Monday, September 19, 2011

Taxing treaty

What is treaty shopping?
Sinduja Bhojwani, Mumbai
It refers to the practice of foreign investors looking to become the resident of a country, with which the investment destination country has the most favourable Double Taxation Avoidance Agreement (DTAA). The Indo-Mauritius DTAA springs to one's mind at once. US, German, Swiss and French companies first set up a shell company in Mauritius, repatriate capital to these shell companies and from there route their investments into India, thereby becoming residents of Mauritius, and becoming eligible for exemption from capital gains tax in India as well as in Mauritius — an obnoxious feature of the treaty, but the one that foreign investors in India like the most.
Currency convertibility
Why can't I maintain 25 per cent of my savings account balance in US dollars, 25 per cent in Indian rupees, 25 per cent in Euro and the remaining 25 per cent in Swiss francs? My bank manger turned down my request.
Pushpa Natarajan, Chennai
The bank manager was not acting whimsically or on an impulse. His was the right response given the fact that only non-residents and NRIs are allowed to maintain saving bank accounts in India designated in foreign currencies. India has not embraced capital account convertibility fully and it is some distance away. Till then, you have to rein in your well-thought desire to diversify your currency portfolio, so to speak, which, of course, makes eminent practical and economic sense, given the fact that rupee's true worth is now taking a battering, thanks to unrelenting inflation.
Banking business
Why does the RBI want to bar real estate companies and brokers from entering the banking business?
Shruti Mahajan, New Delhi
This is because these are the sectors prone to asset bubble. When the Real Estate sector is awash with funds, it results in artificially high valuations for houses. This is true for the stock market. The RBI has rightly opined that if any promoter has even a 10 per cent interest in these sectors, he would invite disqualification. But this country has witnessed several labyrinthine and crooked versions of diversion of funds, and one suspects that despite the sound safeguard, there is no guarantee that wily promoters of banks would not be able to find ways and means to channelise funds into these sectors through subterfuges.

Monday, August 29, 2011

Royalties and profits


What is the difference between royalty and share of profits?
Padmapriya, Chennai
Royalty is paid with reference to production or sales — Rs 5 per unit or 1 per cent of sale etc. It is generally paid for the user of intellectual property rights belonging to someone else, such as trademark, patent etc. Share of profits, on the other hand, is conditional and based upon profits. The one agreeing to take a share of profits is more intimately involved in the running of an enterprise and is a risk taker at that, but the supplier of technology, who has no financial stakes in an enterprise, usually settles for less alluring, but steady and sure royalties.
Mutual fund taxes
Why is it that dividend to corporates handed out by mutual funds attract a 30 per cent distribution tax, whereas in the case of individuals and HUFs it attracts only 12.5 per cent tax?
Ramya Gopalakrishnan, Coimbatore
With the years, the government has been viewing with growing dismay the steady hijacking of mutual fund investments by corporates and high net worth individuals, whereas it was essentially meant for the common man, the one with very little financial literacy, who ought not be exposed to the vagaries and volatilities of the stock market. The government found that the benign tax regime for mutual funds was the major reason for corporates warming up to mutual fund investments. A 30 per cent tax corresponds to the corporate rate of tax, and should dissuade corporates from seeking the mutual fund route. At the other end of the spectrum, a soft tax of 12.5 per cent on dividend paid to individuals and HUFs by mutual funds, besides liquid and money market funds, would serve to promote equity cult amongst the middle class.
Golden shares
What is a golden share?
Jim Rodrigues, Panaji
It was an instrument pioneered by the Margaret Thatcher government in the UK, on the eve of disinvestment. A golden share in the hands of the government vested it with the right to veto any proposal of significance, so that the new private promoter does not run amok and ride roughshod over public interests by assets stripping etc.

Wednesday, August 17, 2011

Economic stagflation

What is liquidity trap, a term doing the rounds in the context of the crisis in the US and Euro zone?
Prabhat Khandelwal, Jodhpur
It is a situation where there is ample liquidity in the system but no investments in productive assets are forthcoming. This may be due to a variety of reasons. Investor confidence might have reached a plateau. Imports from abroad might stymie domestic investments. These precisely are in evidence in the US. The system is awash in dollars, yet domestic investments and employment are not improving. Liquidity trap is a caution to the pump-priming enthusiasts. There is a limit to which increasing the liquidity can tone up the moribund economy. The resultant improvement in purchasing power might actually be fuelling inflation, thus giving rise to economic bugbear — stagflation — inflation without increase in production capacities.
Currency union
What exactly is the root cause of the problem in the European region?
Santosh Rane, Pune
In my mind, the root cause is the incomplete nature of the union. You have the European Central Bank, whose writ runs all over the union. Thus its remit is to make the monetary policy for the entire European Union. But the fiscal policies are in the hands of the individual nations. This was a clear recipe for disaster. With nations pursuing their own economic agendas on the back of independent fiscal, manufacturing and labour policies, the power keg was waiting to explode. Laggards took it easy, counting on a bailout from better performers. Germany is actually ruing its decision to have spearheaded the union.

Friday, August 12, 2011

Company shares


Isn't it unethical for a company to trade in its own shares? How then does the Company Law in India permit it?
Shyamal Chatterjee, Durgapur
Share capital, historically, was held too sacrosanct to be trifled with, but the financial engineers in the US couldn't restrain themselves. They went overboard, and the result was legislation that not only permitted purchase of a company's shares by the company itself, but also allowed the company to keep them on its portfolio for buying and selling in a cycle of investment activities. This is insider trading at its worst. The UK government showed some restraint and its law mandates that the shares bought back must be cancelled forthwith. This is a lesser evil and India hasfollowed the UK model.
Medical tourism
Isn't the Indian medical tourism success story more a reflection on the economics of treatment here rather than its quality?
Bhargav Rajan, Gainesville, Florida
I think that would be uncharitable, because medical treatment is too serious a matter to be frugal with, even if one is in dire straits financially. It is true that the cost of a surgery in India is way below what it takes in the US, for example, especially if one is underinsured, but that isn't the only reason why Americans are making a beeline to Indian hospitals. Despite the negative campaign, discerning people see both savings and quality medical care in Indian private hospitals.
What is the idea behind the Swiss auction model?
Manish Chowdhry, Gurgaon
The idea is to encourage a project which would cater to the larger public good, like an expressway or a causeway above a large water body. The originator of the proposal is not awarded the project straightaway but is asked to wait till others interested offer better terms. The originator is allowed to have the last laugh by being entitled, in his capacity as the originator, to the privilege of doing away with the competition by initially padding up his quotation and bringing it down in a manner of double-take. This is why critics aver that the model encourages crony capitalism.

Wednesday, August 03, 2011

Investing abroad

Can I invest in shares and units of mutual funds abroad?
Ramesh Anavekar, email
The RBI has been ushering in capital account convertibility in a calibrated manner during the past few years. An Indian resident is now allowed to invest upto 2 lakh dollars abroad under the automatic route, which means one can do these transactions straightaway through his / her Indian banker(s). This includes shares and units of mutual funds abroad. The right to invest, thus, impliedly, also includes the right to open a savings account abroad for quick and easy consummation of transactions. But I suggest you take a second opinion on this aspect.
Foreign retailers
I understand the government has at last agreed to FDI in retail. Is this correct?
Mehak Ahuja, Amritsar
It isn't quite. It is only at the secretaries' level that the decision has been taken. The Cabinet has to ratify the proposal mooted by the committee of secretaries. The committee has been guarded in its proposal — Foreign Direct Investment (FDI) in retail is to be allowed only in cities with a population of more than a million. That makes 36 in our country. Anyway, if approved, it would be a good beginning with better supply chain management and extensive use of cold storage, resulting in all-round economies to the nation. Besides, it would also make for a better shopping experience. But the moot question is how the foreign retailers could afford land so crucial for a sprawling retail store, given the fact that in most of the cities, land is scarce and, therefore, their prices are skyrocketing.
Subsidiary chains
Why is the Companies Bill, 2009, against the idea of subsidiaries?
Ratan Gupta, Agra
It isn't really opposed to the idea as such, but wants to contain the process of subsidiaries in turn spawning subsidiaries, befuddling the identity of true ownership. Thus it would be fine for company A to spawn company B but it wouldn't be alright for company B in turn to spawn C. Chain or pyramid holdings has been the bane of this country and investigators are often stymied in their work while setting out to investigate the true ownership of a company, as it happened in the recent IPL controversy. Many teams' ownerships are caught in a web of complicated holdings with the strings ultimately being controlled from a distant tax haven.

Tuesday, July 26, 2011

Income-tax liability

I am a senior citizen. My sources of income are my annual pension of Rs 2,70,730 ( tax deducted at source amounts to Rs 3,170), agriculture income of Rs 60,000 and an income of Rs.25,000/ month since August 2011 with a total deduction of tax at source of Rs 1,968 from leasing my car to a company. What is my tax liability?
G Venkateshwer Rao, e-mail
Your income from salary is Rs 2, 70,730 and from other sources are agricultural income Rs 60,000 (added only for rate purposes) and car rental Rs 2, 00,000 . The total income is Rs 5, 30,730. The tax on this works out to Rs 32, 146 considering your senior citizen status. But since this includes agricultural income of Rs 60,000, you get the following rebate- tax on Rs 2,40,000 + Rs 60,000 i.e. Rs 6,000. Thus your net tax liability is Rs 26, 146 plus a surcharge of 3 per cent. The total tax due from you is Rs 26, 930. Since you have already paid tax by way of TDS (Rs 3,170 and Rs 1,968), you need to pay only the balance. Pay this together with the applicable interest for the short fall in payment of advance tax as well as for the interest on the balance of the tax due from you. Since the calculations especially of interest are slightly involved, take the help of a chartered accountant.
Timing the market
What is timing the market?
Soumya Sachdev, New Delhi
It is a utopian situation, when a person buys at the rock bottom price and sells at the peak in a stock market. Even for the best chart buster, it is a near impossible task. What one can, however, do is to buy when the market is down and sell when the market is peaking. It is wrong to sit on one's investments. One must book his profits periodically.
Equity investments
Should I start my investments in equity in the cash segment or in the F&O segment?
Priya Godbole, Sholapur
For the first-time investor not well-versed in the nuances of equity, the one who is likely to slip on the slippery surface of share market, the best beginning is through the primary market i.e. IPOs.
The alternative is to invest through mutual funds that have expertise and experience besides infrastructure in investments.

Friday, July 22, 2011

Income-tax liability

I am a senior citizen. My sources of income are my annual pension of Rs 2,70,730 ( tax deducted at source amounts to Rs 3,170), agriculture income of Rs 60,000 and an income of Rs.25,000/ month since August 2011 with a total deduction of tax at source of Rs 1,968 from leasing my car to a company. What is my tax liability?
G Venkateshwer Rao, e-mail
Your income from salary is Rs 2, 70,730 and from other sources are agricultural income Rs 60,000 (added only for rate purposes) and car rental Rs 2, 00,000 . The total income is Rs 5, 30,730. The tax on this works out to Rs 32, 146 considering your senior citizen status. But since this includes agricultural income of Rs 60,000, you get the following rebate- tax on Rs 2,40,000 + Rs 60,000 i.e. Rs 6,000. Thus your net tax liability is Rs 26, 146 plus a surcharge of 3 per cent. The total tax due from you is Rs 26, 930. Since you have already paid tax by way of TDS (Rs 3,170 and Rs 1,968), you need to pay only the balance. Pay this together with the applicable interest for the short fall in payment of advance tax as well as for the interest on the balance of the tax due from you. Since the calculations especially of interest are slightly involved, take the help of a chartered accountant.



Timing the market
What is timing the market?
Soumya Sachdev, New Delhi
It is a utopian situation, when a person buys at the rock bottom price and sells at the peak in a stock market. Even for the best chart buster, it is a near impossible task. What one can, however, do is to buy when the market is down and sell when the market is peaking. It is wrong to sit on one's investments. One must book his profits periodically.



Equity investments
Should I start my investments in equity in the cash segment or in the F&O segment?
Priya Godbole, Sholapur
For the first-time investor not well-versed in the nuances of equity, the one who is likely to slip on the slippery surface of share market, the best beginning is through the primary market i.e. IPOs.
The alternative is to invest through mutual funds that have expertise and experience besides infrastructure in investments.