Archive for November, 2011

Cos with Secured Loans may be Allowed to Turn into LLPs

November 14, 2011

The government plans to allow companies with outstanding secured loans to be converted into limited liability partnerships, a more flexible corporate structure introduced two years ago to boost business. According to a circular being prepared by the corporate affairs ministry, while companies with secured loans, or loans against assets, will not be barred from conversion into LLPs, companies with unsecured loans will no longer need creditors consent in writing to convert.

This will clear the hurdles for many companies that could not be converted into LLPs, which combine the benefits of corporate and partnership ownerships. LLPs entail limited liability for the owners, unlike unlimited partnership firms, and greater leeway in internal management, simpler compliance norms, lower cost of formation and easier exit options.

Besides mandating simpler norms for conversion, the circular will clarify that a minor cannot be a partner in an LLP because a person below the age of 18 has no contractual capacity. Industry experts say that even as the changes due to be announced are welcome, the government needs to do more to incentivise firms to convert into LLPs. Banking guidelines also need to be more clearly defined, say experts, to determine whether an LLP will be treated as a corporation or a partnership in terms of classification of assets.

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India takes a leap ahead in granting Ease of Business

November 14, 2011

Online incorporation of companies within 24 hours

Ministry of Corporate Affairs has decided to simplify the procedures of incorporation to enable promoters to get their companies incorporated within 24 hours. Pursuant to this initiative , in case the incorporation forms viz e-Forms 1, 18 and 32 have been certified by the practicing professional regarding the correctness of the information and declaration given by the subscribers, the application shall be processed electronically and the digital certificate of incorporation shall be issued online immediately by the Registrar of Companies.

To ensure and safeguard the interest of Stakeholders, the subscribers/professionals are subjected to penal actions in case of wrong, false or illegal declarations/certifications made by them. It is further notified that in case it is found that a company registered online on such basis of declarations made by the subscribers and certification given by, professionals ought not have been registered under the provisions of the Companies Act, the Registrar of Companies shall take the necessary action to put the company in state of suspended animation and initiate process of revocation of the registration of the company after giving a reasonable opportunity of being heard. The legal procedure and powers of ROC with regard to revocation of registration has not yet been clarified.

This initiative while on one hand would enable completion of the process of incorporation of a company (including approval of DIN and availability of name) within a short time span of 24 hours and improve India’s position in granting ease of Business on a Global Front, on the other hand bring forth greater trust, reliability and responsibility on the professionals certifying the application for incorporation.

Microfinance Bill likely in Winter Session

November 13, 2011

The government is likely to introduce a Bill that seeks to make it mandatory for all microfinance institutions to be registered with the Reserve Bank of India (RBI) and entrusts the task of regulating the sector to the central bank in the Winter Session of Parliament.

In an earlier Bill, it was proposed that the National Bank for Agriculture and Rural Development (Nabard) would be the regulator of the sector. The latest draft Bill proposes to make it mandatory for microfinance institutions (MFIs) to be registered with the RBI and have minimum net-owned funds of Rs 5 lakh.

In addition, a Microfinance Development Council will be set up to advise the government on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the sector and microfinance institutions with a view to promote financial inclusion. The draft Bill also proposes that any micro-finance institution which is not a company registered under the Companies Act, 1956, and which becomes a systemically important micro-finance institution shall convert its institution into a company registered under the Companies Act, 1956, with or without a licence, under Section 25 of the Act. This should happen within six months from the date of the balance sheet that shows the MFI has become a systematically important microfinance institution in terms of the rules prescribed by the central government, the draft Bill said.

The RBI may pass an order directing an MFI to cease and desist from carrying out micro-finance activities if it is found acting in manner prejudicial to the interest of its clients or depositors. The RBI will cancel the certificate of registration granted to an MFI if it fails to comply with the directives or condition, the draft Bill states.

Memorandum of Instructions governing money changing activities in India

November 13, 2011

In terms of applications from AMCs for additional offices in metropolitan cities are considered if the total offices (including proposed offices) of the applicant are in the ratio 1:1 (i.e. the applicant has one non-metropolitan office for every office in a metro) – In order to provide more flexibility, to authorised persons to decide the location of their branches, it has been decided to dispense with the criteria of 1:1 ratio between metro and non-metro branches. However, we expect branches to be diversified and to be meeting the demand of tourists, etc. All the other instructions shall remain unchanged.

Deregulation of Savings Bank Deposit Interest Rate in India

November 13, 2011

Reserve Bank of India directs that banks are free to determine their savings bank deposit interest rate for resident Indians only with immediate effect subject to two conditions. First, each bank will have to offer a uniform interest rate on savings bank deposits up to Rs.1 lakh, irrespective of the amount in the account within this limit. Second, for savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, if it so chooses, subject to the condition that banks will not discriminate in the matter of interest paid on such deposits,  between one deposit and another of similar amount, accepted on the same date, at any of its offices.

NRIs liable to file tax returns too in India

November 13, 2011

From the perspective of tax liability, under the Income Tax Act, an individual is considered to be a resident of India if he meets either of these conditions – he should be present in India physically for 182 days or more in a tax year (April 1 to March 31), or for 60 days in a tax year and 365 days or more in the preceding four tax years.

The period of 60 days will be extended to 182 days if the individual is an Indian citizen who left India during a tax year for employment abroad or as a member of the crew of an Indian ship, or is a person of Indian origin and comes to India on a visit. A person is deemed to be of Indian origin if he or either of his parents or any of his grandparents were born in India.

If neither of these conditions are met, the individual is classified as a non-resident. A NRI may be required to file income tax returns in India under certain situations. It depends on whether the income earned by the individual is taxable in India. In case of a NRI, income received in India and income that accrues in India are taxable here.

Just like residents, NRIs are also required to file income tax returns in India, in case the local income exceeds the basic exemption limits. In case the income consists only of returns from investments or longterm capital gains and the applicable tax has been withheld on the income, the NRI is not required to file income tax returns.

To file the returns, a NRI will need a PAN. The PAN needs to be quoted in all correspondences with the tax authorities, including income tax returns. Based on the nature of income, the appropriate income tax returns form needs to be filled. The income tax returns can be filed either in physical form or electronically through the website of the Income Tax Department.

In case a NRI chooses to file the returns physically, he must fill the relevant ITR form and submit it along with the acknowledgment (ITR V) to the income tax office concerned, signed and verified. If the individual is not present in India, the income tax returns and acknowledgement should be signed by a person authorised by him and holding a valid power of attorney.

In case of electronic filing, the NRI is required to fill in the necessary details and validate the ITR form. Upon validation, a XML file is generated, which is uploaded on the website with a digital signature. The digital signature is required to be obtained separately from the specified authorities. However, if the XML file is uploaded without a digital signature, the individual is required to print the acknowledgement and submit it through ordinary post to the Centralised Processing Centre (CPC).

Not filing income tax returns will result in interest and penalty. In case there are any losses to be carried forward, the returns need to be filed. Without filing the returns, the losses cannot be carried forward for set-off against subsequent years’ incomes.

India has signed double taxation avoidance agreements with most countries which can be referred to in order to avoid double taxation of income in both countries.

India to review tax treaty with Mauritius in December 2011

November 13, 2011

The much-awaited talks between India and Mauritius over renegotiation of their tax treaty may begin soon, with India pushing for changes in the clause on the treatment of the capital gains tax. The agenda for the discussion has broadly been finalised — and India has prepared a list of items proposed to be reviewed when the two countries meet in the second week of December.

Nonetheless, there’s a catch: the renegotiated treaty may prove to be a damp squib if Mauritius does not agree to review the clause on the capital gains tax. Besides, India itself may not ask for completely eliminating the capital gains exemption, as that might hurt genuine investors as well as capital inflows from Mauritius that account for about 40 per cent of the total foreign direct investment into India.

A finance ministry official says Mauritius has agreed to renegotiate the treaty in December. From our side, everything is on the agenda…including better exchange of information and treatment of capital gains tax. But, ultimately they should agree to it.

The Double Taxation Avoidance Agreement (DTAA) between India and Mauritius provides for capital gains tax only in the country of the residence of the investor. A person routing investments through the tax haven to India does not pay tax, as such income is tax exempt under the domestic laws of Mauritius.

So, what purpose does a renegotiated treaty serve when the clause on capital gains tax is not changed? It would still provide for exchange of banking information and assistance in collection of taxes, says the official. Though Mauritius has already agreed to provide such information to India, bringing that under the treaty would strengthen the process further.

To tighten noose on treaty shopping and check tax evasion, India has been pushing Mauritius for long to revise the agreement. This would change the way foreign investors structure their investment in India. After years of persuasion, Mauritius had finally agreed to start the talks by the middle of this year, but it got postponed as a political upheaval in the country in August led to a Cabinet reshuffle.

As Mauritius is a friendly country with a huge Indian population, the tax exemption on capital gains was given under the DTAA to benefit investors there, but this was misused. And many companies started channelling their investments through the island to get tax benefit. The finance ministry wants to tax fly-by-night companies which do not have their management and control in Mauritius.

India has already starting raising tax demands against many such companies. Many of these cases are being disputed in various courts. India has also set up an overseas income tax unit in Mauritius.

Besides, the Direct Taxes Code, which is proposed to be implemented in April 2012, will introduce general anti-avoidance rules to override provisions of tax treaties under specific situation.

Direct Taxes Code (India) will come next year: Finmin

November 13, 2011

The government on Wednesday expressed optimism that the Direct Taxes Code (DTC) would come into force from the next financial year. Finance minister Pranab Mukherjee said he was confident of the DTC being recommended by the standing committee in the coming (winter) Parliament session.

The DTC Bill introduced in Parliament on August 30 last year, proposes to replace the 50-year old Income Tax Act. The Act was initially proposed to come into force at the start of the ongoing financial year. The deadline was then extended to April next year, as the draft Bill has been referred to the Parliamentary Standing Committee.

Things may now change, as the finance minister has expressed the hope that the DTC would be implemented from next year. The new direct tax law, which is proposed to simplify and streamline the income tax regime in the country, has already missed the April 2011 deadline.

Prepay loan without fine to housing finance companies

November 13, 2011

In a development that will cheer thousands of home owners who have availed of loans from any of the 54 housing finance companies (HFCs), the National Housing Bank (NHB) has banned the levy of pre-payment penalty.

The NHB, which is the housing finance regulator, has also asked HFCs to ensure that all borrowers pay the same  interest rate, irrespective of when the loan was taken. The two decisions will cover all HFCs ranging from HDFC to LIC Housing Finance and Dewan Housing Finance. They come into effect immediately.

The housing finance regulator said HFCs will no longer levy any fee on floating rate loans. In case of fixed rate loans, it has made a distinction and only those borrowers who pay from their “own sources”, such as savings or even loans from relatives, will be exempted from payment of penalty.  In case borrowers shift to another bank or HFC, the penalty will be applicable.

The move will enable several borrowers to now shift their loans to banks or HFCs that offer home loans at a lower rate. Banks and HFCs levy pre-payment penalty of up to 4%, which often resulted in borrowers continuing to pay higher rates. On uniform interest rates, the NHB’s letter was in the nature of an advisory and did not talk of any penal action for violation. “It is accordingly advised that HFCs should ensure uniformity in rates, on floating rate basis, charged to their old and new customers, with the same risk profile irrespective of the time of entry of borrowers in the market,” the letter said.