TAX PLANNING- INDIVIDUALS PERSPECTIVE- PART 1

Income tax, the two words which gives us nightmare. We wonder why we should pay tax on our hard earned income. However despite all the efforts we cannot escape from taxes. We pay taxes for the development of country as a whole such as infrastructure, rural development, industrial development, social development, security and in many other areas.

Let us now have a look at the tax benefits from individual’s perspective

Income Tax Rates

Normal Rates of Tax

Tax Slab	Tax Rate
Where the total income does not exceed Rs. 2,00,000/-	Nil
Where the total income exceeds Rs. 2,00,000 but does not exceed Rs. 5,00,000/-	10 per cent of the amount by which the total income exceeds Rs.2,00,000/-
Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.	Rs. 30,000/- plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000/-.
Where the total income exceeds Rs. 10,00,000/-.	Rs. 130,000/- plus 30 per cent of the amount by which the total income exceeds Rs. 10,00,000/-.

Are these tax rates applicable to all persons? No, it is taxable to persons depending upon their residential status.

A person is resident in India if he satisfies any of the following two conditions

1.    He is in India in the previous year for a period of 182 days or more.

2.    He was in India for a period of 60 days or more in previous year and 365 days or more during the four years preceding the previous year.

If the individual does not satisfy any of the following two conditions mentioned above, he shall become a non resident.

SALARIES

·         Salaries are chargeable to tax u/s 15 of Income Tax Act, 1961.

·         For salaries to be taxable there must be employee-employer relationship.

Meaning of Salary u/s 17(1)

Salaries is defined to include wages, annuity, pension, gratuity, leave salary, profit in lieu of salary, advance salary, employees contribution to RPF in excess of 12% of salary of employee, interest credited to RPF in excess of 8.5%, transferred balance from unrecognised provident fund to recognised provident fund being employers contribution, contribution made by any employer on behalf of employee towards pension scheme u/s 80CCD.

 SECTION 17(3)

·         Any amount received by employee from employer upon termination of employment or modifications in terms of employment.

·         Any amount received under keyman insurance policy scheme is taxable  under 3 heads if it is received by

                       I.        Employee- Income from Salary

                     II.        Employer- Income from business or profession

                    III.        Employers wife- Income from other sources

·         It includes any sum received by employee from employer before joining employment or after cessation of employment.

EXEMPTIONS U/S 10

1.    Section 10(5) Read with Rule 2B- Leave Travel concession/ Allowance

·         Any leave travel allowance granted by employer to employee in connection with employee and his family members going on leave to any place in India is exempted subject to flowing conditions

·         LTA shall be given while on service or upon retirement

·         Exemption is applicable only in respect of travelling/ journey expenses.

There are certain restrictions

              i.        If journey is performed by air, reimbursement shall be economy fair of a national carrier.

            ii.        If journey is performed by rail, exemption shall be restricted to 1^st class AC fair by shortest route.

           iii.        If journey is performed in a recognised public transport system, exemption shall be deluxe fair by shortest route.

           iv.        If journey is not covered by any recognised transport system, it is assumed that the particular place is covered by railways. Reimbursement shall be first class AC fair by shortest route.

·         Exemption can be claimed by employee and his family members. Family includes self, spouse, children, dependent parents, brothers and sisters.

·         However w.e.f 01.01.1998 onwards exemption u/s 10(5) can be claimed for two children.

·         But this restriction is not applicable for children born before 01.01.1998 and multiple births after first child.

·         Exemption u/s 10(5) can be claimed any two times in a block of four calendar years.

·         With effect from 1986 onwards calendar years are uniform.

·         If any exemption is carried forward, it should be utilised in the first succeeding block else it will lapse.

·         For exemption employee must take leave and actually incur leave travel expenditure.

·         For claiming exemption employee must maintain proof of expenditure.

·         Actual travelling expenses less exemption will be restricted to that amount.

·         Currently we are in block of 2010-2013. If any person has not used his LTA during this block, then he may use the same during the current year as well as in next year.

2.    Section 10(10)  Gratuity

·         Gratuity received while in service is fully taxable.

·         Gratuity received at the time of death or termination is eligible for exemption.

·          For employees covered under the payment of Gratuity Act, 1972, exemption is least of the following

                      i.        Rs 10,00,000

                    ii.        Gratuity Actually received

                   iii.        Last drawn salary*15/26* completed years of service or part thereof in excess of 6 months. (Salary – basic + DA)

·         Gratuity received from two or more employers in the same year, then the aggregate amount of gratuity is exempted from the tax cannot exceed the prescribed limits.

·         Where employee has received gratuity in any earlier year from his former employer and also receives gratuity from another employer in later year, the limit of Rs 10 lakhs will be reduced by amount of gratuity exempt from tax in the earlier years.

3.     Section 10(10AA) Leave Encashment

·         Leave Salary received while in service is fully taxable.

·         It is exempt at the time of death, termination or retirement.

·         For non government employees it is least of the following,

·         Lump sum payment Rs 3, 00,000

·         10 months average salary*10

·         Leave encashment actually received

·         Leave to his credit/ year * completed years* average salary

·         Salary= basic+ DA + commission as a % of turnover

4.    Section 10(10C) VRS/VSS

·         VRS exemption can be claimed only once in lifetime of an employee

·         The scheme applies to an employee who has completed 40 years of age or 10 years in service whichever is earlier.

·         The scheme is applicable to all employees by whatsoever name called but shall not be applicable to directors.

·         Main aim of the scheme is to reduce the workforce, i.e. vacancy created should not be filled.

·         Employee opting for the scheme should not be appointed in any orgainsation under same management.

·         Exemption is least of the following

                      i.        Actual amount received

                    ii.        Lumpsum Rs 5,00,000

                   iii.         Last drawn salary*3* completed years of service or last drawn salary *  remaining  months of service

5.    Section 10(12) Recognised provident Fund

• RPF is PF recognized by provident fund commissioner
• Employee can contribute any amount to RPF but if employer’s contribution exceeds 12% of salary of employee, excess will be taxable in the hands of employee.
• Employer can contribute any amount to PF on behalf of employee.
• Interest credited to RPF in excess of 8.5% per annum will be taxable.
• Any amount received from RPF is fully exempted subject to satisfaction of certain condition.
• Employee must have rendered continues service of 5 years. This is not applicable if employee has vacated in case of death or incapacitation.
• Employee contribution to RPF can be claimed as deduction under section 80C.

6.    Sec 10(13A) House Rent Allowance HR

• Exemption is least of the following.
• Excess of rent paid over 10% of salary. Salary = Basic + DA + Commission as a % of turnover.
• 40% of salary applicable for all cities & 50% for metros.
• Actual HRA received
• Exemptions are not available to an assessee who lives in his own house or in house for which he does not pay rent.

7.    Sec 10 (14) General Exemptions

• Any allowance in nature of tour & travels, helper allowance, uniform allowance, academic & research perquisites allowance is exempted to the extent it is actually spent for official purpose.
• Children education allowance – exemption is Rs100/month/child for maximum for 2 children.
• Children hostel expenditure allowance Rs. 300/ month / Child for 2 children.
• Transport allowance Rs. 800/ month for commuting between residence & office.

AIR INDIA – TIME FOR AN END

The aviation sector has been hurt with rising cost of fuels, inability to meet its day to day operational expenses and high user fees charged by AAI. Beside this, rise in service tax rates also is not going to help these companies.

With mounting losses, government’s consideration for 49% FDI in aviation sector is a welcome relief.  Air India is no different to this scenario. We quite often see regular strikes by the employees of the company for non receipt of their salary and for various other reasons. With liabilities over Rs 40,000 crores, the aviation is surely headed down south.

Government is now going to infuse Rs 30,000 crores over the next 8 years. Capital infusion will take place in phases. Also, if see the performance of these companies, it’s no good. It’s always in red. These losses keep piling every year. There was a point of time, when before merger, Air India was making profits. Tide has changed its course.  Government’s strategy has gone for a toss.  But whose money the government is pumping in to the Air India. It’s ours, the common man. Our hard earned money is going down the drains. But if the situation of Air India does not improve, what can be done to avoid wasteful expenditure of public money?

The government can sell of Air India to another entity (privatisation), where the airlines can turnaround. Another option is to bring Air India to the ground i.e. nothing but end of Age old Maharaja of India.

Since no other entity would take up Air India because of the crisis it is in, the second option would suit Air India. At least it will save the taxpayers money.  The Indian government need not borrow funds to run airlines, in a way it will reduce mounting fiscal deficits and the same money can be invested in a way benefiting the larger part of India instead of a smaller one.

An action needs to be taken quickly in the best interests of the country. Hope the government wakes up to the situation.

HOW TO CRACK CA FINAL EXAMS

Is it really tough to clear CA final exams?  It’s your perception that matters. If you think it is tough, then it will be, but if you say it’s not tough, then you can easily clear the exams. It is belief, which you require to clear the CA final exams.  Along with this you also require lot of willpower, determination and focus. These words assume great importance while you prepare for your final exams.

Preparation for CA final exams becomes a little easier if you have done your articleship in a very structured manner with full commitment and passion. Practical training does make your theory preparations easier, as you would have applied theory during the course of training.

While you enter the core phase in your exam leave and if you are feeling down, visualize yourself as being a Chartered Accountant. Visualize having CA prefixed to your name, the amount of opportunities you ll have once you become a CA. This in itself will inspire you to study.

During study leave, irrespective of amount of leave, give in your very best from day1. Focus, focus and focus- this is what is required.  It doesn’t mean that you have to study 24*7. No, there is nothing like that. Have a little bit of fun in between like an occasional movie, sports activities, exercise.  These activities will help you will refresh your mind and keep you mentally fit. At times by keeping your mind off from studies does a world of good.  An hour or two a day being away from study will help in relaxation of mind. Listening to music, exercise, playing sports or watching TV, occasional outing is really good for mind as it keeps you fresh as you are living the present moment and not in past or future. But when you enter towards the last month of study leave,  leisure time can be reduced to 30-45 mins a day, as time becomes very crucial.

When you prepare for the exams, prepare in such a way that you will be able to revise the entire syllabus a day before the exams. Student must have finished at least 4-5 revisions before he/she writes the exams. At the same time you must have a very clear cut strategy during those three crucial hours. That makes a huge difference in your marks. Attempt the questions which you know the best at first. Once you gain confidence, then you ll be able to do the other questions without much difficulty.

Most of you would be attending classes for various papers. Problem arises when you attend classes of more than one faculty for the same paper. This is not at all required. Attend classes of one faculty for one paper and believe in that faculty. Practice problems from the material of that faculty. At the same go through the problems and questions in the institutes module and practice manual which have not been done in class by the faculty. For havens sake, do not ignore practice manual and module. Do not do selective studies, but cover the entire syallabus. This is because questions can be asked from anywhere.  All these factors play a very important roll.

Now coming into the crux of the topic, there are 8 papers in final exam. Method of preparation for each of the papers will have to be approached differently.

Paper 1 i.e. is Financial reporting, there are 8-10 chapters in total as per the study material. Make sure you know Amalgamation, valuation and consolidation very well. These 3 chapters together will fetch you 48 marks. Know your Accounting standards very well. Accounting standards normally come for 36-40 marks. All AS are very important. Make sure you know AS thoroughly. AS 30, if you find it difficult, don’t worry, practice the questions well in the text book and practice manual. It’s all about discounting. The remaining miscellaneous chapters will cover 12-16 marks which are scoring and do not ignore those chapters. It’s simple and the entire marks will be in your pocket. While you write your exams, as a part of strategy, attempt consolidation at the end, after you attempt all the other questions, as consolidation may take around 45-60 mins. Best suggestion, if you can attempt other questions, then you can leave consolidation as a choice. Most students are not able to clear this paper as they spend too much time attending consolidation and then accuse lack of time/ say that paper is long.

Paper 2 i.e. SFM, to do well in this paper, it is very important that you know the concepts very well. Without knowing the concepts, it will be very difficult to clear the paper. Maintain a separate small book for formulas, as there are many formulas in this paper. This will be very helpful before the exam day. Study the theory very well. Many students ignore theory and attempt problem in the choice question.  Theory can be well comprehended from practice manual. By attempting theory in exam, 16 marks can be answered in a matter of 15 mins. This leaves you with a lot of time to attempt the remaining questions. Derivatives and forex are very important as normally 20-25 marks question arises from this area. Past trend indicates that questions tested in exams are practice manual based.

Paper 3 i.e. Auditing, different from paper 1 and 2 being more of theory, Professional ethics is worth 16 marks in exam and easy to score. Know the clause number well. Standards on auditing cover another 20 marks. All SAs are very important and if it can be quoted, it will help student get additional marks as it leaves an impression on the evaluator. CARO, 3CD, audit and account of company are normally asked for 20-25 marks. These chapters require lot of attention with clause number (3CD) and paragraph number (CARO). Special auditing chapters cover another 15 marks. The balance questions can be answered with the help of articleship training as answers to these questions will not be available in your study material. This is where the institute tests student’s articleship training. It could have an influence on the results of this paper. Practice manual questions are really good in this paper. Material suggested for this paper is Surbhi Bansal

.

Paper 4 i.e. Corporate law, Directors again is important as 16 marks are normally tested in this area. Accounts of company and audit of accounts cover another 16 marks.  Allied laws cover 30 marks and each and every chapter is really important as equal weight age is given to each of these.  The remaining questions can be asked from all the other chapters. Therefore 100 % coverage is very important for this paper. Practice manual and text book are good for this paper. Also Munish Bhandari material is suggested for this paper.

Paper 5 i.e. AMA, text book and practice manual are ideal for preparation for this paper. Understanding of concept is more important. With the help of concept, you can complete about 60% of the problem. Balance can be completed with practice. The more you practice in this paper with proper understanding, the better your grip will be. Most students neglect theory in this paper which constitutes 33-38 marks. Again Practice manual would be sufficient enough to study theory.  Even in QT, don’t neglect theory as it is a scoring area. 30 marks can be easily obtained in full. All chapters are important as weight age for each chapter differs from exam to exam.

Paper 6 i.e. ISCA , The institute module is more than sufficient to clear the exams. Do not refer any other books for studying. Study the module very well. A lot of time has to be spent on ISCA as it is only theory.  Revise ISCA on a regular basis. This is a paper where you will feel blank if you have not revised for more than 2 weeks in a row. Regular revision is required.  Chapter 2, 10 is important as well as others also. Chapter 5,6,7,8 is comparatively easier to study and lot of marks can be scored from this area. Study this paper with lot of effort. ICAI require more or less you to reproduce the same from material. The suggested answer also shows the same. Do not put this paper for the end. Try to enjoy it and you will learn this paper quickly. Believe in yourself that you can do well in this paper. This paper can ruin your chance to clear your CA. Realize the importance of this paper and do not underestimate it.

Paper 7 & 8 i.e Direct and Indirect taxes- both the papers are voluminous and  difficult to complete the day prior to exam.  In these papers you must be smart. Know the provisions very well and completed the entire syllabus during your leave and revise continuously.  The institute releases a case law applicable for each exam. Study those case laws very well. There is no need to know any other case law than what institute has given. Case laws related questions are normally asked for 30-35 marks in both Tax papers. It’s simple and easy to score if you have revised at least 4-5 times. The problems are asked for about 30 marks each in both papers. If you prepare well then you can easily get exemption in both the tax papers without much difficulty. Wealth tax in Direct taxes is worth another 10 marks. Study the other areas well; tax paper shouldn’t be a difficulty at all. Books suggested are TN Manoharan (DT) and Bangar (IDT).

If you have done your part and put in your best, there is no one stopping you from being a successful CA.  Everything lies in your mind. Hard work, focus, determination and the will to do it, is what matters. Go on and give in your best. Have a strategy in mind, systematic study and patience will see you through the exams.

Wishing you all the very best for all endeavors.

FDI IN MULTI-BRAND RETAIL IN INDIA

Retail industry in India in recent times has been hailed as one of the sunrise sectors in the economy. FDI in multi-brand retail is one of the most debated topics over the last few months both in the parliament and in the streets. 51% FDI will open up a wide range of opportunities for the foreign retailers such as Wal-Mart, Metro AG of Germany, Carrefour of France and so on.

A. WHAT IS FDI?

FDI expands to Foreign Direct Investment. It represents investment in Indian companies by foreign entities. GOI has prescribed maximum amount of FDI that can flow into the country in specific industry sectors. For ex: the cap in the insurance sector is 26 %. FDI will be in lasting assets such as equity capital. Because of restrictions on capital convertibility in India, FDI cannot be taken out of the country automatically.

B. WHAT IS SINGLE BRAND AND MULTI BRAND RETAIL?

As the name indicates single brand means that only one brand can be sold at the outlet. In multi brand retail a variety of brands will be available at the retail outlet. Generally speaking in India single brand retailing will not have a significant impact on the retail market and will mostly be patronized by the upper class whereas multi-brand has the potential to dramatically alter the market dynamics of the retail trade and in India’s case the local “kirana “stores.

C. THE INDIAN STORY

FDI in multi brand retail is not allowed in India. 51% FDI in single brand is already allowed .Foreign brands like Nike, Adidas etc are already present in India .100 % FDI is allowed in “ cash and carry “retail where all transactions are by cash up front. FDI participation can only be through franchise relationships or as wholesalers. Foreign chains operating in the “cash and carry” business in India are:

1)      Wal-Mart: It has a franchise relationship with Bharati Enterprises (the parent arm of Bharati Airtel) It operates 14 stores.

2)      Tesco Plc: It has a franchise relationship with Trent’s Star Bazaar.

3)      Metro AG of Germany has 8 wholesale stores.

4)      Carrefour of France has two wholesale stores.

The annual retail sale in India is around US $300 billion million. Nearly 90 to 95 % of this is in the unorganized sector controlled by tiny family run shops or ‘kirana’ shops. The organized retail is growing at 20 %. Their growth is driven by the middle class of around 300 million. To put the organized retail business in India in perspective, let us look at the picture in some other countries.

Countries	Retail sale in US $ Bn	Share of organized sector (%)
USA	2983	85
UK	475	80
France	436	80
Germany	421	80
Japan	1182	66
Pakistan	67	1
China	785	20
India	322	4

Growth in the retail sector has been due to over-crowded agriculture sector, stagnating manufacturing sector combined with low wages in both, has led to an explosion in growth of service sector. Given the lack of opportunities, an individual is forced to set up a small store depending upon the means of capital and so we have millions of small kirana stores.

D.EXPECTATIONS AND CONCERNS:

Cheap and good quality goods become available to the consumer. Cheap because they will buy directly from the farmer or producers eliminating middlemen and in large quantities with bulk quantity discounts. Good quality because they prescribe quality standards which have to be adhered to. At the end of the day the nature and type of competition does not matter. Whatever be its nature and type it will always be beneficial to consumer whether foreign or Indian and whether it comes with 26 % FDI cap or 51 % or 76 % or whatever.

v  They have access to market information globally and have knowledge of global trends as well as seasonality. They can, therefore, take advantage of cheaper sourcing from anywhere in the world.

v  They will invest in good storage facilities especially cold storages particularly helpful in seasonal goods which have to be stored in the non-season for use during the season. The loss of agricultural products in India due to defective storage conditions is estimated at Rs. 50,000 crores yearly which is equal to the subsidy budgeted for the proposed Food Security bill.

v  A compulsory investment US $ 100 million in Infrastructure has been proposed of which 50 % must be in the backend like cold storage. The concern is that this amount is just not sufficient to make a significant impact in an area which requires billions of dollars.

                                            

v  The unorganized retail opportunities in India offers avenues of self-employment (hawker etc) for unskilled labour if a factory in which he is working closes down. In short it acts as a shock absorber in our social system bereft of governmental social security for the unemployed by way of employment dole. He returns to his original job when his factory reopens or the harvesting season begins. Will such safety valves disappear with organised retail taking a firm grip on the market forces? Only time will tell.

v  An important fact that is often not highlighted is that if the share of organized retail in the total retail trade business increases GOI revenue by way of sales tax will also increase as the organized retail players will not evade tax. All sales will be invoiced and taxes paid. This is good news for a country like India where the Tax-GDP ratio is at around 14 % as against 30 % in developed countries. The tax –GDP ratio is an indicator of the amount of funds available with the Govt for discharging their functions and duties.

·         India Inc seems to be gung-ho on the proposal while the political class are divided and are not so enthusiastic citing concerns about job losses, the demise of kirana stores and of MNCs getting a stranglehold on the economy in a historical repetition of the East India Company story.

·         It is interesting to recall the first budget speech of Dr. Manmohan Singh in February 1992 after he announced the new policy in July 1991.

“We must not remain permanent captives of a fear of the East India Company, as if nothing has changed in the last 300 years. India as a Nation is capable of dealing with foreign investors on its own terms. Indian industry has also come of age and is now ready to enter a phase where it can compete with foreign investment.”

v  The new policy proposes that 30 % sourcing should be from local micro and small producers are perhaps another safe guard. This could, however, run counter to WTO regulations which prohibit such reservation. The plus side of the coin is that a complaint to WTO takes years to resolve.

E. CONCLUSION

As far as organized sector is concerned there should be regulatory framework. On the one hand, because of penetrating pricing and because of the fact that it definitely creates monopolistic market and because it has potential to create loss to crores of families, which will occur to unorganized sector.  FDIs shall not be allowed in Retail sector.

Whereas, on the other hand, the concept of global village forces the theme of liberalization. By closing door of your home, world outside will not stop from upgradation. Accepting changes and challenges is the truth of life. Food retailing supply chain is required to be improved and it is need of an hour to adapt the technology. It is right time to invite FDI when USA and Europe are under crisis and India is on the verge of facing heat of inflation.

 Backing efficiency of the system at a cost of potentially social disruptive policy is the main concern. As a countryman I hope for the best but at last it’s all about nature’s law: “Survival of the Fittest!”