TIME TO DELIST OIL MARKETING COMPANIES?

The government of India is having a majority stake in the Oil marketing companies (OMC). But these companies aren’t doing well. Is it because the government controls it? The answer lies within the question. Hit by High crude prices, excise duty, under recoveries are the main reason for downslide of OMCs.

Look at this!  Many retail investors are investing in these OMCs. Since the government is having a majority stake in these companies and due to political compulsions, prices at which they sell their products are not in line with international prices, these OMCs are forced to go in to losses in order for the government to survive at the centre.

It’s completely ridiculous.  By having larger stake, government cannot take the other stakeholders concerned with these OMCs for a ride. They have to consider the interest of shareholders. Shareholders are not getting the appropriate returns, as they should receive, like any other listed company. So what’s the whole point of having these companies listed? Why not delist them if they their performance is restricted in order to save the government and its vote banks. Or is it because the government is dictated by one person?

The ultimate aim of government is to provide petroleum and its products at a lower rate to the common man. Though Petroleum prices have been de regulated, but the government is still controlling it. Why is it that we still see oil companies want an increase in prices of petrol, but they are not able to increase it at the same time? Decontrol is only for namesake. But if the GoI is seriously concerned, then they should deregulate the prices and let the market decide it. Else if they want to go on with the existing policy, its better they delist the OMCs. What the point of having these companies listed, if they can’t generate profits and are give returns to the stakeholders involved.  Banks, investors, suppliers and many more are involved. We cannot let OMCs be the next Air India.

These issues need to be addressed and a quick decision needs to be taken soon.

MERGER OF OIL MARKETING PSU

There has been a lot of uproar in recent times on the oil marketing PSUs. HPCL, BPCL and IOC, the 3 major PSU aren’t doing well. Under recoveries, sale of petroleum and its products at lower prices has affected theses companies. Rise in international crude prices, mounting losses and reduction in compensation from government during this fiscal (mentioned in budget), the future for these companies looks bleak.

The pressure of a coalition government has taken a toll on these companies as they have not been able to increase the prices and reduce their losses.  Making profits is out of scenario. What is the option left for these PSUs? Report regularly on losses and expect government to compensate them in form of subsidies and bonds. This isn’t a long term solution.

 The solution, the government has now is to go for a restructuring plan and merge these 3 oil giants in to one single entity. If possible they could also consider the idea of merging ONGC with these companies in to one single PSU.  Merger will really help these companies and would do them a world of good.

I mean see it for yourself. You will find an IOC pump and next to it/100 metres ahead; you will find BPCL/ HPCL pump. What’s the use of having these pumps next to each other, competing among themselves when the owner for them is the same- the government. The main aim is to provide fuel supply, then why is there competition among them? This question needs to be seriously addressed.

Merger will help these companies reduce their cost in terms of multiple outlets in one single area, wasteful expenditure on advertisement, marketing and other activities.  These companies can consolidate and improve infrastructure nationwide through cross country pipelines, refineries, tankages, filling station and so on. It will save huge amount of costs and tax payers money. Also the capacity of the merged entity will be enhanced and can match those of private sector companies and be a market leader in this sector.

High oil prices and non availability of excise credit has taken a toll on these companies individually. Time is not far when Oil sector will be the next aviation sector.

Looks like the infectious disease of negative net worth of airlines sector is spreading quickly to the oil sector. Increasing subsidies and bonds will not help this sector to last lifelong.  The best the government can do is to merge and unite them as one single entity.  Phrase which is very old is apt for this industry- United we stand, divided we fall.

“Hope is like a cloud but it comes true when it rains”. Hope that the government will take steps to save the 3PSU giants by merging them into a single entity at the earliest.

RBIs GIFT

Reserve Bank of India cut repo rate by 50 basis points was surely a big surprise and the first rate cut in over 3 years. Repo rate is the rate at which RBI lends to the banks. No doubt the loans will get cheaper for those who opted for floating rate of interest.

Why did RBI go for such cut in the rates?  Growth had come down last year at 7.7 per cent in Q1 to 6.9 per cent in Q2 to 6.1 per cent in Q3 and investment had gone negative in Q2 and Q3. And look at inflation, the headline inflation had come down from 9 per cent over last two year to 7 per cent core inflation and non-food manufacturing inflation which had peaked at 8.4 per cent in November last year has come below 5 per cent for the first time in two years and the no 4.7 per cent has been closed to the recent long period average.

Also this reduction will help revive growth of credit in the economy. RBI also abolished the prepayment penalty on home loans so as to bring about uniformity and transparency in this area. It is a win-win situation for both, the borrowers and banks. Banks will see their business improve.

 But RBI has missed out one big change in this credit policy review. When there is an increase in repo rates, the banks are quick to increase the base rate, which leads to an increase in borrowing rates.  Therefore the loans are expensive from the very next day of such hike.

In this policy, reverse has happened. With cut in lending rates, banks have not reduced their rates simultaneously. Instead banks will consider the rates cut by month end. They will earn additional income equivalent to 50 basis points until such time, the rates are reduced. RBI may consider looking at this aspect for larger benefit of borrowers.

Inflation, crude prices and fiscal deficit will play a crucial role in RBIs future review policy. As such this is one of the best review policies by RBI in years.

UNION BUDGET 2012- HIGHLIGHTS FINAL PART

INDIRECT TAXATION PROPOSALS

1.     SERVICE TAX

Service tax needs to confront two important challenges.  These are:

The share of services in taxes remains far below its potential. There is a need to widen the tax base and strengthen its enforcement;

Service Tax law is complex and sometimes avoidably different from Central Excise. We need to bring the two as close as possible in the light of our eventual goal of transition to GST.

·        The rate of service tax to be increased from 10% to 12%. Works contract composition rate increased from 4 % to 4.8%

·        NEGATIVE LSIT OF SERVICES

ü  Proposal to introduce negative list approach to taxation of services will enhance the share of service tax in the total tax revenue manifolds. The services specified in the negative list shall remain outside the service tax purview. This approach brings almost all the services under the tax net barring 17 heads of service listed in the negative list. Negative list includes most of the services provided by Government for local authority, services provided by Reserve Bank of India, foreign diplomatic missions located in India, cultivation services, trading of goods, betting, gambling, approved vocational educational education, etc.

ü  Certain specified services including health care services, services by religious persons and sports persons, educational services are to be exempted.

ü  To support the negative list approach to taxation of services, Place of Supply Rules are proposed to be placed in public domain for stakeholders’ comments. These rules are to determine the location where a service shall be deemed to be provided.

ü  As a measure of harmonization between Central Excise and Service Tax, a number of alignments have been made. These include a common simplified registration form and a common return for Central Excise and Service Tax, to be named EST-1.

ü  Cascading of taxes has been significantly reduced by permitting utilization of input tax credits in a number of services such as catering, restaurants, hotel accommodation, pandal and shamiana and transport sectors.

·        POINT OF TAXATION RULES,2011

ü  Rules pertaining to the Point of Taxation are also being rationalized, providing greater clarity and removing the irritants. Cenvat credits in a number of areas are being restored.

ü  Definition of continuous supply of service to be amended to capture the entire dimension of the concept. Small service providers [less than 50 lakh per year] being individuals/ partnership firms could discharge the tax on receipt basis.

ü  Date of payment is being defined.

·        SERVICE TAX RULES, 1994

ü  The time period for issuance of invoice to be increased from 14 days to 30 days. For banks and financial institutions providing banking and other financial services, period to be increased to 45 days.

ü  Retrospective amendments to reduce existing litigation with regard to infrastructural services being non commercial in nature.

2.    EXCISE DUTY

·        Enhancement of Standard rate of excise duty from 10% to 12%, concessional rate of duty from 5% to 6% and lower rate of duty from 1% to 2%.

·         Large cars currently attract excise duty depending on their engine capacity and length. In keeping with the increase proposed in the standard rate, duty is enhanced from 22 per cent to 24 per cent. In the case of cars that attract a mixed rate of duty of 22 per cent + `15000 per vehicle, it is proposed to increase the duty and switch over to an ad valorem rate of 27 per cent.

·         Chassis for building commercial vehicle bodies to be charged ED at an advalorem rate instead of mixed rate

·        Officers of audit, cost accountants and chartered accountants appointed under section 14A and 14AA to be empowered to prescribe the time limit within which the units being audited will produce the documents.

·        Expansion of deemed manufacture to bring more traders into the excise net in regard to cigarettes, branding of jewelry, cutting/ printing of aluminum foils and match and charging batteries.

·        Section 9 amended to provide that the cases of evasion in which the duty exceeds Rs. 30 lakh would be punishable with a term of imprisonment extending to seven years and with fine. Earlier this amount was Rs. 1 lakh.

·        Levy of ED of 1% on branded precious metal jewellery is extended to include unbranded jewellery.

·        Along with increase in duty to 12%, abatement on readymade garments enhanced from 55%-70% from Retail sales price.

·        Increase on basic excise duty on cigarettes of more than 65mm length by adding an ad valorem component of 10 per cent to the existing specific rates. The ad valorem duty would be chargeable on 50 per cent of the Retail Sale Price declared on the pack.

·        Nominal increase in basic excise duty on hand-rolled bidis from Rs8 to Rs10 per thousand and on machine-rolled bidis from `19 to `21 per thousand. The existing exemption available to hand-rolled bidis for clearances up to 20 lakh bidis per annum is being retained.

·        Crude petroleum oil produced in India attracts a cess of Rs 2,500 per metric tonne under the Oil Industries Development Act has been increased to Rs 4500 per metric tonne.

·        Excise duty has been rationalized on for packaged cement whether manufactured by mini cement plant or others.

·        The concessional excise duty at 2% has been extended to parts, components and specified accessories.

·        Excise duty has been reduced from 10% to 6% on LED lamps, lodine, processed food products of soya, matches manufactured by semi mechanized units, parts of blood pressure monitors and specified raw materials.

3.      CUSTOMS DUTY

·        Peak rate of customs duty of 10% to be restored.

·        Definition of customs airport to be amended to include the air freight stations also.

·        Increase in duty-free allowance of baggage allowance for eligible passengers of Indian origin from Rs25, 000 to Rs35,000 and for children of up to 10 years from Rs12,000 to Rs15,000.

·        Certain items exempted from customs are – steam coal, LNG & natural gas for generation of electricity, aircraft tyres, waste paper, equipments for road construction projects, tunnel excavation, expansion of fertilizer projects, coal mining projects, raw silking testing equipment.

·        Basic customs duty reduced from 7.5% to 2.5% on sugarcane planter, root or tuber crop harvesting machine and rotary tiller and weeder.

·        Basic customs duty reduced from 7.5% to 5% on specified coffee plantation and processing.

·        Reduce basic customs duty on some water soluble fertilisers and liquid fertilisers, other than urea, from 7.5 per cent to 5 per cent and from 5 per cent to 2.5 per cent machinery;

·        Initial setting up or substantial expansion of fertiliser projects are being fully exempted from basic customs duty of 5 per cent for a period of three years up to March 31, 2015.

·        Full exemption from basic customs duty is being provided to coal mining projects.

·        It is proposed to extend concessional basic customs duty of 5 per cent with full exemption from excise duty/CVD to six specified life-saving drugs/ vaccines. These are used for the treatment or prevention of ailments such as HIV-AIDS, renal cancer, etc

Direct Taxes are estimated to result in a net revenue loss of Rs4500 crore for the year. Proposals relating to Indirect Taxes are estimated to result in a net revenue gain of Rs 45,940 crore, leaving a net gain of Rs 41,440 crore in the Budget.

FAILURES OF BUDGET 2012

• ·        Failed to address roadmap on implementation of GST, DTC and the New Companies Bill.
• ·        Have not yet taken into consideration higher fuel and power prices.
• ·        The Budget has guided for a fiscal deficit target of 5.1% for FY13, and gross borrowing figure of Rs 5.69 lakh crore. Market does not appear to be taking both numbers seriously, even though the fiscal deficit number is something it was hoping to hear.
• ·        Budget has failed to address the concerns on inflation.
• ·         More focus on indirect taxes for increase in revenue rather than direct taxes.
• ·        No big reforms were brought about to improve growth in the economy.
• ·        The changes to tax laws with retrospective effect will affect investment in India.
• ·        Budget lacks roadmap for fiscal consolidation.

CONCLUSION

The budget calculations have been prepared with a minimum fluctuation in oil prices. If the pressure on Iran increases then the oil prices may touch $150-$200/ barrel. The government’s measure to tackle fiscal deficit may go out of hands. At the same time with wider definition given to Capital asset it will impact the investments made in India.

Budget 2012 presented by Finance Minister Shri Pranab Mukherjee lacked the push that the Indian Economy was looking for. It was a status quo budget for the common man with some fears of inflation and not much hope for an accelerated growth. It had lot of political constraints and pressure of coalition government.

Whether the budget is a success or a failure, I leave that question open to you to decide for.

UNION BUDGET 2012- HIGHLIGHTS PART 3

TAX INCENTIVES AND RELEIFS:

o   Effective from AY 2013-14 assessees in business of generation and distribution of power are eligible for initial depreciation @ 20% of actual cost of new machinery (other than ships and aircraft) acquired and installed in previous year u/s 32(1)(iia).

o   Extension of the sunset date by one year for power sector undertakings so that they can be set up on or before March 31, 2013 for claiming 100 per cent deduction of profits for 10 years.

• o   Income of a foreign company received in India in Indian currency on account of sale of crude oil to any person in India is exempted u/s 10(48).
• o   Weighted deduction of 200% relation to expenditure incurred on scientific research on in-house research and development facility of any specified article or thing u/s 35(2AB) has been extended for a further period of five years to 31.03.2017.
• o   Weighted deduction of 150% of expenditure incurred on agricultural extension is provided in new section 35CCC & 35CCD.
• o   It is further proposed to remove the cascading effect of Dividend Distribution Tax (DDT) u/s 115-O in a multi-tier corporate structure.
• Concessional rate of taxation @ 15% of gross dividends received by an Indian company from specified foreign company to be extended in respect of dividend received in F.Y. 2012-13 also
•   New Section 35CCD for weighted deduction of 150% of expenses ( not being in nature of land or building) incurred on skill development projects as notified by the board.
• o   Threshold limit for audit u/s 44AB and 44AD (presumptive tax) has been increased from Rs 60 lakhs to Rs 1 crore for persons carrying on business and for persons carrying on profession it has increased from Rs 15 lakhs to Rs 25 lakhs.
• o   Senior citizens are exempted from paying advance tax not having any income chargeable under the head Profits and gains from business or profession.

o   SECTION 35AD Investment linked deduction of capital expenditure incurred in the following businesses is proposed to be provided at the enhanced rate of 150 per cent, as against the current rate of 100 per cent.

o   Cold chain facility

o   Warehouses for storage of food grains

o   Hospitals

o   Fertilisers

o   Affordable housing

·        Section 35AD  has been amended to include 3 new business for the purposes of investment linked deduction:

·        bee keeping and production of honey and beeswax

·        container freight station and inland container depots

·        warehousing for storage of sugar

o   Reduction in Securities Transaction Tax (STT) by 20 per cent (from 0.125 per cent to 0.1 per cent) on cash delivery transactions.

INTERNATIONAL TAXATION PROVISIONS

 

·        INCOME DEEMED TO ACCRUE OR ARISE IN INDIA: Income deemed to be accruing or arising to non-residents directly or indirectly through the transfer of a capital asset situated in India is to be taxed in India with retrospective effect from 1 April 1962. This amendment has been proposed for clarifying the scope of Section 9 and 195, in the background of certain recent judicial pronouncements, by inserting explanations. Therefore explanation is given to Section 9(1)(i), 2(14), and 2(47). This has been given a retrospective effect from 01.04.1962. Withholding tax obligation on payment of income to non-residents clarified to be applicable to non-residents in all scenarios and notwithstanding they having no formal taxable presence in India u/s 195 and has retrospective effect. This has negated the decision of Vaodafone case.

·        NON RESIDENT SPORTSMEN, ENTERTAINER: Income arising to non- resident sportsman, sports association and entertainer shall be taxable @ 20% of gross receipts. Section 194E has been amended to provide withholding tax @ 20%.

·        Royalty income for non-residents to include computer software includes transmission by satellite, cable, optic fibre or any other such technology with retrospective effect from 1 June 1976.

·        Tax Residence Certificate (TRC): Section 90 & 90A has been amended to enable make submission of TRC containing prescribed particulars, but not sufficient for availing benefits of the agreements referred to in these sections.

·        ADVANCE PRICING AGREEMENT (APA): In a globalised economy with expanding cross-border production chains and growing trade within entities of the same group, Advance Pricing Agreement (APA) can significantly bring down tax litigation and provide tax certainty to foreign investors will be effective from 01.07.2012

·        Transfer pricing regulations will apply to certain domestic transactions where the aggregate amount of all such domestic transactions exceeds Rs 50lakhs in a year.

·        With retrospective effect from 01.04.2002 the tolerance band of 5% is not taken as standard deduction while computing ALP. However completed assessments will not be reopened in this ground. It shall be applicable to all proceedings pending since 01.10.2009.

·        All assesses who are required to file transfer pricing report the due date would be 30^th November which was earlier available only to a corporate assessees.

·        Intangible property used in definition of international transaction shall include a transaction of business restructuring or reorganization and has been given a retrospective effect from AY 2002-03.

·        DISPUTE RESOLUTION PANEL: With effect from 1 April 2009, the enhancement powers of DRP to include any matter arising out of the draft assessment order. The CIT / AO can now file an appeal to the Tribunal against an order passed pursuance to the directions of DRP as stipulated

·        GENERAL ANTI AVOIDANCE RULES: Introduction of  General Anti Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel

OTHER AMENDMENTS

·        Section 10(23C), 13 and 143 is amended with retrospective effect from AY 2009-10 that charitable organizations from commercial activities exceeding Rs 25 lakhs shall not get the benefit of tax exemption whether or not registration is cancelled or withdrawn.

·        W.e.f AY 2013-14 any payment exceeding sum of Rs 10,000 shall be allowed as a deduction u/s 80G, 80GGA if sum is paid by any mode other than cash.

·        It has been clarified that Section 111A is amended with retrospective effect from 01.04.2009 to increase tax rate to 15% instead of 10%.

·        LIFE INSURANCE POLICIES:  Threshold limit is reduced from 20% to 10% of the actual capital sum assured u/s 10(10D). Exemption would be available for insurance policies issued on or after 01.04.2012 if premium paid does not exceed 10% of actual capital sum assured. Deduction u/s 80C shall be allowed only to extent of 10% of actual sum assured.

·         In order to augment funds for SMEs, it is proposed to exempt capital gains tax on sale of a residential property, if the sale consideration is used for subscription in equity of a manufacturing SME company for purchase of new plant and machinery.

UNION BUDGET 2012- HIGHLIGHTS PART 2

TAXATION

DIRECT TAXES

The direct taxes amendments have been made to bring it in line in with DTC.  Major amendments made in Income Tax Act, 1961 are

PERSONAL INCOME TAX

• ·        Exemption limit for general category of individual tax payers is enhanced from Rs 1,80,000 to Rs 2,00,000. For Senior citizens( 60 yrs- 79 yrs) it is retained at Rs 2,50,000 and for very senior citizens( 80 yrs & above) exemption limit is Rs 5,00,000.
• ·        Deduction for expenditure on preventive health checkups is allowable on payments aggregating upto Rs 5,000for self, spouse, dependent parents and children.

·        It is a deduction u/s 80D and is within the limits of Rs 15,000.( Rs 20,000 for senior citizens.)

·         DEDUCTION IN RESPECT OF INTEREST FROM SAVINGS ACCOUNT

·        It is applicable to individuals and HUF and for this purpose Sec 80TTA has been introduced.

·        Deduction up to Rs 10,000 in aggregate in respect of any income by way of interest on deposits (not being time deposits) in a savings account with a banking company, a co-operative society or post office.

·        Senior citizens who do not have any income from business are proposed to be exempted from the payment of advance tax. This will reduce their compliance burden.

WITHOLDING TAX

·        In order to provide low cost funds to some stressed infrastructure sectors, the rate of withholding tax on interest payments on external commercial borrowings is proposed to be reduced from 20 per cent to 5 per cent for three years. These sectors are:

·        power; airlines; roads and bridges; ports and shipyards; affordable housing; fertilizer; and dams.

• o   Effective from AY 2012-13, u/s 209C, where a person has received any income without deduction or collection of tax, he shall be liable to pay advance tax in respect of such income.

1. o   Effective from 01.07.2012  u/s234E levy of fee @ Rs 200/day for late furnishing of TDS statement and a penalty u/s 272A ranging from  Rs 10,000 to Rs 1,00,000 for not furnishing TDS statement within 1 year of the prescribed due date after payment of tax deducted along with applicable interest and fee is provided.

• o  TDS threshold has been increased from Rs 2500 to Rs 5,000 for section 193(Payment of interest on debentures)
• o   TDS threshold has been increased from Rs 1,00,000 to Rs 2,00,000 u/s 194LA (compulsory acquisition)

WIDENING OF TAX BASE

o   ALTERNATE MINIMUM TAX (AMT):

o   Applicable to all persons (other than companies) claiming any deduction under chapter VI A (other than deduction u/s 80P) or u/s 10AA, if the adjusted total income for the year exceeds Rs 20,00,000.

o   Adjusted total income is the total income before giving effect to provisions of Chapter XII A, as increased by the deductions claimed under Chapter VIA or section 10AA as above.

o   Where the income tax payable as per normal computation is less than the AMT, the adjusted total income as per the section shall be deemed to be the total income liable to tax @ 18.5%.

o   Credit for AMT paid shall be allowed to the extent of the AMT paid over regular Income Tax and allowed to be carried forward to be set off in the succeeding assessment year in which tax is payable under regular provisions is in excess of AMT.

o   TAX DEDUCTED AT SOURCE & TCS

o   TDS @ 1% is to be deducted by the transferee at the time of making payment or crediting the consideration above Rs 50,00,000 for urban agglomeration and Rs 20 lakhs in any other area. (Immovable properties other than agricultural land).

o   If the consideration is less than the value assessed by statutory authority for the payment of stamp duty, such value shall deemed to be as consideration.

o   Proof of payment of TDS to be furnished without which the registering authority will not register the transaction.

o   WEF from 01.07.2012 TDS is to be deducted on remuneration (not in nature of salary) paid to a director @ 105 u/s 194J.

o   Tax collection at source on trading in coal, lignite and iron ore shall be collected @ 1% u/s 206C by the seller from the buyer except where the purchase is of personal consumption or for manufacturing, processing or producing articles or things.

o   Tax collection at source on cash sale of bullion and jewellery @ 1% of sale consideration from every buyer irrespective of whether purchase is of personal use.

o   PREVENTION OF GENERATION AND CIRUCLATION OF UNACCOUNTED MONEY

o   Unexplained money, credits, investments, expenditures etc., u/s 68, 69A, 69B, 69C and 69D shall be taxed at the highest rate of 30 per cent irrespective of the slab of income. No deduction shall be allowed under any of the provisions of the act for computing total income. It is similar to Section 115BB.

o   W.e.f AY 2012-13 furnishing of return of income is mandatory for every resident having asset (including financial interest in any entity) located outside India irrespective of the fact whether the resident tax payer has taxable income or not.

o   Reopening of assessment u/s 149, where the income in relation to any asset located outside India, chargeable to tax, has escaped assessment shall be increased to 16 years.  Corresponding amendment has also been made in Section 17 of wealth tax act.

o   New Section 271AAB has been inserted for levying penalty on undisclosed income found during the course of search wef from 1^st July 2012.

o   Section 56(2) is amended  to provide that consideration for issue of shares received by a company ( other than a company in which public are substantially interested ) from any person being a resident, exceeds the face value of shares, the excess of aggregate consideration over fair market value of the shares will be taxable under “Income from other sources”. The provision shall not apply to a venture capital company. But the big question how will fair value will be determined?