Money Bol

Do You have Deemed Income ?

• The government “deems” it fit to see income even when there might be none. At present 22 such provisions exist in the Income Tax Act
• In case of a seller; if a person has sold a flat for 22 lakhs but the fair value assessed by the authorities comes to 24 lakhs, the extra 2 lakhs would be added to the taxable income and deemed to be received
• In case of a buyer, if the purchase price is seen to be below the value taken for stamp duty in case of immovable property, even if it is not registered, the difference is added to the income
• The provisions apply only to Individuals and Hindu Undivided families, and are thus discriminatory
• The registering authorities are neither qualified engineers nor valuers and often go by street rates or thumb rule
• No proper inspection of properties are done to check whether it is in a good shape or dilapilated, hence distorting the value

Some Deals Deemed as Taxable Income

• Loans/advances taken by shareholder with 10 per cent stake
• Transfer of assets by firm, or even assets to son’s wife
• Money, jewellery, income of spouse, investments not fully disclosed
• Aircraft operation for passengers/cargo, goods transport
• Civil construction work by Indian and foreign firms

The experts say that the FY10-11 budget is one of the best budgets the government has presented in the recent years which not only introduced reforms that would instigate growth, but also focused on the mounting deficit and laid a clear road map that ensured that the country is not on the path of becoming the next Greece.

I agree to all what the experts say that the budget did so many things that is good for the economy in the longer term it includes things like:

• Reducing the tax slabs that would empower the consumer
• Moving towards simplified tax reforms Read the rest of this entry »

Shift from BPLR to Base Rate

Recently with release of RBI circular on Base rate implementation, there has been a lot of debate going on regarding BPLR (benchmark prime lending rate). Here is our beginner’s guide to understand the two rates.

What is BPLR?

BPLR is the reference rate for banks for pricing their loan products. It is calculated taking into account the cost of funds, operational expenses, and the minimum margin to cover regulatory requirements of provisioning and capital and profit margin. Banks are supposed to lend to their prime customers at BPLR and increase the rate with risk premium in case of sub-prime customers and tenor premium wherever applicable.

Problems with BPLR

1. Main problem with BPLR is that banks have resorted to sub-BPLR lending. On an average, 67% of the total loans and Advances of banks was sub-BPLR. For Private banks, the figure was even higher at 83%. Housing, agriculture, and corporate segments were the major beneficiaries of sub-BPLR lending. Nearly 31% of the housing loans in FY08 were disbursed at an interest rate of less than 10%, while 49% of the housing loans were disbursed at 10-12%. In the case of loans to the industry, around 32% were disbursed at an interest rate of 10-12%.

A study of BPLR and actual lending rates of the banks show that as on Sep’2009, against a BPLR in the range of 11-13.5% for public sector banks, actual lending rates where in the range of 4.2-18%. For private banks, actual lending rates were 3-29.5% against BPLR of 12.5-16.7%.

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Treatment of Property, Plant And Equipment (PPE) under IFRS

First time adoption of IFRS for PPE
An entity can use fair value as deemed cost on First time adoption of IFRS

OR

It has to apply Retrospective application which means recalculate carrying amount of each PPE item according to IFRS since its purchase date including transaction cost, useful life and residual value.

Suggestion
However fair value as deemed cost is more appropriate since there would be practical difficulties for companies to do retrospective application from the date when the asset has been purchased.

Fair value for PPE
Fair value for Land and Buildings is usually determined from market based evidence by appraisal normally undertaken by professionally qualified valuation officers and for other items of PPE their market value is determined by appraisal.

If there is no market-based evidence of fair value because of special nature of asset then it has to be determined on basis of either Income Approach or Depreciated replacement cost approach.

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Readers, as promised, we have posted the market review for February without delay this time. Month of February witnessed the most important calendar event for Indian economy, the Budget 2010. Our reports on the same would have kept you updated. Hopefully this will update you about its affect on various markets.

Equity

After correcting for most part of January and early February, Sensex touched a monthly low of 15725 on Feb 5 and thereafter gained strength from positive news on the budget front. It touched a monthly high of 16669 on the day of budget and closed the month at 16429, about 2 % above the last month’s close and 4.5% above the monthly low.

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IFRS 9: FUTURE FINANCIAL INSTRUMENT

(SIGNIFICANT FOR BANKS AND FINANCIAL INSTITUTIONS)

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CURRENT STATUS

HELD TO MATURITY CLASSIFICATION

• Banks have to invest in government securities to comply with RBI’s prudential norms
• As per current RBI rules, such investments are accounted for at ‘amortized cost’. Read the rest of this entry »

Banking system in India is so far accustomed to rule based approach and hence for any implementation, Banks look to the regulator for guidelines i.e. RBI.

In case of Basel II implementation, the National Supervisor i.e. RBI is provided with power to modify the guidelines to suit the country condition. The Objective of Basel seems to be first to achieve robust banking practices and then to have uniformity of approach.

In case of IFRS, it is doubtful whether the National Regulator has role to play.

IFRS recognizes a ‘Carve Out’ procedure for country specific issues. But this has to be approved by IASB. In reality, it is gathered that IASB is not comfortable with carved out procedures, as it will affect the standardization of systems and procedures.

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Poor Monsoon – affected Rabi and Kharif crops
India weathered the crisis well
Supporting and delivering services and not giving directly to the citizens
2009-10 – Challenging year attributed to 2008-09 Q3, Q4
GDP
FY 2008-09 – GDP 6.7 % Substantial fiscal expansion
Q1 2009-10 – GDP 6.1%
Q2 2009-10 – GDP 7.9%
Q3 & Q4 – expected higher than 7.2%
Hope to reach 10% GDP shortly
Negative growth in agriculture
Renewed growth in Manufacturing – Dec 2009 – 18% (highest in past 2 decades)
Since Dec 2009 – food prices transmitted to other non food items
Budget to reflect Govt’s vision for development
Ensure better management of Food security
Move towards Fiscal consolidation
Make growth more broad based and ensure demand supply are better managed and matched
Need to review the public spending, mobilize resources
Exit strategy from Expansionary fiscal stance in past 2 years

Fiscal consolidation
Explicit reduction in Domestic Public Debt FM to come out with a report
To introduce Simple Tax system which includes Voluntary compliance
Direct Tax Code (DTC) – To be in a position to implement DTC from 1-April 2011
GST – To finalize the structure of GST and implement by 1-April-2011
Disinvestment program – PSU
Oil India, NHPC, NTPC, Rural Electrification Corp; NMDC, SVJN
Raise Rs 25000 Cr in FY 2010
Proceed to utilize Capex for social sector for creating new assets
Unlock value for all stakeholders
Adhered to fiscal roadmap

Simplify FDI regime
Defined indirect investment by foreign companies in Indian Companies
Automatic route – Payment for Royalties etc
Clarity and predictability for FDI policy

Banks
To extend geographic coverage of Banks
RBI considering additional banking licensing to Pvt Sectors and NBFC (if meet RBI eligibility criteria)
Rs 1900 Cr as Tier I capital in 4 Pub Banks infused
Rs 16500 Cr infused to maintain min 8% Tier I Capital Ratio in Public sector banks
Increase lending to rural economy
Interest subvention of 2% preshipment export credit – extended to 1 more year (handicraft, handloom, carpet and SMEs)

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Introduction
In 2009, the U.A.E. witnessed a significant slowdown in growth and strains in the banking system as a result of the global financial crisis, the decline in oil prices, and the continuing fallout from the bursting of the Dubai property bubble. The ramifications of the DW debt event will depend on the scope and modalities of the debt restructuring, its impact on the financial sector, and the strategy being developed by the Government of Dubai (GD) to put Dubai World (DW) and possibly other corporate entities on a viable economic and financial footing.

Improved global conditions, especially out of Asia, will fuel Dubai’s logistics and service sector. However, the correction in the over-extended property and construction sector renders the overall outlook highly uncertain. With foreign investor confidence shaken and international capital markets less accessible, Abu Dhabi’s policy of selective support to Dubai will play an important role in limiting contagion to the U.A.E. economy and the banking system.

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Key issues

• The contrast between growth based on hydrocarbon resources and that based on non hydrocarbon diversification funded by maturity-mismatched leverage
• The spillover effects and financial support structures in the federation
• The volatility of markets in response to a lack of information disclosure and transparency
• In particular, the debt announcement undermined the widely held market perception of implicit government support, including from Abu Dhabi

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Macro economic expectations
Budget 2010-11 will be presented against a backdrop of reviving economic conditions. The year 2009-10 saw all the economic indicators painting a healthy picture of the economy after a year of subdued growth. GDP has started to accelerate; IIP has gone into a double digit growth trajectory. Exports have entered into positive growth zone. All these indicate a robust economy but these are still incipient signs and the economy still faces a huge risk in the form of inflation which is expected to reach double digit by this fiscal end. Finance Minister Pranab Mukherjee faces dilemma in the form of managing inflation and at the same time pushing the economy firmly on the growth path. In order to maintain growth momentum, fiscal stimulus needs to be maintained but the cost of retaining fiscal stimulus is high fiscal deficit which the country cannot afford. What strategy he adopts to balance all these contrasting factors would be unveiled on Feb 26, but this is what we expect the budget 2010-11 to come up with.

Government Revenue
Corporate sector is lobbying to bring down the corporate tax rate but considering the deficit reduction target of Govt and implementation of Direct tax code and Goods and services tax, we do not expect any change in the corporate or individual tax rate. A hike in the tax revenues is projected, seeing the buoyancy in the corporate bottom lines. Tax revenues can be expected to grow at a healthy rate of 20% as against a decline witnessed in the current year. With a robust growth observed in the industrial production, the customs and excise collections too may be projected to rise after the decline observed in the current year. The current Budget that penciled in only Rs.1,120 Cr as disinvestment proceeds, marked a conservative approach in budgeting Non-Debt Capital Receipts. However the estimates for disinvestment proceeds for FY 2010-11 could be buoyant at Rs.30,000 – 35,000 Cr. Proceeds from 3G auction are also expected to be realized next year and thus we expect a non-tax revenue of Rs 1,40,000 cr in this budget year. Overall, revenue receipts are expected to grow by 15.4% over that of the budgeted figure for 2009-10. Total receipts are expected to grow about 20% to Rs 7,43, 061 cr in the year 2010-11.

Government Expenditure
Budget 2009-10 saw expenditure burgeoning 13.3% to Rs 10,20,838 cr. This year emphasis would remain on reining in expenditure. The Plan Expenditure would be in line with the Gross Budgetary Support approved by the Center. It is estimated at Rs.3,73,000 Cr for FY 2010-11 marking a YoY growth of 14.7%. This fiscal would not be burdened with extraordinary inclusions such as 6th Pay Commission Arrears or the farm loan waiver scheme. Marking a trend based growth in the expenditure for various other heads, the total non-plan expenditure is estimated around Rs.7,40,000 Cr. The total expenditure for the year to come is projected in the range of around Rs.11,12,200 Cr.

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