The Management Accountant · 2012-12-22 · by Satya Ranjan Doley 457 Direct Tax Code Bill-Meaning,...

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PRESIDENT G. N. Venkataraman email : [email protected] VICE PRESIDENT B. M. Sharma email : [email protected] CENTRAL COUNCIL MEMBERS A. N. Raman, A. S. Durga Prasad, Ashwin G. Dalwadi, Balwinder Singh, Chandra Wadhwa, Hari Krishan Goel, Kunal Banerjee, M. Gopalakrishnan, Dr. Sanjiban Bandyopadhyaya, S. R. Bhargave, Somnath Mukherjee, Suresh Chandra Mohanty, V. C. Kothari, GOVERNMENT NOMINEES Jaikant Singh, D. S. Chakrabarty Ms. Smita S. Chaudhri, P. K. Jena CHIEF EXECUTIVE OFFICER Sudhir Galande [email protected] Senior Director (Examinations) Chandana Bose [email protected] Senior Director (Administration & Finance) R N Pal [email protected] Director (Technical) J. P. Singh [email protected] Director (Studies) Arnab Chakraborty [email protected] Director (CAT) L. Gurumurthy [email protected] Director (PD, Training & Placement) J. K. Budhiraja [email protected]. Additional Director (CEP) D. Chandru [email protected] Additional Director (Membership) cum Joint Secretary Kaushik Banerjee [email protected] Additional Director (International Affairs) S. C. Gupta [email protected] EDITOR Sudhir Galande Editorial Office & Headquarters 12, Sudder Street, Kolkata-700 016 Phone : (033) 2252-1031/34/35, Fax : (033) 2252-1602/1492 Website : www.icwai.org Delhi Office ICWAI Bhawan 3, Institutional Area, Lodi Road New Delhi-110003 Phone : (011) 24622156, 24618645, Fax: (011) 24622156, 24631532, 24618645 The Management Accountant « Official Organ of The Institute of Cost and Works Accountants of India established in year 1944 (Founder member of IFAC, SAFA and CAPA) Volume 45 No. 6 June 2010 the management accountant, June, 2010 433 Editorial 435 President’s Communique 436 Inaugural Speech of Mr. Jagdish Capoor, Chairman of HDFC Bank Ltd. 438 Role of Cost and Management Accountants under Direct Tax Code Direct Tax Code-Value Based Services by Cost and Management Accountant by Mrityunjay Acharjee 440 Direct Tax Code 2009: Fate of FDI-flow through Indo-Mauritius DTAA? by Dr. Sudipta Sarkar 451 Direct Tax Code 2009: Boon or Bane by Satya Ranjan Doley 457 Direct Tax Code Bill-Meaning, Features and Accountants Role by Pooja Sareen 458 Role of Cost and Management Accountant Under Direct Tax Code by Dr. Sukamal Datta & Tamal Taru Roy 462 Recent Development in Finance Impairment of Financial Assets in the Era of IFRS by P. V. Antony & Ragesh M. 466 Legal Updates National Company Law Tribunal : Supreme Court Judgement by Dr. K. S. Ravichandran 470 Costing Techniques An Alternative Approach to an Analysis of Standard Cost Variances by Ramamohana Rao Guttikonda 474 Risk Management Challenges in Implementing Operational Risk Management by Thirunellai Radhakrishnan Anand 479 Banking Matters Regional Rural Banks and Prudential Norms–An Overview by R. Suresh 484 Admission to Membership 493 MDP Programme for July 501 Notification Company Law Settlement Scheme, 2010 502 Easy Exit Scheme, 2010 506 Calendar of MDP Programes 508 Notice 510 IDEALS THE INSTITUTE STANDS FOR q to develop the Cost and Manage-ment Accountancy profession q to develop the body of members and properly equip them for functions q to ensure sound professional ethics q to keep abreast of new developments. The views expressed by contributors or reviewers in this Journal do not necessarily reflect the opinion of The Institute of Cost and Works Accountants of India nor can the Institute by any way be held responsible for them. The contents of this journal are the copyright of The Institute of Cost and Works Accountants of India, whose permission is necessary for reproduction in whole or in part.

Transcript of The Management Accountant · 2012-12-22 · by Satya Ranjan Doley 457 Direct Tax Code Bill-Meaning,...

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PRESIDENTG. N. Venkataraman

email : [email protected] PRESIDENT

B. M. Sharmaemail : [email protected] COUNCIL MEMBERS

A. N. Raman, A. S. Durga Prasad,Ashwin G. Dalwadi, Balwinder Singh,Chandra Wadhwa, Hari Krishan Goel,Kunal Banerjee, M. Gopalakrishnan,

Dr. Sanjiban Bandyopadhyaya,S. R. Bhargave, Somnath Mukherjee,

Suresh Chandra Mohanty, V. C. Kothari,GOVERNMENT NOMINEESJaikant Singh, D. S. Chakrabarty

Ms. Smita S. Chaudhri, P. K. JenaCHIEF EXECUTIVE OFFICER

Sudhir [email protected]

Senior Director (Examinations)Chandana Bose

[email protected] Director

(Administration & Finance)R N Pal

[email protected] (Technical)

J. P. [email protected]

Director (Studies)Arnab Chakraborty

[email protected] (CAT)L. Gurumurthy

[email protected] (PD, Training & Placement)

J. K. [email protected].

Additional Director (CEP)D. Chandru

[email protected] Director (Membership) cum

Joint SecretaryKaushik Banerjee

[email protected] Director (International Affairs)

S. C. [email protected]

EDITORSudhir Galande

Editorial Office & Headquarters12, Sudder Street, Kolkata-700 016Phone : (033) 2252-1031/34/35,

Fax : (033) 2252-1602/1492Website : www.icwai.org

Delhi OfficeICWAI Bhawan

3, Institutional Area, Lodi RoadNew Delhi-110003

Phone : (011) 24622156, 24618645,Fax: (011) 24622156, 24631532, 24618645

TheManagementAccountan t

« Official Organ of The Institute of Cost and Works Accountants of India

established in year 1944 (Founder member of IFAC, SAFA and CAPA)

Volume 45 No. 6 June 2010

the management accountant, June, 2010 433

Editorial 435

President’s Communique 436

Inaugural Speech of Mr. JagdishCapoor, Chairman of HDFCBank Ltd. 438

Role of Cost and ManagementAccountants under Direct TaxCodeDirect Tax Code-Value Based Servicesby Cost and Management Accountant

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

by Mrityunjay Acharjee 440

Direct Tax Code 2009: Fate of FDI-flowthrough Indo-Mauritius DTAA?

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

by Dr. Sudipta Sarkar 451

Direct Tax Code 2009: Boon or Baneby Satya Ranjan Doley 457Direct Tax Code Bill-Meaning,Features and Accountants Role

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

by Pooja Sareen 458

Role of Cost and ManagementAccountant Under Direct Tax Codeby Dr. Sukamal Datta &Tamal Taru Roy 462

Recent Development in FinanceImpairment of Financial Assets in theEra of IFRSby P. V. Antony & Ragesh M. 466

Legal UpdatesNational Company Law Tribunal :Supreme Court Judgementby Dr. K. S. Ravichandran 470

Costing TechniquesAn Alternative Approach to anAnalysis of Standard Cost Variancesby Ramamohana RaoGuttikonda 474

Risk Management

Challenges in Implementing OperationalRisk Managementby Thirunellai RadhakrishnanAnand 479

Banking Matters

Regional Rural Banks and PrudentialNorms–An Overview

by R. Suresh 484

Admission to Membership 493

MDP Programme for July 501

NotificationCompany Law Settlement

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

Scheme, 2010 502

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

Easy Exit Scheme, 2010 506

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

Calendar of MDP Programes 508

Notice 510

IDEALSTHE INSTITUTE STANDS FOR

q to develop the Cost and Manage-mentAccountancy profession q to developthe body of members and properlyequip them for functions q to ensuresound professional ethics q to keepabreast of new developments.

The views expressed by contributors orreviewers in this Journal do notnecessarily reflect the opinion of TheInstitute of Cost and Works Accountantsof India nor can the Institute by anyway be held responsible for them. Thecontents of this journal are the copyrightof The Institute of Cost and WorksAccountants of India, whose permissionis necessary for reproduction in wholeor in part.

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The Institute reserves the right to refuse anymatter of advertisement detrimental to theinterest of the Institute. The decision of theEditor in this regard will be final.

434 the management accountant, June, 2010

MISSION STATEMENTMISSION STATEMENTMISSION STATEMENTMISSION STATEMENTMISSION STATEMENT

“ICWAI Professionals would ethically driveenterprises globally by creating value tostakeholders in the socio-economic contextthrough competencies drawn from theintegration of strategy, management andaccounting.”

VISION STATEMENTVISION STATEMENTVISION STATEMENTVISION STATEMENTVISION STATEMENT

“ICWAI would be the preferred source ofresources and professionals for the financialleadership of enterprises globally.”

DISCLAIMER

The views expressed by the authors arepersonal and do not necessarily representthe views and should not be attributed toICWAI.

Students Edition of The Management

Accountant is discontinued w.e.f. July

2010. Students will instead be distributed

members edition of The Management

Accountant for the first six months from

date of registration at each stage.

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Editorial

the management accountant, June, 2010 435

Just when the world appeared to be on the way torecovery after suffering from one of the worst boutsof economic hardship, the crisis at Greece has emergedas a party pooper. Thanks to greater financialinterconnectedness, the upheaval in Athens has theability to impact not just the European Union ; but evendistant countries like India which have negligibleeconomic relations with the Mediterranean countrymight be impacted too. Further the crisis at Greece hasnot been limited to the currency markets; alternativeinvestment markets like gold too have felt the tremorsof the Hellenic tectonic movements in the form ofincreased volatility of price.

Greece has an ancient and rich past and in many areaslike warfare, philosophy, empire building, culture andeconomics it was the harbinger of modern ideas andconcepts. However, post World War, it has never beena strong contender for economic supremacy. Thus itsmove to join the European Monetary Union in 1995was seen as an attempt to piggyback on the strength ofthe EU’s Common currency, unified capital marketsand free trade. Interestingly, however, today this verymembership to the EU is like a Damocles sword whichis blocking the country's attempt to contain the crisis.

Throughout the period of its membership to EU, thecountry had never adhered to the stringent norms offiscal deficit, external indebtedness and inflation thatwas required from all members. During the credit boomof 2005, there had been a surfeit of capital into Greecelike other countries but this had merely fuelled hugefiscal expenses and runaway inflation without any realgrowth. The first signs of strain were felt when thepresent administration confessed to manipulating thepublic accounts by way of complex derivatives to underreport actual public debt. When the true (and higher)public debt figure came into light, it created a panicamong investors exposed to Greece. This wasmanifested in higher spreads on bonds and with arecession already underway led to an imminent prospectof sovereign default. Speculative attacks on thecurrency further compounded the problem.

The options before Greece are painful and unpalatable.In fact there are not too many options. A loosemonetary policy would have allowed to inflate awayits debt. Its membership to EU leaves it with no leewayfor monetary and external management to manage thecrisis barring fiscal tightening. Devaluing its drachmato restore competitiveness would have been a goodsolution but that would entail leaving the EU. But aweak nation would avoid leaving the aegis of a strongeconomic club. Fiscal contraction is not only politicallyunacceptable (especially since 40% of the nation's workforce are public workers) but makes bad economicsense since it will reduce taxes, an important source ofrevenue needed to shore its public finances. Othereconomically strong members of the EU are hesitantto come to the nation's aid since they view Greece tobe a chronically irresponsible nation. The assistancepackage of nearly one trillion dollars is seen to be tooless when compared with a fiscal deficit of 13% ofGDP and public debt of 140% of GDP. In the absenceof sufficient assistance from either the EU or IMF, theonly way out would be restructuring of existing debtor outright default. Thus Greece might win the battlebut in the process will lose the war.

In this context, praise must be reserved for theexemplary handling of the near sovereign default thatIndia faced in 1991. India neither defaulted norrestructured its debt; rather it was a combination ofsome painfully short term measures (like mortgage ofthe nation's gold) and prudent long term steps (likebuilding of forex reserves and discipline in fiscal andforex management) aided with increased householdsavings (as against profligacy of the Greeks), thathelped India emerge from the crisis.

Thus both the present crisis at Greece and the pastcrisis in India in 1991 teach us important lessons forthe future. It is our duty and responsibility as Cost andManagement Accountants to learn from these episodes,avoid making the same mistakes and contribute to betterserving the nation.

Grecian tragedy- redux

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436 the management accountant, June, 2010

lPresident’s Communique l

Dear Professional Friends,

The month of May has been a very eventful month for our profession. The followingevents indicate the importance of the above statement:-

1. Visit of Mr. Robert Bunting, President, IFAC, to our Institute:

It was a historic moment for ICWAI to have with us Mr. Robert Bunting, President,IFAC at our Delhi Office. It was a good exchange of professional matters on currentinterest with the CEO of IFAC, Mr. Ian Ball, Mr. Mathew, Technical Manager and Mr.Robert Bunting, President, IFAC. He also attended our Cost Accounting StandardsBoard meeting. Mr. Bunting has indicated that "in Cost Accounting Standards,perhaps India is the global leader." He was also of the opinion that though the roleof ICWAI Cost Accounting Standards are now limited to certain regions, select sectorsand select countries, he advised ICWAI to spread this message to most of the other countries so that IFACmay discuss the possibilities to make this Cost Accounting Standard acceptable in more regions. Mr. Buntingwas presented with the publication of Cost Accounting Standards 1-12 of the Institute. Mr. Chandra WadhwaChairman, CASB, gave a presentation and explained the constitution of CASB, the methodology adopted andthe list of items identified for the development of Cost Accounting Standards.

2. MOU between ICWAI and MCX Stock Exchange Ltd:

I am happy to inform you that the Institute of Cost and Works Accountants of India (ICWAI) and MCX StockExchange Ltd., (MCX-SX) have signed a Memorandum of Understanding (MOU) on 7th May 2010 at Kolkata.The programme was graced by Shri R. Bandyopadhyay, IAS, Secretary, Ministry of Corporate Affairs, as theChief Guest. On this occasion, a programme on Corporate, Environmental and Social Governance wasalso organized by MCX-SX. This MOU will result in joint programmes between ICWAI and MCX-SX forvarious certification programmes on financial markets, cost accounting standards and effective corporatefunctioning. For the first time, a private stock exchange company will be involved in promoting cost accountingstandards developed by ICWAI.

3. CAS familiarisation programme:

Cost Accounting Standards Board (CASB), under the Chairmanship of Shri Chandra Wadhwa, took up thefamiliarisation programme for the professors and faculty members of universities, colleges and institutions ofNCR on 11th May 2010 at YMCA Auditorium, New Delhi. Shri Jitesh Khosla, IAS, OSD, Indian Institute ofCorporate Affairs, inaugurated the function. The programme was attended by more than 100 academicians. Itwas an opportunity for me as President, ICWAI and Shri B.M. Sharma, Vice President, ICWAI, to interactwith the learned professors and faculties of various Colleges and Institutions and make them come forward todo the needful to promote Cost Accounting Standards.

4. ICWAI at NFCG Governing Council Meeting:

The Governing Council of National Foundation on Corporate Governance (NFCG) took place on 14th May2010 under the Chairmanship of Shri Salman Khurshid, Hon'ble Minister of Corporate Affairs (I/c), Governmentof India. ICWAI was welcomed as the new member of the Governing Council of NFCG. Shri Bandyopadhyay,IAS, Secretary, MCA, and Chairman of NFCG, Shri Salman Khurshid, Hon'ble Minister of Corporate Affairs(I/c), Government of India, indicated that there will be an Investor Awareness Week in the month of July 2010and announced that around 3000 programmes are to be conducted all over India by all professional and tradebodies and other institutions. He informed that ICWAI has been entrusted with conduct of 500 programmesinvolving all other Stake-holders including Investor Associations. All Chapters are requested to participate inthis programme and conduct Investor Awareness Programmes and send the details as per the guidelines whichare being issued shortly by ICWAI Head Quarters.

5. CAPA Board and Annual General Meeting:

I along with Shri B.M. Sharma, Vice President, ICWAI, attended the Confederation of Asian and PacificAccountants (CAPA) Board Meeting and Annual General Meeting held on 20th and 21st May 2010 in Wellington,

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the management accountant, June, 2010 437

lPresident’s Communique l

New Zealand. There was also a presentation from all countries of CAPA as well as India on the latest professionalachievements.

6. ICWAI represented by the President in MCA delegation to Netherlands and Germany:

An MCA delegation led by Shri R. Bandyopadhyay, IAS, Secretary, MCA, visited Netherlands and Germanyduring 24-31 May, 2010 to establish a Joint Working Group with the Governments of Netherlands and Germanyin the area of Corporate Governance and Corporate Social Responsibility. There was also an interaction withvarious organizations engaged in the areas of CG/CSR in these two countries. During this visit, detaileddiscussions were held with the Netherlands Government at Hague to identify the areas of interest to develop amutual consensus for exchanging points relating to Corporate Governance and Corporate Social Responsibility.The Netherlands Government appreciated the efforts taken by the Ministry of Corporate Affairs, Governmentof India in this regard.

We were happy to participate in an International Global Reporting Initiative Conference at Amsterdam and wereamong the 77 countries which discussed various practices of Global Reporting Initiative. Our Secretary, MCA,Shri R. Bandyopadhyay, IAS, addressed the Plenary Session on the inaugural day in addition to participation invarious Group Discussions of GRI International Conference.

7. ICWAI at Parliamentary Standing Committee on Finance:

The Institute was given an opportunity to appear before the Hon'ble Parliamentary Committee on Finance fororal hearing on Companies Bill 2009 on 24th May 2010 at New Delhi. A presentation was made before theHon'ble Committee and further replies were submitted for the queries.

8. Visit to Regions and Chapters:

Laying of Foundation Stone for new Building of Cochin Chapter:

I was happy to lay the foundation stone for the new building of Cochin Chapter of ICWAI on 9th May 2010 atCochin. The new land purchased by the ICWAI Cochin Chapter serves the members' interest as well asstudents' interest in the region and it will enable Kerala to propagate more and more of Cost and ManagementAccounting Professionals. Once again congratulations to Cochin Chapter for its effort and wishing all the bestin their endeavour. Shri Sukumaran Nair, Past President of ICWAI was present during the function in additionto the Chairman and other members of SIRC.

Seminar on Indirect Taxes organized by Bhopal Chapter:

During the seminar organized by Bhopal Chapter of Cost Accountants on Indirect Taxes on 2nd May 2010,I had the opportunity to interact with the members of the profession at Bhopal.

9. Announcement from Government of Kerala on inclusion of Cost Accountants in their Local Bodiesfor Accounting System:

The month ended with a happy note with the news from ICWAI Cochin Chapter regarding Government ofKerala's Notification on inclusion of Cost Accountants in Urban Local Bodies for the purpose of adoption ofDouble Entry Accrual based System of Accounting.

With regards,

Yours sincerely,

(GN Venkataraman)PresidentDate : 4th June, 2010

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438 the management accountant, June, 2010

Inaugural Speech of Mr. Jagdish Capoor, Chairman of HDFC Bank Ltd.delivered at the Seminar on 'Cost and Strategic Management for

Growth of SME Sector' at Mumbai on 19th May, 2010

I am extremely happy to be a part of the proceedings of this seminar relating to the growth of SME sector in the country. I amgrateful to the Indian Institute of Cost and Works Accountants, Western India Regional Council and personally to Shri V C Kotharifor giving me this honour of speaking in the seminar. On a personal note, I recollect having met Shri Kothari first about 20 years agowhen we had traveled together to Bhilai to address a well attended seminar and also to open there the local chapter of ICWA and Ifind that his enthusiasm for undertaking such training and developmental activities remains unshaken. Perhaps the same may be thecase with his other colleagues in the Institute whom I may not have known closely. I am also happy that the Institute continues tofocus its attention on the SME sector.

2. As we are all aware, the SME sector has a very important place in the Indian economic environment. Whenever we think ofemployment generation, whenever we think of exports and whenever we think of balanced growth, it is the SME sector thatoccupies our mind. Large industry depends on large capital doses to sustain itself. It involves heavy capital expenditure. My guessis that larger capital expenditure displaces human capital in the same proportion and sometimes even more. In a country where thegrowth of employment seeking population does not show signs of abatement, simultaneous growth of opportunities is an absolutemust. Otherwise, a large population of unemployed youth is capable of creating havoc to the social fabric of any country and moreso in the case of a country which has no provision for any sort of help from state sources to the unemployed.

3. Moving away from the employment concerns, it is the export sector where SMEs have done very well. As you may beaware, a dominant proportion of our exports come out of SME, whereas the larger units basically take care of huge domestic demandfor various products. I am not for a moment suggesting that larger units are not capable of generating exports. They do sizeableexports themselves but the lead is with the SMEs. Also, most items in our export basket suit the smaller sector.

4. Another benefit that the smaller units provide, as I mentioned earlier, is that they get widely dispersed and provide a sort ofbalanced growth in geographical terms. Because of their smaller size they are able to derive smallest locational advantages which alarger outfit may perhaps find unviable.

5. Certain welcome changes have taken place in the SMEs over a period of time which augurs well for the future of this segment.When I look back 15-20 years back, SMEs used to be always considered weak in their organizational and managerial structure unableto negotiate successfully through the ups and downs of businesses. Also a large number of them were unable to focus on theirproduction as the entrepreneurs were forced by circumstances to spend disproportionate amount of time in their efforts to raisefinances and in complying with the regulatory requirements of the Govt. and local authorities and their inspectors. I think, mattershave since improved considerably and the units are generally run more professionally. They have thus gained strength andconfidence. Entrepreneurs are relatively more enlightened. I think a part of credit should go to the programmes like this arrangedby professional bodies like the Institute of Cost & Work Accountants.

6. Having been associated with the banking sector for long I cannot help touching upon the views of banks in relation to the areaswhere they feel an amount of discomfort in dealing with SMEs. I am not for a moment suggesting that they would apply universallybut certainly go to create a general perception. Most prominent amongst these are their low capital base which would mean that aunits' capacity to deal with the ups and downs of the business would get diluted considerably. It would also lower its ability toleverage. If a unit is able to fill the resource gap with excessive debt, it could be a prescription for problems in the future. Again Imay add that this is only a general observation and this may not be true universally for every single unit.

7. Another problem which is generally observed in the case of SMEs is absence of timely settlement of their receivables by thelarge corporates who are their buyers. This naturally affects the cash flow. Several corporates do arrange with their bankers in orderto enable their vendors to discount their bills drawn on the corporates for the goods supplied. But not every vendor gets to enjoythis facility. SMEs do often find it difficult to negotiate better terms in view of their relatively weak bargaining power vis-a-vis thelarge corporates.

8. There could be several other risk factors also which determine a bank's appetite or lack of it to add SMEs to its asset portfolio.These could relate to absence of succession planning, non availability of private equity or venture capital, low credit ratings etc.Here we need to appreciate that Banks deal with somebody else's money and therefore their exercising caution in order to safeguardthe depositors' interest should be quite understandable. In fact they have to do tight rope walking as between safeguardingdepositors' interest and simultaneously taking lending decisions for the sake of their revenues and finally look after the interests oftheir shareholders. But there is no denying the fact that the industry problems do need a sympathetic approach from the bankersas well as from the Govt.

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the management accountant, June, 2010 439

9. Here I would take the liberty of narrating a couple of personal experiences during the period I was with RBI. These may beold but still relevant. I was involved with a couple of Committees that were set up at different points in time to look into theproblems of SSI. The Committees comprised Senior bankers, representatives of the industry and a Govt. representative at verysenior level. On both the occasions the exercise threw up some valuable conclusions. I was, however, disappointed that on boththe occasions lot of time was wasted in unproductive deliberations mainly due to reluctance to appreciate each others point of viewand taking rigid positions and also indulging in a good amount of blame game between the industry and bankers. Time lost couldhave otherwise been used for focusing on genuine issues. Still, the deliberations did throw up some useful conclusions.

10. I may give another instance of this lack of effort to understand and appreciate others views. It was decided in RBI that wehold open house sessions at important SSI centres in order to understand better problems facing this sector. I participated in theseprogrammes along with several top executives of banks and representative from Govt. at two centres - Ludhiana and Bhubaneswar.Members of the industry were invited in good number to participate and put their point of view. The Ludhiana one was a fairlyplacid affair. But the one at Bhubaneswar was simply boisterous. There was loud and agitated expression of grievances by therepresentatives from the industry and equally hot responses from the bankers and representative of the Govt. who defendedthemselves. It was clear to me that the industry had never had any opportunity earlier to air their grievances. Huge number ofallegations were made against the bankers and the Govt. for responding indifferently to the problems faced by the members of theindustry. While some of the grievances were really genuine the problem had arisen mainly on account of lack of mutual understanding,lack of proper communication and lack of faith. This was not at all a happy situation. RBI then decided to take this problem toits logical conclusion. We picked up 15 or 20 selected cases out of live cases quoted by the industry and asked a group comprisingrepresentative of the concerned banks, representative of the industry association and a senior representative from RBI to go deepinto each of these cases and see where the matters had gone wrong. It was a useful exercise and I believe it sorted out several issuesand helped in building mutual understanding and trust and perhaps things have been better. Thus we observe that for finding alasting solution of any problem a two way communication with an open mind on both the sides is a must. Above all, if an industryruns into a genuine problem, it deserves a sympathetic approach from all concerned - its lenders, the government and also itscustomers.

11. Lastly I would like to make a short point about our labour laws. We need to seriously examine if in our anxiety to protectexisting employment, which is nothing wrong in itself, are we creating hurdles in creation of additional employment. If employersare busy ensuring that its labour does not remain employed at a stretch more than a certain number of days, it does not serveanybody's purpose. If a unit has to split only to ensure that its labour strength does not exceed a certain number, again it does notserve anybody's purpose.

There could be several other similar restrictive provisions which create avoidable hassles. If exit is made difficult, therewould always be reluctance to allow entry. You would recollect that we had a very strong exchange control in the past whichprevented free outflow of foreign exchange. Still, our reserves reached rock bottom and the country was on the verge of default.That was in early nineties. But the moment the outflows were liberalized, you know what has happened. Our reserves are aroundUS$ 270 billions despite liberal outflows. So our labour laws also need a very dispassionate relook.

12. I think I must conclude here. I once again thank the ICWA for giving me the privilege of speaking before you. I also thank thedelegates for bearing with me. We have a full day of deliberations before us. All the sessions have been very carefully chosen andwould be taken through by well selected faculty. There is a session dealing with success stories. I am sure it would be a great learningplatform. I wish the seminar a very successful conclusion. I also take this opportunity to congratulate the Institute and itsassociates for holding this programme.

Thank you.

Jagdish Capoor*

*About Mr. Jagdish Capoor

Mr. Jagdish Capoor holds a Master of Commerce Degree and is Fellow of Indian Institute of Banking and Finance.

Mr. Capoor retired as Deputy Governor of the Reserve Bank of India. Mr. Capoor was Chairman of Deposit Insurance and CreditGuarantee Corporation of India, Unit Trust of India, Bharatiya Reserve Bank Note Mudran Limited, Agricultural Finance CorporationLtd., and Bombay Stock Exchange Ltd., and served as a Director on the Boards of Bank of Baroda, Export Import Bank of India,the State Bank of India, the National Bank of Agriculture and Rural Development, National Housing Bank, Infrastructure DevelopmentFinance Co., and GHCL Limited.

Presently, Mr. Capoor is Chairman of HDFC Bank Ltd., Assets Care Enterprise Ltd., and Quantum Trustee Co. Pvt. Ltd. Mr.Capoor is also on the Board of Directors of The Indian Hotels Company Limited, LIC Pension Fund Ltd.

He is also a member on the Board of Governors of the Indian Institute of Management, Indore.

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Direct Tax Code-ValueBased Services by Cost andManagement AccountantMrityunjay Acharjee*

CMA, AICWA

Introduction

T o consolidate and amend the ageold law relating to direct taxesand to establish an economically

efficient, effective and equitable directtax system, a new Direct Tax Code hasbeen proposed to be introduced. TheDirect Taxes Code Bill, 2009 ('Code') hadbeen released on August 12, 2009. Thediscussion paper states that theobjective of the Code is to achievesimplicity, clarity and transparency indirect taxes. In line with recentlegislative trends, the Code is a bareframework to be augmentedsubsequently by the multiple rules,regulations and notifications, whileconferring discretionary powers on theIncome Tax Department, and also notbacked by guiding principles orsafeguards, either legislative or judicial.A significant change is the formulaicapproach in calculation of certainexemptions and deductions, as opposedto the outdated, verbose andconvoluted language used in theIncome-tax Act, 1961, which in itself mayhave caused a fair share of tax disputesin the past. Certain proceduralprovisions in the Code are also madefar more arbitrary and anothersignificant feature in this regard is thealmost total absence of provisions ofnatural justice in implementing the same.However, according to the FinanceMinister the purpose of DTC , is "toimprove the efficiency and equity of ourtax system by eliminating distortions in

the tax structure, introducing moderatelevel of taxation and expanding the taxbase".

The tax code makes radical changesin all areas of taxation. It lowers theincidence of tax on corporate andindividual incomes but reintroduceswealth tax and capital gains tax, albeitat lower levels. It also proposes to bringan uniform pattern of taxation on all long-term savings in the form of EET - exemptat the stage of contribution, exemptduring accumulation and taxed duringwithdrawal. The underlying philosophybehind the Code is the philosophy ofthe Government, which is wedded to awell-regulated free market system asclaimed by the Government.

The most significant change in theproposal is to bring in the EET regimeall the approved provident funds,approved superannuation funds, lifeinsurance and new pension system trustfrom April 1, 2011. As the NPS is alreadysubject to EET, where contributions andaccruals in the scheme are not taxed butwithdrawals are subject to tax, the newproposal is to deny the benefit whichthe working class earned by theirmassive struggles. The withdrawals willbe taxed whenever they are made, thatis, at maturity or prematurely at thepersonal marginal rate.

"Any withdrawal made, or amountreceived, under whatever circums-tances, from this account will beincluded in the income of the assesseeunder the head 'Income from residuarysources' in the year in which the

withdrawal is made or the amount isreceived" is the new proposal to makeEEE regime to EET regime. The NewPension Scheme (NPS) operational fromJanuary 1, 2004 makes mandatory tocontribute by all new recruits to theCentral Government service fromJanuary 1, 2004. It has been opened upfor the employees of the StateGovernment, private sector or self-employed. To synchronize the savingswith exempt-exempt tax, it is providedto exempt from income-tax any incomereceived or any dividend paid orpurchase and sale of equity andderivatives by the NPS trust shall beexempt from securities transaction tax.However, the benefits shall not beextended to the terminal or withdrawalstage of the savings in par with the EPFor PPF which enjoy exemption even onwithdrawal. Since by not giving theExempt-Exempt-Exempt (EEE) status tothe NPS funds it is not considered as asubstantial benefit, it only delayed theevent of taxation.

Path way towards Tax Reforms

The Direct Tax Code is a bit of amixed bag for individuals, particularlythe salaried class. Prima facie, the taxliability will reduce significantly as theDraft Code proposes to tax incomes upto Rs. 10 lakhs at 10 per cent, thatbetween Rs. 10 lakhs and Rs. 25 lakhs,at 20 per cent and sum in excess of that,at 30 per cent. Thus, an individual withtaxable gross income of Rs. 10 lakhs,will pay tax of Rs. 84,000 as opposed toabout Rs. 2.11 lakhs, he pays this fiscalyear. Significant reform proposal thathas been prescribed in the Direct TaxCode, inter-alia includes businesslosses are to be allowed to be carriedforward indefinitely, wealth to be taxedon net basis (asset value less debt inrespect of that asset), to include allassets including shares, if it exceeds Rs.50 crore, abolition of distinctionbetween long-term and short-termcapital gains is supposed to encourage

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trading, Financial intermediaries suchas mutual funds venture capital fundsand life insurance companies will havea pass through status and their incomeis to be tax free, security transactionstax is to be abolished, etc. The instantreaction of the industry was verypositive immediately after pronounce-ment of the Direct Tax Code. Sensexgained -198 points or 3.3 per cent onthe next day. Industry hailed the Codeas path breaking, reformative andinnovative. However, on detailedanalysis and understanding of theprovisions relating to DTC, the otherside of the bill has been revealed out.This article shall provide an indeapthanalysis about the significantamendments that has been proposed inthe Direct Tax Code (DTC) withparticular emphasis on InternationalTaxation and Taxation on Cross BorderTransactions.

Framing the Strategy

The strategy for broadening thebase essentially comprises of threeelements. The first is to minimizeexemptions. For many decades, the taxbase has been eroded through a steadilyescalating range of exemptions. Theremoval of these exemptions will havethree consequences:

(i) it will result in a higher tax-GDP ratio;

(ii) it will enhance GDP growth, sincetax exemptions and deductions distortallocative efficiency; and

(iii) it will improve equity (bothhorizontal and vertical), reducecompliance costs, lower administrativeburdens, and discourage corruption.

(iv)The second element of the strategyrelates to the problem of ambiguity inthe law, which facilitates tax avoidance.

Therefore, it is necessary toundertake a periodic exercise ofrewriting the Tax Code in the light ofnew trends in interpretation by thejudiciary, aggressive tax planning bytaxpayers, and new opportunities for

reducing compliance cost throughmassive induction of technology andpublic private partnership. The thirdelement of the strategy relates tochecking of erosion of the tax basethrough tax evasion.

Objective of Direct Tax Code

The Code seeks to consolidate andamend the law relating to direct taxes,that is, income-tax, dividend distributiontax, fringe benefit tax and wealth-tax, soas to enable to establish aneconomically efficient, effective andequitable direct tax system which willfacilitate voluntary compliance and helpincrease in the tax-GDP ratio. Anotherobjective is to reduce the scope fordispute and minimise litigation.

Salient Features

The following are the salientfeatures of the Code-

1. Single code for direct taxes;

2. Use of simple language - as toconvey with clarity the intent, scopeand amplitude of the provisions oflaw;

3. Reducing the scope of litigation -by avoiding ambiguity in theprovisions so that the taxpayer andtax administration are ad idem on theprovisions and the assessmentresults in a finality;

4. Flexibility- by reflecting the generalprinciples in the statute and leavingthe matter of details to rules,Schedules so that changes in thestructure of growing economy areaccommodated without resorting tofrequent amendments;

5. Ensuring that the law can bereflected in a Form - by designingthe structure of tax laws so that it iscapable of being logicallyreproduced in a Form;

6. Consolidation of regulatoryfunctions provisions relating todefinitions, incentives, procedureand rates of taxes have been

consolidated for betterunderstanding of the legislation byrearranging various provisions tomake them consistent with generalscheme of the Act;

7. Elimination of regulatory functions- by withdrawing the regulatoryfunction of the taxing statute;Providing stability - by prescribingthe rates of taxes in the Schedule ofthe Code instead of being doneannually in the Finance Act.

Highlight of the New Direct Tax Code

l All Direct Taxes integrated in oneAct.

l Effective from April 1, 2011

l 16 Chapters, 285 sections, 18Schedules

Tax rates, TDS rates, etc., inSchedules to the code.

The concept of Assessment Yearand Previous Year removed.

Tax Audit Ceiling remains the same.

Books to be maintained for notifiedprofessions and for business if Income>2 lakhs and Turnover > 10 lakhs.

l Depreciation rates largely remain thesame.

Non-compete fees specifically madeeligible for depreciation @ 25 percent.

Lease premium specifically madeeligible for depreciation @ 25 percent.

Personal taxation reduced drasticallyby increasing the slab ranges,though the basic exemption limitremains the same.

l Corporate tax rate proposed to be at25 per cent.

l MAT at the rate of 2 per cent ofGross Assets (0.5 per cent forbanking company)

l No Surcharge, No cess to be levied.

l Dividend Distribution Tax @ 15 percent

l Foreign companies liable to pay

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branch profit tax at the rate of 15 percent

l No wealth-tax for companies.Wealth-tax only for individuals, HUFand private discretionary trust, ifwealth exceeds 50 crores.

l Wealth-tax rate 0.25 per cent above50 crores.

l TDS rates largely remain the same.

l Definition of 'person' to include anoffice or establishment of theCentral or the State Government (ForTDS compliance)

l Advance tax installments and duedates remain the same.

l Definition of books of account toinclude data stored in Pc. (ExistingAct includes only print outs and notsoft copy). .

l Capital asset to exclude only stock-in-trade, consumable stores and rawmaterials in business. Even personaleffects, etc., not liable to CG tax.

l A foreign company will be treatedas resident in India, if at any time inthe financial year, it is controlledpartly in India (as against wholly inthe present Act)

l The concept of R but NOR doneaway with, but their taxation remainsthe same.

l Heads of income remain the same,though nomenclature slightlychanged.

l Only capital loss and speculationloss not allowed against other heads.Other losses to be aggregated andindefinitely c/fd. So even businessloss c/fd. can be set off against otherheads.

l Provisions similar to Section 14Aand Rule 8D remains.

l All expenditures to be disallowedfor TDS defaults. Existing provisionof March expenditure allowed up todue date extended to last quarter.

l If TDS paid subsequently,

expenditure allowed in that year (asat present). But if paid more than 2years late, not allowable.

l VRS, gratuity and commutedpensions, taxable if not invested inspecified savings. Will be taxable onwithdrawal.

l Difference in taxation of theGovernment and non-Governmentemployees removed.

l Standard Deduction of 30 per centof NA V now made 20 per cent ofgross rent.

Annual value linked to rateablevalue (litigation on fair rent nowacademic)

l Housing loan interest not allowedfor self occupied house.

l Composite letting (with machinery,etc.), included in IFHP

l Profits on business assets (oldsections 50, 50A, 50B, etc.) to bebusiness income and not capitalgains.

l Radical changes in computation ofbusiness income, though thesubstance obviously remains thesame.

l Business expenditure classified inthree groups.

l Difference between LTCG and STCGabolished. However, indexationallowed if held for more than 1 year(as against 3 at present).

l Base year for indexation shall berevised and Year 2000-01 to beconsidered a the base year

l STT to be abolished. So, share profittaxable as usual.

l Capital gains reinvestment only inagricultural land and in oneresidential house

l Interest income to be underresiduary head (earlier income fromother sources) always.

l Savings to be taxable on withdrawals(EET), except pure life policies andprovident funds.

l Loan more than Rs.20000, taken orrepaid, if not by account payeecheque or draft, to be taken asincome.

l Certain exemption under section 10retained and listed in 6th and 7thSchedule.

l EET only for new investments andnot the existing ones.

l Savings limit eligible for deductionincreased to Rs. 3 lakhs fromexisting Rs. 1 lakh .

l Tuition fees for children allowed toindividuals and HUF

l Deductions like 80D, 80DD, 80DDB,80U, 80E, 80GG retained. (Obviouslywith new Section Nos.)

l Profit based incentives like section80-lA, etc., changed to investmentbased incentives.

l Co-operative societies deductions,royalty for copyright, patents, etc.,retained.

l No carry-forward of MAT credit.

l Limits on remuneration and interestto partners removed.

l 'Charitable purpose' renamed as'Permitted welfare activity', butdefinition largely remains the same.

l Various exemptions to charitableentitles clubbed together forsimplification.

l Charitable entities liable to tax at therate of 15 per cent of their surplusas calculated in a prescribed mannerand under cash system

l Due dates for return 30th June fornon business income of non-corporate assessees and 31stAugust in other cases (includingcases where audit is compulsoryrequired)

l Notice to be issued to stop filers andnonfilers (as defined)

l Returns to be processed within oneyear, otherwise no demand noticecan be raised.

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l Scrutiny selection to be centralizedScrutiny notice by 31st July.

If the assessment is not inconformity with any decision of IT AT/NTT/HC/SC in any body's case,income is deemed to have escapedassessment.

Reassessment up to 7 yearsl If return not filed by due date,

income is deemed concealment.Enjoy penalty

l Revision by CIT within 6 months

Appeal against consequential orderafter revision, only to the Commissioner(Appeals), no appeal to the Tribunalagainst revision order.

Easily Understandable Tax LawProposed

If many of the redundant provisionsare deleted, exemption provisionsremoved, or provisions relating tocomputation of profits from ship, naturalgas, special economic zones, specialsources, specified business, orprovisions relating to determination ofincome from presumptive basis, orprovisions relating to non-taxableincome ete., are shifted to separateSchedules as the new Code has done,the present Act would be as simple andeasily understandable andadministrable as the new Code isclaimed to be, if not more.

The new language of the Code, thelanguage that is understandable by acommon man and not legal, will confusethe court and tax administrator andpractitioners. The confusion would bemore confounded if they have tointerpret the provisions ot the Act bykeeping in view of definition clause.

The definition clause defines 318words and expressions. Even a simpleword 'however' has been defined. Someare defined exhaustively while someother inclusively. Attempt appears tohave been made to avoid all ambiguityby keeping the words and expression'plain'. But the' plain and unambiguous

meaning of words' of which courts sooften believe themselves to be governedis really a delusion, since no words areso plain and unambiguous that they donot need interpretation in the contextof the language or circumstances.Without this process, the intention ofthe Legislature is alwaysundiscoverable. Words are vehicle ofmeaning. But 'what is that meaning thatthe Legislature wants to convey. Withas many as 318 definitions, the courtsand the tax administrators are bound tobe confused even while tryinginterpretation contextually.

In an attempt of giving a simple andcommon man language, the role ofproviso, Explanations and exceptionsetc., has been downgraded. Theprovisions which should have beenintroduced as provisos or Explanationshave been done as sub- sections andsections. This may result moreconfusion than removed. A statute isarranged in sections and sub-sectionswhich are grouped in distinct chaptersand sub-chapters. When a section orsub-section needs qualification,clarification, Explanation or detailedannexure or lists, it is done with the aidof a proviso, Explanation, exception, ora schedule. The usual drafting practiceis that the words 'section' andsubsection' should be used whilereferring to a provision. Each sub-section is a part of section of an Actand is considered as a separateenactment. In order to understand a sub-section, one must look at the wholesection of which it forms a part [c.Busshel v. H. Hmnmord (1904) 2 KB 563(CA)]. The sub-sections of a sectionmust be construed as a whole; eachportion is throwing light, if need be, onthe rest. [CIT v. Victoria Mills Ltd. [1985]153 ITR 733 (Born.)] But where two sub-sections of a statute provide for adifferent matters, there is no need ornecessity for construing the sub-sections together [Smt. Sudhira Bala

Roy v. State of West Bengal AIR 1981Ca!' 130] But a proviso or an Explanationor an exception has different role to play.It is confined to the section to which itis a proviso, Explanation or exception,qualifying, clarifying and explainingsomething in that section. Further, theproviso immediately follows the sectionto which it is a proviso. For example,section 5 of the Code would have givena better reading and understanding ifsub-sections (3) and (4) could haveimmediately followed sub-section (1) asproviso or Explanation and not asseparate sub-sections.

Another example that comesimmediately to mind is sub-section 6(b)which could better have been explainedwith the help of a proviso. It reads asunder:

"The following income shall be deemedto be received in the financial year"

"any contribution made by the employerto any fund, other than an approvedfund, or the interest thereon" Perhapsthe provision intends to say that anycontribution to an approved fund or theinterest thereon would not be incomedeemed to be received. But it conveysthat contribution would not but interestthereon would be so deemed. It couldhave been better expressed as "anycontribution made by the employer toany fund or interest thereon, providedit is not an approved fund".

Best way to Amend The Tax Lawsis to Retain The Basic Fabric of theIncome-Tax Act, 1961

The best way to amend the tax lawsis to retain the basic fabric of thepresent Indian Income tax Act, 1961. Ifredundant provisions and exemptionprovisions are deleted, it would berelieved of its bulk and become easierto understand. The tax administrators,the lawyers, the courts and theassessee are all well conversant of itsprovisions and terminology usedtherein. It conforms the pattern of the

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tax laws world over. Much litigation isnot because the law is complex or itsprovisions are not understandable, butbecause of the procedural lapses andlack of proper administration. There is astory by Plutarch in his Life of Aristidesabout the Greek general Aristides calledthe Just, because he managed to assessthe cities of ancient Greece in such away that they had the feeling of beingfairly and justly taxed. According toPlutarch, Aristides drew up the lists ofassessments with scrupulous integrityand justice. Scrupulous integrity andjustice would always inspireconfidence. There is a publicperception, perhaps not correctlyingrained, that assessments are drawnnot with scrupulous integrity andjustice. That perception is so deeplyrooted that a taxman is looked upon asan adversary and not a friend,philosopher and guide; his" arrogance"and "insensitivity" to their problemsscare people away.

There is misconception that the taxlaws are complex because they aredrafted not in a common man language.They are complex not because of thecomplexity of the language but becauseof the complexity of the society andeconomy. In a complex society anddeveloping economy, tax laws drebound to be complex. Complexity lies intheir administration and not in thelanguage. Simple or common manlanguage cannot make the laws simple.As aforesaid, no words are so plain andunambiguous that they do not needinterpretation in the context of thelanguage or circumstances. The morewe attempt to draft laws in the commonman language and not the legallanguage in the hope that they wouldbe faithfully complied with andadministered efficiently, the more wefind contrary results.

The Direct Tax Code, in its presentform is expected to adversely affectforeign investors and foreign

Individual, other than women and senior citizens

Women below 65 years at any time during the financial year

In the case of senior citizens

Where income is below Rs.1,60,000

Nil Where income is below Rs.1,90,000

Nil Where income is below Rs.2,40,000

Nil

Where income exceeds Rs.1,60,000 but is below Rs.10,00,000

10% of income exceeding Rs.1,60,000

Where income exceeds Rs.1,90,000 but is below Rs.10,00,000

10% of income exceeding Rs.1,90,000

Where income exceeds Rs.2,40,000 but is below Rs.10,00,000

10% of income exceeding Rs.2,40,000

Where income exceeds Rs. 10,00,000 but is below 25,00,000

Rs.84,000+20% of income exceeding Rs.10,00,000

Where income exceeds Rs. 10,00,000 but is below 25,00,000

Rs.81,000+20% of income exceeding Rs.10,00,000

Where income exceeds Rs. 10,00,000 but is below 25,00,000

Rs.76,000+20% of income exceeding Rs.10,00,000

Where income exceeds Rs.25,00,000

Rs.3,84,000+30% of income exceeding Rs.25,00,000

Where income exceeds Rs.25,00,000

Rs.3,81,000+30% of income exceeding Rs.25,00,000

Where income exceeds Rs.25,00,000

Rs.3,76,000+30% of income exceeding Rs.25,00,000

companies, desirous of takingadvantage of the relative growth andstability inherent in the Indian economy.

EET Model, Whether the same wouldencourage Long Term Savings ?

EET mode of taxation, the Code saidwould encourage long-term savings bythe people. How it will encouragesaving, as the accruals to be subjectedto taxation at the time of its maturity orits withdrawal. On the other hand, itconstitutes a cheat on the people toencourage saving and subject to tax onits accrual at the time of its withdrawal.The Government rushes to implementthe Exempt-Exempt-Tax whereas theprevious Governments not dared to taxthe accruals on its maturity or anywithdrawals of EPF, PPF and GPF. Whenthe New Pension Scheme for the newrecruits in the Central Governmentemployment was introduced during2004, the Government had not faced anyprotest from the working class since itwill not affect the incumbents. Unlike

Proposed Rate & Slab of Taxation as proposed in DTC is as follows

Rates of Income Tax

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various other saving schemes, theproposal to tax the withdrawals fromPPF, EPF and GPF would be a toughtask to implement.

Taxation regarding Capital Gains onSale of assets

Capital assets have been classifiedinto two categories - business capitalassets and investment assets. While thetax rate for income from sale of both thecategories is identical (except for capitalgains in case of non residents), somekey differences are tabulated below:

Slump sale

Profit on sale of an undertaking(slump sale) is also considered asbusiness income under the Code. Whilethe consideration is to be credited togross earnings, the "net worth' of theundertaking (the term will be definedonce the Rules are published under theCode) will be allowed as a deduction.This is similar to the existing provisions,except that the difference between theconsideration and net worth ischargeable to capital gains tax under theAct.It is interesting to note that thecommentary attached with the Codeindicates that the loss on sale of thebusiness capital asset will be treated asan intangible asset for which deductionwould be allowed on a deferred basis.The deferment of loss is intended toserve as a disincentive for assetstripping and loss manipulation.However, since, the gross considerationand net worth are to be added to thegross earnings and deductionsrespectively while computing thetaxable income, it appears that the lossincurred on sale of the undertakingshould also be fully allowed in the yearof sale itself. Thus, the dichotomybetween the commentary and theprovisions will need to be resolved.

The Code also provides that the taxbase of the assets in the hands of thebuyer would be the tax base in the handsof the seller. Presently, under the Act,

the buyer of an undertaking in a slumpsale allocates the consideration to theassets (tangible and intangible) at theirfair values and claims depreciationaccordingly. Hence, after the Codecomes into effect, the buyer will not getany tax breaks for the enhanced amountpaid for acquisition of the undertaking.The notional written down value of theassets will get reduced for computingthe value of the block of assets in thehands of the seller.

Impact of Direct Tax Code inInternational Taxation

The code in it's present form shallinvariably affect adversely all the foreigninvestors, foreign companies intendedto take part and accelerate the economicgrowth of the nation. Significant impactthat are expected are enumerated hereinbelow :

Tax residency and income deemed toaccrue or a rise in India

Under the Code (DTC) a company shallbe deemed to be a tax resident in India ifits control or management is even partlyin India (as opposed to wholly in Indiaunder the present law).

Thus, the tax residency provision ismade very wide in its scope and willcover a lot more companies. The onlysilver lining (possibly not intended) isthat an associated enterprise which isoutside India, but deemed resident

under this provision, and deals with itsassociate in India will be out of thepurview of transfer pricing compliances.

Further, under the proposed Codeincome arising out of direct or indirecttransfer of a capital asset situated inIndia will now be deemed to accrue inIndia and subject to tax. Under thepresent law, income arising from theindirect transfer of a capital asset wasout of the purview of income deemed toaccrue in India. This amendment is adirect consequence of the VodafoneInternational Holdings B V v. Union ofIndia [2008] 175 Taxman 399 (Bom.). Theprinciple of territorial nexus with incomedeemed to accrue in India enunciatedby the Apex Court in the case ofIshikawajima Harima Heavy IndustriesLtd. v. DIT [2007] 288 ITR 408/158Taxman 259 is also given a big blow tothe assesses having presence in theInternational Business Segments.

Impact on the Capital markets

The Code proposes to tax capitalgains on all assets uniformly instead ofthe selective and differential ratetaxation system at present. The removalof the securities transaction tax whichwas the main differentiator betweencapital gains taxation on securities andother assets is significant.

Losses against the head 'CapitalGains' are freely offsetable against any

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other head of income and also may becarried forward indefinitely. However, aForeign Institutional Investor (FII')which is not expected to have incomefrom any source except investment, thisprovision is a very retrograde one, sinceit will have to compulsorily carryforward capital losses (since dividendsare tax free in its hands in any case)only to offset against future capitalgains.

General Anti Avoidance Rules ('GAAR')This is perhaps the most arbitrary

provision of the Code as a whole andthis provision is applicable both toresident and non-resident alike. Underthis provision, a Commissioner may:-

Negate, disregard, set aside or re-characterize any arrangementDerecognize one or more parties to atransaction Simply by characterizingsuch arrangement as an impermissibleavoidance arrangement, even on meresuspicion or whim, the onus of proof isnow put on the assessee to prove thatthe arrangement is genuine. What isvery alarming is that there is no scopefor any 'natural justice' in this provisionand it has the potential to become ahydra headed monster of harassmentand corruption in the Income-taxDepartment.

These provisions virtually empowera Commissioner to lift the corporate veilon the slightest 'whim' to reallocateincome, negate transactions and treatseveral entities as one for taxationpurposes. In fact the discussion paperequates tax avoidance with tax evasion.Thus the Supreme Court's landmarkdecision in Union of India v. AzaadiBachao Aandolan [2003] 263 ITR 768/132 Taxman 373 which had conferredlegality on treaty shopping as alegitimate tax planning method has beenoverruled and the' ghost' of McDowellwhich was supposed to be exorcisedby Azaadi Bachao, will continue tohaunt Indian tax jurisprudence with theenactment of the Code.

Tax Impact of Royalty & TechnicalKnowhow fees in Cross BorderTransaction

Newly introduced definitions of'royalty' and 'fees for technical services'as provided by the Direct Taxes Codeand their impact is explained below. Theintroduced new definitions of' royalty'and' fees for technical services'. Thesewill have direct impact on the tax liabilityof non-residents receiving paymentsfrom Indian payers. Mere have beendiscussed implications of thesedefinitions.

ROYALTY

Royalty is defined in para 240 ofsection 284 of the Code, as under:

"284 (240) 'royalty' meansconsideration (including any lump sumconsideration but excluding anyconsideration which would be theincome of the recipient chargeableunder the head 'Capital gains') for-

(a) the transfer of all or any rights(including the granting of a license) inrespect of a patent, invention, model,design, secret formula, process, trademark or similar property;

(b) the imparting of any informationconcerning the working of, or the useof, a patent, invention, model, design,secret formula, process, trade mark orsimilar property;

(c) the use of any patent, invention,model. design, secret formula, process,trade mark or similar property;

(d) the imparting of any informationconcerning technical, industrial,commercial or scientific knowledge,experience or skill;

(e') the use or right to use of anyindustrial commercial or scientificequipment including ship or aircraft butexcluding the amount, referred to in itemnumbers 10 and 11 of Table in theFourteenth Schedule, which issubjected to tax in accordance with theprovision of that schedule;

(f) the use or right to use oftransmission by satellite, cable, opticfibre or similar technology;

(g) the transfer of all or any rights(including the granting of a licence) inrespect of:-

(i) any copyright, literary, artistic orscientific work; or

(ii) cinematographic films or work onfilms, tapes or any other means ofreproduction; or

(iii) live coverage of any event;

(h) the rendering of any services inconnection with the activities referredto in sub-clauses (a) to (g);"

If definition is compared with theexisting definition in Explanation 2 toclause (vi') of subsection (1) of section9, the following differences are found:

(a) The phrase 'secret formula orprocess or trade mark' has been replacedby 'secret formula, process, trademark',in sub-clauses (a) to (c);

(b) Proposed definition would nowcover: the use of transmission bysatellite, cable, optic fibre or similartechnology; the transfer of all or anyrights (including the granting of license)in respect of live coverage of any event;

(c) Inclusive coverage of 'films orvideo tapes for use in connection withtelevision or tapes for use in connectionwith radio broadcasting but notincluding consideration for the sale,distribution or exhibition ofcinematographic films' has beenreplaced by 'cinematographic films orwork on films, tapes or any means ofreproduction'.

Earlier definition of 'royalty' couldbe interpreted that because of 'comma',appearing after 'trademark', the word'secret' qualified not only' formula', but'process' and 'trade mark'. Thus, changewill reduce litigation.

Addition of sub-clauses - the useof transmission by satellite, cable, opticfibre or similar technology; the transfer

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of all or any rights (including thegranting of license) in respect of livecoverage of any event will bring morerevenue to exchequer, since till nowthese activities were being claimed tax-free and so there was litigation betweenthe taxpayer and the revenue. Litigationwill now be reduced.

The phrase, 'the use or right to useof transmission by satellite, cable, opticfibre or similar technology', was part of'royalty' definition in Indo-HungaryDTA, notified way back on 31-3-2005. Itis not too late that this activity has beenincluded in the domestic definition of'royalty'. This phrase would be omittedfrom Indo-Hungary DT A, because Indiahas entered into DTA with OECDmember countries, in which this phrasedoes not find place, after entering DTAwith Hungary.

Further change in the definition,replacing phrase 'films or video tapesfor use in connection with television ortapes for use in connection with radiobroadcasting but not includingconsideration for the sale, distributionor exhibition of cinematographic films'by 'cinematographic films or work onfilms, tapes. or any means ofreproduction', is making language simpleand spreading tax net by omitting theexemption to 'consideration for the sale,distribution or exhibition ofcinematographic films'. This measuremay bring level playing field to Indianfilm producers.

Fees For Technical Services

The proposed definition of 'fees fortechnical services' is as under:

"284(105) 'fees for technical services'

(a) means any consideration (includingany lump sum consideration) paid orpayable directly or indirectly for -

(i) rendering of any managerial,technical or consultancy services;

(ii) provision of services of technicalor other personnel; or

(iii) development and transfer of adesign, drawing, plan or software, or anyother service of similar nature; and

(b) does not include consideration forany construction, assembly, mining orlike project undertaken by the recipientor consideration which would beincome of the recipient chargeableunder the head 'Income fromemployment';

On comparing the above definitionwith the existing definition inExplanation 2 to clause (vii) of sub-section (1) of section 9, the followingchanges are found:

(a) Consideration would be suchfees, whether paid or payable directlyor indirectly;

(b) Proposed definition willhenceforth cover:

Development and transfer of a

l design

l drawing, plan or

l software, or any other service ofsimilar nature

The phrase, 'paid or payable directlyor indirectly' has been added in thedefinition of 'fees for technical services'.New definition is again pro-revenue, byincluding indirect consideration in thefold. Extended definition of 'fees fortechnical services', proposed in thecode is: development and transfer of a :

l design

l drawing

l plan or software or any other serviceof similar nature status of the changes:

The activity 'design' is covered byexisting or proposed definition of'royalty', as shown below:

(a) the transfer of all or any rights(including the granting of a licence) inrespect of a patent, invention, model,design, secret formula, process, trademark or similar property;

(b) the imparting of any informationconcerning the working of, or the use

of, a patent, invention, model, design,secret formula, process, trade mark orsimilar property;

(c) the use of any patent, invention,model, design, secret formula, process,trade mark or similar property;

(d) the rendering of any services inconnection with the activities referredto in sub-clauses (a) to (g);

Constitutional Validity -

Out of the provisions, proposed inthe code, the constitutional validity ofthe following, 'whether these are treatyoverrides, has to be considered:

Royalty:

The replacement of phrase' secretformula or process or trade mark' by'secret formula, process, trademark', insub-clauses (a) to (c);

Addition of the phrase 'the use oftransmission by satellite, cable, opticfibre or similar technology

(iii) Addition of the phrase 'thetransfer of all or any rights (includingthe granting of license) in respect of livecoverage of any event' ;

(iv) The replacement of phraseincluded' films or video tapes for use inconnection with television or tapes foruse in connection with radiobroadcasting but not includingconsideration for the sale, distributionor exhibition of cinematographic films'by 'cinematographic films or work onfilms, tapes or any means ofreproduction'

Fees for technical services:

(i) Addition of the phrase: 'paid orpayable directly or indirectly';

(ii) Restricting the meaning of 'technical services' by making thephrase 'provision of services oftechnical or other personnel' exclusiveinstead of inclusive;

(iii) Addition of the phrase:'development and transfer of a design,drawing, plan or software, or any otherservice of similar nature'.

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Treaty overrides -

International view - McIntyre (TaxNotes Int'l611-614 (December 1989) ADefence of Treaty Overrides), dividedall of the override legislations that hadactually been adopted by the UnitedStates into three non-exclusivecategories: interpretive overrides, non-material overrides, and prospectiveoverrides that have been or may beacceded to by US treaty partners,According to him, , overrides fitting intoone or more of these categories wouldnot violate existing international law.'Interpretive overrides was introducedin the Income-tax Act, 1961 by sub-section (3) of section 90, through theFinance Act, 2003, effective April 1,2.004. These have held the fort for lastseveral years. Overrides discussedabove do not seem to' be non-material.

These may be justified by theIncome-tax Department, on the groundof following provision proposed in thecode:

"258(8) For the purposes ofdetermining the relationship between aprovision of a treaty and this code,-neither the treaty nor the code shall havea preferential status by reason of itsbeing a treaty or law; and the provisionwhich is later in time shall prevail."

Simplicity· Promise V. Performance

The Direct Taxes Code claims thatits attempt is "to simplify the languageto enable better comprehension andremove ambiguity to foster voluntarycompliance." Just consider this. Section284 of the Code dealing with 'definitions'defines as many as 318 terms andexpressions, including commercial andcommon words, which contain cross-references to meanings assigned undernearly 50 different Acts or legislations,a taxpayer would be required to refer to.

Even a simple word of daily use suchas 'however' has been defined in suchan intricate manner so as to mean "analternative intention, or a contrast, with

the previous section, sub-section,clause or sub-clause, item or phrase, asthe case may be, and a modification ofit under such circumstances as specifiedtherein." Complex and alien jargonunder the Code such as 'stop filer' and'non filer' is bound to baffle any commontaxpayer.

One Assessment - Five Authorities!

Under the Code, for purposes ofassessment, a taxpayer would berequired not to just deal with hisAssessing Officer, but also be preparedto encounter the suo motu interventionof the Joint Commissioner or even theCommissioner, who have beenempowered to call for and examine therecord of any scrutiny assessmentproceeding. This is over and above thematters he would need to handle with aTransfer Pricing Officer, in case of aninternational transaction or with aValuation Officer, if estimation of thevalue of any asset, investment orexpenditure in his case is referred to bythe Assessing Officer.

Thus, for a single assessment, onetaxpayer may be required to haveinterface with as many as fivedepartmental authorities. Howdistressing and nerve-racking anexperience this could be?

Sweeping powers with noaccountability

Sweeping powers to tax authoritiesfor reopening of assessment,rectification of mistakes and revision oforders prejudicial to revenue have beenprovided under the Code in such a dare-devil fashion, which virtually nullifiesthe ratio of all judicial decisionsequitably interpreting the scope ofthese powers as currently prevailingunder the Income-tax Act, 1961.

One major area of concern on theprocedural front is in regard to thehighly discretionary and unrestrictedpowers granted under the proposedGeneral Anti-Avoidance Rules (GAAR)

to treat an arrangement as an'impermissible avoidance arrangement.'The fear is that even genuine andbonafide transactions may come to betorpedoed by GAAR creating unduehardships and undesired Litigation.

Harsh penalties, harsher prosecutions

Several provisions in regard topenalties and prosecutions asproposed under the Code are simplyhair-raising and mind-boggling. Aperson has been deemed to havewillfully concealed income simplybecause he has not filed the return bythe due date or the assessed income orwealth is higher than the returnedamount. Moreover, for computing theamount of penalty at the minimum of100 per cent or maximum of 200 per centof the tax payable on concealed income,the tax is required to be worked out, notat the applicable rate but at the maximummarginal rate of tax in the case of theconcerned taxpayer.

On the prosecution front, it has beenprovided that these proceedings shallbe independent of any order under thisCode and no defence shall be availableunder prosecution that such an ordermay be made or has not been made.When prosecution hinges upon analleged evasion, how can there be apresumption of an offence, until aconclusive finding of concealment isfinally arrived at?

Position in Double Tax AvoidanceAgreements

4. The proposed phrase in thedefinition of 'fees for technical services'in the Code, by addition of'consideration for development andtransfer of a design. drawing, plan orsoftware, or any other service of similarnature' occurs in the Indian DT As. Forexample:

USA/Canada/Cyprus/Malta: Feesfor included services (Finland,Netherlands, UK technical services):'payments of any kind to any person in

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consideration for the rendering oftechnical or consultancy services…ifsuch services… consist of thedevelopment and transfer of a technicalplan or technical design'

Double tax avoidance agreements(DTAA) proposed to be overruled by theDTC

The most draconian overarchingprinciple for international taxation is theone that negates a Double TaxAvoidance Agreement CDT AA')prevailing over the local income tax law.The Code merely states that theprovision 'later in point of time' willprevail. This is a 'heads I win, tails youlose' situation since the tax authoritiescan easily bring out a notification whichis 'later in point of time' and override aDT AA and/ or any judicialinterpretation.

This effectively overturns theprinciple enshrined in the landmark caseof Azaadi Bachao Aandolan (supra)which puts the stamp of legality on taxplanning by routing of investmentsthrough a favourable tax jurisdiction andalso enshrined the Westminsterprinciple that 'a person is entitled to planhis affairs so as to minimize theincidence of tax' .

The Code as it presently stands withits DT AA override as well as theGeneral Anti Avoidance Principle nowpenalizes an assessee if he does not soarrange his affairs so as to maximize theincidence of tax!

Further the Code proposes that anyforeign company proposing to take thebenefit of a DTAA must obtain a taxresidency certificate from the countryof its tax residence. This provision isotiose since the Code, which will belater in point of time on most occasionswill prevail over the DTAA.

Provisions relating to transfer pricingin DTC

Transfer pricing is another areawhere the Code proposes sweeping

changes since it drastically reducesthresholds for deeming two transactingparties as Associated Enterprises('AEs'). Thus, as a consequence thenumber of compliances and transferpricing audits will register an increaseof geometric proportions and transferpricing auditors are expected to laughall the way to the bank!

The Code proposes the benefit of asafe harbour of a .5 per cent range incase there is only one Arms LengthPrice. It also proposes to have an.advance pricing arrangement of abinding nature (subject to conditions)and proposes to frame a scheme in thisregard.

The report of an accountant is nowrequired to be filed with the TransferPricing Officer and also by the due dateof filing the return of income (referredto as return of tax base under the code),Transfer Pricing scrutiny will beapplicable based on a 'secret riskmanagement strategy' rather than ontransaction value as at present. It isnoteworthy that the concept of 'secretrisk management strategy' is proposednotwithstanding India being the world'slargest and most populous democracy.

The benefit of the dispute resolutionmechanism for transfer pricing cases[proposed only in the Finance (No 2)Act, 2009] is to be curtailed to disputesover INR 25 million. Certain penaltyprovisions have also been revisited withranges prescribed, conferring discretionon the Assessing Officer. However,certain penalties, for venial breacheshave also been reduced.

Impact on foreign companies taxation

The Code proposes to tax corporateprofits at a reduced rate but the benefitof this largesse is sought to be curtailedby doing away with the slew ofexemptions and deductions proposedearlier. The Code also proposes to bringin Minimum Alternate Tax ('MAT') on acorporation based on the value of its

assets as per a formula prescribed,irrespective of its profits (as opposedto its current form based on the bookprofits of a corporation). This tax cannotbe carried forward for credit againstfuture tax liabilities (as the present lawpermits). This in effect discriminatesagainst the manufacturing sector vis-a-vis the service sector and also amountsto a back door wealth (capital) tax.Whether foreign companies/ brancheswill be subject to this MAT remains tobe seen.

Branch Profit Tax (BPT)

The Code also proposes to taxbranch profits made by a foreigncompany in addition to regular corporatetaxes (like the PE tax in USA) but stillleaves a lot of lacunae in drafting. Itdoes not define what constitutes abranch. Thus, an FII based offshoretrading through an independent brokerfrom India mayor may not be categorizedas a branch.

Whether an associated enterprise ofa foreign company deemed as residentdue to the 'partial control andmanagement provision' would bedeemed as a branch and, therefore,liable to branch profits tax, is alsodebatable.

Another lacuna in this regard is thatthe branch profits tax, is not classifiedas 'income tax' and, therefore, a companypaying it may not be able to obtain a taxcredit for the same in its residential taxjurisdiction.

Cross border merger & acquisition -tax impact

Mergers of an Indian company intoa foreign company are also not madetax neutral under the Code. Based onthe above, the unkindest cut for foreigninvestors are provisions relating tocross border capital gains whereonWithholding Tax ('WHT') at the high rateis attracted. In such cases, it is unlikelythat the residence jurisdiction of such ataxpayer would allow credit for this

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WHT if the local capital gains tax is atlower rate (or even worse if it is nil).

Another feature potentiallyimpacting capita markets is the decisionto treat mutual fund:: employee benefitfunds and trusts on a pas through basisfor taxation purposes where the incomeis taxed in the hands of the ultimaterecipient. However, in the absence ofdetailed provisions relating to themethod of such pass through, theimpact on the ultimate investors in suchmutual funds and venture capital fundsis unascertainable.

Is the Direct Tax Code ReallySimplified ?

The Code with 318 definitions, isclumsily drafted in an attempt toavoiding use of well known tools oflegal drafting such as provisos,Explanations, non obstante clauses, etc.Every word or expression used in theAct appears to find a place in thedefinition clause. When a word has beenstatutorily defined, its dictionarymeaning cannot be looked at. Anordinary man of average intelligence,not versed in law, may not find it easyto understand its provisions as its everyword has a statutory meaning and not apopular meaning. Even if they do withlittle efforts, its administration by thetax administrators and interpretation bythe courts would be difficult. With thepassage of time, the Code will have toaccommodate provisos andExplanations if it is to retain its relevanceand efficacy.

Simplicity is apparent from the waythe clauses have been drafted, but thefrequent references to definitions,clause 284 and 2 Schedules make thereading and understanding of theseclauses cumbersome and time-consuming. For example, reading clause4 for understanding the meaning of'residents' and then referring to clause284 for the definition of 'non-resident'

cannot be considered a good planning.One line definition of 'non-resident'could also have been given in clause 4itself to give a complete picture at oneplace about' residence' aspects.Similarly, transferring the provisionspresently contained in section 10 byclauses (9) and (10) has made theseprovisions look short and sleek, butthese by themselves have no legs tostand without the crutches of SchedulesVI and VII. Drafting the Code in thismanner cannot be said to achieve theobjectives of simplicity and easyunderstanding_ Hence, a re-look of theproposals contained in Chapter-II iscalled for. As against its avowedobjectives, the Code al its mostelementary level is another round of theendless 'yin-yang' between the 'taxadvisors and the taxman', with thetaxman placed in an advantageousposition due to the Code.

Role of Cost & ManagementAccountants

The Direct Taxes Code is beingmooted as a replacement to the IncomeTax Act 1961. The Cost & ManagementAccountants (CMA) being the memberof the Institute set up under an Act ofthe Parliament shall have a veryimportant role bridging the taxadministrates and the tax payers/ taxassessees. With their in-depthknowledge and experience in the fieldof accounting, taxation and valuationmanagement, the CMA would be in amuch better place in providing valueadded services to the assessees andalso protecting the revenue to theGovernment in the following manner :

1. Determining the total income and taxliability in the case where havingregard to the nature & complexityof the accounts of the assessee, theassessing officer may direct theassessee to get his accountsaudited.

2. Accurate determining of arms lengthprice in case of any internationaltransactions

3. providing compliance certificationunder the provisions of 'GeneralAnti Avoidance Rule' in respect ofany arrangement entered into byany person

4. determining Income Tax arising outof transaction resulting in transferof income to non resident

5. Proper determination of fair marketvalue regarding disallowance ofexpenditure and correct valuationrequired towards determination ofcapital gains on merger &acquisition.

6. Selection of most appropriatemethod which a person may adoptwhile determining arms length priceand enter into an advance pricingagreement with the CentralGovernment.

7. Proper and accurate determinationof net wealth for the purpose ofcharging wealth tax.

8. Authentication of all deductionsand allowances available underdifferent provisions of the Act

9. Proper determination of CapitalGains in respect of differentcategory of Assets.

10. Ascertainment of business Income/Loss in case of Business re-organisation

11. To ensure proper withholding tax inrespect of remittances out of India

12. Providing compliance certificates inrespect of all the provisions of theAct.

In view of the incredible scope &opportunity in the regime of Direct TaxCode, the cost & managementaccountants shall have the role of ancatalyst in bringing in total reforms inDirect Taxes in our country.q

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Direct Tax Code 2009:Fate of FDI-flowthrough Indo-MauritiusDTAA?A paradigm change is going to take place very shortly in the Indian Tax systemwith the release of the draft Direct Tax Code 2009. The code contains suchchanges in the existing tax system, that it is claimed that it will reduce the FDI-flow into India from Mauritius.The paper makes a comparative analysis of different provisions of the IncomeTax Act 1961 and the proposed DTC 2009 in regard to tax treaty and incomefrom different sources by a non-resident to assess how far the claim is justifiedfrom income tax point of view.

Dr. Sudipta Sarkar *

* Sr. Lecturer, Deptt. of Commerce, KalyaniMahavidyalaya, Kalyani, Nadia, WestBengal. E-mail: sudiptasarkar 235 @rediffmail.com

Introduction

A paradigm change is going totake place very shortly in theIndian Economy in line with the

New Economic Policy 1991 and WTOcommitment. The Finance MinisterPranab Mukherjee on Wednesday, 12August 2009, released the draft of DirectTax Code 2009 (DTC) for public opinionand debate (www.finmin.nic.in). ThisCode, if implemented, will replace theexisting Income Tax Act 1961 with moresimplified tax provisions. The basicobjective of this tax code is to broadbase the tax umbrella and to bring ahorizontal equity among differentclasses of tax payers in line with bestinternational practices. It is claimed bythe Government that the DTC throughradical changes of the existing DirectTax Laws not only simplify the directtax structure for individual tax payers,corporate houses and foreign investorsbut also reduces the cost of taxadministration machinery. Theproposed code, envisages meaningful

reduction of tax burden at all levelswhile simultaneously being revenueneutral for the government. It isexpected that the new code will facilitatehigher consumerism and therebypromote economic growth. TheGovernment plans to enact andimplement the DTC, with modification,if necessary, from the Financial Year 2011onwards.

Experts have already started toanalyse the proposed changes of theexisting direct tax system threadbare.The DTC already attains mixedreactions from different cornersregarding different changes of theexisting tax system. An important areain this regard is Double TaxationAvoidance Agreements (DTAAs), toavoid double taxation on capital gainsfrom transfer of shares and securitiesby a non-resident.

India has bilateral tax treaties, in theform of DTAAs, with various countriesto provide double taxation relief as anincentive for investment in India by theresidents of those countries. Amongthose countries Mauritius is highlysignificant because of the magnitude ofthe Foreign Direct Investment (FDI)

came into India through this country.DTC proposes such radical changes inthe tax on Capital Gains and otherincomes of NRI that will surely hit theexisting DTAAs and consequently onthe FDI-flow from the tax treatycountries.

Considering this background, thepresent paper is intended to survey theproposed changes in the Indian incometax system with the existing one inregard to DTAAs and tax on capitalgains and other incomes of NRI toassess how far the claim that the DTCwill act a setback for FDI into India viaMauritius is tenable. Here lies theimportance of this paper.

Double Taxation Avoidance Agreementand Flow of Foreign Direct Investment

Double taxation can be defined asthe levy of taxes on income or capitalgains in the hands of the same tax payerin more than one country, in respect ofthe same income or capital gains for thesame period. Double taxation may arisewhen the jurisdictional connections,used by different countries, overlap orit may arise when the taxpayer hasconnections with more than onecountry. For e.g. a Non Resident Indian(NRI) will have to pay tax on the incomeearned in India on source basis i.e.where income accrues or arises. On thesame income, tax will have to be paid inthe country of residence on residencebasis. As such, an NRI will end uppaying Income-tax twice on the sameincome. Tax Treaties provide protectionto tax payers against such doubletaxation. To avoid this hardship ofdouble taxation, Government of Indiahas entered into DTAAs with variouscountries. DTAAs provide for thereduced rates of tax on capital gains,business income, dividend, interest,royalties, technical service fees, etc.,received by residents of one countryfrom those in the other. Where totalexemption is not granted in the DTAAsand the income is taxed in bothcountries, the country in which the

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person is resident and is paying tax willget tax credit for the tax paid in the othercountry. These treaties are based onthe general principles laid down in themodel draft of the Organisation forEconomic Cooperation andDevelopment (OECD) with suitablemodifications as agreed to by the othercontracting countries.

India has bilateral tax treaty, undersection 90 of the Income Tax Act 1961,with Mauritius and 75 other countrieslike Singapore Japan, USA, UK etc. toavoid double taxation on capital gainsand prevention of fiscal evasion. Thesetreaties serve as a vehicle for routingFDI into India because of the taxbenefits it offers, as FDI is highlysensitive to tax. Among these treatiesthe Indo-Mauritian agreement is highlysignificant because of the quantum of

Table 1. SHARE OF TOP TEN INVESTING COUNTRIES IN INDIA(Rs. in crores)

Ra

nks

Country 2006-07 (April- March)

2007-08 (April- March)

2008-09 (April- March)

2009-10 (April-

June ‘09)

Cumulative Inflows

(April ‘00 to June ‘09)

%age to total

Inflows (in terms of

rupees) 1. MAURITIUS 28,759 44,483 50,794

16,511 177,784 44 %

2. SINGAPORE 2,662

12,319

15,727

1,814

35,666

9 %

3. U.S.A. 3,861

4,377

8,002

3,906

31,865

8 %

4. U.K. 8,389

4,690

3,840

502

23,406

6 %

5. NETHERLANDS 2,905

2,780

3,922

984

16,827

4 %

6. JAPAN 382

3,336

1,889

2,285

13,509

3 %

7. CYPRUS 266

3,385

5,983

2,345

12,395

3 %

8. GERMANY 540

2,075

2,750

1,365

10,853

3 %

9. FRANCE 528

583

2,098

348

5,830

1 %

10. U.A.E. 1,174

1,039

1,133

742

4,749

1 %

TOTAL FDI INFLOWS * 70,630

98,664

122,919

34,211 403,294 -

FDI India has received through thiscountry. During the past 4 years,between 2006-07 and 2009-10, FDI fromMauritius amounted to Rs 177,784 crore(Table 1) which is 44 percent of the totalFDI received by India during thisperiod.

Why Mauritius Route?

The Indo-Mauritius DTAA was firstsigned in 1982 and came into force on06-12-1983 [vide Notification F. No. 501/20/73-FTD]. Under this treaty orConvention, taxing rights were allocatedbetween the two countries and alsovarious reliefs for the tax payers hit bythe tax systems of both the countrieswere provided (in the form of 'doubletax reliefs'). The main provision was thatno resident of Mauritius would be taxedin India on capital gains arising out of

Source: www.dipp.nic.in/fdi_statistics/india_FDI_June2009.pdf visited on 15.09.09

transfer of share or securities in Indiaas India imposes tax on source based.While Mauritius taxation is on residencebased. Thus capital gain on such saleshould be taxable in Mauritius. But asper Mauritius domestic tax rule, capitalgain is tax free. Thus capital gain in caseof such sale remains unassessed in bothcountries. Thus the treaty virtuallymakes capital gains tax free, forinvestments if routed via Mauritius.This made Mauritius as India's majortrading partners in FDI.

But it is interesting to note thatMauritius itself is not such an investingcountry in its own right. ActuallyMauritius is used as holding company'sjurisdiction for making investments inIndia with actual investors being taxresidents of countries outsideMauritius. Even the Mauritius

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government itself is alleged to advocatefor companies from abroad to set theirsubsidiaries or structured their businessthrough a holding company inMauritius so as to get incorporated (orotherwise become Resident) inMauritius and thereupon invest outsideMauritius, specially in the fast growingmarkets of India to take advantage of

Income Tax Act 1961

1. Under the provisions of the Indian Income Tax Act,1961, gains from the sale of shares of Indian companiesare taxable in India.

2. While determining tax a distinction is made betweenshort term capital gain and long term capital gainsdepending on the period of holding of the transferredasset.

3. The level of tax is determined by whether the gainsfrom the purchase and sale of shares are deemedbusiness income or capital gains.

4. India currently does not impose capital gains tax onlong-term gains from shares sold on a recognized Indianstock exchange. For all off-exchange share sales, theprovisions of the DTAA are important in determiningwhether the investor can avoid paying capital gains taxin India.

5. If a foreign investor is an active trader and Indianrevenue authorities classify the investor's gains fromthe sale of shares as business income, India will usuallytax such business income only if the investor has a taxresidence in India. As a result, the country from whichthe investments have been made-and any prevailingDTAA-is not usually relevant in determining tax liabilityas long as the investor has no tax residence in India.

6. Present capital gains tax varies from 10.5 percent to 42percent (plus surcharge and education cess) dependingon the sale of shares of a private company or a listedcompany, whether the sale was on or outside of arecognized Indian stock exchange and whether the gainswere short-term gains or long-term gains. Besides thereare Securities Transaction Tax.

Direct Tax Code 2009

1. Under DTC it is proposed that capital gains from sale ofshares of Indian companies will be taxable as regularincome at normal rate.

2. The present distinction between short-term capital gainand long-term capital gain on the basis of the length ofholding of the transferred asset will be eliminated.

3. The Code makes a distinction between investmentassets and business capital assets [Section 284(27)].Gains on transfers of investment assets will continue tobe taxed as capital gains but gains on transfer ofbusiness capital assets and slump sale will be taxed asbusiness income [Section 31(XI)].

4. Under the proposed situation capital gains by anoffshore company, whether tax treaty exists or not, fromtransfer of shares in an Indian company becomes taxablein India. A lower rate of tax for long term capital gainson sale of shares is eliminated.

5. In the DTC it is proposed that Income from the transfer,directly or indirectly of a capital asset situated in Indiashall be deemed to accrue in India. Hence capital gainswill be taxable in India irrespective of the tax residencein India. The DTC will override the prevailing DTAA inthis respect

6. Tax on Capital Gain for Non-Resident will be 30%whether deducted at source or at the time of calculatingtotal income. Securities Transaction Tax is proposed tobe abolished.

the India-Mauritius DTAAs.

Hence, by this 'Treaty Shopping'though huge amount of FDI is cominginto India but India government actuallylosses the tax revenue on account ofmisuse of DTAAs by conduitcompanies registered in Mauritius.

Comparative Analysis of Income TaxAct 1961 and Proposed Direct Tax Code

2009 in Regard to Tax on Capital Gainsand other Incomes of NRI

Let us make a comparative analysisof the present Income Tax Act 1961 andthe proposed DTC 2009 to get a clearpicture of changes, in regard to tax onCapital Gains and other incomes of NRIand also the position of the prevailingDTAA.

Note - In so many countries including Mauritius capital gain is tax free so under the proposed scenario investment in Indiawill be costlier, from income tax point of view, than what it is today. It is highly expected that this situation will surely hit theflow of FDI into India through Mauritius route, if not some changes are made in the DTC to save capital gains tax of the non-resident investors.

4.1. Tax on Capital Gains of NRI

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4.2. Tax on Business Income of NRI

Income Tax Act 1961

1. For a foreign company (including branch/ projectoffices), tax rate on business profit is @ 40% plussurcharge of 5%. An Indian registered company, whichis a subsidiary of a foreign company, is also consideredan Indian company for this purpose.

2. Non-resident corporations are essentially taxed on theincome earned from a business connection in India orfrom other Indian sources. A corporation is deemed tobe resident in India if it is incorporated in India or if it'scontrol and management is situated entirely in India.But as per present DTAA if the investors is a taxresident of the country from where investment is madeand have no permanent establishment in India , thenhe will get the benefit of tax relief The business incomeof a non-resident is taxable in India under section 9(1)(i)of the Income Tax Act 1961 only if it accrues or arises,directly or indirectly, through or from any businessconnection in India, property in India, asset or sourceof income in India, or through the transfer of an Indiancapital asset.

Direct Tax Code 2009

1. In the DTC corporate tax rate of foreign companies isproposed at 25% plus 15% for branch profits resulting ineffective tax rate of 36.25 percent.

2. A foreign company is considered to be a resident in Indiaif its place of control and management at any time duringthe year is situated wholly or partly in India. Consequentlyit will be taxed at the rate applicable for the domesticcompany. Thus, though tax rate is reduced for businessprofits, but due to increase in the periphery of residentialstatus so many foreign companies become taxable in India.The existing DTAA will not guard the tax liability in thiscase.

Note- In Mauritius tax rate on business profits is only 15 percent. A survey by KPMG International on Global Corporate Taxshows that corporate tax rates in Asian countries are significantly lower than those of India's. For example, Hong Kong'scorporate tax rate is 17.5%, Singapore's 20% and Malaysia's 27%. These countries are also in the process of developing theireconomies, and with their lower corporate tax rates, they can provide stiff competition to India in attracting FDI.

4.3. Tax on Dividend, Interest etc. Income of NRI

Income Tax Act 1961

1. Current Indian tax laws do not tax dividends in the handsof a shareholder. However, Indian companies are subjectto a dividend distribution tax at on the amount theydistribute as dividends.Some of the DTAAs India hasentered into (with Mauritius, for example) stipulate aconcessional tax rate on dividends received byinvestors who are tax residents of the applicablecountry.

2. Interest income, on the other hand, is subject towithholding tax at an effective rate of approximately 42percent for a foreign company and 23 percent for anIndian company. The provisions of a DTAA, however,may modify this tax rate. The India-Mauritius DTAAdoes not provide any concession with respect to Indiantax on interest payments, so Mauritian tax residentswill pay an approximate rate of 42 percent on interestincome received from Indian companies.

Direct Tax Code 2009

1. Dividend will continue to be tax-free in the hands ofinvestors. Rate of tax proposed in the First Schedule ofDTC for Non-resident are as follows: (a) On investmentincome by way of dividends on which distribution taxhas not been paid -20 per cent

2. Rate of tax proposed in the First Schedule of DTC forincome by way of interest on investment of NRI is 20%.

Note: In Mauritius tax on dividend income from Indian companies is nil if more than 5 percent of the Indian company isowned by the Mauritius resident and 3 percent otherwise. In case of interest received from an Indian company tax is nil ifbusiness holds a global business license.

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4.4. Double Taxation Avoidance Agreement

Income Tax Act 1961

Under the present situation relief against double taxationis provided in two ways: A. Section 90: Bilateral Relief:The Central Government may enter into a DTAA withanother country, based on mutually acceptable terms, toavoid double taxation. Such relief may be offered undertwo methods:1.Exemption method - This ensures completeavoidance of tax overlapping.2.Tax credit method - Thisprovides relief by giving the tax payer a deduction from thetax payable in India.As per section 90(2) Where the CentralGovernment has entered into an agreement with theGovernment of any country outside India or specifiedterritory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be,avoidance of double taxation, then, in relation to theassessee to whom such agreement applies, the provisionsof this Act shall apply to the extent they are more beneficialto that assessee.Explanation 1. For the removal of doubts,it is hereby declared that the charge of tax in respect of aforeign company at a rate higher than the rate at which adomestic company is chargeable, shall not be regarded asless favourable charge or levy of tax in respect of suchforeign company.In case of a remittance to a country withwhich a DTAA is in force, the tax should be deducted atthe rate provided in the Finance Act of the relevant year orat the rate provided in the DTAA, whichever is morebeneficial to the assessee. [Circular No. 728, dated30.11.95]Where a specific provision is made in the DTAA,that provision will prevail over the general provisionscontained in the Income Tax Act. Where such agreementprovided for a particular mode of computation of incomethe same should be followed irrespective of the provisionsof the Act. [ Circular No 333, dated 02.04.82]This facility isalso available for agreement between any specifiedassociation in India and any specified association in thespecified territory outside India as per section 90AB.Section 91- Unilateral Relief The Central Government canrelieve an individual from double taxation irrespective ofwhether there is a DTAA between India and the othercountry concerned. Unilateral relief may be offered to a taxpayer if:1.The person or company has been a resident ofIndia in the previous year.2. The same income must beaccrued to and received by the tax payer outside India inthe previous year. 3. The income should have been taxed inIndia and in another country with which there is no taxtreaty.4. The person or company has paid tax under thelaws of the foreign country in question. Double taxationagreement restricts the jurisdiction of the contractingstates to taxing business income of a foreign enterpriseonly if such enterprise carries on business in India througha permanent establishment

Direct Tax Code 2009

Under the proposed Direct Taxes Code Bill, 2009 followingpoints are worth to be mentioned Section 3.3 - Any incomewhich accrues to a resident outside India in the year, or isreceived outside India in the year by, or on behalf of, suchresident, shall be included in the total income of the resident,regardless of -(a) the income having been charged to taxoutside India; or(b) the method for granting of relief for theavoidance of double taxation under any agreement referredto in section 258.Section 285- Agreement with ForeignCountriesSection 258(5): A person shall not be entitled toclaim relief under the provisions of the agreement unless acertificate of his being a resident in the other country orspecified territory is obtained by him from the tax authorityof that country or specified territory, in the prescribedform.Section 258(6): The provisions of this Code shall notbe regarded as discriminatory against the foreign companymerely on the consideration that the liability of the foreigncompany to pay tax is calculated at a rate higher than therate at which the liability of a domestic company iscalculated.Section 258(8): For the purposes of determiningthe relationship between a provision of a treaty and thisCode, -(a) neither the treaty nor the Code shall have apreferential status by reason of its being a treaty or law;and(b) the provision which is later in time shallprevail.Section 206 - Foreign tax credit(1) An assessee shallbe allowed a credit in respect of income-tax paid bydeduction, or otherwise, in any other country under thelaw in force in that country.(2) An assessee shall be alloweda credit against the Indian income-tax payable by him inrespect of his income which has accrued during the financialyear outside India, of the amount determined in accordancewith the Agreement entered into with such other countryunder section 258.(3) However, in a case where there is noagreement under section 258 with the other country, theamount referred to in 206(2), shall be calculated at lower taxrate among the rates of the two country.(4) An assesseeshall, regardless of anything contained in 206(3), not beentitled to credit against the Indian income tax payable byhim if -(i) the income is also deemed to accrue in India; and(ii) no Agreement under section 258 has been entered intowith the other country in which the income has accrued.(5)The Central Government may prescribe the method forcomputing the amount of credit, the manner of claimingcredit and such other particulars as are necessary for therelief or avoidance of double taxation.It is also proposedthat tax due from non-residents could be recovered fromany of his assets even if situated outside India or from anyamount payable by any person to the non-resident.

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Note: Thus, new tax code is that India'sdomestic law of income tax willeffectively override the tax treaty andcertainly reduce the benefit of the taxtreaty. One thing is very important isthat under the proposed situation,neither the treaty nor the code shallhave a preferential status by reason ofits being a treaty or law; and theprovisions which is later in time shallprevail. This will certainly hit thecommitments made by India at the timeof entering the treaty and thisvulnerability will surely hit the minds ofthe foreign investors and routinginvestments into India through a thirdcountry may become a thing of the past.

International Practice for Tax Treaties

The practice of applying tax treatyvis-à-vis domestic law varies fromcountry to country. However, in mostof the countries, the treaties supersedethe domestic law, a practice which isfollowed, at present, in India also.Wherever the domestic law overridesthe tax treaties, such a practice is notconsidered appropriate under theInternational Treaty Convention. In thiscontext, reference may be made to theVienna Convention, which provides:"Every treaty in force is binding uponthe parties to it and must be performedby them in good faith" and "A partymay not invoke the provisions of itsinternal law as justification for its failureto perform a treaty." [Agarwal HP, 2009].

Conclusion

Thus from the above analysis it isclear that the proposed Direct Tax Code2009, if implemented in its present formwill override the DTAAs India hasentered into with different countries. Insuch case, though treaty shopping canbe avoided to some extent but it willsurely hit the inflow of FDI into India.Especially in case of Mauritius routeIndia will not be so much attractive forinvestment as it is today.

It is to be noted that in developingcountries, treaty shopping is oftenregarded as a tax incentive to attractscarce foreign capital or technology.The Supreme Court of India also pointedout the advantages of tax treaties in thecontext of developing countries."Developing countries need foreigninvestments, and the treaty shoppingopportunities can be an additionalfactor to attract them. The use of Cyprusas a treaty haven has helped capitalinflows into Eastern Europe. Madeira(Portugal) is attractive for investmentsinto the European Union. Singapore isdeveloping itself as a base forinvestments in South East Asia andChina. Mauritius today provides asuitable treaty conduit for South Asiaand South Africa. In recent years, Indiahas been the beneficiary of significantforeign funds through the 'Mauritiusconduit'. Although the Indian economicreforms since 1991 permitted suchcapital transfers, the amount wouldhave been much lower without theIndia-Mauritius tax treaty." [Ref. AzadiBachao Andolan 263 ITR 706.]

The apex court clarified that a taxtreaty is essentially a bargain betweentwo sovereign States. Therefore, wherethe tax treaty provides for a particularmode of computation of income, thesame should be followed, irrespectiveof the provisions in the Income Tax Act.Where there is no specific provision inthe agreement, it is the basic law, i.e. theIncome Tax Act that will govern thetaxation of income.

Lastly, it is to be noted that theFinance Minister Pranab Mukherjeerecently announced that theGovernment has identified seven criticalareas including DTAAs, on the DTC2009 for further detailed re-examination.Hence it is expected that necessarychanges will be made in the draft DTC

before presenting in the parliament soas to guard the treaty shopping on onehand and simultaneously make IndianTax system internationally competitiveso that it will not act as hindrances inthe flow of FDI into India speciallythrough Mauritius route.

References:

1. Agarwal HP, "Tax Code hits at taxtreaties", Business Standard, Sept08, 2009

2. Ramanujam T. C. A, "DoubleTaxation Avoidance Agreements-Why a fresh look is called for",Business Line, Nov 19, 2004

3. Shah Sunil & Mahajan Ashutosh,"Draft Direct Taxes Code Bill, 2009-Is the Mauritius route dead?",August 21 2009, www.deloitte.com,visited on 15.09.09.

4. Shukla Puneet, "Double taxationavoidance agreement", September08, 2009, http://www.indlawnews.com, visited on15.09.09.

5. Singhania Dr. Monica (2009),"Corporate Tax and DividendPolicy", Taxman Publication, NewDelhi.

6. Singhania V.K (2009), "Income TaxAct", Taxaman Publishers, NewDelhi.

7. Singhania, V.K. and Singhania, Kapil(2009), "Direct Taxes Law andPractice", Taxman Publications Pvt.Ltd, New Delhi.

8. Srinivasan Anand G (2009), "AComparative Study of Direct TaxCode 2009 & Income Tax Act 1961",Taxman Publications Pvt. Ltd., NewDelhi.

9. www. finmin.nic.in

10. www.dipp.nic.in/fdi_statistics/indiavisited on 15.09.09.q

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Direct Tax Code 2009:Boon or BaneSatya Ranjan Doley*Introduction

T he taxation structure of thecountry can play a veryimportant role in the working of

our economy. While designing thetaxation structure, it has to be seen thatit is in conformity with our economicand social objectives. It should notimpair the incentives to personalsavings and investment flow and on theother hand it should not result intodecrease in revenue for the state.

Income Tax Act 1961 consists of alarge numbers of sections, sub-sectionsrunning into thousands, schedules,rules, sub-rules etc. and is supportedby other acts and rules. This Act hasbeen amended by several amendingActs since 1961. But the act is stillcumbersome and complicated which inmost cases are not understood by theordinary tax payers. As such, they haveno option but to take help of experts inthe calculation of tax and submissionof Tax Return. Keeping this in view,there has been proposal to replace theexisting Income Tax Act 1961. Direct TaxCode 2009 is a draft proposal to makeexisting tax structure easy and simpleso that tax payers themselves cancompute and file income tax return.Direct Tax Code 2009

A step has been taken towardsbringing about structural changes byreleasing a draft of the Direct Tax Codefor public debate. The Code follows thepromises made by Finance Minister inhis Budget Speech on July, 2009 ofreleasing draft code. The code alongwith a Discussion Paper was releasedon August 12, 2009 with the statedobjective of improving the efficiencyand equity of the Indian tax system byeliminating distortions in the structure,

introducing moderate levels of taxationand expanding the tax base.

It is necessary to analyze some ofthe drawbacks of the proposal whichneed to be taken into account beforemaking it act. The paper deals with someof the points contained in the proposalwhich is required to be addressed.

New tax slab: Under the Direct TaxCode 2009, the amount of non taxablelimit is Rs.160000. this non taxableamount of individual assessee needs tobe increased to give benefit to lowerincome group because of high cost ofliving due to price rise in the presenttime. Thus, it is seen in the proposal ofDirect Tax Code that the assesseehaving income between Rs.1600000 andRs.10 lakhs, the rate of tax is 10%, theperson earning income from Rs.10 lakhsto Rs.25 Lakhs need to pay 20% and30% for the person having income overRs.25 lakhs. Thus it can be observedthat the proposal of Direct Tax Codewould give more benefit to the upperclass group than that of lower group.Leving tax on withdrawals of PPF andother pension scheme:

After retirement from service, someof the retirees and pensioners are merelydependent on the amount of PPF andpension amount for rest of their lives inthe future. Charging tax on withdrawalsof PPF and other pension scheme willhave adverse impact on the retirees andpensioners. This would reduce theirwillingness to contribute less amountof this fund to avoid tax burden. Apartfrom, this source of fund is also revenueto the government which it can use fordevelopment activities. Thegovernment, therefore, would faceshortage of fund and as a result thegovernment will have no option but toadopt other mode of getting fund i.e. (borrowing) paying higher rate of interestfrom financial institution and abroad atthe cost of state exchequer which will

*Assistant professor of DHSK CommerceCollege, Dibrugarh, affiliated to DibrugarhUniversity (Assam), Pin-786001. E-mail:[email protected]

badly affect the economy of the countryas a whole.Removal of deduction for interest onhouse building loan:

There is a proposal that deductionof interest on house building loan is tobe deleted. This is not an appropriatedecision and this is to be reconsideredby the government taking into accountthat many taxpayers purchaseresidential house on banks' loan. Taxpayers would not like to pay interest onhouse building loan because ofwithdrawal of deduction for interest inthis case. Some of the tax payers maydesire to stay on rented house foravailing house rent allowance. On theother hand, the decision of deletingdeduction for interest on housebuilding loan, the construction andallied industries i.e. cement factories,iron and steel industries, brick factoriesand the labor market etc. will receive ajolt which in turn will have impact onthe economy.Reduction of standard deduction forrepairs and maintenance of houseproperty:

The direct tax code 2009 reduces thestandard deduction for repairs andmaintenance of house property from30% to 20%. The rate is to bemaintained the same as earlier becausethere is high cost of repairs andmaintenance of house in time ofskyrocketing prices of materialsconnected with it.Conclusion:

Direct Tax Code 2009 is to replacethe Income Tax Act 1961 which hasbeen complicated and complex due tolarge numbers of sections and sub-sections. This is, no doubt, anappreciative step but beforeimplementing such proposal, thegovernment needs to examine some ofthe cases from the taxpayers' points ofview which will have impact on themadversely and accordingly, modificationis to be done considering variousperspectives of angle. On the one hand,this will enable the government toincrease collection of tax revenue fordevelopmental work and on the other,will give relief to the lower and middleincome group to large extent.q

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Direct Tax Code Bill-Meaning, Features andAccountants RoleThe Finance Minister during his speech in the Parliament on 6 July 2009 hadpromised to bring about structural changes in direct taxes by releasing the newDirect Tax Code to improve the efficiency and equity of the Indian tax system byeliminating distortions in the tax structure, introducing moderate levels oftaxation and expanding the tax base. An accountant is certified and are extremelyversed in the tax code, finances and tax issues. In this paper an attempt is madeto specify the accountants role in calculating the tax by taking care of DirectTax Code.

Pooja Sareen*

*Lecturer, Chandigarh

Introduction

I n a global market in thecontemporary economicenvironment all business needs

relevant and appropriate informationquantitative as well as qualitativeinformation, which is adequate tosurvive and grow in a market. In currenttimes the market is unpredictable anddynamic in nature, The main objectiveof business organization is to maximizeowners wealth or put it in other wordsto be profitable in the short-tern as wellas in the long-term. The designation ofthe accountant is proving to be anindispensable part of the business andits responsibilities are more than thataccounting task He is a person who hasthe requisite skill and experience inestablishing and maintaining accuratefinancial records for an individual or abusiness. The duties of an accountantmay include designing and controllingsystems of records, auditing books, andpreparing financial statements. Anaccountant also give tax advice andprepare tax returns.. These people arepassionate about the numbers, figuresor data of the business. Their career lieswith the same passion in the varieties

of businesses. And their servicesinclude a wide range to fit with thesmaller accountancy as well as bigcorporations and government offices.

Direct Tax Code Bill

The Finance Minister during hisspeech in the Parliament on 6 July 2009had promised to bring about structuralchanges in direct taxes by releasing thenew Direct Tax Code. Keeping with hispromise, the Finance Minister hasreleased the draft Code along with adiscussion paper on 12 August 2009inviting the public to share their viewsand suggestions. The final version ofthe Code would then be presentedbefore the Parliament in the WinterSession, 2009 for enactment.

The Discussion Paper states thatthe thrust of the Code is to improve theefficiency and equity of the Indian taxsystem by eliminating distortions in thetax structure, introducing moderatelevels of taxation and expanding the taxbase. The attempt is to simplify thelanguage, remove ambiguity, providestability and adopt best internationalpractices. The code seeks to consolidateall direct taxes i.e. Income Tax, DDT, FBT& Wealth Tax under a single umbrella.Features of Direct Tax Code Bill is asfollows:-

1. The regulatory function of thetaxing statute has been withdrawn. Thisis being labelled as a great simplificationmeasure.

2. Under the code all rates of taxes areproposed to be prescribed in theFirst to the fourth Schedule to thecode itself thereby obviating theneed for an Annual Finance Bill. Thechanges in the rates will be donethrough appropriate amendments tothe Schedules.

3. The Code has provided acomprehensive definition of income.It includes all accrual and receiptsof revenue and capital nature unlessotherwise specified. It is importantto note in this regard that agriculturalincome has been excluded from thescope of this code.

4. The separate concept of "PreviousYear" and "Assessment Year" willbe replaced by a unified concept of"Financial Year"

5. Unabsorbed business losses shallbe allowed to be carried forwardindefinitely.

6. Classification of source of Income(Section 12)

For the purpose of computation oftotal income of any person for anyfinancial year, income from all sourcesshall be classified under the following :

a. Income from Special Sources

§ Items listed in the Table in Rule 3 ofthe First Schedule shall beconsidered as income from specialsources

b. Income from Ordinary Sources

All income accruing from a sourceother than the special sources, shall beclassified under the following heads ofincome

l Income from Employment

l Income from House Property

l Income from Business

l Capital Gain

l Income from Residuary Sources

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It is explained as follows:-

l Income from House Property - Nodeduction for taxes or interest willbe allowed in case of a self-occupiedproperty.

l The earlier limit of Rs. 1,50,000/- onaccount of interest on capitalborrowed for the purpose ofacquiring constructing repairingrenewing or reconstructing theproperty has been withdrawn. Asper the code any amount of interestpaid in this regard shall beadmissible.

l Income from Business - profit onsale of business capital assets andundertaking under a slump sale willno longer be treated as capital gain.They will be treated as genuinebusiness income.

l Income by way of interest earnedby the assessee other than financialinstitutions shall now be treated as"Income from Residuary Sources".

l Business expenditure has beenclassified into 3 mutually exclusivecategories:

Operating Expenditure

Permitted Financial Charges

Capital Allowances

l Depreciation on business capitalassets will now include expensesamortised.

l In order to curb the growing casesof asset stripping and lossmanipulation the code proposesthat loss on sale of business capitalassets will be treated as intangibleassets and depreciation will beallowed at the same rate applicableto the relevant block of assets.Thereby, only a fraction of loss shallbe allowable every year.

l Income from Capital Gains - Thepresent distinction on the basis ofthe length of holding of the assetbetween short-term capital assetand long-term capital asset will beeliminated.

l The Securities Transaction Tax(STT) will be abolished.

l The base date for determining thecost of acquisition of asset has nowbeen shifted from 01-04-1981 to 01-04-2000.

l It has been held time and again byvarious judicial authorities thatwhere the cost of acquisition ofcapital asset is indeterminable, themachinery provisions for computingcapital gains fail. In this regard, thecode now proposes a new provisionwherein if the cost of acquisition ofan investment is not determinableor ascertainable for any reason, thecost of acquisition shall be deemedto be 'NIL'.

l Income from Residuary Sources -Any amount exceeding Rs. 20,000/-taken or accepted or repaid as loanor deposit otherwise than byaccount payee cheque or draft shallnow be treated as " Income fromResiduary Source.

7. Incentive for Savings - The codenow proposes a new method oftaxation of savings i.e EET ( Exempt-Exempt-Taxation). Under thismethod the contributions to savingsintermediary are exempt from tax, theaccumulation/accretion is alsoexempt from tax and onlywithdrawals from such accountwould be taxed. The aggregateamount of deduction admissibleunder this scheme shall be limited

to Rs. 3,00,000/-.

8. Tax Holiday for certain business:-The new code substitutes profitlinked incentive by a new schemeas the profit linked incentive isregressive in nature. Under the newscheme a person would be allowedto recover all capital and revenueexpenditure (except expenditure onland, goodwill and financialinstrument) and he would be liableto income tax on all profits madethereafter.

9. Liability under Minimum AlternateTax (MAT): a radical change hasbeen proposed under the scheme ofMAT. The code provides for MATcalculated with reference to the"Value of the Gross Assets" and notaccording to the existing book profitmethod. The rate of MAT asproposed is 2 percent of the valueof the gross assets. The same shallbe 0.25 percent in case of bankingcompanies.

10. Set off MAT credit: - Under the codeit has been proposed that MAT willbe a final tax and hence it would notbe allowed to be carried forward forclaiming tax credit in subsequentyears.

11. Rate of Income Tax : In case ofIndividual, other than women andsenior

12. In case women the basis exemptionlimit raised to Rs. 1,90,000/- and forsenior citizen to Rs. 2,40,000/-

Particulars Rate of Income Tax Where the total income does not exceed Rs.1,60,000/-

Nil

Where the total income exceed Rs.1,60,000/- but does not exceed Rs. 10,00,000/-

10% of the amount by which the total income exceeds Rs. 1,60,000/-

Where the total income exceed Rs.10,00,000/- but does not exceed Rs. 25,00,000/-

Rs. 84,000/- plus 20% of the amount by which the total income exceeds Rs. 10,00,000/-.

Where the total income exceed Rs.25,,00,000/-.

Rs. 3,84,000/- plus 30% of the amount by which the total income exceeds Rs. 25,00,000/-.

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13. It has been proposed that the TaxRate of Companies shall be reducedto 25 percent.

14. Wealth Tax :- The Individual andHUF has been included under thepurview of wealth tax. Further, theexemption limit for them has beenfixed at Rs. 50 crores. Rate has beenfixed at 0.25%.

15. Income Tax Authorities shall nowalso include Transfer Pricing officer.

16. Due date of filing of return in caseof companies proposed to be 31stAugust.

17. The time limit for filing revised returnwill be limited to 21 months from theend of the relevant financial year.

18. Under the code, the time limit forfiling an appeal before higher forumi.e CIT(A), ITAT , shall be thirtydays from the date of receipt of theorder.

19. Income Escaping Assessment :- Acase can be reopened under the codefor the following reasons :

l If computation has not been madein accordance with decisionrendered by the appellate authority

l Computation has not been made inaccordance with the directioncontained in Circulars, instructionsissued by the CBDT.

l Any objection has been raisedregarding the computation by theC&AG.

20. The time limit has been increasedfrom existing 4 years to 7 years fromend of the Financial Year.

21. The notice of reassessment mustcontain in writing the reason forreopening the case.

22. Penalty Provisions:- A person whowilfully under reports his tax liabilityshall be liable to penalty not lessthan and upto twice the amount oftax payable. No income tax authorityhas power to waive the penalty

23. Specific Anti Abuse Rules : The

general anti avoidance rules willfurther supported by anti avoidancerules to deal with the followingcircumstances:-

l Payment of associated persons inrespect of expenditure

l International transaction not at armlength

l Transaction resulting in transfer ofincome to non resident;

l Avoidance of tax in certaintransaction in securities

24. Value of Gross Assets :- Value ofGross assets shall be computed inaccordance with the formula

A+B+C-D-E

A= The value of the gross block of fixedassets of the co. as on the close fothe financial year

B= The value of the capital work inprogress of the co. as on the closefo the financial year

C= book value of all the assets of thecompany as on the close of the FY

D= accumulated depreciation on thevalue of the Gross block claimedupto the last day of the of therelevant financial year

E= the amount of debit balance of profitand loss account if included in theamount "C"

Accountants Role in providing taxservices

"Anyone may so arrange his affairsso that his taxes shall be as low aspossible. He is not bound to choosethat pattern which best pays theTreasury. There is not even a patrioticduty to increase one's taxes."

-- Judge Learned Hand

The breakdown of the financialoversight system led to billions inlosses for investors, tens of thousandsof unemployment checks for workers,and a crisis of confidence in our capital-markets system.

It has become apparent that manyof the corporate bankruptcies of the

past couple of years were caused, atleast in part, by the voluntary nature ofour tax-compliance system. Simply put,the system is based on individuals andbusinesses paying their "fair share" oftax liability.

Given that loosely policed honorsystem, it's fair to ask what role taxprofessionals are playing, or perhapsmore importantly, what role they shouldplay. But there's little consensus amonggovernment officials, consumeradvocates, journalists, professionalorganizations, and tax preparers fromboth small and large firms, about whatthe extent and nature of that role is. Itcan be explained as follows:-

1. An accountant or a charteredaccountant firm India needs to beapt in calculating different kinds oftaxation like sales tax, income tax,value-added tax, property tax,emergency tax, corporation tax,retirement tax, capital gains tax, polltax, excise duty, and inheritance tax.

2. Since tax calculation involves verycomplex intricacies, thus it is verydifficult for people who are unawareof its procedure to calculate and filetax returns. More over most of thebusiness people do not have muchof time to carry all this taxationprocedure themselves and thus hirea professional accountant to helpthem in their financial calculation.

3. Accountants are people experts inproviding financial services like taxcalculation, cost evaluation, budgetanalysis, selecting JV Partners,asset management, investmentplanning, legal consulting andauditing consulting services.Chartered accountants are certifiedpublic accountants with high levelaccounting degrees, knowledge andadvanced level of expertise andfollow certain financial accountingrules laid down in national tax lawsto calculate your tax or assist you inyour financial holdings.

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Role of Accountant in Direct Tax CodeBill

An accountant is a licensedprofession who has gone to hell andback to gain their designation as acertified public accountant. The testingfor the certification is beyond brutal. Ifan accountant is certified, it means theyare extremely versed in the tax code,finances and tax issues.

Many people are under the mistakenbelief that accountants simply providetax return preparation services. Thestereotypical view involves a persondropping off their receipts a monthbefore tax returns are due and theaccountant doing the best he or she canto prepare a tax return while limiting theamount of money you owe thegovernment. This occurs, but people arewasting money if this is how they are

using their accountant.

Accountants have expertise in thetax code. You should use this. Ideally,an accountant will aware of all aspectsof your financial life. They should alsobe aware of significant events in yourprivate life, such as the fact you areabout to have a child. The reason thisis important is it gives the accountantthe ability to solve your tax mystery.

Solving a tax mystery simply refersto an accountant figuring out the bestway to limit your taxes. As you knowfrom police shows on television ormystery novels, finding as many cluesas possible is the way to solve themystery. The accountant needs to dothe same with you and you need to helpthem. Each part of your financesrepresents a clue to solving the mysteryof how to cut your tax bill.

Once an accountant has all the clues,he or she can do their job. They willgive you specific direction on the stepsto be taken to save money on your taxbill this year. Equally important, they willgive you advice on how you are goingto save taxes in future years. Dependingon your situation, they may evenrecommend a long-term tax strategy forstuffing away money to pay for yourkids' college tuition or your retirement.

The purpose of using anaccountant is not just to put tax returnstogether. They put together taxstrategies to save you money this year,the next and throughout your life..

With products like Turbo Taximproving, many wonder where thisleaves accountants. Ironically, theevolving role of accountants is helpingpeople save on their taxes.q

C A N C E L L AT I O N O F R E G I S T R AT IO N U N D E R R E G U L AT I O N 2 5 (1 ) O F C WA A C T, 1 9 5 9R E G I S T R AT IO N N U M B E R S C A N C E L L E D F O R JU N E -2 0 1 0 E X A M I N AT I O N

U P T OE R S /0 0 0 9 0 4

N R S /0 0 10 5 6 (E X C E P T 96 , 11 9 , 1 2 7 , 1 4 0 -1 4 5 ,4 8 8 - 4 9 9 , 5 3 3 - 6 0 0 , 9 0 1 - 9 2 3 , 9 3 7 -9 5 0 )S R S /0 0 2 1 9 1 ( E X C E P T 20 6 2 – 21 0 4 )

W R S /0 0 1 8 1 8R S W /0 7 5 3 7 6R A F / 0 0 5 8 2 4

R E - R E G I S T R AT IO N

T h e s tu de n ts w h o se R eg is tra tio n N u m b ers h ave b een can ce l led ( in c lu sive o f th e s tu d en ts reg is te red up to 3 1 s tD ece m b er-2 0 0 2) as ab ove bu t d es ire to ta ke th e In s ti tu te ’s E x am in a tion in Jun e-20 1 0 m u s t ap p ly fo r D E -N O VOR eg is tra t ion an d o n be in g R eg is te red D E -N O V O , E x em p tion f ro m in d iv idu a l sub ject(s ) a t In te rm ed ia te /F in a lE x am in a tio n o f th e In s ti tu te secu red u n de r th e ir fo rm e r R eg is tra tio n , i f any, sh a l l rem a in va lid as pe r preva len tR u les .

F o r D E -N O VO R eg istra tio n , a c an d id a te sh a l l have to ap p ly to D irec to r o f S tu d ie s in p resc r ib ed F o rm (w h ichcan b e h ad e ith er from th e In s ti tu te ’s H .Q . a t K o lka ta o r from th e co n cern ed R eg io n a l O ffices o n p ay m e nt o f R s .5 /- ) a lo n g w ith a re m ittan ce o f R s. 2 00 0 /- o n ly a s R eg is tra tio n F ee th rou g h D em a nd D ra ft d raw n in favo ur o f

THE ICWA OF INDIA, payable at KOLKATA.

Kindly ignore the earlier Circular dt. 27 th January, 2010 in this regard.Arnab Chakraborty,

Date: 24th March, 2010 Director of Studies

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Role of Cost andManagement AccountantUnder Direct Tax CodeDr.Sukamal Datta*Tamal Taru Roy**

*Principal, Naba Ballygunge Mahavidyalaya,Kolkata.**CMA, AICWA, Selection Grade Lecturerin Commerce, Naba BallygungeMahavidyalaya, Kolkata.

Direct Tax Code - A Step towards TaxReforms in India

T he present Income Tax Act wasenacted in 1961 to replace theearlier Act which had been

legislated in 1922, before independence.About 50 years have been elapsed sincethe enactment of present Income TaxAct. At the time of presenting the UnionBudget for 2005-06 the Government hadannounced its intention to introduce arevised and simplified Income Tax Bill.Subsequently, the Government undertook a work on drafting a Direct TaxCode to replace the existing Income TaxAct,1961 and the Wealth Tax Act,1957.

Hon'ble Finance Minister ShriPranab Mukherjee during his speech inthe Parliament on 6th July 2009 hadpromised to bring about structuralchanges in direct taxes by releasing thenew Direct Tax Code (DTC). Keepingwith his promise, the Finance Ministerreleased the draft Direct Tax Code alongwith a discussion paper on 12th August,2009 for public debate. The draft DTCenvisaged promoting voluntary taxcompliance and an equitable andprogressive tax regime, introducingmoderate levels of taxation, expandingthe tax base and simplifying the draftinglanguage by eliminating distortions inthe tax structure. The attempt is alsotaken to remove ambiguity, providestability and adopt best international

practices. Based on the inputs andsuggestions received from the publicthe Government would finalize the DTCBill for presentation in the winter sessionon Parliament, 2009. The Governmentplans to implement the DTC from thefinancial year 2011-12 (starting from 1stApril, 2011). Before finalizing it, theGovernment would take suggestions onseven critical areas of concern in thecode. The critical areas of concerninclude shifting the base forcomputation of Minimum Alternate Tax(MAT) from book profits to assets;capital gains taxation for non-residents;taxation of foreign companies; doubletax avoidance agreements; GeneralAnti-Avoidance Rules (GAAR),taxation of charitable institutions; andshift to EET (Exempt-Exempt-Tax)methodology for taxation of savings.Finance Minister Shri PranabMukherjee said that tax reform, like allreforms, is a process and not an event.He said that to simplify tax laws andmoderate tax rate all direct taxesincluding EBT and income tax would bebrought under one code. The new codeis aimed at eliminating the scope oflitigation as far as possible. Theproposed DTC when it would beimplemented would go a long waystreamlining the existing complex taxstructure. Since international bestpractices will be included in DTC, itsadoption would ensure that the Indiantax structure would be at par with globalstandards.

How does DTC impact on CommonPeople

There is going to be some bigchanges in tax laws if DTC will beeffective from 1st April, 2011. Commonpeople are not at all interested regardingamendments, alteration, modificationand introduction of various provisionsand sections through Finance Bill eachyear or the change of political equationsof Minister-in-Charge and socio-economic requirements, they are onlyconcerned with present and the futureand plan their income appropriation toget maximum benefit. The draft DTCwhich is a document containing changesin exemptions, tax slab etc. This willperhaps be a big change in the fivedecades old Income Tax Act. As per theproposal, the new tax slab would be :

0% tax for income less than Rs.1.6 lac

10% tax for income from Rs.1.6 lac to 10lac

20% tax for income form Rs.10 lac to 25lac and

30% tax for income more than Rs.25 lac

For Female, second slab begins fromRs.1.90 lac and for Senior Citizen itbegins from Rs.2.40 lac.

The new tax slab is really amazingbecause almost 98% of Indian will thenpay 10% or less tax because income ofmajority of people is below 10 lac. Inplanning and framing an ideal IncomeTax Structure of a welfare state likesours the objectives are to give relief tothe maximum possible extent to thelower and middle income grouptaxpayers and check certain blackmoney at one hand and to enable theGovernment to increase collection of taxrevenue for development works on theother.

Savings and Investments

At present we get exemption forinvestment upto Rs.1 lac under section80C. This amount may be raised to Rs.3lac. Section 80C gets major hit byintroduction of EET methodology. Theinvestment is to be exempted wheninvested. The investment is to be taxedwhen it will be withdrawn. The

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investments are to be considered onlyof those invested through savingsintermediaries approved by PensionFund Regulatory and DevelopmentAuthority (PFRDA). Such savingsintermediaries may in turn invest inGovernment Securities, Public SectorSecurities, ELSS Mutual Funds etc. Inaddition to this Tuition Fees forchildren, expenses for medicaltreatments, higher education loaninterest, donation and rent paid by self-employed individual will be allowed asdeduction. Handicapped individuals willalso get deduction upto Rs.75,000 underthe Code.

Under current Income Tax Act onlyinterest accruals are taxed in someschemes like National SavingsCertificates (NSC) but the savingsschemes like Public Provident Fund(PPF) and General Provident Fund (GPF)are not taxed at all. Now, anywithdrawals of the investment andinterest would be taxable. However, notax would be payable in respect ofwithdrawals of accumulations upto 31stMarch, 2011 in an approved providentfund.

Housing Loan

If the draft DTC becomes a law thenit will spill water to a common people'splan to buy home. Under currentprovisions allowance of interest onhousing loans for individuals is up toRs.1.5 lac u/s 80C which encouragedhome-ownership. But in the draftproposal there is a suggestion that thisdeduction alongwith repayment ofprincipal amount of loan will be deleted.It is an injustice to those tax payers whohave constructed or purchasedresidential accommodations on bankloan following the Government taxationpolicy. The withdrawal of allowance willobviously increase taxable income ofindividuals who were availing such taxbenefits earlier.

Standard Deduction for House Property

At the draft there is a proposal of

reducing standard deduction for repairsand maintenance of house property to20% from 30% as applicable now. Theopportunity once given to tax payershould not be withdrawn or reducedwhen the cost of repairs andmaintenance of house is going high dueto inflation.

Capital Gains Tax

As per existing provisions there is adifference between (i) short-terminvestment asset and (ii) long-terminvestment asset depending on periodfor which such Capital asset is held.Concessional tax rate is imposed onlong-term Capital gains. As perproposed DTC distinction betweenshort-term investment asset and long-term investment asset to be eliminated.Capital gains from transfer of personaleffects and agricultural land areexcluded from the ambit of taxation.Income from transaction in allinvestment assets to be taxed under thehead 'Capital gains' and uniformlycharged at normal rate. The advantagesof concessional tax rate for long-termcapital gains to be removed, which mayresult in higher tax burden to the taxpayers for investment transactions. Thebase date for determining cost ofacquisition for the purpose ofcomputing Capital gains to be shiftedfrom 1st April, 1981 to 1st April. 2000.The benefit of indexation will beavailable in computing Capital gains intransfer of Capital assets held for morethan one year.

As per existing provisionsSecurities Transaction Tax (STT) islevied on purchase or sale of equityshares on stock exchanges.Consequently, long-term or short-termCapital gains arising on sale of suchshare is exempted or taxed at lower raterespectively. But proposed DTCsuggested abolishing the STT. So, thelong-term Capital exemption andconcessional tax rate for short-termCapital gains in respect of listedsecurities will no longer available. At

present a transfer of Capital asset in ascheme of reverse mortgage is notconsidered as taxable transfer but underthe Code it will be considered as taxabletransfer and taxable as Capital gains.

Income from Employment

The Code formulated rules forcomputation of income fromEmployment (currently income fromsalaries). To compute Income fromEmployment gross salary will includevalue of perquisites and profit in lieu ofsalary and that will be taxed on due orreceipt basis, whichever is earlier andto be reduced by permissibledeductions. Permissible deductions willinclude professional tax, transportallowance, prescribed specialallowance, and compensation undervoluntary retirement scheme, gratuityand commutation of pension amongstothers. But perks will be included as apart of income from employment, so taxburden may slightly be high. All theperks, an employee is allowed by hisemployer like interest free loan, freelunch etc. will be added to his incomefrom employment and to be taxed.

Is DTC Good for Common People

We have discussed so far the impactof proposed DTC on common people.Now we may rise a question is the newTax Code is good are or bad? The TaxCode is good one from the point of taxliability of common people. The biggestthing is that the tax slab is just 10% forincome from Rs.1.6 lac to Rs.10 lac andabout 98 % of Indian will pay 10% orless tax whose incomes are within Rs.10lac per annum. There are many changesin the DTC which may look bad andadversely affect but at the end commonpeople will gain from it, because tax willbe charged by just 10% on almost allcommon people. As a result, thoughtaxable income from employment of acommon people will go up to a certainextent due to adverse affect of DTC butultimately tax liability will reduce farmore.

Due to introduction of EET

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methodology for investment at the timeof maturity of Insurance Policy,withdrawal of Provident Fund, MutualFund a lump-sum amount of tax will bepaid by the common people who investthat amount for living during the restdays of their lives of superannuationperiod. From the point of theGovernment, investment of commonpeople in these funds serves as asignificant source of long term financefor the Government which uses thefinance for developmental purpose.Since tax is imposed on withdrawalsfrom the Provident Fund, the assessesmay not hereafter generously contributeto avoid additional tax burden. As aresult, the Government may faceshortage of finance and have to borrowfund at a higher rate of interest from thefinancial institutions or others. By theexisting system of Provident Fund notonly the common people are benefitedbut also the Government is equallybenefited. Any way, this is now adebatable topic and putting argumenton it will be going on.

Corporate Tax

DTC will reduce the Corporate taxrate from 33% (including surcharge) to25% which will benefit the corporate(company across) sector. Businesslosses will be allowed to be carriedforward indefinitely, unlike 8 years atpresent. The reduction in tax rate is tobe compensated by withdrawal ofvarious tax incentives that are availableto this sector such as infrastructure,exports, area-based tax holidays etc. Inaddition to that, allowable rate ofdepreciation on plant and machinery isproposed to be reduced to 15%. Thedraft DTC recommended for reductionof Corporate Tax of foreign companiesfrom 40% to 25%. The branches offoreign companies in India have to payadditional branch profits tax of 15% (onafter tax total income) resulting inEffective Tax Rate of 36.25%. It is alsorecommended that a company isconsidered to be resident in India if its

place of control and management at anytime during the year is situated whollyor partly in India. This will obviouslycheer up those foreign companies astheir tax burden would reduce.

Dividend Distribution Tax

All the companies would be liableto pay Dividend Distribution Tax (DDT)at the rate of 15% of the amount declaredby way of dividends and the recipientwill be exempted from tax. The effectivetax rate for the domestic companywould be 34.78% and that of foreigncompany would be reduced from theexisting 42.23% to 34.78% (includingbranch profit tax).

Minimum Alternate Tax

The Tax Code proposed a radicalchange in MAT (Minimum AlternateTax) provisions. As per draft MAT willbe paid at a specified percentage ofgross assets of a company (although itis not clear whether net or gross currentassets will be considered forcomputation). The proposed rate is0.25% for banking companies and 2%for all other companies. The draft hadraised some controversial issue becausecompanies suffering from a genuinelosses or sub-normal ROCE due toinitial gestation period or cyclicaldownturn would also have to pay MATat 2% on gross assets. Moreover, MATwill be a final tax and will not be allowedto be carried forward. Anothercontroversial issue is that under IFRS(International Financial ReportingStandard), assets such as investmentsand derivatives are fair valued withcorresponding gains or lossesrecognized through the profit and lossstatement. Accordingly, themeasurement of prescribed assets at fairvalue under IFRS would havesignificant impact on MAT. So, theproposal evoked sharp reaction fromcompanies which described the moveas introducing wealth tax on enterprise.

Transfer Pricing

The Finance Act, 2001 has

introduced detailed provisions relatingtransfer pricing, requiring all'international transaction' between'associated enterprises' to be at arm'slength. This was applicable with effectfrom 1st April'2001.

The then provisions was to treatany income / expense arising from aninternational transaction with anassociated enterprise must be computedhaving regard to the arm's length orapportioned between two or moreassociated enterprise should bedetermined having regard to arm's lengthprices.

Concept of arm's length price isproposed to be replaced by introducingAdvance Pricing Agreement (APA)with effect from 2011-12 under DTC. TheCode provides for up frontdetermination of the arm's length price /pricing methodology in internationaltransactions between associatedenterprises. This will reduce litigationon the basis of acceptable arm's lengthprices. This will ultimately alter theinternational transfer pricing agreementin India.

Double Taxation

The proposed DTC will give relieffrom Double Taxation. The CentralGovernment is empowered to enter intoan agreement with the Government ofany country in order to provide reliefon double taxation and exchanginginformation for prevention of evasionor avoidance of income tax. If there raiseany conflict between the provisions ofa tax treaty and the provisions of DTCwhichever is later in time shall prevail.

It is observed that both the domesticas well as foreign companies will enjoysome tax relief under DTC but radicalchanges in MAT raise controversy.

The draft DTC is only 'illustrative'and open for discussion. Any one canput forward suitable suggestions forfuture consideration. There is no needto think that all things have beenfinalized. The Government has identified

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seven critical areas of concern in theDTC and would take suggestions onthe board before finalizing it.

Role of Cost and ManagementAccountant

In the era of liberalization,privatization and globalization Cost andManagement Accounting professionplays an important role both inmanufacturing and service sector. Costand Management Accountantevaluates the efficiency of productionand service management. He alsoevaluates operational efficiency bycollection, compilation, organization,verification and analysis of informationfrom various departments of anorganization. A Cost and ManagementAccountant analyses the trend of salesfor maintaining the proper balancebetween the forces of demand andsupply. This analysis also helps tocompare the financial performances, andtaking managerial decisions regardingfuture pricing and costing policies. Costand management accounting facilitatesin planning, controlling and monitoringthe price and cost of a product orservice. During the recession orbusiness slowdown the efficiency ofCost and Management Accountant isevaluated. The enterprise havingefficient cost and managementaccounting system are expected to besurvive in the global competitive market.Moreover the management of theenterprise may rely on this professionalfor necessary advisory services relatingto different critical areas since Cost andManagement Accountant providesvaluable services relating to investmentplanning, tax planning, project appraisalas well as overall management decisionmaking process. This profession playsa pivotal role in the globalizationprocess of economics in terms ofvaluation, performance management,strategic management, resourcemanagement and knowledgemanagement. To facilitate theincreasingly interactive role the Cost

and Management Accountants willneed broader business understandingin their academic and professionalbackground. Considering all thesethings and as per recommendation ofInternational Federation ofAccountants (IFAC) ICAI remodeled itssyllabus in the line with the principles,standards and guidelines set our withinIFAC International Education Standards(IES) for professional Accountants. Theinstitute also equips their members withadequate practical training to enablethem to understand the functioning ofan enterprise which will help them to bemore efficient with practical knowledge.Moreover the institute arranges forseminars, workshops, symposium withgood number well informed resourcepersons to update and refresh theirmembers to the latest developments inthe specialized areas of this profession.

Critical Role of Cost and ManagementAccountant under DTC

The importance of qualified Costand Management Accountants ineconomic development of a country inthe globalized era has led to theirinvolvement in advising theGovernment in cost and pricing policiesand also in framing of tax and fiscalpolicies. The Cost and ManagementAccountants also work as taxconsultants, advisors, executives,administrators, valuers etc. in thecorporate world. They perform the workto administer tax policies andprocedures, to supervise and to co-ordinate in preparing the reports forGovernment agencies.

ICAI, being an apex body to regulatethe profession of cost and managementaccountancy in India approached theUnion Minister of Corporate AffairsMr.Salman Khurshid to empower theInstitute through its members for moreregulating powers including inclusionof Cost Accountants within thedefinition of 'Accountant' of the DirectTax Code Bill 2009, clause 284(2).

The draft Direct Tax Code is still in

the pipe line. The Central Governmenthas near to completion of the processof consultation on the draft DTC. Thedraft code moves one step towardsfinalizing a new tax structure which isproposed to be introduced during thefinancial year 2011-12. DTC is arevolutionary mechanism in Indianeconomic and financial arena. With aview to replacing the 50 years oldIncome-Tax Act, 1961, the Governmenthad come out with a draft code aimed atsimplifying the direct tax structure bywas to lowering the tax rate withreducing a number of exemptions. Thedraft was placed before the public fordiscussion following which a numberof issues were raised by the individualsand corporate world. Eventually, a listof about 9-10 contentious issues havebeen pointed out by the FinanceMinistry that required a fresh look-in.Since Direct Tax Code is a universallyacceptable Tax Code. The Cost andManagement Accountants are expectedto take initiative being experts as taxconsultants to co-operate theGovernment before taking final decisionof DTC.

This is the high time for Cost andManagement Accountants beingexperienced tax consultants with theirexpertise and knowledge ofprofessional excellence thoroughlyanalyze each and every point of thecode. They will put forward theirvaluable suggestions andrecommendations specially on taxationof long-term savings on withdrawal byway if EET (Exempt-Exempt-Tax), doingaway with tax rebates on home loans,changing the criteria for imposition ofMAT (Minimum Alternate Tax) andtaxation of foreign companies in Indiato the Government so that thoserecommendations may favourably beconsidered by the Government whichmake a balance between the facilities tobe enjoyed by the individuals, corporatebodies and other tax payers on the onehand and the Government the collectorof direct tax on the other.q

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Impairment of FinancialAssets in the Era of IFRSThe article seeks to discuss issues relating to impairment of financial assets thatwill be encountered by banks once they move towards IFRS. Existing stipulationsof IAS 39 on impairment is woven around an Incurred Loss Model whereintriggers in the form of objective evidence of impairment are required forrecognizing impairment losses. Once it is established that there is objectiveevidence of impairment, the amount of loss is measured as the difference betweenthe asset’s carrying amount and the present value of estimated future cash flowsdiscounted at the financial asset’s original effective interest rate. This is invariance with current provisioning norms for Non Performing Assets issued byRBI, which are essentially formula based. Now, IASB has issued an ExposureDraft seeking to amend IAS 39 and one of the major amendments is moving toExpected Loss Model for impairment from Incurred Loss Model. InternationalAccounting Standards Board expects that the new requirements will not bemandatory before January 2012. Thus, while Indian banks adopt the existingIFRS in April 2011, it may undergo a major revision by January 2012 andaccounting/regulatory bodies will have to take note of this.

P. V. Antony*Ragesh M.**

*Dy. General Manager (Accounts & RiskManagement), The Catholic Syrian BankLtd., Head Office, Thrissur.**Sr. Manager (Accounts), The CatholicSyrian Bank Ltd., Head Office, Thrissur.

T he most challenging issue facingIndian banks who are gearing upto be IFRS compliant by April 1,

2011 is provisions relating to impairmentof financial assets as per IAS 39. Further,IASB is considering revising theexisting provisions in toto and anExposure Draft to this effect has beenreleased. This article is an attempt tounderstand the existing and proposedprovisions relating to impairment inIFRS.1. Extant RBI Guidelines

As per extant RBI guidelines, anasset becomes Non Performingaccording to the 90 days delinquencynorm and once it become a NonPerforming Asset (NPA), the impairmentprovision is calculated as a percentageof asset values based on classificationas secured/unsecured, substandard,doubtful and loss.

Other than provisioning for NPA,another form of impairment provisionrequired as per RBI guidelines isprovision for diminution in the fair valueof the advance in the case ofrestructuring of advances. The erosionin the fair value of the advance shouldbe computed as the difference betweenthe fair value of the loan before and afterrestructuring. Fair value of the loanbefore restructuring will be computedas the present value of cash flowsrepresenting the interest at the existingrate charged on the advance beforerestructuring and the principal,discounted at a rate equal to the bank'sBPLR as on the date of restructuringplus the appropriate term premium andcredit risk premium for the borrowercategory on the date of restructuring.Fair value of the loan after restructuringwill be computed as the present valueof cash flows representing the interestat the rate charged on the advance onrestructuring and the principal,discounted at a rate equal to the bank'sBPLR as on the date of restructuringplus the appropriate term premium and

credit risk premium for the borrowercategory on the date of restructuring.2. Existing Stipulations of IAS 39 onImpairment

Under IAS 39, the process ofrecognition and provisioning forimpairment is a bit complex, as explainedbelow:2.1 Incurred Loss Model

Existing provisions of IAS 39 onimpairment is woven around the conceptof Incurred Loss Model. Accordingly,impairment losses should be recognizedonly when they are incurred (i.e. adeterioration in the credit quality of anasset or group of assets after their initialrecognition). For a loss to be 'incurred'an event that provides objectiveevidence of impairment must haveoccurred after the initial recognition ofthe financial asset.2.2 Objective Evidence of Impairment

As per IAS 39, an entity shall assessat the end of each reporting periodwhether there is any objective evidencethat a financial asset or a group offinancial assets is impaired. Objectiveevidence that a financial asset or groupof assets is impaired includesobservable data that comes to theattention of the holder of the assetabout the following loss events:a) significant financial difficulty of the

issuer or obligorb) a breach of contract, such as a

default or delinquency in interest orprincipal payments

c) the lender, for economic or legalreasons relating to the borrower'sfinancial difficulty, granting to theborrower a concession that thelender would not otherwiseconsider

d) it becoming probable that theborrower will enter bankruptcy orother financial reorganization

e) the disappearance of an activemarket for the financial asset becauseof financial difficulties

f) observable data indicating that thereis measurable decrease in theestimated future cash flows from agroup of financial assets since the

Recent developments in finance

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initial recognition of those assets,although the decrease cannot yetbe identified with the individualfinancial assets in the group,including:

i) adverse changes in the paymentstatus of borrowers in the group

ii) national or local economicconditions that correlate withdefaults on the assets in the group(e.g. a decrease in property pricesfor mortgage in the relevant area,adverse changes in industryconditions that affect the borrowersin the group].In some cases the observable data

required to estimate the amount ofimpairment loss on a financial asset maybe limited or no longer fully relevant tocurrent circumstances. For example, thismay be case when a borrower is infinancial difficulties and there are fewavailable historical data relating tosimilar borrowers. In such cases, anentity uses its experienced judgment toestimate the amount of any impairmentloss. Similarly, an entity uses itsexperienced judgment to adjustobservable data for a group of financialassets to reflect current circumstances.

As per RBI guidelines, only twotriggers (viz. delinquency andrestructuring] will invite impairmentprovisioning, while under IAS 39 thereare many more triggers as explainedabove.2.3 Individual and CollectiveAssessment

An entity first assesses whetherobjective evidence of impairment existsindividually for financial assets that areindividually significant, andindividually or collectively for financialassets that are not individuallysignificant. If an entity determines thatno objective evidence of impairmentexists for an individually assessedfinancial asset, it includes the asset in agroup of financial assets with similarcredit risk characteristics andcollectively assesses them forimpairment. Assets that are individuallyassessed for impairment and for which

an impairment loss is or continues to berecognized are not included in acollective assessment of impairment. Inother words, measurement of impairmenton a portfolio basis under IAS 39 isconfined toa) groups of small balance items andb) financial assets that are individually

assessed and found not be impairedwhen there is indication ofimpairment in a group of similarassets and impairment cannot beidentified with an individual assetin that group.For example, if the trigger event is

fall in exports in the country, the bankwill be assessing individually customersfor impairment. On such individualassessment, if no evidence ofimpairment is found in an accounts, thebank will have to include the account inthe export credit group and test thegroup as a whole for impairment,drawing from past correlations betweenfall in export and increase in delinquencyof export customers.2.4 Bases for Grouping

Different methods are conceivablefor grouping assets for the purpose ofassessing impairment and computinghistorical and expected loss rates. Forexample, assets may be grouped on thebasis of one or more of the followingcharacteristics:a) established default probabilities or

credit risk gradesb) type (for example residential

mortgage, consumer credit etc.)c) geographical locationd) collateral typee) counterparty typef) past-due statusg) maturity.2.5 Amount of Provisioning

Once it is established that there isobjective evidence of impairment, theamount of loss is measured as thedifference between the asset's carryingamount and the present value ofestimated future cash flows discountedat the financial asset's original effectiveinterest rate. The amount of the lossshall be recognized in P&L account.

If a loan has a variable interest rate,the discount rate for measuring anyimpairment loss is the current effectiveinterest rate determined under thecontract.

Future cash flows in a group offinancial assets that are collectivelyevaluated for impairment are estimatedon the basis of historical loss experiencefor assets with credit risk characteristicssimilar to those in the group. Entitiesthat have no entity-specific lossexperience or insufficient experience usepeer group experience for comparablegroup of financial assets. Historical lossexperience is adjusted on the basis ofcurrent observable data to reflect theeffects of current conditions that didnot affect the period on which thehistorical loss experience is based andto remove the effects of the conditionsin the historical period that did not existcurrently.

Formula based approaches orstatistical methods may be used todetermine impairment losses in a groupof financial assets as long as the modelused incorporates the effect of the timevalue of money, considers the cashflows for all the remaining life of anasset, considers the age of the loanswithin the portfolio and does not giverise to an impairment loss on initialrecognition of financial asset.

Thus, the method of arriving atamount of provision is different fromthat of extant RBI guidelines onprovisioning for NPA, while thefinancial mathematics is essentially thesame as the extant RBI guidelines onprovisioning for restructured advances(though the conceptual underpinningsof the discount rate used are different).2.6 Excess Provisioning

Amounts that an entity might wantto set aside for additional possibleimpairment in financial assets, such asreserves that cannot be supported byobjective evidence about impairment,are not recognized as impairment or baddebt losses under IAS 39.2.7 Collaterals

RBI guidelines prescribe lower

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provisioning for secured advancescompared to that for unsecuredadvances. Under IAS 39, themeasurement of the impaired financialasset reflects the fair value of thecollateral.3. Incurred Loss Model to ExpectedLoss Model

In July 2009, the InternationalAccounting Standards Board releasedthe Exposure draft to IAS 39 - FinancialInstruments: Classification &Measurement. As per the ExposureDraft, Impairment is to be based onExpected Loss Model (in place ofIncurred Loss Model). At the time ofarriving at the original effective interestfor a loan, the expected losses have tobe considered under the proposedapproach (while it is not done under thecurrent IFRS). Further, there iscontinuous re-estimation of all expectedcash flows and the carrying amount ofthe loan is adjusted whenever there is arevision of cash flow estimates. Underthe current IFRS, this process starts onlywhen there is objective evidence ofimpairment (i.e. only when the loss isincurred].

The expected cash flow approachuses from the outset the best estimateof expected future cash flows. Thisestimate includes any expectedreductions in cash flows owing to creditrisk. Expected cash flow approach wouldnot involve any trigger or thresholdwith regard to impairment testing. Therequirement of continuouslyreestimating all the expected cash flowswould include any revisions of cash flowestimates that occur under the incurredloss model. In other words, an'impairment test' is integral to theexpected cash flow approach. IASBexpects that by eliminating 'triggers' and'thresholds' with respect to assessingcredit losses results in a consistentapproach to revisions of cash flowestimates, whether for effective interestrate purpose or assessing credit losses.

Thus, the key difference betweenthe incurred loss model and expected

loss model is that the estimates of thefuture cash flows are not limited by the'incurred' threshold (of objectiveevidence of impairment).

Because the expected cash flowapproach does not involve a thresholdfor impairment testing, the interplaybetween a collective and an individualassessment would be principle based:the type of assessment that betterfacilitates the cash flow estimate wouldbe used.

Viewed from a different perspective,the basic difference between the twomodels stems from the way effectiveinterest rate of a financial asset (i.e therate that exactly discounts future cashflows to the carrying amount of thefinancial asset) is recognized. ExpectedLoss Model factors in expected futurecredit losses while arriving at theeffective interest rate as againstIncurred Loss Model which ignores theexpected future credit losses whilearriving at the effective interest rate atthe starting point (i.e. the date oforigination of loan).4. Illustration

Suppose a bank grants Rs 1 crore toMr.X at an interest rate of 10% p.a. andpayable in 5 equal annual instalments.The contractual cashflows will be asfollows:

As per extant IAS 39 (i.e. incurredloss approach), the Effective Interest

Rate arrived at will be the same as theinterest rate for the loan i.e. 10%. But,under expected loss approach, theEffective Interest Rate will have to becomputed based on expected cashflows, rather than contractual cashflows. Based on past delinquency ratesof customer group to which Mr.Xbelongs, the bank may be expecting adefault of 10%, 20% and 30% in years3,4 and 5. Then, the expected cash flowswill be as follows:

By trial and error, we get the effectiveinterest rate as 5.53435% (i.e. thediscount rate that will equate theexpected cash flows to the initial loanof Rs 1 crore.).

Now let us compute the interestincome and impairment loss that will berecognized in the different years underthe two approaches.Year 1

Interest income recognized in year1 under the incurred loss model will beRs 10,00,000/- (i.e. 1,00,00,000 x 10%) andthe carrying amount at the end of theyear will be Rs 83,62,025/- (i.e.1,00,00,000 - 26,37,975 +10,00,000)

Interest income will be Rs 5,53,435/-only in the case of expected loss model.Carrying amount will be Rs 79,15,460/-(i.e. 1,00,00,000 - 26,37,975 +5,53,435)Year 2

Interest income recognized in year2 under the incurred loss model will beRs 8,36,203/- [i.e. 10% x 83,62,025] whileit will be only Rs 4,38,069/- [i.e. 5.53435%x 79,15,460] in expected loss method.

Carrying amount at the end of Year2 will be Rs 65,60,253/- (i.e. 83,62,025 -26,37,975 + 8,36,203) in the case ofIncurred Loss Model and Rs 57,15,555/

Period Contractual Cash Flow

0 -10000000 1 2637975 2 2637975 3 2637975 4 2637975 5 2637975

Year Contractual Cash Flow

Expected Defaults

Expected Cash Flows

0 -10000000 1 2637975 0 2637975 2 2637975 0 2637975 3 2637975 263797 2374177 4 2637975 527595 2110380 5 2637975 791392 1846582

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- (i.e. 79,15,460 - 26,37,975 + 4,38,069) inthe case of expected loss model.Year 3

Suppose 10% delinquency isincurred (as expected). Now, sinceobjective evidence of impairment ispresent, under the incurred loss model,the estimated future cash flows willhave to be computed and discountedat 10%, compared with the carryingamount and the difference provided asimpairment loss.

Carrying amount at the end of Year3 will be Rs 48,42,101/- (65,60,253 -23,74,177 + 6,56,025). But the presentvalue of expected cash flows is Rs34,44,628/- as arrived below:

Thus at Year 3, using incurred lossmodel, the impairment loss to be debitedto Profit & Loss Account will be Rs13,97,473/- (i.e 48,42,101 - 34,44,628).Since Rs 6,56,025/- will be recognizedas interest income, the net debit to profitand loss account in Year 3 will be Rs7,41,448/-.

Under Expected Loss Model, theinterest income that will be recognizedwill be Rs 3,16,319/- (i.e. 5.53435% of57,15,555) and the carrying amount willbe Rs 36,57,696/- (i.e. 57,15,555 -23,74,177 + 3,16,319). No impairmentloss need be recognized since the lossis as per expectations and there is nochange in future expected losses.Year 4

Suppose 20% default is incurred (asexpected). Under incurred loss methodinterest income of Rs 3,44,463/- (i.e. 10%of the carrying amount of Rs 34,44,628)will be recognized. Carrying amount ofloan will be Rs 16,78,712/- (i.e.34,44,628+ 3,44,463 - 21,10,380). Present value offuture cash flows will also be the same(i.e. 18,46,582/1.10) and hence noimpairment loss should be debited toProfit & Loss Account.

Under Expected Loss Model, theinterest income that will be recognizedwill be Rs 2,02,430/- (i.e. 5.53435% of36,57,696) and the carrying amount willbe Rs 17,49,746/- (i.e. 36,57,696 -

Period Contractual Cash Flow

Expected Defaults

Expected Cash Flows

Expected Cash Flows Discounted at 10%

4 2637975 527595 2110380 1918527 5 2637975 791392 1846582 1526101

Total 3444628 21,10,380+ 2,02,430). No impairment lossneed be recognized since the loss is asper expectations and there is no changein future expected losses.Year 5

Suppose 30% default is incurred (asexpected). Under incurred loss model,interest income of Rs 1,67,871/- (10% of16,78,712) will be recognized. With thereceipt of Rs 18,46,582, the carryingamount will be reduced to zero (16,78,712+ 1,67,871 - 18,46,582).

Under Expected Loss Model, theinterest income of Rs 96,837 (i.e.5.53435% of 17,49,746) will berecognized and with the receipt of Rs18,46,582, the carrying amount will bereduced to zero (i.e. 17,49,746 + 96,837).

The following table summarises theimpact on Profit & Loss Account usingthe two different methods:

As shown by the above tableExpected Loss Model is bound toreduce the volatility of reported earningscompared to Incurred Loss Model.Incurred Loss Model, in the aboveillustration, has led to overstatement ofincome in the initial loss, big one timedebit to Profit & Loss account in theyear of impairment trigger (the loss isoverstated in that the original yield,which do not consider the expectedloss, is used to discount the future cashflows) and over statement of income in

the subsequent years (since the samehigh in appropriate yield is used torecognize income). Expected LossModel in fact recognizes income in amanner which is consistent witheconomic substance of the loancontract.5. Conclusion

Compliance with the impairmentnorms of IAS 39 requires build up ofdata on delinquency rates acrossvarious borrower groupings, capabilityto arrive at reliable estimates of futurecash flows and above all the exercise ofa lot of judgement on the part of bankers,auditors and regulators. As to theproposed amendments to IAS 39,International Accounting StandardsBoard expects that the newrequirements will not be mandatorybefore January 2012. Thus, while Indianbanks adopt the existing IFRS in April2011, it may undergo a major revisionby January 2012 and accounting/regulatory bodies will have to take noteof this.References

1. IAS 39 - Financial Instruments:Recognition and Measurement

2. Exposure Draft ED/2009/7 - FinancialInstruments: Classification andMeasurement, July 2009.

3. Staff Paper on Amortised Cost - anexpected cash flow approach, May 2009.

Year Impact on Profit & Loss Account under Incurred Loss Model

Impact on Profit & Loss Account under Expected Loss Model

1 Rs 10,00,000 Credit Rs 5,53,435 Credit 2 Rs 8,36,203 Credit Rs 4,38,069 Credit 3 Rs 7,41,448 Debit Rs 3,16,319 Credit 4 Rs 3,44,463 Credit Rs 2,02,430 Credit 5 Rs 1,67,871 Credit Rs 96,837 Credit

Total Rs 16,07,089 Credit Rs 16,07,089 Credit

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470 the management accountant, June, 2010

Supreme Court clears issuesrelating to the establishment ofNational Company Law Tribunal

and Appellate Tribunal

The Constitution Bench SupremeCourt has finally upheld the constitutionof the National Company Law Tribunal(NCLT).

Background

Parts IB and IC were inserted in theCompanies Act, 1956 by the Companies(Second Amendment) Act, 2002. Part IBdealt with the establishment of aNational Company Law Tribunal[NCLT] and Part IC dealt with theestablishment of a National CompanyLaw Appellate Tribunal [NCLAT]. ThisSecond Amendment Act, 2002 receivedthe assent of the President of India on13/01/2003. In pursuance of the same,the Government of India brought intoforce Sections 2 and 6 of the Companies(Second Amendment) Act, 2002 w.e.f.01/04/2003. The primary objective ofbringing into force the above twosections alone was to commencepreliminary steps towards establishingthe National Company.

Law Tribunal and make itoperational. The Government of Indiaissued a press release on 04/04/2003 toinform the public that the bringing intoeffect of Section 6 of the Companies(Second Amendment) Act, 2002 (11 of2003) will only set in motion allpreliminary steps required forestablishment of National CompanyLaw Tribunal. Upon establishment of

National Company LawTribunal: Supreme CourtJudgementDr. K. S. Ravichandran*

*MCom, LLB, FCS, PHD & PartnerKSR & Co.

the same a separate Notificationregarding constitution of NCLT will beissued. Till such time jurisdiction ofCompany Law Board will continue toremain unchanged.

In Thiru R.Gandhi v Union of India,the Madras High Court way back in 2004declared that the constitution of NCLTis not unconstitutional but hadstipulated certain amendments to theprovisions contained in Parts IB and ICof the Companies Act, 1956 are neededto redefine provisions relating tocomposition, tenure of the Tribunals,members and their selection, the powersof the President, etc., and to allay thefears about gradual erosion of judicialindependence in the special areas forwhich the Tribunals are created.

On an appeal against the abovedecision by the Government of India,Supreme Court had referred the matterto a constitution bench which has nowupheld the constitution of the NCLT.

Role of NCLT

Presently under the Companies Act,1956 certain matters require the consentconfirmation, and sanction of theCompany Law Board [CLB] and certainmatters require the consent,confirmation and sanction of therespective High Courts. Further inrespect of sick industrial companies,revival and rehabilitation schemesrequire the approval of the Board forIndustrial and Financial Reconstruction[BIFR]. Matters relating to mergers,demergers, schemes of arrangementsand compromises and liquidation,winding up and dissolution of

companies were under the purview andcontrol of High Courts. Certainlitigations and contested matters wereunder the jurisdiction of the CLB. Inorder to bring all these matters relatingto companies, the Government of Indiahad thought it fit to introduce NCLT asa special tribunal with benches atdifferent places of the country. Inaddition to advocates, CompanySecretaries, Chartered Accountants andCost Accountants are entitled to appearbefore the NCLT. Even under the LLPAct, 2008, lot of powers and functionshave been conferred upon NCLT.

Repeal of SICA

Consequent upon the move tointroduce the NCLT, there was asimultaneous attempt to do away withthe system of BIFR under the SickIndustrial Companies (SpecialProvisions) Act, 1985 [Act 1 of 1986].Therefore the Parliament enacted theSick Industrial Companies (SpecialProvisions) Repeal Act, 1985 in orderto do away with the BIFR mechanism.Section 2 of the Repeal Act has not yetbeen notified. This will also be doneonce the NCLT gets established andbecomes operational.

The Decision of the Supreme Court

In Union of India (UOI) v R. Gandhi,President, Madras Bar Association, andMadras Bar Association v Union ofIndia (UOI), the Constitution Bench ofthe Supreme Court comprising ofHon'ble Judges K.G. Balakrishnan, C.J.,R.V. Raveendran, D.K. Jain, P.Sathasivam and J.M. Panchal, JJ, in Para56 of their decision dated 11/05/2010,stated as follows:

(i) Only Judges and Advocates canbe considered for appointment asJudicial Members of the Tribunal.Only the High Court Judges, orJudges who have served in therank of a District Judge for at leastfive years or a person who haspracticed as a Lawyer for ten yearscan be considered for appointmentas a Judicial Member. Persons who

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have held a Group A or equivalentpost under the Central or StateGovernment with experience in theIndian Company Law Service(Legal Branch) and Indian LegalService (Grade-1) cannot beconsidered for appointment asjudicial members as provided inSub-section 2(c) and (d) of Section10FD. The expertise in CompanyLaw service or Indian Legalservice will at best enable them tobe considered for appointment astechnical members.

(ii) As the NCLT takes over thefunctions of High Court, themembers should as nearly aspossible have the same positionand status as High Court Judges.This can be achieved, not bygiving the salary and perks of aHigh Court Judge to the members,but by ensuring that persons whoare as nearly equal in rank,experience or competence to HighCourt Judges are appointed asmembers. Therefore, only officerswho are holding the ranks ofSecretaries or AdditionalSecretaries alone can beconsidered for appointment asTechnical members of the NationalCompany Law Tribunal. Clauses(c) and (d) of Sub-section (2) andClauses (a) and (b) of Sub-section(3) of Section 10FD which providefor persons with 15 yearsexperience in Group A post orpersons holding the post of JointSecretary or equivalent post inCentral or State Government, beingqualified for appointment asMembers of Tribunal is invalid.

(iii) A ̀ Technical Member' presupposesan experience in the field to whichthe Tribunal relates. A member ofIndian Company Law Service whohas worked with Accounts Branchor officers in other departmentswho might have incidentally dealtwith some aspect of Company Law

cannot be considered as `experts'qualified to be appointed asTechnical Members. ThereforeClauses (a) and (b) of sub-section(3) are not valid.

(iv) The first part of Clause (f) of sub-section (3) providing that anyperson having special knowledgeor professional experience of 15years [the clause actually provided20 years experience] in science,technology, economics, banking,industry could be considered tobe persons with expertise incompany law, for being appointedas Technical Members inCompany Law Tribunal, is invalid.

(v) Persons having ability, integrity,standing and special knowledgeand professional experience of notless than fifteen years [the clauseactually provided 20 yearsexperience] in industrial finance,industrial management, industrialreconstruction, investment andaccountancy, may however beconsidered as persons havingexpertise in rehabilitation/revivalof companies and therefore,eligible for being considered forappointment as TechnicalMembers.

(vi) In regard to category of personsreferred in Clause (g) of Sub-section (3) at least five yearsexperience should be specified.

(vii) Only Clauses (c), (d), (e), [theseclauses provide for appointmentof chartered accountants, costaccountants and companysecretaries with a minimum of 15years experience] (g), (h), and laterpart of Clause (f) in sub-section(3) of Section 10FD and officers ofcivil services of the rank of theSecretary or Additional Secretaryin Indian Company Law Serviceand Indian Legal Service can beconsidered for purposes ofappointment as TechnicalMembers of the Tribunal.

(viii) Instead of a five-member SelectionCommittee with Chief Justice ofIndia (or his nominee) asChairperson and two Secretariesfrom the Ministry of Finance andCompany Affairs and theSecretary in the Ministry ofLabour and Secretary in theMinistry of Law and Justice asmembers mentioned in Section10FX, the Selection Committeeshould broadly be on the followinglines:

(a) Chief Justice of India or hisnominee - Chairperson (with acasting vote);

(b) A senior Judge of the SupremeCourt or Chief Justice of HighCourt - Member;

(c) Secretary in the Ministry ofFinance and Company Affairs- Member; and

(d) Secretary in the Ministry ofLaw and Justice - Member.

(ix) The term of office of three yearsshall be changed to a term ofseven or five years subject toeligibility for appointment for onemore term. This is becauseconsiderable time is required toachieve expertise in the concernedfield. A term of three years is veryshort and by the time the membersachieve the required knowledge,expertise and efficiency, one termwill be over. Further the said termof three years with the retirementage of 65 years is perceived ashaving been tailor-made forpersons who have retired orshortly to retire and encouragesthese Tribunals to be treated aspost- retirement havens. If theseTribunals are to functioneffectively and efficiently theyshould be able to attract youngermembers who will have areasonable period of service.

(x) The second proviso to Section10FE enabling the President and

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members to retain lien with theirparent cadre/ministry/departmentwhile holding office as Presidentor Members will not be conducivefor the independence of members.Any person appointed as membersshould be prepared to totallydisassociate himself from theExecutive. The lien cannot thereforeexceed a period of one year.

(xi) To maintain independence andsecurity in service, sub-section (3)of Section 10FJ and Section 10FVshould provide that suspension ofthe President/Chairman or memberof a Tribunal can be only with theconcurrence of the Chief Justiceof India.

(xii) The administrative support for allTribunals should be from theMinistry of Law & Justice. Neitherthe Tribunals nor its members shallseek or be provided with facilitiesfrom the respective sponsoring orparent Ministries or concernedDepartment.

(xiii) T wo-Member Benches of the

Tribunal should always have ajudicial member. Whenever anylarger or special benches areconstituted, the number ofTechnical Members shall notexceed the Judicial Members.

Will NCLT come?

The Government is busy inintroducing a new company law.Mr.Salman Khurshid, Minister forCorporate Affairs introduced theCompanies Bill, 2009 to the Lok Sabha[Parliament] on 03rd August 2009.Recently the Minister had announcedthat the bill is expected to be enactedby the end of 2010. The bill containsredesigned and improved provisions asregards the role of NCLT.

Clause 395 of the Companies Bill,2009 states that on the date of theconstitution of the NCLT, all matters,proceedings or cases pending beforeCLB immediately before such date shallstand transferred to the Tribunal andthe Tribunal shall dispose of suchmatters, proceedings or cases inaccordance with the provisions of this

Act. Similarly all proceedings under theCompanies Act, 1956, includingproceedings relating to arbitration,compromise, arrangements andreconstruction and winding up ofcompanies, pending immediately beforesuch date before any District Court orHigh Court, shall stand transferred toNCLT and the NCLT may proceed to dealwith such proceedings either de novoor from the stage before their transfer.

Clause 424 of the Companies Bill,2009 contained the enabling provisionfor the dissolution of CLB and itsconsequential provisions. Clause 424 ofthe Companies Bill, 2009 states thatupon constitution of the NCLT and theAppellate Tribunal, CLB shall standdissolved.

ConclusionEven though NCLT has become a

near reality, it may take some more time,a year or more, before we see the samefunctioning. Otherwise NCLT and theAppellate Tribunal will have to beestablished under the present law andthe clauses of the Companies Bill, 2009will have to be modified!q

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ANNOUNCEMENT

The Management Accountant - July, 2010 will be a special issue on

‘ROLE OF COST AND MANAGEMENT ACCOUNTANTS IN GST REGIME’

Articles, views and opinions on the topic are solicited from readers to make it a special issue to read and

preserve. Those interested may send in their write-ups by e-mail to [email protected], followed by hard

copy to the Research & Journal Department, 12 Sudder Street, Kolkata-700016 to reach by 15th June, 2010.

ANNOUNCEMENT

The Management Accountant - August, 2010 will be a special issue on

‘COST AND MANAGEMENT ACCOUNTANTS IN TRANSPORT & LOGISTICS SECTOR’

Articles, views and opinions on the topic are solicited from readers to make it a special issue to read and

preserve. Those interested may send in their write-ups by e-mail to [email protected], followed by hard

copy to the Research & Journal Department, 12 Sudder Street, Kolkata-700016 to reach by 15th July, 2010.

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Variances, or the differences between budgeted, planned, or standard amountsand the actual amounts incurred or sold, are a critical part of managerialaccounting. They give managers a basis for making informed decisions, yetmany accounting students have a difficulty with variance analysis. Part of thisdifficulty may be caused by their manner in which this topic is typically presentedin cost/managerial accounting text books.The case presented in this paper allows students to see the “Big Picture” withoutbeing overly complex. While students are required to calculate all variancestypically presented in cost/managerial textbooks, they are continuouslyreminded of the numerous similarities in the computational aspects of thesevariances. Furthermore, they learn - and understand -alternative methods forcomputing variances and presenting their solutions.

An Alternative Approachto an Analysis of StandardCost Variances

*Ph.D. (Associate Professor of Accounting)Tuskegee University, Tuskegee, AL, U.S.A.

V ariances or the differencesbetween budgeted, planned orstandard amounts and the

actual amounts incurred or sold are acritical part of managerial/costaccounting. This provides managers abasis for making informed decisions,yet many accounting students havedifficulty analyzing and understandingof variance analysis. Part of thisdifficulty may be caused by the mannerin which this topic is typically presentedin cost/managerial accounting textbooks. Some text book coverage isdisjointed, with brief mentions offlexible budget variances just prior todiscussion manufacturing costvariances. Then, in a much later chaptersales variance analysis may be coveredwith little or no reference to the earliersections. Discussion of input mix andyield variances may be presented inappendices, if at all.

In addition to these disjointedpresentations, text book coverage isoften heavily formula driven, offering

no alternative methodology. Althoughsome textbooks provide overview tables(and problems) showing theinterrelationships of the variances in aparticular chapter, comprehensivecoverage of variances in the entiretextbook is lacking. In other words,there is typically no discussion of howvariances covered in earlier chaptersmay be incorporated with variancescovered in the later chapters. Thus,many students fail to see how they arerelated, as well as the similaritiesbetween the computational aspects ofsome of the variances.

This paper presents a case study tohelp students better understandvariance analysis. The case allowsstudents to see the 'Big Picture' withoutbeing overly complex. While studentsare required to calculate all variancestypically presented in cost/managerialtextbooks, they are continuouslyreminded of the numerous similaritiesin the computational aspects of thesevariances. Furthermore they learn andunderstand alternative methods forcomputing variances and presentingtheir solutions.

The case requires the students tocalculate all the traditional salesvariances and the flexible budgetvariances for the Avanthi Companywhich manufactures three types of finepool cues: Good, Better and Best. Theonly difference is the materials used intheir production.

The Avanthi Company

The Avanthi Case (Table I) has fiveparts. Part I requires students to makeseveral detailed calculations in a tablesimilar to those usually included in textbook coverage of flexible budgeting.The Avanthi company table, however,has additional columns to incorporatethe sales mix variance and rows bothfor variable and fixed operatingexpenses. Because accurate completionof this table is vital for students to fulfilland better understand the remainingrequirements students may completethe table manually, but the use ofspread sheet package is encouraged asthey may clearly observe thecomputational similarities of eachnumber and thus are better prepared tounderstand the differences. Studentscomfortable with a spread sheetpackage tend to use the copy commandand then revise the formula as needed.The completed table appears in table 2,Sales Volume, Sales Mix, and SalesQuantity Variances.

Part 2 of the Avanthi case requiresstudents to detail the calculations of thevariances. The Sales volume varianceis equal to the difference of contributionmargin between the flexible budget(based on actual sales mix and the staticbudget based on original budgetedsales mix). In table 2, it is simply thedifference between the contributionmargins (and incomes) in the thirdcolumn (Actual mix at budgeted dollars)and the seventh column (The StaticBudget). The volume variance may bebroken down into a mix variance(column three minus column five) and

Ramamohana Rao Guttikonda*

Costing Techniques

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the Quantity Variance (column fiveminus column seven). Some studentscalculate the respective weightedaverage contribution margins of $39.60per unit (actual) and $36.00 per unit(budgeted). Using this information, thesolution of the volume variance, mixvariance, and quantity variance ispresented in Table 3.

The amounts of course agree withthose in the solution of Part 1. Studentsobserve that all variable items (sales andall variable costs) increase by 10%because the quantity increases by 10%.Some students explain the 'mix' variancein a little more detail, noting that the$6.00 ($106-$100) increase in the averagebudgeted sale price times 110,000 unitsequals the $660,000 sales difference. Thevariable operating expenses' increase of$0.60 (for the 10% sales commissionsbased on the higher average price)times110,000 equals the $66,000 variableoperating expense difference and the$1.80 increase in the average budgetedcost of materials due to the change inthe sales mix times 110,000 equals$198,000 increase in materials cost.These differences amount for the $3.60per unit increase ($6.00 - $0.80 - $1.80)in average budgeted contributionmargin. Table 4 shows anotherapproach; it is not necessarily simplerbut gives students a better view of theunderlying cause of the mix variance.

Sales Price VarianceThe sales price variance is the

$341,000 at the top of the flexible budgetvariance column in table 2. It is thedifference between the actual sales (inthe actual mix at actual prices) and thebudgeted sales (in the actual mix atbudgeted prices). Students are providedwith the actual average selling price($109.10) and the average budgetedselling price based on the actual mix($106.00) The $341,000 sales pricevariance comes from the differencebetween these two averages ($109.10 -$106 = $3.10) multiplied by 110,000 units.Another method is to calculate thevariance by multiplying the individualdifferences in actual and budgeted salesprices times the actual number of units

sold and then to prove the mathematicalequivalency of the two approaches.

Materials and Labor VariancesThe total material variance may be

broken down between price andquantity (efficiency) differences whilemost textbooks present thesehorizontally. This is typically presentedvertically with the actual quantity andprices on the top (using the same formatas with the sales mix and quantityvariances.) Because the calculationsinvolve costs, positive differencesreflect unfavorable variances andnegative differences reflect favorablevariances. The unfavorable materialvariance in table 2 ($87,725) is explainedin table 5. The labor variance can bepresented using the same format asmaterial variances. Table 6 illustrates the$33,000 favorable labor variance.

Variable Overhead VariancesWhen manufacturing overhead is

allocated on the basis of direct laborhours, the variable overhead efficiencyvariance will be consistent with thelabor efficiency variance. A quick wayto calculate the overhead efficiency isto multiply the labor efficiency varianceby 7/25 (the budgeted variable overheadrate per hour divided by the budgetedlabor rate per hour). In this case, theanswer would be a favorable $38,500($137,500 x 7/25). Table 2 shows the totalvariable overhead variance is $13,750unfavorable. Thus, the variableoverhead spending variance must be$52,250 unfavorable. The variableoverhead variance can be shown in aformat similar to the materials and laborvariances in table 7.

Fixed Overhead VariancesThe fixed overhead spending

variance is typically the easiest tocompute because both the actualamount and the budgeted amount areknown; it is simply a matter ofsubtracting in the Avanthi case. Theactual fixed overhead is $2,150,000 andthe budgeted fixed overhead is$2,000.00. The difference of $150,000 isthe unfavorable fixed overheadspending variance.

The fixed overhead volume variancerepresents the under (over) applied fixedoverhead. It can be calculated easily bymultiplying the budgeted fixed overheadrate by the percentage difference in thenumber of actual units sold and thenumber of units originally predicted. Ifthe units produced exceed the originalbudget, the variance is favorable (morefixed overhead cost allocated/appliedthan budgeted) and vice versa. Thus,the fixed overhead volume variance inthis case is $200,000 favorable($2,000.000 10%). Because the volumevariance in this case is closed to cost ofgoods sold (or gross margin) thisvariance does not reflect a difference inthe actual income and the static budgetincome.

Operating Expense VariancesIn this case, variable operating

expenses were larger than anticipatedbecause of higher sales commissionsassociated with higher sales prices.Because sales commissions were 10%of Sales prices, the unfavorable variableoperating expense variance of $34,100is equal to 10% of the favorable salesprice variance of $341,000. The fixedoperating expense variance is similar tothe fixed overhead spending variance.It is calculated by subtracting thebudgeted fixed operating expenses fromthe actual fixed operating expenses. Inthis case, the unfavorable fixedoperating expense variance spendingvariance is $50,000 ($1,050,000 -$1,000,000). Part 3 of the Avanthi caserequires students to summarize parts 1and 2 as previously noted, the fixedoverhead volume variance is the onlyone not used in reconciling thedifference between actual income andstatic budget income.

Market Size and Market Share VariancesPart 4 of Avanthi Company case

provides information about thebudgeted market size (1,000,000 units)and the actual market size (880,000units). Students are asked to computethe market size and market sharevariances.

Avanthi Company budgeted 100,000

Costing Techniques

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units (10% of the budgeted market) butsold 110,000 units (12.5%) of the actualmarket). Textbook solutions aretraditionally much more complex thannecessary. For example, using the datafrom this case, a typical solution wouldbe: Market share = actual market sharex (actual market share - budgeted marketshare) x budgeted weighted averagecontribution margin per unit = 800,000(.125-.10) x $36.00 = $792.000 favorable.Market size = (actual market size -budgeted market size) x budgetedmarket share x budgeted weighted

average contribution margin per unit=(880,000 -1,000,000) x .10x$36 = $432,400unfavorable. Together the market shareand market size variances account forthe $360,000 favorable quantityvariance. To simplify the complexprocedure is to focus on the causes ofeach variance. For example one way topresent it is:

Market share = (actual sales in units -10% of actual market) x $36.00

(110,000 - 88,000) x $36 = $792,000.22,000x $36 = $792,000 Favorable.

Market Size =( 10% of actual market size- static budget) x $36(88,000 -100,000) x$36 (88,000-100,000) x $36 = - $ 432,000Unfavorable

Another way to present thevariances is to note that the market sizevariance is simply 12% (the decline inmarket size) times $3,600,000 (the staticbudget contribution margin) or $432,000unfavorable. The market share varianceis 25% (the percentage increase in themarket share from 10% to 12.5%) times$3,168,000 ($3,600,000 - $432,000). An

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Costing Techniques

even simpler presentation representingjust a minor modification is:

Actual units 110,000 budgetedshare of actual market 10% of 880,000)88,000.

Assuming no beginning nor endinginventories of any kind, show thecalculation of the following variances.

Sales Volume VarianceSales Mix VarianceSales Quantity VarianceSales Price VarianceMaterial efficiency and price

variances for each of the three materialsand the total material variance

Labor efficiency and price variancesVariable overhead efficiency and

spending variancesFixed overhead volume and

spending variancesVariable and fixed operation expense

variancesUsing the above variances to

reconcile the difference between theactual operating income and the staticbudget operating income.

Assume that the total fine pool cuemarket was anticipated to be 1,000,000units. The actual total market size wasonly 880,000 units. Explain the Avanthicompany's quantity variance I terms ofmarket size and market share.

Static Budget Units 100,000The market share variance ($792,000

Favorable) is simply the differencebetween the first two numbers (22,000)times the budgeted contribution margin($36). Likewise, the market sharevariance is the difference between the

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second and third numbers times thebudgeted contribution margin (-12,000 x $36= $492,000 unfavorable).

Part 5 asks students to discusscomputational similarities betweenthe variances calculated and thecalculations involved with strategicanalysis of operating income(Growth component, Price-Recoverycompo-nent, and Productivitycomponent). While strategicanalysis is not 'variance analysis' perse, certainly the computationsinvolved in the growth and price -recovery components.

Exposing Students to A Variety ofApproaches

Students could be required toprovide the mathematical equivalencyof alternative methods and perhapschallenged to offer their ownalternatives. More labor variancescould be added by includingadditional classes (and costs) of laborfor each product and by having eachproduct exhibit different efficiencyvariances for materials and labor.Students may provide logicalexplanations of possible causes ofindividual variances.q

NOTIFICA TION

Ref. No. DS-3/1/1/10 January 12, 2010

Finance (No.2) Act 2009, involving Assessment Year 2010-2011 will be applicable for the subjects Business Taxation(Intermediate) and Strategic Tax Management (Final) under Syllabus 2002 for the purpose of June 2010 term ofExamination.

Arnab ChakrabortyDirector-Studies

NOTIFICA TION

Ref. No. DS-3/2/1/10 January 12, 2010Finance (No.2) Act 2009, involving Assessment Year 2010-2011 will be applicable for the subjects Applied DirectTaxation (Intermediate), Applied Indirect Taxation (Intermediate) and Indirect & Direct-Tax Management (Final) for thepurpose of June 2010 term of Examination under Revised Syllabus 2008.

Arnab ChakrabortyDirector-Studies

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Challenges inImplementing OperationalRisk ManagementThirunellai Radhakrishnan Anand*

*Assistant Vice President - Enterprise RiskManagement in Tata AIG Life InsuranceCompany.

Introduction

A ll Banks in India haveimplemented the Basic IndicatorApproach for Operational Risks

with effect from 31-March-2009. ReserveBank of India has now announced thetimelines for introduction advancedapproaches of Basel II Framework inIndia1. The timelines are as follows.

The banks now have to undertakean internal assessment of theirpreparedness for migration to advancedapproaches, in the light of the criteriaenvisaged in the Basel II document, asper the aforesaid time schedule.However, banks at their discretion,would have the option of adopting theadvanced approaches for any of the riskcategories, while continuing with thesimpler approaches for other riskcategories.

In this context, it is sought toanalyse the various challenges thatbanks are likely to face in implementingan operational risk managementframework that will support theStandardized Approach or theAdvanced Measurement Approach(AMA).

Traditional operational riskmanagement in financial services isdriven on four wheels - (1) Risk andControl Self Assessment (RC5A), (2)Loss Data Collection, (3) Key RiskIndicator tracking and (4) OperationalRisk Capital Computation.

In each of these areas, there arepockets of ambiguity that can impedesmooth implementation of anoperational risk managementframework. Also, operational riskmanagement is rapidly evolving and

Earliest date of Likely date ofApproach making application approval by the RBI

by banks to the RBI

The Standardised Approach (TSA) April 1, 2010 September 30, 2010for Operational Risk

Advanced Measurement Approach April 1, 2012 March 31, 2014(AMA) for Operational Risk

Table 1 - Timelines for Implementing Basel II Advanced Approaches forOperational Risk

therefore, has many loose ends whereliterature is scarce. This creates manybottlenecks in the smooth implemen-tation of the above framework infinancial institutions. Some of these arediscussed below.The concept of risk

Risk is present when there is apossibility of loss in the future. Thismeans that the loss has not materialized.It also means that there is only apossibility of loss and that loss is notcertain. If loss were certain to beincurred, the organization might as wellmake a provision for the loss in itsbooks of accounts. It is particularlyimportant to understand this conceptwhile doing the operational riskmanagement exercise, because inoperational risk management we dealwith both realized and potential losses.

How do realized and potentiallosses compare with expected andunexpected losses? Realized losses arethose which have already occurredwhile expected losses are expected tooccur in the future. Potential losses onthe other hand are those that are moreor less certain to occur in future, thoughthe magnitude of loss remains to bedetermined.

For example, consider a person wholeans out of a 10th storey window. Shehas a 50% chance of falling over and

injuring herself. In case her value to hercompany is Rs.100 Crores, thecompany's expected loss would be 50%x 100 - Rs.50 Crores. However, if theprobability increased from 50% to 100%,the risk would become zero andcertainty would take over. Therefore,existence of risk implies uncertainty ofthe outcome and once an outcomebecomes certain, there is no risk.

This paradigm squarely fitsoperational risk as defined by theBASEL Committee2, where bothexpected and unexpected losses aretaken into account. Every bank that usesAdvanced Measurement Approach(AMA) is required to calculate expectedand unexpected losses and theregulatory capital requirement foroperational loss will be the sum ofexpected and unexpected losses, unlessthe bank can demonstrate that itcaptures expected losses as a businesspractice and makes adequate provisionsfor meeting expected losses.Key Risk Indicators, PerformanceIndicators and Control IndicatorsHow do we deal with overlappingdefinitions?

There is a large amount of literatureon KRIs, KPIs and KCIs. However, inpractice there is a fair bit of overlapbetween these indicators.

For example, consider staff turnoverratio, is it a key risk indicator or a keycontrol indicator? The answer is "itdepends" on what you want to track. Ifyou are tracking a key risk indicator,higher staff turnover can indicatetrouble. Staff turnover ratio can also beused as a control indicator to judge

1 Refer RBI Circular No. RBI/2009-10/99DBOD.8P.BC.No. 23 /21.06.001/2009-10f h t t p : / / w w w. r b i . o r e . i n / s c r i D t s /NotificatignUser.a5Eix?Mode=oa:ld=5167)

Risk Management

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Figure 1 - Operational Risk Management Framework

Risk Management

whether newly instituted retentionefforts are successful. The ratio can alsobe used as a Key Performance Indicatorif reduction in staff turnover ratio isstated as a key objective of the processimprovement plan. Therefore, it isimportant to take the context into account.

However, consider a company thatis consciously trying to rationaliseheadcount. In this case, just higherturnover would not be a sufficientindicator, but the quality and /or levelof people leaving the organizationwould become key risk indicator. Thisbrings in another dimension to theproblem in that, key indicators have tobe tailored specifically to the individualneeds of any organization.

Given this complication, in anoperational risk managementprogramme the same set of indicatorsmay crop up in many places under manyguises. Such indicators are called"common indicators". The number of

audit points is an example of a commonindicator. Similarly, the number ofcustomer complaints, turnaround timesare common indicators.

Specific indicators as opposed tocommon indicators are those that arerelated to a particular process, e.g.,number of outstanding tradeconfirmations can predict losses fromthe settlement process.

Using such common indicatorsmight work well for most day-to-dayoperations in financial services, butwon't work for many specializedfunctions, e.g., treasury, lending, etc.Risk managers have to spend time withstaff in specialized functions to identifythe most critical parameters that governthe performance of these functions andtransform them to metrics that can betracked on a periodic basis.Comparability of key indicators

While selecting key indicators, riskmanagers are mostly internally focused.

The question often asked is "Whichindicators best reflect the inherent andresidual risks in the company?" Manya times an equally important question"Can these key indicators be comparedwith industry benchmarks?" does notget asked. Comparability of keyindicators with industry benchmarks isimportant while using risk managementas a tool for gaining competitiveadvantage.

Initially this challenge may seem toodifficult to surmount, particularly inIndia, where very limited data ispublished on relevant risk relatedbenchmarks in the financial servicesindustry and the risk manager may findher heretofore healthy-looking list ofindicators drastically pruned afterapplying this criteria. Moreover, variouscompetitors do in fact track the sameindicator but name it differently.

Another issue is the calculationmethodology, which may be different

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2BASEL Committee defines operational riskas the risk of loss resulting from inadequate orfailed internal processes, people and systemsor from external events. This definitionincludes legal risk, but excludes strategic andreputational risk.

3"It is important that the internal model isactively used to support decision making.Internal models should be integrated into all riskmanagement and business processes, i.e. capitalallocation, performance measure-ment, pricing,etc." - Internal Model Admissibility - Principlesand criteria for internal models by CROFORUM,April 2009

Risk Management

across the industry. It is thereforeimportant to understand themethodology to compute the indicatorstracked by peers. Diligent scanning ofannual reports, analyst reports andregulator publications can help inunderstanding the nuances incalculations that will lend comparabilityto indicators and also help inaugmenting the list of indicators.Key Indicator Specification

Key Indicators are often selected onthe basis of a general understanding ofa process or function, usually bydepartment representatives. Implicationof methodologies used to compute theindicator is not immediately visible tothe risk manager. Even slight changesto the methodology over time can robthe key indicator of comparability.Therefore, it is imperative to specify thecomputation method for at a sufficientlevel of detail for each key indicator.Features to be observed in a keyindicator, for example, trends like growthdecline, cyclical behaviour, value vis-a-vis a benchmark, etc., have to bedocumented.

For most indicators it is possible tospecify "soft" and "hard" thresholds.A soft threshold is one which invitesmanagement action when breached.Management action is directed towardsrestoring the indicator within the softthreshold. A "hard" threshold is notexpected to be breached except whenthe company is in severe stress.

Thresholds directly relate to the riskappetite of a company. A company thathas a higher risk appetite can allow theindicator to fluctuate in a larger band,while a company that is relatively riskaverse is likely to have a narrow band.Consequences of breach of indicatorthresholds need to be articulated.

The audience for key indicatorscould be spread across the companyacross levels. Therefore, it may benecessary sometimes to segregate theindicators into different categories andtailor them to the nature of the audience.

This can best be achieved througha business intelligence solution, whereusers can view reports that are relevantfor them. This can also facilitateintegration of risk management into theday-to-day decision making and movethe organization a step closer to the"use test"3 postulated by regulators.

Given below are some of the keyindicator specifications that areimportantn Description of the indicatorn Data sourcen Frequency of indicator collection

and analysisn Computation steps to arrive at the

indicatorn Thresholds (minimum / maximum) of

the indicator and interpretation ofeach level

n Audiencen Management action in case of

breach of thresholdsLoss Data

Collection of loss data presentsunique challenges. There are uniquepractices followed by financialinstitutions in collecting, analyzing,reporting and monitoring operationallosses. A cross-section of areas wherethere are continuing ambiguities areanalysed.Operational Loss Categories

One of the pain points is to definethe boundary of operational risk relatedloss. Classification of a loss asoperational risk requires detailedanalysis of the root cause. In manycases, losses are reported severalmonths after the date of actualoccurrence that adds to the fuzziness.To surmount this obstacle, it is alwaysadvisable to first compile a long list ofoperational loss examples mapped totheir respective risk categories. Onesuch illustrative list is presented at theend of this article.Loss that affects more than one businessline

Basel Committee on BankingSupervision (BCBS) has defined eightbusiness lines to which operationallosses have to be mapped. The Basel-defined business lines arel Corporate Financel Trading £t Salesl Retail Banking

l Commercial Bankingl Payment & Settlementl Agency Servicesl Asset Management andl Retail Brokerage

The purpose of classification of lossinto these lines of business is tocalculate operational risk capitalrequirements separately for each of thebusiness lines and aggregate them tothe company level.

However, if a loss event affected twoor more lines of business, how shouldthe loss be apportioned to each line?Though some banks use other measureslike number of employees, number ofoffices, etc., gross income of eachbusiness line seems the most likelycandidate for allocation. Basel Committeealso uses gross income as a broadindicator that serves as a proxy for thescale of business operations and thelikely scale of operational risk exposurewithin each of these business lines.Negative Losses (Profits) fromoperational risk events

Though not very frequent, it ispossible that some of the operationalrisk events will generate profits, insteadof losses. Should these losses be nettedoff from total operational loss orignored? Current practice in banks is torecognize that profits from operationalrisk related events indicate weakcontrols and initiate steps to strengthenthe controls. However, the profits arenot used for any further quantitativeanalysis, i.e., the treatment is akin tonear misses.Gross Loss versus Net Loss

Unlike credit risk where riskmitigation is possible through collateralsand guarantees, the only protection foroperational risk is a strong controlprocess. Once the risk materializes andthe organization suffers a loss, aprocess to recover the loss is set inmotion. The following questions arisein this context.

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While modeling operational lossesfor computing operational risk capitaldo we include recoveries and model thenet loss or do we take only the grossloss? Also will any capital arbitrage beavailable with respect to recoveries?

Unlike credit risk, where it is possibleto model loss given default andrecovery rate as a function of creditrating and market value of assets of afirm, it may not be possible to estimaterecoveries. Also in case of credit risk,in most cases, there is a clear lender-borrower relationship with the lenderenjoying a legal right to recover moneyfrom the borrower, while in operationalrisk only in limited cases can such a rightbe established. Recoveries can varyrandomly, depending on thecircumstances of each loss and noregular pattern for recoveries canpossibly be observed in many cases.

Some practitioners do assert that netoperational losses give a fair sense ofthe inherent strength of a company'srecovery processes and therefore, it isfair to use net losses for operational riskcapital computation.

Some others argue that recoveriesdistort the effect of pure operationalloss, while in many operational lossesno recoveries are possible (e.g., lossesrelated to transaction processing,systems, etc.). Also the organizationincurs significant expenses forinfrastructure and other processes tosupport recoveries and after accountingfor such expenses size of recovery canbe insignificant. This method may thusunderstate the amount of operationalrisk capital requirements. Also it putsunnecessary load on the system to trackrecoveries over an indefinite horizon.

This argument is supported by thefollowing data collected by US FederalBank and thrift regulatory agencies in20044. The results of the study thatconcerns recoveries is as follows.

The first column reports the numberof losses with a recovery as apercentage of the total number of lossesin the sample. The second columnreports the recovery rate, which isdefined as the dollar amount recoveredas a percentage of the total loss amountfor all losses associated with a recovery.

The third column reports the dollaramount recovered as a percentage ofthe total loss amount for all losses inthe sample. The actual amountrecovered as a percentage of total lossis very negligible as compared to thetotal operational loss amount.

However, it would only be fair if acompany gets to enjoy the fruits of astrong post-event recovery process thatit has put in place. Therefore, it wouldbe beneficial to track recoveries andadjust for such recoveries whilecomputing the capital requirements.

Let’s go with the argument of thelatter set for a moment and ask thequestion - what use is a recovery if ithappens, say, two years after the losshas occurred? To surmount this issue,it might be beneficial to adjust therecoveries by discounting them to theirpresent value using the company’sweighted average cost of capital. Alsoany other expenses that have beenincurred in the recovery process shouldbe netted off from the amountrecovered.Quick Recoveries

There may be some cases where aloss occurred, but there was a quickrecovery. For example, wrong debits orcredits to client accounts, incorrect inter-bank remittances, etc., can occur, butcould be recovered quickly, say on thesame day. Should these be treated asgross losses for the time period theywere open?

For dealing with this issue, somebanks differentiate between clientaccounts and proprietary accounts. Incase of inter-banks remittances onlythose amounts that remain overnight arerecognized as gross operational losses.In case of client accounts however, evenintra-day open positions arising due towrong credit and debits are counted asgross operational losses.

Some other banks do not

differentiate between client accountsand proprietary accounts and recognizegross loss when there an intra-dayexposure arises.

The latter approach is morecomprehensive and does not speculateon possibility of recoveries whileassessing the loss.Capital Computation - choice betweenregulatory approach and internalmodels approach

Even though BCBS has made itlucrative for banks to adopt internalmodel based approaches to avail ofreduced capital charges, many banks(particularly the smaller ones) stillbelieve that putting in place a datacollection, analysis and managementinfrastructure along with robust capitalestimation methodologies do not givesufficient return on the investment. Thefollowing reasons further contribute tothis belief.l As capital measurement approaches

are still evolving, the most effectiveapproach to capital measurement isunclear.

l On the other had, the simplicity ofthe Basic Indicator andStandardized Approaches do haveattraction for many banks, eventhough the approaches may notfully reflect their specific riskprofiles.

l There are rigorous standards andsupervisory approval requirementsfor internal model based

4Results of the 2004 Loss Data CollectionExercise for Operational Risk, US Regulators,May 2005

No. of Losses with Recovery Rate for Amount RecoveredRecoveries as a Losses with as a Percentage of

Percentage of all Recoveries Total Loss AmountLosses

All Losses 8.4% 59.5% 5.0%All Losses > $10,000 2.2% 63.8% 5.4%

Table 2 - Recovery Rates on Operational Losses

5A limitation to this study that the analysis Isbased on publicly available loss informationand does not consider historical internal lossesor internal controls.6Execution, Delivery, and ProcessManagement, Employment Practices andWorkplace Safety, Business Disruption andSystem Failures, Clients, Products and BusinessPractices, Internal Fraud, External Fraud,Damage to Physical Assets

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Risk Management

approaches, which some banks maynot be able to meet.

l It is also possible to have adichotomy with the organization,whereby the some advancedtechniques and enhancements canbe used, while choosing not tofollow the Advanced MeasurementApproach.

l A recent publication (April 2009) bya well-known research andconsulting firm suggests that BasicIndicator and StandardizedApproaches underestimate theextent of operational loss whencompared with internal modelscalibrated to 99.9% confidence levelfor all but the largest banks5.As such, there is no clear winner

between internal models and regulatoryapproaches as of now.Loss Distribution Approach - keyassumptions

The Loss Distribution Approach(LDA) has emerged as one of the widelyused statistical methods to deriveoperational risk capital charge. Theessence of the loss distributionapproach is to measure frequency as aPoisson process and severity as anyone or a mixture of Lognormal,Generalized Pareto or Gammadistributions.

Operational risk events oftenproduce losses that are heavy tailedwhich are extremely unpredictable.Therefore, distributions that have acentral tendency (like the normaldistribution) are seen to be inadequateto predict operational loss severity.Therefore, non-normal distributions likethe Weibull, Generalized Pareto andGamma distributions which are skewedto the right are used to modeloperational loss severity.

As these distributions are used tocapture the tail of loss events thatrepresent large losses they are verysensitive to the underlying data set.There are some key issues that need tobe borne in mind before building themodel and analyzing the results.l Completeness of loss data - A key

assumption in LDA is that loss datahas been systematically collectedand covers all material losses that

occurred in an organization. Thishowever, is far from the truth for mostcompanies, particularly the onesthat have no experience of loss datacollection and aggregation or whosesystems are not geared to meet thechallenge of operational lossidentification, collection andreporting. This is one of the reasonswhy the BCBS has prescribed thatthe bank's AMA will be subject to aperiod of initial monitoring by itssupervisor before it can be used forregulatory purposes. Similarly,BCBS also prescribes that"internally generated operationalrisk measures used for regulatorycapital purposes must be based ona minimum five-year observationperiod of internal loss data".However, to first adopt AMA, athree-year historical data window isacceptable.

l Completeness of sample -Meaningful results from IDA requirea large sample of observations underthe soundness standardspostulated by BCBS. However,many organizations, particularlysmaller ones, are unlikely to havean internal loss database withobservations that enable them tomodel the full range of possibilities.Therefore, they most likely have torely on industry-level loss data fromexternal databases, which bringswith it a further set of problems likeheterogeneity of activity, differentrisk profiles of different banks, sizeand scaling.

l Fragmentation of losses - Thefragmentation effect will distort theseverity and the frequencydistribution, leading to spuriousresults.

l Commingling of data among riskcategories - In some cases it may bevery difficult to separate the creditrisk, market risk and operational riskstrands and as such, the underlyingdata may reflect credit risk andmarket risk properties (both of whichcan be modeled using the normaldistribution). In such cases the rightskewed distributions (Weibull, GPD,Gamma, etc.).

l Dependence and correlationbetween business lines / riskcategories - In the BASEL IImethodology, 7 risk categories6 and8 business lines have beenidentified. It is envisaged that losseswill be modeled for each of thecategories within the business lines,thus generating 56 individualoperational loss estimates. Simplesum of these loss estimates will addup the organizational leveloperational risk capital requirement.Banks are nevertheless offered thepossibility to estimate and toaccount for partial dependence byappropriate techniques. However,dependence between operationalrisks is at best very fuzzy. Also, it isnot very clear whether thedependence should be modeledusing correlations between severityor frequency or the aggregatedistribution. In a paper published in2004, Frachot et al do mention thatBasel Committee meant thataggregate loss distributions shouldbe tested for dependence.

ConclusionOperational risk management is an

evolving field where several financialinstitutions, central banks andconsulting firms are contributing to theknowledge base every day. It is soughtto highlight some of the practical issuesin implementing an operational riskmanagement framework.

A majority of the highlighted issuesemanate from the fact that financialinstitutions historically had noincentive to collect and analyse datarelated to operational risks andtherefore, this area was partiallyneglected. Operational risks weremanaged intuitively as "residual risks"that were left over after mitigating the"main" risks, i.e., credit, market andinsurance risks. This has led tostructuring of processes andorganizational structures that are notquite conducive to operational riskmanagement.

Emerging solutions to these issueswill indeed determine how operationalrisk management and measurement isshaped in future.q

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Regional Rural Banks andPrudential Norms - AnOverviewR. Suresh*

*Assistant Professor of Commerce,Madurai Kamaraj University College,Aundipatti-625 512

Banking Matters

T he concept, regional rural bankwas an outcome of theNarasimham Committee's

recommendation in the year 1975 wasopened in the rural mass for the purposeof reaching the unreached. Theseregional rural banks, in the presentscenario play a vital and essential rolethat supports the economicdevelopment of India. This paperattempts to trace the history of regionalrural banks in India.Financial Sector Reforms in India

In India, financial sector reformswere introduced in the early 1990s. Itwas at the centre stage of the economicliberalization. Mainly it was toadministrate the following two crisesinvolving the financial sector.

In addition to the above crises, therewere so many deeper problems of theIndian Economy emerged for thefinancial sector reforms which arecategorized as below.

*The financial crisis induced byadministered interest rates pegged atunrealistically low levels.

*Large scale pre-emption ofresources from the banking system bythe government to finance its fiscaldeficit.

*Excursive structural and microregulation that inhibited financialinnovation and increased transactioncosts.

*Relatively inadequate level ofprudential regulation in the financialsector

*Poor developed debts and moneymarket and

*Outdated technological andinstitutional structure that made thecapital markets and the rest of thefinancial system highly inefficient.

The financial sectors reforms inIndia have their origin in the followingthree reports.1) World Development Report 1991 -

an annual report of the World Bank,which led to a market-friendlyapproach for economic develop-ment.

2) Report of Agricultural CreditReview Committee (ACRC)conducted by the Reserve Bank ofIndia under the chairmanship of Mr.Khushro.

3) Report of the High Power Committeeappointed by the Government ofIndia to review the financial systemof India under the chairmanship ofShri. Narasimham.In the above three reports, Khurshro

committee gave the following fivebuilding blocks for the futureagricultural credit system.

*A market - based and not an over -administered banking system.

*The need for credit allocation*A two -category solutions

consisting ofi) Free structure of interest ratesii) Administered rates for specialized

categories of borrowers.*Avoidance of popularism.*The government to bear the cost

of infrastructure and mandatoryprogrammes.

In addition to the above items theKhushro Committee gave two specificrecommendations leading to structuralchanges in rural banking related to

i) Mergers of the Regional Rural

Banks with Sponsor banks andii) Establishment of the National

Cooperative Bank of India.Earlier to financial sector reforms the

situation of the Indian financial Systemwas far from satisfactory. The viabilityof the rural banking institutions hadbecome a major concern. It was verywell recognized that the viability of therural banking was largely affected bythree elements, namely, rate of interest,cost of operation and recoveryperformance. Kushro Committee madea detailed analysis of the determinantsof viability in rural banking. It analyzedthe implications of the elements suchas financial, transactions, risk costs,income and margin which are to betackled by interest rate structure, costcentre and recovery of overdue.

The high power committee under thechairmanship of Shri. Narasimham madethe following recommendations, whichconsists of direct and indirect bearingon flow of funds to rural areas and alsoaffect the structure or functioning ofrural banking institution.

i) Phased reduction in the statutoryliquidity ratio to 25% over a period offive years.

ii) Reduction in cash reserve ratiofrom its present high level.

iii) Phasing out directed creditprogrammes and redefining the prioritysector- directed credit programmecovering a redesigned priority sector,consisting of small and marginalfarmers, tiny sector of industry, smallbusiness and transport operators,village and cottage industries, ruralartisans and other weaker sections. Thecredit target for the redefined prioritysector was recommended to be 10% ofaggregate book credit, which accordingto the committee would be broadly inline with the credit flows to thesesectors at present. It is alsorecommended that a review should beconducted at the end of three years forthe credit programmes implemented.

iv) Setting up of special tribunal tospeed up the process of recovery ofloans.

v) Establishment of an Asset

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Reconstruction Fund to take over frombanks and financial institutions aportion of their bad and doubtful debtsat discount.

vi) Restructuring of bankingsystems in the context of rural banking.

vii) Setting up of one or more ruralbanking subsidiaries by each publicsector bank to takeover all its ruralbankers.

viii) Permitting regional rural banksto engage in all types of bankingbusiness, abolition of branch licensingpolicy and leaving the matter of openingor closing of branches to the commercialjudgments of individual banks.

The financial sector reforms ingeneral and also in the context of ruralcredit systems has the following majorelements namely

i) Structural dimensions.ii) Capital baseiii) Viability aspects like interest, cost

and recovery.iv) Management issues.v) Human resource developmentvi) Legal system andvii) Monitoring.The main objectives of the financial

reforms in India area) To eliminate and to remove the

depressions that existed earlier.b) To create an efficient productive and

profitable financial sector industry.c) To enable price discovery,

particularly, by the marketdetermination of interest rates thatthen helps in efficient allocations ofresources.

d) To provide operational andfunctional autonomy to institutions.

e) To prepare the financial systems forincreasing international competition.

f) To open the external sector in acalibrated fashion.

g) To promote the maintenance offinancial stability even in the faceof domestic and external stocks.The financial sector reforms in India

was carried in three forms asi) Banking sector reformsii) Reforms in the government

securities market.

iii) Reforms in foreign exchangemarket.Banking Sector Reforms

The financial sector reformsprovided the necessary platform forbanking sector to operate on the basisof operational flexibility, functionalautonomy, thereby enhancingefficiency, productivity and profitability.The banking sector reforms undertakenin India from 1992 onwards werebasically aimed at ensuring the safetyand soundness of financial institutionsand at the same time at making thebanking system strong, efficient,functionally diverse and competitive.The reform included measures forarresting the decline in productivity,efficiency and profitability of thebanking sector. Expanding reformsactivity of the banking sector is nowunder process. The banking system, byfar, the most dominant and vital segmentof financial sector, accounting to 80percent of the funds flowing throughthe financial sector and it is appropriatethat reform measures taken in this areahave followed the recommendation ofthe Committee on the Financial System(CFS), which reported in November1991. The recommendations aim atimproving the productivity efficiencyand profitability of the banking sectoron the other hand, providing it greateroperational flexibility and functionalautonomy in decision making. The mainaim of banking sector reforms is tomaintain the standard of the banks ofIndia at international level.

The nationalization of bankswitnessed a phenomenal expansion inthe geographical coverage andfunctional spread of Indian banking andfinancial system. The development ofthe financial sector is a majorachievement and it has contributedsignificantly to the increase in savingsrate, particularly of the householdsector.

Impressive achievements inresource mobilization and in extendingthe credit reach, several distortions haveover the years, crept into the bankingsystem. As a result, productivity and

efficiency of the system have suffered.Its portfolio quality has badlydeteriorated and profitability has beenevaded. Several public sector banks andfinancial institutions have become weakfinancially and some public sectorbanks have been incurring lossescontinuously. The customer servicesbecame poor, that work technologyoutmoded and they are unable to meetthe challenges of a competitiveenvironment. After having a penetratingview, the Government of India set up ahigh level committee, headed by Shri.M. Narasimham, a former Governor ofReserve Bank of India to examine allaspects relating to the structure,organization, functions and proceduresof the financial system. The committeesubmitted its report in November 1991.The committee identified the followingtwo causes for the poor financial shapeand low efficiency of public sectorbanks and financial institutions.

i) Extensive degree of centralizedcontrol of their operations in terms ofinvestments, credit allocation, branchexpansion and even internalmanagement aspects of business and

ii) The systems have beensubjected to political interference: as aresult, these institutions have failed tooperate on the basis of the commercialjudgment and in the frame work ofinternal autonomy. The high levelcommittee gave the followingrecommendations, which are thecontours related to the banking sectorsreforms, after identifying the drawbacksand pit fall factors, which led thebanking sector to mass failure.Outlines of Banking Sector Reformsa) Creating an enabling environment

for banks to overcome the externalconstructs related to administeredstructure of interest rates, highlevels of pre-emption in the form ofreserve requirement (namelystatutory liquidity ratio, cashreserve ratio) , and credit allocationto certain sectors. Interest ratederegulations have an importantcomponent of the reform processwhich has imparted greaterefficiency to resource allocation.

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b) Granting of operational autonomyto public sector banks, reduction ofpublic ownership in public sectorbanks by allowing them to raisecapital from equity market up to 49percent of paid-up capital.

c) Implementing the prudential normsfor the purpose of prudentialsystem of recognition of income,classification of assets andprovisioning of bad debts, to ensurethat the books of the banking reflecttheir financial position moreaccurately and in accordance withinternationally accepted accountingpractices to maintain the standardof the basis at international level forfit and proper position.

d) Transparent norms for entry ofIndian private sector, foreign andjoint-venture banks and insurancecompanies, permission for foreigninvestment in the financial sector inthe form of Foreign DirectInvestment (FDI) as well as todiversify product portfolio andbusiness activities.

e) Setting up of people's court -popularly known as Lok-Adalats,debt recovery tribunals, assetreconstruction companies, settle-ment advisory committees,corporate debt restructuringmechanism for quicker recovery andrestructuring promulgation ofSecuritization and Reconstructionsof Financial Assets and Enforce-ment of Securities Interest(SARFAESI) Act and its subsequentamendment to ensure creditorsrights.

f) Setting up of INFINET - as thecommunication backbone for thefinancial sector, introduction ofNegotiated Dealing System (NDS)for screen - based trading ingovernment securing and Real TimeGross Settlement (RTGS) system.

Multi Agency Approach in BankingSector

Banking sector is an essential partof the Indian economy. The ruraleconomy occupies a major part of theIndian economy which is an important

driver of the country's economy as awhole. The rural economy includesagriculture, trade, commerce, industryand other productive and serviceactivities like small and marginal farmers,agriculture labourers, artisans and smallentrepreneurs. In the early periodbefore banking concept came into forceindividual money lenders andindigenous bankers came forward togive financial assistance to the abovepoor. However, they levied moreinterest and incidental and othercharges, which swallowed the tiny, smalland medium land farmers, smallindustrialists and entrepreneurs. In thissituation, naturally the governmentcame in to the picture to help them bygiving financial conveyance with verylow benefits. It was executed by thegovernment through four channels. Itis known as multi agency approach tocredit to sub serve the needs of theinput-intensive agricultural strategywhich had initially focused on "bettingthe strong".

A country of India's size, diversityand complexities of development wouldnaturally need an institutional creditsetup which can cater to the vastdiversified and genuine needs of credit.The composition and structure of ruralfinancial institutions are reflecting theconcern and efforts of the policy makersin making the demand of rural credit.The rural credit financial institutions areprimarily divided into two categoriesnamely

i) Apex level Institution whichcontrols the Primary LendingInstitutions and includes Reserve Bankof India, National Bank for Agricultureand Rural Development, NationalCooperative Bank of India and SmallIndustries Development Bank of India,and

ii) Primary Lending Institutionswhich are known as multi agency. Theprimary lending institutions comprise offour sets of institutions namely,a) Commercial Bankingb) Local Area Bankingc) Co-operative Credit / Banking

Institutions and

d) Regional Rural Banking.In this context, it is relevant to

discuss about regional rural banking.Regional Rural Banking

Until recently, we know, India is anagrarian country. As said earlier, themain produce, which occupies morepercentage in the gross domesticproduct, is agricultural income. Next toit, income from trade and industriescome in the gross domestic product. Itshows that agricultural income is themain revenue to India. India is a so-called developing country. Agriculturalbusinesses are taking place mostly invillages of India. To develop theeconomic condition of India, it isessential to develop the villageeconomy because the growth of ruraleconomy is one the important growthdrivers of the economy as a whole. Itcan be done by providing, "for thepurpose of the development inagriculture, trade, commerce, industryand other productive and serviceactivities in rural areas, credit and otherfacilities, particularly to small andmarginal farmers, agricultural labourers,artisans and small entrepreneurs, andfor matters concerned therewith andincidental thereto".

In early periods, to support theabove-mentioned low-income earningpeoples many individual moneylendersand indigenous bankers came forward.However, they levied exorbitant interestand other charges, which areunaffordable and unbearable squeezedthe small and marginal, medium levelfarmers and entrepreneurs. In thissituation, naturally the governmentsupported them by opening banks andco-operative institutions. It is really apathetic condition to small and marginallevel farmers and entrepreneurs in Indiato sustain their position in the businessdue to financial crisis and competitionswith big shots doing the similar businessin a large scale.

Thanks to Prof. Muhammad Yunusa Bangladeshi, the father of Self HelpGroups, he who also introduced theconcept "Rural Banking" to serve theneedy poor. To help them a concept

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credit to rural poor was introduced bythe Government of India.

This was exercised by starting bankswith the name of Regional Rural Banks,in addition to commercial banks andcooperative institutions. They three areinter-related with each other in the nameof multi agency approach. It was foundthat the bankers and co-operativeinstitution were not sufficient tosupport the requirement of rural credit.In 1954 the All India Rural Credit SurveyCommittee, headed by Mr. A.D. Gorwalagave recommendations in this regard.The report was submitted in August1954.

The survey exposed the utterinsignificance of co-operatives inproviding rural credit. Essentialmeasures in larger level rather than smalladministrative, functional or otherchanges were required to ensure thesuccess on co-operative creditinstitutions and enable them to becomeself-supporting.

The state tendency in the past hadbeen to over-control and under-financethe co-operative movement, but thereport pointed out the need for anintegrated system of co-operation andrural credit. In this situation, regionalrural banks were formed to provideaccess to low cost banking facilities tolow-income gaining poor. They cameinto existence before three decades inthe Indian financial structure. Theinception of the regional rural bankswhich are shortly known as RegionalRural Banks in the year 1976 can be seenas a unique experiment as well asexperience in improving the efficacy ofrural credit delivery mechanism in India.

It was a recommendation to start theregional rural banks given in the year1975 by Shri. M. Narashimam WorkingGroup Committee. In theirrecommendation, they said to "combinethe local feel and the familiarity with therural problems, which the co-operativespossess and the degree of businessorganization, ability to mobilizedeposits, access to control moneymarkets and modernized outlook, whichthe commercial banks have". For this

purpose, to strengthen those in ruralareas the regional rural banking systemwas introduced. They were formed tomeet the excess demand for institutionalcredit in the rural areas, particularlyamong the socially and economicallymarginalized and deprived sections toimprove the efficiency in rural creditdelivery mechanism. Based on therecommendations an act was passed inthe Parliament during the year 1976namely, "The Regional Rural Bank Act,1976." The multi-agency approach torural credit was also to sub-serve theneeds of the input-intensive agriculturalstrategy, which had initially focused on"betting the strong". The regional ruralbanks act, 1976, succinctly sum up theoverall vision to sub-serve both thedevelopmental and redistributiveobjectives.

These regional rural banks arefunctioning with the support of thecommercial banks that are technicallytermed as 'sponsor bank'. The equitycapital of the regional rural bank is tobe shared among the CentralGovernment, State Government and byits Sponsor Bank in the proportion of50:15:35 respectively.The regional rural banks popularlyknown as small man's bank have takenthe deep roots and have become a sortof inseparable part of the rural economy.It plays a vital and essential role in therural institutional financing foragricultural credit in terms ofgeographical coverage, with friendlyapproach and contributes more for thedevelopment of rural economy.

During the inception there were onlysix regional rural banks having 17branches covering 12 districts. At theend of the year, 1980 there was anincrease to 85 regional rural bankshaving 3,279 branches. It was noticedin the year 1985 that there were 188regional rural banks having 12,606branches. As on March 2004, it showeda greater growth in regional rural bankshaving a large number of branches inrural areas forming 42 percent of totalbranches of commercial banks. Therewere 196 regional rural banks with 14,747

branches covering 518 districts acrossthe country. Due to the initialization ofthe process of amalgamation of regionalrural banks by the Government of Indiawith effect from September 2005 in termsof Section 23A of the Regional RuralBanks Act, 1976, the number of regionalrural banks declined to 91 operating in26 States across 585 districts with anetwork of 14,788 branches as on March31, 2008. With further amalgamation,and formation of a regional rural bankin Union Territory of Puducherry, thetotal number of regional rural banksdeclined to 88 as on May 2008.Recent Changes in Regional RuralBanking by various committees

Recently, the performances ofregional rural banks are not hearteningall over India. The performance resultedwith more losses and they have morenon-performing assets. The financialviability of regional rural banksattracted the attention of the policymakers from time to time. In this regard,various committees were formed toobserve the performance of them.

Committee to Review Arrangementsfor Institutional Credit for Agriculturaland Rural Development (CRAFICARD)gave its recommendations in the year1981 that "loss incurred by the regionalrural banks should be made goodannually by the shareholders in thesame proportion of their shareholdings". It was not accepted. But atthe same time, under a scheme ofrecapitalization, financial support wasprovided by the share holders in theirproportion of share holdings. In theyear 1984, Kelkar committee gaverecommendation that small anduneconomic regional rural banks shouldbe merged in the interest of economicviability. After five years, in the year1989, Kushro committee pointed out thesame recommendation in a different waythat "the weakness of regional ruralbanks is endemic to the system andnon-viability is built into it, and the onlyopinion is to merge the regional ruralbanks with the sponsor banks. Thenonly the objective of serving the weakersections effectively could be achieved

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only by self-sustaining creditinstitutions". In 1994, Bhandari committeerecommended for comprehensiverestructuring of regional rural banks andgreater devolution of decision-makingpower to the board of regional ruralbanks in the matter of businessdevelopment and human resourcematters. In 1996, Basu committee mootedthe opinion of liquidation on revampingof regional rural banks. Thingalayacommittee gave another similarsuggestion in the year 1997 that veryweak regional rural banks should beviewed separately and possibility oftheir liquidation may be recognized.They might be merged withneighbouring regional rural banks.

Vyas committee-I, the expertcommittee on rural credit gave itsopinion that the sponsor bank shouldensure necessary autonomy to theirregional rural banks in their credit andother portfolio management system. Inthe year 2003, Chalapathy Raocommittee recommended that the entiresystem of regional rural banks may beconsolidated while retaining theadvantages of regional characters ofthese institutions. The sponsoringbanks may include other financialinstitutions for the support.

The Purwar committee laid basementfor the better performance of regionalrural banks in the year 2004. Itrecommended the amalgamation ofregional rural banks by way of verticaland horizontal merges. Finally, in theyear 2005, Sardesai committee gave itsrecommendation that "to improve theoperational viability of regional ruralbanks and take advantage of theeconomies of scale, the routeamalgamation/mergers of regional ruralbanks may be considered taking ontoaccount the views of variousstakeholders".

It also recommended that change insponsor banks may, in some cases helpin improving the performance namelyimprove the competitiveness, workculture, management and efficiency ofthe concerned regional rural banks. In

addition to that, in order to impartviability to the operations of regionalrural banks, the Narashimam committeesuggested that the regional rural banksshould be permitted to engage in alltypes of banking business and shouldnot be forced to restrict their operationsto the targeted groups. Thisrecommendation became a turning pointin the functioning of the regional ruralbanks, which uplifted the position ofthem. Simultaneously, prudential normswere introduced to maintain thestandard of regional rural banksequivalent to international standard.Due to these recommendation-amalgamation/mergers, regional ruralbanks in India were undergone on thisaction.

Due to the initialization of theprocess of amalgamation of regionalrural banks by the Government of Indiawith effect from September 2005 in termsof Section 23A of the Regional RuralBanks Act, 1976, the number of regionalrural banks declined to 96 operating in26 States across 585 districts with anetwork of 14,957 branches as on March31, 2008. With further amalgamation,and formation of a new regional ruralbank in Union Territory of Puducherry,the total number of regional rural banksdeclined to 88 as on May 2008.Ineffective and inefficient operation andpolicies adopted made to face a setback.The main reason for merger andamalgamation is poor performance ofloss making. To strengthen the regionalrural banks the policy makers suggestedthem to enter into the activities where acommercial bank does. In addition tothat, during the reform period, adoptionof prudential norms in the regional ruralbanks was insisted to place the regionalrural banks that they maintain theinternational standard. For the betterperformance, to ease the effectivecontrol over them the loss making bankswere merged. In addition to thatrecapitalization funds were provided towrite-off the accumulated losses ofloss-making regional rural banks. It wasfor the purpose of cleansing the balancesheet of such regional rural banks.

Prudential Norms as applicable toRegional Rural Banks

In order to reflect a bank's actualfinancial health in its balance sheetstringent prudential regulations untilrecently have been stack in the Indianbanking system. There has beendeterioration in the quality of loanportfolio, which in turn affected thebanks income generation andenhancement of their capital funds. Theinadequacy of capital funds has beenaccompanied by inadequacy of loanloss provision Major element of thefinancial sector reforms has been theintroduction of prudential norms andregulation aimed at ensuring the safetyand soundness of the financial system,imparting operates transparency andaccountability in operations andrestoring the credibility and confidencein the Indian financial system. Theprudential norms service in two anglesviz. to bring out the true position of thebank's loan portfolio and helps to arrestdeterioration.

The Reserve Bank of India vide itscircular, dated 27.04.92 advised allscheduled commercial banks toimplement the recommendation of theNarasimham committee on prudentialnorms and regulations. The circular waseffective to important by all scheduledcommercial banks except regional ruralbanks. Later Reserve Bank of Indiaissued detailed guidelines in March,1994 on prudential norms.

It led that all the regional rural banksshould adopt the prudential norms asapplicable to scheduled commercialbanks, to bring up the regional ruralbanks equivalent to internationalstandard.Income Recognition Policy

The term "Income Recognition" isvery crucial to banks for which interest,discount, dividend, commission onexchange are major sources of income.This concept country around thequestion whether a particular incomeshould be taken to profit and lossaccount or not. It is concerned with therecognition of revenue arising in thecourse of the normal activities of the

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bank. The revenue should berecognized, provided that at the time ofperformance, it is not unreasonable toexpect ultimate collection. Theuncollected revenue should bepostponed to that extent. It aims toinclude the items which are collected ina particular period in the particularperiod of profit and loss a/c.Receivables are to be termed as Pastdue.

The Reserve Bank of India in itscircular, DBOD BP.BC 59/21. 01-043-92,dated December 17, 1992 introduced theconcept past due with respect topayment of interest and installments.The circular stated that "It has beendecided, taking into account thepractical problems involved in theIndian Context that an amount shouldbe considered "Past due" when itremains outstanding for 30 daysbeyond the due, date. Thus, whileinterest may become due on say 31March, 1992, it becomes "Past due on30 April, 1992". The terms 'due','overdue', and 'Past due' are already inwage. Each bank has its own meaningassigned to these terms. The April 1992circular of Reserve Bank of India usedthe word 'Past due' while defining a non-performing asset in the context of a termloan interest and any amount withrespect to other accounts. This meansthat the past due concept was madeapplicable to interest on term loan andother accounts.

For a term loan, both for thepayment of interest and installments theconcept of past due was applicable, thatis an additional time of 30 days wasgiven from the due date. The paymentof interest is due normally on a quarterlybasis. The past due date is 30 daysbeyond the due date. As per thedirection issued by Reserve Bank ofIndia, "income should be recognizedonly when actually received and not onaccrual basis. Banks should not chargeand take into income account intereston any non-performing assets.

Pandyan Grama Bank had adoptedthe concept of income recognition andasset classification norms from 1995-

1996 as per the instruction issued byReserve Bank of India vide their circularRPOD.No. RRB BC.112/3-5-34, dated22nd March 1996 and the provisioningnorms were enforced from the year 1996-1997.Asset Classification Norms

The assets of the banks as per theNarashimam Committee's opinion areclassified for the purpose ofprovisioning. The banks and financialinstitutions should classify their assetsby compressing then prevailing eighthealth codes into four broad groups.Basically, it is classified into two groupsand then further they are classifiedbased as well-defined credit weaknessand extent of dependence on collateralsecurity for realization of dues. Thebifurcation as follows is the assetclassification for the purpose ofprovisioning against non-realization.

* Assets* Performing Assets or Standard

Assets* Non-Performing Assets* Sub-standard Assets* Doubtful Assets* Doubtful less than one year* Doubtful more than one year and

less than three years* Doubtful more than three years.* Loss-making assetsThe non-performing assets are

these assets that cease to generateincome for banks. The securitizationand Reconstruction of Financial Assetsand Enforcement of Security Interest(SARFAESI) Act, 2002 defined non-performing assets (NPAs) as "an assetor account of a borrower, which hasbeen classified by a bank or financialinstitution as sub-standard, doubtful,or loss assets in accordance with thedirection and guidelines relating toasset classification issued by theReserve Bank of India".

From 31st March, 2004 an asset isconsidered to have gone bad when theborrower has defaulted on principal andinterest repayment for more than onequarter or 90 days. As per Reserve Bankof India guidelines, non-performing

assets- NPAs consist of sub-standardassets, doubtful assets and loss assets.Any assets generally turn into non-performing assets -NPAs when they failto yield income during certain period.As a result, doubtful assets find its wayfrom sub-standard assets after 12months under the international normsand finally when it is foundirrecoverable then it moves to lossassets category. Banks are allowed tomake full provisions for such assets i.e.100 percent of unsecured portion ofdoubtful assets plus 20-100 percent ofsecured portion (depending on theperiod for which the account isdoubtful) and a general 10 percent (20percent under the international norms)of the outstanding balance in respectof sub standard assets. The centralbank is in favour of implementing thetime limit of 90 days from April, 2004 sothat the banks would remain competitivein the context of their internationalexposure.

In the light of the NarasimhanCommittee recommendations, from timeto time Reserve Bank of India hasissued the guidelines in respect ofrecognition of non-performing assetsNPAs, their classification andprovisioning, which is summarized asunder.

Standard Assets: which are not non-performing assets -NPAs, but involvebusiness risks.

Sub-standard Assets: From31.3.2005, these are the accounts whichhave been classified as non-performingassets -NPAs for a period less than orequal to 12 months.

Doubtful Assets: - From 31.3.2005these are those accounts which haveremained as sub-standard asset for aperiod exceeding 12 months.

Loss Assets: - Loss assets are thosenon-performing assets -NPA accountswhich are identified by the banks'internal/ external auditors, NationalBank for Agriculture and RuralDevelopment or by Reserve Bank ofIndia on inspection as uncollectible.

Standard assets are treated asperforming assets and the remaining

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Table 2.1Reserve Bank of India's guideline for non-performing assets recognition

Loans & advances Guidelines applicable from 31.3.2001

Guidelines applicable from 31.3.2004

Term loan interest and / or installment remain over due for more than

180 days 90 days

Overdraft / Credit A/c. Remains out of order Remains out of order Bill purchased and discounted remains over due for more than

180 days 90 days

Agricultural loan interest and / or installments remain over due for

Two harvest seasons but not exceeding two and half years

Two harvest seasons but not exceeding two and half years

Other accounts-any amount to be received remains over due for more than

180 days 90 days

Source: Dr. Ch. Rajesham and Dr. K. Rajendar, " Management of NPAs in Indian Scheduled Commercial Banks", Thejournal of Management Accountant, August 2008, Vol.43, No.8, p.602-608

categories of sub-standard, doubtfuland loss assets are known as non-performing assets -NPAs. According toReserve Bank of India directives, allbanks are required to maintain non-performing assets -NPAs both on grossand net basis. It is general practice tonon-performing assets -NPAs in termsof percentage. The table 2.1 will illustratethe Reserve Bank of India's guidelinesfor non-performing assets recognition.Agricultural Advances

The non-performing normsapplicable for agricultural advanceswere revised in July, 2004. Accordingto the revised guidelines, a loan grantedfor short duration crops will be treatedas non-performing assets, if installmentof principal or interest thereon remainsoverdue for two crop seasons and a loangranted for long duration crops will betreated as non-performing asset, if theinstallment of principal and interestthereon remains overdue for one cropseason. For the purpose of theseguidelines, "long duration" crops arethose with crop season longer than oneyear crops, which are not "longduration" crops, are treated as "shortduration" crops.

The crop season for each crop,which means the period up toharvesting of the crops rose, would beas determined by the State LevelBanker's Committee (SLBC) in eachState.

Depending up on the duration of thecrops raised by a farmer, the non-performing asset norms would also bemade applicable to agricultural termloans availed by him. The norms areapplicable to direct agriculturaladvances only. They are not applicablein the case of activities allied toagriculture, such as dairy, poultry,fishery etc.Provisioning Norms on the basis ofAsset Classification

Provisioning is necessaryconsidering the erosion in the value ofthe security charged to the banks overa period of time. Asset classificationwas made for the purpose ofprovisioning. Reserve Bank of Indiaaccepted the recommendations ofNarashimham Committee onprovisioning and advised all the banksto make provision on the basis ofspecified percentage of each categoryof asset. It was stipulated as givenbelow.

Standard assets: The regional ruralbanks have been advised to make ageneral provision for standard assetsat the following rates:a) Direct advances to agricultural and

small and marginal entrepreneurialsectors at 0.25 percent;

b) All other advances at 0.40 per cent.Sub-standard assets: A general

provision of 10 per cent of net

outstanding should be made withoutmaking any allowances for Export CreditGuarantee Corporation guarantee coverand securities available. The 'unsecuredexposures' which are identified as sub-standard would attract additionalprovision of 10 per cent, i.e. a total of 20per cent on the outstanding balance.

Doubtful assets: Provision shouldbe made for 100 per cent of the extent towhich the advance is not covered bythe realizable value of the security towhich the bank has a valid recourse andthe realizable value is estimated on arealistic basis.

In regard the secured portion theprovision is to be made as specifiedbelow:

Doubtful status percentage ofprovisioning assecured portion

Up to one year 20percent>1 £ 3 years 30percent> 3 years 100percent

Loss-making assets: It is advisedby Reserve Bank of India to all banksthat in cases where loss assets are morethan two years old in the books of abank without legal action being initiated,the banks should submit a review noteto their management committee / boardsof directors giving specific reasons asto why steps have not been taken forrecovery. A 100 per cent provisionshould be made for such assets.

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Other purposes: Usually, banks haveretirement benefits namely ProvidentFund Card Gratuity. Now banks havepension schemes also. Most of thebanks have set up recognized Gratuityor Pension Fund to fund the relativeliability. In April, 1992, Reserve Bank ofIndia had advised that any bank, whichhad not set up such fund to estimatesuch liabilities on archival basis andmake full provision for that purpose.Capital Adequacy Norms

Capital signifies the core strengthof an organization. This is truer in caseof banks, because adequate capital notonly infuses depositors' and regulators'confidence but also acts as a cushionagainst possible losses arising out ofnormal risks inherent in banking. Likeall other businesses, banks hold capitalas a buffer against unforeseen losses.

Unlike other enterprises, however,one of the main functions of banks is toperform financial intermediationbetween other participants in theeconomy. Given this key role, trust isessential. To ensure confidence and toprotect the interest of depositors,banking activities are subject tolicensing, to specific regulations and tosupervisions. It is the supervision ofthe banks that has been rise toregulatory capital requirement.Regulatory capital is the minimumcapital that the supervisory authoritiesrequire banks to set aside in order tomeet potential losses. This is meant toensure that the banks can absorb lossesarising from their activities on anongoing basis. A minimum capitaladequacy ratio (ratio of capital to risk-weighted assets-CRAR) of nine (9) percent has been prescribed for allscheduled commercial banks in thecountry under the Basel I framework.

Commercial banks are also set tomove over to the more sophisticatedrequirements under the new capitaladequacy requirements (Basle II).However, no such norms have beenspecified for regional rural banks so far.In the context of the ongoingconsolidation process in the regionalrural bank sector, as a result of which

the regional rural banks are emergingas bigger and stronger banks, a needhas arisen for having appropriate capitaladequacy norms in their case also.Currently, in terms of provisions of theRegional Rural Bank Act, 1976, aregional rural bank can have issuedcapital not exceeding rupees one crore.Apart from this, many of the regionalrural banks received recapitalizationsupport from the shareholders (CentralGovernment, Sponsor bank and StateGovernment) in the 1990's, which havebeen parked in "Share Capital DepositAccount", pending amendment to theprovisions of the Act. It was providedfor the purpose of cleansing the balancesheet of such regional rural banks.Further, 27 regional rural banks havingnegative net worth as on 31st March2007 are in the process of receivingrecapitalization support. However, thecapital base at present is too low andwith increased diversity andsophistication in their activities,regional rural banks will certainly needa larger capital base to be able to takethe risks related to banking.

The Reserve Bank of India in itscircular RBI/2007-2008/218 RPCD.CO.RRB.NO.BC.44/05.03.095/2007-08,Dated December 28, 2007 sent to theChairmen of all Regional Rural Banksabout Mid-Term Review of AnnualPolicy Statement for the year 2007-2008regarding Application of CapitalAdequacy norms to Regional RuralBanks highlighting the recommen-dations of the Internal Working GroupCommittee, that the Internal WorkingGroup on Regional Rural Banks(Chairman: Shri A.V.Sardesai) hadrecommended that "Regional RuralBanks may be advised to maintain aminimum level of capital to risk-weighted assets ratio (CRAR) whichwould be progressively raised to thecurrent level of CRAR as per the Basle Inorms. At present, capital adequacynorms are not prescribed for RegionalRural Banks. In order to furtherstrengthen the capital structure and thesoundness and stability of RegionalRural Banks in the context of financial

stability of the whole system, it isproposed that: "Regional Rural Banksshould disclose the level of CRAR ason March 31, 2008 in their balancesheets as "Notes on Accounts",Regional Rural Banks should furnish anannual return to Reserve Bank of IndiaRegional Office / National Bank ofAgriculture and Rural DevelopmentRegional Office, indicating capital fundsand risk assets ratio. The return shouldbe signed by two officials who areauthorized to sign the statutoryretur11ns submitted to the ReserveBank and a road-map may be evolvedfor achieving the desired level of Capitalto Risk-weighted Assets Ratio (CRAR)by these banks".

The Committee on Financial SectorAssessment had suggested a phasedintroduction of Capital to Risk-weightedAssets Ratio (CRAR) in Regional RuralBanks, along with the recapitalization,after consolidation of these entities.

It was, therefore, announced in theAnnual Policy Statement for 2009-10 tointroduce Capital to Risk-weightedAssets Ratio (CRAR) for Regional RuralBanks in a phased manner, taking intoaccount the status of recapitalizationand amalgamation. A time-table for thispurpose would be announced inconsultation with National Bank forAgriculture and Rural Development.Accordingly, National Bank forAgriculture and Rural Development hasbeen advised to constitute a WorkingGroup to suggest bank-wise actionablemeasures for Regional Rural Bankswhich had Capital to Risk-weightedAssets Ratio (CRAR) less than one percent as on March 31, 2008 so that theycould achieve the target of seven percent by March 2010.

"On the basis of the recommen-dations of the Committee on FinancialSector Assessment Chairman: Dr.Rakesh Mohan and Co-Chairman: ShriAshok Chawla, the Annual PolicyStatement of April 2009 proposed tointroduce Capital to Risk-weightedAssets Ratio -(CRAR) for Regional RuralBanks in a phased manner, taking intoaccount the status of recapitalisation and

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amalgamation. The Government of Indiahas constituted a Committee under theChairmanship of Dr. K.C. Chakrabartywith represen-tatives from theGovernment, sponsor banks, RegionalRural Banks and the National Bank forAgriculture and Rural Development toexamine the financials of the RegionalRural Banks and suggest a roadmap toraise the Capital to Risk-weighted AssetsRatio -(CRAR) of Regional Rural Banksto nine per cent by March 2012. TheCommittee is expected to submit itsreport by end-January 2010.

Dr. D. Subbarao, Governor, ReserveBank of India has said at the time ofmeeting to announce the Annual Policy2009-2010 that the "phased introductionof capital to risk-weighted assets ratio(CRAR) to the regional rural banks by2012.Disclosure Norms

At present, investments of bankscomprise Statutory Liquidity Ratio(SLR) securities and non- StatutoryLiquidity Ratio (Non-SLR securities).These investments are classified in the

balance sheet, for the purpose ofdisclosure, under five groups namely

i) Government securities,ii) Other approved securities,iii) Shares,iv) Debentures and Bonds andv) Others (like Commercial Papers,

Mutual Fund units, etc.). While the firsttwo classifications represent the banks'investments in Statutory Liquidity Ratiosecurities, the others represent non-Statutory Liquid Ratio securities.Investments should be shown in thebalance sheet net of depreciation.Banks are also required to classify theirentire investment portfolio under twocategories, namely permanent andcurrent. The entire Statutory LiquidityRatio portfolio can be classified aspermanent, while the entire non-Statutory Liquidity Ratio would beclassified as current. Implementation ofPrudential Norms on regional ruralbanks led them for a better growth andprospects. Table 2.2 indicates theregional rural banks' important key

indicators for the pre-implementationstage up to 1996 and for the selectedyears in the post-implementation stage.

It is evident from the table 2.2 thatthere is a reduction in number ofRegional Rural Banks from 196, 133, 96,91, to 86 shows that the Government ofIndia has taken necessary steps for thedevelopment of the regional rural banksin consultation with Reserve Bank ofIndia and National Bank for Agricultureand Rural Development to improve theoperational viability of the regional ruralbanks by merging/ amalgamating theloss making regional rural banks asrecommended by various committees.Increase in number of districts coverageis due to financial inclusion to reach theun-reached villages. Increase indeposits-collected shows the effectivecustomer's service rendered by theregional rural banks and the availabilityof potential customers. Increase inborrowings shows the efficientperformance of lending to more numberof customers.

Contd. on Page 500

Table -2.2KEY PERFORMANCE INDICATORS

Sl.

No. Key Indicators 1995 2004 2005 2006 2007 2008 2009 P

1. No. of RRBs 196 196 196 133 96 91 86

2. No. of District Covered 425 518 523 525 534 534* 534*

3. Deposits Collected (Rs. In Crores) 11,141 56,350 62,143 71,329 83,143 99,093 1,14,317

4. Borrowings (Rs. In Crores) 2,274 4,595 5,524 7,303 9,776 11,494 12,250

5. Investments (Rs. In Crores) 6,128 36,135 36,761 41,182 45,666 48560 51,159

6. Loans Receivable (Rs. In Crores) 6,291 26,114 32,870 39,713 48,494 58,984 65,841

7. Loans Disbursed (Rs. In Crores) NA 15,579 21,082 25,427 32,067 38,582 38,581

8. C-D Ratio (in percentage) 56 46.34 52.89 55.68 58.50 NA NA

9. No. of RRBs having accumulated losses (Rs. In

Crores)

175 33 30 22 39 36 35

10. Accumulated Loss in percentage NA 3.9 3.5 2.9 2.9 NA NA

11. No. of RRBs earned profit 32 163 166 111 81 82 81

12. Net Profit earned (Rs. In Crores) NA 769 748 617 926.40 1,328 1,712

13. NPA to loans outstanding in percentage 43 8.55 8.53 7.28 6.55 6.05 5.58

Source : Arranged from various pages available in the website of Reserve Bank of India www.rbi.org.in. p- Provisional, * Expected

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Advancement to FellowshipDate of Advancement :10th March 2010

M/5006Shri Madhava Rao S. Mankal,BCOM, FCA, CMA(USA),FICWA7476, Sungold Avenue, Corona,California 92880

M/6060Shri K. Sekar,BE(MECH), FICWADirector (Finance), NeyveliLignite Corporation Ltd.,Corporate Office, Block 1,Neyveli 607801

M/7455Shri Vinay Kumar Mittal,MCOM, FICWADy. General Manager (Fin.),N.T.P.C. Ltd., BadarpurThermal Power Station,Badarpur,New Delhi 110044

M/8430Shri Ramamohana Rao Sure,BCOM, FICWAB-103, Jaideep Apartments,Nafat Ring Road, Jaripatka,Nagpur 440014

M/8482Mrs. Lakshmi PravinDeosthalee,MCOM, LLB, ACS, FICWADy. Chief Accounts Officer,Mumbai Port Trust, AccountsDept., Port Bhavan, BhoorjiVallabhdas Marg, BallardEstate, Mumbai 400001

M/8582Shri Chandra Shekhar Verma,MCOM, LLB, MBA, ACS,FICWADirector (Finance), BharatHeavy Electricals Ltd., BHELHouse, Siri Fort,New Delhi 110049

M/9419Shri S. Sridhar, BCOM, FICWAFlat No. 603, Royal Residency,Sector - 5, Opp. RailwayStation, Koparkhairne, NAVIMUMBAI 400709

M/9712Shri Parimal Das,MCOM, FICWAF-02, Indraprastha Apartment,114, I.P. Extension, Patparganj,Delhi 110092

M/10139Shri Jagdish Chand Bhatia,BSC, FICWAHouse No. 243, AdvocatesSociety, Sector-49A,Chandigarh 160047

M/10607Shri Abhijit Ghose,BCOM, LLB, FICWABranch Head & Vice President,Axis Bank Ltd., MuktiChambers, 4, CliveRow,Kolkata 700001

M/12416Shri L. Rajendran,MCOM, FICWAManager (Cost), NationalTextile Corpn. Ltd., SouthernRegional Office, 35-B,Somasundaram Mills Road,Coimbatore 641009

M/12690Shri Zacharia Avirah,BCOM, FICWA8741, Contee Road, #204,Laurel, Maryland 20708

M/14513Shri A. S. Nageswar Rao,BSC, MA, FICWAChief Manager, Karur VysyaBank, CPC-Loans, 5-8-363(First Floor), Chirag Ali Lane,ABIDS,Hyderabad 500001

M/15318Shri H. Balaprakash,MCOM, BL, FICWA37, Thanigachalam Nagar,Ponniammen Medu Post,Chennai 600110

M/15528Shri Parag Gundaji Rane,MCOM, FICWAAssociate Dean, The ICFAINational College, R.O.,Maharashtra West, 5th & 6thFl., Block III, LlyodsChambers, 409, MangalwarPeth, Near Ambedkar Bhawan,Sassoon Road,Pune 411011

M/15661Shri Biswajit Nandy,BCOM, FICWAB. N. & Co., 1, Daw Lane,Kolkata 700005

M/15870Dr. Harish Kumar Singhal,MCOM, PHD, MBA, FICWAC-205, Aster, Valley ofFlowers, Thakur Village,Kandivali (E),Mumbai 400101

M/16039Shri Rajan Narayan,MCOM, FICWADy. Manager (Finance),NHPC Ltd., TLDP-III, Rambi,Reang, Darjeeling 734321

M/16263Shri Hruday Ranjan Biswal,MCOM, FICWAAudit Officer (Commercial),O/o. The Accountant General(CW & RA), Orissa, AuditDepartment,Bhubaneswar 751001

M/17712Mrs. Vandana Nikhil Sohoni,BCOM, FICWA6, VishwasCHS, V.M. Ghanekar Marg(Azad Road), Vile Parle (East),Mumbai 400057

M/18836Shri Indrasen Singh,MCOM, LLB, ACS, FICWADy. Manager (Fin. & Accts.) &Dy. Co. Secretary, BharatPumps & Compressors Ltd.,Naini, Allahabad 211010

M/18904Shri Ananthan Puliyath,MCOM, FICWAPuliyath House, Mukkattukara,Nettissery 680657

M/22200Shri Hari T. Devadiga,BCOM, FICWANo. 3, DeviKrupa, 7th Main, III Phase,Ayappa Nagar, K.R.Puram,Bangalore 560036

M/22827Shri Anirudh Joshi,BCOM, FICWAAnirudh Joshi & Associates,B-12, 203, Railway Road,Opposite Shastri Market,Hoshiarpur 146001

M/23321Shri Arup Kumar Maity,MCOM, FICWAA.K. Maity & Associates, C/o.Shri Biswanath Chakraborty,Nabagram ̀ C` Block,P.O. Barabahera,Konnagar 712246

M/23825Shri Brijendra Mohan Bali,MCOM, FICWAK-332, Kangra Niketan, OuterRing Road, Vikas Puri, NewDelhi 110018

M/24191Shri Pankaj Sharma,MCOM, LLB, FICWASr. Finance & Accounts Officer,O.N.G.C. Ltd., KDMIPE (F&ASection), 9, Kaulagarh Road,Dehra Dun

Admission to Membership

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494 the management accountant, June, 2010

M/24258Shri Mohan Sharad Bhombe,BSC, LLB, FICWAMohan Bhombe & Co., 201,Mahak Apartment, NearShramik Balaji Chowk,Bhistbag Road, Savedi,Ahmednagar 414003

M/24343Shri A. Arjunan,MCOM, FICWAFinance Officer, AnnaUniversity, Tirunelveli, Govt.Engineering College Campus,Tirunelveli 627002

M/24500Shri Yashpal Singh Rawat,MCOM, LLB, MBA(FIN),FICWA5/143, DDA Flat, Garhi, Eastof Kailash, Lajpat Nagar, NewDelhi 110065

M/24615Shri Mantu Kumar Ghosh,BCOM (HONS), FICWASr. Manager - Finance &Accounts, Abir InfrastructurePvt. Ltd., 143-144, Phase IV,Udyog Vihar,Gurgaon 122015

M/24675Shri B. Subramanian,BCOM, FCA, FICWAChief Financial Officer,Starmark Services Pvt. Ltd.,#3, 80 Feet Road, Indira Nagar,Bangalore 560038

M/24704Dr. Ashish Varma,PHD, FICWA1502, Sector-37, Noida201303

M/24727Shri Amit Budhiraja,BCOM(HONS), FCA,FICWAHead Finance, MenariniRaunaq Pharma Ltd., B-16, 1stFloor, B1, Community Centre,Janak Puri, New Delhi 110058

M/24797Shri Ravi Shekhar Tiwari,BSC, FICWAAsst. Professor & HOD(MBA), Accurate Institute ofManagement & Technology,49, Knowledge - III, GreaterNoida 201306

M/24860Shri Santanu Kumar Panigrahi,BCOM, FICWAFinance Officer, HindustanAeronautics Ltd., EngineDivision, Sunabeda 763002

Admission to Associateshipon the basis of MOU withIMA, USADate of Admission :12th February 2010

C/28755Mr. Muralidharan PuthanMadathil,BSC, CMA(USA), CFM,AICWAGroup Finance Manager, AlGhandi Investment Co. LLC,P.O. Box 1034, Dubai, U.A.E.

C/28756Mr. Prashanth Shenoy,BCOM, ACA, CMA(USA),CFM, AICWAFinance Manager, Injazat DataSystems LLC, P.O. Box 8230,Abu Dhabi, U.A.E.

C/28757Mr. VaidyanathanUmamaheswaran,BCOM, MBA, CMA(USA),AICWANo. 7, Al Kharbash Building,Behind Sea Rock, Karama, P.O.Box 14662, Dubai, U.A.E.

C/28758Mr. John Mario Furtado,MCOM, CMA(USA), CFM,CPA, AICWAHead-Operations, IT &Finance, Ahli CapitalInvestment Company, AhemadAl Jaber Street, P.O.Box 1387,Safat 13014, Kuwait

C/28759Mr. Thomas Vettickal Issac,MCOM, CMA(USA),AICWAHead of Accounts, Al SafatInvestment Co. KSCC, Floor13, Al Qebla Al KharafiTower, Kuwait City, P.O.Box 20133, Safat13062Kuwait

Admission to AssociateshipDate of Admission :10th March 2010

M/28760Shri Vinod Das,BCOM(HONS), AICWAC/o. S. B. Duttagupta Sri SriRam Villa, Ananda Pally,Green Row,Kolkata

M/28761Ms Somela Khastgir,BCOM, AICWA5/57, Mordicai Lane, PlotNo. 73 Old, Saheb Bagan,Chatakol, Dum Dum,Kolkata700074

M/28762Ms Manisha ShyamkumarLulla, MCOM, AICWAA 1, Panchesheel Nagar,Behind Sindhi Colony,Aurangabad 431005

M/28763Shri G Giridhara Gopal,BE, AICWAOld No. 14, New No. 10, 3rdCross Street, New ChinniahColony, Perambur,Chennai 600011

M/28764Shri Veeraswamy Padidam,MCOM, AICWAC/o. K B Traders, No. 26/2/695, 50 Feet Road,Hanumantha Nagar,Bangalore 560031

M/28765Ms Neetu Chauhan,MCOM, AICWAC/o. Siddhartha Singh, C-332,East End Appartment, MayurVihar, Phase - I, Delhi

M/28766Shri Nitin Choudhary,BCOM, AICWAB-118/A, Street Harshabardhan,North Ghonda, Delhi 110053

M/28767Shri Satya Narain Garg,BCOM, AICWAPost Box 22590 Doha QatarDoha

M/28768Miss S Vanitha,BCOM, MBA, AICWA2/438, Angayar Kanni Nagar,Thanakkankulam Post,Madurai 625006

M/28769Shri Jyoti Ranjan Sahoo,BCOM, AICWANew No. 30/1, 1st Floor, 2ndStreet, Veerapandian Nagar,Choolaimedu,Chennai 600094

M/28770Shri Banda Sridhar Rao,BTECH, AICWA202, Jayshree Mansion, StreetNo. 8, Gandhi Nagar,Hyderabad 500080

M/28771Shri S Sankara Narayanan,BCOM, MBA, AICWAFlat No.505, Zenith Block, SunCity Apartment, Outer RingRoad, Near SarjapurJunction,Bangalore

M/28772Shri Ahire Manoj Uttamrao,BCOM, CMA(AUS), AICWA5, Krishinagar Hsg. Society,Behind HPT College, CollegeRoad, Nasik 422005

Admission to Membership

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the management accountant, June, 2010 495

M/28773Shri AdithyanarayananTripunithura Subramanian,BCOM, AICWA4 B 306, Dheeraj Enclave,Siddarth Nagar, Borivali (E),Mumbai

M/28774Shri Shah NevilkumarHasmukhbhai,MCOM, AICWAD-91, Swagat Duplex, NearMuktinagar, Tandalja Road,Vadodara 390020

M/28775Ms Manisha Sambhaji Daine,BCOM, AICWAJay Maharashtra Chawl No.11, Indira Nagar No. 02,Ghatkopar (West),Mumbai 400086

M/28776Shri Chittaranjan Satpathy,MCOM, AICWAC/o. Niranjan Satpathy, PressColony, Qrt. No. 2R/96,Madhupatna, Cuttack 753010

M/28777Shri Ravi Siravuri,MCOM, AICWAFlat No. 103, Plot No. 148/1,Lalitha Nilayam, KalyanNagar, Hyderabad 500018

M/28778Shri Satya Narayan Mundra,MCOM, LLB, AICWAH. No. - F2, Lenox Co-op.Hsg. Society, Nr. G I L Colony,G I D C., Ankleshwar,Ankleshwar 393002

M/28779Shri T. V. Subramanian,BCOM, FCA, AICWANo.1, Lakshmi Nivas,Gokulam Third Stage, ThirdCross, Mysore 570002

M/28780Shri T.V. Venkataraman,BCOM, AICWA20/401, "Kusumgiri",Siddhachal Phase - III, OffPokhran Road 2,Thane (West) 400610

M/28781Shri M. Yuvaraj,BCA, AICWANo. 42 "C" Cross, AnnaiahReddy Layout, DoddaBanqswadi, Bangalore 560043

M/28782Shri C.S. Sendhil Kumar,BSC, AICWAFlat No. 110, MahaveerSeasons, 24th Main, Sector - 2,H S R Layout,Bangalore 560068

M/28783Shri Rakesh Kumar Selarka,MCOM, AICWAC/o. B. Chanda (SBI Officer),Adrash Nagar, ChateAtarmuda, Raigarh 496001

M/28784Shri Surya Ram Verma,BCOM, AICWADPMU - NRHM / CMOOffice, Khalilabad, Sant KabirNagar Sant Kabir Nagar272175

M/28785Ms. Deepa Oberoi,BCOM(HONS), AICWAFinance Executive, HSBC,Unitech Commercial Complex,Block - B, Greenwood City,Sector 45,Gurgaon 122001

M/28786Mrs S. Kousalya,MCOM, MBA, AICWANew No. 139, Old No. 78,Kumarappa Street,Nungambakkam,Chennai 600034

M/28787Ms Chandana Das,MCOM, AICWAC/o. Late Kailash Ch. Das,House No. 207, Rupnagar,Guwahati 781032

M/28788Shri Tanikella Kiran Kumar,BCOM, AICWAH. No. 8-12-3/2, Police ClubStreet, Gandhi Nagar,Kakinada,Kakinada 533004

M/28789Shri Santosh Pandey,BCOM, AICWASr. M I G - 86, Sector - 3, Pt.Deendayal Upadhyay Nagar,Danganiya, Raipur 492001

M/28790Shri Sudip Gangopadhyay,BCOM, AICWAFlat : H-2, Phase - IV,Pramukh Vihar, Naroli Road,Silvassa, U.T. of Dadra &Nagar Haveli,Silvassa 396230

M/28791Shri Sushant ChandrakantKatikeri,MCOM, AICWASr. No. 40-1/2/3, Rutuparna -PMC Building, D P Road,Kothrud,Pune 411029

M/28792Shri Ram Jeevan Chaudhary,MCOM, MBA, AICWAH. No. 56, Ground Floor,Yamaha Vihar, Sector-49,(Near Barola Village),Noida201304

M/28793Shri Dilli Bharath Reddy,BCOM, AICWAH. N0. 1-15, Thatti Annaram(V), G.S.I.(P), Hayathnagar(M), R. R. Dist.,Hyderabad 500068

M/28794Shri Vaidyanathan NeelakantanIyer, BCOM, AICWAB - 204, Vrindavan Towers,Sector - 9, Plot - 52, KhandaColony, New Panvel(West) 410206

M/28795Shri Hemant Mundhra,BCOM(HONS), ACA, AICWAAl Shraifi Centre, Opp. KaramaPost Office, Karama, P.O. Box122657, Dubai

M/28796Shri Rajat Kumar Rath,BCOM, AICWAGalaxsy Towers, ThurayaTelecommunications, Tecom ALBarsha, Dubai, United ArabEmirates-283333Dubai

M/28797Shri Sudhir Aggarwal,BCOM(HONS), FCA, AICWASamynk & Co., 41, ConvenientShopping Complex, A-4 TriveniMarket, Paschim Vihar,NewDelhi 110063

M/28798Mrs Nomita Ajay Agrawal,MCOM, AICWA84 - E, Ground Floor,Dasturwadi, Naigaum CrossRoad, Dadar - East,Mumbai 400014

M/28799Shri Subhabrata Basu,BCOM, AICWAP-31, Southend Gardens, Garia,Kolkata 700084

M/28800Ms. R.R.N. Chandra Lekha,MCOM, AICWA34-32, Venkateshwar Nagar,Jagathgiri Gutta,Hyderabad 500037

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M/28801Shri Kanhaiya Gupta,BCOM(HONS), AICWA87, Balram Dey Street,Kolkata 700017

M/28802Ms Archna Gupta,BCOM, LLB, AICWA"Aashirwaad", 145, DurgeshVihar, J. H. Road, NarelaShankari, Bhopal 462023

M/28803Shri K. S. Ganesh,BSC, AICWAD-15, SPIC Nagar,Tuticorin 628005

M/28804Shri Darpan Gupta,BCOM, AICWA489, Bholanath Nagar, NearBaburam School, Shahdara,Delhi 110032

M/28805Shri Radhakant Mishra,MCOM, AICWA4/125, Viram Khand, GomtiNagar, Lucknow 226010

M/28806Shri Nagarajan Ramesh,BCOM, AICWA33, Covebrook PL NE CalgaryAB Canada T3K 0C8Calgary Alberta

M/28807Shri Ketan Bhagvanlal Parekh,ME, AICWAB/11, Gangotri Duplex, Opp.Yash Complex, Gotri, NearVuda Flats,Vadodara 390021

M/28808Shri Surya Prakash Paidi,BCOM, AICWADevi Sea Foods Ltd., NH-5,Peravali Road, Tanuku, Dist-West Godavari,Tanuku 534211

M/28809Shri Gujjari Venkata AnjenayaSiva Prasad,MCOM, AICWANo. 89, S. S. Nivas, IInd Main,Bharathi Layout, S. G. Palya,Bangalore 560029

M/28810Shri P. Raja, BCOM, AICWAKaluumadayil Veedu, KD PlotP.O., South Kalamassery,Ernakulam 683109

M/28811Shri M. Ranga Reddy,BCOM, FCA, ACS, AICWADoor No. 659, 24th MainRoad, Ideal Homes Township,Raja RajeswariNagar,Bangalore 560098

M/28812Ms Shilpa Shashikant Shinde,MCOM, AICWASiddhivinayak Apt., AIG-3,Beherampur, Umeleman, VasaiRoad (W), Dist- Thane,Thane 401202

M/28813Ms Shubhangi DattatraySoman,MCOM, AICWA401, Vasudeo - Lakshmi C HS., Kelkar Road, Ramnagar,Dombivali (E), Tal : KalyanDist - Thane,Dombivli (East) 421201

M/28814Shri Sudhir Raghunath Shirole,BCOM, AICWA501, Godavari, Behind PoonamPetrol Pump, Sion TrombayRoad, Chembur,Mumbai400071

M/28815Shri Ran Vijay Singh, BCOM,AICWA4/125, Viram Khand, GomtiNagar, Lucknow 226010

M/28816Shri T. R. Vijay,BCOM, AICWA14, Daniel Street,Adambakkam,Chennai 600088

M/28817Shri Athem MalikB.M., MCOM, AICWA14/185, PO - ArakkinarCalicut 673028

M/28818Shri Amit Arora,BCOM(HONS), AICWADA - 175, Shalimar Bagh,Delhi 110088

M/28819Shri Balasubramaniam A,BCOM, AICWAE - 1, Kailash Apartment,8th Main Road,Malleswaram,Bangalore 560003

M/28820Shri Kaustuv Banerjee,BCOM, ACA, AICWA1 D, Rathborne Avenue,Ashtown, Dublin ,D15Republic of Ireland

M/28821Shri Dipak Bhadra,BSC, LLB, AICWA126, Bangur Avenue,Block - C, Kolkata 700055

M/28822Mrs Rupali Yogesh Diwan,BCOM, AICWA34199 Cromwell PLFremont, CA, U S A., 94555

M/28823Shri Lester Fernandes,BCOM, AICWA5148 Parkplace Circle,Mississauga, Ontario,Canada, L5V 2M2

M/28824Shri Arup Bishnu Ganguly,BCOM, ACA, AICWA4080 Living Arts Drive, Apt1101, Mississauga, Ontario,Canada, LSB4M3Ontario

M/28825Shri Ghanshyam Goyal,MCOM, AICWA43B, Ground Floor, IndraprasthaColony, Sector - 30/33,Faridabad 121001

M/28826Shri Gadepally Anil Kumar,MCOM, AICWAPlot No. 246, Sector-1,Ghansoli, NAVIMUMBAI 400701

M/28827Shri Kanti Lal Jain,BSC, LLB, AICWAH/o. Govind Cottage, ChhotaPara, Raipur 492001

M/28828Shri Ajay Ganpat Kadam,BCOM, AICWA601/A, Prafulla Co-op. Hsg.Society, Anant Ganpat PawarLane, Byculla, Mumbai 400027

M/28829Shri Biman Behari Mandal,BCOM, AICWAShree Ganesh Gouri Apartment,B/605, 6th Floor, GumustaLayout, Nagpur 440015

M/28830Ms Tripti Mehrotra,BCOM(HONS), AICWAFlat No. A3/G3, BidyakutAbasan, Narayanpur, PO. - R.Gopalpur,Kolkata 700136

M/28831Shri Rangeet Mitra,AICWA46, Richmond Road, House ofWills, 1st Floor,Bangalore 560025

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M/28832Shri P. K.. Prasad,MCOM, ACS, ACA, AICWANew No. 38, Old No. 19,Nammalwar Street, EastTambaram, Chennai 600059

M/28833Shri Abhishek Ranga,BCOM(HONS), AICWA11/1, Watkins Lane,Sohandeep Building,Block-B, 5th Floor,Howrah 711101

M/28834Shri Robin Singh,BCOM, AICWAG - 2, Sector - 56,Noida 201301

M/28835Shri Sandip DnyaneshwarTathe,MCOM, AICWAB-10, 1/1 Sandipani C H GSociety, Income Tax Colony,Sector - 21/22, C.B.D.Belapur NAVIMUMBAI 400614

M/28836Shri Anoop KumarUpadhyaya,BCOM, AICWA3/204, Vipul Khand, GomtiNagar, Lucknow 226010

M/28837Shri S. Venkataraman,BSC, ACA, AICWA9, Mylai Ranganathan Street,T. Nagar, Chennai 600017

M/28838Ms Neha Verma,AICWA7, Burnt Salt Gola Lane,Near Howrah A.C. Market,3rd Floor,Howrah 711101

M/28839Shri Suresh Kumar VarmaGadhiraju,MCOM, MSC, MBA,AICWAFlat No. 213 A, Block-C, Sri Sai Krupa Apartment,Madinaguda,Hyderabad 500050

M/28840Shri Vikas Radha Damodaran,BSC, AICWANo. 1, Darshan Mansion,Arogyappa Layout,Kammanahalli Circle, Bangalore

M/28841Shri Raman Ranjan Das,BCOM(HONS), AICWAS/O. Gourhari Das At/Po.Aurobind Nagar - 2nd Lane, H.No. A- 2/3, Dist -Ganjam,Berhampur 760001

M/28842Mrs Gayake CharusheelaRavindra,MCOM, AICWAB - 3, 28, Sadbhav Apartment,Mahatma Society, VrindavanPark, KothrudPune 411029

M/28843Mrs Gandavarapu Kaivalya,MCOM, AICWAFlat No. 402, ChakkilamEstate, 10-2-289/50, ShantiNagar, Masab Tank,Hyderabad 500028

M/28844Shri Mohd Aarif,BCOM, AICWAC/o. R. A. Hashmi, D-18,(Near Dr. Basudev Clinic),Sarvodaya Nagar,Lucknow 226016

M/28845Mrs Nandipati Aruna,MCOM, AICWAW/o. K. Ashok Reddy,55-42-6/3, Seethammadhara,Visakhapatnam 530013

M/28846Shri Pathapati Srikanth,BCOM, AICWAS/o. P. Venu Gopala Rao,Zonnawada Road, BuchiReddy Palem,Dist - Nellore,Nellore 524305

M/28847Shri Parwez Alam,MCOM, AICWAH/o. Abdul Azim,In Front of F.C.I. Godown,Jamia Nagar,KadruRanchi 834002

M/28848Shri Chandan Singh,BCOM(HONS), AICWAP - 34, Hide Road,Kolkata 700043

M/28849Ms Srividhya B, BCOM,MFM, AICWAOS-19, Ground Floor,Sundar Nagar, 3rd MainRoad, Gukula,Bangalore 560054

M/28850Ms Dheepa Ramani,BCOM, AICWA10857, Muirwood Way NE,Redmond,WA 98053 Redmond

M/28851Shri Sanjoy Bhattacharjee,BCOM(HONS), AICWA9, Goutam Buddha Marg,C - Zone, DurgapurDurgapur 713212

M/28852Shri Panchanan Barik,MCOM, LLB, AICWALIG - 976, Kalinga Vihar,PO- Patrapada,Bhubaneswar 751019

M/28853Ms Anju Kumar Balan,BCOM, AICWAFlat - 6, Ibrahim Qasim Building,AL Musala Road,Bur Dubai, P.O. Box18001Dubai , U A E.

M/28854Shri ChandrashekarC, BCOM, AICWA# 473, 3rd Main Road,Sreenagar, B. S. K. I Stage,Bangalore 560050

M/28855Shri Dibyo Chakraborty,BCOM(HONS),MBA(UK), AICWA27 Orkneej Avenue, Aberdeen,United Kingdom AB166QGAberdeen

M/28856Shri Sumit Chatterjee,BCOM(HONS), AICWAUnit 2311, 350 WEBB Drive,Mississauga, ON,L5B 3W4 Mississauga

M/28857Shri Ashwani Churiwala,BCOM(HONS), AICWAFlat No. B-44, C.I.T. Building,Singhi Bagan, 7/1, RajendraMullick Street,Kolkata 700007

M/28858Shri Vivekananda Datta,BSC(HONS), AICWA1A/48, Aurobinda Avenue, A -Zone, DurgapurDIST - BurdwanDurgapur 713204

M/28859Shri Sumanta Das,BSC, AICWA29/5/12, Ranapratap Road,A - Zone, Durgapur, DIST -Burdwan,Durgapur 713204

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498 the management accountant, June, 2010

M/28860Ms Raksha Jain,MCOM, MBE, AICWAC/o. Shyam Karan Rai, 1391/18, Opp. Panna Lalji MaliKi Badi, New Bhupalpura,Kharakua,Udaipur

M/28861Shri M. Vinod Kumar,MCOM, AICWA114, Tagore Nagar Phase-III,Khajuri Kalan Road,Near SOS Village,Piplani,Bhopal 462021

M/28862Shri Anil Kumar Kedia,BCOM, AICWA"KRISHNA TOWER"Block - II, Flat No.-102,42, Sree Charan Sarani,PO - Bally,Howrah 711201

M/28863Shri Sujit Misra,BSC, AICWA14/37, Secondary Road,PO - Durgapur, DIST.Burdwan Durgapur 713204

M/28864Shri Krit Narayan Mishra,BCOM(HONS), ACA,AICWAF - 29 (Ground Floor),Near Derawala Bhawan,Kirti Nagar,New Delhi 110015

M/28865Shri Dusmanta Kumar Mishra,BCOM(HONS), AICWAPlot No. 437, At - Nuasahi,Post - Nayapalli,Bhubaneswar 751012

M/28866Ms Sudakshina Das Gupta,MCOM, AICWA73B Baburam Ghosh Road,Tollygunge,Kolkata 700040

M/28867Shri Nirmal Kumar Mandal,BCOM(HONS), AICWA4 No. School Road,Pramathanagar, Parsudih,PO - Tata Nagar,Jamshedpur 831002

M/28868Ms Mousumi Pachal,BCOM(HONS), AICWA10/12 Kasundia Lane,PO - Santragachi,Howrah 711104

M/28869Shri Dhruba Jyoti Roy,BCOM, AICWA8/13, Derojio Path, S.A.I.L.Co-operative, City Centre,Durgapur, Dist - Burdwan,Durgapur 713203

M/28870Shri Kondala Rao Palisetti,AICWA# 17/45, TipparajuVari Street,Nellore 524001

M/28871Shri Mahesh Sodhani,BCOM(HONS), ACA,ACS, AICWAP - 79, Block - B,Lake Town,Kolkata 700089

M/28872Shri Abir Sharma,BCOM(HONS), AICWAFlat No. 77D, Sector - 6,Pocket - 2, Dwarka,New Delhi 110075

M/28873Shri Ram Kamal Saha,BCOM, AICWAQtr. No. 3035, Sector - 4F,Bokaro Steel City 827004

M/28874Ms Sumita Sen,BCOM, AICWAC/o. Santanu Sengupta, 5/6A, Netaji Nagar, Tollygunge,Kolkata 700040

M/28875Shri Pradeep Tiwari,BCOM, CPA, AICWAType IV 5/29, RCF Colony,Chembur, Mumbai 400074

M/28876Shri China VengaiahNukaraju,BCOM, AICWA# 17/45, Tipparaju VariStreet, Nellore 524001

M/28877Shri Prabhash Verma,BSC, AICWA532 K / 156, ManjulaPrinters, Pandeytola, Aliganj,Lucknow 226022

M/28878Ms Seema Verma,BCOM, AICWAPlot No. 159/A, Nayapalli,Near Kalinga Stadium,Bhubaneswar 751012

M/28879Shri Pradip Kumar Sarkar,BCOM(HONS), AICWA60 St. Pauls Road, A - Zone,Durgapur 713204

M/28880Ms Kavita Goel,MCOM, MPHIL, PHD,AICWAB-199, Lok Vihar, PitamPura, Delhi 110034

M/28881Shri Vikrant Bansal,BCOM, AICWAHouse No.1504, Street No.15, Gurbax Colony,Patiala 147001

M/28882Shri Sumit Goel,BCOM, AICWAB - 26, Sanjay Enclave,Uttam Nagar,New Delhi 110059

M/28883Shri Aditya Jhingan,BCOM, AICWA429, Shalimar Garden,Extn. - I, Sahibabad,Ghaziabad 201005

M/28884Ms Saini Rajwant Kaur,MCOM, AICWA163, Ahluwalia Colony,Ludhiana 141010

M/28885Shri Neeraj Kumar Jindal,MCOM, AICWAHouse No. E-2/62, Sultan Puri,New Delhi 110086

M/28886Shri Vineet Mishra,BCOM, AICWAD-118, IIIrd Floor,Savitri Bhawan, Shakerpur,Delhi 110092

M/28887Shri Deeptanshu Pareek,BCOM, AICWAH No.- 4844, K.G.B.Street,Sotijon Ka Mohalla, JohariBazar, Jaipur 302003

M/28888Shri Surya Kant Lal,BCOM(HONS), AICWAWP-23C, Pitampura,Delhi 110034

M/28889Shri Ravi Srivastava,AICWASector - 14,H. No. 740, Indira Nagar,Lucknow 226016

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the management accountant, June, 2010 499

M/28890Shri Subhash Earath,BCOM, AICWAC - 30, Hemavathy,B A R C Quarters, NewMandala, Anusakthi Nagar,Mumbai 400094

M/28891Mrs Gandi Saroja,BCOM, MBA, AICWAE-5/1, Flat No. 6,Nisarg Co-op Housing Society,Sector - 48 A, Nerul,NAVI MUMBAI 400706

M/28892Shri Hradesh Tiwari,BCOM, AICWAC/o. Narinder Singh,Kothi No. 279, Phase - II,Mohali 160055

M/28893Shri Sachin Verma,BCOM(HONS), AICWA257, Om Vihar,Phase - 1A, Uttam Nagar,New Delhi 110059

M/28894Shri Pradeep Yadav,BCOM(HONS), AICWAH No. 1414/3, Street No. 7,Rajiv Nagar,Gurgaon 122001

M/28895Ms Babitha S. Yadav,MCOM, AICWA# 1572, Ist Main Road,2nd Cross,Sanjeevini Nagar,PO - Sahakara Nagar,Bangalore 560092

M/28896Shri Shailesh Kukreti,BCOM(HONS), AICWABlock - 1/5, Arjan Vihar,Delhi Cantt.,Delhi 110010

M/28897Shri Anand Kishore Baheti,BCOM(HONS), AICWA22 - Surya Colony, IstResidency Road,Jodhpur 342003

M/28898Shri Amit Anil Dhanurdhari,BCOM, AICWAA-204, ShivshaktiAppartment, OPP :Vidhyakunj School,Palanpur Jakatnaka Road,Surat 395009

M/28899Shri Kodanda Dhar Jena,BCOM, AICWAPlot No. 1033,Chandimata Colony,Rasulgarh,Bhubaneswar 751010

M/28900Shri Rajendra Marmat,BCOM, AICWAOpp. Achalnath Temple,Katla Bazar,Jodhpur 342002

M/28901Shri Partha Sarathi Parida,MCOM, LLB, AICWAWard No. 5, Bagh,Kishanganga H.E. Project,N H P C Ltd.,Bandipora 193502

M/28902Shri Harshit Kumar Rastogi,BCOM, AICWAAsstt. Manager - Accounts &Costing Earthz Urban SpacesPvt. Ltd., F-7/12, Vasant Vihar,Delhi 110057

M/28903Shri Malay Roy Chowdhury,MCOM, AICWABishpara (Near Water Tank),P.O. Nayasarai, DIST.Hooghly Nayasarai 712513

M/28904Ms Nikita Naimesh Talati,BCOM, AICWA8, Manish Apartment,Zunzar Rao Nagar, ShivajiPath, Kalyan West,Kalyan (West) 421301

M/28905Shri Pawan Kumar Tiwary,MCOM, AICWAL - 4/166, Vinay Khand,Gomti Nagar,Lucknow 226010

M/28906Shri Arup Choudhury,BSC, AICWA41, Kabi Guru Sarani, CityCentre, Durgapur 713216

M/28907Shri Ranjan Kumar,BSC, AICWA"DEEP BHAVAN",Shivpuram, SatipurGanspur - Paniala Road,Roorkee 247667

M/28908Shri Binod Panigrahi,MCOM, AICWAMIGH - 28, Bharat NagarColony, Moosapet,Hyderabad 500018

M/28909Shri Malla Srinivasa Rao,BCOM, MBA, AICWADr. No. 19-159/2, Plot No.128/A, Sri Sai MadhavaNagar, Naiduthota,Visakhapatnam 530047

M/28910Shri Anant Kumar Thakur,BA, AICWAManager-Accounts, VipulLimited, Vipul Tech Square,Sector 43, Golf Course Road,Gurgaon 122009

M/28911Shri Himanshu Verma,BCOM, AICWAAssistant Manager, Max NewYork Life Insurance Co. Ltd.,12th Floor, DLF Square,Jacaranda Marg,DLF City, Phase II,Gurgaon 122002

M/28912Dr. Vishnu Prasanna K.N.,MSC, MA(ECON), MBA,MCA, MBL, MS, PHD,AICWADirector - MBA Program,K.V.G. College of Engineering,Kurunji Bhag,Sullia 574327

M/28913Ms Sanjana Rajesh Chhatlani,BCOM, AICWA502, Kirti Kunj,Plot No. 436, 14th Road,Khar (W),Mumbai 400052

M/28914Shri Nayan Kunvarji Gala,BCOM, AICWA7, 3rd Floor, Dnyan PrasadCo-op Hsg. Society, ManpadaRoad, Opp. Godrej ShowroomDombivli (East) 421201

M/28915Shri Sameer Vithal Gaikwad,BCOM, AICWAB-177/6181, Kannamwar NagarNo. 2, Vikhroli (East),Mumbai 400083

M/28916Shri Kapil Jain,BCOM, ACA, CFA, AICWA502, Jewel Star,Navkiran Marg, 4,Bungalows, Andheri (W),Mumbai 400053

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500 the management accountant, June, 2010

Hike in the investment level expeditethe proper utilization of funds, whichare not issued as loans to customers.Increase in loans receivable is a red alertfor the increase in non-performingassets in future. The regional ruralbanks should take immediate actions torecover the amount lent as loans tocustomers using the Securitization Act.Increase in Profit making regional ruralbanks and decrease in loss makingregional rural banks, however there is areduction in net profit in the year 2007due to operational expenses, whichreveals a fruitful result on their overallperformance.

The banking sector reforms led allthe banks including regional rural banksfor an exemplary performance. In theearly years, the regional rural banksneeded refinance from sponsor bankand National Bank for Agriculture andRural Development to a significantextent to meet the credit demand. Overtime, the deposits of these banks

overtook the lending and the benefitsof the relatively cheap resources wentto sponsor banks. Now the regional ruralbanks avail refinance as borrowingsfrom National Bank for Agriculture andRural Development only where it isconcessional like advances for seasonalagricultural operations and self helpgroups.

Conclusion

Since, India is an agrarian anddeveloping country which is alsoevident from the above, that thesituation makes the decision makers ofcountry to concentrate more on thedevelopment of the rural economy. Atpresent the banking sectors are in acompetitive mood, to some extent theyare in situation to skip the rural areas. Itis identified that the population of theregional rural banks are not in asatisfactory level as well as theperformance of some regional ruralbanks are not satisfactory. It isnecessary to take a decision for the

further better performance of theregional rural banks. The ratio of theregional rural banks- at branch level,comparing with commercial banks maybe fixed as 2:5. The government shouldalso insist the Government, Quasi-Government and Government aidedsector to have their transaction withregional rural banks on the basis of thebranch availability. The Governmentshould have a close watch, whether theschemes announced by the Governmentare merely reaching the rural poor likecoolies, small farmers, artisans etc., ornot through regional rural banks. TheGovernment of India and Reserve Bankof India should work together moreeffectively to develop the socio-economic conditions of the rural poorthrough regional rural banks, becauseit is well said by the Saint PoetThiruvalluvar, in his Thirukkural104:6 (1036), that

"If the farmer's hands slacken, eventhe ascetic's state will fail"q

M/28917Shri Prem Vengad Krishnan,BCOM, MBA, AICWADaffodil Building, Flat-301,"B" Wing, MirchandaniGarden, Sun City, Vasai - West,Thane 401202

M/28918Ms Kiran BhimraoNirbhavane, MCOM, AICWAAL5/32/5, Asmita Apt.,Sector - 17, Airoli, NAVIMUMBAI 400708

M/28919Ms Shalaka Pramod Vaidya,MCOM, AICWA308/B, New DahisarApartment, Vidya MandirRoad, Dahisar (East),Mumbai 400068

M/28920Shri Gaurav Kumar Chugh,BCOM, AICWA

8-G, Atul Complex, LaxmiVihar, (Near Dwarka MoreMetro Station), Uttam Nagar,New Delhi 110059

M/28921Ms. Sukhbeer Kaur,BCOM, AICWA2/327, Subhash Nagar,Delhi 110027

M/28922Shri Abhishek NarendraKamboj,MCOM, AICWAC/o. Deshpande D.D.,`Sumati`, 7/B, Hemakant CHS,Dattawadi, Pune 411030

M/28923Shri Puvvada Seshagiri Rao,BCOM, ACS, AICWAB 105, ASPEN Apts., BehindSpencers Daily, Taranaka,Secunderabad 500007

M/28924Shri Arun Kumar K.V.P.,BCOM, AICWAInternal Auditor, RiskConsulting Division, Albazie& Co., RSM International,Kuwait Airways Bldg., 7thFloor, Shuhada St., P.O. Box2115, Safat, State of Kuwait

M/28925Shri Dinesh JyotiprakashAgrawal,MCOM, LLB, ACS,AICWA70 - Janki Kutir, KalamnaRoad, Surya Nagar, NearLata Mungeshkar Garden,Nagpur 440008

M/28926Shri Pavan Kumar Singh,MCOM, AICWAOfficer - Costing, AmbujaCements Ltd., Survey No.

39/40, Near ABG Shipyard,Magdalla Port Road,Surat 395007

M/28927Ms. Leena Pandurang Gadgil,AICWA5, Shanti Garden, Anand Nagar,Sinhgad Road, Near MatajiSuper Market, Opp. SantoshHall, Pune 411051

M/28928Mrs Priya Krishna Srinivasan,BCOM, AICWA27, Vyasar Street, First Floor,T. Nagar Chennai 600017

M/28929Shri Chandrashekar Kupperi,BCOM, FCA, FCS, MBA,AICWAG - Block, Flat - 1-B, SunshineApartments, West Jones Road,Saidapet,Chennai 600015

Contd. from Page 492

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the management accountant, June, 2010 501

The CONTINUING EDUCATION PROGRAMME DIRECTORATE IS ORGANSING FOLLOWING PROGRAMMES.FOR FURTHER DETAILS and on-line registration VISIT OUR WEBSITE http://mdp.icwai.org/OR www.icwai.org (click the link Management Development Programmes).

CONTACT PERSON

Mr. D ChandruAdditional Director (PD&P)CEP Directorate,ICWAI Bhawan, 3rd Floor3 Institutional Area, Lodi RoadNew Delhi-110 003.Tel - 011-24643273 (D), 24622156/157/158

Name of the Programme

Duration Course coverage Venue Fee (Rs.)

COST MANAGEMENT FOR COST COMPETITIVENESS

28-30 JULY, 2010

• Linking Cost Information to Business Strategy

• Cost Structuring for Competitiveness

• Sensitivity Analysis • Cost Management Issues in • Quality Management • Performance Evaluation • Technology Optimization

& Allocative Efficiency • Strategic Cost

Management • Pricing and Product Mix

Decisions • Target Costing for Cost

Competitiveness • Effective Cost Reduction :

A Strategic Perspective • Cost Accounting

Standards • Case Studies • Generally Accepted Cost

Accounting Principles (GACAP)

HOTEL SAVERA, 146 DR. RADHAKRISHNAN SALAI, CHENNAI-600 004 Tel-044-28114700

Non-Residential Fee- Rs.15000/- (Rupees fifteen thousand only) per participant Residential Fee-Rs.30000/- (Rupees thirty thousand only) per participant

CORPORATE TAX – PLANNING, COMPLIANCE AND MANAGEMENT

28-30 JULY, 2010

• Planning for Minimum Alternate Tax (MAT) and Implication of Accounting Laws Vs. Taxation Laws

• Planning for Advance Tax and Management, Compliance of Tax Deduction at Source

• Planning for restructuring of business entities and the incidence of tax benefit

• Planning for International Transactions/ Cross-border Transaction

• Outline of service tax and issues in Service Tax

• Planning for CAPEX/OPEX and the impact of taxation thereof

• Amendments relating to Finance Act, 2010 and overview of Direct Tax Code and its implication on Corporate Taxation

• Issues in Corporate Taxation

HOTEL SAVERA, 146 DR. RADHAKRISHNAN SALAI, CHENNAI-600 004 Tel-044-28114700

Non-Residential Fee- Rs.15000/- (Rupees fifteen thousand only) per participant Residential Fee-Rs.30000/- (Rupees thirty thousand only) per participant

MDP Programme for July

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502 the management accountant, June, 2010

General Circular No. 1 /2010

F. No. 2/7/2010-CL VGovernment of India

Ministry of Corporate Affairs5th Floor, A Wing, Shastri Bhavan,

Dr. R.P. Road, New Delhi,Dated the 26th May, 2010

To

All Regional Director,All Registrars of Companies.

Subject: Company Law Settlement Scheme, 2010

Sir,

It has been observed that a large number of companies are not filing their due documents timely with theRegistrar of Companies. Due to this, the records available in the electronic registry are not updated and therebyare not available to the stakeholders for inspection. Further, due to not filing the documents on time, companiesare burdened with additional fee andfacing the prosecutions also.

2. There are many companies, who have also not increased their paid up capital up to the threshold limitprovided in sub-section (3) and sub-section (4) of Section 3 of the Companies Act, 1956.

3. In order to give an opportunity to the defaulting companies to enable them to make their default good by filingbelated documents and to become a regular compliant in future, the Ministry, in exercise of the powers underSection 611(2) and 637B (b) of the Companies Act, 1956 has decided to introduce a Scheme namely, “CompanyLaw Settlement Scheme, 2010,” condoning the delay in filing documents with the Registrar, granting immunityfrom prosecution and charging additional fee of 25 percent of actual additional fee payable for filing belateddocuments under the Companies Act, 1956 and the rules made there under. The details of the Scheme are asunder:-

(i) The scheme shall come into force on the 30th May, 2010 and shall remain in force up to 31st August,2010.

(ii) Definitions: - In this Scheme, unless the context otherwise requires, -

(a) "Act" means the Companies Act, 1956 (1 of 1956);

(b) "company" means a company registered under the Companies Act, 1956 and a foreign companyfalling under section 591 of the Act;

(c) "defaulting company” means a company registered under the Companies Act, 1956 and a foreigncompany falling under section 591 of the Act, which has made a default in filing of documents on thedue date(s) specified under the Companies Act, 1956 and rules made there under;

(d) "designated authority" means the Registrar of Companies having jurisdiction over the registeredoffice of the company.

(iii) Applicability: - Any “defaulting company” is permitted to file belated documents in accordance withthe provisions of this Scheme:

Notification

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Provided that any defaulting private company or public company which has not increased its paid capital upto the threshold limit of rupees one lakh and rupees five lakh respectively as provided in sub section (3) and (4)of section 3 of the Companies Act, 1956, as the case may be, shall first file its documents to increase their paidup capital up to the threshold limit under the scheme and thereafter would be allowed to file other belateddocuments;

(iv) Manner of payment of fees and additional fee on filing belated document for seeking immunityunder the Scheme- The defaulting company shall pay statutory filing fees as prescribed under theCompanies Act and rules made there under along with an additional fee of 25 percent of the actualadditional fee standardised under sub-section (2) of Section 611 of the Companies Act, 1956, payableon the date of filing of each belated document;

(v) Withdrawal of appeal against prosecution launched for the offences- If the defaulting companyhas filed any appeal against any notice issued or complaint filed before the competent court for violationof the provisions under the Act in respect of which application is made under this Scheme, the applicantshall before filing an application for issue of immunity certificate, withdraw the appeal and furnish theproof of such withdrawal along with the application;

(vi) Application for issue of immunity in respect of document(s) filed under the scheme - Theapplication for seeking immunity in respect of belated documents filed under the Scheme may be madeelectronically in the Form annexed, after closure of Scheme and after the document(s) are taken onfile, or on record or approved by the Registrar of Companies as the case may be, but not after theexpiry of six months from the date of closure of the Scheme. There shall not be any fee payable on thisForm;

(vii) Order by designated authority granting immunity from the penalty and prosecution - Thedesignated authority shall consider the application and upon being satisfied shall grant the immunitycertificate in respect of documents filed in the Scheme;

(viii) Scheme not to apply to certain documents - (a) This Scheme shall not apply to the filing of documentsfor incorporation or establishment of place of business in India or where specific order for condonationof delay or prior approval under the provisions of the Companies Act, 1956 is to be obtained from theCompany Law Board or the Central Government or Court or any other Competent Authority is required;

(b) This Scheme shall not apply to companies against which action under sub-section (5) of section 560of the Act has been initiated by the Registrar of Companies;

(ix) After granting the immunity, the Registrar concerned shall withdraw the prosecution(s) pending if anybefore the concerned Court(s);

4. At the conclusion of the Scheme, the Registrar shall take necessary action under the Companies Act, 1956against the companies who have not availed this Scheme and are in default in filing of documents in a timelymanner.

Yours faithfully,

Sd/-

(P.K. Malhotra)

Joint Director

Notification

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504 the management accountant, June, 2010

Notification

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Notification

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506 the management accountant, June, 2010

General Circular No. 2 /2010

F. No. 2/7/2010-CL VGovernment of India

Ministry of Corporate Affairs

5th Floor, A Wing, Shastri Bhavan,Dr. R.P. Road, New Delhi

Dated the 26th May, 2010

To

All Regional Director,All Registrar of Companies.

Subject: Easy Exit Scheme, 2010

Sir,

It has been observed that certain companies have been registered under the Companies Act, 1956, but due to various reasons someof them are inoperative since incorporation or commenced business but became inoperative later on and are not filing their due documentstimely with the Registrar of Companies. These companies may be defunct and are desirous of getting their names strike off from theRegister of Companies.

2. In order to give an opportunity to the defunct companies, for getting their names strike off from the Register of Companies, theMinistry has decided to introduce a Scheme namely, “Easy Exit Scheme, 2010” under Section 560 of the Companies Act, 1956. The detailsof the Scheme are as under:-

(i) The Scheme shall come into force on the 30th May, 2010 and shall remain in force up to 31st August, 2010.

(ii) Definitions - In this Scheme, unless the context otherwise requires, -

(a) “company” means a company registered under the Companies Act, 1956;

(b) “Collective Investment Management Company” means the company as defined in clause (h) of sub-regulation of 2 ofSecurities and Exchange Board of India (Collective Investment Companies) Regulations, 1999;

(c) “defunct company” means a company registered under the Companies Act, 1956 which is not carrying over any businessactivity or operation on or after the 1st April, 2008 and includes a company which has not raised its paid up capital asprovided in sub sections (3) and (4) of section 3 of the Companies Act, 1956;

(d) “Non-Banking Financial Company” means a company as defined under clause (f) of section 45-I of the Reserve Bank of IndiaAct, 1934;

(e) “Scheme” means the “Easy Exit Scheme, 2010”, being specified through this Circular;

(f) “vanishing company” means a company, registered under the Companies Act, 1956 and listed with Stock Exchange which, hasfailed to file its returns with Registrar of Companies and Stock Exchange for a consecutive period of two years, and is notmaintaining its registered office at the address notified with the Registrar of Companies or tock Exchange and none of itsDirectors are traceable.

(iii) Applicability: -

(a) Any “defunct company” which has active status on Ministry of Corporate Affairs portal may apply under EES, 2010 inaccordance with the provisions of this Scheme for getting its name strike off from the Register of Companies;

(b) Any defunct company which is a Government Company shall submit ‘No Objection Certificate’ issued by the concernedAdministrative Ministry or Department or State Government along with the application under this Scheme;

(c) The purpose of the Scheme is to allow eligible companies to avail of this opportunity to exit from the Register of Companiesafter fulfilling the requirements laid down herewith and the decision of the Registrar of Companies in respect of striking off thename of company shall be final.

(iv) Scheme not applicable to certain companies: - The Scheme does not cover the following companies namely:-

(a) listed companies;

(b) companies registered under section 25 of the Companies Act, 1956;

(c) vanishing companies;

(d) companies where inspection or investigation is ordered and being carried out or yet to be taken up or where completedprosecutions arising out of such inspection or investigation are pending in the court;

(e) companies where order under section 234 of the Companies Act, 1956 has been issued by the Registrar and reply thereto ispending or where prosecution if any, is pending in the court;

(f) companies against which prosecution for a noncompoundable offence is pending in court;

Notification

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the management accountant, June, 2010 507

(g) companies accepted public deposits which are either outstanding or the company is in default in repayment of the same;

(h) company having secured loan ;

(i) company having management dispute;

(j) company in respect of which filing of documents have been stayed by court or Company Law Board(CLB) orCentral Government or any other competent authority;

(k) company having dues towards income tax or sales tax or central excise or banks and financial institutions or any other CentralGovernment or State Government Departments or authorities or any local authorities.

(v) Procedure for making an application:-

(a) Any defunct company desirous of getting its name strike off the Register under Section 560 of the Companies Act, 1956 shallmake an application in the Form EES, 2010, annexed;

(b) The Form EES, 2010, should be filed electronically on the Ministry of Corporate Affairs portal namely www.mca.gov.in andthere shall be no fee payable for filing of the same;

(c) In case, the application in Form EES, 2010, is not being digitally signed by any of the director or Manager or Secretary, aphysical copy of the Form duly filled in, shall be signed manually by a director authorised by the Board of Directors of thecompany and shall be attached with the application Form at the time of its filing electronically;

(d) In all cases, the Form EES, 2010, shall be certified by a Chartered Accountant in whole time practice or Company Secretaryin whole time practice or Cost Accountant in whole time practice;

(e) The company shall disclose pending litigations if any, involving the company while applying under this Scheme;

(f) The Form shall be accompanied by an affidavit annexed at Annexure- A of Form EES, 2010, which should be sworn by eachof the existing director(s) of the company before a First Class Judicial Magistrate or Executive Magistrate or Oath Commissioneror Notary, to the effect that the company has not carried on any business since incorporation or that the company did somebusiness for a period up to a date (which should be specified) and then discontinued its operations and has not carried on anybusiness after the 1st April, 2008, as the case may be;

(g) The Form EES, 2010 shall further be accompanied by an Indemnity Bond, duly notarized, as annexed at Annexure B of FormEES, 2010, to be given by every director individually or collectively, to the effect that any losses, claim and liabilities on thecompany, will be met in full by every director individually or collectively, even after the name of the company is struck off theregister of Companies;

(h) The Company shall also file a Statement of Account annexed at Annexure C, prepared as on date not prior to more than onemonth preceding the date of filing of application in Form EES, 2010, duly certified by a statutory auditor or CharteredAccountant in whole time practice, as the case may be.

(vi) Simplified procedure for Registrar of Companies for removal of name of defunct companies:-

(a) The Registrar of Companies, on receipt of the application, shall examine the same and if found in order, shall give a notice tothe company under section 560(3) of the Companies Act, 1956 by e-mail on its e-mail address intimated in the Form, givingthirty days time, stating that unless cause is shown to the contrary, its name be struck off from the Register and the companywill be dissolved;

(b) The Registrar of companies shall put the name of applicant(s) and date of making the application(s) under Easy Exit Scheme,2010, on daily basis, on the MCA portal www.mca.gov.in, giving thirty days time for raising objection, if any, by thestakeholders to the concerned Registrar;

(c) In case of company(s) like Non-Banking Financial Company(s), Collective Investment Management Company(s) which areregulated by other Regulator(s) namely RBI, SEBI, the Registrar of Companies, at the end of every week, after the Schemecommences, shall send intimation of such companies availing EES, 2010, during that period to the concerned Regulator(s) andalso an intimation in respect of all companies availing EES, 2010, during that period to the office of the Income TaxDepartment giving thirty days time for their objection, if any;

(d) The Registrar of Companies immediately after passing of time given in sub-paras (a) to (c) of this Para and on being satisfiedthat the case is otherwise in order, shall strike its name off the Register and shall send notice under sub-section (5) of section560 of the Companies Act, 1956 for publication in the Official Gazette and the applicant company under this Scheme shallstand dissolved from the date of publication of the notice in the Official Gazette.

Yours faithfully,

Sd/-

(P.K. Malhotra)

Joint Director

For details, please visit www.mca.gov.in

Notification

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508 the management accountant, June, 2010

THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA(Set up in 1944, Founder member of IFAC, CAPA and SAFA)

MANAGEMENT DEVELOPMENT PROGRAMMES 2010-11Programmes Areas

Cost Management l Financial Management l IFRS l Risk Managementl Taxation Management l Auditingl Valuation Managementl Contract Management l Derivatives l Mergers & Acquisitions

DATES TOPIC VENUE STATUS & FEE (Rs.)Non- Residential

Residential

MAY, 2010

26-28 Workshop on IFRS Convergence Mumbai 15,000

JUNE, 2010

01-04 Recent Trends in Financial Management Ranikhet 30,000Including IFRS Convergence (Nainital)

01-04 Finance for Jr. Finance and Accounts Officers Ranikhet 30,000and Non-Executive (F&A) (Nainital)

09-11 Workshop on IFRS Convergence Bangalore 15,000

16-19 Management of Taxation - Service Tax, VAT, Ooty (TN) 30,000Excise & Customs, TDS and Proposed GST

16-19 Contract Management Ooty (TN) 30,000

JULY, 2010

07-09 Workshop on IFRS Convergence New Delhi 15,000

28-30 Corporate Tax-Planning, Compliance and Management Chennai 15,000 30,000

28-30 Cost Management for Cost Competitiveness Chennai 15,000 30,000

AUGUST, 2010

04-06 Derivatives and Risk Management New Delhi 15,000

10-13 Internal Auditing for Effective Management Control Madurai 30,000

10-13 Recent Trends in Financial Management Madurai 30,000Including IFRS Convergence

SEPTEMBER, 2010

07-10 Management of Taxation - Service Tax, VAT, Port Blair 30,000Excise & Customs, TDS and Proposed GST

07-10 Finance for Jr. Finance and Accounts Officers Port Blair 30,000and Non-Executives (F&A)

15-17 Mergers and Acquisitions Hyderabad 15,000 30,000

OCTOBER, 2010

05-08 Corporate Tax-Planning, Compliance and Management Goa 30,00

Calendar of MDP Programmes

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NOVEMBER, 2010

10-12 Contract Management New Delhi 15,000

22 to International Programme on Singapore, 2,25,000Dec 2 ‘Emerging Trends in Financial Management’ Kualalumpur

& Bangkok

DATES TOPIC VENUE STATUS & FEE (Rs.)Non- Residential

Residential

DECEMBER, 2010

21-24 Advance Tax, TDS and Tax Planning Shirdi 30,000

21-24 Internal Auditing for Effective Management Control Shirdi 30,000

JANUARY, 2011

03-09 Recent Trends in Financial Management including Dubai & Muscat 1,50,000IFRS Convergence

18-21 Management of Taxation - Service Tax, VAT, Mahabaleshwar 30,000Excise & Customs, TDS and Proposed GST

18-21 Finance for Jr. Finance and Accounts Officers Mahabaleshwar 30,000and Non-Executives (F&A)

FEBRUARY, 2011

09-11 Financial Risk Management New Delhi 15,000

16-18 Valuation Management New Delhi 15,000

For Non-Residential Programmes Fee includes course fee, course material, lunch, tea/coffee etc.

For Residential Programmes Fee includes course fee, course material, accomodation on Single Room Basis, all meals and visits.

CEP Credit Hours - [For 1 Day Prog.-4 Hours] [For 2 Days Prog.-6 Hours] [For 3 Days & more Prog.-10 Hours]

For Kind Information

« For outstation programmes the participants are requested to get the confirmation from the Institute before proceeding to the venue.If any participant reaches the venue for the postponed/cancelled programme without getting the confirmation from the Institute, theInstitute will not be held responsible for the same. The cancellation/postponement of the programme, if any, will be initimated to onlythose organizations whose nominations have been received by the Institute on time.

« For residential programmes normally the first day check-in at 12.00 noon and last day check-out at 12.00 noon.« For International programmes, Faculty will be from the respective countries apart from the Indian Faculty.« The Payment of the Fee is to be made by Cheque/DD in favour of ‘The Institute of Cost and Works Accountants of India’ payable

at New Delhi.« Details for ECS Payment : State Bank of India, Lodhi Road Branch, New Delhi-110 003

Current A/c No. 30678404703 MICR Code : 110002493 IFSC Code : SBIN0060321

For further details and Registration please contact :

Shri D. Chandru, Addl. Director (PD&P)The Institute of Cost and Works Accountants of IndiaICWAI Bhawan, 3 Institutional Area, Lodi Road, New Delhi-110 003Phones : 011-24622156-57-58, 24618645 (D) 011-24643273 (M) 09818601200Tele Fax : 011-43583642 / 24622156 / 24618645E-mail : [email protected], [email protected] Website : www.icwai.org

PresidentSHRI G. N. VENKATARAMAN

Vice PresidentSHRI B.M. SHARMA

Chairman, Continuing Education Programme CommitteeSHRI A.G. DALWADI

Calendar of MDP Programmes

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510 the management accountant, June, 2010

FOR ATTENTION OF MEMBERS

ICWA OF INDIA MEMBERS BENEVOLENT FUND

OBJECTIVE

The Fund has been created to provide:

1. Outright grant of prescribed amount to the beneficiary in the event of death of a member of the Fund.

2. Financial assistance of prescribed amount repayable in prescribed manner by the members of the Fund in case offinancial distress due to prolonged illness or temporary loss of employment, illness of spouse/dependent children ofmember of the Fund; and education of dependent children of deceased member of the Fund.

Beneficiary means member of the Fund including dependent spouse/dependent children/parents/dependent minor brothersand sisters of the member of the Fund.

PROCEDURE OF MEMBERSHIP

An Associate / Fellow Member having paid up to date membership fees to the Institute can become a Life Member of theFund on application being made in the prescribed application form along with a remittance of Rs.500/- (one time payment) bya Demand Draft favouring ‘ICWAI Members Benevolent Fund’ payable at Kolkata. The application form can be collectedfrom the headquarters of the Institute at Kolkata or downloaded from the website of the Institute www.icwai.org. Soft copyof the application form can also be sent on requisition made to e-mail: [email protected] .

For the purpose of obtaining benefit from the Fund, a member should ensure to pay his up to date Associate/Fellowmembership fees to the Institute and his name should continue to exist in the Register of Members of the Institute.

Note: This is for intimation of all concerned that it has been decided that with effect from 1st July, 2010, the fee foradmission as a Life Member of the Fund shall be revised to Rs.2000/-. Further, there shall be revision in benefits from theFund with effect from the said date.

FOR ATTENTION OF MEMBERS

PAYMENT OF MEMBERSHIP FEES

Members of the Institute who are having outstanding membership dues have been communicated individually to pay theirdues. In addition, their due position is also uploaded on Institute’s website www.icwai.org under the option Members->Member Details->Search Details & Check Dues. All members having outstanding dues are requested to pay the sameimmediately.

Further, the Annual Membership Fee for 2010-2011 for Associate and Fellow Members of the Institute shall become due andpayable on 1st April, 2010 at the following rates:

Associate Annual Membership Fee : Rs.500/- (Rs.125/- for members entitled to pay at reduced rate)

Fellow Annual Membership Fee : Rs. 1000/- (Rs.250/- for members entitled to pay at reduced rate)

All members are requested to pay their respective membership fees along with arrears, if any, immediately and not later than30th September, 2010.

The fees may be paid by Cash/Demand Draft/Pay Order/Cheque at the Headquarters/Regional Councils/Chapters of theInstitute. The Demand Draft/Pay Order/Cheque should be drawn in favour of “The ICWA of India” and payable at Kolkata.In case of outstation cheque not payable at Kolkata, Rs.30/- is to be added towards Bank Charges. Fees may also be paidonline through the Institute’s Internet Payment Gateway on the link: http://www.icwai.org/icwai/membership _payment. lncase of payment made at the Regional Councils/Chapters of the Institute, the position will be updated upon receipt of theremittance at the Headquarters.

NOTE: MEMBERS SHOULD ENSURE TO INDICATE THEIR NAME AND MEMBERSHIP NO. ON THE REVERSE OFDEMAND DRAFT/PAY ORDER/CHEQUE TO BE DRAWN IN FAVOUR OF “THE ICWA OF INDIA” PAYABLE AT KOLKATAIN CASE PAYMENT IS TENDERED BY DEMAND DRAFT/PAY ORDER/CHEQUE. IT SHOULD ALSO BE ENSURED NOTTO ENCLOSE ANY OTHER INTIMATION ETC. ALONG WITH THE REMITTANCE OF MEMBERSHIP FEE.

Notice

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the management accountant, June, 2010 511

For A tten t ion of P ract ising M em b ers

G U ID E L IN E S FO R R E N E WA L O F C E RT IF IC AT E O F P R AC T IC E

T he m em b ers o f the In sti tu te ho ld in g C erti fica te o f P rac tice hav ing va lid ity up to 30 th June , 201 0 a re reques ted tocom p ly w ith the fo llow ing g u ide lines fo r renew al o f th eir C e rt i fica te o f P rac tice :

1 . A pp lica tion fo r renew al o f C e rti fica te o f P rac tice u p to 30 th Ju ne , 2011 has to b e m ade in the p rescr ibed Fo rm ‘D ’du ly f il led in and sign ed o n bo th sid es to ge the r w ith R en ew a l C er tif icate o f P ractice fee fo r R s. 5 00 /- and a l l o th erdu es to th e Ins ti tu te on acco un t o f annu a l m em bersh ip fees an d en trance fees . T he annu a l m em bersh ip fee fo rA sso c ia te an d F e llow M em be rs a re R s. 5 00 /- an d R s. 1 00 0 /- respec tive ly. T he en tran ce fee fo r A ssoc ia te andF e llow M em b ers a re R s. 60 0 /- an d R s. 5 00 /- resp ec tively payab le a t a t im e at the t im e o f app lica tion fo r adm ission .T he fees m ay b e pa id by D em an d D ra ft/P ay O rde r/C h eq ue payab le a t K o lk ata if rem itted b y po st to the H eadqu a rte rso f th e Ins ti tu te . In case rem ittance is m ad e th roug h an o u tsta tion chequ e , R s.30 /- is to be inc lud ed tow ards ban kcha rg es. T h e fees m ay a lso b e pa id d irec tly by cash a t the H eadqua r te rs o r by C ash / D em and D ra ft/Pay O rde r/C h eque at the R eg ion a l C o unc ils o r C hap ters o f th e Ins ti tu te .

2 . I t m ay p lease be no ted tha t und e r S ec tio n 6 o f the C os t and Wo rks A ccou n tan ts A c t, 19 59 , the annua l m em bersh ipfee and R en ew a l C erti fica te o f P rac tice fee fa l l d ue o n 1s t A p ri l each y ea r.

3 . S pec ia l a tten tion is inv ited to the fac t tha t the va lid ity o f a C erti f ica te o f P rac tice exp ires o n 3 0 th Jun e each yea run less it is renew ed o n o r b efo re th e da te o f ex p iry in te rm s o f R egu la tion 10 o f the C ost and Works A ccou n tan tsR egu la tion , 19 59 . T he re fo re , a m em b er s ign in g any d ocum en t as a p rac tis ing C os t A ccoun tan t w ithou t hav ingh is C erti fica te o f P rac tice renew ed on o r b efo re the d ue da te , m akes the s igned d ocum en t inva lid .

4 . I t m a y p le as e b e no ted th a t m ere pa y m en t o f fe es a lo n e w i l l n o t b e su ff ic ie n t fo r ren ew a l o f C e r ti f ic a te o fP rac tice . A pp lica tion in p resc rib ed F o rm ‘D ’ d u ly f il led in an d s ig ned on b o th sid es is ab so lu te n ecessary. S o ftc o p y o f F o rm ‘D ’ c a n b e d ow n lo a d e d f ro m In s t i tu te ’s w e b s i te w w w . ic w a i .o rg u n d e r th e o p t io n M e m b e rs -> D ow n lo a d -> F o rm s .

5 . It is a lso essen tial to fu rn ish a ce rt i fica te fro m the em p loye r in the fo l low ing fo rm o r in a fo rm as n ea r the re to aspo ss ib le i f th e p rac tis in g m em ber h as unde r taken any em ploym en t o r the re has been a chan ge in em p loym en t:

"S h ri … … … … … … … … … … … … … … … … … … .is em p loy e das (d es ign a tio n )… … … … … … … … … … … … … … ..in (n am e o fO rgan isa tion )… … … … … … … … … … … … … … .a nd he is pe rm i tted ,no tw iths tand ing any th in g co n tain ed in the te rm s o f h is em p loy m en t,to engage h im se lf in th e p rac tice o f p ro fession o f C os t A ccoun tan cyin h is spa re tim e in add it ion to h is regu la r sa la ried em p loy m en t w ith us .

S igna tu re o f E m p loye rsun de r sea l o f O rgan isa tion "

6 . In o rde r to enhance p ro fessio na l com pe tence and evo lve a sys tem a tic m ech an ism to upd ate k now ledge o fm em bers in p rac tice , a sch em e o f C on tin u ing E du cation Pro g ram m e (C E P ) w as in trod uced in the yea r 200 3 .

A rev is io n o f the sa id schem e h as b een m ade by th e C o unc il o f the IC WA I in 200 9 as fo llow s :

( i) T he m em ber shou ld u nde rg o m in im um m and ato ry tra in ing o f 10 hou rs pe r yea r w.e .f . 2 009 -10 .

( ii) T he ce rt i fica te o f a ttendan ce fo r tra in in g w il l have to be en clo sed w ith the app lica tion fo r ren ew al o f C er tif icateo f P rac tice .

T he de ta i led rev ised g u ide lines in th is connec tion a re ava ilab le on Ins ti tu te ’s w ebs ite w w w.icw a i.o rg und e r theop tion M em bers-> G u id e lines /P rocedu res -> Fo r M and a to ry Tra in ing Fo r a l l M em b ers o f IC WA I und er C on tin u ingE d u ca tio n P ro g ram m e.

T he requ irem en t spec ified above d oes no t ap p ly to a m em b er in p rac tice w h o h as atta ined th e age o f 6 5 y ea rs ason 1s t Ju ly, 201 0 .

H ence , a l l p rac tis ing m em bers a re requ ested to send the ir app lica tion fo r renew a l a lo ng w ith o ther requ irem en tsa s in d ic a te d h e re in a b ov e im m e d ia te ly, in a ny c a se so a s to re ac h th e In s ti tu te H e a d q u a r te rs n o t la te r th a n1 5 th Ju n e , 2 0 1 0 .

Notice

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FOR ATTENTION OF MEMBERS

Additional fee payable on Restoration of Membership

In the 260th meeting of the Council held on 27th March, 2010, it has been decided that a member whose name stands removedfrom the Register of Members for non-payment of fees shall be required to pay additional fee of Rs.500/- for restoration ofmembership under Regulation 17 of the Cost and Works Accountants Regulations, 1959, which shall be payable in additionto arrears of annual fee and entrance fee, if any.

Partial modification to Guidelines for mandatory training for all members ofICWAI under Continuing Education Programme

In the 260th meeting of the Council held on 27th March, 2010, it has been decided to make partial modification to the guidelinesfor mandatory training for all members of ICWAI under Continuing Education Programme (CEP) made at the 254th meeting ofthe Council held on 20th & 21st May, 2009 by adding the following clauses retrospectively to the said guidelines with effectfrom 1 st June, 2009:

I. The members who reside outside India for a part of the year may be exempted from credit hours requirement for thesame year on submission of valid documents in support of the same.

II. The members who are victimized by polio or accident or physically handicapped may be exempted from fulfilling therequirement of CEP hours on submission of valid documents in support of the same.

III. The members who could not get credit of requisite CEP hours due to unavoidable circumstances may be grantedrelaxation to make up balance CEP credit hours requirement in the next year in addition to the normal requisite CEPcredit hours for that year.

However, no such exemption/relaxation as mentioned in clauses I & III above would be given to a member who obtainsmembership of ICWAI in accordance with the MOU entered into between IMA, USA & ICWAI.

NOTICE

We at ICWAI are committed to encourage sustainable development policies for the future.One such issue very dear to the Institute's heart is environmental preservation. Towards thisend we propose to come out with a special edition of the Research Bulletin on 'ClimateChange and Protection'. We request the active participation of all readers through sharingof news, views and opinions on the abovementioned topic. The articles may cover a widecanvas touching upon issues of the economic, social and physical impact of climate change;variants of urban pollution and rural environmental damage; and steps for controlling thedamage with special emphasis on improvement of quality of human life, rehabilitationmeasures and costs of preservation. Write-ups containing case studies and live exampleswill be preferred. All interested can send their write-ups to Research & Journal Dept., ICWAI,12 Sudder Street, Kolkata-700016.

Notice