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ACCOUNTING & TAXATION - NBFCs

ACCOUNTING & TAXATION - NBFCs. BY R ANAND VICE PRESIDENT (CORPORATE AFFAIRS) SUNDARAM FINANCE LIMITED. GENERAL. MANAGING ACCOUNTING vs. MANAGING BUSINESS COST OF COMPLIANCE & DECLINING MARGINS OVER REGULATION Vs. LIBERLISATION. ACCOUNTING - COMPANY LAW REQUIREMENTS.

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ACCOUNTING & TAXATION - NBFCs

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  1. ACCOUNTING & TAXATION - NBFCs BY R ANAND VICE PRESIDENT (CORPORATE AFFAIRS) SUNDARAM FINANCE LIMITED RBI - PUNE

  2. GENERAL • MANAGING ACCOUNTING vs. MANAGING BUSINESS • COST OF COMPLIANCE & DECLINING MARGINS • OVER REGULATION Vs. LIBERLISATION RBI - PUNE

  3. ACCOUNTING - COMPANY LAW REQUIREMENTS • COMPLIANCE WITH ACCOUNTING STANDARDS MANDATED - SEC 211(3A). • NON ADHERENCE REQUIRES DISCLOSURES – SEC 211(3B). • TRIPARTITE INVOLVEMENT IN FORMULATION – CENTRAL GOVT, NATIONAL ADVISORY COMMITTEE AND ICAI – SEC 211(3C). RBI - PUNE

  4. ACCOUNTING – RBI REQUIREMENTS • SEC.45Q UNDER CHAPTER III B OF THE RBI ACT, 1934 OVERRIDES OTHER LAWS • RBI PRUDENTIAL NORMS VS. ACCOUNTING STANDARDS AND GUIDANCE NOTES - PARA 5 OF RBI PRUDENTIAL NORMS DIRECTIONS DT.31ST JAN 1998. • MANDATORY ACCOUNTING STANDARDS AS APPLICABLE TO OTHER CORPORATES TO THE EXTENT NOT INCONSISTENT WITH RBI’S DIRECTIONS. RBI - PUNE

  5. ACCOUNTING – INCOME-TAX REQUIREMENTS • CENTRAL GOVT. HAS GOT POWER TO ISSUE ACCOUNTING STANDARDS FOR INCOME-TAX PURPOSE UNDER SEC.145 VIDE AMENDMENT IN 1997 • SO FAR, ONLY 2 STANDARDS WERE ISSUED (NOTIFICATION NO. SO69(E) DT. 25/01/1996) - AS I : DISCLOSURE OF ACCOUNTING POLICIES - AS II : DISCLOSURE OF PRIOR PERIOD & EXTRA ORDINARY ITEMS AND CHANGES IN ACCOUNTING POLICIES. RBI - PUNE

  6. IMPORTANT STANDARDS APPLICABLE TO NBFCs RBI - PUNE

  7. DISCLOSURE OF ACCOUNTING POLICIES (AS 1) • FUNDAMENTAL ACCOUNTING ASSUMPTIONS - GOING CONCERN, ACCRUAL & CONSISTENCY • MAJOR CONSIDERATIONS - PRUDENCE, SUBSTANCE OVER FORM & MATERIALITY • CHANGE IN RECOGNITION OF HP INCOME -WHETHER AMOUNTS TO CHANGE IN ACCOUNTING POLICY? • BROKERAGE ON DEPOSITS / COMMISSION FROM DEALERS - ACCOUNTING TREATMENT. RBI - PUNE

  8. CASH FLOW STATEMENTS (AS 3) • CLAUSE 32 OF THE LISTING AGREEMENT REQUIRES TO GIVE CASH FLOW STATEMENT ALONG WITH BALANCE SHEET AND P & L. • ACTIVITIES TO BE CLASSIFIED INTO OPERATING, INVESTING AND FINANCING. • STANDARD RECOMMENDS TWO METHODS OF REPORTING : i.e., (1) DIRECT ; & (2) INDIRECT. • LISTING AGREEMENT MANDATES INDIRECT METHOD. • DIRECT METHOD: RECEIPTS & PAYMENTS ARE TAKEN AT FULL VALUE. • INDIRECT METHOD: NET PROFIT BEFORE TAX & EXTRAORDINARY ITEMS IS THE STARTING POINT AND ADJUSTMENTS ARE MADE THERETO. RBI - PUNE

  9. PROVISIONS, CONTINGENCIES, PRIOR PERIOD & EXTRAORDINARY ITEMS - AS 4, AS 5 & AS 29 • PROVISION TO BE MADE FOR PRESENT OBLIGATON AS A RESULT OF PAST EVENT WHERE PROBABLE OUTFLOW OF RESOURCES CAN BE RELIABLY ESTIMATED. • CONTINGENT LIABILITIES / ASSETS SHOULD NOT BE RECOGNISED. • EVENTS OCCURING AFTER THE BALANCE SHEET DATE THAT PROVIDE FURTHER EVIDENCE OF CONDITIONS THAT EXISTED AT THE BALANCE SHEET DATE TO BE RECKONED. • EXTRAORDINARY ITEMS SHOULD BE SEPARATELY DISCLOSED IN THE P&L ACCOUNT. • PRIOR PERIOD ITEMS SHOULD BE SEPARATELY DISCLOSED IN THE P&L. • ANY CHANGE IN AN ACCOUNTING POLICY WHICH HAS A MATERIAL EFFECT SHOULD BE DISCLOSED. RBI - PUNE

  10. DEPRECIATION - AS 6 • SYSTEMATIC BASIS AND USEFUL LIFE ARE THE CRITERIA FOR CHARGING DEPRECIATION. • CONSISTENCY IS THE BASIC PRINCIPLE, BUT CHANGE IN THE METHOD IS ALLOWED FOR BONA FIDE REASONS. • CHANGE IN THE METHOD – RETROSPECTIVE EFFECT WITH DEFICIENCY / SURPLUS TO BE ACCOUNTED IN THE YEAR OF CHANGE. • IN THE CASE OF REVALUATION, DEPRECIATION IS ON THE REVALUED AMOUNT OVER THE REMAINING USEFUL LIFE. • ADDITION OR EXTENSION, EXCHANGE FLUCTUATION TO BE DEPRECIATED OVER REMAINING USEFUL LIFE. • SCHEDULE XIV RATES ARE TO BE ADOPTED AS THE MINIMUM LEVEL. RBI - PUNE

  11. FIXED ASSETS - AS 10 • COST OF FIXED ASSETS = PURCHASE PRICE + COST OF BRINGING THE ASSET TO ITS WORKING CONDITION. • SUBSEQUENT EXPENDITURE SHOULD BE ADDED ONLY IF IT INCREASES THE FUTURE BENEFITS. • FIXED ASSETS SHOULD BE ELIMINATED UPON ITS DISPOSAL. • GAINS OR LOSSES FROM DISPOSAL OF FIXED ASSETS SHOULD BE RECOGNISED IN P & L ACCOUNT. • REVALUATION IS PERMITTED FOR A CLASS OF ASSETS OR SELECTION OF ASSETS ON A SYSTEMATIC BASIS. • DISCLOSURE : - GROSS & NET BOOK VALUE WITH DETAILS OF ADDITIONLS, DISPOSALS, ACQUISITIONS & OTHER MOVEMENTS. - PARTICULARS ABOUT REVALUATION : AMOUNT, METHOD ETC. RBI - PUNE

  12. DEPRECIATION ACCOUNTING (AS 6) &ACCOUNTING FOR FIXED ASSETS (AS 10) • CAPITALISATION AS FIXED ASSETS BY LESSOR NOT PERMITTED FROM 01/04/2001. • FOR LEASES PUT THROUGH PRIOR TO 01/04/2001 - DISCLOSURE OF LEASED ASSETS IN THE BALANCE SHEET. FIXED ASSETS LESS:ACCUMULATED DEPRECIATION LESS/ADD: ACCUMULATED LEASE ADJUSTMENT • DEPRECIATION AS PER SCH.XIV RATES OR AS PER MANAGEMENT’S ESTIMATE BASED ON USEFUL LIFE OF THE ASSET • CONCEPT OF ANNUAL LEASE CHARGE (ALC) FOR LEASES PUT THRO’ PRIOR TO 01.04.2001 • ALC COMPRISES OF MINIMUM STATUTORY DEPRECIATION & LEASE EQUALISATION CHARGE • REPOSSESSED HP/LEASE ASSETS SHOULD BE SHOWN AS DISTINCT FROM ‘ASSETS ON LEASE’ OR ‘STOCK ON HIRE’(RBI CIRCULAR DT. 01.02.2002) RBI - PUNE

  13. REVENUE RECOGNITION • INCOME FROM HP & LEASE FROM 01.04.2001 • RECOGNITION OF HP AND LEASE INCOME FOR BOOKS -GOVERNED BY AS 19 • RECOGNITION OF LEASE/HP INCOME - IRR BASIS PRE 01.04.2001 • LEASE - GOVERNED BY GUIDANCE NOTE • HP - NO SPECIFIC REQUIREMENT • OTHER INCOME (AS 9): - INCOME FROM DIVIDENDS TO BE RECOGNISED WHEN OWNER’s RIGHT TO RECEIVE PAYMENT IS ESTABLISHED - INTEREST ON LOANS ACCRUES ON TIME BASIS AFTER CONSIDERING AMOUNT O/S AND RATE APPLICABLE RBI - PUNE

  14. EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES – AS 11 • FOREIGN CURRENCY TRANSACTION TO BE RECORDED AT THE EXCHANGE RATE ON THE DATE OF TRANSACTION. • ON BALANCE SHEET DATE - FOREIGN CURRENCY MONETARY ITEMS SHOULD BE REPORTED USING CLOSING RATE. - FOREIGN CURRENCY NON-MONETARY ITEMS TO BE REPORTED AT THE RATE ON THE DATE OF TRANSACTION. • EXCHANGE DIFFERENCES SHOULD BE RECOGNISED AS INCOME OR EXPENSES IN WHICH THEY ARISE. • PREMIUM OR DISCOUNT ON FORWARD EXCHANGE CONTRACT SHOULD BE AMORTIZED AS EXPENSE OR INCOME OVER THE LIFE OF THE CONTRACT. RBI - PUNE

  15. ACCOUNTING FOR INVESTMENTS RBI DIRECTIONS & AS 13 • INVESTMENTS CLASSIFIED AT THE BEGINNING INTO - CURRENT INVESTMENTS & - LONG TERM INVESTMENTS • INTER CLASS TRANSFER IS PERMITTED ON HALF YEARLY BASIS • QUOTED CURRENT INVESTMENTS BE GROUPED INTO EQUITY SHARES, PREF. SHARES ,DEBENTURES& BONDS,GOVT. SECURITIES, UNITS OF MUTUAL FUNDS AND OTHERS • QUOTED CURRENT INVESTMENT VALUED AT COST OR MARKET VALUE, WHICHEVER IS LOWER ON SCRIP-WISE AND CATEGORY WISE • AGGREGATE MARKET VALUE OF A PARTICULAR CATEGORY IS LESS THAN THE AGGREGATE COST THEN THE SHORTFALL SHOULD BE PROVIDED FOR. • SEPARATE TREATMENT FOR UNQUOTED SECURITIES • LONG TERM INVESTMENTS ARE VALUED AT COST AND DECLINE IN VALUE OF INVESTMENTS, OTHER THAN TEMPORARY TO BE PROVIDED RBI - PUNE

  16. BORROWING COSTS - AS 16 • BORROWING COST DIRECTLY ATTRIBUTABLE TO THE ACQUISITION, CONSTRUCTION OR PRODUCTION OF A QUALIFYING ASSET SHOULD BE CAPITALISED. • QUALIFYING ASSET IS AN ASSET THAT TAKES A SUBSTANTIAL PERIOD OF TIME TO GET READY FOR ITS USE OR SALE. • TEMPORARY INVESTMENTS OF BORROWING SHOULD BE REDUCED FROM BORROWING COSTS. • CAPITALISATION OF BORROWING COSTS BE SUSPENDED DURING A PERIOD IN WHICH ACTIVE DEVELOPMENT IS INTERRUPTED. • CAPITALISATION OF BORROWING COST SHOULD CEASE WHEN SUBSTANTIAL ACTIVITIES ON QUALIFYING ASSET ARE COMPLETE. • ACCOUNTING POLICY AND AMOUNT OF CAPITALISATION TO BE DISCLOSED IN THE FINANCIAL STATEMENTS. RBI - PUNE

  17. SEGMENT REPORTING - AS 17 • SEGMENT REPORTING HELPS TO UNDERSTAND THE PERFORMANCE & ASSESS THE RISK AND RETURN OF AN ENTERPRISE. • LISTED COMPANIES TO PUBLISH SEGMENT REPORTING ON A QUARTERLY BASIS IN THE FORMAT PRESCRIBED BY SEBI. • TYPES OF SEGMENT: (1) BUSINESS ; & (2) GEOGRAPHICAL. • DISCLOSURE IS ON REPORTABLE SEGMENT. • REPORTABLE SEGMENTS TO SATISFY REVENUE, RESULT AND ASSET BASED CONDITIONS. • REPORTING FORMAT IS ON PRIMARY SEGMENT & SECONDARY SEGMENT. • DOMINANT SOURCE AND NATURE OF RISK & RETURNS GOVERNS PRIMARY SEGEMENT REPORTING FORMAT. • NBFCs ENGAGED PRIMARILY IN FINANCING ACTIVITY IN INDIA HAS SINGLE REPORTABLE SEGMENT AND HENCE NO REQUIREMENT TO DISLCOSE SEGMENT INFORMATION [REFER ASI 20]. RBI - PUNE

  18. RELATED PARTY DISCLOSURES - AS 18 • OBJECTIVE IS TO DISCLOSE RELATED PARTY RELATIONSHIPS & TRANSACTIONS. • RELATED PARTY RELATIONSHIPS COVERED: A. ENTERPRISES HAVING CONTROL. B. ASSOCIATES & JOINT VENTURES. C. INDIVIDUALS HAVING SIGNIFICANT INFLUENCE. D. KEY MANAGEMENT PERSONNEL. E. ENTERPRISES WHERE C & D EXERCISE SIGNIFICANT INFLUENCE. • NAME OF THE RELATED PARTY & NATURE OF THE RELATIONSHIP SHOULD BE DISCLOSED IRRESPECTIVE OF ANY TRANSACTIONS DURING THE YEAR. • EXAMPLES OF RELATED PARTY TRANSACTIONS: PURCHASE, SALES, SERVICE, LEASING, HP, LICENCE, AGENCIES, FINANCE, GUARANTEES ETC. • AGGREGATION BY TYPE OF RELATED PARTY IS PERMITTED WITH EXCEPTIONS. • FORMAT OF DISCLOSURE IS PRESCRIBED BY ICAI. RBI - PUNE

  19. ACCOUNTING FOR LEASES – AS 19 - APPLICABILITY • MANDATORY WITH EFFECT FROM 01.04.2001. • HIRE PURCHASE TRANSACTIONS ARE COVERED. • A FINANCE LEASE TRANSFERS SUBSTANTIALLY ALL RISKS AND REWARDS OF OWNERSHIP OF ASSET TO LESSEE. • AN OPERATING LEASE IS SIMPLY AN AGREEMENT FOR HIRE OF ASSET. RBI - PUNE

  20. AS 19 – LESSEE ACCOUNTING LESSEE’S BOOKS: • FINANCE LEASE:  RECOGNISE LEASED ASSET AS ASSET WITH CORRESPONDING LIABILITY AT FAIR VALUE OF THE ASSET OR THE PRESENT VALUE OF THE MLP.  ASSET AND LIABILITY SHOULD BE SHOWN SEPARATELY AND NOT NETTED OFF.  LEASE PAYMENTS = PRINCIPAL + INTEREST • OPERATING LEASE: PAYMENT TO BE TREATED AS EXPENSE ON A STRAIGHT LINE OR SYSTEMATIC BASIS. RBI - PUNE

  21. AS 19 – LESSOR ACCOUNTING LESSOR’S BOOKS • FINANCE LEASE: RECOGNISE ASSET AS RECEIVABLE AT THE AMOUNT EQUAL TO NET INVESTMENT . LEASE RENT = PRINCIPAL + FINANCE INCOME. • OPERATING LEASE : EXISTING TREATMENT CONTINUES. RBI - PUNE

  22. AS 19 - IMPORTANT DISCLOSURES • BY LESSEE - OWN / LEASED ASSETS TO BE SEGREGATED - NET CARRYING AMOUNT ( W D V ) FOR EACH CLASS - LEASE PAYMENTS MATURITY AND THE PRESENT VALUE (DUE IN ONE YEAR, BETWEEN 1 TO 5 YEARS AND ABOVE 5 YEARS ) - LEASE PAYMENTS RECOGNISED IN THE STATEMENT OF PROFIT AND LOSS SEGREGATING MLP AND CONTINGENT RENT IN THE CASE OF OPERATING LEASE. • BY LESSOR - RECONCILIATION BETWEEN MLP AND PV OF MLP - LEASE RECEIVABLES MATURITY AND PRINCIPAL MATURITY (DUE IN ONE YEAR BETWEEN 1 TO 5 YEARS AND ABOVE 5 YEARS ) - UNEARNED FINANCE INCOME - GROSS ASSET COST, ACCUMULATED DEPRECIATION & CHARGE FOR EACH CLASS IN THE CASE OF OPERATING LEASE. RBI - PUNE

  23. EARNINGS PER SHARE – AS 20 • BASIC AND DILUTED EARNING PER SHARE SHOULD BE DISCLOSED ON THE FACE OF THE P & L STATEMENT. • BASIC EARNING PER SHARE = NET PROFIT OR LOSS AVAILABLE TO EQUITY SHAREHOLDERS / WEIGHTED AVERAGE NO. OF EQUITY SHARES OUTSTANDING. • DILUTED EARNING PER SHARE MAY ARISE IN THE CASE OF CONVERTIBLE DEBENTURES, OPTIONS ETC. • BASIC & DILUTED EARNING PER SHARE SHOULD BE ADJUSTED FOR ALL PERIODS PRESENTED IN BONUS, SHARE SPLIT SITUATIONS. RBI - PUNE

  24. CONSOLIDATED FINANCIAL STATEMENTS – AS 21, AS 23 & AS 27 • PARENT COMPANY SHOULD PRESENT CONSOLIDATED FINANCIAL STATEMENTS IN ADDITION TO SEPARATE FINANCIAL STATEMENTS. • CONSOLIDATION ON THE FOLLOWING BASIS: • - SUBSIDIARIES – LINE BY LINE CONSOLIDATION (AS 21) • - ASSOCIATES (20% VOTING INTEREST) – EQUITY METHOD (AS 23) & • - JOINT VENTURE – PROPORTIONATE CONSOLIDATION (AS 27) • GOODWILL / CAPITAL RESERVE ARE TO BE DETERMINED AND ACCOUNTED. • INTRA-GROUP BALANCES AND TRANSACTIONS TO BE ELIMINATED. RBI - PUNE

  25. ACCOUNTING FOR TAXES ON INCOME - AS 22SCOPE & OBJECTIVE • MATCHING OF TAXES AGAINST REVENUE. • BRIDGE THE GAP BETWEEN REPORTED INCOME AND TAXABLE INCOME • IF THE STANDARD IS APPLICABLE TO AN ENTERPRISE THEN ALL OTHER ENTERPRISES OF THE GROUP SHALL FOLLOW THE STANDARD - PROVIDED CONSOLIDATED FINANCIALS ARE BEING PREPARED. • IMPORTANT TERMS: - TAX EXPENSE (TAX SAVING) - CURRENT TAX - DEFERRED TAX - TIMING DIFFERENCE - PERMANENT DIFFERENCE RBI - PUNE

  26. AS 22- PERMANENT vs TIMING • ORIGINATION AND CAPABLE OF REVERSAL REQUIREMENTS • GOING CONCERN CONCEPT VS. ITEM BY ITEM • PARTIAL PROVISION VS. FULL PROVISION [BOTH WERE RECOMMENDED IN GUIDANCE NOTE] • AS 22 RECOGNISES ONLY FULL PROVISION METHOD • TIMING DIFFERENCES LEAD TO DEFERRED TAX ASSETS / LIABILITIES. • DEFERRED TAX ASSETS: • DISALLOWANCE U/S 43B, PROVISION FOR NON PERFORMING ASSETS [NBFC] • DEFERRED TAX LIABILITIES: - DIFFERENCE IN WDV BETWEEN BOOK & IT, DEFERRED IN BOOKS VS FULLY ALLOWED IN IT AND VICE VERSA. RBI - PUNE

  27. AS –22 RECOGNITION • TAX EXPENSE (CURRENT TAX + DEFERRED TAX ) BE INCLUDED IN P & L ACCOUNT • DEFERRED TAX LIABILITIES - TO BE FULLY PROVIDED FOR • DEFERRED TAX ASSETS - TO BE RECOGNISED ON THE BASIS OF “PRUDENCE” • PRUDENCE: - DEFERRED TAX ASSET - REASONABLE CERTAINTY (FAIR/ PREDICTABLE AND SENSIBLE ) - UNABSORBED DEPRECIATION & CARRY FORWARD LOSSES - VIRTUAL CERTAINTY (VERY NEARLY THE THING DESCRIBED) • VIRTUAL CERTAINTY - SUPPORTED BY CONVINCING EVIDENCE • NATURE OF EVIDENCE TO BE DISCLOSED • IAS-12 - “PROBABLE” APPROACH [GENERALLY 70% AND ABOVE] • FAS-109 - “MORE LIKELY THAN NOT” APPROACH [ JUST OVER 50%] RBI - PUNE

  28. AS-22 - MEASUREMENT & DISCLOSURE • DEFERRED TAX ASSETS BE REVIEWED EACH YEAR . • CURRENT TAX - APPLICABLE TAX RATES • DEFERRED TAX - TAX RATES ENACTED/ SUBSTANTIVELY ENACTED BY THE BALANCE SHEET DATE. • NETTING OFF IS PERMISSIBLE. • DEFERRED TAX ASSETS AND LIABILITIES SHOULD BE DISCLOSED UNDER A SEPARATE HEADING FROM CURRENT TAX ASSETS AND LIABILITIES • MAJOR COMPONENT WISE BREAK-UP TO BE DISCLOSED IN THE NOTES TO ACCOUNTS. RBI - PUNE

  29. INTERIM FINANCIAL REPORTING – AS 25 • CLAUSE 41 OF THE LISTING AGREEMENT MAKES IT MANDATORY FOR LISTED COMPANIES. • RECOGNITION AND MEASUREMENT BY AS 25 AND DISCLOSURE BY SEBI’S FORMAT IN THE CASE OF LISTED COMPANIES. • SAME ACCOUNTING POLICIES AS ANNUAL TO BE FOLLOWED IN PREPARING INTERIM REPORTS. • MATERIALITY DETERMINES RECOGNITION OF AN ITEM FOR INTERIM REPORTING. • TAX EXPENSE IS DETERMINED ON THE BASIS OF ESTIMATED AVERAGE ANNUAL INCOME-TAX RATE – INTEGRAL METHOD. • APPLICABILITY OF CHANGE IN THE TAX RATES (SUCH AS EDUCATION CESS) IN THE INTERIM PERIODS – POSITION CLARIFIED BY ICAI. RBI - PUNE

  30. INTANGIBLE ASSETS – AS 26 • INTANGIBLE ASSETS SHOULD SATISFY THE TESTS OF IDENTIFIABILITY, CONTROL & FUTURE ECONOMIC BENEFITS. • INTANGIBLE ASSETS SHOULD BE RECOGNISED ONLY IF FUTURE ECONOMIC BENEFITS WOULD FLOW AND COST CAN BE MEASURED. • DEPRECIATION ON INTANGIBLE ASSET SHOULD BE ALLOCATED ON A SYSTEMATIC BASIS OVER USEFUL LIFE (REBUTTABLE PRESUMPTION IS LIFE WILL NOT EXCEED 10 YEARS). • DISTINCTION BETWEEN RESEARCH PHASE & DEVELOPMENT PHASE IS CRUCIAL. • SEPARATE DISCLOSURES TO BE MADE FOR ACQUIRED AND SELF-GENERATED INTANGIBLE ASSETS. RBI - PUNE

  31. IMPAIRMENT OF ASSETS – AS 28 • IMPAIRMENT TEST TO BE MADE AT EACH BALANCE SHEET DATE. • BOTH EXTERNAL & INTERNAL SOURCES OF INFORMATION TO BE RESORTED TO DETERMINE IMPAIRMENT LOSS. • IMPAIRMENT LOSS = CARRYING AMOUNT – RECOVERABLE AMOUNT. • IF ASSET IS NOT INDEPENDENT, THEN IMPAIRMENT SHOULD BE ASCERTAINED FOR CASH GENERATING UNIT TO WHICH THE ASSET BELONGS. • IMPAIRMENT LOSS CAN BE REVERSED IN SUBSEQUENT PERIOD IF NO LONGER EXISTS. • FINANCIAL ASSETS EXCLUDED FROM ITS APPLICABILITY – POSITION REGARDING FINANCE LEASE, HIRE PURCHASE, HYPOTHECATION LOAN ? RBI - PUNE

  32. TAX ISSUES - DIRECT TAXES • STANDARD VS CBDT CIRCULAR [ NO. 2 OF 2001 ] • LESSOR CONTINUES TO CLAIM DEPRECIATION • TWO DIFFERENT SETS OF ACCOUNTS REQUIRED • VEHICLE LEASING & DEPRECIATION - COMMERCIAL VEHICLE ENTITLED TO HIGHER DEPRECIATION - MADAN & CO 254 ITR 445 (MAD.) DEPT. SLP DISMISSED BY SUPREME COURT IN CIT vs. MGF (INDIA) LTD [2003] 262 ITR 2 [STAT.] • DEPRECIATION ALLOWABLE TO HIRER (CBDT CIRCULAR NO.9 OF 1943) RBI - PUNE

  33. TAX ISSUES - DIRECT TAXES[contd] • DUAL METHOD OF RECOGNISING HP INCOME - CHENNAI TRIBUNAL’S DECISION IN ASHOK LEYLAND FINANCE CASE -80 ITD 560 (CHE.) • PROVISION FOR NPA AND ITS ALLOWABILITY - CHENNAI TRIBUNALS’ DECISION IN OVERSEAS SANMAR DECISION - AMENDMENT IN 36 (1) (VII) - WRIT PETITION IN MADRAS HIGH COURT & STAY ORDER. • INCOME DEFERMENT ON NPA - SEC 43D BENEFIT DEPRIVED - WRIT PETITION IN MADRAS HIGH COURT & STAY ORDER. - RECENT DECISION OF DELHI TRIBUNAL – TEDCO INVESTMENT & FINANCIALS SERVICES PVT LTD vs. DCIT [2003] 87 ITD 298 [DEL] RBI - PUNE

  34. TAX ISSUES - DIRECT TAXES[contd] • ADDITIONAL FINANCE CHARGES - NOTIONAL VS. ACTUAL ACCRUAL • SOFTWARE GIVEN ON LEASE - REVENUE OR DEFERRED REVENUE • TDS ON HP FINANCE CHARGES - NOT APPLICABLE - INSTRUCTION OF CBDT DATED 16/11/1981. • TDS ON INTEREST ON HYPOTHECATION LOAN - ALL CATEGORIES OF BORROWERS EXCEPT INDIVIDUALS / HUF WITH TURNOVER LESS THAN RS.40 LAKHS LIABLE TO DEDUCT TAX ON INTEREST PORTION OF THE INSTALMENT AT THE APPLICABLE RATES. • REPAYMENT OF LOAN IN EXCESS OF RS.20,000/- SHALL NOT BE IN CASH – BORROWERS TO TAKE CARE OF COMPLIANCE OF SEC 269T. • TDS ON PUBLIC DEPOSITS - DECLARATION FOR NON-DEDUCTION OF TDS - FORM 15H BY SENIOR CITIZEN AND FORM 15G BY OTHERS. - DTAA RATES FOR NRIS RBI - PUNE

  35. TAX ISSUE - SALES TAX HIRE PURCHASE • ‘DELIVERY’ - AFTER 46TH AMENDMENT • SINGLE POINT LEVY AND LOCALISATION OF `SALE’ • INTER-STATE FORMALITIES • WHETHER FINANCE CHARGES FORMS PART OF TURNOVER - SC DECISION IN JAI BHARAT CASE (120 STC 001) • USED HP TRANSACTIONS/HYPOTHECATION – SUNDARAM FINANCE VS STATE OF KERALA – 17 STC 489 • REPOSSESSION AND SALE. • RESALE TAX – MAHARASHTRA (0.5%), KARANATAKA (1.5%) & TAMIL NADU (1%). • VAT & ITS EFFECT ON HIRE PURCHASE. RBI - PUNE

  36. TAX ISSUES - SALES TAX LEASE • INCIDENCE OF TAX –TAXABLE EVENT – ‘TRANSFER OF RIGHT TO USE GOODS • TAXABLE EVENT – EXECUTION OF AGREEMENT IN CASE OF ASCERTAINED GOODS OR DELIVERY IN THE CASE OF UNASCERTAINED GOODS. • INTER-STATE AND IMPORT LEASE TRANSACTION – NOT LIABLE FOR TAX UNDER THE STATES SALES TAX LAWS. • SALE AFTER TERMINATION - ANY SALE MADE ON NORMAL/ FORECLOSURE OF THE CONTRACT IS A SALE MADE BY THE FINANCE COMPANY TAXABLE, IF NOT SUFFERED LOCAL TAX ALREADY - SALE TO BE MADE NORMALLY TO NOMINEE OF LESSEE • CONSEQUENT UPON RECENT CST AMENDMENT, INTER-STATE LEASE TRANSACTION EXIGIBLE TO CST. • C FORMS CAN BE ISSUED FOR THE PURPOSE OF PURCHASE OF ASSET FOR LEASING. RBI - PUNE

  37. TAX ISSUES - SERVICE TAX • LEVY APPLICABLE TO HIRE PURCHASE & LEASE TRANSACTION W.E.F 16/07/2001. - SEC 65 (72) (ZM) OF THE FINANCE ACT 1994 & TRU INSTRUCTION DATED 09/07/2001 • LEVY AT 8% (PROPOSED 10% + CESS 2%) ON FINANCE CHARGES, PROCESSING FEE, DOCUMENTATION CHARGES, LEASE MANAGEMENT FEE. • PAYABLE ON RECEIPT BASIS. • WRIT PETITIONS FILED CHALLENGING THE CONSTITUTIONAL VALIDITY OF LEVY AND STAY OBTAINED. - SIHPA & ELAI – STAY IN FORCE - ALFS & MADRAS HP ASSN – STAY VACATED • SC DECISION IN TAMIL NADU KALYANA MANDAPAM ASSN. VS. UNION OF INDIA [2004] 267 ITR 9 [SC] - SUPPORTS OUR ASSOCIATIONS’ CLAIM. • LOANS ARE BROUGHT INTO THE TAX NET BY THE FINANCE (NO.2) BILL, 2004. BUT INTEREST SPECIFICALLY EXCLUDED. RBI - PUNE

  38. KELKAR’s TASK FORCE REPORT – DIRECT TAXES • TASK FORCE REPORT ON FRBM ACT, 2003, RELEASED ON 16.07.2004. • BASIS FOR NEXT YEAR BUDGET PREPARATION. • TWO ALTERNATE SETS OF POLICY MEASURES ON CORPORATE TAX REFORM. • MAIN DIFFERENCE BETWEEN THE TWO SETS OF MEASURES IS: - OPTION 1: GRANDFATHER TREATMENT IN THE CASE OF EXEMPTIONS / DEDUCTIONS FOR EXISTING UNITS ON 1ST SEPTEMBER 2004 & DIVIDEND DISTRIBUTION TAX CONTINUES. - OPTION 2: EXEMPTIONS FOR DEDUCTIONS TO BE PHASED OUT OVER A PERIOD OF 2 YEARS & NO DIVIDEND DISTRIBUTION TAX. • COMMON MEASURES – CORPORATE TAX RATES TO BE REDUCED TO 30% FOR DOMESTIC COMPANIES & 35% FOR FOREIGN COMPANIES. RBI - PUNE

  39. KELKAR’s TASK FORCE REPORT – INDIRECT TAXES • AN INTEGRATED GOODS AND SERVICES TAX [GST] IS RECOMMENDED. • GST WILL REPLACE EXCISE DUTY, SERVICE TAX, SALES TAX, OCTROI, ENTRY TAX, STAMP DUTIES ETC. • UNDER GST BOTH CENTRE & STATES EXERCISE CONCURRENT BUT INDEPENDENT JURISDICTION (GRAND BARGAIN). • THREE TYPES OF RATE STRUCTURES PRESCRIBED i.e. STANDARD, FLOOR & HIGHER RATE. • STANDARD RATE SHOULD NOT EXCEED 12% & 8% FOR CENTRAL - GST & STATE – GST. • SEPARATE SCHEME OF TREATMENT FOR FINANCIAL SERVICES INDUSTRY WHICH INCLUDES ALL REGULATED FINANCE COMPANIES REGISTERED WITH RBI. RBI - PUNE

  40. THANK YOU RBI - PUNE

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