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Buybacks: acing the pace?

Defining buy-back
When a company procures its own outstanding shares i.e. quantum of stock in the open market along with shares held by institutional investors and restricted shares held by insiders and company officers, to reduce the number of shares available for General Public.

Reasons for buy back
Buy back of shares is undertaken for numerous reasons, like to strengthen the value of remaining shares available by cutting the supply or preventing other stakeholders from taking a controlling share. Few reasons for companies buying back their shares are discussed as follows:

  • Preserving stock price: Company operates with the intention of maximizing shareholder’s wealth which in turn is related to the quantum of dividend supplied to them. But the increasing stream of dividends is difficult to maintain during recession. If the economy slows or dips into recession, there are chances of cutting down on the volume of dividends to preserve cash, leading to shareholders selling off their stocks. Instead, if buy back of fewer shares is considered, the stock price will likely take less of a hit. Share buy backs can be modified according to the conditions prevailing in the market, thus, preserving the stock price.
  • Undervalued stock: Due to investor’s inability to see beyond a business’ short lived presentations, bearish performance and lurid news statements, undervaluation of stock of a company is common. In such a situation, company might repurchase a part of its shares at reduced price and then re-issue the same once the market gains momentum, thereby raising its equity capital without issuing any additional shares.
  • Instant anchor to financial statements: Declining number of outstanding shares results in increasing Earning Per Share (EPS) of a company as the net income is now divided by reduced number of outstanding shares; this in turn lures small investors looking for quick money to invest in that company. This rapid influx of investors artificially leads to inflation in the stock price. All this leads to appreciation in the financial health of the company, thus, stemming the total inflows enjoyed by the company.

Buyback implementation
Buybacks are carried out by following two methods:-

  • Tender offer: It refers to a process whereby shareholders might be conferred with a tender offer and given the option to tender or submit all or a portion of their shares within a given time period at a premium to the current market price. The premium given compensates investors for advancing their shares rather than holding onto them.
  • Open market purchase: Companies buy back their shares on the open market over an extended frame of time and may even organize an outlined share repurchase program that purchases shares at certain times or at regular intervals.

Dividend v/s Buyback: Contrasting taxes
The mode of attaining satisfied shareholders is by rewarding them with a steady stream of dividends. But now dividends are being taxed at three different levels, namely:

  • Being post tax appropriations, dividends are distributed after taxes are paid to the government on the total revenue influx, leading to multiple tax imposition on same amount.
  • Payment of Dividend Distribution Tax (DDT) on dividends, paid by the company declaring dividends.
  • Dividends exceeding INR 10 lakhs earned in a year will pay an additional tax at 10%.

On the other hand, tax criteria in case of buybacks is different for listed as well as unlisted companies, the same is discussed as under:

  • For listed companies: Buyback can be executed via following two channels:-
    1. Buyback directly from the shareholders: If gain from buyback is Long-Term Capital Gain (LTCG), the tax will be payable on the lower of two amounts, which are, 20% with indexation or 10% without indexation. No Security Transaction Tax (STT) is paid by the shareholders. Hence, LTCG on buyback is taxable.
    2. Buyback through Stock Exchange: Buying back of shares through stock exchange leads to payment of STT on transaction. Since STT is already paid in this case, LTCG will be entirely exempt.
  • For unlisted companies: No tax imposition on the person who benefits from the buyback of shares irrespective of whether the gain from the buyback is short-term or long-term.

As compared to dividends, buybacks has emanated as a smart instrument for large investors and companies. Though, the introduction of tax on LTCG without benefit of indexation lead to diminishing advantages of buyback, it still has an upper hand with its implications comparatively serviceable than those of dividends.

Need more information on buybacks in India, you may reach us.

At AJSH, we offer you a variety of services including company registration, accounting and bookkeeping, statutory audits, tax compliances, trademark registration and setting up of SEZ, for any assistance, please click here.

investment require to start a business

Originating Businesses

Investment required to start a business

“The Entrepreneur always searches for change, responds to it and exploits it as an opportunity!”

Quoted above is not only a saying but a true exhibit of how a man aspiring to establish his own business should retaliate to the dynamic environment we live in. As risk and reward go hand-in-hand, it is crucial for an entrepreneur to estimate the cost involved and income generated for any new business, whether you’re a fast moving start up or still weighing the pros and cons of whether or not to set up a new venture.

Though, the funds needed to ignite and propel a business may vary depending on the nature and type of business, here is a gist that lays down common steps to work it out.

Funds available with you: Initially, you should analyse the fact whether you have sufficient funds to start a business or not. Scrutinizing your income after deducting all your personal expenses will automatically lead you to the figure of funds that you have in hand, accordingly cut down the payments which you think can be avoided and add necessary expenditure which cannot be circumvented. These numbers will help you decide if your business is viable or not, and show you a quicker path to breaking even and long-term profitability.

Fuelling the business: After facing the crisis of financial crunch, take notes on how much is needed to keep the business going for a longer period. This process of incorporating a business is followed by taking account of the application of such funds at various stages:

  • Initial Cost: These tend to be one-off cost items, including:
  1. Lease or purchase of buildings or land
  2. Permits, licenses or other compliance costs
  3. Equipment and/or machinery
  4. Vehicles
  5. Shop fittings and/or office furniture
  6. Branding
  7. A website and domain name
  • Fixed Costs: These are bills and other costs you need to pay on an on-going basis, also known as overheads. These tend to be time-related like monthly phone bills or quarterly rates payments. Common fixed costs include:
  1. Insurance
  2. Utilities, e.g., electricity and internet
  3. Rent or mortgage payments
  4. Wages/ Salaries
  • Variable Costs: These are expenses that vary depending on how much, or how little, your business produces and include:
  1. Raw ingredients
  2. Production materials
  3. Stock orders

In case of insufficient funds, investors and lenders can prove to be of utmost help, but their decision mostly depends on the history of your business. In case you step foot in the business market for the first time, only exceptional idea or skills can induce them to invest their money in your business.

Take expert opinion:  An expert in the field of financing can give you clear insights into how much money is required to start and run the business. Try to find an accountant or advisor who has a good track record with business similar to your own.

Analysing established businesses: An intelligent move to estimate profits and costs is by studying and analysing other businesses in the same industry. This could not prove to be full proof at all times, but still serves the purpose.

Critical evaluation of sources and application of funds of last 12 months is necessary to keep a check on what was planned and how far the business has come. It’s common to operate at a loss when first business is started. One has to make sure that they have enough money in reserve to sustain during this period. A cash flow forecast will help predict whether you’ll need to borrow money, and if you are financially prepared for running the business.

Still uncertain on how to start a business or run already established business? Feel free to consult our experts for this or regarding any other information you are sceptic about AJSH & Co. LLP

To facilitate the process of setting your business, we offer a wide range of services including company registration, accounting and bookkeeping, statutory audits, tax compliances, trademark registration and setting up of SEZ.

Income tax adviser in India

Income Tax: Skepticism eliminated

What is Income Tax?
A tax imposed on taxable income or profits of persons (whether individual, firm, company, Artificial Juridical Person, Association of Persons, Body of Individuals or Local Authority). Taxation rates may vary by type or characteristics of tax payers.

Tax trend followed in India:
In India, two types of tax trends are followed:

  • Progressive Rates: When the tax rate increases as the taxable income increases.
  • Proportional Rates: When the tax rates are uniform, irrespective of the person or their incomes.

Income tax in itself is a vast concept and cannot be understood in entirety by a layman, so here are few answers to drive away all ifs’ and buts’ that usually arise:

  • Are gifts from relatives always tax free?
    The provisions of Section 56 of Income Tax Act, 1956, state that the section provides for a cap of INR 50,000 on gifts received from non-relatives and if gifts exceeded the amount, the same would be taxable under the head “income from other sources.” But there was no such cap on gifts received from a relative.
  • What is the meaning of Presumptive taxable scheme?
    As per section 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account under certain circumstances. In order to provide relief to small taxpayers, the Income-tax Act has framed the presumptive taxation scheme under sections 44AD, 44ADA and 44AE. A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from the job of maintenance of books of account. ​
  • Is occasion a necessary condition for receiving any sum from a relative as a gift?
    The need to provide an explanation on the occasion for which gift was received is not mandatory, as per the provisions of Section 56 of Income Tax Act, 1956.
  • How is long-term capital gain from NABARD bonds taxed?
    Long-term capital gains (LTCG), after indexation, from zero-coupon bonds of NABARD are taxable at 20.8% and without indexation they are taxable at 10.40%, after taking into account basic exemption limit.
  • Is deduction allowed on money invested in Senior Citizens’ Saving Scheme (SCSS)?
    Amount deposited in SCSS is eligible for deduction under section 80C of the Income Tax Act, subject to the maximum limit of Rs 1.5 lakh.
  • What are Equity Oriented Mutual funds?
    Mutual Funds that apply 65% or more of their corpus to equity or equity related securities at all times.
  • How Equity Oriented Mutual Funds are taxed?
    1. Gains on equity oriented mutual funds held for less than a year are treated as short-term capital gains and taxed at 15%.
    2. Gains on equity oriented mutual funds held for a year or more are treated as long-term capital gains and taxed at 10% for gains exceeding Rs 1 lakh in a year.
    3. For equity oriented mutual funds invested on or before 31 January 2018, gains till that date will be considered as grandfathered and will be exempt from tax.
  • Is maintaining proof or records of earnings necessary? ​​
    For every source of income one should maintain proof of earning and the records specified under the Income-tax Act. In case no such records are prescribed, reasonable records with which one can support the claim of execution of income should be maintained.
  • Is relief available from double taxation, if income is earned in both India as well as abroad?
    A person can claim relief in respect of income which is charged to tax both in India as well as abroad. Relief is granted either, as per the provisions of double taxation avoidance agreement entered into with that country (foreign country) by the Government of India or by allowing relief as per section 91 of Income Tax Act in respect of tax paid in the foreign country.
  • When are incomes deemed to be received in India?
    Following incomes are treated as incomes deemed to be received in India: ​

    1. Interest credited to recognised provident fund account of an employee in excess of 9.5% per annum.
    2. Employer’s contribution to recognised provident fund in excess of 12% of the salary of the employee.
    3. Transferred balance in case of re-org​anization of unrecognised provident fund.
    4. Contribution by the Central Government or other employer to the account of the employee in case of notified pension scheme referred to in section 80CCD​.​
  • What is the eligibility for being taxable under Presumptive taxable Scheme under section 44AD?
    The scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm). Further, a person who has made any claim towards deductions under section 10A / 10AA / 10B / 10BA or under  sections 80HH to ​80RRB in the relevant year, cannot come under the purview of this scheme.We believe that income tax cannot be illustrated and explained with few questions because of its vast dominion. Still confused and have questions regarding your income tax filing, you can reach our team of experts.

If you require any assistance in filing income tax returns, corporate returns, tax assessments, tax planning, structuring, transaction advisory, please click here.

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Rupee sliding: Reasons & Forecast

What is value of currency for an economy?
An economy is often represented by the people who live there and the value its currency has, further the value of a currency depends on factors that affect the economy like imports and exports, performance of equity markets, foreign exchange reserves, macroeconomic policies, inflation, employment, interest rates, growth rate, trade deficit, foreign investment inflows, banking capital, commodity prices and geopolitical conditions. Currencies are often influenced by income levels through consumer splurge. When income increases, people tend to expend more. Demand for imported goods increases demand for foreign currencies, thus, weakening the local currency.

Reasons for Rupee depreciation against USD:

  • Crude oil- US restricted all countries, including India to import crude oil from Iran. Iran being the second most largest exporter of crude oil to India due to geographic proximity that saves  shipping cost as well as the favourable financial terms offered by Iran, including the longest credit period among all of India’s suppliers is losing its rupee value further.
  • Trade war- US and China have been involved in heated up trade war as they are imposing import tariffs on goods from either of these countries and such a situation is not viable for a country like India.Trade war is leading the markets into period of risk off where prices of all assets are moving lower. US Dollar and Japanese Yen are observed to be the major beneficiaries from trade war. Indian Rupee is already under pressure from high crude oil prices and on-going trade war sparked another bout of capital outflows.
  • Fiscal deficit blues- As a result of hike in crude oil prices, crude oil imports from Iran and trade war between US and China India’s fiscal deficit might get hurt over the upcoming quarters as India is a net importer of crude oil and also heavily dependent on it. It is further expected that weakness in Indian Rupee might persist as it will be difficult to fund the widening current account deficit given the increased return by way of higher US Dollar rates offered by other emerging market debtors.
  • FPI outflows: FPIs (Foreign Portfolio Investors) have surfaced as net sellers in the months of FY2018 and have already sold-off around INR14,000 crores worth of equity and debt securities so far, leaving Rupee to a downslide.

Ways to protect the depreciating currency:

  • The country should sell more goods in overseas market than it buys from them and have a trade surplus, which leads to more foreign currency into the country than what is paid for imports. Thus, strengthening the local currency.
  • As the difference in interest rates between countries is one of the major factors for rupee depreciating, RBI’s move to deregulate interest rates on savings deposits and fixed deposits held by Non-Resident Indians (NRIs) proved to be a successful part of a series of steps to stem the fall in the rupee. By allowing banks to increase rates on NRI rupee accounts and bring them on a par with domestic term deposit rates, the RBI expects fund inflows from NRIs, resulting in a rise in demand for rupees and strengthening value of the local currency.
  • Some ways through which the RBI controls the movement of the rupee are:
    1. Changes in interest rates
    2. Relaxation or tightening of rules for fund flows
    3. Tweaking the cash reserve ratio (the proportion of money banks have to keep with the central bank)
    4. Selling or buying dollars in the open market
    5. Fixation of the statutory liquidity ratio, that is, the proportion of money banks have to invest in government bonds
    6. The repo rate, at which RBI lends to banks.

While an increase in interest rates makes a currency expensive, changes in cash reserve and statutory liquidity ratios increase or decrease the quantity of money available, impacting its value in the positive direction.

Forecast:
Increased customs duty on total 19 categories of “non-essential items” such as washing machines, refrigerators, radial tyres, and aviation turbine fuel (ATF) witnessed an import of around INR 86,000 crores in 2017-18, leading to improvement in Current Account Deficit and attracting inflows. The Indian rupee will also be benefited from any inclusion of local government bonds in the JP Morgan government bond index for emerging markets. Also, citing the $1 billion rupee-linked bond issuance launched by World Bank’s private sector arm International Finance Corp, rise in value of rupee can be speculated.

We are a Chartered Accountants firm rendering a gamut of services related to accounting & bookkeeping, auditing and assurance, taxation, business process outsourcing and company formation in India. If you require any assistance, please click here.

FDI-1024x341

India: The nucleus for FDIs

Foreign businesses often channelize their funds to reap the benefits of fast growing economy, cheap labor and wide scope of earning increased returns in India. To capture and relish such benefits, FDIs are superintended towards India in huge proportions by different countries around the world. 

What is FDI?
Foreign Direct Investment (FDI) is generally termed as an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company.

India amidst top destinations for FDI
India ranks among the top 10 host economies for FDI, according to the United Nations Conference on Trade and Development (UNCTAD) 2018 World Investment Report. FDI inflows hit an all-time high of USD 44.5 billion in 2016, however, following the global downward trend, flows to India declined in 2017 to USD 39.9 billion.

In January 2018, the Indian government gave its approval to a number of major amendments aiming to further liberalise and simplify the national FDI policy. In the last three years, the government had already eased 87 FDI rules across 21 sectors. In 2018, India ranked 100th out of 190 countries in the Doing Business report published by the World Bank.

Russia contemplating investments in India
One such major step can be sighted by the Russian Direct Investment Fund (RDIF) moving towards investing in India eyeing to boost infrastructure funding. As mentioned by Kirill Dmitriev, CEO, RDIF in an interview that RDIF will sign two key deals at this annual summit on October 5, 2018:

  • Agreement with their partners in India to jointly invest in ports & logistics; and
  • Joint investment in mineral fertilisers, including the construction of production facilities and related infrastructure, as well as the introduction of advanced technologies in Russia and India. The agreement also provides for the supply of PhosAgro products to Indian partners on a long-term basis.

Growth spotted
The sectors attracting the greatest amounts of FDI in India include the services sector, followed by IT services and software, construction, the automobile industry and wholesale and retail trade.

FDI Equity Inflows by Country

Main Investing Countries 

 (January – March 2018)

%

 (April – June 2018)

%

Mauritius 34 33
Singapore 18 19
Netherlands 6 6
United States 6 6
Japan 7 7
Germany 3 3
United Kingdom 7 7
Cyprus 3 2
France 2 2
U.A.E. 2 2

Discerning the consistent and steady growth in the influx of FDIs, one can identify these to be a secure source of foreign funds entering in the economy subsequently. Thus, promoting all sectors in India.

Is it a lot to take in? Need some assistance or more information for investment in India, please click here.

Also, we can assist you in setting up your presence in India, company formation in India, statutory accounting and bookkeeping and other regulatory requirements.

Source:

  1. https://en.portal.santandertrade.com/establish-overseas/india/foreign-investment
  2. http://www.dipp.nic.in/fdi-publications