Journal of FInance Vol 15

8/9/2019 Journal of FInance Vol 15

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1 BETTING ON THE BUDGETUnion Budget 2008-09

As another budget looms, here is a good new: Indias fiscal situation has improved beyond the

expectations of most people. Further, the improving trend is set to continue. It doesnt matter thatsubsidies are on the rise and the Sixth Pay Commissions impact will have to be factored in. Indias fiscal

turnaround is remarkable because it is overwhelmingly the result of booming revenues and very little

expenditure compression. This is quite unlike the experience of many other economies.

It is also remarkable because it has happened without any big contribution from disinvestment. It is time

to bid goodbye to fiscal pessimism. This does not mean tax giveaways. Indias tax-to-GDP ratio is lowerthan that of many developed and developing economies. Tax efforts must continue. But the improved

fiscal position certainly gives room for stepping up public investment, which has languished for long.

Fiscal 2008-09, according to finance minister, should be a year of consolidation and effectiveimplementation of programmes already launched. The focus would be on implementation of the flagship

programmes in letter and spirit.

Starting with farmers, dont leave out a single vote bank. Give Sonia Gandhi the option of going for anearly election this year. This is the unstated agenda that finance minister has come up with the Budget thatcan be called intelligent populism combining populist sops with sensible measures to stimulate growth,through wide-ranging tax cuts and big outlays on infrastructure and knowledge developments.

A slowdown in global and US economies has made the finance minister flag off the gravy train forconsumers. The 204 million-odd Indian households can buy cheaper soaps, detergents, motorbikes, smallcars, direct-to-home satellite TV connections and medicines.

Finance minister has, at one go, addressed the objectives of inflation control as well as spurring consumerdemand, which has been sluggish in a host of sectors for the past one year. His tax proposals should pushup consumer confidence. As he said, consumption drives production and that in turn drives investment.The 13-million middle-class households (annual household income between Rs 2 lakh and Rs 10 lakh),

many of who pay income tax, would get significant tax relief. While a good amount of the extra incomewill end up as savings, a happy and confident consumer is likely to splurge as well.

1. FINANCIAL ADVISORS:Weigh impact on investors

Betting on budget

In 1990, a young stock trader bet big on what the then finance minister, Madhu Dandavate, would do in

the budget. His bets paid off and suddenly, Dalal Street had a new star, now referred to as the Big Bull.

Come February, every year, thousands of investors begin building up positions in the hope that one ofthem may end up as the next big-bull.

But, there are chances for an investor will lose some of their hard-earned money, because a detailedanalysis of the market (Sensex) reveals that betting on the budget is a bad idea. The study of marketreturns for the period 03-07 found that the returns in the month of February were lower than the averageof other monthly returns for all years barring 06. Experts argue that every year, budget punters build upunrealistic expectations of the budget and when disappointment strikes, the market takes a beating.


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Betting on budget... 2

2. WEALTH MANAGERSMap out the details to translate into benefits

Capital market

(1) Pan Indian market for securities

Finance minister added that our stock exchanges provide national electronic trading platform forsecurities transaction. Yet, we do not have a seamless national market for securities because of differencesamong States on the scope and applicability of rates of Stamp duty. Hence, I propose to request theEmpowered Committee of State finance ministers to create a truly pan Indian market for securities thatwill expand the market base and enhance the revenues of the State Governments.

(2) Exchange-traded market for corporate bonds

In the budget speech of 2006, Finance minister had informed the house that, on the basis of R.H. PatilCommittee Report, he will take steps to create an exchange-traded market for corporate bonds. Both BSE

and NSE have created platforms for trading in corporate bonds. Hence, he proposes to:

Take measure to develop the bond markets with appropriate safeguards, and exempt from TDScorporate debt instruments issued in demat form and listed on recognised stock exchanges; and

Enhance the tradability of domestic convertible bonds by putting in place a mechanism that willenable investors to separate the embedded equity option from the convertible bond and trade itseparately; and

The development of a deep and vibrant corporate bond market will ensure that Indian companies raise

money locally and do not look overseas for raise funds.

(3) Currency and derivatives markets

Finance minister proposes to take measure to develop bond, currency and derivatives markets that willinclude launching exchange-traded currency and interest rate futures and developing a transparent creditderivatives market with appropriate safeguards.

Finance minister P Chidambaram has taken another step towards capital account convertibility. Theproposed measures to deepen capital markets like bonds, currency and derivatives will help Corporate

India raise money at a finer rate and cover risks from currency and interest rate fluctuations.

(4) Classification of market products

Finance minister proposes to encourage the development of a market-based system for classifyingfinancial instruments based on their complexity and implicit risks.

Against the backdrop of the pain inflicted on financial markets due to the subprime crisis and complaints

pouring in on misselling of products, the government has put its weight behind a proposal featuringclassification of capital market products as highly complex, complex or simple. The aim is to guide

investors, especially retail, and ensure that the right products are sold to the right people. Credit rating

agency Crisil, will role out this initiative soon.


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3. FINANCIAL PLANNERSValue unlocking for all stakeholders

Farmers meet

A large number of farmers were given audience with Ms Sonia Gandhi at her residence in a bid to give

her an opportunity to directly understand their problems. Ms Gandhi assured them that she would talkto PM and FM about their concerns.

The Congress exercise to have farmers meet Ms Gandhi ahead of the budget appears to be aimed at

drumming up a tempo to the announcements, which can then be used for campaigning during the election year by the UPA government. Farmers demanded loan waivers, reduction in rate of interest on farm

loans, remunerative prices of crops, packages for rehabilitation and resettlement, introducing of crop

insurance at the village level and health insurance for the poor.

The Budget waived Rs 60,000 crore of loans for 40 million farmers, wooing the biggest vote bank.However, Mr Chidambaram has made no budget provision for the write-off, and says he will find ways to

provide additional liquidity of Rs 60,000 crore to banks over three years. Starting with farmers, but dontleave out a single vote bank. Wages will rise by 50% for 1.8 lakh anganwadi workers, a new vote bank.Special schemes in education, insurance and area development are targeted at a variety of traditional votebanks women, senior citizens, minorities, dalits, tribals and other backward castes.

Farm loan waiver

The loan waiver package which will cover four crore farmers three crore small and marginal and onecrore others will be completed by June 30, 2008. This was designed to help farmers clean up their debtsbefore the next Kharif season when they would need to raise loans again.

Since most of these loans, Rs 60.000 crore had already turned into bad loans; the government waiverpackage would help clean up accounts of the banks. While the banks will write off the loans at one go, thegovernment will have the comfort of making the payout to the banks in instalments over a three-yearperiod without incurring an interest burden on it.

Finance minister P Chidambaram believes that the RS 60,000-crore farm debt-waiver and debt-relief

packages will strengthen the banking system and that the central bank would back the government inimplementing the scheme. He reiterated PMs view that banks would be compensated as and when loans

came due and the scheme would be funded through government revenue. He added that government; RBI

and banks would work in a manner that the goals and objectives of the scheme are achieved.

The RBI governor said that RBI is fully geared to support the government in implementing the scheme ina manner that the banking sector will be strengthened, not weakened. The banking sector will becompensated in a way that the banks will not be constrained at all.

The governor added that the RBI would work closely with the government and the banks to ensure that

the loan waiver scheme was implemented within the announced time frame to serve the interest offarmers. Steps would be taken to improve credit flow while subserving the interest of the banking system.


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4. INCLUSIVE CEOsInnovative responses to problems

Path of power

The Congress appears to have concluded that path to power is paved with large spending and populist

measures. A pre-budget memorandum said the government should delay the implementation of FRBM Actfor wiping out revenue deficit by another three years. With rural distress, spiraling price rise and risingunemployment mauling the governments popularity, Congress leaders are of the view that budget should

demonstrate the governments commitment to that famous category the aam admi. The finance minister

has been arguing against wasteful expenditure and unworkable schemes. But his views do not have manytakers. A majority of the partys economic policy-making body considers the budget is a political

wardrobe that can enhance the ruling sides appeals.

Election-year promises are peppered across all vote banks in the Union Budget 2008-09. The wooing ofMuslim vote bank is note-worthy. Special development plans for 90 minority concentration areas gets Rs3,780 crore and 544 bank branches will be opened in districts with a substantial Muslim population.

Central Para-military forces will hire additional Muslim candidates. Muslims will get pre-metricscholarships worth Rs 80 crore and another Rs 45 crore for madrassas modernisation.

To woo the middle class, the Budget raises the exemption limit for income tax from 1.1 lakh to Rs 1.5lakh and widens the tax slabs, gifting every taxpayer at least 4,000 more in his pocket. The middle class as well as Indian industry will benefit from the cut in cenvat from 16% to 14%, and further dutyreductions for small cars, two-wheeler, paper and pharmaceuticals.

So, despite giveaways galore, the Budget has cut fiscal deficit to just 2.5% of GDP, below the FRBMtarget of 3%. Mr Chidambaram leaves headroom for meeting the higher wage and pension obligationsthat will flow from the imminent Pay Commission award. Also, his calculations exclude under-recoveries

of fertiliser and oil marketing companies, which could exceed 2% of GDP, and will be only partiallyoffset by the issue of bonds. So, fiscal window-dressing cloaks the sad fact that FRBM targets havebecome meaningless in practice.

5. RISK MANAGEMENT CONSULTANTSEducate Engineer and Enforce

Rich-poor divide

Even as the government flaunts the impressive growth rate, its Left allies are ranting that the

beneficiaries are a few millionaires. As the economy grew, the lions share flowed into the coffers of asmall section on the top, leaving a vast majority of our people high and dry. Never has there been such

shocking disparity between the rich and poor. Millionaires have grown into billionaires. The claim of theprime minister on GDP growth lacks ethical merit when a vast majority of people lives in poverty. Their

standard of living is among the lowest in the world.

The party has published a booklet listing out names of billionaires and millionaires whose wealth addedup to Rs 1,232,135 crore. For the CPI, the who gets what list is a picture of shocking disparity. The

63-page booklet of the CPI, at the outset, asks what is the benefit derived by the common man?


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It ends up by saying that the India, which is shining, belongs to a small minority while another India is

steeped in poverty, hunger, unemployment, illiteracy and disease. This is unacceptable. We have to fight

for an India where economic growth is combined with distributive justice, where people benefit from all-round growth. Only that can mean the development of the country.

The Budget leaves corporate tax untouched, and makes no mention at all of extending the corporate taxexemptions for software parks, export-oriented units or industries set up in Uttarakhand and HimanchalPradesh. If these are allowed to expire, they will give corporation tax collections a boost in the country inthe coming years.

The flagship programmes of the government aimed at the Aam Aadmi, all get big increase in outlays. TheNational Rural Employment Guarantee Schemes will now cover all 596 rural districts in India, and theoutlays will rise from Rs 12,000 crore to Rs 16,000 crore. Bharat Nirman, the rural programme, will getRs 31,280 crore against Rs 24,603 crore in 2007-08. Education spending will rise 20% and similarincreases are provided for the missions for rural health and drinking water.

Unorganised workers will get an increased health insurance scheme (Rastriya Swasthya Bima Yojana)

cover of Rs 30,000 per family. The Aam Aadmi Bima Yojana will provide life insurance cover to anadditional one crore poor families.

And the Indira Gandhi National Old Age Pension Scheme will now benefit 157 lakh people against 87lakh earlier. Another promising innovation is the use of smart cards to deliver government funds directlyto the beneficiaries. Haryana and Chandigarh have agreed to a pilot programme. This has the potential toeliminate leakages and give beneficiaries the full benefit of food subsidies.

6. FINANCE PROFESSIONALSDeveloping alternative credit delivery models

Advancement of due date of filing of return

Section 139 of Income-tax Act provides for filing of income by certain categories of assessees. Due dates,

for filing such return on income in respect of different categories of assesses, have been provided in

Explanation 2 to sub-section (1) of this section.

The due date has been prescribed as 31st day of October of the AY for the certain categories of assesseelike a company, a person (other than a company) and a working partner of a firm whose accounts arerequired to be audited under the Act or under any other law for the time being in force. It is proposed toamend, so as to provide that the due date for filing of return of income for the above categories shall be

30th

day of September of the assessment year.

Similarly the due date of return of fringe benefits is also proposed to be advanced from 31st day ofOctober of the assessment year to 30th day of September of the assessment year in the followingcategories of assessees a company; or a person (other than a company) whose accounts are required tobe audited under this Act or under any other law for the time being in force.

There is no change in the due date of filing of returns in the case of all other categories of taxpayers.These amendments will take effect from 1st April 2008.


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7. CREDIT COUNSELORSResolve convertibility and recompensation issue

Notice of assessment

Sub-section (2) of section 143 of the Income-tax Act provides that the notice under this sub-section shall

be served on the assessee within a period of twelve months from the end of the month in which the returnis furnished. Further, the service of such notice must be affected in a manner laid down in sections 282,283 and 284 of the Income-tax Act, read with General Clauses Act.

Instance s have come to the notice of the department, where notices, though issued by registered postwithin 12 months as prescribed have been held invalid on the ground that the notice was actuallyreceived by the assessee after the limitation date. This is notwithstanding the fact that the assessee hasattended the assessment proceedings in response to the notice served on him. Instances have also come tonotice where the orders of the assessing officer is being quashed on the ground that there is no evidence ofissue or service of notice, even though the assessee have attended the hearing before the AO during theassessment proceedings. Further, the design of the limitation period with reference to the end of the

month leads to administrative inconvenience in as much as the last day of every month becomes a timebarring date.

In order to address these issues and to reduce litigation, it is proposed to insert a new section 292BB in theIncome-tax Act to provide that where an assessee has appeared in any proceeding or cooperated in anyinquiry related to an assessment or reassessment, it shall be deemed that any notice under any provision ofthis Act has been duly served upon him in time in accordance with the relevant provisions of the Act.Further, such assessee shall be precluded from taking any objection in any proceeding or inquiry underthis Act that the notice was (a) not served upon him; or (b) not served upon him in time; or (c) servedupon him in an improper manner. Similar amendment is also proposed in the Wealth-tax Act.

Advancement of the period of notice

Further, it is also proposed to amend clause (ii) of sub-section (2) of section 143 to provide that the noticeunder sub-section (2) of section 143 shall be served on the assessee within a period of six months from theend of the financial year in which the return is furnished. This amendment will take effect from 01/04/08.

8. TECH SAVVY PROFESSIONALSTake first step to ensure efficient and reliable system

Use of Information Technology in tax administration:

Initiatives taken in the last budget:

Better tax administration has been high on the FMs agenda. So, a large part of what he sought to achievein the last Budget has moved forward. However, while some initiatives have taken off successful, othershave been slower to get off the ground.

Annual Information return: At present, the I-T department gets data on seven transactions under theAIR. The idea behind the AIR is mainly aimed at expanding the tax base and preventing tax evasion.However, the CBDT has not notified any new transactions so far.


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Large taxpayer unit: The other major initiative large taxpayer unit (LTU), which is aimed at making lifeeasy for corporate taxpayers, is yet to gain traction. Besides the Bangalore LTU, the tax department hasnot been able to introduce this in other centres, though LTUs are likely to be set up in Chennai, Delhi andMumbai soon.

E-payment & e filing: The government has made e-payment and e-filing mandatory for certain assessees.E-payment for indirect taxes like service tax, custom and excise has also been taken off.

Refund Banker Scheme: The scheme is to ensure that assessee receives their income-tax refunds in time.The scheme, after being tested in Patna and Delhi, has been extended to more cities and it is only a matterof time when the whole country gets covered. This essentially involves outsourcing of tax refunds tobanks, primarily SBI, instead of the IT department directly sending tax refunds.

At present processing of returns takes four months to one year. This is primarily because there is no

equitable distribution of the processing work. In some jurisdictions, assessing officers are saddled with

the processing of 60,000 to 70,000 returns. On the other hand, officers in smaller jurisdictions have just5,000 returns to handle. After introducing e filing, the government is now set to revolutionise processing

of returns. Jurisdiction-free processing of income-tax returns could be reality soon, with the financeminister authorising the government to introduce such a scheme. The move is aimed at expediting the

processing of returns and thereby quickening the issue of refunds.

9. ONE-STOP-SHOPSDedicated to offer related services under a roof

Centralised processing of return

Generally, tax administration across the countries adopts a two-stage procedure of assessment as part of

risk management strategy. In the first stage, all tax returns are processed to correct arithmetic mistakes,internal inconsistencies, tax calculation and verification of tax payments. At this stage, no verification of

the income is undertaken. In the second stage, a certain percentage of the tax retunes are selected for

scrutiny/audit on the basis of the probability of detected tax evasion. At this stage, the tax administrationis concerned with the verification of the income.

In India, the scheme of summary assessment being in force since the 1st day of June, 1999 does notcontain any provision allowing for prima facie adjustment. The scope of the present scheme is limitedonly to checking as to whether taxes have been correctly paid on the income returned. Under the existing provisions of section 143(1), there is no provision for correcting arithmetical mistakes or internalinconsistencies. This leads to avoidable revenue loss.

With the objective to reduce such revenue loss, it is proposed to amend the section to provide that thetotal income of an assessee u/s 143 (1) shall be computed after making the following adjustments to thetotal income in the return

(a) any arithmetical error in the return; or

(b) an incorrect claim, if such incorrect claim is apparent from any information in the return.


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An incorrect claim apparent from any information in the return shall mean such claim on the

basis of an entry, in the return

a) Of an item, which is inconsistent with another entry or some other item in such return,b) In respect of which, information required to be furnished to substantiate such entry, has not been

furnished under this Act; or

c) In respect of a deduction, where such deduction exceeds specified statutory limit which may haveexpressed as monetary amount or percentage or ratio or fraction.

Further, these adjustments will be made only in the course of computerised processing without any humaninterface. In other words, the software will be designed to detect arithmetic inaccuracies and internalinconsistencies and make appropriate adjustments in the computation of the total income.

For this purpose the Department is in the process of establishing a system for Centralised Processing ofReturns.

To facilitate this, it is also proposed that

a) The Board may formulate a scheme with a view to expeditiously determine the tax payable by, orrefund due to, the assessee;

b) The Central Government may issue a notification in the Official Gazette, directing that any of theprovisions of this Act relating to processing of returns shall not apply or shall apply with suchrestrictions, modifications and adaptations as may be specified in the notification. However, suchdirection shall not be issued after 31st March 2009.

c) Every restriction shall be laid before each House of Parliament as soon as such notification isissued.

Along with the notification, the scheme referred above is also required to be laid before each House ofParliament.

Similar amendments have also been proposed in section 115WE of the Income-tax Act, relating to fringebenefits.

These amendments will take effect from 1st April 2008.

Authentication of documents/notices/letters

It is proposed to insert a new section 282A in the I-T Act to provide that any notice or other document isrequired to be issued, served or given; it shall be deemed to have been authenticated if the name andoffice of a designated income tax authority is printed, stamped or otherwise written thereon.

It is also proposed to provide that for the purpose of this section, a designated I-T authority shall meanany I-T authority authorised by the Board for this purpose. The amendment will take effect from the01/06/08.


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10. GLOBAL OUTLOOKForeign currency exchangeable bonds (FCEBs)

The government allowed firms to issue FCEBs to unlock the value of their holding in-group companies.The norms governing tax treatment and eligibility of FCEBs are on the lines as foreign currency

convertible bonds (FCCBs). In the case of FCCBs, bonds can be converted to equity of the issuing firm.

While in the case of FCEBs, bonds can be converted into equity of a group companies. The newinstrument would provide corporate groups more flexibility to raise funds as they can leverage value of

holding of a company in group firms too.

FCEB is a bond expressed in foreign currency with the principal and interest payable in foreign currency.Foreigners, NRIs and overseas entities are eligible to subscribe to these bands, which can be convertedinto equity shares of a group company (called the offered company). The issuing company shall bepart of the promoter group of the offered company and shall hold the equity shares being offered at thetime of issuance of the bond. The offered company should be a listed company engaged in a sectoreligible for FDI and is eligible to issue or avail of FCCBs or ECBs. The investment under the schemeshall comply with the FDI and ECB policy requirements. Funds raised through FCEBs cannot be invested

in the capital market, but can be used for overseas expansion.

No capital gains on transfer of FCEBs

In 1992, the Government allowed established Indian companies to issue foreign currency convertiblebonds (FCCB), with special tax regime for non-resident investors, so as to encourage the flow of foreignexchange in India. The Government has now allowed established Indian companies to issue foreigncurrency exchangeable bond (FCEB). With a view to providing a level playing field to FCEBs, it isproposed to provide that the conversion of FCEBs into shares or debentures of any company shall not betreated as a transfer within the meaning of Income-tax Act. Further it is also proposed to provide that thecost of acquisition of the shares received upon conversion of the bond shall be the price at which the

corresponding bond was acquired. These amendments will take effect retrospectively from 1st April 2008,and will accordingly apply in relation to assessment year 2008-09 and subsequent assessment years.

11. CONTINUING LEARNING CENTRESTake informed decisions

Unified goods and Service Tax (GST)

The proposed GST regime could spell an end to various kinds of exemptions enjoyed by the corporatesector. These include area-based exemptions and sectoral tax breaks. Finance minister P Chidambaramhad proposed the introduction of GST from April 1, 2010 in the last budget. He had asked the empowered

committee of state finance ministers to prepare a road map. The Planning Commission has alreadyendorsed the finance ministrys view on launching GST from 2010 in the approach paper to the 11th Pan.

The empowered committee has accepted the report on GST submitted by the joint working group and hasfavoured adoption of dual GST central GST and state GST. The penal has suggested levies like exciseand service tax into a single federal GST. States would need to merge value-added tax and local leviesinto a state-level GST. The report of the joint working group has called for doing away with areas orindustry-based exemptions. It has suggested that, if at all some incentive is to be given; it should be in theform of direct subsidy. This will help in keeping the GST rate low by expanding the tax base. Moreover,the emphasis is on keeping the derivation minimum and having a common exemption list.


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Cartelisation

Referring to oligopolistic tendencies in some industries as flagged off in the Budget speech; the financeminister said Monopolies & Restrictive Trade Practices Commission (MRPTC) has come out with twojudgments on the cement industry, pointing out that the cement firms are acting like a cartel. He said, Ayear ago, when I tried to persuade the cement industry to reduce prices, they reacted with a sense ofinjured innocence. Since then, there have two MRPTC decisions finding them guilty of cartelisation.

Home loan

Finance minister P Chidambaram said: He agrees that housing loan borrowers of less than Rs 20 lakhshould be incentivised by lower interest rates. I made a number of efforts to impress upon bankers in thisregard. It is a constant effort that I will have to make. Bankers will have to take a call; RBI will have totake a call. Already these loans have less risk weight than those above Rs 20 lakh and, therefore, bankershave incentives to lend to these borrowers at lower interest rates.

Growth during 2008-09

Finance minister said he wanted to complete his innings with a batting average of 8.8% growth per year. Iam extremely bullish about growth during 2008-09. The industry should rise to the demand by producinggoods and services. I have said that my batting average is 8.8% in four years. I have no intention to closemy innings with a lower batting average.


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2 PRIMARY MARKETStruggling IPOs

The problems experienced by some of the recent IPOs have exposed the flaws in the way primary issuesare being sold. At one level it is simply a case of investors, spooked by a falling market, suddenly takingcloser look at valuations. But there are structural weaknesses need to be fixed. Sebi would do well to lookat the whole process and in particular the price band-based book building process.

Some recent IPOs have become akin to an end-season sale. A company makes an offer, which it thinks isattractive, but on not finding enough takers announces a discount. When that doesnt work, it extends thedate for which the offer is open. The point is that these IPOs are often more expensive than their listedpeers. A small premium in IPO is justified because a large number of shares are available at a fixedprice to institutional investors. The strong institutional demand, meanwhile, ensures a good listing andoften large short-term profit for retail investors. A secondary market purchase of a reasonably pricedalternative would not yield such short-term gains to retail investors. This game, however, lasts only instrong markets. The sharp correction in the secondary market warranted an equally sharp reduction in IPOpremiums, which is what has happened and why IPOs are suddenly struggling.

The core issue is the price band-based book building. The price band is decided by the interested parties,merchant bankers and the company. It is not a discovered price, which was the idea behind book building.What is needed is free bidding for the QIB portion with 100% margin requirement. The discovered pricecould become the basis for a fixed-price offering to retail investors. Yes, there is a risk of aggressivebidding in exuberant times. But a 100% margin-based bidding should serve as a check, as bidders wouldbe exposed to the risk of getting large allotments at high prices.

(1) Wockhardt Hospitals to call off IPO

The turbulent market has claimed its first high-profile casualty. Lead managers decided to call off theissue after the QIB portion was undersubscribed. This is the first time that a leading group has been forcedto withdraw an IPO due to poor investor response. The signs were ominous from the beginning, with theissue opening for subscription a day later than stipulated. With the secondary market in a bear grip, theissue price band had to be lowered to Rs 225-260 from Rs 280-310 initially. Wockhardt was the firstcompany to revise its price band downwards.

With the market remaining volatile, the QIB and the non-institutional portion of the issue remainunsubscribed till almost Day 5. Therefore, Wockhardt Hospitals sought regulatory approval to extend itssubscription process by two days. However, the extension did not help matters for the company.Interestingly, the best response came from retail investors, usually the most risk averse class of investors.

(2) Investor apathy forces Emaar- MGF to call off IPOs

Emaar-MGF becomes the second high-profile casualty of the worsening IPO market. WockhardtHospitals was the first company to revise its price band downwards, and was soon followed by EmaarMGF. It has extended its bid process by three days. The company also revised its price band at the lowerend by Rs 10. This is the first time two equity offerings have been called off within such a short span.


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Primary Market... 13

There is a now big question mark on the future of the IPO market in the near term. All eyes are now onthe Reliance Power listing on February 11. It could be a make or break for the primary market in general.If the stock lists below Rs 550, HNI and other leveraged investors who have borrowed money to bet onReliance Power will take a hit. (Here, the funding cost works out to around Rs 125 a share).

(3) Listing of Reliance Power IPO

On Monday, the 11th of February 08, Anil Ambani becomes richer by about Rs 25,000 crore. Butcountless investors who helped make that happen arent so lucky. After Reliance Power the stock thatmade Mr Ambani wealthier slipped into a discount. Investors, who a month ago went into a frenzy toget a slice of the offerings, rushed to offload the stock which tumbled to an intra-day low of Rs 355.05,before closing at Rs 372.50, down by 17% over the issue price of Rs 450.

While there have been many issues in the last couple of years that closed below the issue price on the firstday, none of them match Reliance Power either in terms of size or pedigree. Not long ago, the Rs 11,700-

crore Reliance Power IPO created history by attracting cumulative bids worth a massive Rs 752,000 crore(around $ 180 billion). It was the highest-ever demand generated by any IPO so far in the country.

(4) Listless Street leaves grey market in tatters

With companies withdrawing their public issues, coupled with the R-power debacle, the once bustlingprimary market has slipped into coma. As direct fallout of this development, activities in the grey markethave come to a standstill. A grey market exists whenever there is a strong response for a public issue.Investors, who want a certain number of shares, but know that they are unlikely to be allotted thatquantity because of the strong demand, turn to grey market brokers. These investors are mostly high net

worth individuals, market operators, reputed brokers and often merchant bankers to the issue.

Chances are that the coming days could be listless for the gray market brokers, who connect buyers andsellers in this thriving unofficial market for IPOs. Once the trade is legalised by putting it through thetrading terminal, the differential is settled in cash between the buyer and the seller. The days after R-power listing have been quite tough for them, as many HNI who had bought R-power shares at inflated prices in the gray market, were threatening to renege on their commitments. Though the buyers willeventually pay up; they have nowhere to go, says gray market brokers, but it is a needless headachechasing them to cough up the money.

(5) R-power mulls bonus issue to woo investors

In an unprecedented move, R-power will give bonus shares to all its shareholders to compensate thelosses they suffered when the company was listed a week ago. In the face of previous disappointmentamong investors, group chairman Anil Ambani is believed to have taken the unique step to win over theinvestors and give a message that shareholders would not lose in his company. The move will reduce thecost of acquisition of shareholders. The promoter group would accept the dilution of their stake due to theissuance of bonus shares. Prior to the over 10% equity dilution in R-power through IPO, Anil Ambani andhis group company Reliance Energy were the equal stake holders.


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3 SECONDARY MARKETBudget rally

Where do we go from here?

With the savage correction in January, a substantial part of the valuation froth in the system seems to havebeen evaporated. With around 20% earning growth expectations over the next two years still not in doubt,

now there is a case for the market to find investment support. This is, however, subject to the foreigninvestor not pulling out from the Indian market in a big way.

1st week of February 08 Glooms all around

Renewed indications of a US recession; Failure of Wockhardt IPO despite a two-day extension; Forecast indicating a slowdown in the Indian economy in 2007-08; Failure of Emaar MGF IPO after Wockhardt IPO; Inflation soars to 5-month high of 4.11% in the week ended January 26;Daily review 01/02/08 04/02/08 05/02/08 06/02/08 07/02/08 08/02/08Sensex 18,242.58 417.74 2.84 (523.67) (612.56) (62.04)

Nifty 5,317.25 146.25 20.40 (161.35) (189.30) (12.90)

Weekly review 01/02/08 08/02/08 Points PercentageSensex 18,242.58 17,464.89 (777.69) (4.26%)

Nifty 5,317.25 5,120.35 (196.90) (3.70%)

2nd week of February 08 Continuing gloom

IIP plunges to 7.6% in December07 from 13.4% in the corresponding month of 06; The cumulative industrial growth rate (April-Dec07) slipped to 9% from 11.2% a year ago; Reliance power listed at 17% discount. French bank Societe Generale, hit by the US credit crisis; Warnings by G7 leaders that the credit turmoil could destabilise the world economy; Petrol price hiked by Rs 2, Diesel price hiked by Rs 1 from February 15.Bush signs economic plan: US President George W Bush signed a $ 152-billion plans to fortify USeconomy against a recession. Passed by Congress with unusual speed, the measures are mainly designedto put more spending money in US consumers pockets. Bush said at the White Hose signing ceremonyon Wednesday: I know a lot of Americans are concerned about our economic future. The bill is largeenough to have an impact. Individuals will get the bulk of the one-time income tax relief rebate cheques

this year of up to $ 600 for singles, $ 1200 for married couples, plus $ 300 per child.

Daily review 08/02/08 11/02/08 12/02/08 13/02/08 14/02/08 15/02/08

Sensex 17,464.89 (833.98) (22.90) 341.13 817.49 348.62

Nifty 5,120.35 (263.35) (18.75) 91.20 272.55 100.90

Weekly review 08/02/08 15/02/08 Points Percentage

Sensex 17,464.89 18,115.25 650.36 3.72%

Nifty 5,120.35 5,302.90 182.55 3.57%


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Secondary Market... 17

Union Budget: Capital market

The market behaves like a voting machine in the short run and weighing machine in the long run, saidlegendary investor Warren Buffett once. The saying appears relevant in the context of Dalal Streets

reaction to the Budget. The Budget may be short on path-breaking reforms, but it is long on stability.

(1) 50% increase in tax on short-term capital gains:

The move will impart stability to the market in the long run by encouraging investors to stay invested forthe long term. But the move is expected to tighten liquidity in the short run. The rate of tax on short-termcapital gains being increased to 15% from 10% is a short-term negative.

(2) Scrapping of income tax rebate on securities transaction tax:

The move is expected to hit day traders, a key source of liquidity in the market, hard. Earlier, these traderscould adjust STT against their income-tax obligations. But with this facility gone, it will squeeze their

profit margins by increasing their tax liability. But that should not much of a concern to long-terminvestors. According to tax professionals, the current practice adopted by big operators and day traders isto add the STT amount to the total income, including income from trading activity and other income, andsubsequently, work out the payable tax. Under Section 80E, they are entitled to get tax rebate and can payonly the surplus of total tax over STT at the end of the year. However, this benefit of setting off incometax against STT would not be available once the new proposal comes into effect.

The government is aware of the practice that some market savvy investors have been taking advantage of

loopholes in the STT law to avoid paying legitimate tax on business income from speculative stock trades.

These investors purchase STT for a fee from other broker/traders who will not be able to claimincome-tax rebate on STT beyond a point. But the tax authorities find it difficult to nail down offenders as

all the transactions are legal and STT has actually been paid to the government.

(3) Chang in the methodology of STT calculation on option contracts

Currently, STT is charged at the rate of 0.125% on delivery-based buy-and-sell transactions and 0.025%only on non-delivery based sale transactions. The rate is 0.017% on F&O sale transactions. The FM hasdecided to keep these rates unchanged. He, however, has given a boost to traders in F&O segment bychanging the methodology of STT calculation on option contracts. At present, option contracts attract anSTT on the entire notional value of the contract. This is going to change after the Budget proposals comeinto effect, as STT will be charged on the option premium where the option is not exercised, and theliability will be on the seller. However, in case where the option is exercised, the levy will be on the

settlement price and the liability will be on the buyer.

(4) Service tax on stock exchanges and clearing houses

Finance minister P Chidambaram proposed to bring services provided by stock exchanges and clearinghouses under the service tax net will not have any impact on brokers who are already paying service taxas they can claim rebate.


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4 INDIAN ECONOMIC SURVEY 2007-08

If you wish me to sum up in one phrase the outlook for 2008-09, I would say optimism, but with caution

as the watchword. There are a number of things going in favour of India. We need to capitalise on these

opportunities while at the same time responding to the evolving situation in the global economy in amanner that our growth story is not affected. Given the high level of food, oil and other commodity prices

in international markets, the risks to inflation remain. There are, also downside risks to growth arising

from the slowdown and possible recession in the global economy.

Turn right for reforms

Please dump the Common Minimum Programme and opt for radical reforms if you want India to grow at9% in the Eleventh Plan. This is implied rather than openly stated by the pre-budget Economic Survey.The survey lists the reforms as options rather than recommendations. The key reform options are:

Privatise old coal mines to enhance coal recovery, and allow the private sector free entry into newmines. Similarly, sell old oilfields to private companies for enhanced recovery.

Decontrol sugar, fertiliser and pharmaceutical segments.

Allow 100% FDI in Greenfield rural-agricultural banks. Allow 51% FDI in rural insurance covering health, weather and such insurance. Allow 49% FDI in

all other insurance.

Amend the Factories Act to extend the workweek from 48 hours to 60, and increase the daily workinghours limit to 12 hours, to facilitate peak use of labour in seasonal industries.

Enact a new bankruptcy law to enable quick exit or management change of sick enterprises. Introduce multi-application smart cards to empower recipients of a wide range of government

schemes from employment to public distribution system and public housing. Recipients can receiveremittances directly into their bank accounts via smart cards, with no leakages or corruption.

Freely allow the entry of A-grade foreign universities, and encourage B and C-grade foreignuniversities, subject to tighter regulation. Allow private certification of skill development, besidesgovernment certification.

Allow foreign equity in all retail trade, and 100% FDI in branded speciality chains. Permit corporate investment in nuclear power. This, in turn means going ahead with 123 nuclearagreement with the US. Make open access in electricity a reality through credible cross subsidies and free permission of

distribution to connect by wire to government electricity pillars.

Allow free entry of private and joint venture freight companies into new freight corridor being builtby Railways.


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Economic Survey... 19

Outlook finance

Primary market:a) With a vibrant capital market, the Indian corporates would step up their access to the primary market

to raise resources both through equity and debt issues.

b) Alongside, the overseas issues (ADR/GDR) too are expected to gain in importance to supplement thedomestic resource mobilisation by the corporates.

c) The governments efforts to streamline the regulatory framework and to bring business transparencymay enhance activity in the primary capital market in terms of increase in the number of debt andequity issues as well as larger participation of investors, particularly retail investors.

Secondary market:a) The performance of Indian stock prices in the secondary market hinges broadly on long-term and

short-term factors.

b) Going forward, despite the possible subdued global growth, the strong fundamentals of the Indianeconomy in tandem with higher growth would help in sustaining the interest of domestic and foreigninvestors in the Indian market.

Foreign investors:a) In the long run, strong world output growth is important to sustain the investment activity across the

globe. Since Indias growth performance is relatively better among the emerging economies, thecountry would continue to attract significant cross-boarder portfolio investments.

b) In the short-term, expectation of higher relative returns from investment in India, favourable riskperception of investors and improved global liquidity would help the country in being an attractive

destination for investment.

Domestic investors:a) Domestically, corporate earnings are expected to remain encouraging. Strong projected economic

growth and supportive policy initiatives would enhance investors preference to invest in financialinstruments, such as equity and debt papers.

b) If the recent pick-up in the amount of resource mobilisation by mutual funds and the assets theymanage are any indication reflecting increased preference for investment in the capital market viamutual funds, the resources available with the Indian financial institutions would increase.

Banking sector:a) As the Indian economy has entered a higher growth trajectory, the investment demand is expected to

remain strong in the short to medium term. The banking sector is equipped to meet the growingdemand for resources.

b) It is, however, necessary that credit expansion is non-inflationary and the productive sectors receiveadequate credit at a reasonable cost. This may call for the banking sector to review the spreadssuitably, thereby ensuring that credit offtake by productive sectors is maintained facilitating thegrowth momentum.


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Economic Survey... 20

Outlook inflation

a) Overall inflation is likely to remain moderate in the coming months, as the policy measures takenduring the course of the year work their way through the system.

b) The behaviour of agricultural prices, including essential consumption items, will be critical, givenfalling poverty and rapid rising per capita income.

c) Global prices are having a more pronounced impact on domestic prices as the ability to meetshortfall at affordable prices is being eroded by global shortages and rising prices.

d) We will continue to depend on enhancement of supplies through higher productivity and efficientsupply management. Domestic supply management is, therefore, critical to stabilising inflationexpectations. The parts of the economy characterised by market competition, such as manufacturing,have responded to the increase in demand through higher investment and capacity creation. Thesupply side pressures are likely only in sectors like agriculture that suffer from structural problems.

e) Monetary policy needs to address the inflationary expectations triggered by sub-sectoral price flare-ups arising from demand and supply. Monetary policy also has to manage the stress arising fromcontinued increase in capital flows and the consequential changes in the exchange rate, exchangereserves and liquidity. This is particularly challenging in a period of stagnancy or decline inproduction of durable consumer goods and deceleration in global demand of our exports.

The Union Budget 2008-09 aims at combating the impact of the global slowdown by stimulating domesticconsumption through lower excise duties, central sales tax and personal income tax.

Since an appreciating rupee has affected exports and made imports cheaper, the finance minister has put offimport duty cuts to Asean levels, as earlier promised. This postponement will ensure a larger marketshare

for domestic producers during a global slowdown that could hit some sectors badly.

OUTLOOK AGRICULTURE

a) The agriculture, forestry and fishing sector is estimated to grow at 2.06% during 2007-08, as againstthe previous years growth of 3.8%. Besides the weather induced fluctuations, output of this sectorhas been affected due to reduced capital investment and plateauing of yield levels in major crops.

b) Any deceleration in the growth of this sector is translated into a lower overall GDP growth.Acceleration of growth of this sector will not only push the overall GDP growth upwards, it wouldalso make the growth more inclusive. This necessitates working out the forward and backward

linkages that enhance productivity through balanced allocation and better utilisation of availableresources at all levels of implementation and quantifying output per unit of resource used.

c) The long-term policy framework at broad sectoral level needs to be strengthened and focused onimproving inter and intra-sectoral linkages. In addition, there is a need to build an outcome orientedperspective in the implementation of public programmes in the area of irrigation, fertilisers, use ofhigh-yielding varieties of seeds, extension support for facilitating adoption of improved practices,and market access. While investment in agriculture may not have kept place with the requirements ofthe sector, food and fertiliser subsidies have supported the agriculture sector.


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5 TAX UPDATESFinance Bill 2008

(1) 2% cut in General Cenvat rate

The manufacturing sector is the backbone of any economy. It is consumption that drives production and itis production that drives investment. Having carefully studied current trends of production andconsumption, finance minister believes that there is a need to give a stimulus to the manufacturing sector.

Hence, he proposes to reduce the general CENVAT rate on all goods from 16% to 14%. The 2% cutmeets the long-standing demand of the industry, which now has the option of boosting sales by passing onthe benefit to consumers or pumping up its bottom lines.

(2) No change in Peak Customs duty

If the finance minister decides to pare peak duties in 2008-09, it would be the fourth consecutive year of

the duty cuts. There has been a continuous annual reduction in Custom duties since 2005-06 when dutieswere reduced from 20% to 15%. In the current fiscal, peak duties were bought down from 12.5% to 10%

while in the year before; the duties were reduced from 15 to 12.5%.

The peak rate for non-agricultural products was 20% in January 04 and now stands at 10%. Since April07, the Rupee has appreciated against the Dollar by 9.8%. Consequently, finance minister proposes tomake no change in the peak rate of custom duty. While he has refrained from cutting the peak customsduty for the first time since he took over, there are a bagful of goodies for India Inc in the form of cheaperraw materials. While the rupees strength was making imports cheaper any way, heres the icing on thecake: countervailing duty (CVD) on most manufactured goods has gone down to 14% - thanks to cenvatrate coming down from 16% to 14%.

So it may be time to splurge as imports are getting cheaper than ever before. In some cases like small carsand motorbikes, the CVD now stands at 12%, while pharma products would attract a CVD of 8%. Noneed to feel guilty, as many would argue, the more you spend, the better it is for the economy. Apart fromthe common man, India Inc too has been given goodies on the Custom duty front. Say, for instance, theBudget has bought down Custom duty on project imports to 5% compared to 7.5% earlier, bringing downcosts of refineries, steel plants, cement units and power projects.

(3) Personal Income Tax:

At present, an income slab of Rs 1.1 lakh to 1.5 lakh attracts a 10% tax rate while that of Rs 150,001 to

Rs 250,000 attracts 20%. A 30% rate is levied on income above Rs 250,001.

Finance minister has always maintained that moderate and stable tax rates coupled with a taxadministration that shows no fear or favour will bring high revenues to the exchequer. Accordingly, heproposes to make some changes in the slabs for personal income tax. I propose to increase the threshold

limit for exemption: In case of all assesses, from Rs 110,000 to Rs 150,000, thus giving every assessee arelief at a minimum of Rs 4,000. Consequently, the four slabs and rates will be as follows:

Up to Rs 150,000 NIL

Rs 150,001 to RS 300,000 10 per cent

Rs 300,001 to Rs 500,000 20 per cent

Rs 500,001 and above 30 per cent

In case of woman assessee, from Rs 145,000 to Rs 180,000In case of a senior citizen, from Rs 195,000 to Rs 225,000


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Tax updates... 22

Tax at the highest bracket (30%) will kick in only for income above Rs 5 lakh twice the earlier limit of

Rs 2.5 lakh. The widening of the slab means that while earlier having an income of say Rs 2.6 lakh put anindividual in the 30% tax bracket, that level of income will now attract a rate of just 10% this year. Call it

PC magic. Even without touching tax rates, the FM has ensured individual earning 5-lakh annually to

take home up to Rs 4000 more every month.

Also, the finance minister proposes to add the Senior Citizens Saving Scheme 2004 and Post Office TimeDeposit to the basket of saving instruments under Section 80C of the Income Tax Act.

Besides, he also proposes to allow an additional deduction of Rs 15,000 under Section 80D to anindividual who pays medical insurance premium for his/her parent or parents

The government will now allow you an additional deduction of Rs 15,000 if you pay the premium for

health cover for your parents. This is how it works: Assume you have paid a medical premium of Rs

15,000 for your spouse and kids, and another premium of Rs 15,000 for your parents. The tax deductions

will now Rs 30,000. This means that additional limit will come as an extra benefit.

(4) No change in Corporate Income Tax

At present, Indias corporate tax rate now works out to 33.99%, after factoring surcharge of 10% and theeducation cess of 3% on top of the statutory rate. FM proposes no change in corporate income tax

(5) No change in Surcharge

At present, in the case of individual, HUF, AOP, BOI having total income exceeding Rs 10-lakh, the taxso computed after rebate under Chapter VIII-A shall be enhanced by a surcharge @ 10%. In the case ofevery firm and domestic company, surcharge @ 10%, shall be levied only in cases where the total

income exceeds one crore rupee. The finance minister proposes no change in this regard.

Also, additional surcharge called the Education Cess on income-tax shall continue to be levied @ 2%,and Secondary and Higher Education Cess on income-tax @ 1%, on the amount of tax and surcharge,if any, in all cases. The finance minister proposes no change in this regard.

(6) 15% Short Term Capital Gains on equity instead of 10%

Section 111A and 115AD provide for special tax rate of 10% on STCG arising from the transfer of short-term capital assets, being an equity share in a company or a unit of an equity oriented fund, where suchtransactions are chargeable to STT. It is proposed to increase the rate of tax on such short-term capital

gains to 15%. These amendments will take effect from the 1st day of April, 2009 and will accordinglyapply in relation to AY 2009-10 and subsequent assessment years.

(7) Sole identification number

Finance Minister said that fear of the PAN has virtually disappeared. PAN is now the sole identificationnumber for all participants in the securities market. I propose to extend the requirement of PAN to alltransactions in the financial market subject, however, to suitable threshold exemption limit.


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Tax updates... 23

Measures for additional revenue mobilisation

(1) Securities Transaction Tax

At present, the amount of STT paid is allowed as rebate under Section 88-E of the I-T Act. This rebate isallowed when the income from taxable securities transactions is taxed under the head profit and gains ofbusiness or profession. It is proposed to discontinue the rebate available to such assessee under section88-E of the I-T Act. Further, it is also proposed to allow the amount of STT as deduction under section 36of the I-T Act. The amendments will take effect from 1st April, 2009 and will accordingly apply inrelation to AY 2009-10 and subsequent assessment years.

(2) Commodities Transaction Tax

The finance minister proposes to introduce a new Commodity Transaction Tax (CTT) on the same linesas STT on F&O. The tax is proposed to be levied from the date on which Chapter VII of the Finance Bill2008 comes into force by way of notification in the Official Gazette by the Central Government. Further,

it is proposed to amend section 36 of the Income-tax Act to provide that amount of CTT shall be allowedas deduction. This amendment in section 36 of the Income-tax Act will take effect from 1st day of April,2009 and accordingly apply to AY 2009-10 and subsequent assessment years.

(3) Capital gain tax on cross-border M&A

Overseas firms, acquiring companies in India just got costlier. The FM may not spelled it out in hisspeech, but the Budget fine-print reveals that the government has opened the doors for taxing cross-borderdeals. And that too with retrospective effect from June 2002. The onus of paying capital gain tax on anacquisition in India will now rest with the buyer. The buyer is expected to deduct tax at source and failureto do so would leave him liable to pay tax. If the government has its way, the proposed changes in the tax

could bring in close to $ 5 billion as capital gains tax from M&A deals struck after June 2002, accordingto an estimate by a leading tax consultant.

(4) Service tax on fees charged to Ulipholders

Returns on Ulips will dip. The drop could be more in the first year of premium payment, but less insubsequent years. The FMs intention is to increase a more level-playing field between MF products andUlips. In achieving this, he proposed a service tax on charges that insurance companies recover fromUlipholders. From now on, every life insurance company will have to pay service tax on all fees chargedto Ulipholders.

(5) Charitable ends when profits start kicking in

It is proposed to amend section 2 (15) so as to provide that the advancement of any other object ofgeneral public utility shall not be a charitable purpose if it involves the carrying on of (a) any activityin the nature of trade, commerce or business or, (b) any activity of rendering of any service in relation toany trade, commerce or business, for a fee or cess or other consideration, irrespective of the nature of useor application of the income from such activity, or the retention of such income, by the concerned entity.This amendment will take effect from 1st day of April, 2009 and will accordingly apply in relation to theAY 2009-10 and subsequent assessment years.


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Tax updates... 24

Rationalisation measures

(1) TDS on Corporate bonds

Section 193 of the Income-tax Act provides for deduction of tax at source on any income by way of

interest on securities payable to a resident.

In order to facilitate development of the corporate bond market, it is proposed to remove TDS on anyinterest payable to a resident on any security issued by a company where such security is indematerialised form and is listed on a recognised stock exchange in India. This amendment will takeeffect from 1st day of June 2008.

(2) Dividend Distribution Tax

The most relevant move in the budget for companies, is removing the incidence of double taxation. The

companies were paying dividend distribution tax (16.99%) twice.

It is proposed that the amount of dividend will be reduced by the amount of dividend received by thedomestic company from its subsidiary. This is one of the biggest hurdles for the creation of holdingcompanies in India. Now, this has been addressed in the budget. However, FM pointed out that tax lawswould not be allowed to encourage shell companies that are created just as tax shelters.

(3) Cash payment exceeding 20K

Section 40A(3)(a) of the I-T Act, 1961 provides that any expenditure incurred in respect of which payment

is made in a sum exceeding Rs 20,000/- otherwise than by an account payee cheque drawn on a bank orby an account payee bank draft, shall not be allowed as a deduction. The provisions are however subject

to exceptions provided in Rule 6DD of Income-tax Rules, 1962.

It has come to notice of the department that the provision of this section are being circumvented bysplitting a particular high value payment to a person into several cash payments, each below Rs 20,000/-.This splitting is also resorted to for payments made in the course of a single day.

According to the judicial opinion, the words used are in a sum i.e., single sum. Therefore, irrespective of

any number of transactions, where the amount does not exceed the prescribed amount in each

transaction, the rigours of section 40A (3) will not apply.

To overcome the splitting of payments to the same person made during a day as referred above and to

increase the efficacy of the provision, the amendment seeks to substitute the present provision to providethat where a payment or aggregate of payments made to a person in a day, otherwise than by an accountpayee cheque on bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance ofsuch expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall bedeemed to be the profits and gains of business or profession under (3A) of section 40A, as the case may be. The proviso to the proposed sub-section (3A) provides that in certain prescribed cases andcircumstances the provisions of proposed sub-section (3) and (3A) shall not apply. This amendment willtake effect from 1st April 2009 and will accordingly apply in relation to AY 2009-10 and thereafter.


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Tax updates... 25

Reliefs in fringe benefit tax

Sub-section (2) of section 115WB of the I-T Act provides that where an employer incurs any expenditure,inter alia, for the purposes of entertainment, hospitality, conference, and sales promotion (including

publicity), such employer shall be deemed to have provided fringe benefits to its employees. Section

115WC of the Income-tax Act provides for valuation of the fringe benefits provided by the employer.

With a view to rationalising the provisions of Fringe Benefit Tax, the following amendments to sub-section (2) of section 115WB of the I-T Act are proposed

Hospitality expenditure shall not include payment through pre-paid Electronic meal card

Any expenditure on the payment through pre-paid electronic meal card shall also be excluded from thehospitality expenditure for calculation of the value of fringe benefit. Such electronic meal card should notbe transferable, should be usable only at eating joints or outlets and should fulfil such other conditions, asmay be prescribed.

Employees welfare shall not include crche facility for the children; Sponsors a sportsperson; Organisesports events all for employees

Explanation to clause (E) is proposed to be amended to provide that any expenditure incurred or paymentmade to Provide crche facility for the children of the employee; or Sponsors a sportsperson, being anemployee; or Organise sports events for employees shall not be considered for employees welfare for thepurposes of calculation of the value of fringe benefit.

Guest house - Omitted

Clause (K) is proposed to be omitted. Hence any expenditure or payment made for maintenance of anyaccommodation in the nature of guest house shall not be considered for valuation of fringe benefit.

Expenditure on festival celebration - Value of fringe benefits shall be 20% (existing 50%)

Further, clause (c) and clause (d) of sub-section (1) of section 115 WC is proposed to be amended so as toprovide that the value of fringe benefits on account of expenditure on festival celebration shall be twentyper cent as against the existing rate of fifty per cent. These amendments shall take effect from 1st April,2009 and shall accordingly apply in relation to assessment year 2009-10 and subsequent year.

Banking Cash Transaction Tax withdrawn from April 1, 2009

The BCTT has served a very useful purpose in enlarging the information system of the Income TaxDepartment. Since the information is also being gathered through other instruments introduced in the lastfew years, I propose to withdraw this tax with effect from April 1, 2009.


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Tax updates... 26

Service Tax

Exemption from service tax:

(1) The annual threshold limit of service tax exemption for small service providers is being increasedfrom the present level of Rs 8 lakh to Rs 10 lakh. It will come into effect from 1st April, 2008.

(2) Exemption from service tax is being provided to - 75% of the gross amount charged as freight forservices provided in relation to transport of goods by road in a goods carriage by a goods transportagency (GTA), unconditionally. Consequently, 75% abatement provided under notification No.1/2006-Service tax, dated the 1st March, 2006 is withdrawn. This will come into effect from 1 stMarch, 2008.

Following services are specified as taxable service: The changes will come into effect from the date to benotified after the enactment of the Finance Bill 2008.

(1) Services provided in relation to information technology (IT) software for use in the course, orfurtherance, of business or commerce.

(2) Services provided in relation to management of investment, under Ulip schemes;(3) Services provided by a recognised stock exchange in relation to securities;(4) Services provided by commodity exchanges in relation to sale or purchase of any goods or forward

contracts;(5) Services provided by processing and clearinghouse in relation to processing, clearing and settlement

of transactions in securities, goods or forward contracts.(6) Services provided in relation to supply of tangible goods, without transferring right of possessions

and effective control of the tangible goods;

(7) Services provided in relation to internet telecommunication.The biggest blow however has been to the IT industry as customised software will now attract service tax.With this, the government has made it clear that software would now be classified as a service and not as agood. Scope of specified taxable services is being amended to include the IT related services. Now:

o Testing and analysis service will include testing or analysing of IT software;o Technical inspection and certification services will include inspection, examination and

certification of IT software.

o It is to clarify that services provided by a consulting engineer in relation to advice, consultancy ortechnical assistance in the disciplines of both computer hardware engineering and computer softwareengineering shall also be classifiable under Consulting engineering services.

o It is to clarify by way of removal of doubt that properties referred to in Management, maintenanceor repair service includes IT software.


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Tax updates... 27

Excise dutyGeneral rate of excise duty (CENVAT) has been reduced from 16% to 14%. The other ad valorem rate of

24%, 12% and 8% remain unchanged.

National Calamity Contingent duty (NCCD):

NCCD @1% has been imposed on mobile phones. On imported mobile phones, this duty shall belevied as additional duty of Customs.

Cellphones are set to become a bit pricier due the 1% NCCD on all handset sales. Symbolically, it is not

a progressive move as it impacts the end user, the common man. The impact however is marginal. The

other related telecom segments have attracted Mr Chidambarams benevolence-

o Wireless internet connectivity will be more affordable, for example, with data cards being exempted from 16% excise duty, leading to price cuts of Rs 500 upwards. Data cards, whose prices varybetween Rs 3,000 and Rs 8,000, enable Internet access without landline connections. The waiver of

excise duty on wireless data cards will shore up broadband usage and penetration levels nationally.

o Modems and set-top boxes (STBs) will also be cheaper as excise and custom duties have been halvedto 8% and 5%, respectively, for specified convergence products. Also, the 7.5% customs duty on STB

components has been axed.

Miscellaneous:

e rate of duty applicable to clearances of goods to domestic tariff area from export oriented units,software technology parks, electronic hardware technology parks etc, has been revised from 25% ofthe basic custom duty + excise duty payable on the like goods to 50% of the basic custom duty +excise duty payable on the like goods.

Amendment in Central Excise Act:

Section 2 of the Central Excise Act, 1944 is being amended to insert an explanation in clause (d) toprovide that goods include any article, material or substance which is capable of being bought andsold for a consideration and such goods shall be deemed to marketable.

Waste material produced by some industries is sold in the market. However, companies do not pay excise

duty on it since the definition of goods in the Excise Act said duty would be levied on marketable products. Interestingly, some residual material like zinc dross or copper ash are high value items

commanding a good price. The new definition plugs this loophole. According to new definition, goods will

be deemed to be marketable. The government has in the Finance Bill, taken a number of measures aimed

at increasing duty collection by plugging loopholes.

Section 3A is being inserted in the Central Excise Act, 1944 empowering the Central Government tocharge excise duty on the basis of capacity of production in respect of notified goods, and to notify theprocedure for the same.

Notes on certain Chapters in the Central Excise Tariff Act, 1985 are being amended to align thedefinition of processes amounting to manufacture with the definition of manufacture in section 2f (iii)of the Central Excise Act, 1944.


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6 MISCELLANEOUS UPDATES

With the last full-fledged Budget session of the 14th Lok Sabha starting from Monday, February 25, 2008,both the government and the opposition are expected to use the floor of the house for maximum political positioning for the next two months with an eye on a series of Assembly elections this year and thegeneral election early next year. The session is slated to last till May 9. There will be a total of 35 sittings,18 before the 25-day recess starting on March 20, and 17 in the second half.

The session began with the Presidents address to the joint session on February 25th. The railway budgetwas presented on 26th and the Union Budget on 29th. The Government also presented the EconomicSurvey on 27th February 08. However Union Budget has not addressed so many things buzzing on thestreets, some of which are given below -

Uncertainty on FIIs

The governments relentless attempt to whittle down the double-taxation treaty with Mauritius is causinguncertainties among foreign investors. Taxation on FIIs has been dogged by uncertainty for several years.FIIs mostly declare their income as capital gains and pay no tax because of the tax avoidance treaty. In theabsence of treaty, short-term capital gains would have attracted 10% tax. The concern expressed by theIndian tax authorities that investors from third countries are routing their investments through Mauritius isstrange. Investors have located in Mauritius only to access the Indian market. A lightly regulated offshoretax haven can be a major boon to a continental sized economy with higher taxation rates, the Hong Kong-China combine being the classic example. Mauritius has played a similar role for India.

Employment Exchanges

The government is expected to announce a complete makeover of the 965 employment exchanges thathave been decrepit and redundant so far. All of them will be computerised and linked up to create avirtual national job market for job seekers and recruiters. With resumes stored in physical, sorting andupdating resume has been a big challenge, making the database largely useless for the talent-starvedcorporate sector. The budget has not addressed this long-pending need of the job market.

Special fund for rejuvenation and plantation

The ageing of plants had emerged as a key issue affecting productivity and global competitiveness ofplantation crops. Emergence of new players like Vietnam, Sri Lanka and Kenya which have new plantswith higher productivity and, thereby, low production costs on the international scene has furtherhampered the growth of the domestic industry. Further, these sectors are also reeling under the impact ofbilateral agreements such as the India-Sri Lanka free trade agreement (FTA). And now that India is givingfinishing touch to its FTA with Asean, there is a need for providing increased support to the industry toprepare it for competition from its East Asian neighbours.

Sovereign fund

The government is considering a sovereign investment fund with an initial corpus of $ 5 billion to acquirecompanies abroad. The investment fund may also be used for bolstering the countrys energy security byacquiring mine and oil & gas blocks abroad. Prime Minister Manmohan Singh has issued a directive tothe finance ministry in this regard and an announcement was likely in the budget.


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7 KNOWLEDGE RESOURCERailway Budget

Railway minister Lalu Prasad Yadav has done it again. This years rail budget has cut fares and freightand announced 63 new trains, significant concessions to women, students and porters, world-classrailway stations and other amenities, besides a fancy IT initiative, including smart cards for suburbanMumbai passengers. And yet, it has projected healthy financials and substantial investments to enhance

the railways future carrying capacity and productivity.

But this is not empty rhetoric: the railways report card in the current fiscal shows a sharp reduction inaccidents, cash surplus of over Rs 25,000 crore, record return of 21% on capital, 31% increase in Planspending, and 15% rise in traffic earnings on the basis of just 8.6% rise in freight volumes. The operatingexpenditure as a proportion of revenues (lower the ratio, more efficient the railways) is down to 76.3%.The operating ratio had climbed to unsustainable highs in the first two years of this decade 98.3% and96% - under the previous NDA government.

We have posted Rs 25,000 crore profit this year. This is better than the net profit of most of the Fortune500 companies. Had we listed ourselves, we would have been on the Top 10 list. The operating ratio at76.3 is one of the best in the world. Our commonsensical and counterintuitive approach has been theforemost reason behind the turnaround.

Our out-of-box thinking, mega scale, high-volume game, boldness in approach has fuelled the turnaround.And to make this turnaround sustainable, we have multiplied our investment for future by about 4 timeswhich is exemplary by any standards in the last 4 years. The Railways would invest Rs 25,000 crore overthe next five years in capacity augmentation, technology upgradation, doubling of tracks and promotionof world-class services to our customers.

(1). Social obligations:

We have shown that social obligation of the public utility married with the commercial enterprise. It has been possible for us to become profitable and at the same time win hearts of teeming millions of thecountry. This happens only when we think creative and act swiftly with the time.

Garib Raths:Nano would make cars affordable for two-wheeler owners in India. Similarly, Garib Rathwill make air-conditioned travel affordable for lower middle class and poor section of our society.This time we have announced 10 more Garib Raths.

Rationalisation in fares: Satisfied with the volume strategy, Mr Yadav cut fares across the board for thesecond year running. There is Rs 1 cut in loss-making non-suburban second class travel for fares up toRs 50. The non-suburban second class fares of mail/express and ordinary trains have been reduced by5% for tickets costing more than Rs 50. This means that a long-distance travelers stands to benefitmore. There are some concessions as well. Women travelers of 60 years and above age would now geta 50% discount against 30% earlier. Boys up to standard 12 and girls up to graduation would noweligible for free monthly season tickets for travel from home to school.

(2). Priority areas:

Over the medium and long term, the priority areas are throughout enhancement and technologicalupgradation of rolling stock, signaling and telecommunication, wider application of informationtechnology for operational improvements, revenue enhancement & better customers service.


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Railway Budget... 30

Travel on e-track: Passenger is the king, seems to have been driving mantra of Mr Prasad as heunveiled a basket of goodies to make train travel more comfortable and greener. Forget the longqueues to book your tickets. You could do it through your mobile phone. The Railways is all set tomake ticketing a childs play. E-booking could now be done for a waitlisted ticket as well. All coacheson trains would have an online display board giving train arrival and departure information,reservation information. The initiatives not only make travel easier for passengers but could also spella huge business opportunity for IT companies.

Stress on cleanliness: Atithi Devo Bhav, said Mr Prasad as he went to announce the landmarkinitiative discharge free toilets. Indian railways would provide for such toilet in all 36,000 coachesin next five years. Besides, passengers will not have to bear with dirty coaches in their journey withthe new on-board cleaning facility that would be outsourced to private agencies. The stress oncleanliness will not be limited to just the trains, the platforms will also gets a new face with a largenumber of them witnessing an increase in heights to make them passengers friendly.

(3). Art of making money:

The focus over the last 3 years is not on yield per passenger or yield per train kilometer. We have mademoney not by increasing tariff, but by increasing length, payload, seating capacity and occupancy levels.

Tariff regulator:At the macro level, the focus is not on denominator but on the numerator. In otherwords, we have taken steps to revive and regenerate the competitiveness of railways in the market place by setting up of a tariff regulator. The battle of the market has to be fought and won andtherefore railway pricing strategy factor is not totally commercial but customer-centric and market-driven. We have a dynamic pricing and commercial policy across routes, regions and periods.

Railways vs Air: Competition between the railways and low-cost airlines is set to reach a new levelwith railway minister lowering AC fares up to 7%. This would help railways woo passengers as thegap between airfare and rail fare has widened significantly on the short-haul routes. Mr Yadavannounced reduction of fares for AC-I class by 7% and AC-II tier by 4%. A fair reduction of 2% forthe newly designed AC 3 tier and AC Chair Car coaches was also announced. The reduction would,however, only be half for popular trains and during the peak period.

(4). Creative and strategic thinking:

We have set up a strategic business analyst and innovation group comprising railway experts for creativityand strategic thinking in Railways on a long-term basis. We would come with a vision document 2025 forthe Railways and vision 2012 on IT exclusively over the next few months. The annual plan for the currentyear is Rs 35,000 crore, which is the biggest till date, and 80% funding of the plan would be done throughnet budgetary resources and internal generation.

World-class stations will be developed in New Delhi, Chhatrapati Shivaji Terminus, Mumbai, Patnaand Secunderabad through global competitive bidding.

Development of surplus land for commercial use at major railway stations through the railway landdevelopment authority is an attractive proposition for the private sector.


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Railway Budget... 31

New wagon leasing policy shall attract investors to induct their own wagons into the railway circuit forleasing to private operators. This shall also attract new innovative designs with commodity-specificwagons. So far, parties having their own production units were allowed to own wagons. The newwagon leasing policy shall attract private investors to become partners in railways operations and willalso bridge the demand-supply gap for wagons.

Development of freight terminals via private sector participation, which will bring revolutionarychanges as it would introduce new innovations and technology that will not only improve quality ofservice but also improve terminal operations. Similarly, the PPP model will be adopted to developdiesel loco, electric loco, rail coach factories, container trains, container depots and multi-modellogistic parks.

(5). Investment strategy:

The investment strategy focus in on low cost, short gestation, rapid pay-back and high return projects forbetter operating efficiency, more effective utilisation of rolling stock and removal of capacity bottleneckson the high-density network.

Effective utilisation of rolling stock: Of the plan investment, the largest share is for rolling stock. Thiscovers locomotives, carriages, wagons, cranes and track machines and other rolling stock. The railwayministry has also prepared a multi-pronged scheme to reduce accidents caused by human failure.Under this scheme, it would provide automatic safety equipments to strengthen rail safety.

Technology upgradation for wagon design: There will be heavy investments in technology upgradationfor wagon design as foreign companies are now allowed to collaborate with Indian manufacturers forbuilding high-capacity steel wagons that will have higher axle load capacity of up to 25 tonnes. Thiswill open up various options of investments and would result in lower cost of transportation withincreased throughput.

Upgradation of Information Technology: There will be huge investments in Information Technologyupgradation over the next five years as customers need better information system to track theirconsignments. The move will also help in running freight trains on time.

Freight corridor: Construction of the North-East section of the dedicated freight corridor willcommence in 2008-09 and, similarly, the northern corridor should also be taken up since the currentline capacity is saturated.

Port connectivity: Emphasis on port connectivity will result in improved export-import business,which is projected to be 1,100 million tonnes by the end of the 11

th

Five-Year Plan.

(6). Huge potential:

What the country has seen so far is not even the tip of the iceberg. The Railways have huge potential andcoming time would see this magic unfold with all its beauty and charm. Foundation of a mega enterprisehas been laid and the identity of the Railways as an institution has grown stronger with the morale andpride of employees at an all-time high.


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WILL THEY DELIVER?

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Safe Financial Advisor Practice Journal: March 2008

Journal of FInance Vol 15

Documents

Transcript of Journal of FInance Vol 15