIPCOT during the lease period, it is not entitled to refund of any portion of the premium paid.

Accounting: Schedule VI requires disclosure of leaseholds in the Fixed Assets schedule under a separate head. Hence, the land should be disclosed under “Leasehold Land” in Fixed Assets schedule. At what Value? The entire non-refundable premium should be taken as cost and amortised over the lease term (99 years) on Straight Line Basis. Each year amortization is taken to Profit and loss account.

Taxation: The primary analysis to be made is whether the expenditure is revenue expenditure or capital expenditure. The decision of tribunal in the case of Jt. CIT vs Mukand Ltd forms the basis for tax treatment. The assessee argued that the entire expenditure is revenue in nature and should be allowed as a deduction. CIT (A) held that the expenditure is revenue in nature but is attributable to 99 years and hence should be claimed as deduction in each year. The case was before the special bench of the tribunal to determine whether the stand of CIT (A) to allow 1/99^th of expenditure is correct. The tribunal noticed that the payment is a premium for leasing of land and it is not in the nature of advance rent to be adjusted against any future payments required to be made. Further, the tribunal noted that the expenditure bore the characteristics of capital expenditure, since the payment is for a benefit of enduring nature. The tribunal held that the premium is capital in nature and not allowable as a deduction to the assessee. The position of revenue is still questionable. Since, the expenditure is very much business expenditure, it can be argued that if the business expenditure is not allowed as a deduction in a single installment, the expenditure need to be allowed over the lease term.

Model II

A company takes land on lease from SIPCOT for a period of 99 years by payment of a refundable deposit of Rs. 15 crores. The company cannot transfer the land to any third party during the lease period unless it is under a business combination.

Accounting: Present GAAP position, the amount should be treated as refundable deposit. But where should it be included? Under Current Assets or Leaseholds? My view is that it should be held under “Leaseholds” rather than “Current Assets”. Considering that the present scenario will be short-lived with the introduction of AS 30,31 and 32, the new treatment needs to be looked into. The deposit which is a financial asset, should be recognised at its fair value – which will be present of value of discounted cash flows. The deposit amount would be increased each year with interest portion with a corresponding credit to profit and loss account. Again regarding the question of presentation, it is only appropriate to present under “fixed assets” rather than under “current assets”. These issues will be addressed once the existing leases standard is revamped based on the discussion paper issued by IASB.

Taxation: The revenue position is unambiguous here, since the amount is refundable it cannot be revenue expenditure or for that matter any expenditure and no expense can be claimed in this regard. On the new treatment as per AS 30,31,32 – the position of revenue cannot be speculated upon.

There will be these never ending spiral issues surrounding the topic of leases in the future as there will be lot of understanding and learning in this regard from the regulatory angle as well as the angle of revenue and professionals.

My guess of Raavan

A Mani Ratnam film will always evoke a kind of anxiety that most people would exhibit for a James Cameron or a Steven Spielberg movie. There are few directors are as articulate as Mani Ratnam is. He is a class act. The narration is crystal clear – be it his Pagal Nilavu, Nayagan, Aayutha Ezhuthu or Guru. He is also a clever director. He always bargains for best technicians to work with him – be in on screen or behind screen. He has the knack of getting the best out of all his colleagues. His latest bi-lingual flick is Raavan or Ravanan. He has roped in Abhishek and Aishwarya Rai Bachchan for the lead roles. Also Vikram plays an important role in both the languages. So casting is best in the profession. For music he stays with A R Rahman – and he weaves magic for Mani, who happens to be his debut director in the film Roja. And there is no doubt that he is the best in the business in Indian industry. He has Gulzar as lyricist for Hindi version and Vairamuthu for Tamil. No questioning of Gulzar, who won Oscar along with Rahman for Jai ho as also Vairamuthu, who easily is the best lyricist when it comes to Tamil cinema. Camera is handled by Santosh Sivan and Manikandan. Santosh Sivan is a veteran and Manikandan, off late is making his worth in Hindi cinema. So with all these quality people around him, what else can Mani produce – should be an extra-ordinary movie.

Looking at the teasers and stills of Raavan, you have to believe that the movie will never be short of expectations. The storyline is supposed to be based on naxals – burning issue in our country now. Abhishek looks to be the head of the tribal population and there is no law and order beyond him. Vikram looks to be a police officer, married to Aishwarya Rai and he is posted to the tribal area. He would resolve to bring an end to Abhishek’s rule amongst the tribe. Sprouted by Vikram’s action, Abhishek would abduct Aishwarya Rai. The kidnap though initially would be to threaten Vikram, later Abhishek would befall to the beauty of Aishwarya Rai and forces her to marry him. Here is where parallels could be drawn to Ramayan and could potentially cause a roar in our country. The climax would be how Vikram fights against Abhishek and wins back his wife and the story would be on how Aishwarya and Vikram fight Abhishek. The character of Abhishek is portrayed by Vikram in tamil version. My intuition is Vikram would have donned the role better than Abhishek. Overall it is going to be mouth-watering entertainment in both the languages. A separate blog on music will follow soon, so much to write on that.

Strategic science

This is the word that has been me fascinating since Mid 2009. Strategy happens everywhere. It is not the sacred thingy discussed at closed rooms, on corporate vacations, over a cup of drink in business-class hotels. Strategies are made by you, me and everyone. A women begging at the signal strategically chooses a signal that lasts more than a minute. A child at a super market strategically eyes for a candy and her mother strategically avoids it. Strategy is in every single moment of our life. Yet in business, strategists are considered are golden egg laying hens. They are treated as honchos. They get all the comfort in this world. They are best paid in the organisation. Why all these attention at corporates when we all are strategically sensitive?

At corporate level, strategic management is the most critical function. They set the direction for the entire business. What is a strategy - It is a systematic long term plan of action. This plan of action depends on various factors. It depends on an organisation's existing policies, procedures, control systems, position in the market, external environment comprising competitors, consumers, government policies and action, and other stakeholders. It requires a lot of inputs. It requires corporate appraisal both internally and externally to generate various alternatives. It is in most cases worked out scientifically. Strategists are statisticians and economists and they work out lot of significant theories and numbers and arrive at a course of action called their strategy for the company.

Going by the way corporates function these days and the level of importance assigned to the function of strategic management, it would be but to tend to the conclusion that strategy development is a science. If it is so perfect a science then why does it fail at all? There is something more to it. It is not mere science. If it is science, there is a definitive way of approaching and concluding it. But hardly we come across same strategy for a similar set of data and situation. This is because strategy also has a touch of human element in it. The people part of strategy making often can be taken as the lead as to how a strategy will be. The strategies will always depend on the person making it. It simply is not possible to detach human element from strategy.

And that human element which makes any strategy successful is intuition. A scientific process may generate a lot of strategic options but at last intuition of the entrepreneur or manager leads to the selection of the most successful alternative and most of the times, the successful strategy may not be even generated by the scientific methods adopted by an organisation. It comes out of repetitive learning and experience that goes into human brain. So it is not scientific strategies that are successful, it is the intuitive strategies that are behind most successful businesses in the past and will be in the future. Never count your intuition out - learn to hear to your intuition, you will be successful 9 out of 10 times.

Talking one out

The term communication in today's corporate world is talking your opponent out. If you are one of the two persons which the company looks for its procurement or services, the quality of the products or your services does not win you the contract. Its obvious that products or services will be felt only at a later point of time. You need to remember that once you have won an order, the client will not be taking the other product/service and the quality is only your delivery. So the bottomline is winning that order. There will be lot of talking that needs to be done with the client. You need to look more convincing than the your competitor.

You are not going to be asked to explain your worth when your competitor is demonstrating his product/service. You are most times, one-one with client, represented by a group of people though. So how do you talk out a person without even talking to him. Thats the challenge you need to be aware of. Its is simple to understand but difficult to comprehend. One can comprehend a situation of arguing out another opponent. But how do you achieve this?

Whenever you are selling your product/services, the conviction thats drawn is more important than your command over vocabulary, language and other stuff. You have to be first convinced of your own product/service. Transcending such conviction to your client is the task that needs to be planned and executed well. So the roadblock is usually the marketer himself, where he tries to sell product/service, which at first place he himself is not convinced about. When you are convinced, half the job is done. With little communication skills you can achieve.

How do you transcend the conviction? The listener has to experience what you speak. The output should be visible to him through your speech. The experience does not often mean attempting an elocution competition. Your command over the subject is important than the language, unless you are selling a dictionary or encyclopedia. Did you see the launch of i-pad by Steve Jobs? The launch just created the interest for the product across the globe. Did you notice his vocabulary? It was simple - marvelous, extra-ordinary, fantastic - you can count, he would have used these words umpteen number of times in his presentation. But, hey weren't you impressed? What he did was, transformed his belief about the i-pad onto you and you are obviously impressed. That is all it takes. Looks fairly simple.

But as mentioned the difficult part is, you sell products/services without being convinced yourself. You will never be able to make it up. But then there is market for what you have produced and you will be convinced that the product/service will be of utility only to that market. Then you stand to convince that market which can derive utility out of the product/service. Designing of marketing strategy based on the utility of the product is most important. Realistic and ambiguous strategy always is the best combination!!

Since the "talking out" is happening without the visible opponent, its important to contemplate what the competitor would sell and emulate it. The key is contemplation without much complication. There should be no direct reference and ditching - to be a fair trade. But still be able to convince more than what your competitor does. If its race of donkeys, you just have to look a clever donkey.

So, talking one out is fighting your invisible opponent out!!!

Budget 2010-11 Analysis of Direct Tax Proposals

The Economic Survey indicates that the Indian economy has survived its worst phase and has not been impacted adversely by the global crisis. This is a good omen that the year ahead will be a rewarding one.

The GDP growth for the third quarter of 2009-10 is reported to be a shade lower than the expected level of 6%. The growth rate for the full year is extrapolated to be between 7.2% and 7.5%. If achieved, this will still be one of the highest growth rates in the world. In the current period, Manufacturing Sector has contributed to the growth more than the Services Sector, with Agriculture Sector registering a negative growth of - 0.2%. The challenges continue to be in:

a) Achieving a double digit growth rate

b) Controlling inflation, specially food prices

c) Reducing the overall fiscal deficit

It is in this backdrop, that the Finance Minister, Shri Pranab Mukherjee had presented his Budget proposals on 26^th February 2010. The budget proposals focused on strengthening infrastructure, power, alternative and renewable sources of energy, and in providing adequate support to health, social security and food security. Overall, the budget was received well and was applauded as a balanced budget by both the economists and the industry leaders. I believe that the direction of budget proposals are in the growth trajectory. However, the significant allocation of Rs.1900 crores to UIDAI and the emphasis on setting up adequate IT infrastructure and interface across government organisations, the positive difference – relative to prior periods - will be ‘implementation’.

A summary of a few select items in the direct and indirect tax segment, proposed in the Budget follows. Unless mentioned otherwise, the amendments proposed to direct taxes will apply from assessment year 2011-2012

Direct Taxes

The new Direct Tax Code will be made effective from 1^st April 2011. This is an important announcement. The summary of the tax amendments is as follows:

• Lower tax burden on individual taxpayers by widening of the tax slabs
• Small companies can convert into Limited Liability Partnerships without attracting capital gains tax liability
• Higher Turnover limits beyond which audit is compulsory, so as to reduce the compliance burden on small business enterprises
• Increased tax-saving investments in Research and Development (R&D) to enhance the competitive ability of the economy
• Tax deduction on investments in long-term infrastructure bonds to encourage savings and for funding infrastructure; and
• Simplification and rationalization of provisions relating to Tax Deduction at Source (TDS).

Personal taxation

Tax rates

The income tax slabs for individual taxpayers to be as follows:

Income upto Rs 1,60,000	Nil
Income above Rs 1,60,000 and upto Rs. 5,00,000	10%
Income above Rs.5,00,000 and upto Rs. 8,00,000	20%
Income above Rs. 8,00,000	30%

The tax slab revisions are moving in the direction of proposal made in the direct tax code. While the amendment in the slab rates last year certainly benefitted higher income group than the medium and lower income group, this years’ slab limit revision is aimed at the middle class. The tax savings would be:

For an individual with taxable income more than Rs. 3,00,000 and less than Rs. 5,00,000	Rs.20,000
For taxable income more than Rs. 5,00,000	Rs. 50,000

Deductions

Deduction in respect of long-term infrastructure bonds

A new section 80CCF is being introduced to allow subscription during financial year 2010-11 made to long-term infrastructure bonds to the extent of Rs. 20,000 as deduction in computation of income of individual and HUF. This will be over and above the existing limit of Rs. 1,00,000 under Section 80C, 80 CCC and 80 CCD of the Act. This provision is available only for subscription made during the year 2010-11, and the long-term infrastructure bonds will be notified by the Government in due course.

Deduction in respect of contribution to the Central Government Health Scheme

Under the existing provisions of section 80D, deduction in respect of premium paid towards a health insurance policy up to a maximum of Rs. 15,000 is available for self, spouse and dependent children. A further deduction of Rs. 15,000 is also allowed for buying an insurance policy in respect of dependent parents. For senior citizens of the age of 65 and above, the ceiling level for this deduction is Rs.20,000.

The Central Government Health Scheme (CGHS) is a medical facility available to serving and retired Government servants. This facility is similar to the facilities available through health insurance policies.

Deduction will be allowed in respect of any contribution made to CGHS by including such contribution under the provisions of section 80D. The deduction will be limited to the current aggregate of Rs.15,000 or 20,000 as mentioned.

Tax returns

As promised by the Finance Minister in the last budget speech, SARAL II is making a comeback to do away with ITR, with respect to individuals.

Corporate tax

Tax rates

Surcharge on taxes for domestic companies is reduced from existing 10% to 7.5%. No change in surcharge of foreign companies.

MAT rate increased from existing 15% to 18%. Companies having to pay Minimum Alternate Tax MAT will have an additional outflow 3% on this score, irrespective of the reduction of surcharge to 7.5%.

Definition of charitable purposes

An amendment was introduced in the last budget to exclude from the definition of “charitable purposes”, if its activities involve ‘the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity’.

The absolute restriction on any receipt of commercial nature did create hardship to organizations which receive sundry considerations from such activities. To mitigate such difficulties, section 2(15) is amended to provide that “the advancement of any other object of general public utility” shall continue to be a “charitable purpose” if the total receipts from any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business do not exceed Rs.10 lakhs in the previous year.

This is a retrospective amendment to be applied in respect of assessment years 2009-10 onwards.

Income deemed to accrue or arise in India

A new explanation is inserted to specifically state that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not,

(a) the non-resident has a residence or place of business or business connection in India; or

(b) the non-resident has rendered services in India.

This amendment is seen to be to neutralize the impact of the decision of Hon’ble Supreme Court, in the case of Ishikawajima-Harima Heavy Industries Ltd., Vs DIT (2007)[288 ITR 408], wherein it was held that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. Whereas the intention of the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India.

This interpretation was felt as not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India. The Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of section 9, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India.

This amendment is proposed to take effect retrospectively from 1st June, 1976 and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years

Weighted deduction for scientific research and development

Under the existing provisions of section 35(2AB) of the Income-tax Act, a company is allowed weighted deduction of 150 per cent of the expenditure (not being expenditure in the nature of cost of any land or building) incurred on scientific research on an approved in-house research and development facility.

In order that Corporate Sector is bestowed with inducements to invest in in-house research, it is proposed to increase this weighted deduction from 150 per cent to 200 per cent.

The existing provisions of section 35(1)(ii) of the Income-tax Act provide for a weighted deduction from the business income to the extent of 125 per cent of any sum paid to an approved scientific research association that has the object of undertaking scientific research or to an approved university, college or other institution to be used for scientific research. Further, under section 35(2AA) of the Act, weighted deduction to the extent of 125 per cent is also allowed for any sum paid to a National Laboratory or a university or an Indian Institute of Technology (IIT) or a specified person for the purpose of an approved scientific research programme.

In order to encourage more contributions to such approved entities for the purposes of scientific research, it is proposed to increase this weighted deduction from 125 per cent to 175 per cent.

Also section 35(1)(iii) is amended so as to include an approved research association which has as its object undertaking research in social science or statistical research, to qualify under Section 35(1)(ii). It is also proposed to amend section 10(21) so as to also provide exemption to such associations in respect of their income.

Investment linked deduction for specified business

Section 35AD is amended to include hotel sector, irrespective of location, allowing 100% deduction in respect of whole of any expenditure of capital nature incurred wholly and exclusively for the purposes of the business. It will include entities in the business of building and operating a new hotel of two-star or above category which starts functioning after 1^st April 2010.

Disallowance of expenditure on account of non-compliance with TDS provisions

The existing provisions of section 40(a)(ia) of Income-tax Act provide for the disallowance of expenditure like interest, commission, brokerage, professional fees, etc. if tax on such expenditure was not deducted, or after deduction was not paid during the previous year. However, in case the deduction of tax is made during the last month of the previous year, no disallowance is made if the tax is deposited on or before the due date of filing of return.

The said section is amended to provide that no disallowance will be made if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income specified in sub-section (1) of section 139.

This amendment will be effective for assessment year 2010-11. This provision can be utilized for the tax deductions in respect of financial year 2009-10.

The interest for non-payment of tax deducted at source after deduction will now attract interest at the rate of 18% instead of existing 12%. This amendment will take effect from 1^st July 2010.

Upward revision in the turnover or gross receipts thresholds, for purposes of audit of accounts and of presumptive taxation

In order to reduce compliance burden of small businesses and professionals, the threshold limit under section 44AB has been increased from Rs. 40 lakhs to Rs.60 lakhs in the case of persons carrying on business and from Rs. 10 lakhs to Rs. 15 lakhs in the case of persons carrying on profession

In view of the amendment proposed above, the maximum penalty, leviable under section 271B for failure to get accounts audited under section 44AB or to furnish a report of such audit, is increased from Rs. 1 lakh to Rs. 1.5 Lakhs .

For the purpose of presumptive taxation under section 44AD, the threshold limit of total turnover or gross receipts would be increased from Rs. 40 lakhs to Rs.60 lakhs.

Conversion of a private company or an unlisted company into a LLP

The Finance (No. 2) Act, 2009 provided for the taxation of LLPs in the Income-tax Act on the same lines as applicable to partnership firms. Section 56 and section 57 of the Limited Liability Partnership Act, 2008 allow conversion of a private company or an unlisted public company (hereafter referred as company) into an LLP. Under the existing provisions of Income-tax Act, conversion of a company into an LLP has definite tax implications. Transfer of assets on conversion attracts levy of capital gains tax. Similarly, carry forward of losses and of unabsorbed depreciation is not available to the successor LLP.

Now, the transfer of assets on conversion of a company into an LLP in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under section 45, subject to certain conditions. These conditions are as follows:

(i) the total sales, turnover or gross receipts in business of the company do not exceed Rs. 60 lakhs in any of the three preceding previous years;

(ii) the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company;

(iii) no consideration other than share in profit and capital contribution in the LLP arises to partners;

(iv) the erstwhile shareholders of the company continue to be entitled to receive at least 50 per cent of the profits of the LLP for a period of 5 years from the date of conversion;

(v) all assets and liabilities of the company become the assets and liabilities of the LLP; and

(vi) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion.

· Carry forward and set-off of business loss and unabsorbed depreciation are allowed to the successor LLP which fulfills the above mentioned conditions.

· If the conditions stipulated above are not complied with, the benefit availed by the company shall be deemed to be the profits and gains of the successor LLP chargeable to tax for the previous year in which the requirements are not complied with.

· The aggregate depreciation allowable to the predecessor company and successor LLP shall not exceed, in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not taken place.

· The actual cost of the block of assets in the case of the successor LLP shall be the written down value of the block of assets as in the case of the predecessor company on the date of conversion.

· The cost of acquisition of the capital asset for the successor LLP shall be deemed to be the cost for which the predecessor company acquired it.

· Credit in respect of tax paid by a company under section 115JB is allowed only to such company under section 115JAA. It is proposed to clarify that the tax credit under section 115JAA shall not be allowed to the successor LLP.

Taxation of certain transactions without consideration or for inadequate consideration

Section 56(2)(vii) amended to cover transfer of shares by a company to a firm or company without consideration or at a price lower than the fair market value. The value of such shares will be taxed in the hands of the recipients as income. The assessing officer can make reference to the valuation officer for an estimate of the value of the property under section 56(2).

Deduction for developing and building housing projects

Under the existing provisions of section 80-IB(10), 100 per cent deduction is available in respect of profits derived by an undertaking from developing and building housing projects approved by a local authority before 31.3.2008. This benefit is available subject to, inter alia, the following conditions:

a) the project has to be completed within 4 years from the end of the financial year in which the project is approved by the local authority.

b) the built-up area of the shops and other commercial establishments included in the housing project should not exceed 5 per cent of the total built-up area of the housing project or 2,000 sq.ft. whichever is less.

To allow for extraordinary conditions due to the global recession and the resultant slowdown in the housing sector, the period allowed for completion of a housing project in order to qualify for availing the tax benefit under the section, has been increased from the existing 4 years to 5 years from the end of the financial year in which the housing project is approved by the local authority. This extension will be available for housing projects approved on or after 1.4. 2005.

Further, the current norms for built-up area of shops and other commercial establishments in housing projects in order to enable basic facilities for the residents is enhanced. The built-up area of the shops and other commercial establishments included in the housing project is three per cent of the aggregate built-up area of the housing project or 5000 sq. ft., whichever is higher. This benefit will be available to projects approved on or after the 1.4.2005, which are pending for completion, in respect of their income relating to assessment year 2010-11 and subsequent years.

Upward revision in threshold limits for tax deduction at source

Threshold limits for deduction of tax at source has been marginally increased in the following cases:

Section	Nature of payment	Existing threshold limits	Proposed threshold limits
194B	Winnings from lottery or cross word puzzle	5,000	10,000
194BB	Winnings from horse races	2,500	5,000
194C	Payment to contractors	20,000 (for a single transaction)	30,000 (for a single transaction)
		50,000 (for aggregate of transactions)	75,000 (for aggregate of transactions)
194D	Insurance commission	5,000	20,000
194H	Commission or brokerage	2,500	5,000
194I	Rent	1,20,000	1,80,000
194J	Fees for professional or technical services	20,000	30,000

These amendments are with effect from 1^st July 2010.

Other highlights

· Cancellation of registration obtained under Section 12A: This is an amendment to make it clear that registration made under Section 12A can also be cancelled by the commissioner vide powers under Section 12AA (3). This amendment takes effect from 1^st June 2010.

· Two more centralized centre for processing returns similar to one in Bangalore

· No need to furnish TDS certificates to tax authorities. However, the requirement that deductor should issue Tax Deduction Certificates to deductees, remains undisturbed

· Scope of cases settlement commission expanded to include proceedings related to search and seizures, if additional amount of tax payable exceeds Rs. 50 lakhs.

ECONOMIC SURVEY

How many of our so-called knowledge fraternity really care about the Economic Survey (there may be a few questioning what is it?). It calls for serious introspection particularly when you project yourself as the ones who are interested (partners) in the economic development and growth of the nation. The budget which hardly has an impact in the most immediate short term hogs our attention, whereas a document which looks far behind to identify the path for growth in the long term is horrendously ignored. This is an attempt to throw light on the economic survey which is presented each year. The salient feature of Economic Survey 2009-10 will post in a separate one.

The economic survey is a report on the performance of the economy over the past year, its comparison with the past and providing its outlook for the future. This document is an honest analysis of the performance of the economy. The economic survey is usually presented to the nation, a day before the budget each year, prepared by eminent economist part of the finance ministry and the planning commission. The finance minister tables it before both the houses of the Parliament. If analysed in detail, it is a document containing the history and also near-perfect prediction of the economy in the future (bet you, there can be no astrologer who can tell your future, these guys tell the future of the nation). The economic survey is a narrative with key statistical data supporting the analysis and conclusions.

The economic survey 2009-10 contains the following chapters:

· State of the economy and prospects: Commentary on overall growth of the economy over the year, overall GDP growth, sector-wise growth, reasons for shortfall/excess of growth over projections, quarterly trend of the growth, per capita income growth, demand and consumption, sector-wise production and supply, savings pattern in the country, Inflation during the year, details of balance of payments, foreign exchange reserves, impact of monetary and fiscal policy, short and medium term prospects are given in this chapter. This section gives an idea of the pattern of growth over years, sectors which are at various stages of its life-cycle and the demand-supply pattern and expectations. These also provide an insight into the potential growth of existing business and viability for new businesses based on the needs of the economy.

· Micro-foundations of inclusive growth: Contains details of how the distribution of growth has taken place in the economy, the challenges face by the economy for inclusive growth, measures taken by government to overcome the challenges of poverty, the measures taken in the form of subsidies, the bureaucratic costs and delays affecting the economy, impact of inflation and availability of food are discussed in this section. This gives an insight into the shortcomings of the economy to stand up to the global needs and growth, particularly with reference to China.

· Fiscal developments and Public finance: The receipts and expenditure statistics of the exchequer, revenue from various taxes, interest liabilities on internal and external funding for the government, plan outlay, outstanding liabilities of the government, performance of government enterprises like railways and post, revenue and fiscal deficits of the states are discussed. This gives a picture of the financial position of the Government. These are like financial statement analysis and can make out where the government is keen to tap revenues and cut down expenditures.

· Prices and monetary management: Analysis of wholesale price index which is taken as base for calculation of inflation, food inflation, main drivers of inflation, city-wise inflation trends, monetary developments like reserve money, liquidity management, repo and reverse repo rates, money market operations and rates, treasury bills, yields of government bonds and outlook are outlined in this chapter. Impact of inflation on each product, for each city and the trend vis-à-vis global trend are elaborated.

· Financial intermediation and markets: Bank operations with respect to credits, deposits and those of financial institutions role as financial market intermediaries, sectoral development of credit, agricultural credit, performance of commercial banks, Commodity markets, currency markets primary and secondary market performance of the economy, debt market and derivatives market performances are analysed in this section. This is one stop source for all those information flowing in the business news channels on stock markets and banking system of the country.

· Balance of Payments: Country’s BOP position in the midst of the challenges of the economic slowdown, current account balances, transaction on capital accounts and foreign exchange reserves, foreign exchange rates over the year and significant developments are discussed in this section. The strength of the economy on the basis of reserves and BOP can be determined from this section.

· International trade: Export trends globally, India’s export trend across various countries and various products, also import trends, direction of trade, India’s position globally, service sector international trade, suggestions for policies for service sector are discussed in this section. India’s present position in the global market and the measures for future is often discussed here.

· Agriculture and food management: Analysis of the entire agriculture sector highlighting contribution of private sector, public sector, foodgrains production, impact of rainfall and monsoons, policy for the sector are discussed in this section.

· Industry: Growth in outputs, performance of each of the sector, flow of finances for the sector, credit availability, policy measure taken for each of the sector and needed for those sectors, project appraisal status and challenges and outlook are discussed in this section. A smart businessperson has enough information to strategise the growth of the business in this section.

· Energy, Infrastructure and Communications: A special emphasis on the much needed resources for the economy is discussed for the present status, prospects and challenges to be addressed, ways of addressing and the outlook. One of the factors in the fundamental analysis of an economy is detailed out.

· Human development, poverty and public programme: Human development index, social sector expenses pattern, poverty status, measuring of the population below poverty line, determination of below poverty line category, employment status and various populist schemes of the government are discussed here in this section.

Economics is such an interesting subject that provides insight into every detail of the country, in the process better understanding often results in successful ventures for those who understand and utilize the reports of the government. Now that we know what exactly is in the economic survey document, we shall try to be literate of the status of the nation and indirectly take any other advantages attached with that, which is reward for being aware of your own economy.

Idli oru unnadha unavu

This is the caption you will find in Murugan Idli outlets across Chennai and Madurai. If there is one who will accept this is me. I am a idli fanatic to say the least. When at Chennai, atleast 6 days in a week will have idli in the menu if not 7 days. Love the smell and would not resist even when it is getting prepared so much so that I have gone against my diet advices, not to have idli. Even in Chennai, I have always been selective about places where I eat idli other than my house. Because if in a particular outlet some item is not nice, you tend to have aversion towards that item anywhere else too. I always had this at the back of my mind before I eat idli outside. That way, I have never had any such untoward incident happening in Chennai.

I carried that same conscience here in Pune and did not have idli for a fortnight. Some force prompted me to have idli. God, what I feared has happened, the idli was easily the worst I have ever had. Now, another fortnight is over and now, badly want to have idli. Necessary utensils for making idli are not available in my guest house to make myself. Trying hard to have those utensils and soon will taste idli and reclaim the temporary loss of affection. But still unsure when this will happen and I'm waiting for that moment. Missing idli and love of Amma and Paati in that idli. I'm immersed in the thought of the smell. Take it, really IDLI ORU UNNADHA UNAVU

Amazon Kindle

Have you seen the "IDEA" Cellular advertisement propagating use of mobile phones instead of papers to save trees? Use the word electronic device instead of mobile phones and that exactly is what is offered by Amazon Kindle. Kindle is both a software and hardware platform developed by Amazon.com. Kindle as a software is available for iphone users and for Windows PC users. It is reported that Blackberry and Mac OS is under development. I don't see much utility for this particular application for PC users. When used in smartphones, it should be amazing. Now, let me come to the hardware part of Kindle. Kindle DX, the present hardware is a piece of electronic device (see picture). There were two earlier models of Kindle known as Kindle, Kindle 2 (had separate version for International users). These versions are no longer avaiable.

The functionalities of the Kindle are nothing but exciting. It is primarily an e-book which u can carry. The kindle supports mobile network standards such as 3G, EDGE and GPRS and hence can be used while roaming in more than 100 countries. This is callled international version. Earlier, there was the US only version, which used network standard called EVDO, available only in the US. Now, there is no US only version also. So roaming is seamless in most countries.

The books that you can read using Kindle are called titles which are offered by Amazon.com and also few other third parties. The contents are offered in Amazons proprietary format for Kindle called AZW. Kindle also supports PDF, .MOBI, .tpz and .txt formats. You can also use to play audio in .mp3 format. Kindle offers conversion softwares to convert to .AZW format for better reading. Presently, there are more than 4,00,000 titles offered by Kindle.

Users can bookmark, highlight and look up contents. Once downloaded, the titles are for exclusive usage. Kindle also offers newspapers, magazines and RSS feeds. This makes more interesting. Absolutely paper-abandoned state. Everything in electronic format. Reading in Kindle does not cause the irritation that we generate while working on PCs, laptops and mobile. It is not flashy. It actually gives an impression of reading a book. It can be used as a personal diary too. Really, What an idea sirji.

Just a look at the kindle being used by a co-passenger at the aircraft has caught my imagination. Looking forward to have one. But, cannot have it in the near future though. The cost is USD 259. Not sure about availability in the Indian markets. Or, let me say it this way. Its worth the wait to have a better technology in hand than the present one. Always, technology and marriage lead to one realisation - could have waited little longer before going for it.

IFRS – Finally the Indian Blueprint of Roadmap out

Ministry of Corporate Affairs has come up with notification dated 22nd January 2010, putting to rest few of the speculations about transition to IFRS in India. As per the notification, transition to IFRS will happen in three phases. The ICAI and Government have stuck to the initial target of 1st April 2011, but the application will be for a limited few. There is no full convergence, in the sense that not all Indian companies can draw unreserved statement of compliance with IFRS. Status of Banking and Insurance companies will be announced in due, and proposal to amend Companies Act by February 2010 indicate serious action from the Government to transit to IFRS and direction to ICAI to recommend converged Accounting Standards by 31st March 2010 means a whack at the country’s premier accounting body to make timely move to IFRS.

The THREE Phases

In phase I, companies falling under the following categories need to prepare opening Balance Sheet as at 1st April 2011:
· Companies forming part of Nifty – 50 index
· Companies forming part of Sensex – 30 Index
· Companies whose securities are listed outside the country
· Companies (whether listed or not) having networth is in excess of Rs. 1000 Crores

In phase II, companies (whether listed or not) having networth in excess of Rs. 500 Crores are required to prepare opening Balance Sheet as at 1st April 2013.

In phase III, listed companies having networth lower than Rs. 500 Crores are required to prepare opening Balance Sheet as at 1st April 2014.

Further confusions

The notification brings a new dimension to the history of confusions surrounding convergence. There is hue and cry among the MNC audit firms about the definition of networth for the purpose of applicability of IFRS. These are noises which are made for the purpose of being noticed. Networth, in any age is not going mean differently. It is straight-forward and simple. Any case, networth, though defined can never be inclusive of outside liabilities in the form of secured loans, etc. Networth can be only one for the company. When two different networth can be worked, either one is not networth or the persons computing are not worth to do the job. However, noises being made are loud enough for consideration and we can expect some more clarification in this front, any modification to include or exclude items in networth.

If you can break down the companies covered in phase I and list it, there would be few hundred companies which will be covered. Nifty 50 covers most of the companies under Sensex 30 (not sure whether there will be any which is not covered). There may be 100 or so companies listed outside India. Coming to networth in excess of Rs. 1000 Crores, there will be hardly any companies which will be bracketed into this particular category. A rough analysis of financial statements reveals that networth can be abysmally low in comparison with extent of public accountability. I understand there should be some logic in coming at this conclusion, though cannot comprehend the same.

The notifications clearly mentions a new set of standards called converged Accounting Standards, which will be in line with IFRS needs to be applied in phases. So, there will be one more set of Accounting Standards, the existing set. The existing set would be applicable to companies covered in phases II and III and also to the companies which are not covered in any of the phases above, now would mean SMCs, notwithstanding the definition of SMCs in Companies (Accounting Standards) Rules 2006. By 2015, there would be say, 25 – 28% of all companies will be preparing financial statements in line with IFRS. Large portions will continue to be preparing financial statements under existing accounting standards, as understood today, because there are no clear signals on IFRS for SMEs. Since there will be two sets of accounting standards it is inferred that there will be no separate standards for SMEs. There can be other view that no IFRS for SMEs for the time being and may be considered after 2014.

The notification talks of companies, whereas IFRS is clearly based on the concept of Group, there is no question of separate financial statements for the Parent. When a parent falls under Phase I, whether the subsidiary needs to prepare financial statements in Phase I or as applicable to it as an individual entity is an issue to be addressed. There can be arguments that since consolidation is mandatory, subsidiary have to be under converged standards. But statutory clarity is required to avoid confusion. However, clarity is inevitable, when subsidiary falls under Phase I and parent falls under Phase II or III.

There is one more clarity needed. The notification talks of opening balance sheet as of 1st April. It can be inferred that comparatives need not be presented for the first year in each of the phases, similar to the Hong-kong model of IFRS convergence.

Next issue to be considered is whether companies not required to comply with converged Accounting Standards will be able to adopt the converged accounting standards? This question is important because the listed companies which are not covered in phase I, would like to present financial statements under converged standards. There may also be other sufficiently large unlisted companies which would like to have their financials under converged standards.
Last but not the least of all is, there is still no clarity on first-time adoption, whether there would be any reconciliations required with previous GAAP and options that would be available while adopting for the first time.

Nevertheless, Government from time to time has been reiterating its firm commitment to converge and this is one more indication of the stand, there is little dilution in the impact that it was meant to make.