Recession : Loss of Commonsense
You can fool some persons for some time or all the persons for some time but you can not fool all the persons at all the times. Lot has been said and lot has been heard about recession. Recession is the result of loss of commonsense not only of Americans but all the people of the world for some time. Fear and Greed had occupied our minds for some time. We forgot to apply our minds .Money had made the Americans to consume blindly and fear had made the Chines to invest in the treasury of Americans.
Major mistake made by the Financial Sector is that they had given loans against the security of houses.. Houses cannot generate money (unless you give them on rent) rather they consume money if borrower is living in pledged house. Financial sectors had given the money to the consumers to consume on the basis of security of houses in which they were living. Thus value of the security became important rather then purpose of loan which ultimately leads to recession in the economy.
Financial Sector should gives the money to the householders even against the security only when there is a regular source of the income of householder. But it is not the regular income that is important but the source of regular income that is important while lending the money to the household. Financial Sector lost the commonsense that source of the regular income should be permanent. Job in a private sector (even from last 10 years) cannot be said to be the permanent source of income as we are seeing now a days in the form of huge job cuts all over the world.
Financial Sector is there to lend the money to the productive sectors of the economy so that these sectors can add to the GDP of the country by investing that money into income and employments generating assets.
Financial sector should always think about the purpose for which the money is being given. Money is always given by financial sector for investment and not for consumption purpose. Value of the security for loan is not as important as purpose for which loan is being given. When loan is given for the long term it will be the purpose of loan that will return the money of financial sectors. Financial sector is not the taker of assets (Security) of the householders rather it is to get the money back with appreciation.
Financial Sector forgot the basic concept that purpose of giving the loan against security is just to set fear in the minds of the borrowers that in case they did not applied the money for the intended purpose then they will loose something valuable for them. It is this fear that forces a borrower to work hard to apply the loan for intended purpose i.e. to create an asset that will produce money for him and for lenders.
Financial Sector lost commonsense that money is only a piece of paper in the hands of lenders but when it comes in the hands of borrowers then it changes its meaning and form instantly. Same piece of paper can be used to create a bomb or building depending upon the purpose of borrower.
Financial Sector applied technology i.e computers and complex models to calculate earnings and payback periods. Discounted Cash Flow techniques were applied without thinking that commonsense is also required to make decision which cannot be depicted on any paper. Technology cannot do anything except analysis of the data but choice has to be made by humans by applying non-monetary factors, facts, figures, commonsense. There are the models to control the prices of commodities but hardly there are measures to control the price of assets. Financial sector lost the commonsense that it is the Decision Maker that is important rather then technology used by decision maker. Technology can assist but cannot replace humans at any cost.
There is also a failure on the part of international financial institutions to track flow of money between different nations, its utilization and purpose of utilization.
With the lesson learnt from recession, we can say that money is not everything but money can do anything. We have to rebuild our commonsense to avoid recession in future. We have to again learn basics what is money? What is Loan? What is consumption? What is investment? before entering into financial world. Money should be given only for the investment purpose and financial sector has to be very strict about its usage.
I CERTIFY THAT THIS ARTICLE IS MY OWN CREATION.
CA SATBIR SINGH
casatbirgill@gmail.com
Saturday, August 8, 2009
Recession
Friday, August 7, 2009
100 Days Programme
• Early passage of the Women’s Reservation Bill providing for one-third reservation to women in state legislatures and in Parliament.
• Constitutional amendment to provide 50 percent reservation for women in panchayats and urban local bodies.
• Concerted efforts to increase representation of women in central government jobs.
• A National Mission on Empowerment of Women for implementation of women-centric programme in a mission mode to achieve better coordination.
• A voluntary national youth corps which could take up creative social action for river cleaning and beautification programme beginning with the Ganga.
• Restructuring the Backward Regional Grant Fund which overlaps with other development investment, to focus on decentralised planning and capacity building of elected panchayat representatives. The next three years would be devoted to training panchayat raj functionaries in administrating flagship programmes.
• A public data policy to place all information covering nonstrategic areas in the public domain.
• Increasing transparency and public accountability of National Rural Employment Guarantee Act (NREGA) by enforcing social audit and ensuring grievances redressal by setting up district level ombudsmen.
• Strengthening Right to Information Act by suitably amending the law to provide for disclosure by government in all non-strategic areas.
• Strengthening public accountability of flagship programmes by the creation of an Independent
Evaluation Officer at an arm’s distance from the government catalysed by the Planning ommission.
• Establishing mechanisms for performance monitoring and performance evaluation in government on a regular basis.
• Five annual reports to be presented by government as Reports to the People on Education, Health, Employment, Environment and Infrastructure to generate a national debate.
• Facilitating a voluntary technical corps of professionals in all urban areas through Jawaharlal Nehru National Urban Renewal Mission to support city development activities.
• Enabling non government organisations in the area of development action seeking government support through a web-based transaction on a government portal in which the status of the application will be transparently monitorable.
• Provisions of scholarships and social security schemes through accounts in post offices and banks and phased transaction to smart cards.
• Revamping of banks and post offices to become outreach units for financial inclusion complemented by business correspondents aided by technology.
• Electronic governance through Bharat Nirman common service centres in all panchayats in the next three years.
• A model Public Services Law, that covers functionaries providing important social services like education, health, rural development etc and commit them to their duties, will be drawn up in consultations with states.
The President outlined a paradigm shift in governance, to be effected through:-
• One, ongoing, independent evaluation and public reporting of progress in implementing schemes;
• Two, big strides in e-governance;
• Three, decentralisation and empowerment of panchayats and non-government organisations to implement and monitor government schemes;
• Four, breaking barriers between departments and schemes to achieve synergy and integration;
• Five, innovative regulation of health, education and provision of public services;
• Six, liberal use of technology in welfare transfers and achieving public awareness; and
• Seven, institutionalisation of the government’s basic commitments by requiring all cabinet notes to specify how their proposals would enhance the goals of equity or inclusion, innovation and publicaccountability
Wednesday, July 29, 2009
Rules of Happy Life
1. Never put yourself last.
2. When you extend a helping hand to one person,
be careful not to kick someone else in the teeth.
3. Always own a pair of old, faded jeans.
4. Count your blessings every day.
5. Acknowledge your successes along with your downfalls.
6. Burn the candle that has been in storage for the last two years.
7. Strive for progress, not perfection.
8. Remember, the voice telling you that you cannot do something is always lying.
9. At least once a day sit and do nothing.
10. Don't close your heart so tightly against life's pain that you shut out life's blessings.
11. Celebrate all your birthdays no matter how old you get.
12. Examine your life for limitations and ask yourself why you put them there.
13. Plant a tree, pull weeds, or get your hands dirty.
14. Diminish your wants instead of increasing your needs.
15. Cry when you feel like it.16. Rejoice in other people's triumphs.
17. Don't wait for someone else to laugh or express joy.
18. Forgive yourself for any mistake you make, no matter how big or small.
19. Keep good company.
20. Never take a pill for a pain you need to feel.
21. Use your enthusiasm to put yourself in forward gear
and give yourself a spark to move ahead.
22. Look in the eyes of the ones you love when you are talking to them.
23. Remember that one is a whole number.
24. Walk in a summer rain shower without an umbrella.
25. Do a kind deed for someone else.
26. Keep your eyes and ears open to get the messages you need
from people and events in your daily life.
27. Be patient.
28. Eat something green.
29. Change what you can and leave the rest alone.
30. Walk hand and hand with truth.
31. Make laughter and joy a greater part of your life than anger and grief.
32. Embrace solitude instead of running from it.
33. Be zealous, not jealous.
34. Forgive anyone you've been holding a grudge against.
35. Slow down and enjoy the present.
36. Walk in others' shoes before judging them.
37. Send yourself a kind message.
38. Remind yourself that the company you keep is a reflection of
what you think of yourself.
39. Go on a picnic.
40. Accept your fears, no matter how crazy they seem.
41. Don't let other people's opinions shape who you are.
42. Say a prayer.
43. Never attribute your accomplishments to luck or chance.
44. Know when to say no.
45. Look at the positive side of negative situation.
46. Remember that you are a spiritual being in a physical body.
47. Avoid seeking out other people for constant approval, because
it make them the master and you the slave.
48. Go fly a kite.49. Avoid fads and bandwagons.
50. Accept the things you cannot change.
51. Look inside instead of outside yourself for answers to life's problems.
52. Remember that all feelings are okay.
53. Shield yourself from bad influences.
54. Stand up for what you believe in.
55. Respect the wishes of others when they say no.
56. Seize every moment and live it fully.
57. Give away or sell anything you haven't used in the past five years.
58. Never downgrade yourself.
59. Take responsibility for what you think, feel, and do.
60. Pamper yourself.
61. Never say or do anything abusive to a child.
62. Let yourself be God powered instead of flying solo.
63. Volunteer to help someone in need.
64. Refrain from overindulging in food, drink, and work.
65. Finish unfinished business.
66. Be spontaneous.
67. Find a constructive outlet for your anger.
68. Think about abundance instead of lack, because whatever
you think about expands.
69. Think of yourself as a survivor, not a victim.
70. Cuddle an animal.
71. Be open to life.
72. See success as something you already have, not something
you must attain.
73. Experience the splendor and awe of a sunset.
74. When you score a base hit, don't wish it were a home run.
75. Learn to be in the present moment.
76. Instead of believing in miracles, depend on them.
77. Take a child to the circus.
78. Change your attitude and your whole life will change.
79. Never turn your power over to another person.
80. When your heart is at odds with your head, follow your heart.
81. Always remember that the past is gone forever and the future never comes.
82. Live your life according to what is right for you.83. Acknowledge your imperfections.
84. Plant a tree and watch it grow.
85. See "friend" instead of "enemy" on the face of strangers.
86. Watch an army of ants build their houses and cities and carry food ten times their weight.
87. Believe in something bigger than yourself.
88. Let the playful child within you come out.
89. Make haste slowly.
90. Work through your problems step by step and one day at a time.
91. Accept compliments from others so you can see the truth about yourself.
92. Sit on the lawn without worrying about grass stains.
93. Don't condemn yourself for your imperfections.
94. Do a humility check periodically by loving the truth about yourself.
95. Tell someone you appreciate them.
96. Never live your life according to what is right for someone else.
97. Talk less and listen more.
98. Admit your wrongdoing and forgive yourself for it.
99. Thrive on inner peace instead of on crises.
100. Affirm all the good things about yourself.
Thursday, July 2, 2009
INDIAN BUDGET TERMINOLOGY
INDIAN BUDGET TERMINOLOGY
READING THE BALANCE SHEET
The lines and figures that reveal the receipts and expenditure of the year
ANNUAL FINANCIAL STATEMENT
This is the last word on the state’s receipts and expenditure for the financial year, presented to Parliament by the government. Divided into three parts — Consolidated Fund, Contingency Fund and Public Account — it has a statement of receipts and expenditure of each. Expenditure from the Consolidated Fund and Contingency Fund requires the mandatory nod of Parliament. CONSOLIDATED FUND
The government’s life line: it is a consortium of all revenues, money borrowed and receipts from loans it has given. All state expenditure is made from this fund.
CONTINGENCY FUND
As the name suggests, any urgent or unforeseen expenditure is met from this Rs 500-crore fund, which is at the disposal of the President. The amount withdrawn is returned from the Consolidated Fund.
PUBLIC ACCOUNT
When it comes to this account, the government’s nothing more than a banker, as this fund is a collection of money belonging to others, like public provident fund.
REVENUE VS CAPITAL
The budget has to distinguish revenue receipts/expenditur e on revenue account from other expenditure. So all receipts in, say, the consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure.
REVENUE RECEIPT/EXPENDITURE
All receipts like taxes and expenditure like salaries, subsidies and interest payments that in general do not entail sale or creation of assets fall under the revenue account.
CAPITAL RECEIPT/EXPENDITURE
Capital account shows all receipts from liquidating (eg. selling shares in a public sector company) assets and spending to create assets (lending to receive interest).
REVENUE/CAPITAL BUDGET
The government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a Capital Budget (capital receipts and capital expenditure) .
CREATING A HOLE IN THE POCKET
Taxes come in various shapes and sizes, but primarily fit into two little slots:
DIRECT TAX
This is the tax that you, I (and India Inc) directly pay the government for our income and wealth. So income tax, FBT, STT and BCTT are all direct taxes.
INDIRECT TAX
This one’s a double whammy: It’s essentially a tax on our expenditure, and includes customs, excise and service tax. It’s not just you who thinks this isn’t fair - governments too consider this tax ‘regressive’, as it doesn’t check whether you’re rich or poor. You spend, you pay. That’s precisely why most governments aim to raise more through direct taxes.
MAKING YOU PAY
The various taxes that the government levies
CORPORATION (CORPORATE) TAX
It’s the tax that India Inc pays on its profits.
TAXES ON INCOME OTHER THAN CORPORATION TAX
It’s income-tax paid by ‘non-corporate assessees’ — people like us.
FRINGE BENEFIT TAX (FBT)
No free lunches here. If you want the jam with the bread and butter, you’d better pay for it. In the 2005-06 Budget, the government decided to tax all perks — what is calls the ‘fringe benefit’ — given to employees. No longer could companies get away with saying ‘ordinary business expenses’ and escape tax when they actually gave out club memberships to their employees. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites.
SECURITIES TRANSACTION TAX (STT)
If you’re dealing in shares or mutual funds , you have to loosen those purse strings a wee bit too. STT is a small tax you need to pay on the total amount you pay or receive in a share deal. In the 2004-05 Budget, the government did away with the tax on profits earned on the sale of shares held for over a year (known as long-term capital gains tax) and replaced it with STT. CUSTOMS Anything you bring home from across the seas comes with a price. By levying a tax on imports, the government’s firing on two fronts: it’s filling its coffers and protecting Indian industry. UNION EXCISE DUTY
Made in India? Either way, there’s no escape. In other words, this is a duty imposed on goods manufactured in the country. SERVICE TAX If you text your friend a hundred times a day, or can’t do with-out the coiffeured look at the neighbourhood salon, your monthly bill will show up a little charge for the services you use. It is a tax on services rendered.
MINIMUM ALTERNATE TAX (MAT)
It’s known that a company pays tax on profits as per the Income-Tax Act. That just may not always be enough. If its tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 10% of the book profits. SURCHARGE This is an extra bit of 10% on their tax liability individuals pay for earning more than Rs 10 lakh. Companies with a revenue of up to Rs 1 crore are spared this rod. VAT AND GST After a lot of discussion and brainstorming, the government levies what is called a ‘value-added tax’: a more transparent form of taxation. The tax is based on the difference between the value of the output and the value of the inputs used to produce it.. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition. A GST, or goods and services tax, on the other hand, contains the entire element of tax borne by a good — including a Central and a state-level tax. MORE REVENUE Of course, tax isn’t the only way governments make money. There’s also ‘nontax revenue’ NON-TAX REVENUE Any loan given to state governments, public institutions, PSUs come with a price (interests) and forms the most important receipts under this head apart from dividends and profits received from PSUs. The government also earns from the various services including public services it provides. Of this only the Railways is a separate department, though all its receipts and expenditure are routed through the consolidated fund.
CAPITAL RECEIPTS RECEIPTS
in the capital account of the consolidated fund are grouped under three broad heads — public debt, recoveries of loans and advances, and miscellaneous receipts PUBLIC DEBT Don’t mistake the phrase. Public debt is not something incurred by the public. In Budget parlance the difference between borrowings (public debt receipts) and repayments (public debt disbursals) during the year is the net accretion to the public debt.. Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources). The internal debt comprises Treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings.
TREASURY BILL (T-BILLS)
These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure. Bonds of longer maturity are called dated securities.
MARKET STABILISATION SCHEME (MSS)
The scheme was launched in April 2004 to strengthen Reserve Bank of India’s (RBI) ability to conduct exchange rate and monetary manage-ment. . These securities are issued not to meet the government’s expenditure but to provide the RBI with a stock of securities with which to intervene in the market to manage liquidity.
WAYS AND MEANS ADVANCE (WMA)
RBI is the big daddy of banks being the banker for both the Central and State governments. Therefore, the RBI provides a breather to manage mismatches in their receipts and payments in the form of ways and means advances.
SECURITIES AGAINST SMALL SAVINGS
The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund.
MISCELLANEOUS CAPITAL RECEIPTS:
These are primarily receipts from disinvestment in public sector undertakings. The capital account receipts of the consolidated fund — public debt, recoveries of loans and advances, and miscellaneous receipts — and revenue receipts make up the total receipts of the consolidated fund.
EXPENDITURE
Before we begin to examine the nitty gritty of where and how the government spends its money, we need to understand what’s called the Central Plan. This is what every child in the country learns about in school; only, we all know it better as the Five-Year Plan. A Central Plan is the government’s annual expenditure sheet, with a five-year roadmap. Here’s where the government gets the money for the grand five-year exercise: The funding of the Central Plan is split almost evenly between government support (from the Budget) and internal and extra-budgetary resources of stateowned enterprises. The government’s support to the Central Plan is called the Budget support.
PLAN EXPENDITURE
This is essentially the Budget support to the Central Plan. It also comprises the amount the Centre sets aside for plans of states and Union Territories. Like all Budget heads, this is also split into revenue and capital components.
NON-PLAN EXPENDITURE
All those bills the government has to pay, under the ‘revenue expenditure’ head are bunched up here: interest payments, subsidies, salaries, defence and pension. The ‘capital’ component, in comparison, is small; the largest chunk of this goes to defence.
DEFICIT
When government’s expenditure exceeds its receipts it has to borrow to meet the shortfall. This deficit has material implication for the economy.
FISCAL DEFICIT
This is where the government feels the pinch. It often lives beyond its means, a lot like the situation mere mortals find themselves in. And then, the vicious circle is complete: it goes right back to the people for more money. Here’s how that works out: The government’s ‘non-borrowed receipts’ — revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds — fall short of its expenditure. The excess of total expenditure over total nonborrowed receipts is called ‘fiscal deficit’. The government then has to borrow money from the people to meet the shortfall.
REVENUE DEFICIT
It’s not just because it’s a deficit, but that it’s a revenue deficit makes it an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero, else the government will be in debt.
PRIMARY DEFICIT
This is one ‘primary’ indicator everyone likes to watch: when it shrinks, it indicates we’re not doing too badly on fiscal health. The primary deficit is the fiscal deficit less interest payments the government makes on its earlier borrowings. It’s the basic deficit figure, if you will.
DEFICIT AND THE GDP
It’s important to see where all this fits, in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then it’s not such a bad thing after all. Prudent fiscal management requires that government does not borrow to consume, in the normal course. FRBM ACT Enacted in 2003, the Fiscal Responsibility and Budget Management Act required the elimination of revenue deficit by 2008-09. This means that from 2008-09, the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure — that is, repayment of loans, lending and fresh investment. The Act also mandates a 3% limit on the fiscal deficit after 2008-09 —one that allows the government to build capacities in the economy without compromising on fiscal stability. The financial crisis and the subsequent slowdown has forced the government to abandon the path of fiscal consolidation. ...AND THE REST Some of the other important terms that figure in the Budget
BHARAT NIRMAN:
Bharat Nirman is UPA’s unfulfilled dream of Build India, Build: irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity. Though it couldn’t meet the target of 2009, the government is still at it.
FINANCE BILL:
This, all important sheaf of papers, is all about taxes and is presented in time before the levy breaks.
FINANCIAL INCLUSION:
This is to ensure that everyone has a bank account and financial institutions are accountable. It sees to it the common denizen is not denied of timely and cheap credit and, more importantly, not intimidated by the facade of a modern bank. However, it has not fully got past the counter. PASS-THROUGH STATUS:
Nothing can be more dreadful than having to pay twice for the same thing. This position is accorded to those investments which stands the danger of being taxed twice like mutual funds. SUBVENTION:
This is how a government bears the loss that financial institutions incur when asked to give farmers loans below the market rates.
RESOURCES TRANSFERRED TO THE STATES
As we saw earlier, the Centre gives states a helping hand in two ways — a part of its gross tax collections goes to state governments. The Centre also transfers funds to states to support their plans. These are largely in the nature of grants, and include those given to states for managing Centrally-sponsored schemes.
Friday, December 19, 2008
Work contract tax
Work contract tax
Goods involved in works contract’ have been included in definition of ‘sale’ w.e.f. 11-5-2002. Note that the CST is on ‘goods involved in works contract’ and not on ‘works contract’ as such. This distinction is vital in deciding aspects of valuation and also whether a particular transaction is inter state sale.What is works contract - Some contracts are for contracts for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building, the buyer pays for cost of building which includes cost of building material, labour and other services offered by the Contractor. Property in building is passed on to buyer and there is no contract for supply of building material as such. An air conditioner manufacturer may undertake a ‘works contract’ for designing, fitting and commissioning of air conditioning equipment. This is contract for sale of labour and material and not contract of sale. Property in air conditioning equipment passes as an incidental to the works contract. Here, there is no sale of ‘goods’. It is a ‘works contract’ and not liable to CST. – State of Madras v. Voltas Ltd. (1963) 14 STC 446 and 861 (Mad HC) – also indirectly approved in Batliboi v. STO (2000) 119 STC 583 (Guj HC DB).Laying of pipe line is yet another example of works contract, where passing of property in the pipe is incidental to works contract.It is difficult to establish whether a particular contract is ‘contract for work’ or ‘contract of sale’ and rigid and inflexible fast tests cannot be laid down. It depends on main object of the parties, circumstances and custom of trade. Generally, a contract of sale is a contract whose main object is the transfer of the property in, and delivery and possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work. The aspects like ownership of material, value of skill and labour compared to value of material can be considered, but these are not conclusive. - Halsbury’s Laws of England - quoted with approval in State of Gujarat v. Variety Body Builders - AIR 1976 SC 2108 = (1976) 38 STC 176 (SC). – same view in State of Himachal Pradesh v. Associated Hotels - (1972) 29 STC 474 (SC) = AIR 1972 SC 1131 = 1972(2) SCR 937 = (1972) 1 SCC 472In Vanguard Rolling Shutters v. CST - (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, it was observed that it is difficult to lay down any rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at prices agreed and the work or service is incidental to the execution of contract, it will be contract for sale. On the other hand, where contract is primarily a contract of work and labour and materials are supplied in execution of such contract, it is a works contract.In Hindustan Aeronautics Ltd. v. State of Orissa (1984) 55 STC 327 (SC) = (1984) 1 SCC 706 = 1983(2) SCALE 1090 = AIR 1984 SC 744 (SC 3 members), HAL imported materials and components on behalf of Government of India and manufactured aircrafts on behalf of Government of India. The goods belonged to Government of India but were entrusted to HAL for manufacture of aircraft to be delivered to Air Force. It was held that it is a works contract. It was observed that in contract for work, person producing has no 'property' in the thing produced as a whole, even if part or even whole of material used by him may have been his property. In contract of sale, the thing produced as a whole has individual existence as sole property of the party who produces it some time before delivery and the property therein passes only under the contract relating thereto to the other party for a price. In State of Gujarat v. Kailash Engineering Co. (1967) 19 STC 13 (SC) = AIR 1976 SC 2108, it was held that if unfinished goods are held as property of buyer, it is a works contract. In UOI v. Central India Machinery Mfg Co. Ltd. (CIMMCO) AIR 1977 SC 1537 = (1977) 40 STC 246 (SC), it was held that if property in final article passes only after it is completed, the contract will be of sale, even if raw material is purchased on behalf of buyer.In State of Tamilnadu v. Anandam Viswanathan – (1989) 1 SCC 613 = (1989) 73 STC 1 (SC), it was observed that nature of contract can be found out only when intentions of parties are found out. The fact that in the execution of works contract some materials are used, and the property in the goods so used, passes to other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the materials. - - Primary difference between a contract of work or service and a contract for sale is that in the former, there is in the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. Where the finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, the transaction is only a works contract.In Hindustan Shipyard Ltd. v. State of Andhra Pradesh 2000 AIR SCW 2582 =(2000) 6 SCC 579 = 119 STC 533 = 2000(5) SCALE 216, after reviewing entire case law, following principles were evolved - (1) It is difficult to lay down any inflexible rule (2) Transfer of property of goods for a price is the linchpin of definition of sale. Main object of parties has to be found out. Substance of the contract and not form is to be looked into. (3) If the thing to be delivered has individual existence before the delivery as sole property of the party who is to deliver it, it is a sale. (4) If bulk of material used belongs to the manufacturer who sells the end product, it is strong pointer that the contract is for sale of goods and not of work and labour. However, the test is not decisive. Relative importance of material qua work is important. Supreme Court in a very old case - State of Madras v. Gannon Dunkerley & Co. - AIR 1958 SC 560 = 1959 SCR 379 = (1958) 9 STC 353 (SC), had held that no tax can be levied on works contract, as tax can be levied only on ‘sale of goods’ as defined in Sale of Goods Act. In an indivisible works contract, there is no sale of goods as there could be no agreement to sell materials as such and moreover, the property does not pass as movables. The material used therein becomes property of the other party on the theory of accretion and, as such, no sales tax can be levied on such material.‘Works Contract’ was one of the ways of avoiding sales tax. Hence, Constitution was amended on 2nd February, 1983 (46th amendment). Clause 29A was added to Article 366 to cover ‘transfer of property in goods involved in execution of works contract’. Subsequently, most of States have amended their sales tax laws to cover ‘works contract’, but Central Sales Tax Act was not amended till May 2002. Thus, till 11-5-2002, CST was not leviable on indivisible works contracts.In Builders' Association of India v. UOI - (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = (1989) 1 SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 (SC 5 member constitution bench), it has been observed : ‘After the 46th amendment, the works contract which was indivisible one, is by a legal fiction altered into one for sale of goods and the other for supply of labour and services. After 46th amendment, it has become possible for States to levy tax on value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of goods and materials supplied in a building contract which had been entered into two distinct and separate parts.’In Associated Cement Companies Ltd. v. CC 2001(1) SCALE 436 = (2001) 4 SCC 593 = 124 STC 59 = AIR 2001 SC 862 = 2001 AIR SCW 559 (SC 3 member bench), it was held that even if the dominant intention of the contract is rendering of service which will amount to a works contract, after forty-sixth amendment to Constitution, the State would now be empowered to levy sales tax on material used in such contract.Contract of skill & labour - Some contracts are essentially contracts of skill & labour e.g. tailoring work, printing or cyclostyling etc. These jobs are not covered under 'works contract'. - - A contract to paint a portrait is a contract for skill and labour and not a contract for sale of goods, as substance of contract is for artist’s skill and it is only ancillary to that there would pass to the customer some materials like paint and canvas. – Robinson v. Graves (1935) 1 KB 579. However, in Lee v. Griffn (1861) 30 LJ QB 252, when a dentist agreed to make set of false teeth for a lady and to fit them into mouth, it was held a contract for sale of goods [There can be two views on the issue].Mere supply of labour not covered – Taxable event is transfer of property in goods. In case of contract for supply of labour, there is no transfer of property in goods and hence there is no tax liability. – Ashok Kumar Garg v. UOI (2002) 128 STC 442 (P&H HC DB) * Rajiv Gumber v. S. (2002) 128 STC 494 (P&H HC DB). Contractor need not be owner if he sales flat before construction – The contractor need not be owner of property. He will be liable even if he never had absolute ownership of the flat. – Mittal Investment Corporation v. ACCT (2001) 121 STC 3 (Karn HC DB). The judgment was modified in Mittal Investment Corporation v. ACCT (2001) 121 STC 14 (Karn HC DB) to the extent that it was held that the contractor is not liable if he enters into agreement with buyer after construction of flat, but will be liable if he enters into contract before construction of flat. [Decision as per Karnataka Sales Tax Act, but principle may apply in other cases also.]Value liable for Works Contract Tax – Some important case law is discussed here.Builders Association of India v. UOI - This is a landmark judgment of Supreme Court on ‘works contract’. (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = 1989(1) SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 ( 5 member Constitution bench). The background of this case is that after amendment to Constitution in 1983, various State Governments imposed levy on works contract. The tax was levied by some State Governments on full value of contract which included the material cost and other costs like labour, supply of services etc. However, in the judgment, Hon. Supreme Court held that the power of States to levy tax on works contract is subject to limitation of Article 286 i.e. tax cannot be levied by State on (a) Outside the State (b) during import/export. (c) Restrictions placed on ‘declared goods’ are applicable even while levying tax on works contract. Further, tax cannot be imposed on full value of contract. The tax is on ‘transfer of property in goods involved in execution of works contract.’ Thus, tax on works contract can be levied only on ‘value of goods involved’ and not on whole value of works contract.Gannon Dunkerley and Co. v. State of Rajasthan - This is also an important judgment on ‘Works Contract' (1993) 66 Taxman 229 = (1993) 10 CLA 56 (SC) = 1992 (3) SCALE 173 = 1993 AIR SCW 2621 = (1993) 1 SCC 364 = (1993) 88 STC 204 (SC - 5 member bench judgment)]. Here, it was held that taxable event is the transfer of property in the goods involved in the execution of a works contract. The said transfer of property takes place when goods are incorporated in the works. Hence, value of goods at the time of incorporation in the works can constitute measure for levy of tax. However, cost of incorporation of the goods in works contract cannot be made part of measure for the levy of tax. It was held that value of goods involved in works contract would have to be considered for taxation on works contract. Charges for labour and services have to be deducted from total value of works contract. Moreover, tax cannot be levied on goods which are not taxable under sections 3, 4 and 5 of CST and goods covered under sections 14 and 15 of CST. If contractor is not able to give detailed break up, legislature can prescribe scales for deductions permissible on account of cost of labour and services for various types of works contract. It is permissible to have a uniform rate for works contract. This rate may be different from the rates applicable to individual goods. The judgment in this case was subsequently followed in Builders’ Association of India v. State of Karnataka - (1993) 88 STC 248 = AIR 1993 SC 991 = (1993) 1 SCC 409 = 1993 AIR SCW 152 (SC - 5 member bench).In Daelim Industrial Co. v. State of Assam (2003) 130) STC 53 (Gau HC), it was held that in case of works contract, tax is payable only of value of goods and not on cost of design and engineering.State of Kerala v. Builders Association - In State of Kerala v. Builders Association of India - 1996 (8) SCALE 730 = (1997) 104 STC 134 = (1997) 2 SCC 183 = AIR 1997 SC 3640 = 1997 AIR SCW 977 (SC), the position was that a convenient, hassle-free and simple method, which was 'rough and ready method' was evolved by State Government for collection of sales tax on Works Contract. This was optional to assessee. It was held that legislature can evolve such alternate, simplified and hassle-free methods of assessment, making it optional to assessee. - . - In the field of taxation, legislation must be allowed greater 'play in joints'. Allowance must be made for 'trial and error' by the legislature. - - In Mycon Construction v. State of Karnataka 2002 AIR SCW 2156 = 127 STC 105 (SC), it was held that a simplified composition scheme instead of regular assessment, can be evolved, if it is on optional basis. Validity of such provision has been upheld.Other judgments - In Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC), it was observed that State Legislature can tax all the goods involved in works contract at a uniform rate which may be different from the rates applicable to individual goods which are involved in execution of works contract.Government can make a provision allowing contractors option to opt for composition by paying a sum based on total consideration of contract. - Mytcon Construction v. State of Karnataka (1998) 111 STC 322 (Karn HC).Royalty payable can be included for purpose of works contract tax – If contractor has to pay royalty and property gets transferred to him, it can be included for purpose of works contract tax. – Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC) – followed in B Seenaiah v. CTO (2001) 124 STC 248 (AP HC DB). However, in ACTO v. R K Constructions (2001) 124 STC 701 (Raj HC), it was held that if material is supplied by Government to contractor for use in Government contract, there is no ‘transfer of property in goods’ to contractor and no sales tax is leviable, even if Government had collected royalty. Sale price for purpose of CST – So far, no specific provision has been made in CST and hence ‘sale price’ will have to be determined on basis of definition of ‘sale price’ as contained in section 2(h) of CST Act. As per this definition, freight or delivery or the cost of installation is not includible when separately charged. Thus, value of goods involved will have to be calculated excluding these charges.‘C’ form can be supplied/ received for purchases / sales for works contract - Many High Courts have held that ‘C’ form can be issued for purchase of goods which are used in works contract. The dealer is entitled to registration and he can receive sales tax forms in respect of his sales. See the discussions under ‘C Form’ in a later chapter. These judgments pertain to period prior to 11-5-2002.After amendment of definition of ‘sale’ w.e.f. 11-5-2002, now C form can certainly be issued as ‘works contract’ has been specifically included in definition of ‘sale’.CST on works contract - Central Sales Tax will be payable on goods involved in works contract, if goods move from one State to another on account of such works contract from 11th May 2002 onwards. Works contract of movable property - There can certainly be inter State works contract in case of movable property e.g. printing contracts. In fact, Central sales tax can be levied on any goods involved in works contract in case of movable property.Works contract in case of immovable property - One interesting question that is likely to arise is whether there can be ‘goods involved in works contract’ if finally the article becomes immovable property in other State. For example, if a dealer undertakes supply and erection of machinery in other State, whether it will be a ‘inter State works contract’. In the opinion of author, it will be held so, as the movement of goods from one State to another certainly occasions on account of the works contract. - - It must be remembered that in case of works contract, the sales tax is on ‘goods involved in the execution of contract’ whether the property passes as goods or in some other form. There is no CST on ‘works contract’ as such. Thus, CST on works contract is really only on goods involved, which certainly move from one State to another.It may be noted that a ‘sale’ can be inter-State even if property in goods is transferred in other State.
REVERSE MORTGAGE SCHEME, 2008
The Central Government has brought out a scheme for the purpose of senior citizens to face monetary problems. In exercise of the powers conferred by Sec. 47(xvi) of the Income Tax Act, 1961 the Central Government made the scheme called as 'Reverse Mortgage Scheme, 2008' ('scheme' for short). The scheme came into force from the 1st day of April, 2008.
Reverse mortgage is defined as mortgage of a capital asset by an eligible person against a loan obtained by him from an approved lending institution. The scheme provides a list of approved lending institution as follows:
National Housing Bank established under Sec. 3 of the National Housing Bank Act, 1987;
· A scheduled bank included in the second schedule to the Reserve Bank of India Act, 1934; or
· A housing finance company registered with the National Housing bank.
The scheme defines the term 'reverse mortgagor' as the eligible person who has mortgaged the capital asset for the purpose of obtaining loan. Then the question arises who is the eligible person. The scheme also defines the term 'eligible person' as-
Any person, being an individual, who is of, or above, the age of sixty years; or
· Any married couple, if either of the husband or wife is of, or above, the age of sixty years.
Reverse Mortgage transaction, according to the scheme is a transaction in which the loan may be disbursed to the reverse mortgagor but does not include transaction of sale, or disposal of the property for settlement of loan.
PROCEDURE:
1. Any eligible person may enter into a reverse mortgage transaction by applying in writing to the approved lending institution, if the capital asset, being mortgaged is owned by him and free from encumbrances;
2. The approved lending institution on receipt of the application shall process the application received from the eligible person and it may charge nominal amount as processing fees;
3. The approved lending institution, before taking mortgage of capital asset and before disbursing any loan under reverse scheme shall enter into a loan agreement in writing with the reverse mortgagor and obtain and maintain the following particulars from the reverse mortgagor-
Name and address of the owner of the capital asset;
· Permanent Account Number of the owner of the capital asset;
· Total area, including built up or covered area, of the capital asset;
· Cost of acquisition and the year of acquisition of the capital asset;
· Cost of improvement and the year of improvement of the capital asset;
· Name, address and Permanent Account Number of all the legal heirs and estate of the owner of the capital asset;
· A copy of the registered will of the owner of the capital asset including any changes made therein during the currency of the term of the loan.
4. The approved lending institution may disburse the loan to the reverse mortgagor either by period payments to be decided mutually between the approved lending institution and the reverse mortgagor or lump sum payment in one more trenches, to the extent that the aggregate of the amount disbursed as lump sum payments does not exceed fifty per cent of the total loan amount sanctioned.
5. The period of mortgage shall not be exceeding twenty years from the date of signing the agreement by the reverse mortgagor and the approved lending institution.
6. The reverse mortgagor, or his legal heirs or estate, shall be liable for repayment of the principal amount of loan along with the interest to the approved lending institution at the time of foreclosure of the loan agreement.
Tuesday, December 16, 2008
Limited Liability Partnership
Parliament Passes Limited Liability Partnership (LLP) Bill 2008
15/12/2008
Parliament has passed the Limited Liability Partnership (LLP) Bill 2008. Lok Sabha today gave its assent to the Bill which was earlier passed by the Rajya Sabha. Replying to the debate on the Bill in the Lok Sabha, Shri Prem Chand Gupta, Minister for Corporate Affairs, expressed the hope that the first ever LLP in the country would be registered by the first day of the new Financial Year i.e. 1.4.2009. In this context he informed the Hose that concept LLP Rules have already been placed on the website of the Ministry. Shri Gupta also assured the House that registration of LLPs will also be a paperless affair as it will also be covered under MCA-21 e-governance program of the Ministry. Regarding taxation, Shri Gupta said that as the matter relates to the Finance Ministry, this concern will be taken care of by that Ministry, but he assured the House that Indian LLPs will in no way be put to any disadvantage and our LLPs will have a level playing field with other similar bodies outside the country.
LLP is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner.
For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.
The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals.
In our country, several expert groups have examined the need for such a concept since 1972 and recommended from time to time, the enactment of a law that would enable the setting up and functioning of the LLPs. These include the Abid Hussain Committee 1997, the Naresh Chandra Committee on Private Companies and Partnerships 2003 and the Irani Committee for new Company Law, 2005.
As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.
Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
Today, the world is in the grip of an unprecedented financial crisis, which is adversely affecting economies of most of the countries, including our own. In such a situation, availability of LLP as an alternative business vehicle to our trade and industry will be an important step. Service industry has grown considerably in India and it accounts for nearly half of our GDP. We believe that the LLPs would further contribute to the growth of the service industry in the future.
An earlier version of the LLP Bill was introduced in the Rajya Sabha around 2 years ago on 15th December, 2006 and was referred to the Parliamentary Standing Committee on Finance. The Standing Committee submitted its report on 27th November, 2007. Taking into consideration the suggestions of the August Committee, the revised Bill, namely the Limited Liability Partnership Bill, 2008 was introduced in the Rajya Sabha on 21st October, 2008. The House passed it on 24th October, 2008.
The salient features of the LLP Bill, 2008 are as under:‑
(i) The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.
(ii) The proposed Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.
(iii)While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
(iv) LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be
applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike a ordinary partnership firm where the maximum number of partners can not exceed 20.
(iv) An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.
(v) Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.
(vii) While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.
Monday, December 15, 2008
New Companies Bill
Sapna Dogra Singh / New Delhi December 12, 2008, 0:48 IST
The new Companies Bill 2008, which is before the standing committee of Parliament, for the first time has fixed responsibility and accountability on the top management instead of leaving it loose and broad-based as in the existing Companies Act. The draft Companies Bill 2008 has identified the three key managerial positions as chief executive officer (CEO), chief finance officer (CFO) and company secretary (CS).
By recognising these three key managerial positions, the Bill is fixing responsibility to bring out a system which is more accountable, transparent and workable, according to an official at the Ministry of Corporate Affairs (MCA). It would be mandatory to mention the names of people holding these three positions in the annual report of the company.
In the present system, it is the ‘officer in default’ who is held responsible for offences committed by a company. However, the definition of ‘officer in default’ is so vast in the Companies Act of 1956 that it is virtually impossible to put the blame on anyone.
“This is an era of self regulation where you need a team of competent professionals at helm who can be held responsible,” said NK Jain, secretary and CEO of the Institute of Companies Secretaries of India (ICSI). This will have a positive impact, added Jain.
Besides bringing accountability and transparency in companies, by recognising the three key managerial personnel, the draft Bill has provided relief to the honorary directors and independent directors and the non-executive members of the company.
In the existing Companies Act, the term ‘officer in default’ encompasses all the senior officials in a company, which include all directors both executive, non-executive and independent. In case of any offence or lapse, any one of them could be made responsible even if they have nothing to do with the actual business of the company, stated Pawan Jain, company secretary of the Abhishek Industries — a leading textiles company in the country.
He cites a recent example in which a leading Bollywood star was implicated because a cheque, issued by a company where the actor was an honorary director, got bounced and the person reportedly filed a suit against the actor.
Also, said Jain, in cases where companies have not filed their returns, action can be taken against anyone in the company under the definition of ‘offer in default’ and hence the new draft Bill will give respite to companies from such incidents.
The draft Bill aims to ensure financial integrity, corporate governance and risk management in the companies, said E Balaji, CEO of Ma Foi Management Consultants.
Many public sector companies feel that this would bring good governance in the companies. The bill is a good step in bringing corporate responsibility by giving statutory recognition to the role of CFO, said DK Saraf, CFO of Oil and Natural Gas Corporation.
Another important step that the draft Bill has proposed is doing away with the need for central government approval for appointments and fixing remuneration of the key managerial positions. It also envisage removal of the ceiling on managerial remuneration based on net profits.
However, AK Singhal, director (finance) NTPC, feels that this wouldn’t be applicable to state-owned companies as the government would continue to fix their remuneration.
360 degree feedback
Performance-appraisal data collected from 'all around' an employee-his or her peers, subordinates, supervisors, and sometimes, from internal and external customers. Its main objective usually is to assess training and development needs and to provide competence-related information for succession planning-not promotion or pay increase. Also called multi-rater assessment, multi-source assessment, multi-source feedback.
Thursday, December 11, 2008
Deflation
A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. opposite of inflation.