The International Accounting and Auditing Standard Board (IAASB) has issued exposure draft to enhance clarity of the standard and redrafted the following proposed standards :
ISA 320, ISA 450 and ISA 260. The concept of materiality, the evaluation of misstatements identified during the audit, and high quality and relevant discussions between those charged with governance and the auditor are fundamental to an audit. The proposed redrafted standards contain clear requirements and easy to understand application guidance in these very important areas.

The International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) has issued an Exposure Draft (ED) designed to strengthen the disclosure of financial information about external assistance, such as emergency assistance and
development aid received by governments and government agencies in developing and other countries. ED 32, Financial Reporting under the Cash Basis of Accounting - Disclosure Requirements for Recipients of External Assistance, proposes that the financial statements of recipients of external
assistance disclose the total amount of external assistance received, used, and available during the reporting period. These disclosures will increase the transparency of the financial statements of recipients and contribute to greater accountability by the recipients of such assistance.

The Off-Balance Sheet (OBS) exposures of the banking system is concentrated in just 15 banks. These banks are particularly active in the derivatives segment. OBS exposures essentially take the form of contingent liabilities and derivatives. Contingent liabilities are the more traditional off-balance sheet exposures, while derivatives, except for traditional forward exchange contracts, have come into prominence recently.

All the insurers have signed an agreement on the formation and administration of the pool. The Pool would act as an avenue of last resort in the event of vehicle owners’ failure to obtain insurance cover from any of the insurance companies. Claims sharing from it would be on the basis of the respective market share of the insurers.

The Insurance Regulatory and Development Authority (IRDA) has relaxed anti-money laundering norms for general insurance companies on the grounds that non-life contracts are less susceptible to abuse. From now on, Know Your Customer (KYC) norms will be applied only at the settlement stage for policies where claims payout or premium refund exceeds Rs. 1 lakh.

The finance ministry has decided to cap foreign investment in depositories and clearing corporations of stock exchanges at 49%. This will include 26% Foreign Direct Investment (FDI) and 23% Foreign
Institutional Investment. Further, foreign institutional investors would not be permitted representation
on the boards of such institutions. Only foreign investors with long-term objectives (strategic partners bringing in FDI) would be allowed board seats commensurate with their holdings. Bourses, depositories and clearing corporations are being seen as infrastructure institutions of the financial market.

With a view to providing greater opportunity to invest overseas, the extent ceiling on overseas investments by Mutual Funds (MFs), registered with Securities and Exchange Board of India (SEBI), have been enhanced. Accordingly, the aggregate ceiling for overseas investment by MFs, registered
with SEBI, is increased from USD 2 billion to USD 3 billion with immediate effect.

NRIs (Non resident Indians) can now not only cash out on the property they hold in India but have also been provided an incentive to invest in real estate. This has been made possible by the Reserve Bank of India allowing NRIs to remit the proceeds from the sale of immovable property. The RBI
has lifted the 10-year lock- in as a step towards further liberalization of the capital account.

All categories of foreign exchange earners are now allowed to credit up to 100 per cent of their foreign exchange earnings, as specified in the paragraph 1 (A) of the Schedule, to their Exchange Earner’s Foreign Currency (EEFC) account with immediate effect. All other terms and conditions
of the Scheme will remain unchanged.

In the case of Export Credit in Foreign Currency (ECFC), banks should not levy any other charges in any manner under any name viz. service charge, management charge etc. except for recovery towards
out of pocket expenses incurred.

The Multi Commodity Exchange of India Ltd. (MCX) will start futures trading in weather derivatives, freight, carbon credit and sulphur credit once the Parliament passes the Forward Contracts Regulation Act (Amendment) Bill, 2006. After the bill is passed, the finance ministry and
the regulator will jointly have to prepare guidelines for futures trading in intangible commodities.

Long with the securities market, the quasi-judicial body might be entrusted with the duty of acting as an appellate body for the commodities market too. The combined turnover of the commodity exchanges could surpass the gross domestic product by the end of this fiscal. The daily combined turnover of the commodity exchanges taken together NCDEX, MCX, NMCE and the regional commodities exchanges is close to Rs. 19,000 crore. The figure would be comparable to the combined turnover of the exchanges in the country.

The Association of Mutual Funds (MFs) in India has allowed fund houses to opt for their own agencies for issuing the unique Customer Identification Number under the “Know Your Client”(KYC) norm so as to prevent money laundering. Under the KYC norms, any investor who wishes to invest Rs. 50,000 and above will have to get a unique ID.

Mutual Funds may dispatch the statement of accounts to the unit holders under SIP/STP/SWP once every quarter ending March, June, September and December within 10 working days of the end of
the respective quarter. However, the first account statement under SIP/STP/SWP shall be issued within 10 working days of the initial investment. In case of specific request received from investors, Mutual Funds shall provide the account statement to the investors within 5 working days from
the receipt of such request without any charges. Further, soft copy of the account statement shall be mailed to the investors under SIP/STP/SWP to their e-mail address on a monthly basis, if so mandated.

The Central Depository Services (India) Ltd. (CDSL) has urged the Depository Participants (DPs) to ensure that all the existing demat account holders submit their PAN card details so as to avoid the
inconvenience of freezing their demat accounts. The deadline for existing demat account holder to submit their PAN card details has been extended to December, 2006.

The Securities and Exchange Board of India (SEBI) recently issued guidelines for divestment of shareholding in stock exchanges, where it barred individuals to directly or indirectly acquiring or hold more than 5 per cent in an exchange.The Public shareholding should remain not less than 51 per cent at all times. The move to limit individual stake at 5% is likely to delay the proposed plan by BSE
to sell 26% equity to a strategic investor. The deadline for selling 26% stake comes to an end in December 31st, 2006. Stock exchanges were asked to dematerialise their equity shares proposed to be
issued or sold.

The Securities and Exchange Board of India (SEBI) has sounded an alarm over Mauritius-based Private Equity (PE) funds picking up controlling stakes in listed Indian companies through the secondary market. This could lead to asset stripping, as the identities of many of these foreign investors are not disclosed. SEBI has found that many foreign companies involved in such takeovers are only fronts based in Mauritius and have a very low capital base. The funds for these takeovers flow in from Overseas PE funds and the ultimate source of funds is not verifiable.

The Securities and Exchange Board of India (SEBI) proposes to levy fee on stock exchanges. The board is in the process of finalising the decision, which will later be communicated to the exchanges.
The charges will be pegged to the turnover of the stock exchanges. It is for the first time that the
market regulator will be charging the stock exchanges. Until now, various activities on the stock
exchanges only attracted taxes levied by the Government like Securities Transaction Tax on
deals and fees to brokers. A recent SEBI report opined that the exchanges should collect registration fees on behalf of the market regulator while collecting transaction charges to avoid duplication.

The revenue department has issued a clarification which makes it mandatory for Government bodies rendering taxable services including railways, security service at airports and others, to pay service tax. However, if one Central Government department renders service to other, no service tax will be levied, as this would not be treated as two separate entities. The same would be the case if one State
Government department provides service to another in the same state. But, if one Central Government department provides a taxable service to a public sector undertaking, it would be treated as one entity providing service to other, and would attract service tax.

Road tractors for semi-trailers attract Central Excise duty @ 16%, if engine capacity is more than 1800 CC. But a tractor used for agriculture purposes were exempted under chapter heading 8701 from excise duty in budget 2004-05 itself. A tractor primarily designed and meant for agriculture purposes can also be incidentally used to take goods to the nearest market. But that is an incidental
use, and such tractors are not primarily designed to haul trailers. Therefore, incidental use of hauling trailers will not put such tractors in dutiable category.

The finance ministry is considering reintroduction of an 8% Value Added Tax (VAT) rate. It may remove certain items from declared goods list so that they may be taxed at 12.5%. At present, under CST Act, item in the declared goods list, has to be taxed at 4% by states. Tax experts feel hiking Vat rates will be inconsistent with the phasing out of the CST.

In order to facilitate payment of service tax, the government has put in place a centralised registration system for taxpayers, who provide services from multi locations. For the purpose, the department of revenue amended Service Tax Rules, 1994 to simplify the procedure for service tax. Thus, a large consultancy organization can choose to register its billing section in the main office or the place from where the main service is provided, as is convenient. Centralised registration is granted by the commissioner or the chief commissioner of Central Excise or DG Service tax, depending on the location of premises where centralised billing or accounting system is maintained or the place from
where the taxable service is provided.

The e-payment of service tax has been made mandatory w.e.f. 1.10.2006, for all assesses who have paid Rs 50 lakh or more in the preceding financial year or in the current financial year. The interpretation of qualifying amount of service tax of Rs 50 lakh paid by the assessee are:

• For a person providing or receiving taxable service from more than one premises, where each one of them has been separately registered for payment of service tax, the criterion of Rs 50 lakh would apply to each registered premises individually. However, in case of a Large Taxpayer (LTU), the cumulative service tax paid by all registered premises of such LTU will be taken into account.
• In case of single registered premises, service tax paid on taxable service provided from and received in such registered premises would be taken into account.
• For the purposes of calculation of Rs 50 lakh the total service tax paid by cash plus CENVAT credit would be taken into account as service tax paid amount.

The Delhi High Court has issued notice to the finance ministry on a petition filed that said the government should not impose 12% service tax on exporters availing the services of foreign-based commission agents to win supply contracts. Meanwhile, Tamil Nadu Spinning Mills Association has won a stay order against the government from the Madras High Court in a similar case. It alleged the government had extended the jurisdiction of the Finance Act beyond Indian territory without substantive provisions. The finance ministry said these instances of service tax came under the “business auxiliary service” category and, therefore, from September 2004, the government could slap charges on exporters for services taken from agents with offices outside India.

Shipping companies are being slapped with fresh summons by the Director General of Central Excise Intelligence (DG-CEI), asking them to submit full details of the services availed by their ships at foreign ports from August 2002 to March, 2006, for the purpose of assessing the cumulative service tax In this connection, it had issued summons to the companies, asking them “full details” of the services availed by their ships at foreign ports, their foreign exchange payments, including dry-docking expenses and other invoice details.

It has been decided by the Board that it will not be mandatory for agents of Non-Resident Indians (NRI), within the meaning of section 160(1)(a) of the Income-tax Act, to electronically furnish
the returns of non-residents corporates in Form No. 1 for assessment year 2006-07. This is because of the reason that there may be more than one agent for a NRI for different transaction. Such situations
are not covered by the existing software which functions on the principle of one assessee- one PAN - one return.

The revenue department has agreed to consider a request from the Department of Telecom to increase the annual commission limit of Rs. 2,500 for the purpose of Tax Deducted at Source (TDS). At present, anyone paying more than Rs. 2,500 by way of commission in a year has to deduct TDS at the rate of 5 per cent under Section 194 H of the Income Tax Act, 1961. Increasing the limit will leave small commission agent out of TDS ambit.

The Finance Ministry is unlikely to cut the basic corporate and income-tax rates in Budget 2007. It will, however, consider doing away with the 10% surcharge on companies and a section of individual
taxpayers.
The main point under consideration are: -

• Peak income-tax and corporate tax rates stand at 30%
• 10% surcharge applicable to those with income above Rs. 10 lakh
• 2% education cess and fuel cess unlikely to be removed

Electronic filing of Income Tax returns by Corporates has evoked a good response. The Income Tax department has received 2,88,471 electronic returns up to the due date of November 30. The returns
were filed through Form-01, which is a combined Income Tax and Fringe Benefit Tax (FBT) return. The Government had last year received 3,27,000 returns from Corporates. Some other categories of
taxpayers, i.e. individuals, firms, Hindu Undivided family (HUF) and trusts, for whom e-filing was optional, also filed their returns electronically. The total number of electronic returns filed has been 2,90,656.

• Payment of interest subsidy by the company directly to the Financial Institution, from which employees availed housing loan was a perquisite falling under section 17(2)(iv), because, it was an obligation otherwise dischargeable by the employees. Hence, tax deducted by the employers on the interest subsidy was perfectly correct. K. Rajendran Pillai v. UOI [2006] 156 Taxman 160 (Ker.)
• If a company manufactures a particular consumable article and starts presenting the same with its emblem and name in a large gathering to a large people, then it may amount to advertisement in a real sense. Presentation of an article with the name of the company to a dignitary or a VIP would not by itself amount to an advertisement.

The Monitoring Committee constituted by the Hon’ble High Court of Delhi regarding Unauthorised Construction, Misuse of Properties and Encroachment on Public Land has issued the following directions for immediate compliance by the banks/Financial Institutions:

• For Construction of Building - An applicant asking for credit facility for construction of house have to submit a copy of sanctioned plan by competent authority in his name and an affidavit-cum-undertaking must be obtained (so that he shall not violate the sanctioned plan). It shall be the sole responsibility of the executant to obtain completion certificate within 3 months of completion for construction, failing which the bank shall have the power and the authority to recall the entire loan with interest.
• For Purchase of Constructed/Built up Property - The applicant have to submit an affidavit-cum-undertaking declaring that the said built up property has been constructed as per sanctioned plan and as far as possible has a completion certificate also. An Architect appointed by the bank must also certify that before disbursement of the loan. No loan should be given in respect of the properties meant for residential use, but which is intended by the applicant for the use of commercial purposes as well as the property which fall in the category of unauthorized colonies.

Reserve Bank of India (RBI) recently has proposed easing of lending by banks to NBFCs which are as follows:

• Banks can lend to a single NBFC up to 10% of capital funds.
• NBFCs to comply with consolidated prudential regulations.
• Limit capped at 40% of bank’s capital funds for all NBFCs lending.

Corporate acquisitions in India are setting a new trend in raising funds through the External Commercial Borrowing (ECB) route and at the same time saving on the withholding tax. Domestic Airlines, which are in the process of raising funds overseas to purchase aircraft, are planning to opt for lease financing rather than a direct purchase. Towards this, the airliner and its consortium of lenders are setting up a Special Purpose Vehicle (SPV) in a foreign country which would lease the aircraft to the airliner. The SPV would help airliner avoid paying withholding tax (which is imposed by the government on the borrowings raised by domestic corporates from foreign banks) on overseas
funds arranged. This is because the SPV will be launched by the lenders in such a country from
where leasing aircraft to Indian companies are exempt from withholding tax.

In a bid to ease the capital raising process for the Urban Cooperative Banks (UCBs), a working group report by the Reserve Bank of India has suggested access of certain innovative instruments. The recommendations include access for raising redeemable cumulative preference shares and long term subordinated deposits with maturity in excess of 15 years. The group has recommended funds raised
through the special shares which are non-voting in nature.

The Reserve Bank of India has given more room for banks to lend and to invest in Non-Banking Finance Companies (NBFCs) in its revised draft guidelines. In the earlier draft guidelines released
on November 3, banks were allowed exposure of up to five per cent of their net owned funds in single NBFCs and up to 40 per cent to a group of NBFCs. As per the revised guidelines ceiling has
been increased to 10 per cent for a single borrower; the base has been changed to the banks’ capital funds from their net worth. There is a relaxation because capital funds, which include tier I and tier II capital, constitute a larger base. Net owned funds are capital funds not including banks’ investment in subsidiaries.

With a view to liberalising the procedure further and providing greater flexibility, in the Foreign Exchange Management (Current Account Transaction) Rules, 2000, in Schedule III, item number 16
and the entry relating thereto has been omitted. Henceforth, AD Category-I banks may permit drawal of foreign exchange by person for purchase of trademark or franchise in India without approval of the
Reserve Bank.

Banks will have to engage in a massive equity raising exercise in a couple of years to meet the Base II norms that comes into force in March 09. According to Reserve Bank of India, banks will see loan
percentage point being knocked off from their capital adequacy ratio on account of the new guidelines. Preliminary analysis indicates that the combined capital adequacy ratio of select banks is expected to come down by about 100 basis points when these banks apply Base II norms.

An internal study by the Reserve Bank of India (RBI) is understood to have found out that most of the foreign exchange inflows into India from Non-Resident Indians (NRIs) and portfolio investments
are emanating from tax-haven countries. The study further aims at trailing the origin of the funds to the tax-haven countries. The findings are part of the overall study by the RBI to track the origin and utility of funds flowing into the country under the broad umbrella of Foreign Direct Investment (FDI). The study indicates the fact that the origin of funds is doubtful. Moreover, these are short-term investments being channelled to the Indian capital markets to earn capital gains exemption and not
for any productive purpose. In fact, some of the NRI inflows have also been used as portfolio investments for investing in the capital market. The portfolio investments in Indian capital market made to the unregistered route of participatory notes and hedge funds should be banned.

RBI has permitted authorised dealers (AD) Category-I banks to issue guarantee on behalf of their customers importing services, provided the guarantee amount does not exceed $ 100,000, and the bank is satisfied about the bona-fides of the transaction. Also if the guarantee is to secure a direct contractual liability arising out of a contract between a resident and a non-resident.

RBI has operationalised the new norm that will allow banks to extend up to 20% of their unimpaired capital funds to JVs and wholly-owned subsidiaries set up by local corporates overseas. The move,
outlined in the recent monetary policy, will help them get more loans from Indian banks.

The Employees Provident Fund Organization (EPFO) will soon allot a Unique Permanent Identity number, called the Social Security Number (SSN) to all EPF members in the country. This identity of the worker will ensure continuation of his membership and consequent PF benefits in spite of change of employment or change in place of job.

According to the Reserve Bank of India (RBI) only Primary Dealers (PDs) can take a short position in the ‘when issued’ (WI) market. Non-Primary Dealer entities can sell the WI security to any counter party only if they have a preceding purchase contract for equivalent or higher amount. ‘When, as and if issued’ security refers to a security that has been authorized for issuance but not yet actually issued. All WI transactions are on and ‘if’ basis, to be settled if and when the actual security is issued.

• As part of the new guidelines for the WI market, the RBI has dispensed with the requirement that any WI transaction in gilts must have a primary dealer as a counter party.
• Only PDs can take a short position in the WI market. Non-PD entities can sell the WI securities to any counter party only if they have a preceding purchase contract for equivalent or higher amount.

India as a nation; and for that matter, all of its national components are passing through a dynamic and evolving phase. If the national economy is vibrant and growing at higher rate of 9%, the civic
activism is also moving up in tandem. Civil society riding on the wave of changes is expected to bring in revolutionary reforms to our political and social structure through various mediums. The
rights of a citizen to garner information on governance and other related issues by invoking the powers vested in him by the Right to Information Act coupled with proactive role of media is a step
to reign in the deplorable use of scarce resources of our country. Time is not far when we will have in place the governance system transparent to such an extent that the economic development will be holistic and far reaching with improving the lives of everyone. Thus shall be the development, socially relevance. Going beyond the boundaries of the nation, the process of globalization of the economy has brought in many interesting facets on economic and socio-political fronts. Now the
national issues may not be tackled on a stand alone basis. Be it the enhancement of power generation with the intervention of nuclear reactors on economic side or the issue of internal security on socio-political front – none of these can be touched upon without assessing their international ramifications. New World Trade Order and the issues emanating there from, viz. FTA, Intellectual Property Rights, Anti Dumping or Cross Border Taxation therefore, makes the political and economic management of the country and for that matter the businesses very challenging.

Directors’ Identification Number

All India Chartered Accountants’ Society has vigorously taken up the issue of DIN with the government. In addition to the recognition of Chartered Accountants as an attesting and certifying professional on DIN- 3, it has been represented to the government for extension of dates and non levy of penalties in case of delay. Further we are making representations for total abolition of requirement of DIN-3, as DIN Nos are already being intimated through other means i.e., Form 32, Annual Returns, etc.

Service tax on Chartered Accountants

In reply to the writ petition pending with the Honorable High Court, the government has been asked to file an affidavit. The Government’s reply is expected to be filed on the next date of hearing.

It is this vibrant and vigorous scenario, wherein we the professionals are operating, causes us to stop for a while; and forces us to take a stock of our own preparedness to face the challenges. If we travel a little backward, we find that the profession till mid-nineties was fairly stable in terms of its operational technicalities. Whether it was Accounting, Audit or Taxation, the regime was fairly static and so was the profession. Forced with the global needs and the fast track growth, it has been the governing necessity that the processes on governance and businesses are overhauled and are in line with the globally accepted standards and practices. Transformation in each segment is alive, the complete overhaul of the taxation statutes, the proposed implementation of the unified GST, amendments in Company Law, amendments in Income Tax Laws, levy of new taxes, ever changing Service Tax and other Financial and Capital Market regulations, none have remained unscathed. E-filing across the board, be it Direct or Indirect Taxation, Corporate or those under the Exim
Policy, is becoming order of the day. These may be considered as mammoth challenges for all professionals but at the same time the challenges are abound with the massive opportunities underneath. What we as chartered accountants need is, to reengineer our professional processes
and fortify ourselves and update our skills to match the vagaries of current professional environment. Emphasis on acquiring necessary IT skills coupled with strengthening our domain knowledge as a
chartered accountant will sail us through smoothly. Time is now ripe for the smaller professional firms to take a plunge and adopt the concept of super specialties offered by “Networking and Mergers”. By getting the Indian Chartered Accountancy qualifications recognized globally, the image of the profession will reinvigorate thus facilitating velvety Trans border movement of Indian professionals in the changed world order. From mundane professional delivery, we need to work through by raising our productivity as a knowledge worker and values to the operations of our service recipients. Empowerment of the professionals is the solitary solution. In the current scheme of things, to fructify the opportunities put forth by the challenges, the role of our august body - The Institute of Chartered Accountants of India is paramount. Efficacy of any institution is dependent upon the empowerment of its stakeholders. Empowerment is directly related to the effectiveness of the body
at the helm of affairs of the institution. The election is the first process whereby the effectiveness is tested. Therefore, when the elections to the Council of the Institute are round the corner, it becomes
our utmost duty to make our discerning judgment to elect our representatives. We need at the controls our representatives, who are visionary and can really steer we, the professionals across the board at each nook and the corner of the country and show us the light of empowerment. Those can only be the ones who look beyond themselves.

The Institute of Chartered Accountants of India (ICAI) may in the coming days decide to adopt International Financial Reporting Standards (IFRS) in toto and shed its current role as an independent standard setter. It has now set up an 11- member task force to examine various issues involved on full convergence and formulate a concept paper in this regard.

The Fixed Income Money Market and Derivatives Association of India (FIMMDA), a body of market players, has issued a code that advises banks against entering into transactions at rates or reference levels that differ materially from market levels.

• The code has called for a process that ensures pricing at market levels, thereby preventing concealment of profit or loss by dealers.
• The code has barred banks from transactions like interest rate swaps

Non Resident Indians (NRIs) can now remit up to $ 1 million per year abroad immediately after they sell immovable property. So far, NRIs and Persons of Indian origin (PIOs) had to lock in their sale proceeds for a certain period in their Non-Resident Ordinary (NRO) accounts. Now, the RBI has done away with the lock-in period. However, the annual ceiling on total remittance out of NRO accounts will remain at $ 1 million.

The Reserve Bank of India has told banks and their subsidiaries not to offer “safety net” facilities to public issues. There is also no income for the banks to corrospond with the risk of loss built into these schemes as the investor will take recourse to the safety net only when the market value of the share falls below the pre determined price.

SEBI is planning to set up Self Regulatory Organisations (SROs) soon for surveillance of the capital market. The SROs will constitute to represent capital market participants with adequate (20% to 30%) SEBI nominees to represent independent professionals, investors and SEBI officials. These SROs will exercise all day-to-day supervisions, surveillance, inspection and investigation on market participants. According to a SEBI official, the idea is to rope in independent professionals such as practicing chartered accountants, lawyers and financial experts to do this job. The proposed separate entity would be in a position to hire professionals on assignment-basis. Instead of making disclosure to the BSE, NSE and SEBI, the regulator is working on uniform e-filing of disclosure details. This way, while compliance is not diluted, its cost will be minimised. 

Sebi has tightened norms for offloading shares held by Venture Capital Funds (VCFs) and investors through an IPO to make the Indian primary market more efficient and transparent. The revised Disclosure and Investor Protection guidelines restricted the benefit of ‘No lockin’ on the pre-issue of shares of an unlisted company, launching the initial public offering on shares held by Venture Capital Funds and Foreign Venture Capital Investors (FVCIs). This no lock-in facility will hereafter be available to the shares held by VCFs and FVCIs, which are registered for at least one year. 

Central Depository Services (India) Ltd. (CDSL) has been appointed as the issuing authority of “Investors Identification Number (IIN)” previously known as Client Identification Number. The deadline to issue IIN, has been extended to January 1,2007.

Editorial Note :
A demat account number of investor or PAN number could be considered as enough for MF investors. AMFI should work out data sharing with NSDL and CDSL without requiring investors to incur cost and effort to obtain another identification. 

Forward Markets Commission (FMC) will levy stiff penalties for traders who don’t comply with delivery obligations under mandatory delivery contracts.

The New York Mercantile Exchange (Nymex), the world’s biggest energy market-place, will introduce electronic contracts to compete with the London Metals Exchange (LME) if a buyout of trading rights is approved by members.

Small and medium companies are likely to be the worst affected in a regime where there are no controls on premium charged on general insurance risks. The proposed lifting of controls on premium rates is expected to bring to an end the prevalent practice of cross-subsidising tariff-free group health insurance and marine risks against profitable portfolios like fire and engineering covers, premium rates for which are tariff based. General insurance would move to estimating premium rates based on assessment of risks on a standalone basis from a client portfolio basis.

To ensure healthy competition in the general insurance sector after it is de-tariffed, the Insurance Regulatory and Development Authority (IRDA) has set out a code of conduct for brokers and insurers. These, they will have to mandatorily adhere to, especially for large accounts. Any deviation will require Irda’s prior approval.

The Supreme Court has ruled that the insurance companies are liable to pay the interest as damages on delayed payment of the insured amount from the date of awarding of the compensation. Such damages shall not be claimed from the date of claim or correspondence in this regard started between the parties concerned.

Post-detariffing from Jan 07, Irda would monitor solvency of general insurance companies on a monthly basis. The accounting as well as actuary professional’s role is going to be more important.

With the free pricing (detariffed) era for general insurance industry nearing, the Insurance Regulatory and Development Authority (IRDA) has announced new guidelines for ‘file and use’ requirements for general insurance products. Keeping in mind the interests of policyholders, it has retained the authority of suspending the sale of products at anytime if they appear inappropriate and unfair in terms of rates and terms and conditions. IRDA has made it clear that the insurers would be required to justify the rates and terms and conditions of insurance products offered and said it would not accept a mere statement that the risk is rated ‘on merits’.

The Central Board of Excise and Customs (CBEC) recently clarified that educational institutes like IITs and IIMs were not liable to pay service tax under the category of “manpower recruitment or supply service” on the fees charged from prospective employers like corporates, who come to these institutes for recruiting candidates through campus interviews. These institutes were not liable to pay service tax prior to May 1, 2006 under the category of ‘manpower recruitment or supply service’ as during this period only commercial concerns were to be taxed. As regards the period after May 2006, decision should be taken after taking into account all material facts on case to case basis.

General Insurance companies will have to reckon paying extra service tax on premium if the rate is hiked mid-way during the tenure of a policy. Policyholders, in turn, could feel the pinch if the extra cost is passed on to them. In an order passed recently on Bajaj Allianz General Insurance, the Commissioner (Excise) struck down the company’s contention that it does not have to pay extra service tax, consequent to the hike in service tax rate. The case relates to Sept 04, when the rate was revised from 8% to 10%.

Trouble seems to be brewing up for companies availing services of Goods Transport Agencies (GTAs). The service tax department has issued show cause notices to them for claiming abatement for service tax on payments made to GTA. The issue of claiming abatement for service tax on payments made to GTA has been hanging fire for quite some time. While the Central Board of Excise and Customs had said the companies could claim an abatement of 75%, the Comptroller and Auditor General (CAG) had raised objections to it. In wake of CAG objection and no clarification on the issue, the field formations have raised demands and show cause notices have been issued.

Editorial Note :
The show cause notices are illegal. The abatement circular is binding on the Government. 

The Directorate General of Central Excise Intelligence (DGCEI), as a part of its inquiry into evasion of service tax, has issued summons to all domestic shipping companies, asking them to submit information on services availed abroad and payments made in foreign exchange retrospectively since August 16, 2002.

Banking services offered to units set up in Special Economic Zones (SEZs) have been exempted from paying service tax. The clarification has been issued by the Central Board of Excise and Customs (CBEC) in response to a query from the Indian Banks’ Association (IBA).

Following the functioning of Large Tax Payers Unit (LTUs) from October 1, the department of revenue has issued a revised format for ER-1 and ER-3 returns for all Central Excise assessees on October 12, 2006. The ER1 and ER3 return forms are applicable for all assessees, including large taxpayers. In the new format, the department has included new tables to get information on inter unit movements of intermediate goods of large taxpayers who have opted for LTU. Similarly, the excess CENVAT Credit transfer to deficient transfer are also sought in the new form. A large taxpayer has the option to transfer any excess CENVAT credit (of Central Excise Duty or Service Tax) accumulated in one manufacturing unit or service providing unit to any other unit under cover of a transfer voucher under rule 12A(4) of the CENVAT Credit Rules, 2004. Self-adjustment of excess duty paid through CENVAT credit account must be reported to the excise office. Other details such as credit taken on imported inputs, and credit taken on imported capital goods, are also being sought from all central excise assessees.

Stock and commodity exchanges could be on their way to getting some relief on service tax. The Central Board of Excise and Customs (CBEC) is examining whether onscreen services provided by stock and commodity exchanges to their members are taxable or not.

Lower rate of tax under DTAA
Hon’ble Madras High Court in the matter of CIT vs. Reiter Ingolsteadt Spimereimaschinenbau AG held that benefit of lower tax rate will go to assessee even when the DTA Agreement was informal by exchange of notes only. [285 ITR 199].

Withdrawal of registration u/s 12A of the Income Tax Act Hon’ble Uttaranchal High Court in the matter of Welham Boys’ School Society vs. Central Board of Direct Taxes, held that once registration is granted u/s 12A there is no inherent power to the registering authority to rescind it on the ground that the institution was running for profit. There is no power in the statute available to the registering authority to cancel the registration. Even assuming that it is possible, it cannot be cancelled, unless the original registration was obtained by practicing fraud or forgery. [285 ITR 74 ].

Attachment of bank account in respect of disputed tax by Income tax officials Hon’ble Bombay High Court in the matter of Coco Cola India Pvt. Ltd. Vs. Addl. CIT cautioned the revenue to advise its officers strictly to follow the appropriate procedures and take such coercive action in case where it is so required after observing the requirement of law. Where an appeal has been filed, no coercive action can be taken till the time the appeal is over and after such period, consider coercive action, if no application is filed and if filed, deal with the same only on merit after considering the parameter set out by the Court. [285 ITR 419].

Revisional Jurisdiction u/s 263 of the Income Tax Act Hon’ble Rajasthan High Court in the matter of CIT Vs. Mangilal Didwania found that once assessing officer made enquiries into various aspects of the case and applied his mind before framing the assessment, there is no jurisdiction for the Commissioner who holds assessment order as erroneous and pre-judicial to the interest of revenue. [286 ITR 126].

Non-resident NGO’s are liable to pay fringe benefit tax Hon’ble Authority for Advance Ruling (Income Tax) in the matter of Population Council Inc. given a ruling that the applicant of non-resident non-profit making organization, having a regional office in India, which carried on charitable, scientific and educational activities, was liable to pay fringe benefit tax u/s 115WA of the Income Tax Act, 1961, in relation to fringe benefits provided to its employees. [286 ITR 243]. 

Tax payers across the country have been facing great difficulties in electronic filing of tax returns on account of technical snags in the software developed by the Income Tax Department. The system is in the process of regular modification to correct errors or logic mismatch.

The Government has extended the due date for corporates to obtain the Tax Audit Report and furnish the Return of Income and Fringe Benefits to November 30 from October 31 for the Assessment year 2006-07.

The Government is considering granting infrastructure status to all budget hotels and convention centers set up in Delhi and National Capital Region between now and the 2010 Commonwealth Games. This will enable them to enjoy a 10-year tax holiday as in case of other infrastructure projects such as roads, ports and power. The move will help to meet an estimated demand for 1,00,000 hotel rooms in Delhi and NCR during the Commonwealth Games and correct the skew that is currently in favour of luxury and first class properties.

Obtaining a Permanent Account Number (PAN) for Indians living abroad, a foreign citizen, or a company, trust or firm not having an office in India has become easier. The Income Tax department has clarified that it will no longer insist on details of a “representative assessee” while accepting PAN applications from the aforementioned categories. The tax department has issued a circular to the two designated PAN service providers – UTI Technology Services Ltd. and National Securities Depositories Ltd. – clarifying on the revised guidelines for allotment of PAN to these categories.

The Central Board of Direct Taxes has informed the Indian Newspaper Society (INS) that Tax Deducted at Source (TDS) is liable to be deducted by newspapers on payments made by them to advertising agencies. The CBDT has written to the INS following a clarification sought by the latter on whether TDS was deductible on payments made by them to advertising agents. The contention of INS was that such payments are not in the nature of a commission but a discount. So no TDS was liable on such payments. However, revenue department officials said the CBDT was of the view that such payments were covered by the definition of the term ‘commission or brokerage’ given in Section 194H of the Income Tax Act and hence liable to TDS.

With more and more Indian companies going global, the government has decided to protect the trademarks of Indian firms abroad. India is planning to become a part of the Madrid International Protocol (MIP) for trademarks under the World Intellectual Property Rights Organisation (WIPO). The protocol has a 78-country membership. Indian companies will be able to get trademark protection in all these countries by simply filing one trademark application at the local or regional trademark office. If the trademark office of a designated country does not refuse protection within a specified period, the mark is considered as registered. MIP also allows for recording subsequent changes and renewal of trademarks by the same single step procedure.

With an aim to enforcing stricter data security laws in the wake of data thefts from BPOs in the country, the Union Cabinet on Monday approved amendments to the Information Technology (IT) Act 2000. The amendments are aimed at preventing computer misuse like video voyeurism, identify theft, e-commerce frauds like phasing, frauds on online auction sites, sending offensive emails, etc.

The Delhi High Court has ruled that outsourcing units cannot be clubbed with each other or the company outsourcing work to them, for the purpose of taking the benefit of Employees Provident Fund (EPF). These ancillary units are independent business entities despite the fact that they are dependent on an automobile company or engineering firm. These units cannot be clubbed with each other or with main company for purpose of EPF Act on the ground of interdependence.

The Government has made it mandatory for developers to adhere to deadlines on finished housing properties. Property developers will now have to refund the entire advance amount with interest if they fail to deliver flats to customers in the agreed time-frame.

As per Delhi State Consumer Disputes Redressal Commission all training imparting institutes, educational centres preparing students for entrance examinations have been directed not to charge the fee for the whole duration of the course in advance by way of lump sum payment. They are duty bound to refund fee for balance period to a student who does not wish to pursue the course further.

Indian Banks can now look forward to easy entry into the US financial market. The Government has to decided to move amendments to the Prevention of Money Laundering (PML) Act, which will make it more in sync with the demands of the US and EU. The amendments will bring terrorism financing and Customs offences under the glare of the Act. While the International Financial Action Task Force (FATF) has also asked for making insider trading in stock markets a money laundering offence, the Government is not in favour.

India’s moribund debt market is set to finally get a leg up with State Governments granting an in-principle approval to rationalize stamp duty on a host of financial instruments including debentures and promissory notes. Reforms have long been in the offing in the local debt market but a major stumbling block has been the levy of stamp duty. A sub-group set up by the standing committee of finance secretaries on stamp and registration has decided to recommend uniform stamp duties on these financial instruments across all states.

The International Finance Corporation (IFC), the private sector arm of the World Bank Group, has launched a new guide explaining how to establish Credit Bureaus. The guide, entitled Credit Bureau Knowledge Guide, is the first publication to prove a comprehensive overview of the development of Credit Bureaus.

The Reserve Bank of India (RBI) norms for lending to the real estate sector are getting stricter. After blocking funding for purchase of land, the central bank has further tightened its measures for checking flow of funds from banks to the real estate sector. It has asked banks to ensure that credit disbursed is used only for “productive construction activity.” The risk weights of bank’s exposure to commercial real estate and home loans above Rs. 20 Lacs has been raised to 150 bps. The banks need to monitor diversion of funds to speculative trading/investments.

SEBI’s plan to create a uniform exchange for trading in corporate bonds is stuck with the Reserve Bank of India (RBI) seeking a separate platform for banks and Financial Institutions (FIs). An RBI committee is understood to have pointed out that banks and FIs will face settlement problems if they trade on the platform of the BSE, chosen by SEBI for on-line trading in corporate bonds. The committee has suggested a separate trading system for banks and FIs. Participation of brokers is to be tackled. RBI is not comfortable with the deals getting routed through brokers and instead prefers an order matching system for better transparency.

The stringent Know Your Customer (KYC) norms had forced banks to put off many small customers or those aspiring to be part of the banking system. RBI has now done away with the requirement to follow the KYC norms for customers in cases where the outstanding balance is not more than Rs. 50,000 and the maximum transaction is not more than Rs. 2 lakh. In such cases, customers will need to provide just a photograph and self-certification of address. However, as and when the transaction size and the balance increased beyond the limit, banks would be required to follow the normal KYC norms. RBI has also made life easier for the retired people by allowing them to operate a joint account for receiving pension payments. RBI said that it would allow crediting of the pension amount to a joint account operated by pensioner with her / his spouse where family pension has been authorized.

The Reserve Bank of India (RBI) has told some of the State Governments to refrain from regulating interest rates charged by Micro-Finance Institutions (MFIs). The regulator feels that the various money lending legislations, which put a cap on the interest rate charged by an entity (not banks), should not apply to MFIs. This comes on the back of a recent incident in Andhra Pradesh where the State Government pulled up local MFIs for competing with the state’s lending programme . The RBI is understood to be of the view that the provisions of the Money Lending Act should not apply to MFIs operating in the form of Non-Banking Financial Companies (NBFCs) and companies which do not declare dividend and are registered under Section 25 of the Companies Act. However, state legislations may continue to govern MFIs operating as trusts or NGOs.

At its meeting on 27th October, 2006 the Board of Approvals in the Commerce Ministry gave formal clearances to 24 SEZ proposals and in-principle nod to 20 others, entailing an aggregate investment of Rs. 40,000 crore. That takes the total applications so far approved to 236 and those with in-principle clearance to 169.

• Ramgad Minerals and Mining Pvt. Ltd., a Mineral Sales Pvt. Ltd. Group firm, has struck gold in Gadag district in Central Karnataka.
• The firm obtained gold reconnaissance permits and prospecting licence in an area covering 10,000 square km in Gadag, four years ago.

The government is further fine tuning the model concession agreement (MCA) and making changes in its policy framework to attract foreign investment to finance mega infrastructure projects.

In a bid to use Special Economic Zones (SEZs) to promote investment in higher education, the Cabinet Secretariat has called a meeting of a committee of secretaries to discuss the policy for setting up of Non Resident Indian (NRI)/People of Indian Origin (PIO) universities in these zones.

The Ministry of Company Affairs, Government of India has recently notified DIN-3 to be mandatory submitted by all the companies to the Registrar of Companies on or before 7th December, 2006, wherein the companies are required to inform the DIN (Director Identification Number) of their Director to Registrar of Companies through MCA-21 Portal, duly certified by:

• A Company Secretary in full time practice or
• A Company Secretary in employment of the concerned Company

The Income Tax Department, Government of India has achieved another milestone by again failing to deliver. The department made it mandatory for corporate assessees to compulsorily file Income Tax Returns electronically and thereafter to take out physical print out and to file the return physically. The concept was noble and once implemented successfully, will make the task of income tax return filing easier and free from hassle. However, as per track record of the government the following major pitfall have severely impacted the entire process:

• The revised Form No. 1 to be used for electronic filing is highly complicated, full of errors and very cumbersome to fill up. After completing all necessary preparations, most of the efficient professionals have to spend at least 6 to 10 hours to fill up this form.
• The form was notified on 24/07/06 and was launched on the depatment’s e-portal www.incometaxindiaefi ling.gov. in was launched only towards the end of September, 2006 whereas the last date of filing of income tax return, will be 31st October, 2006 for the assessment year 2006-07, for which it has been made mandatory.
• No proper publicity or training was given to the assessees or professionals.
• The architecture of the system, hardware as well as software launched by the government is highly inadequate and cannot support such a mammoth requirement of more than 6 lakh Companies who are expected to file their income tax return mandatory, as per the new system.
• There are several data structure errors and technical infirmities in the software and in the form.
• The form has been notified for electronic fi ling only for the current assessment year i.e. 2006-07.
• No software is available which can effectively support e.filing to the Income Tax Portal and for the purpose of preparing the returns in the new format. This is in view of very short notice and time given by the Government.
• The Government has failed to provide any physical front offices, which could provide necessary technical assistance to the assessees.

The Government’s decision to allow chairman of public sector banks the freedom to appoint statutory auditors without approvals from the Reserve Bank of India has led to chaos. Statutory auditors have expressed to the RBI their unwillingness to be engaged directly by the banks board and have also accordingly made a representation to the government seeking a review. The All India Chartered Accountants Society has demanded that the Government should withdraw and/or revoke its decision to permit public sector bank Board of Directors to appoint auditors. The intellectual group and leading economists are of the view that it will cause great risk to the independent functioning of public sector banks and will give leverage to the Senior Government Officials, Ministers and other Politicians to misuse public fund with the help of government nominated Board of Directors, in the absence of an independent audit. This decision of the government has the propensity to completely perish the financial sector. This decision will also promote corrupts practices in relation to appointments. The smaller firms and those who are not ‘well connected’ will loose these Audits to those who are close to the Board of Directors.

The CA profession has demanded from the Council of the Institute of Chartered Accountants of India to pass necessary resolution directing the professionals to decline acceptance of appointment as auditors, such appointments being severely marred by non-independence, in case it is made by the Board of Directors rather than by the Reserve Bank of India in consultation with CAG as per the existing practice or by any other independent authority. The auditors are supposed to critically examine the deeds and mis-deeds of the Board of Directors and top management and this most important function of the auditors will be severely impacted by the decision of the government.

Also, some public sector banks have declined to enjoy the freedom and want to continue to avail of the services of the auditors empanelled by the RBI. These banks do not wish to be questioned by public or CBI or courts in case of allegation of financial impropriety. Since this requires the RBI to continue with the practice of selecting a panel of auditors, the banking regulator has written to the finance ministry for clarification. The confusion has delayed finalization of the new panel of auditors for auditing public sector banks’ accounts in the current financial year. Some are of the view that the stalemate may result in PSBs being forced to get their financial statements for the half year ending September 30 audited by the old panel of auditors. Auditors fear doing away with the practice of RBI maintaining a panel of auditors will surely lead to a conflict of interest. They feel that audit firms might lose their freedom in recording their qualifications if they are chosen by Chairman or the Board of PSBs themselves.
Auditing financial statements of banks has become risky following failure of a number of private sector banks in last 2 years, the private sector banks being audited by the auditors appointed by the Banks’ management / owners. It may be noted that Global Trust Bank, United Western Bank and several other banks have recently been closed down / merged with public sector banks in view of their poor financial position and in the backdrop of serious allegations of improper financial reporting. The Reserve Bank of India despite its best regulatory practices, has failed to monitor the private sector banks and foreign banks, several times in past, in the absence of a detailed audit by independent auditors. On the other hand the public sector banks have shown an all round growth and recovery in their financial strength, supported by financial discipline resulted out of true and fair financial reporting by the conduct of auditors appointed independent of the Banks hitherto.

Benami property transactions and registration of undervalued real estate deals may not be that easy if the government has its way. The centre is likely to make third-party auditing mandatory for all property transactions. Property transactions would require a certification from chartered accountants to ascertain that the property has not been undervalued to save registration fee. Registration fee, which varies from state to state, is levied on the value of the property. According to sources in the urban development ministry, the proposal is already being discussed.

RBI has advised the banks that :

• All expenses including provisions and write-offs recognized in a period, whether mandatory or prudential, should be reflected in the profit and loss account for the period as an ‘above the line’ item (i.e. before arriving at the net profit); 
•  Banks are also advised in their own interest to take prior approval from the Reserve Bank before any appropriation is made from the statutory reserve or any other reserves.
• Wherever draw down from reserves takes place with the prior approval of Reserve Bank, it should be effected only ‘below the line’ (i.e. after arriving at the profit/loss for the year); and 
• It should also be ensured that suitable disclosures are made of such draw down of reserves in the ‘Notes on Accounts’ to the Balance Sheet.

The 2-percentage point subsidy on farm loans of up to Rs. 3 lakh will be extended to all scheduled commercial banks. In other words, private banks, too, will get the benefit of the government decision.

In terms of Section 45-IA of the RBI Act, 1934 it is mandatory for a company to obtain Certificate of Registration (CoR) from Reserve Bank of India (RBI) before commencing or to carry on business of a non-banking financial institution. It has been observed that there are NBFCs which are no longer engaged in the business of NBFI but still continue to hold the CoR even though they are not required/eligible to hold the CoR granted by RBI. In order to ensure that only NBFCs which are actually engaged in the business of NBFI hold CoR, it has been decided that all NBFCs should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934. The first such certificate should relate to the financial year ending March 31, 2006. The certificate from the Statutory Auditors in this regard may be submitted to the Regional Offi ce of the Department of Non-Banking Supervision under whose jurisdiction the NBFC is registered, latest by June 30, every year with reference to the position of the company as on March 31 of that year. The certificate for the year ending March 31, 2006 need to be submitted latest by October 31, 2006

The prevalence of using the digital signatures will grow at a break-neck speed in very near future with the advent of increasing emphasis on e-governance. With such phenomenon, the need to safe gaurd its usage becomes immensely important. It is an imperative obligation on the part of our fraternity to educate our service recipients on the risks annexed to the usage of digital signatures. RBI has expressed concern over use of smart cards, as these could compromise security. Raising this issue in a speech, deputy governor of RBI, V Leeladhar pointed out that a smart card could fall into wrong hands who would then have access to the digital signature within.

Large enterprises may soon have to pay interest rate as high as 18% on unpaid dues of purchases from small scale enterprises. The much awaited policy decision has become operational with the Micro, Small and Medium Enterprises Development (MSMED) Act coming into effect from October 2, 2006. Companies will now have to pay the interest on their liability after the Act comes into play. The interest rate charged will be compounded on a monthly basis. Buyers will also have to declare outstanding amounts to SSIs in their balance sheet as per the Act.  

The facility of DTA sale to EOUs is available against physical export of goods manufactured in EOU and earning positive net foreign exchange. Exports effected through third party and foreign exchange realized in the name of the third party for those goods which have been manufactured in the EOU and are directly transferred from the unit to the port of shipment are eligible exports and this export is also counted for the purpose of fulfillment of export obligation of EOU. The EOU is, therefore, eligible to get DTA sale benefits on exports effected through third party. The Shipping Bills must indicate the names of both the manufacturer and the third party. While indicating the name of the manufacturer in such cases, the status of the unit i.e. Export Orient Unit must be clearly indicated. The entitlement of DTA sale will, however, be calculated on the basis of the price at which the goods are supplied by EOUs to third party exporter. Para 6.19 (e) of Handbook is not intended to preclude DTA sale facility against third party exports.

• Subir Roy v. P.R. productions (P) Ltd. [2006) 70 SCL (CLB)] S. Balasubramanian, Chairman. Companies Act, 1956 – Section 111 – Transmission of shares – Deceased indebted to the company – company demanding the settlement of debt before registering the transmission – Whether valid – Held, No.
• Precot Mills Ltd. v. Commissioner of Central Excise [(2006 5 STT 1 (CESAT)] T.K. Jayaraman (T) & Dr. S.L. Peeran, (J] Service Tax – Assessee having several units – inter unit services – Whether service rendered by one unit to another unit is liable to tax – Held No.
• C.P.P. Mandal v. Commissioner of Central Excise [(2006) 5 STT 1 (Bom)] R. M. Lodha & J.P. Devadhar, JJ. - Service Tax – Mandap keeper – Assessee leased out the premises exclusively to ‘S’ on certain consideration – ‘S’ rendering catering services to the hirers of the premises – Whether assessee is liable for service tax for the catering done by ’S’ – Held, No.
• Alembic Glass Industries Ltd. v. Commissioner of Central Excise [2006(201) ELT 161 (SC)] Arijit Pasayat and Tarun Chatterjee, JJ - Central Excise Act, 1944 – Valuation – Advertisement cost borne by purchaser – Whether includible in the assessable value in the hands of the manufacturer – Held, No.
• Esss Vee Traders & Ors. Vs. M/s. Ambuja Cement Rajasthan Limited [131(2006) DLT 341] Badar Durrez Ahmed, J - Arbitration and Conciliation Act, 1996 read with the Indian Partnership Act, 1932 – Unregistered partnership fi rm – Plaintiff applied to High court for the appointment of arbitrator – Whether an unregistered fi rm could apply – Held, No.
• Jyoti Sarup Mittal v. Water and Power Consultancy Services (India) Ltd. [131(2006) DLT 503] Vikramajit Sen, J - Arbitration and Conciliation Act, 1996 – Section 11 – Appointment of arbitrator by court – Contract named the sole arbitrator – Whether court could appoint an arbitrator in the place of named arbitrator – Held, No. 
• Sadhu Singh v. Gurdwara Sahib Narike & Ors [JT2006 (8) SC 525] B.P. Singh & P.K. Balasubramanyan, JJ. - Hindu Succession Act, 1956 – Will – Testator creating life interest in favour of his wife and after her death bequeathing the properties to his nephews – Wife sold the property – Nephew fi led suit for repossession – Whether a person having only life interest could sell the willed property – Held, No. 

Insurance brokers are seeking a reduction in minimum capital requirement for securing a licence. Currently, an insurance broker is required to have a minimum capital base of Rs. 50 lakh while for a composite broker who also does reinsurance business, should have a higher limit of Rs. 2.5 crore. The broking community contributes around 15 per cent of the non-life premium.

Public sector insurance companies have beefed up their capital on the back of the equity boom and are taking their combined capitalization close to $ 2,5 billion (Rs. 11,500 crore).

The detariffing of insurance rates after January 1 in the country may trigger shake-out in Indian general insurance sector. “After post detarriffing, there will be premium volatility, the need for the capital will be higher and the pressure on the profitability in the industry will make the survival of small companies difficult”. Going by the global experience, the premium prices will plummet with insurers opting for predatory pricing resulting the insurance companies suffering underwriting losses after the detariffing begins. “The price differentiation will have a social implication as those who can least afford the insurance premium will be excluded.” There will be substantial cross-subsidisation in the industry and the insurers will re-focus on under-writing/ technical pricing, emphasis on data quality and there will be a need for internal control/ guide-lines for the insurers. The regulator IRDA will have to be very active to ensure fair practices, transparence and fair competition. The industry on the other hand fear a hefty increase in cost of insurance. The silver lining is in the expected new products, new features and better coverage.

Several recommendations made by RBI on the issue of remittances by Non Resident Indians (NRIs) are as follows:

•  Review charges at both foreign and domestic ends and resort to latest technology for handling large volume of transactions
• Extend e-transfer facilities
• Cap on brance numbers may be reviewed
• NRIs remittances through Indian bank or a foreign bank having a branch in India
• Indian Banks should explore tie-ups with more correspondent banks which would bring down the cost for the NRIs at the foreign centers. 

The commerce ministry wants companies that are in the race to set up Special Economic Zones (SEZs) or to invest in telecom business, to disclose the extent and source of foreign direct investment proposed. This comes in the wake of increased security concerns of FDI inflows, especially with regard to telecom and port based SEZs. The Government has modified the checklist recently to include three parameters pertaining to FDI to be examined keeping in view:

• Extent of FDI
• Its source, and asking the applicant to reveal the country and name of the company bringing in the investment.

The Government has also made it mandatory for applicants who have proposed to set up telecom and port SEZs to confirm if the FDI is according to the norms of Press Note 5, 2005, which imposes various security related conditions”.

Exporters need not henceforth divulge details of the foreign buyers in the shipping bills submitted to the Government for claiming benefits under various export promotion schemes. The Government has now allowed exporters to keep back such details by defacing the name and address of the foreign buyers in the shipping bills. This move is aimed eat preventing leakage of confidential business information, according to a circular issued by the Directorate General of Foreign Trade (DGFT).

The Finance Ministry is planning to make mandatory payment of service tax through the electronic mode for those who pays Rs. 50 lacs or more a year. A circular will come shortly in this regard.

Telecom operators providing international roaming services to in-bound roamers will soon have to pay service tax on the fees received through the home network for providing such services.

Central Board of Excise & Customs (CBEC) has clarified that exemption to any club or association under the Income Tax Act on the ground of being a public charitable institution is of no consequence to levy of service tax. Levy of service tax is entirely governed by the provisions contained in the Finance Act, 1994 and the rules made there under. CBEC has further clarified that the definition of “charity” and “charitable” as defined in Black’s Law Dictionary may be kept in mind. “Charity” is defined as “aid given to the poor, the suffering or the general community for religious, educational, economic, public safety, or medical purposes”, and “charitable” as “dedicated to a general public purpose, usually for the benefit of needy people who cannot pay for the benefits received”. 

Websites that sell space to companies could be asked to pay service tax under the category of advertising services with effect from 1996. The Authority for Advance Ruling for Service Tax had earlier this month dismissed an application filed by Google Online India Pvt. Ltd.

The Central Board of Direct Taxes (CBDT) has announced the cost inflation index for the financial year 2006- 07 at 519. This is a five fold growth in about quarter of a century. The base year of the index is 1981-82. 

The revenue department plans to increase the number of cases picked up for transfer pricing audit to keep pace with the increase in the volume of business transaction. The Government has last year audited 1,500 companies. The adjustments have been made in 350 out of 1,500 cases taken up for audit last year during 2004-05. The Government intend to increase that number since the department has been able to realize more revenue from the audit exercise.

The Central Board of Excise and Customs (CBEC) has announced that assesses faced with show cause notices in cases involving fraud or misstatements could avoid the regours of adjudication procedure if they were to opt for a scheme that provides for voluntary payment of duty along with interest and penalty. Penalty under the scheme would be 25 per cent of the duty and assesses opting for such a scheme would have to make the entire payment within 30 days of the receipt of the show cause notice. This ”trade facility” would be available for both Central excise and customs duty cases, which are at the show-cause notices stage.

The much-awaited phase out of Central Sales Tax (CST), which is a tax on inter-state sales of goods, would now begin from April 1, 2007, against the earlier planned date of October 1 this year. This decision has been taken by empowered committee of State Finance Ministers on VAT. 

The Indian Authority for Advance Rulings (AAR) has said a foreign NGO was liable to pay fringe benefit tax (FBT) in India. The FBT will be payable even if there is no income-tax payable on the NGO’s total income in the country, the authority ruled in a recent case.

Life is not going to be the same again for the umpteen small savings schemes with a tax saver bait as commercial banks are hitting the streets in full force with a new Fixed Deposit (FD) scheme with a locking period of 5 years and tax savings features were by a deduction is allowed under section 80C of up to Rs. 1 lakh to the assesses investing. The icing on the cake is that the new scheme offers a higher rate of interest than the competing schemes like National Savings Certificate (NSC) and others.

A brand new income tax law that provides for “easy reading and understanding” of the provision may become a reality from April 1, 2008? An expert group of Central Board of Direct Taxes (CBDT) that was constituted to suggest simplification of the Income-Tax Act, 1961, has submitted its report to the Union Finance Ministry. The Finance Minister said that the new Income Tax Act will replace the existing one and will be applicable for the assessments made in assessment year 2009-2010.

RBI will discontinue the age-old overdraft facility of mutual fund which will reduce their fl exibility in investment and affect the returns on liquid fund schemes. This move could shift from a T+0 to T+1 system.

The Institute of Chartered Accountants of India (ICAI) had finalized the format for stockbrokers, who are operating in non-corporate form, based on a request of Sebi.

The Securities Appellate Tribunal (SAT) recently upheld Sebi’s order directing the depositories and their participants not to levy transaction charges when an investor transfers his securities from one depository participant (DP) to another at the time of closure of DP account.

The Securities and Exchange Board of India has reduced the turnover fees for brokerages with effect from October 1, 2006. Under the new fees structure, broking houses are required to pay Rs. 20 per Crore worth transactions (0.0002 %) on all transactions in the securities market, down from earlier Rs. 1000 per Rs. 1 Crore worth transactions (0.01 %). Similarly, for debt transactions, the rate has been brought down to Rs. 5 per Rs. 1 Crore transactions (0.00005 %) from the existing Rs. 1000 per Rs. one Crore transactions. In the futures & options segment, the fee has been doubled to Rs. 20 per Crore (0.0002 %) from the existing Rs. 10 per Crore. The revision has been broadly along the lines suggested by an expert committee headed by Mr. Anjaria. The revision in the fee structure was brought about by a notification, amending the relevant Sebi regulations.

• This is further to SEBI Circular No. MRD/DoP/SE/Cir-8/2006 dated July 13, 2006 making, inter-alia, PAN mandatory for trading in the cash market with effect from October 1, 2006. Similarly Demat account holders were to mandatorily obtain PAN, even if they are non resident. The demat accounts of non compliant account holders were to be frozen by 30th of September 2006.
• Subsequent to the issue of above referred SEBI Circulars, market participants have made further representations and suggestions and sought clarifications on the various issues from SEBI. 
• The present deadline of September 30, 2006 has been extended to December 31, 2006, as a one time measure.

The Securities and Exchange Board of India (SEBI) has doubled the fees for application, registration and renewal of licences of market intermediaries such as merchant bankers, credit rating agencies, underwriters, share transfer agents, debenture trustees, bankers to the issue, foreign venture capital funds and local venture funds with immediate effect. SEBI earlier imposed hefty filing fee for offer documents and others. The intermediary cost increase will directly impact fund raising cost and cost of other services in the capital market.

• NBFCs to issue sanction letter indicating loan amount and annualised rate of interest.
• NBFCs to issue notice to borrower for any change in terms and conditions. Any change in rate or charge to effected prospectively
• Decision to recall payment should be in consonance with the loan agreement.
• NBFCs to release all securities on repayment of all dues.
•  In case borrower requests for transfer of borrowal account, NBFC to notify its consent or otherwise within 21 days from the date of receipt of request.
• NBFCs not resort to undue harassment in the matter of recovery of loans.
• Fair Practices Code based on the guidelines issued to be put in place by all NBFCs with the approval of their Boards within one month from the date of issue of this circular. 

The Government is likely to allow foreign companies to offer Employee Stock Options (ESOPs) to employees in Indian subsidiaries, through the India Depository Receipts (IDR) route. For example, Microsoft USA wants to offer Esops to employees of Microsoft India, which is not listed here. It can fl oat an IDR and earmark a percentage of the same for Indian employees.

Exporters will soon be able to realise export proceeds in days instead of weeks. Banks are working on dematerialising the letter of credit and documents that accompany it. As against the current practice where the exporter has to physically transmit the letter of credit between bank branches, LCs will soon be sent across bank branches in an electronic format to prevent defrauding and ensure security.

The European Central Bank raised interest rates by a quarter percentage point to a near four year high of 3.25 per cent.

The National Housing Bank (NHB), the apex body for promoting and regulating housing finance companies (HFCs), has increased its refinance rate yet again by 50-150 basis points (bps). This is likely to result in firming up of housing loan rates marginally.

China will step up investments in projects involving development of bio-energy and other alternative energies between 2006 and 2010 to ensure energy security and maintain its high economic growth. India to learn lesson and consider their experience to solve India power problem issues.

Homeowners and potential buyers can now look forward to a better deal from their lenders. The regulator for Housing Finance Companies (HFCs) - the National Housing Bank (NHB) - has directed them to provide sufficient notice to customers before hiking interest rates or prior to introducing new charges. Like banks, HFCs will now have to adopt a fair practices code for dealing with customers. NHB wants HFCs to notify customers 30 days before raising charges or introducing new ones. Any change in the terms and conditions of a loan agreement, carried out without notice, would also have to be notified within 30 days. If the new changes are to the disadvantage of the customers, they should be allowed to close or switch accounts without paying any charge or interest. A customer can then exit without giving any notice within 60 days.

Ministry of Finance (MOF) has rejected a proposal for mandatory personal guarantees from promoters of companies that borrow from PSU banks. Acceptance of the proposal, the ministry said, would prompt companies to shift their accounts from public sector banks to private and foreign banks.

Board of Approval for SEZs has set forth list of authorized operations for building social infrastructure within the various SEZs and criteria for developers to qualify for tax breaks. The board has given in-principle nod of 14 SEZs, taking the total number of SEZs approved so far to 164. Out of this, 25 SEZs have been notified. Minimum investment or net worth of the promoter company in the SEZs prescribed is as follows:

• Sector-specific SEZ developers must plough in a minimum investment of Rs.250 Crore or have net worth of Rs. 50 Crore. 
•  For multi-product SEZs, minimum investment is Rs. 1,000 Crore and net worth Rs. 250 Crore is required.

The Reserve Bank of India on Saturday approved the amalgamation of The United Western Bank (UWB) with the Industrial Development Bank of India Ltd. (IDBI), with effect from October 3, 2006.

Corporates will have to mandatory file annual returns and balance sheets electronically as the Registrars of Companies will stop accepting these documents in physical form from September 16. Having rolled out e-filing programme at all Registrars of Companies, the Ministry of Company Affairs recently said corporates will have to mandatory file annual returns and balance sheets electronically from September 16. All the company representatives authorised to sign the documents are required to obtain digital signatures by that time to ensure the security and authenticity of filing in the electronic mode, Company Affairs Minister P C Gupta said. The filing in electronic mode is part of e-governance project - MCA21 - initiated by the ministry.

Insurance Regulatory & Development Authority (Irda) has allowed companies to cancel their existing policies and buy new ones to take advantage of cheaper pricing, expected after de-tariffing of general insurance products from January 1, 2007. The premium paid by 15 million corporate clients across all segments is currently pegged at around Rs.10,000 crore. The existing corporate policy can be cancelled by paying a small fine by the policy holder.

Indians going abroad for employment in strife -torn countries like Lebanon and Afganistan now have reasons to feel assured. General insurance companies have agreed to offer personal accident cover of upto Rs. 25 lakh under Pravasi Bhartiya Bima Yojana (PBBY).

While leading domestic banks will be the first to implement the revised capital adequacy (popularly Known as Basel- II) norms in 2007-08, the smaller (weaker) ones will be allowed to continue with the current (Basel- I) guidelines.

In terms of Regulations 3 and 4 of the Notification ibid, Indian citizen residing outside India and Persons of Indian Origin (POIs) can acquire immovable property in India other than agricultural property, plantation or a farmhouse. It is clarified that the payment for such acquisition shall be made out of following ways:-

•  funds received in India through normal banking channels by way of inward remittance from any place outside India , or
•  funds held in any non-resident account maintained in accordance with the provisions of the Foreign Exchange Management Act, 1999 and the regulations made by Reserve Bank of India from time to time.