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.