Failure to issue TDS certificate within the time allowed, attracts penalty of Rs. 100/- per day

Failure to issue TDS certificate within the time allowed, attracts penalty of Rs. 100/- per day of default (Sec 272A(2)(g)). However, penalty will not exceed the amount of tax deductible or collectible, as the case may be.

Circular No 7/2010 regarding validity of 80G Application

INCOME-TAX ACT

CIRCULAR

Section 10(23C)(iv) of the Income-tax Act, 1961 – Exemptions – Charitable or religious trusts/institutions –Clarification regarding period of validity of approvals issued under section 10(23C)(iv), (v), (vi) or (via) and section 80G(5) of the Income-tax Act

Circular No. 7/2010 [F.No.197/21/2010-ITA-I], Dated 27-10-2010

The Board has received various references from the field formations as well as members of public about the period of validity of approvals granted by the Chief Commissioners of Income Tax or Directors General of Income Tax under sub-clauses (iv), (v), (vi) and (via) of Section 10(23C) and by the Commissioners of Income Tax or Directors of Income Tax under Section 80G (5) of the Income Tax Act, 1961.

2. It has also been noticed by the Board that different field authorities are interpreting the provisions relating to the period of validity of the above approvals in a different manner. The following instructions are accordingly issued for the removal of doubts about the period of validity of various approvals referred to above.

3. Sub-Clauses (iv) and (v) of Section 10(23C) were amended by Taxation Laws (Amendment) Act, 2006 by insertion of the following proviso to that clause:-

“Provided also that any (notification issued by the Central Government under sub-clause (iv) or sub-clause (v), before the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, shall at any one time, have effect for such assessment year or years, not exceeding three assessment years) (including an assessment year or years commencing before the date on which such notification is issued) as may be specified in the notification.”

The intention behind the insertion of the above proviso was laid out in the relevant portion of the explanatory notes to the Taxation Laws Amendment Act, 2006 which reads as under:

“A need has been felt to dispense with the requirement of periodic renewal of notifications. The requirement of periodic renewal of notifications has been resulting in delays in their renewal.

5.2 In order to overcome delays, the eighth proviso to section 10(23C) has been amended so as to provide that the above mentioned limit of effectivity for three assessment years shall be applicable in respect of notifications issued by the Central Government under sub-clause (iv) or sub-clause (v) before the date on which Taxation Laws (Amendment) Bill, 2006 receives the assent of the President.

5.3 The Taxation Laws (Amendment) Bill, 2006 received the assent of the President on 13.07.2006. Therefore, on account of the above amendment any notification issued by the Central Government under the said sub-clause (iv) or sub-clause (v), on or after 13.07.2006 will be valid until withdrawn and there will be no requirement on the part of the assessee to seek renewal of the same after three years.”

The intention of legislature that the approvals under Section 10(23C) (iv) & (v) after the cut off date mentioned above would be a one time approval which would be valid until withdrawn, is thus sufficiently clear.

4. Approvals under Sub-Clauses (vi) and (via) of Section 10(23C) are governed by the procedure contained in Rule 2CA. Rule 2CA was amended w.e.f. 1.12.2006, inter alia by substitution of the existing sub-rule 3 by a new provision which is reproduced below:-

“(3) The approval of the Central Board of Direct Taxes or Chief Commissioner or Director General, as the case may be, granted before the 1st day of December, 2006 shall at any one time have effect for a period of exceeding three assessment years.”

Read in isolation, without any further guidance as was given by way of explanatory notes to Finance Act, 2006 in respect of amendment of sub-clauses (iv) & (v) of Section 10(23C), the above amendment leaves some scope for doubt about the period of validity of the approval under Section 10(23C)(vi) and (via) on or after 1.12.2006. For the removal of doubts if any in this regard, it is clarified that as in the case of approvals under sub-clauses (iv) & (v) of Section 10(23C), any approval issued on or after 1.12.2006 under sub-clause (vi) or (via) of that sub-section would also be a one time approval which would be valid till it is withdrawn.

5. As regards approvals granted upto 1.10.2009 under Section 80G by the Commissioners of Income Tax/ Directors of Income Tax, proviso to Section 80G(5) (vi) clarified that any approval shall have effect for such assessment year or years not exceeding five assessment years as may be specified in the approval. The above proviso was deleted by the Finance (No. 2) Act, 2009. The intent behind the deletion of above proviso as explained in the explanatory memorandum to Finance (No.2) Bill, 2009 was as under:

“Further as per clause (vi) of sub-section (5) of section 80G of the Income-tax Act, 1961, the institutions or funds to which the donations are made have to be approved by the Commissioner of Income-tax in accordance with the rules prescribed in rule 11AA of the Income-tax Rule, 1962. The proviso to this clause provides that any approval granted under this clause shall have effect for such assessment year or years, not exceeding five assessment years, as may be specified in the approval.

Due to this limitation imposed on the validity of such approvals, the approved institutions or funds have to bear the hardship of getting their approvals renewed from time to time. This is unduly burdensome for the bona fideinstitutions or funds and also leads to wastage of time and resources of the tax administration in renewing such approvals in a routine manner.

Therefore, it is proposed to omit the proviso to clause (vi) of sub-section (5) of section 80G to provide that the approval once granted shall continue to be valid in perpetuity. Further, the Commissioner will also have the power of withdraw the approval if the Commissioner is satisfied that the activities of such institution or fund are not genuine or are not being carried out in accordance with the objects of the institution or fund. This amendment will take effect from 1st day of October, 2009. Accordingly, existing approvals expiring on or after 1st October, 2009 shall be deemed to have been extended in perpetuity unless specifically withdrawn.”

It appears that some doubts still prevail about the period of validity of approval under Section 80G subsequent to 1.10.2009, especially in view of the fact that no corresponding change has been made in Rule 11A(4). To remove any doubts in this regard, it is reiterated that any approval under Section 80G(5) on or after 1.10.2009 would be a one time approval which would be valid till it is withdrawn.

CAN A COMPANY GIVE LOAN TO GROUP COMPANIES UNDER COMPANY ACT, 2013?

Many corporate including Pvt Ltd Cos have other related group companies and they transfer money to & from other company as and when require. Stop doing this, even retrospectively from 12th Sep, 2013 as these can be treated as interest free loan u/s 185 of new company law. Loan has not been defined u/s 185. These transfers can be treated as loan. Any transaction of giving money to be returned with or without interest can be treated as loan. However, fund can be transferred to public ltd co. if less than 25% of total voting power is exercised or controlled by "such director(s)".
Section 185 of the Companies Act, 2013 has been made operational from 12-09-2013.This sec is applicable for all companies. This sec states that:
  No company can advance loan to its “directors” or to “other persons in whom directors are interested”.
 No company can give any guarantee or provide any security in connection with any loan taken by him or such other person.

EXCEPTIONS:
Ø  the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
Ø   a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.
The expression “TO ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED” means—
(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or “controlled” by any such director, or by two or more such directors, together; or
(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
"Control" has been defined as to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding or management rights or shareholders agreements or voting agreements or in any other manner. [Section 2(g) of the Companies Act, 2013]
IMPRISONMENT & PENALTY UPTO 25 LAKHS :If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.
COMMENTS: Kindly note the following observations:
1) Existing loan on 12th sep is not affected by above provisions. However, it should not be renewed & should be repaid on due date.
2) If any loan had already been given after 11th sep., you should book it as advance  for property/ purchase of goods/ materials etc. backed by adequate documentation . These should be return as soon as possible.
3) Deposits or advance for property/ purchase of goods, services etc  is not covered.
4) Company in the ordinary course of business can give loan at not below bank rate.
5) Sec 372 of the Companies Act, 1956 is applicable after 11th sep.
6) Above is my opinion only, you may have different opinion.
PRIVATE LTD COMPANIES HAVING TURNOVER UPTO 60 LAKHS SHOULD BE CONVERTED TO LLP
1) LLP is not a company, hence proposed limit of audit of 20 company / CA will not be applicable.
2) As companies Act will not be applicable, you can transfer fund from one LLP to another group LLP.
3) Many of exemption which Pvt Ltd company enjoy under old Companies Act has been withdrawn, which are not applicable to LLP.
4) Compliances under new companies Act for Pvt Ltd Companies has been substantially increased, which are not applicable for LLPs.
5) There is heavy penalty for non compliances under New Company Act. Penalty of rs 50000 is a small amount for a single violation.
6) Cost benefit analysis suggests that these should be converted into LLP.
7) However, as per sec 47(xiiib) of Income tax Act, for tax neutrality of such conversion , turnover of Pvt Ltd company  in any of last 3 years must not exceeds 60 lakhs. So, if turnover exceeds 60 lakhs than such conversion will be subject to income tax.
PRIVATE LTD COMPANIES SHOULD  BE CONVERTED INTO PUBLIC LTD COMPANIES
1) Sec 185 of New Co Act is not applicable to public ltd co at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together
2) We can plan accordingly and take benefit.
3) So, we can convert our existing Pvt Ltd companies to public Ltd companies and take benefits.

THE COMPANIES ACT, 2013
185. (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:
Provided that nothing contained in this sub-section shall apply to—
(a) the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.
Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—
(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Companies Act 2013 Not Providing Exemptions To Private Companies

1.    Section 293 of Companies Act 1956 provisions relating to Restrictions on Powers of Board mandate members approval in general meeting only for public companies and private companies which is subsidiary of public companies. It was not applicable to private companies. 

However, now corresponding new Section 180 of Companies Act 2013 relating to Restrictions on Powers of Board. (which has been made effective w.e.f  12.09.2013) has taken away such exemption from private companies.

2.    Section 295 of Companies Act 1956 relating to loans to directors did not apply to private companies. Even in case of public companies such transactions could be entered into at the most with the approval of the Central Government.

Now corresponding Section 185 of Companies Act 2013 which has become effective from 12.9.2013 does not provide for such exemption to private companies. It seems the new Act puts total ban on such transactions, excepting loans to MD/WTD as part of conditions of service extended to all employees or pursuant to scheme approved by members by special resolution.

3.    Presently Section 372A of Companies Act 1956 provisions relating to Inter-corporate loans and investments are not applicable to private companies.

However, now corresponding new Section 186 of Companies Act 2013 relating to Loan and investment by company. (which is yet to be made effective) has taken away such exemption from private companies.

4.    Presently Section 81 of Companies Act 1956 relating to further issue of shares are not applicable to private companies. Even public companies issuing further shares within initial specified period ( two years from incorporation or one year after first issue of shares, whichever is earlier) are free to issue shares to anyone and need not be to existing shareholders on proportionate basis.

However, now corresponding new Section 62 of Companies Act 2013 (which is yet to be made effective) has taken away such exemption from private companies. Further, even initial specified period as above has also been deleted. As a result now all companies, whether private or public, will have to follow prescribed procedure (Rules yet to be notified) for further issue of shares right from the date of incorporation.

          Compliances on the part of private companies will increase substantially.

Fees and Penalty for Late Filing of TDS Returns are as follows:

Section 234E – Levy of Fees :

• Failure to submit e-TDS Statement on time will result in fees on the deductor.
• If you delay or forget to file your e-TDS Statement, fees of Rs. 200 per day will be levied on the deductor, as long as TDS Statement is not filed.
• The levied amount of fee is not supposed to exceed the TDS deductibles.
• Prior to filing of TDS Statement such fee should be paid and it should be reflected in the TDS Statement.

• Effective from 1st July 2012, any delay in furnishing the eTDS statement will result in a mandatory fees of Rs. 200 per day, the total fees should not exceed the total amount of TDS made for the quarter. The late filing fee should be paid before filing such delayed eTDS statement.

Section 271H – Penalty:

Deductor has to pay a penalty ranging from minimum of Rs. 10,000/- to One Lac rupees,

• If deductor exceeds one year time limit to File TDS Statement.
• If deductor furnishes incorrect details like PAN, TDS Amount, Payment of Challan etc.

How To File Your Income Tax Returns Online

Filing income tax returns is something everyone dreads. That isn't without reason, because the sheer complexity makes most mortals concede defeat and run to their chartered accountants. Note: This guide applies only to salaried individuals. The most important part of this exercise is to procure the Form 16, which is provided by your employer. It is a statement of your taxable salary, allowed deductions, and the tax that has been paid on your behalf. Also, banks and other financial instutions that deduct tax on the interest due to you are supposed to supply you with the Form 16A. If that sounds Greek and Latin, all you need to do is contact the HR department and demand a copy of your Form 16. This needs to be done before 31st July, if you are eligible for tax refunds (this depends on the tax slab you fall in). However, if you aren't eligible and your salary is under 5 lakhs, you are exempt from filing returns. It is prudent to do so nonetheless. This is especially true if you intend to apply for home \ car loans in the future, since that requires I-T return details spanning the last three years. With the Form 16 sorted out, you can then log on to the INCOMETAX INDIA website. Step 1: Click on the Register link to create a new account. You are then prompted to enter your PAN number, which is assigned as your user ID. Step 2: Enter your details in the registration form, following which you will receive a confirmation mail in the inbox of the specified email address. Keep your PAN card handy, because the details have to match those mentioned on the card. Step 3: After verifying and logging into your spanking new account, you need to view the Form 26AS statement and ensure that the Tax Deducted at Source (TDS) amount matches the one mentioned in your Form 16. However, if the TDS amount in the Form 16 is more than that reflected in the Form 26AS, you cannot file your I-T return online. You will then have to contact your CA or the Form 16 issuer to correct the discrepancy. To view the 26AS statement, click on the View Tax Credit Statement (Form 26AS) under the My Account drop-down menu at the top. Step 4: In the subsequent form, select Assessment Year 2011-12 from the drop-down box, enter your Date of Birth, and click Submit. Step 5: Note down the total TDS deposited (highlighted by the red box) and verify if it matches with the amount mentioned in your Form 16. Step 6: Now, we need to download the I-T Return utility. To do so, select Individual, HUF from the e-Filing menu under the Download section at the top of the left hand side bar. Use the table below to check which one of the ITR forms you are supposed to fill. Since this guide only covers salaried individuals, you'll have to select ITR-1. However, if you own a business or have amassed a truckload of money after selling off property, this guide is of no use to you. Then again, you're rich enough to hire a CA anyway. That means you have to download either the PDF or Excel version of the I-T Return utility. Step 7: Open the I-T Return utility downloaded in the previous step. The examples illustrated below use the PDF version of the utility. Get your Form 16 ready, as most details are to be copied over from the same. This section is fairly straightforward. Enter your name, address, birth date, PAN number, and fill up the numbers in Fields 1 and 2 from the Form 16 (details below). Field 3 (yellow box) is the sum of the interest earned from your bank accounts, FDs, etc. Unless you are employed by the Indian government or in a Public Sector Undertaking (PSU), select the Others check box in the Employer Category (highlighted in purple). Keep the default value for the Return Filed Under field (denoted by a brown box). The Income Tax Ward \ Circle value (marked in black) requires a bit more effort. Head back to the website and click on Know Jurisdiction under the Services drop-down menu at the top. Copy your Jurisdiction code as shown below. You only need to copy the numbers and not the letters. Paste the same in the Income Tax Ward \ Circle box. Remember, Field 1 in the ITR-1 has to be filled with the amount mentioned in the Gross Total Income field in your Form 16, as illustrated below: Step 8: Fields 16, 17, 18, and 19 are calculated based on the values you will enter in Field 23. Details below. Field 20 lets you specify the bank account where you want the tax refunds, if any, to be credited. The next two fields allow you to choose between a direct wire transfer or cheque-based refund. If you choose the former, you have to specify your MICR code (printed in your cheque book). Set the bank account type to Savings. Field 23 deals with TDS details. You have to fill the name and TAN number of your employer(s), and the associated numbers - all of which can be found in the Form 26AS. If you have drawn money from more than one employer, you can add an additional row by pressing the [+] button at the left margin, whereas the [x] button kills unwanted rows. Field 24 is meant to fill in TDS details on your income from investments such as fixed deposits, while Field 25 deals with Advance Tax and Self Assessment Tax. The latter is best illustrated with this example: suppose you have a large sum in the bank account earning you a tidy interest that is already taxed at the default rate of 10%. However, your income actually puts you in the 20% slab. This is where you honestly inform the government of the same, by paying the tax through any nationalised bank and receiving a Challan Number. While it's easy to get away without doing so, you'll be in a big doo-doo in the rare case that the authorities decide to audit you. You know how the saying goes: Honesty is the best policy. Fill in your verification details and then click the Calculate Tax button at the bottom. Then click on the Check Form button to weed out any mistakes or omissions. Once you do that, the Export to XML button (in the bottom right corner) will become active. Click on it and save the XML report to your hard drive Step 9: Now, we need to submit the XML report. To do so, head back to the website (make sure you're still logged in) and select AY 11-12 from the Select Assessment Year menu under the Submit Return section in the left hand side bar In the subsequent form, select ITR-1 from the drop-down box and hit Next. You may choose to digitally sign the form, but that entails some more effort on your part to submit your digital signature for verification. I have chosen to skip that step. However, if you use a digital signature, you have to upload that along with the XML file, then head over to Step 11. Step 10: You will now be given a printout of your return, which you need to print, sign, and submit to the address mentioned in the form itself. Please note that the submissions have to be sent through regular post only, within 120 days. In due course of time, you will receive an acknowledgement email from the I-T department. Step 11: Congratulations, you have successfully filed your I-T returns online.

Amendment to the provisions of section 40A(3) of the Income-tax Act, Read more: BUDGET CHANGES -MISSED BY U -40A(3) CASH PAYMENT EXCEEDING 20000 RS.

Section 40A(3)(a) of the Income-tax Act, 1961 provides that any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction.
Section 40A(3)(b) also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs. 20,000/- otherwise than by an account payee cheque or by an account payee bank draft.
The provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962.
Section 40A(3) is an anti tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction thereby mitigating the risk of evasion.
Person are splitting a particular high value payment to a person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day.
Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book.
According to the judicial opinion, the words used are ‘in a sum’, i.e., single sum.Therefore, irrespective of any number of transactions, where the amount does not exceed the prescribed amount in each transaction,the rigours of section 40A(3) will not apply.

To overcome the splitting of payments to the same person made during a day as referred above and to increase the efficacy of the provision, the amendment seeks to substitute the present provision to provide that where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be.

To illustrate with an example, let us assume a taxpayer has incurred an expenditure of Rs 40,000/-. The taxpayer makes separate payments of Rs 15,000/-, Rs 16,000/- and Rs 9,000/- all by cash, to the person concerned in a single day. The aggregate amount of payment made to a person in a day, in this case, is Rs 40,000/-. Since, the aggregate payment by cash exceeds Rs 20,000/-,Rs. 40,000/- will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.


Read more: BUDGET CHANGES -MISSED BY U -40A(3) CASH PAYMENT EXCEEDING 20000 RS. | SIMPLE TAX INDIA-ITR FORM -TDS RATE 11-12

Internal Sources of Finance

Definition

These are sources of finance that come from the business' assets or activities.
Retained Profit

If the business had a successful trading year and made a profit after paying all its costs, it could use some of that profit to finance future activities .

This can be a very useful source of long term finance, provided the business is generating profit (see section on profit & loss accounts).

Sale of Assets

The business can finance new activities or pay-off debts by selling its assets such as property, fixtures & fittings, machinery, vehicles etc.

It is often used as a short term source of finance (e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets being sold are very valuable (e.g. land or buildings)

If a business wants to use its assets, it may consider sale and lease-back where it may sell its assets and then rent or hire it from the business that now owns the assets. It may mean paying more money in the long run but it can provide cash in the short term to avoid a crisis.

Reducing Stocks

Stock is a type of asset (see balance sheet work for more on assets) and can be sold to raise finance. Stock includes the business' holdings of raw materials (inputs), semi-finished products and also finished products that it has not yet sold.

Businesses will usually hold some stock. It can be useful if there is an unexpected increase in demand from customers. Stock levels tend to rise during economic slowdowns or recessions as goods are not sold and 'pile-up' instead.

It is not usually a source of large amounts of finance - if a business has very large stock piles, it might mean that nobody wants to buy the product and reducing stocks will therefore be hard. It is often considered to be a short term source.

Trade Credit

Unlike you and me, a business does not normally pay for things before it takes possession of them. Instead, it will usually place an order for supplies / inputs and will pay after receiving the items. It is good practice to pay quickly (often within one month) as this will help the business develop a good relationship with its suppliers.

This source of finance appears on the balance sheet as trade credit. This method of deferring (delaying) payment to a future date is a form of very short term borrowing and helps with the problems of the cash cycle identified in the work on liquidity.

Internal Sources of Finance

Definition

These are sources of finance that come from the business' assets or activities.
Retained Profit

If the business had a successful trading year and made a profit after paying all its costs, it could use some of that profit to finance future activities .

This can be a very useful source of long term finance, provided the business is generating profit (see section on profit & loss accounts).

Sale of Assets

The business can finance new activities or pay-off debts by selling its assets such as property, fixtures & fittings, machinery, vehicles etc.

It is often used as a short term source of finance (e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets being sold are very valuable (e.g. land or buildings)

If a business wants to use its assets, it may consider sale and lease-back where it may sell its assets and then rent or hire it from the business that now owns the assets. It may mean paying more money in the long run but it can provide cash in the short term to avoid a crisis.

Reducing Stocks

Stock is a type of asset (see balance sheet work for more on assets) and can be sold to raise finance. Stock includes the business' holdings of raw materials (inputs), semi-finished products and also finished products that it has not yet sold.

Businesses will usually hold some stock. It can be useful if there is an unexpected increase in demand from customers. Stock levels tend to rise during economic slowdowns or recessions as goods are not sold and 'pile-up' instead.

It is not usually a source of large amounts of finance - if a business has very large stock piles, it might mean that nobody wants to buy the product and reducing stocks will therefore be hard. It is often considered to be a short term source.

Trade Credit

Unlike you and me, a business does not normally pay for things before it takes possession of them. Instead, it will usually place an order for supplies / inputs and will pay after receiving the items. It is good practice to pay quickly (often within one month) as this will help the business develop a good relationship with its suppliers.

This source of finance appears on the balance sheet as trade credit. This method of deferring (delaying) payment to a future date is a form of very short term borrowing and helps with the problems of the cash cycle identified in the work on liquidity.

Public Issue (IPO) : Key Terms

Public Issues are in the air. You can call it the IPO season. It seems that the Primary Market is competing with Bollywood, releasing new issues every week. But before you share your hard earned money with the promoters of the company, it is very important to get a basic understanding about the various technical terms, abbreviations and jargons used in the primary market ( call it the IPO market). I have tried my best to explain in brief some of the key terms, without making any reference to the various sections and clauses governing the primary market. So here are a certain must know Public Issue (IPO) terms :

1. IPO : IPO stands for Initial Public Offer. An IPO is the first sale of shares of a company to the general public. The promoters of the company, after complying with the various guidelines of SEBI (Securities and Exchange Board of India) and The companies Act, ask the public at large to subscribe to their shares so that they can generate capital and utilize the same for expanding their business. A successful IPO can raise a substantially huge amount of capital.

2. FPO : FPO stands for Follow-on Public Offer. Once a company comes with an IPO , it gets listed on the stock exchanges. After a certain period of time, if the company again intends to raise capital from the general public, then it again comes with a public issue which is called an FPO (Follow-on Public Offer ). It is a supplementary issue made by a company once it is listed and established on the stock exchange. In short, the first public issue of a company is an IPO, and any further public issue of the same company is called an FPO. For example, Shipping Corporaton of India (SCI), a listed company, is again coming up with a public issue which will be its FPO ( i.e. a second public issue)

3. Listing : Once the issue gets subscribed and the shares are allotted, they are listed on a recognized stock exchange e.g. BSE, NSE etc. Listing means that company has adhered to the terms and conditions of the stock exchange and its shares are now a part of the list of shares which can be traded on the stock exchange. Post listing, any investor can sell the shares, allotted at the time of the issue, in the secondary market.

4. Bid-cum-Application Form : For applying in any public issue, each investor must fill a standard form providing all the relevant details like Name, PAN, Demat id, Bank account details, Bid price, Number of shares applied etc. Such a form is called a Bid-cum-Application form. It can be submitted through the offline or online mode. An investor must ensure that all the relevant details are filled correctly to avoid rejection of application and to ensure smooth allotment of securities.

5. Price Band : A price band is the range of price within which an investor can place his bid for the securities. The price mentioned by the investor in the bid-cum-application form can neither be less than the lower limit of the price band nor can it exceed the upper limit of the price band. For example, In the recent IPO of Coal India, the price band was Rs. 225-245 per share, which means that an investor can bid only within the range of Rs. 225 to Rs. 245

6. Floor Price : In a price band, the lowest price is called the floor price, below which a bid cannot be placed. In the above example Rs. 225 is the floor price of the Coal India IPO

7. Cap Price : Cap price is the upper ceiling limit in a price band beyond which a bid cannot be placed. Again, taking the same example of Coal India, Rs. 245 is the Cap price, beyond which you cannot place the bid.

8. Minimum order quantity : Minimum Order Quantity is the minimum number of shares which the investor has to apply for in a public issue. For example, in the case of Coal India’s IPO, the minimum order quantity was 25, i.e. an investor has to bid for atleast 25 shares.

9. Market Lot : If an investor wants to bid for shares which are more than the minimum order quantity, then he can do so by bidding in multiples of a certain number of shares which is known as the Market Lot. By continuing the above example, if an investor wants to apply for more than 25 shares of Coal India, then bids can be made in multiples of 25 shares, which is the market lot size in case of the Coal India issue. Thus, applications can be made for 25, 50, 75 …….number of shares until the maximum subscription limit is reached. In case of Coal India, the minimum order quantity and market lot size, both were 25 shares.

10. Maximum Subscription Limit for Retail Investors : Maximum Subscription Limit for Retail Investors is the maximum amount of investment which can be made though a single bid-cum-application form, or simply speaking, by a single individual, in a public issue. Previously, retail investors were allowed to make an application of a maximum of Rs. 1,00,000, but now SEBI has increased this limit to Rs. 2,00,000. Any application by an retail investor which exceeds Rs. 2,00,000 becomes an application by a High Net Worth Individual (HNI), thus disabling the investor to enjoy the benefits of discount which are offered in some big ticket IPOs to the retail investors.

11. Cut Off Price : In book building issues, the issuer company specifies a price band within which the bids are made. The actual issue price can be any price above the floor price and within the price band. This issue price is called the Cut Off Price. This price is determined after considering the demand for the stock by the investors. Investors, in order to get allotments in big ticket public issues, bid at the cut off price, conveying their intention that they are willing to pay any price for the stock within the price band, at the end of the book building process.

12. ASBA (Application Supported by Blocked Amounts) : ASBA is an alternative mode of making payments in public issues whereby the application money stays in the bank account of the investor until the allotment is made. Only that much amount of funds are debited to the investor’s bank account for which the allotment is made and the rest of the blocked amount is released. In case the application is made using the ASBA facility, the need for refunds is completely obviated. For example : if an investor makes an application for Rs. 2,00,000 , then in the earlier system, he was required to pay the entire sum of Rs. 2,00,000 upfront, either through a cheque or net-banking and then if shares worth Rs. 1,50,000 are only allotted, then Rs. 50,000 used to get refunded. Under the ASBA mechanism, the investor just need to keep Rs. 2,00,000 in his bank account and at the time of allotment only Rs. 1,50,000 would be debited to his account thus releasing the left over blocked amount of Rs. 50,000 and also doing away with the cumbersome task of issuing refunds.

13. Book Building Process : Book Building is one of the methods of carrying out a public issue, the other being the Fixed Price method. Under the Book Building method, the price at which securities will be offered is not known to the investor. The investor is allowed to bid in a given price range called the price band, and then, after the bids are closed & looking at the demand for the shares at various price levels within the price band, the final issue price is decided by the Merchant Bankers or BRLMs. This process leads to a better price and demand discovery. It is called the “Book Building Process” because during the entire issue period, the book for the offer remains open and keeps building up with the bids collected from investors.

14. BRLM (Book Running Lead Manager) : BRLM are those financial institutions whose names you find at the bottom of the bid-cum-application form like Karvy Securities, Kotak Mahindra, SBI Capital, Enam Securities etc. On a serious note, BRLMs or Merchant Bankers are those financial intermediaries which are involved in the IPO process right from the very first stage and play a vital role in preparation & submission of prospectus, price fixation, application processing, allotment and listing.

Happy investing

Source : www.n2moneymatters.com

DIRECT TAX CODE – Will it achieve anything for taxpayers?

Post Rao era, most reforms in tax laws have promised a lot but delivered very little. VAT was announced with a view to avoid cascading effect of taxes and reduce the burden of compliance on the business community. In reality, govt revenues have gone up, incidence of tax has gone up and burden of compliance has not changed one bit. Instead, the increased emphasis on C form for inter-state transactions and increased resistance of the Deptts in issuing these C forms have not only made life more difficult for the business community but also the whole exercise is looking meaningless (there is no incentive for an intrastate sale to be disguised as interstate sale that C form would reveal, because intra-state sale will enable input credit for the buyer while interstate will not).

Likewise, DTC was announced by Finance Minister, Mukherjee to be a revolutionary tax reform for simplification, rationalization and what not. The first draft was a classic repetition of history where too many adverse proposals will be introduced, public will protest and focus will be concentrated on a handful of such adverse proposals which will be diluted and the end result will be a number of adverse proposals passed through legislation quietly. What DTC has achieved is:-

1) Reduction in tax rate slabs, and intention not to revise tax rates every year,

2) Doing away with surcharge on corporate tax, and reduction of corporate tax rate to 30%

3) Increase in MAT rate from 18% to 20%

4) Abolition of the concept of long term capital gain

This is a very small part of tax changes brought about by govts every year, and could easily have been done in the existing income tax act itself. What has gone out of attention of the public is more revolutionary such as definition of capital asset itself. Now, sale of all agricultural lands anywhere in the country will come within the tax net and exemption will be available only if it is reinvested in another agricultural land. Lawfully, each and every farmer, and each and every tribal habitant no matter how remotely they are located, can be issued notices by income tax office to show why they should not be imposed tax on their capital gain arising out of sale of such land. Not only it will be impossible for the Deptt to administer such exercise properly, but also it will be highly breeding ground for corruption, and so on.

I have a strange feeling that in last over 10 years, no tax reforms are done with the intention that is expressed in preamble to such reform. There is always a hidden agenda for collecting more revenue, and to have greater control on the public. No such intention has been expressed in last 60 years to check corruption despite every raid yielding crores under the sack. They could easily have made it imperative for every politician and govt servant to file detailed income tax return with Cash flow statement and Balance Sheet, with reconciliation with the previous year’s, something that Chidambaram proposed to introduce for all tax papers a few years ago. If intention is genuine and noble, a compulsory tax of such return could be introduced with a provision to change auditors every three years, and all such tax returns be brought within the purview of RTI.

With corruption taking a good part of our revenue, and with govt (centre+states) revenue being anywhere around 12 to 15% of GDP of this country, the focus better be shifted from extracting more revenue to curbing misuse and making more effective use of existing revenue. The eye wash of such dummy tax reforms such as DTC should be resisted.

Tax 2010-11: Should you invest in infrastructure bonds?

One of the fresh tax reliefs that has come as an outcome of the budget 2010 is the deduction allowed for investing upto Rs 20000 in the infrastructure bonds. Many articles and the FM have said that this is a very positive thing. But how can the same thing be positive for every individual. If not negative it should at least be neutral for many.

Else life would be so boring. This article will try to look the pros and cons of investing in Infrastructure bonds for the sake of tax saving. The analysis will be from the perspective of the different “tax groups” post budget 2010.

Tax group 1: Taxable income Rs. 1.6-5 lakhs

Tax group 2: Taxable income Rs. 5-8 Lakhs

Tax group 3: Taxable income above Rs. 8 lakhs

To understand the pros and cons of any tax saving investment we need to look at 4 major parameters

Actual tax saving (let’s take the highest saving possible).

Returns from the investment (during the lock in period at the least).

Opportunity cost (what if the same money had been invested in some other investment?).

Effect of Inflation on the returns on investment (what would the worth of your investment be when it comes to redeem/incash it?).

For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios – 3 year lock-in and 5 year lock-in

Let’s assume the rate of return on infrastructure bonds = 5.5% per annum.

Let’s consider overall rate of inflation to be 8%. (Food inflation itself is currently at 18 %).

For people in the 1.6- 5 lakh taxable income group, as per the new norms the income will be taxed at a rate of 10%.

Parameter 1: Actual tax saving: 10% of Rs 20,000 = Rs 2000 (if you invest Rs 20000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10% benefit)

Parameter 2: What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20000 would fetch an income of Rs. 3484. When added to the tax saved we get an effective return of Rs 25485 (Rs 20000+3484+2000) on our investment

Parameter 3: If this same amount were to be invested in a market instrument that fetched a return of 15% (which is very reasonable considering that the benchmark Sensex and many mutual funds have given comparatively higher returns on a long period.) the investment would fetch an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15% per annum for 3 years).
Parameter 4: What would be the minimum amount required to counter inflation at 8%? The amount would be Rs 25, 194.

Thus we see that for a person in the slab of 1.6-5 lakh the benefit out of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.

Requirement for maintaining books of account

Maintenance of accounts: [section 44AA and rule 6F]

A.In case of specified professions [Gross receipts exceeds Rs.150000…] : the followings books of accounts shall be maintained by a person carrying on the specified profession:-

i.A cash book;

ii.A journal, (in case of mercantile system of accounting);

iii.A ledger;

iv.carbon copies/ counterfoils of bills and receipts, serially numbered, issued by him, Provided that nothing in this clause shall apply in relation to sums not exceeding Rs.25;]

v.original bills and receipts issued to him [where such bills and receipts are not issued and the expenditure incurred does not exceed Rs.50, payment vouchers prepared and signed by him or adequate particulars of expenditure in the cash book]:

B.Other: the following persons shall maintain such books of account and other documents as may enable the A.O. to compute total income in accordance with the provisions of this Act:-

i.A person carrying on Specified professions, whose Gross receipts do not exceed Rs.150000 in any one of three previous years preceding to the current previous year. (in case profession is newly setup gross income is not likely to exceed in current previous year)

ii.A person carrying on other professions or business, whose Gross receipts exceed Rs.10 lakh or income from PGBP exceeds Rs.120000 in any one of three previous years preceding to the current previous year. (in case profession/ business is newly setup: likely to exceed in current previous year)

iii.A person to whom section 44AD or section 44AE or section 44AF [or section 44BB or section 44BBB], as the case may be, and he claims his income to be lower than the deemed profits under respective sections.

Note:
Ø Specified professions: legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representative and film artist

Ø Such books and documents shall be kept and maintained for a period of 6 years from the end of relevant A.Y.

Ø In case assessment reopened u/s 147 within the abovesaid period, then all the books etc shall be continue to be kept and maintained till the completing of assessment so reopened.

Penalty: A.O. or CIT (appeals) may direct to pay Rs.25000 as penalty. [section 271A]

TDS at a higher rate on all transactions not having PAN -PROVISION TO COME INTO EFFECT FROM 1ST APRIL 2010

TDS at a higher rate on all transactions not having PAN

PROVISION TO COME INTO EFFECT FROM 1ST APRIL 2010

A new provision relating to tax deduction at source (TDS) under the Income Tax Act 1961 will become applicable with effect from 1st April 2010. Tax at higher of the prescribed rate or 20% will be deducted on all transactions liable to TDS, where the Permanent Account Number (PAN) of the deductee is not available. The law will also apply to all non-residents in respect of payments / remittances liable to TDS. As per the new provisions, certificate for deduction at lower rate or no deduction shall not be given by the assessing officer under section 197, or declaration by deductee under section 197A for non-deduction of TDS on payments shall not be valid, unless the application bears PAN of the applicant / deductee.



All deductors are liable to deduct tax at the higher rate in all transactions not having PAN of the deductees on or after 1st April 2010. In order that there is no dispute regarding quoting / non-quoting of PAN or accuracy thereof, the law requires all deductees and dedutors to quote PAN of deductees in all correspondences, bills, vouchers and other documents sent to each other. All deductors are, therefore, advised to intimate their deductees to obtain and furnish their PAN so as to avoid TDS at a higher rate. All deductees, including non-residents having transactions in India liable to TDS, are advised to obtain PAN by 31st March 2010 and communicate the same to their deductors before tax is actually deducted on transactions after that date.



The procedure for obtaining PAN is simple, inexpensive and quick. Application for PAN can be filed in Form 49A to National Securities Depository Ltd. (NSDL) or Unit Trust of India Investor Services Ltd. (UTIISL) or their intermediaries. Non-residents can apply through the local embassy / consulate of India. Applications can also be filed, paid for or tracked online through the Internet on the following web-sites:-



http://incometaxindia.gov.in/

https://incometaxindiaefiling.gov.in/portal/index.jsp

http://www.tin-nsdl.com/

http://www.utitsl.co.in/

Budget 2010- Income Tax

Budget and Income Tax



The Union Budget 2010 is definitely inflationary for Aam aadmi. Middle class shall become poor class! There is no respite from continuing inflation and the budget provisions are adding fuel to the fire of inflation. India too shall be in the list of most expensive countries in the world. It may break all the records and may be on the top of such list!

Income tax provisions:

There is no change in basic exemption limit in Income Tax for individuals including women and senior citizens; but tax slabs are changed to 10% for an income in between above Rs.160000 to Rs. 500000 ; 20@ above Rs.500000 to Rs.800000 and 30% for above 800000.There shall be some relief in total tax as earlier rates are same except 20% for above 300000 to Rs.500000 and 30% for above Rs.500000. Whatever there is relief in income tax that shall be offset by an increase in other essential items –mainly petrol / diesel prices.

There shall be deduction of an additional amount of Rs. 20,000 allowed, over and above the existing limit of Rs.1 lakh on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government. It would be better if maximum ceiling is raised to Rs. 120000 and let the assesses decide in which funds or where an amount be invested within specified investments.

The current surcharge of 10 per cent on domestic companies is reduced to 7.5 per cent. Also the rate of Minimum Alternate Tax (MAT) increased from the current rate of 15 per cent to 18 per cent of book profits. For simplification surcharge and MAT should be abolished in toto.To compensate the revenue on account on these accounts, raise 1 or 2 per cent rate of tax!

The Limit of turnover for the purpose of presumptive taxation of small businesses

enhanced to Rs. 60 lakh. It should be further raised to Rs, 1 Crore.

The income tax department to notify SARAL-II form for individual salaried

taxpayers for the coming assessment year. It should be assesses friendly –salaried individuals must be able to fill themselves without any help from anyone!

Also such Saral forms are the need of the hour for individuals having small business or profession –i.e., who are outside the ambit of tax audit!





Tax Deduction at Source (TDS):

TDS limit for interest on bank deposit remains at Rs.10, 000, it must be raised to Rs. 20,000 and for Professional incomes it is proposed to enhance from Rs.20000 to Rs.30, 000 –it should be further enhanced to Rs.50, 000.



Senior Citizens are ignored:

No TDS should be deducted from any income for Senior Citizens. At present they are required to fill a Form in Duplicate for their TDS non deduction. It increases paper work and barring a low percentage of Senior citizens, their incomes are below taxable limits. Let them pay Advance tax for their income if it is more than taxable limits.

Even the age limit is maintained at 65 years for Senior citizens. In the present budget only it should be lowered to 60 years as per National Policy of Senior Citizens.



Administrative Reforms:

Further ordinary income tax assesses wish some Administrative Reforms too like Issuance of Refunds and completion their assessment in time limit and receiving Assessment Orders in time without a visit to the Income Tax Office (ITO) .As old as cases for Assessment Years 2006-07 there are a good number of such cases pending with the Income Tax Department. On its own the Department should find such cases and issue pending refunds and complete all such assessments and send assessment orders to all such assesses. Also Reduce Scrutiny time for issuance and completion of assessments. I hope this is not a dream!