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C&AG recommended referring the cases of professional negligence to ICAI:Serious issued raised by CAG: icai must look into it seriously

NEW DELHI, DEC 21, 2014: CAG’s Performance Audit Report No. 32 of 2014 on ‘Appreciation of Third Party (Chartered Accountant) Reporting in Assessment Proceedings’ was presented in the Parliament on Frioday. The CAG carried out a Performance Audit on ‘Appreciation of Third Party (Chartered Accountant) Reporting in Assessment Proceedings’ during January to May 2014 covering all cases of scrutiny assessments, appeal and rectification, completed during the period of financial years 2010-11 to 2012-13 and upto May 2014 within the selected units. Findings of performance audit were reported to the Central Board of Direct Taxes (CBDT) in September 2014 and results of discussions were incorporated in the Report.


The Income Tax Act, 1961 (Act) contains several provisions which mandate the assessees to furnish audit reports and certificates issued by the ‘Accountant’ in the prescribed Form for meeting the specific objectives. The Act defines an ‘Accountant’ as a Chartered Accountant (CA) within the meaning of the Chartered Accountants Act, 1949 under explanation to Section 288(2) of the Act. Audit reporting and certification by CAs under the Act are thus Third Party Reporting. Tax audit under Section 44AB of the Act was introduced in 1984 in order to ensure that the books of account and other records of the assessees are properly maintained and faithfully reflect the true income of the taxpayer. The objective of reporting/certification is to discourage tax avoidance and tax evasion.

Audit Findings

During audit, C&AG noticed certain issues with regard to certification of reports/certificates by CAs, which are discussed below in brief:

a. Tax auditors failed to give correct information relating to allowance of depreciation in 66 cases involving short levy of tax of Rs. 457.79 crore.

b. Tax auditors did not report correct information regarding brought forward loss/depreciation resulting in irregular brought forward loss/depreciation allowance in 46 cases involving short levy of tax of Rs. 557.79 crore.

c. In 42 cases personal/capital expenditure was incorrectly allowed as the tax auditors did not report the amount in their tax audit reports which resulted in short levy of tax of Rs. 477.89 crore.

d. CAs have certified wrong information/claims for various exemptions and deductions in 74 cases having tax effect of Rs. 259.72 crore.

e. CAs gave incorrect/incomplete information in Tax Audit Reports/certificates in 132 cases having a revenue impact of Rs. 1,037.61 crore.

f. CAs committed mistakes in another 616 cases viz. in allowance of exemption/deductions, charging of tax on Book Profit under Section 115JB, adoption of Arm’s Length Price and reporting on cash payments exceeding Rs. 20,000 per day.

g. In 109 cases, assessees did not furnish requisite Form 3CEB on verification of ALP and Form 29B relating to certification for Book Profit.

h. Assessing Officers failed to utilize the information available in 102 reports/certificates submitted to them by the assesses leading to short levy of taxes of Rs. 1,310.05 crore.

i. Regarding monitoring of work of CAs and ensuring quality tax audit, ICAI issued guidance to its members for limiting the tax audit assignments in a financial year. It was found that 18.87 per cent of CAs (12,435 CAs) for AY 2013-14 issued more tax audit reports than prescribed by ICAI.

j. CAs did not mention their membership numbers in many cases.

Recommendations by C&AG

C&AG has suggested ITD to utilize information available in tax audit reports/certificates at the time of assessment proceedings and not to grant exemptions/deductions to the assesses without submission of necessary reports/certificates. To improve the quality of work done by CAs, C&AG recommended referring the cases of professional negligence to ICAI. Besides, C&AG also recommended to make provisions in the Act to limit the number of tax audit, provide suitable controls in the ITD system and validating the membership of CAs at the time of e-filing. C&AG also recommended to ensure to prohibit a CA who is a relative of the assessee or directors of a company, from signing any report or certificates.

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Proposed GST- The Game Changer for professionals- Opportunity


GST is a consumption based levy. Destination principle would be applicable in normal course of business to business [B2B] other than for few services and business to consumer.[ B2C] GST is propose

GST to be in place by April 2016- maybe a bit optimistic.

In an ideal GST, all the credit of taxes paid on purchase of inputs, input services and capital goods are seamlessly allowed for set-off against the tax payable on subsequent sale of goods that are either sold as such or sold upon conversion, or in the context of services, are supplied.


It is required to have a brief view of the existing indirect taxes regime, before proceeding to understanding GST. The excise duty, import duties of customs, VAT/CST and service tax are the main levies at present. The principles of GST would be drawn form the best practices internationally and some time tested principles which have been working well in India.

a. Excise duty: Central Excise Duty is levied by the Central Government under the Central Excise Act, 1944. The levy is on all goods manufactured and produced in India, which are specified in the schedule to the Central Excise Tariff Act subject to certain exemptions. The effective rate may vary from product to product though most goods are subject to excise duty at 12% (without education cess).

The concepts of cenvat credit, dispute resolution, removal and valuation on intrinsic value under this law may find a place in GST. Also the principle of trusting the tax payer while having the checks and balances of audit rather than suspecting all businessmen would hopefully be adopted.

b. Import Duties: Customs duties are levied by the Central Government under the Customs Act, 1962.  The levy gets attracted on all specified goods imported into and exported from India, which are specified in the schedule to the Customs Tariff Act.  The customs duties are levied on assessable value and the total customs duty ordinarily would amount to an average of 28 % (subject to cenvat credits) on the value of goods imported.

Basic Customs duty would continue but the additional duty of customs (CVD) and special additional duty (SAD)would get subsumed into GST as an IGST. The Classification under customs which is based on the harmonised System of Nomenclature would be adopted under GST.

c. Value Added Tax (VAT): Value Added Tax (VAT) is levied by the State Governments on transfer of property in goods from one person to another, when such transfer is for cash, deferred payment or other valuable consideration.  VAT is also payable on certain transactions that are deemed to be sale such as transfer of right to use goods, hire purchase and sale by instalments, works contract and sale of food and drink as a part of rendering of any service.

The supplies of goods and importantly services would now be available to the States as SGST. They would also get apportioned part of the IGST.

d. CST: The rate of CST is 2% against the declaration in Form C and in case the said declaration is not provided by the buyer, they are subject to tax at the rate specified in the local VAT law.  Form C is allowed to be issued by the buyer when he purchases the goods for use in manufacture or for resale or for use in telecommunication network or in mining or in generation or distribution of power. Sales without C form would be at the rate as applicable in State of origin.

The principles of inter state sales, sales in the course of export/ import with required changes for supplies would be a part of the GST. The aspects of valuation in some parts would also be adopted.

e. Service Tax: Service tax is levied all activities as defined other than those specified in the negative list and those specifically exempted.  Service tax is presently taxed at 12% (without education cess). Ordinarily, service tax is payable by the service provider, except in specified cases where a reverse charge and joint charge has been put in place.

The principles of Place of Provision of Services would be adapted from the place of supply rules. The point of taxation philosophy could also be a viable option. The States are expected to enjoy at least Rs.150,000/- Crores of revenue depending on the intra state consumption of services.

What is meant by GST?

Goods & Service Tax (GST) as the name suggests, is a tax on supply of goods or services. Any person, providing or supplying goods or services would be liable to charge GST. The States would be eligible for the SGST part of services consumed within the State which would be an additional revenue for the State. The person supplying the goods or services is allowed to take credit for taxes paid on supply of goods or services, consequent to which, GST becomes a tax on the value added at the next stage by the dealer. Further GST would be levied by both the Central Government (CGST) and State Government (SGST) on the same transaction, making GST a dual transaction tax structure. For inter state transactions IGST ( total of SGST + CGST) would be charged which would be apportioned to the Union as well as the States. This would apply for the subsumed part of the customs duties.

A 1% origin based tax to offset the CST loss would be collected by the Union retained by the States. This tax would not be vattable.

The definition of services being other than goods raises the concern of whether it would also cover Immovable property transactions.

What would be the Applicability of Levy?

Under GST, every specified transaction would be subject to tax.

Supply within State: In case the supply of goods or services is done locally i.e. the place of consumption rules provide that local GST needs to be applied for the transaction, then the supplier would charge dual GST i.e. SGST and CGST at specified rates on the supply.  This is explained with the following example:

Basic value charged for supply of goods or services


Add: CGST @ 10%*


Add: SGST @ 10%*


Total price charged for local supply of goods or services


Note:    In the above illustration, the rate of CGST and SGST is assumed to be 10% each

The CGST & SGST charged on the customer for supply of goods or services would be remitted by the seller into the appropriate account of the State/ Central Government.

Supply from One State to Another

In case the supply of goods or services is done interstate i.e. the place of consumption rules provide that interstate GST (or integrated GST) needs to be applied for the transaction, then the supplier would charge IGST at specified rates on the supply.  This is illustrated with the help of the following example:

Basic value charged for supply of goods or services


Add: IGST @ 20%*


Total price charged for interstate supply of goods or services


Note:    In the above example, the rate of IGST is assumed to be 20%

The IGST charged on the customer for supply of goods or services would be remitted by the seller into the appropriate account of the Central Government. The CG would share the same with the State of destination and itself.


In case the supply of goods or services are exported out of India i.e. the place of consumption rules provide that regard the transaction as ‘exported’, then the transaction would be zero rate.  In other words, the supplier would be allowed to export the goods or services without charging any tax. This is explained with the help of the following example:

Basic value charged for supply of goods or services


Add: GST


Total price charged for export of goods or services


From the above the following features of the GST emerge. The salient features of GST are given below:

Dual GST: Dual GST signifies that GST would be levied by both, the Central Government and the State, on supply of goods or services.  Under the Constitution, presently the taxing powers are presently split between the State and the Centre.  In case of certain transactions, the power to tax is vested with the Centre and while in certain others, the power is vested with the State.  Under GST, the power to tax on supply of all goods and services would be vested in the hands of both, the State and the Centre. In certain cases, such as the interstate transactions, the power to tax would be vested with the Central Government, while the revenue would in some appropriate manner, get distributed to the States. Considering the dual taxation power to tax transactions under GST, the structure is referred to as Dual GST. Considering the basic framework of the constitution and keeping its structure intact, Dual GST appears to be implementable solution for India scenario.

Subsuming many Taxes: GST should subsume all major indirect taxes levied by the Central Government i.e. central excise, customs and service tax and majority of the taxes levied by the State Government i.e. VAT, luxury tax, entertainment tax, etc.  In this regard, tax on sale of 5 specified petroleum products would continue to be under sales tax and central excise till the GST Council suggests its inclusion in the GST.  Alcohol is intended to be kept for state excise ONLY. The following taxes would be absorbed/ subsumed into GST:

The following indirect taxes would be subsumed under GST:


Levied By

Duty of excise on manufacture


CVD & SAD (component of customs duties)


Service tax


Central Sales Tax – Taxes when sale or purchase takes place in the course of inter-State trade


CST- Taxes on consignments that take place in the course of inter-State trade


Taxes on the entry of goods into a local area for consumption, use or sale therein ( Including octroi).


Taxes on sale/purchase of goods within state


Luxury Tax


Entertainment Tax


Rate Structure: It is expected that GST would be levied on the transaction value i.e. price actually paid or payable for supply of goods and services. The GST for local supplies would be split into SGST and CGST. The Task Force on GST of Thirteenth Finance Commission (TFC) has worked out a Revenue-Neutral Rate (RNR) of 12% (5% CGST and 7% SGST) assuming there is a single GST rate and stamp duty & electricity duty are also subsumed in the GST. However the rate now being discussed is in excess of 20%.

GST could have a 4 rate structure with standard rate, concessional rate, special rate for bullion & jewellery and exempted/ nil rated.  It is presently the view that services and goods would have the same rate.

The discussion paper mentions and the Constitution Amendment bill 2014 indicates that the empowered committee has decided to adopt the following rate structure for taxing goods and services:

Exempted goods: The short list [ Out of 91 items ] under the State VAT law-0%

Special rate: Precious metals- could be 1 %

Concessional rate: Necessities and goods of basic importance [ the concept of declared goods would not longer be relevant] -could be 10%

Standard rate: For all other goods- could be 20% [ Maybe more is the indication]

Note: States maybe able to fix the SGCT based on a band say 9-11%. [ 1-2 %]

The recommend uniform State GST threshold of INR 25 Lakhs for both goods and services and composition scheme for those between Rs. 25 Lakhs to 75 Lakhs is being discussed.

A 1% tax would accrue to the originating States for a period of 2 years unless extended by the GST council.

GST Council would be put in place which would consist of the FM of Union and States. The issue of veto power for the Union still is to be resolved.

Credit Scheme: GST would be levied on supply of goods and services and the supplier would be allowed credit for the GST paid on purchases.  The credit would be seamless except that the credit of CGST paid would not be allowed for set-off against SGST payable and vice versa.

The objective of seamless credit would be met except for those below the threshold limit, those under special composition schemes and the products which are exempted. Presently in the central as well as the state tax laws a number of restrictions exist on eligibility of goods and services used for business. It is hoped that these anomalies would be taken care in the draft law which is expected tobe in place by June 2015.

How would this work?

The assessee dealer would be entitled to avail credit of GST paid on purchases.  In this regard, the dealer may purchase the goods or services locally or interstate or as imported. The following taxes paid on purchases when made locally, interstate or imported, would be available as credit in the hands of the dealer:

Type of purchase




GST incidence on purchase (taxes payable)







Credit entitled on (with respect to taxes paid)






The assessee is required to account for CGST, SGST and IGST separately.

Extent of Cross Utilisation:

Nature of tax paid on purchase

Can be utilized for payment of











IGST: Under this model the Centre would levy the IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services.[ This would also include goods and services imports] Inter-State seller would pay the IGST on value addition after adjusting of IGST, CGST and SGST on purchases. The Exporting state would transfer to the Centre the credit of SGST used on payment of IGST.

Compensation to States: In the opinion of the paper writer though some States who are consumer centric like Kerala would immensely benefit by GST most well to do States like Gujrat, Maharastar, Haryana, Tamil Nadu & Karnataka among others would get a share of the services consumed in the State which is a much bigger proposition [ 59% of GDP]. They would also get a share of the Rs125,000/- of Additional Customs Duty as well as the Special Additional Duty] on imports.

The compensation for the first 3 years would be 100% of the shortfall. Then 75 % and 50% in the 5th year. States which over estimate the impact may find delayed disbursement a possibility.

Administrative Mechanism: Both the Central Government and State Government would have the authority and control over the assessee as follows.

(i)     The administration of the Central GST would be with the Centre and for State GST with the States.

(ii)   Each taxpayer could be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department.

(iii)  Keeping in mind the need of tax payers convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States. Both the State and Centre may also adjudicate jointly to avoid conflicting decisions.

(iv)  The assessee dealer would be required to pay GST into the specified account of the State/ Centre and file periodic returns separately with the State/ Central Government.

Challenges For GST Implementation: Some expected hurdles to be adequately overcome could be as under:

1.    Standardization of systems and procedures all over India

2.    Unfair dispute resolution- Equal powers

3.    Training/ Equipping Tax administration

4.    Adoption of huge capacity IT to improve efficiency and credit states for input credit utilised as taxes collected would be on account of destination state.

5.    States not willing to give Veto to Union

6.    Compensation disbursal doubts

The recent events and focus on making India a powerful and respected country also needs tax reforms to be in place for enhanced competitiveness. The view of the paper writer is that in due course of time GST would be useful for the industry immediately and for State / Central Government as well as general public over a period of 2 years.

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LS clears Companies  (Amendment) Bill Govt periodically


New Delhi, 17 December

The Lok Sabha on Wednesday cleared the Companies (Amendment) Bill, which seeks to ease related- party transaction norms and ensure severe punishment for those raising illegal deposits from the public. The amendments also propose restricting hearings by special courts to serious offences.

The Bill, containing 14 amendments, was passed by voice vote. This followed the Congress raising objections to the Bill, demanding it be referred to a standing committee.

The demand was, however, turned down.

Replying to a debate on the Bill, Corporate Affairs Minister Arun Jaitley said the amendments spanned four types of changes — increasing the ease of doing business, correcting drafting errors, fixing oversight and changing clauses that were “ harmful to doing business”. The current Act provides for special courts taking up offences under the Companies Act. “ Are we trying to induce or scare investors,” Jaitley asked, adding henceforth, only severe offences would be tried in special courts.

He said “ oppressive provisions” had been removed from the Companies Act 2013, as it was felt “ nobody will come here to set up business if such an environment persists”. He added the United Progressive Alliance government had repealed the Prevention of Terrorism Act, brought about by the Atal Bihari Vajpayee led National Democratic Alliance, alleging its bail provisions were draconian. But these stringent provisions, Jaitley said, were included in the Companies Act, 2013.

“A terrorist can get bail, but accompany official cannot,” he said.

The Bill also amends provisions pertaining to related party transactions.

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User fee likely for filing GST returns

New Delhi, 17 December

In a first for the Indian tax- filing system, the country’s 6.5 million dealers might have to pay a nominal user charge when they file their returns on a unified portal once the unified Goods and Service Tax ( GST) comes into force.

This concept is being considered by Goods and Service Tax Network ( GSTN), the quasigovernment company that has been mandated to build and operationalise the GST Common Portal, to pay for the exceptionally heavy technology infrastructure involved in setting up an integrated network for India’s most ambitious indirect tax reform.

The central and state governments are yet to take a call on the issue or on whether the states will subsidise the cost. However, a Cabinet note ahead of the formation of GSTN had approved of a self- sustaining revenue model under which the company could charge both taxpayers and the tax authorities, that is, the states and the Central Board of Excise and Customs (CBEC).

“We don’t know whether state governments will agree to this suggestion and how taxpayers will react because at present people don’t pay for filing returns. But if we can charge a user fee upfront, that would be best,” said Navin Kumar, chairman, GSTN, in a joint interview with CEO Prakash Kumar.

The case for user charges gained momentum after a meeting between senior GSTN executives and leading multinational and Indian information technology service providers under the aegis of industry body Nasscom to invite applications for potential managed service providers (MSPs).

Most infotech companies expressed reservations about participating on account of the lack of clarity on their own revenue streams from a project that could stretch over five years. In the past year or so, infotech majors have stayed away from major e- governance projects because of uncertainties over payment.

“I know states are ready to pay for the portal, but what we want is to levy user charges upfront because it is the most efficient route and will give the MSP confidence and assurance that they will get their money quickly whereas the government takes time to release funds,” Navin Kumar said, adding that the portal would offer many other services beyond registration, filing and payments. The fee charged could be 20 or less.

The background work on setting up the portal has begun. Prakash Kumar, CEO, said a request for proposals ( RFP) was being designed and the contract would be finalised by next month. The company appointed PricewaterhouseCoopers the main consultants to the project last month to assess a pilot that was created by the CBEC and National Securities Depository Ltd ( NSDL) before GSTN was set up. The pilot has tested the concept by building applications that have enabled both registration and return filing.

While the government has indicated a deadline of April 1, 2016, for rolling out the project, GSTN has already started working closely with state authorities to authentic PAN information. Prakash Kumar said 70 per cent of this data was already “cleaned” and he hoped to finish the process by April.

“Meanwhile, we expect that by September- October our MSP will be able to roll out the registration so that we port and test data,” he added. The final testing of the systems is expected to begin from January 2016 through March.

However, the project is looking at ambitious timelines. The biggest concern of GSTN executives right now is a constitutional amendment bill to be passed and ratified by two thirds of the states, and for the states to pass their own GST laws. And before that, said Navin Kumar, basics like “ the GST Business Rules and Process, which includes the rate of tax, have to be frozen at the earliest for us to begin work on the network.” The Union finance ministry assured business chambers on Wednesday that the intent was not to have a high rate for the proposed national goods and services tax ( GST). These would be set after consulting them.

“The intent is to have a stable regime,” revenue secretary Shaktikanta Das said at a function organized by the Confederation of Indian Industry ( CII). He said the GST Council, headed by the Union finance minister, would finalise the rates after consulting business representatives. The Council will also have states representatives.

Earlier, a sub- panel of the Empowered Committee of State Finance Ministers had suggested a revenue- neutral rate of 12.77 per cent for a central GST and 13.99 per cent for state GST, totaling 26.5 per cent. This has fuelled fear of a high rate.

Combining excise duty with state- level value added tax ( VAT), the current combined rate for goods comes to about 24.5 per cent. However, many states have imposed a higher VAT than the agreed 12.5 per cent. Besides, GST will have input credit.

In services, only the Centre currently imposes tax at 12 per cent. After GST, both Centre and states will impose the tax. BS REPORTER FinMin assurance on GST rates

The central and state governments are yet to take a call on the issue or on whether the states will subsidize the cost.

GST Bill ready to be tabled after Cabinet approval


New Delhi, 17 December

After a prolonged wait, the Cabinet on Wednesday approved the Constitutional Amendment Bill on the Goods and Service Tax (GST), paving the way for the legislation to be introduced in the current winter session of Parliament, which will end on December 23.

The Bill is learnt to have sought to include petroleum within GST, but the Centre would be allowed to impose excise duty on it and the states value- added tax ( VAT) for initial years.

Petroleum was one of the contentious issues between the Centre and the states and had delayed the Bill.

States wanted petroleum products excluded from GST as they earn over 50 per cent of their revenues from this head. However, the Centre wanted to keep it within GST so that the chain of providing reimbursement for input taxes is not broken.

The other contentious issue was compensation to states for revenue loss after GST is introduced. Wary after the Centre’s unkept promises on compensation for a cut in the Central Sales Tax ( CST) rate, the states wanted to include GST compensation within the Bill. They also asked the Centre to promise that GST compensation would be provided for five years.

The Bill, it is learnt, contains the compensation for five years, but on a tapering basis.

Petroleum will be included in GST but Centre and states will be allowed to impose their current taxes on it GST compensation to states for five years will be part of the Bill. Centre will provide full compensation for three years and then progressively reduce it Entry tax levied by local bodies to be subsumed within GST.


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Bombay HC says lawyers, law firms must pay service tax to biz clients


The Bombay High Court has upheld the levy of service tax on services provided by lawyers and law firms, to their business clients. Thus, business entities who hire lawyers and law firms will have to continue to pay service tax and also deposit it with the government.

Since July 2012, a ‘reverse charge mechanism’ was introduced. Business entities, with a turnover of Rs. 10 lakh or more, have to pay service tax and also deposit the same against the legal fees paid to individual lawyers or law firms. Smaller business entities and individuals do not have to pay service tax when they hire lawyers or law firms. The current rate of service tax is 12.36%.

The Bombay High Court, on Monday, set aside the writ petitions filed by The Bombay Bar Association, Advocates Association of Western India and a few lawyers. The main argument of these petitioners was that lawyers are officers of the court who help in the administration of justice. In the absence of any service being provided, no service tax levy can be imposed. The petitioners had held that the introduction of service tax on legal fees was unconstitutional. While dismissing the petition, the court, referred to the changing role of the legal profession and held it is no longer limited to appearing before the court

It also pointed out that the classification between legal services provided to business entities and to individuals, for the purpose of levy of service tax, is not discriminatory and does not violate the Constitution. In addition to their key contention, that lawyers are officers of the court and perform a solemn duty in the administration of justice, the petitioners also pleaded that: “The levy of service tax imposes a heavy additional burden on litigants and disables them from approaching the courts.” The writ petition also said the service tax provision is unconstitutional because it discriminates between services provided to an individual (where there is no service tax imposition) and to a large business entity which has to bear the service tax burden. The service tax authorities and the government of India, who were the respondents to this case, argued that even as lawyers provide assistance in administering justice, they do in fact provide services to their clients and are duly compensated in the form of fees which are charged from clients.

The respondents also argued that representational legal services provided to individuals were kept out of the service tax net to ensure the burden is not borne by the common man. As there was a rational nexus, it was not discriminatory against business entities and this has been the position taken earlier by the Supreme Court. The Bombay High Court observed that the legislature in introducing service tax on the legal profession had noted the commercialization of the practice of law which has expanded in scope and sphere post liberalization and globalization.

At the same time the fact that a lawyer is an officer of the court and part and parcel of the administration of justice was not ignored. “Rather by a rational and intelligible differentiation the Parliament has proceeded to levy and impose service tax on legal services rendered to business entities by an individual advocate or law firm,” concluded the Bombay HC and dismissed the writ petitions.


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Promoter becoming a public shareholder: SEBI spells out reclassification norms


The Securities and Exchange Board of India, which has spelt out the conditions under which promoters of companies may be reclassified as public shareholders, has provided five situations which may result in a request for reclassification.


Acquisition by another

The first is that of promoters who seek reclassification after the company has been acquired by another entity.

The promoters request the company to terminate the shareholders agreement and want to classify themselves as public shareholders post termination of shareholding agreement. Then, informing the developments to stock exchanges, besides giving up their special rights and privileges by an amendment to the Articles of Association of the company after obtaining shareholders’ consent through postal ballot.


Post daughter marriage

The second arises when a company seeks reclassification of the status of the promoter’s daughter post her marriage with a family member of a business competitor.


Entry of strategic investor

Entry of a strategic investor who picks up 50 per cent in the company and the promoter who earlier held 70 per cent stake in the company is now reduced to 25 per cent and the promoter still continues to be the chairman according to agreement.

This gives rise to a situation for seeking reclassification, as the control of the company has changed hands.


Family separation agreement

Two family members who have jointly promoted several companies enter into a family separation agreement due to a dispute which is registered.

According to the agreement, the first will transfer majority of its holding in some of the companies to the second and the second will transfer majority of its holding in the remaining companies to the first entity.

In such a case, both would desire to be reclassified as public shareholders in those companies where they do not hold a majority stake.


Pruning stake, rights

Finally, the Infosys example — company is run initially by family members.

However, they want to exit from the day-to-day operations of the company and would hold a minor stake in the company handing over the management of the company to professionals while giving up their special rights in the company.


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Task force to submit suggestions in 45 days


The Government will revisit the food safety Act to make it more stringent to check growing instances of adulteration and contamination.

“Two days ago, we set up a task force, which will submit its suggestions in 45 days, which will be then be put up in public domain for inviting comments. Imported food items will also be covered by this,” Health Minister JP Nadda informed the Lok Sabha on Monday. Replying to a calling by PV Midhun Reddy of YSR Cong and Satyapal Singh of BJP, Nadda admitted that food adulteration and contamination were one reason for the rising burden of non-communicable diseases across the country.

“It is also proposed to revisit the punishment stipulated for milk adulteration and make it more stringent,” Nadda said, adding that the Government would focus creating infrastructure and manpower to face the challenge, such as setting up testing labs under public-private partnership.

Nadda further added that 13,571 out of 72,200 food samples analysed in 2013-14 were adulterated, resulting in launch of 10,325 civil and criminal cases.

He also informed the House that the Food Safety and Standards Authority of India was at present engaged in an exercise for harmonisation of the maximum residue limit of pesticides in food commodities.

Earlier, Reddy said the threat from adulteration and contamination of water, milk, oil, etc, was “greater than the threat from terrorism”, as it would take more lives in the long run.

Terming the unregulated use of pesticides and antibiotics as “slow poison” and the use of hormone injections on cows to increase milk yield, as a more “serious crime than cow slaughter”, Reddy particularly urged the Government to ensure “Shudh Bharat” (Pure India)” along with the initiative, “Swachch Bharat.”


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SEBI might review delisting rules


Mumbai, 15 December

The Securities and Exchange Board of India ( Sebi) could take are- look at the recently- introduced delisting regulations, its chief hinted on Monday.

“Many have problems with one aspect of the regulation… We will see how it pans out. If required, we will have a re- look. But first see how it pans out,” said U K Sinha, chairman, in his speech at the Association of Investment Bankers’ summit.

A clause in the new framework mandating participation from at least 25 per cent of public shareholders for the success of a delisting bid has drawn criticism from the market. Investment banking experts say this would pose a practical difficulty for promoters wanting to make an entity a private company.

Last month, the market watchdog had announced new guidelines for delisting, with a shortened timeline and tweaked price discovery. The new regulation, aimed at making the process easier and quicker, will come into effect once notified by Sebi. This typically happens within two months of board approval. It had done so on November 19.

According to the new norms, for a delisting bid to be deemed successful, the promoter shareholding should reach 90 per cent and at least 25 per cent of the public shareholders should tender their shares.

For instance, company X, with 100 shareholders in the non- promoter category, intends to delist. Then, irrespective of the quantity of shares in the category, at least 25 per cent of them should participate in a delisting bid for it to be successful.

“The 25 per cent rule will ensure wider participation. But Sebi should look at the value, instead. In most other regulations such as the takeover code, it is the quantity of shareholding that is given importance,” said Tejesh Chitlangi, partner, IC Legal.

There has been a representation to Sebi, highlighting low public shareholder participation in reverse book building (RBB) offers— a price discovery mechanism used for delistings. Experts say the percentage of shareholders tendering shares in an RBB is typically in single digits and this is making the market nervous.

Lack of a provision on shareholder participation was a loophole that companies were seen to be exploiting, the Sebi chairman explained. “ If you look at what has happened in the past. we feel justified in what we are doing. There have been instances when delisting has been successful with only two shareholders participating,” said Sinha.

Sebi wants delisting companies to reach out to shareholders to ensure an offer is successful.

Convertible bonds

Sinha also said Sebi was looking at removing the disparity between foreign currency convertible bonds ( FCCBs) and convertible bonds issued in local currency.

FCCBs have a maturity period of up to five years. Similar instruments when issued in the domestic market have a maturity period of only 18 months.

Sinha said a clause in the Companies Act needed to be amended to realign the norms and the regulator had started a discussion in this regard. IPOs On concern that Initial Public Offerings ( IPO) were getting delayed due to regulatory approvals, the Sebi chief said theyd sped up the clearing process and the number of filings hadnt improved.

“We have set tight timelines (for clearing IPOs). The number of filings hasn’t improved. We hope it does as the investment climate improves. If our requirements are met, we will be clearing documents as fast as possible,” said Sinha.

Chief U K Sinha says there is market opposition to requirement on 25% investor participation


Threshold limit Promoter holding must cross 90% Promoter holding must cross 90% or must acquire at least 50% of public shareholding, whichever is higher Investor participation 25% of total public shareholders No such requirement Offer price The price atwhich the shareholding The highest price at which determination of the promoter, after including the maximum number of shareholders through ROBB shareholding of the public shareholders place their bids in ROBB who have tendered their shares, reaches the threshold limit of 90% Timeline 76 days 137 days Delisting directly Allowed Not allowed

pursuant to open offer DELISTING FRAMEWORK

“Many have problems with one aspect of the regulation… We will see how it pans out.

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Repayment rules for core


Mumbai, 15 December

As a step to ease the pressure on stressed assets, the Reserve Bank of India has allowed lenders to restructure existing loans above 500 crore to infrastructure and core industries’ projects.

Banks and financial institutions will have an option to periodically refinance such loans. Bankers said the revised norms will provide relief to completed projects which have started commercial operations in the said sectors. Many of these were finding it difficult to repay due to shortfall in cash flows and cost over runs.

This leeway is expected to help ensure the long- term viability of existing projects by aligning the debt repayments with the cash flows generated during their economic life. It is a step that will reduce potential stress, said Arundhati Bhattacharya, chairman of State Bank of India.

Vibha Batra, co- head of financial sector ratings at ICRA, said the new norms would “ help to reduce the addition to the existing portfolio of stressed assets”.

According to Union finance ministry data, the stressed loan books of commercial banks were 12.57 per cent of the total of loans as of end- September. Nonperforming assets ( NPAs) had a share of 5.32 per cent and restructured assets were 7.25 per cent.

While giving the flexibility, the banking regulator has attached some riders, to ensure the exercise happens within a framework of prudential norms.

Only term loans where the aggregate exposure of all institutional lenders exceeds ₹ 500 crore will be eligible for such flexible structuring and refinance. Banks can fix a fresh loan repayment (amortization) schedule for existing project loans once during their lifetime. This could be done only after the date of commencement of commercial operations, based on the reassessment of project cash flows.

The exercise will not be treated as a ‘restructuring’, provided it is a standard loan as on the date of change of the repayment schedule. The Net Present Value of the loan should remain the same before and after the change in repayment schedule, RBI said.

BK Batra, deputy managing director, IDBI Bank, said the new norms were positive in the sense that they help to reduce the debt servicing burden on companies. Banks will save on provisioning for restructured loans.

Banks may refinance the project term loan periodically ( for example, five or seven years) after the project has commenced commercial operations. The repayments at the end of each refinancing period could be structured as a bullet repayment, with the intent specified upfront, RBI added.

Refinancing can be done by existing lenders, a new set of lenders or a combination of both or by issuing corporate bonds. Such refinancing can be repeated till the end of the repayment schedule.

Bank can so address existing standard restructured assets; the letters label won’t change. Similarly, existing non- performing loans can be restructured under the new norms but these would continue to carry the “NPA tag”, and refinancing can be done only after it becomes a standard asset, said RBI.


RBI allows lenders to restructure existing loans above ₹ 500 crore to infrastructure and core industries’ projects |Banks and financial institutions will have an option to periodically refinance such loans |Bankers say revised norms will provide relief to completed projects which have started commercial operations in the said sectors |Leeway expected to help ensure long- term viability of existing projects |While giving the flexibility, the banking regulator has attached some riders, to ensure the exercise happens within a framework of prudential norms.


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