Hypothetical tax not an income accruing in India
In a recent judgment involving a foreign national, the Mumbai Income Tax Tribunal has held that hypothetical tax paid by an employer on behalf of the taxpayer is not an income accruing in India and can be claimed as a deduction by the employee from the gross salary.
The assessee, Roy Marshall, was an employee of British Airways. In the computation of total income in the tax return, the assessee deducted hypothetical tax withheld by his employer from gross salary. According to the contract agreement, the company had to bear additional tax burden arising out of his services in India and the assessee would bear only that part of the tax which he would have required to pay in his home country.
During the year, the assessee’s salary income was Rs 77 lakh and the company reimbursed Rs 35 lakh towards tax liability. Total income of the assessee thus became Rs 1.12 crore and with the maximum marginal rate of 44.8 per cent, the total tax liability came to Rs 50 lakh. The company had paid Rs 35 lakh, so the balance tax liability of Rs 15 lakh was borne by the assessee.
Though the taxpayer had paid his total tax dues in India, the income-tax assessing officer held that the hypothetical tax (Rs 35 lakh) should also form a part of the salary income. This became a bone of contention as the assessee may take a hit in his home country. According to the provisions of the Double Taxation Avoidance Agreement, the person may have taken a credit of Rs 15 lakh Indian taxes paid on an income of Rs 77 lakh in his home country tax return. However, if he would have to show that his salary income was Rs 1.12 crore in India, there could have been additional tax burden on him in his home country.
The tribunal relied on the judgment on a similar case of Jaydev H Raja, wherein it was held that the hypothetical tax does not form a part of the salary income taxable in India and the appellant was justified in reducing the same from his taxable salary.
It was held by the tribunal that income arising in India in the hands of the taxpayer is the actual salary plus the incremental tax liability arising on account of the Indian assignment. The amount of hypothetical tax withheld from the salary of the taxpayer is not an income accruing to him in India.
The ruling further held that as long as tax is paid on the income accruing in India, it is not relevant if the taxpayer takes credit of Indian taxes in his home country tax return.
Accordingly, the tribunal held that no deduction was actually claimed by the assessee on account of hypo tax as otherwise misconceived by the revenue authorities and deleted the addition made on this count.
Wednesday, November 26, 2008
cat among the pigeons
Setting the cat among the pigeons
Shardul S Shroff & Akila Agrawal / New Delhi November 24, 2008, 0:45 IST
The change in the creeping acquisition limits allows unscrupulous promoters to make a killing at the expense of small shareholders.
Sebi has, pursuant to its notification dated October 30, 2008, made amendments to the creeping acquisition limits available to promoters of listed companies. Until recently a person holding 15 per cent to 55 per cent stake in a listed company could acquire additional shares or voting rights up to 5 per cent per financial year without having to make a mandatory open offer. Any acquisition of further shares beyond 55 per cent required the acquirer to make an open offer. Pursuant to the recent amendment, Sebi has provided an opportunity to promoters holding more than 55 per cent but less than 75 per cent, to acquire a further 5 per cent stake in the company without making an open offer to the public shareholders. The 75 per cent will be read as 90 per cent for those companies which have a minimum public shareholding limit of 10 per cent pursuant to the first proviso of Regulation 11(2) which is applicable to the entire sub-regulation. This opportunity of acquiring 5 per cent is not available on an incremental basis every financial year but is a one-shot opportunity to further consolidate 5 per cent stake in the company. The amendment also specifies that the 5 per cent increase in shareholding by the promoter beyond 55 per cent shall be only through open market purchases, which surprisingly does not include a bulk deal. Moreover, acquisitions through a block deal or through preferential allotment have been expressly ruled out.
The statements made by the finance minister in the press indicate that the objective of this amendment is to boost the sagging stock market. However, the amendment itself does not prima facie appear to be a short-term measure as there is no specific time period up to which this window of creeping acquisition is available. If the stated purpose of an amendment is to cure a short-term ill, it is only reasonable to expect such an amendment to have an upfront time limitation which is preferable to any surprise move withdrawing the creeping facility.
Moreover, whilst one does appreciate Sebi’s move to boost the stock market during such turbulent times, it is open to debate whether the end justifies the method adopted by Sebi given the objectives of the Takeover Regulations. Any move to enable an existing controlling shareholder to further consolidate its shares should be balanced with the interests of ordinary investors. In the past, creeping acquisitions were originally introduced in the Takeover Regulations in 1997 on the recommendations of the Bhagwati Committee Report to enable persons in control of the company to consolidate their holdings or to build defences against takeover threats, provided it does not unduly affect the interests of shareholders. Prior to the recent amendment, there was a reasonable balance between the interests of the controlling shareholders in a competitive market and those of the small investor as one would assume that on reaching 51 per cent and above, a person can reasonably be assured of control over the company without having to worry about undue takeover threats. At the same time, if the promoter was interested in amassing further voting rights upto the maximum limit permitted under the listing agreement or even 100 per cent pursuant to a delisting offer, he had to provide relevant exit opportunities i.e. a fixed price offer under the Takeover Regulations with complete disclosures on all future plans relating to the target company followed by a delisting offer where the price is determined by the minority shareholders.
By permitting further acquisition of 5 per cent beyond 55 per cent, albeit through a narrow window of open market purchases sans bulk deals, Sebi has now rocked the delicate balance of the Takeover Regulations. Today, a controlling shareholder who holds beyond 55 per cent and is intending to delist the securities of the target company can buy 5 per cent in a depressed market and thereafter make a delisting offer. A delisting offer is deemed successful only if the public shareholding falls below the required minimum. Consequent to the 5 per cent acquisition, it is easier for the controlling shareholder to ensure success of the delisting offer. To further illustrate, an 85 per cent promoter holder can acquire 5 per cent through open market purchases and delist the securities as he needs just one share to be tendered for the offer to be successful. The promoter could always relist the securities after a period of two years and make huge gains as hopefully the bulls will be back in business in a couple of years.
Another change made by Sebi pursuant to the October 30, 2008 amendment is to permit an increase in shareholding or voting rights of the acquirer pursuant to a buyback without having to make an open offer or obtain specific exemption of Sebi, provided the promoter in question holds shares between 55 per cent to 75 per cent/90 per cent as the case may be. This change is welcome given the fact that one need not approach Sebi for an exemption, as has been the practice, for increase in shareholding pursuant to a buyback offer. However, it is necessary to point out that whilst the press release expressly states that the buyback exemption is permitted for 5 per cent per annum, the notification simply states 5 per cent with no reference to ‘per financial year’ which raises questions on the exact intent of Sebi. An even more welcome change would be to expressly exempt any increase in voting rights due to a buyback offer from the purview of Regulations 10,11 and 12 by way of an amendment to Regulation 3 of the Takeover Regulations.
The recent amendments to the Takeover Regulations seem to be a reactive approach to a volatile stock market rather than a strategic change in the policy. If the intention was only to bolster the stock market that could have been achieved by simply increasing the creeping acquisition limits permitted under Section 11(1) to 7.5 per cent or 10 per cent (up to 55 per cent) without having to tamper with fundamental provisions of the Takeover Regulations having a bearing on investor protection issues.
Shardul S Shroff & Akila Agrawal / New Delhi November 24, 2008, 0:45 IST
The change in the creeping acquisition limits allows unscrupulous promoters to make a killing at the expense of small shareholders.
Sebi has, pursuant to its notification dated October 30, 2008, made amendments to the creeping acquisition limits available to promoters of listed companies. Until recently a person holding 15 per cent to 55 per cent stake in a listed company could acquire additional shares or voting rights up to 5 per cent per financial year without having to make a mandatory open offer. Any acquisition of further shares beyond 55 per cent required the acquirer to make an open offer. Pursuant to the recent amendment, Sebi has provided an opportunity to promoters holding more than 55 per cent but less than 75 per cent, to acquire a further 5 per cent stake in the company without making an open offer to the public shareholders. The 75 per cent will be read as 90 per cent for those companies which have a minimum public shareholding limit of 10 per cent pursuant to the first proviso of Regulation 11(2) which is applicable to the entire sub-regulation. This opportunity of acquiring 5 per cent is not available on an incremental basis every financial year but is a one-shot opportunity to further consolidate 5 per cent stake in the company. The amendment also specifies that the 5 per cent increase in shareholding by the promoter beyond 55 per cent shall be only through open market purchases, which surprisingly does not include a bulk deal. Moreover, acquisitions through a block deal or through preferential allotment have been expressly ruled out.
The statements made by the finance minister in the press indicate that the objective of this amendment is to boost the sagging stock market. However, the amendment itself does not prima facie appear to be a short-term measure as there is no specific time period up to which this window of creeping acquisition is available. If the stated purpose of an amendment is to cure a short-term ill, it is only reasonable to expect such an amendment to have an upfront time limitation which is preferable to any surprise move withdrawing the creeping facility.
Moreover, whilst one does appreciate Sebi’s move to boost the stock market during such turbulent times, it is open to debate whether the end justifies the method adopted by Sebi given the objectives of the Takeover Regulations. Any move to enable an existing controlling shareholder to further consolidate its shares should be balanced with the interests of ordinary investors. In the past, creeping acquisitions were originally introduced in the Takeover Regulations in 1997 on the recommendations of the Bhagwati Committee Report to enable persons in control of the company to consolidate their holdings or to build defences against takeover threats, provided it does not unduly affect the interests of shareholders. Prior to the recent amendment, there was a reasonable balance between the interests of the controlling shareholders in a competitive market and those of the small investor as one would assume that on reaching 51 per cent and above, a person can reasonably be assured of control over the company without having to worry about undue takeover threats. At the same time, if the promoter was interested in amassing further voting rights upto the maximum limit permitted under the listing agreement or even 100 per cent pursuant to a delisting offer, he had to provide relevant exit opportunities i.e. a fixed price offer under the Takeover Regulations with complete disclosures on all future plans relating to the target company followed by a delisting offer where the price is determined by the minority shareholders.
By permitting further acquisition of 5 per cent beyond 55 per cent, albeit through a narrow window of open market purchases sans bulk deals, Sebi has now rocked the delicate balance of the Takeover Regulations. Today, a controlling shareholder who holds beyond 55 per cent and is intending to delist the securities of the target company can buy 5 per cent in a depressed market and thereafter make a delisting offer. A delisting offer is deemed successful only if the public shareholding falls below the required minimum. Consequent to the 5 per cent acquisition, it is easier for the controlling shareholder to ensure success of the delisting offer. To further illustrate, an 85 per cent promoter holder can acquire 5 per cent through open market purchases and delist the securities as he needs just one share to be tendered for the offer to be successful. The promoter could always relist the securities after a period of two years and make huge gains as hopefully the bulls will be back in business in a couple of years.
Another change made by Sebi pursuant to the October 30, 2008 amendment is to permit an increase in shareholding or voting rights of the acquirer pursuant to a buyback without having to make an open offer or obtain specific exemption of Sebi, provided the promoter in question holds shares between 55 per cent to 75 per cent/90 per cent as the case may be. This change is welcome given the fact that one need not approach Sebi for an exemption, as has been the practice, for increase in shareholding pursuant to a buyback offer. However, it is necessary to point out that whilst the press release expressly states that the buyback exemption is permitted for 5 per cent per annum, the notification simply states 5 per cent with no reference to ‘per financial year’ which raises questions on the exact intent of Sebi. An even more welcome change would be to expressly exempt any increase in voting rights due to a buyback offer from the purview of Regulations 10,11 and 12 by way of an amendment to Regulation 3 of the Takeover Regulations.
The recent amendments to the Takeover Regulations seem to be a reactive approach to a volatile stock market rather than a strategic change in the policy. If the intention was only to bolster the stock market that could have been achieved by simply increasing the creeping acquisition limits permitted under Section 11(1) to 7.5 per cent or 10 per cent (up to 55 per cent) without having to tamper with fundamental provisions of the Takeover Regulations having a bearing on investor protection issues.
Commercial paper’s back
Commercial paper’s back after Oct break
24 Nov 2008, 0000 hrs IST, Gayatri Nayak, ET Bureau
MUMBAI: With more liquidity released into the system on account of lower cash reserves (CRR), banks’ treasury desks have become more active and
investments have come into focus again. Besides buying government bonds, banks, for the first time, after the liquidity crunch in October, have invested over Rs 7,000 crore in commercial papers (CPs), mutual funds (MFs), bonds and stocks. Ever since the central bank has adopted an accommodative stance by reducing CRR — the portion of cash banks need to compulsorily park with the Reserve Bank of India — in early-October, non-statutory liquidity ratio investments, which are generally guided by commercial consideration, have risen by over Rs 7,000 crore since early-October, from Rs 91,120 crore as on October 10 to Rs 98,170 crore a fortnight back. Since the beginning of 2008-09 until mid-July, banks were actually offloading CPs, corporate bonds, MF schemes and stocks to generate liquidity. Though they have gradually hiked their exposure in these assets since mid-July, investments rose sharply only in the latest two fortnights, particularly in CPs and MF schemes. While they picked up CPs worth Rs 6,034 crore, their MF investments rose by Rs 7,535 crore in the latest fortnights. Data suggests that banks are totally shunning corporate bonds and are going slow on stocks. Though there is no clear cut explanation for this trend, a section of the market says that banks have promised to pick up CPs from cash-starved MFs in order to provide them an additional window of liquidity support. MFs are among the biggest subscribers to CPs that are issued by corporates and NBFCs for a tenure ranging from seven days to up to a year at the prevailing market rates. These are tradable and a bulk of the investments, which are believed to be secondary market purchases by banks. While primary issuances are said to have slowed in the past few weeks. On the other hand, banks, flush with funds after the central bank cut the CRR by about 300 basis points until November 7, 2008 as they now have to park less with the central bank, are now said to be investing their surplus funds in liquid MF schemes, waiting for attractive lending opportunities. Bank investments in government bonds (25% of the deposits mobilised) need to be mandatorily parked with the central bank as SLR, which had dipped to around Rs 10,000 crore a fortnight between August 1 and October 10, have gone up to nearly Rs 45,000 crore a fortnight between October 10 and November 7, 2008.
24 Nov 2008, 0000 hrs IST, Gayatri Nayak, ET Bureau
MUMBAI: With more liquidity released into the system on account of lower cash reserves (CRR), banks’ treasury desks have become more active and
investments have come into focus again. Besides buying government bonds, banks, for the first time, after the liquidity crunch in October, have invested over Rs 7,000 crore in commercial papers (CPs), mutual funds (MFs), bonds and stocks. Ever since the central bank has adopted an accommodative stance by reducing CRR — the portion of cash banks need to compulsorily park with the Reserve Bank of India — in early-October, non-statutory liquidity ratio investments, which are generally guided by commercial consideration, have risen by over Rs 7,000 crore since early-October, from Rs 91,120 crore as on October 10 to Rs 98,170 crore a fortnight back. Since the beginning of 2008-09 until mid-July, banks were actually offloading CPs, corporate bonds, MF schemes and stocks to generate liquidity. Though they have gradually hiked their exposure in these assets since mid-July, investments rose sharply only in the latest two fortnights, particularly in CPs and MF schemes. While they picked up CPs worth Rs 6,034 crore, their MF investments rose by Rs 7,535 crore in the latest fortnights. Data suggests that banks are totally shunning corporate bonds and are going slow on stocks. Though there is no clear cut explanation for this trend, a section of the market says that banks have promised to pick up CPs from cash-starved MFs in order to provide them an additional window of liquidity support. MFs are among the biggest subscribers to CPs that are issued by corporates and NBFCs for a tenure ranging from seven days to up to a year at the prevailing market rates. These are tradable and a bulk of the investments, which are believed to be secondary market purchases by banks. While primary issuances are said to have slowed in the past few weeks. On the other hand, banks, flush with funds after the central bank cut the CRR by about 300 basis points until November 7, 2008 as they now have to park less with the central bank, are now said to be investing their surplus funds in liquid MF schemes, waiting for attractive lending opportunities. Bank investments in government bonds (25% of the deposits mobilised) need to be mandatorily parked with the central bank as SLR, which had dipped to around Rs 10,000 crore a fortnight between August 1 and October 10, have gone up to nearly Rs 45,000 crore a fortnight between October 10 and November 7, 2008.
risk premium
Term of the Day
Investing: (1) Difference between a risk-free return (such as from government bonds) and the total return from a risky investment (such as equity stock). (2) Additional return or rate of interest (above the market interest rate) an investor requires for investing in a proposition or venture. Also called price of risk.
Investing: (1) Difference between a risk-free return (such as from government bonds) and the total return from a risky investment (such as equity stock). (2) Additional return or rate of interest (above the market interest rate) an investor requires for investing in a proposition or venture. Also called price of risk.
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