Loans to/by Companies

Lets see what are the restrictions to a Company in borrowing or lending loans to individuals or to other companies. The reason behind taking this topic is off late there are so many companies which does not comply with the regulations and legal compliance. We could have come across these lines in all our daily's

"CBI investigations have revealed that the DB group took a loan of Rs 242 crore from a financial service company on December 23, 2008. And Rs 200 crore out of this loan was routed on the same day to Cineyug and Kusegaon Fruits and Vegetables, who in turn transferred the money on the same date to Kalignar.CBI believes this money was the bribe for Raja and Kanimozhi, even though Kalignar claims this was an unsecured loan."

This article is not anything about political views. But it was on this background which stirred my curiosity to see what are the limitations a Company has in receiving or lending loan

Inter-corporate Loans and investments

• A company cannot lend loans to another company beyond certain limits.Any lending of loan should be done by passing resolution in the meeting.However, if a Company lends loan to its subsidiary company, then there are no restrictions.
• The rate at which a Company lends loan to another company should not be less than the bank rate prescribed by RBI at any time.
• If the lending Company has defaulted in the repayment of loans and interest, then it will not be allowed to extend any loans.

Buying Gold? Do you know this?

Whenever we buy gold, we hear terms like making charges and wastage charges. Thus we end up in paying something more than the actual gold rate on that particular day.

So what all these rates are about?

Making charges:

Whenever ornament is made, the goldsmith puts in lots of effort to give exceptional designs which attracts the buyer.Even though , machines have reduced the manual effort, still the craftsman artistic skill is indeed required.So, this ends up in jewellery shops fixing certain charges as making charges.This depends on the type of the ornament and complexity involved in it.The rate varies between 3%-12%. 10% is most common. However the same can be negotiated.There are few occasions where offer comes out with zero making charges.

Wastage charges:

Do gold gets wasted in making? If we buy,say 2 gram chain, we need to pay for 2 grams and labour cost.Gold does not disappear. Then why this wastage charges?

Craftsman wastes some gold while  manufacturing which depends on the jewellery item. For the pure gold items the wastage is around 6-8%, whereas for a diamond jewellery it goes upto 15% of pure gold. A complete finished gold ornament shines brilliantly. But during the process of making  some amount of gold will be wasted or go as loss while cutting, soldering,melting etc.Thus jewellers collects this as wastage charges.However, this can be negotiated.

This leads to price difference of what needs to actually paid and what we pay for. Making Charges and wastage charges are what a consumer pays above the price of gold(on a certain day) for crafting the gold into jewellery. This variation depends on the ornaments we buy.

All about PAN

Permanent Account Number (PAN) is a national identification number, issued to any person who has applied for or to whom department allots the number without application

I am not a tax payer. Do I need to have PAN?

Yes. Your income may not be coming in taxable limit or you may be senior citizen and your children may give money to you. In such case, you may have to make some transactions for which PAN is mandatory. For example:

1. Sale or purchase of any immovable property valued at five lakh rupees or more; 
2. A time deposit, exceeding Rs.50,000, with a banking company ; 
3. A deposit, exceeding Rs.50,000, in any account with Post Office Savings Bank; 
4. Opening a bank account; 
5. Making an application for installation of a telephone connection (including a cellular telephone connection); 
6. Payment in cash for purchase of bank drafts or pay orders or banker’s cheques for an amount aggregating     
7. Rs.50,000 or more during any one day; 
8. Deposit in cash aggregating Rs.50,000 or more with a bank during any one day; 

Why do i need to quote PAN for all the above mentioned transactions?

PAN is used by the department to trace all the transactions made by the individual.It acts as identifier of the person with the department.So department has made it mandatory to quote PAN. 

I have PAN card. But I have not filed Income Tax return.

As long as your income does not move beyond the taxable limit and its for genuine reasons, you need not file IT return even if you have PAN card.But in case , you have income exceeding the limit and you have not filed IT return, there are possibility of getting caught when you do any of the above transactions

How do i identify a PAN number?

The structure of a PAN number is as follows:

AAAPK9999A

The first 3 digits i.e. “AAA” in the above PAN are alphabetic series running from AAA to ZZZ 

Fourth character of PAN i.e. “P” in the above PAN represents the status of the PAN holder. “P” stands for Individual, “F” stands for Firm, “C” stands for Company, “H” stands for HUF, “A” stands for AOP, “T” stands for TRUST etc. 

Fifth character i.e. “K” in the above PAN represents first character of the PAN holder’s last name/surname. 

Next four characters i.e. “9999” in the above PAN are sequential number running from 0001 to 9999. 

Last character i.e. “A” in the above PAN is an alphabetic check digit. 

Insider Trading

Insider trading is the buying , selling or dealing in securities of a listed company by a director , member of management , employee of the company , or by any other person such as internal auditor , advisor , consultant , analyst etc, who has knowledge of material inside information which is not available to general public.

Why forbid insider trading?

The ideal securities market is one which allocates the capital in the economy in a proper manner. This function is enabled by "market efficiency", the situation where the market price of each security accurately reflects the risk and return in its future. The primary function of regulation and policy is to foster market efficiency, hence we must evaluate the impact of insider trading upon market efficiency.

When insider trading happens, they speed up the flow of information and forecasts prices.This is possible by the insiders as they are in comfortable position to make forecasts about the risk and return of the shares and bonds of their company. This would lead to perceiving the market prices to be "too low" or "too high". When they trade on the secondary market, they serve to feed their knowledge into prices, thus making markets more efficient.

What is the regulation?

Securities and Exchange Board of India(SEBI) has formulated Prohibition of Insider Trading regulations.

The regulations also explains about the disclosure norms to be followed. The details of insider trading by any corporates can be obtained by logging into bseindia.com, where disclosures made by the Company can be seen.

Latest Headlines

On May 10, 2011,SEBI has embarked upon a programme to increase surveillance and prevent insider trading. The regulator has also formed a committee to reach out to new retail investors, while introducing new products and working out risk mitigating measures.

Exemption from declaration in Annual Information Return(AIR)

The Central Board of Direct Taxes (CBDT) has exempted individual taxpayers from declaring high value transactions with banks, mutual funds, credit cards etc in their income tax returns forms.The recently notified returns Sahaj and Sugam , ITR II and ITR III does not carry AIR blocks.

However, point to be kept in mind is the AIR is still in statute book. Government will have this information while checking the Income Tax returns.

The income tax department has a special arrangement with the National Securities Depository Ltd ( NSDL )) where companies issuing shares or bonds, banks, credit card companies, mutual fund houses, the Reserve Bank of India , registrars and sub-registrars for property transactions can file the AIR either physically or online. 

These institutions notify the high value transactions an individual has entered into with them. As such, the details will be available to the Department. So, on a selective basis, the income tax officer can verify or select cases for scrutiny.

Employee State Insurance (E.S.I)

Any employee who earns less than or equal to Rs.15,000 will be deducted ESI. Employer's contribution is 4.75% and employee's contribution is 1.75%


Example:
Gross salary - Rs.20,000
P.F- Rs. 2,000
Leave Travel Allowance (LTA)- Rs.4,000


In this case if we take net salary it is Rs.14,000 (20,000-2,000-4,000) . So it is below Rs.15,000. Whether ESI is applicable???
Gross salary is Rs.20,000. So, definitely the employee will not come under the preview of ESI Act. Whether his salary goes below Rs.15,000/- in any one of the month (on the deduction of PF, LTA and any other deductions) ESI act will not apply.

Professional Tax

The next deduction which can be seen in the payslip is the Professional Tax. The Professional Tax is tax on the profession,trade or employment.

The professional Tax slabs differ for different states. Some states have different tax structure for men , women and senior citizens.Few corporation deduct on monthly basis. 

In Tamil Nadu, the professional tax is collected half yearly.

Provident Fund

Continuing with my earlier post, lets see wat role P.F plays in the deduction part in our salary slip.

Provident fund deduction which is reflected in the payslip is 12% of the basic salary. Provident fund is contributed by the employees and the employers as well. The contribution made by us is forming part of the income and there is no question of tax here.Meaning , the same can be claimed under section 80C. Coming to the contribution made by the employer, it is over and above our salary and it is taxable.

When planning for investments, it is necessary to consider the total P.F. deduction as the same is eligible for claiming under section 80C. So, when the total contribution made by you is Rs.25,000 in a year, the same can be claimed under section 80C (Which is having maximum limit of Rs.1,00,000)

Taxability of P.F
Lets see this from two angle
1. Continuing the employment under the same employer
2. Receipt of accumulated balance at the time of retirement or resignation

The Provident Fund Scheme ruling the private establishment is Recognized Provident Fund Scheme(R.P.F) governed by Employee’s Provident Funds and Miscellaneous Provisions Act, 1952. Whereas , the government and semi government employees , universities would be governed by Provident Fund Act,1925.

So for a private sector employee, any contribution made by the employer over 12% of the salary would be taxable. Similarly , the interest on P.F is exempt upto 9.5%. Any interest over and above the rate is taxable.

( Have you ever calculated how much deduction is made for the P.F!!!!)

 At the time of retirement/ resignation

Nothing would be taxable if the following conditions are satisfied
1. If you are in service for more than 5 years
2. The service is for less than 5 years but you terminated the job due to ill health or discontinuance of business by your employer etc.,
3. When you get new job, the balance in the R.P.F account is transferred to the R.P.F account of the new organisation. So the number of years will be reckoned as a continuity from the previous employment.

Check whether you fit into these conditions , if not.....
1. Whatever amount which is not taxable will be taxed now.
2. If you have availed any tax concessions for your contribution under 80C, the same would be withdrawn now and taxable.

Lets understand this more with an example:
Basic salary  - Rs. 15,000
Your contribution - Rs. 1,800 (12% on Rs.15000)
Employer;s contribution - Rs.1800 ( Same as above)

Your take home would be Rs.13200 ( Rs.15000-1800). Your contribution can be claimed under section 80C for tax calculation.

For government and semi government employees:

Be it your contribution or employer's contribution or  interest on it or any lump sum received on retirement/resignation , nothing is taxable.

Details on other possible deduction are about to come....

Did you take a second look into your payslip!!!!

Almost all salaried employees would have got this thoughts atleast once in their mind.The thought of investing pops up in our mind only when we see our pay slips and get heart attack to see the deductions made as Provident Fund (P.F) and most important Income Tax (I.T). Many of us do not really analyse our payslips and take few seconds to see the deductions made.

So what are these deductions actually?
Can we do something to minimise it?
Can we plan our investments accordingly?
Do we need to invest mainly to get the tax exemption?

The above are few questions which will crop up and which ought to be understood by everyone. One need not be a Finance graduate and professional to know these finance related terms. Let us take a look on each of the above.

So what are these deductions actually?
The most common deductions are Provident fund ( which is 12 percent of our basic salary), Income Tax deduction, professional tax, Gratuity, ESI etc.,
Can we do something to minimise it?
Yes we can!!!. Though we cannot reduce our P.F deduction , we can very well minimise the I.T deductions by structuring our salary properly. 
Can we plan our investments accordingly?
Again it is Yes. We can minimise our IT deductions if and only if we plan our investments sensibly. To mention a few ,Life insurance, mediclaim insurance, Public Provident Fund(P.P.F), National Savings Scheme (N.S.S) etc., 
Do we need to invest mainly to get the tax exemption? 

This is the wrong thought which prevails in everyone's mind.Do not go for investment with a mind set to get tax exemption. Investments, be it  Rs.10,000 or Rs.1,00,000 should be done only keeping the long term and short term benefits in the mind.

I have seen many who gets Rs.25,000 deducted as P.F opts for Rs. 75000 in the LIC cover thus summing up Rs.1,00,000 for 80C exemption. Point to note here is opting for Rs.10,000 or Rs.20,000 more in LIC cover would have rendered long term benefit. Though your 80C restricts you to Rs.1,00,000 only.

So never invest with the sole objective to get tax exemption.

If these are the things which need to be avoided and seen , then how to plan for your investment!!!!
Watch this space for more