Inflation above 12%

Completely unmindful of the havoc it wreaks on one and all, the monster called Inflation is surging ahead…relentlessly. Inching beyond 12%, it has left the RBI with hardly any choices but to resort to credit squeeze and interest hike yet again.

July 29, 2008 once again saw the repo rate raised by 50 basis points to a seven-year high of 9%.Not to be left behind is the cash reserve ratio (CRR which is the proportion of funds that banks must keep on deposit with RBI), which went up 25 basis points to 9%.

The dominoes effect is obviously there for all to see and feel the pinch of. Following the announcement of the RBI, many commercial banks announced increase in their lending and deposit rates. The immediate victims of the interest hike are the automobile and real-estate industries, because of an immediate reduction in demand due to high cost of loans. Obviously, if the inflationary trend continues for a longer duration, higher financing cost will adversely affect other sectors too.

Bleak scenario indeed, with little respite in sight!

Industrial Park Scheme – the embrace widens

It was not very long ago when the drawing-rooms of upscale, urban India echoed the sardonic, stale and cynical banter like “If you want to start a new venture or get an industrial plan/project expedited just go to the nearest Government Department…and then go off to a Rip Van Winkle sleep…because the Department would be sleeping too!” Of course this was an exaggeration but then like all satire, such self-deprecatory humour had more than a little ring of truth to it.

Indeed we have come a very long way from the strangle-hold of the ‘license-permit-quota-raj’ where the ‘babu-dom’ tried every trick in the book to thwart or at least delay economic enterprise in the country. Refreshingly, the new watchwords are ‘Enable’ ‘Empower’ and ‘Facilitate’ Industry-(manufacturing as well as other sectors). The latest step forward in this direction is the notified amendments dated 2nd July 2008, issued by the Central Board of Direct Taxes (CBDT) to the Industrial Park Scheme 2008. (Refer sub-section (4) of section 80IA, IT Act1961) According to the amended scheme, the ambit of “industrial activity” has been expanded to include three additional types of industrial activity viz. (i) Research and Experimental development on natural sciences and engineering as defined in section K, division 73, group 731 of the National Industrial Classification, 2004 Code, issued by the Central Statistical Organisation, Department of Statistics; (ii) Development of computer software; and (iii) ITES covered under notification S.O. 890(E),dt.26th September 2000 (pertaining to sections 10A, 10B and 80HHE of the IT Act)

Moving ahead in this direction, the amendments provide for further easing the eligibility under the scheme through the following:

• a reduction in the minimum constructed floor area requirement from the earlier 50,000 to the current 15000 sq. metres;
• the area allocated or to be allocated to industrial units reduced to 75% of the allocable area (from earlier 90%); and
• Provision to allocate area for commercial activity with a cap of 10% of the allocable area.

The original scheme was notified on 8th January 2008.

Location Restriction-going, going…gone?

Yet another roadblock to the process of Industrial march falls by the wayside as the Indian Union Cabinet gave its approval for removal of ‘location restriction’ in setting up of industries.

The extant restriction under Industries (Development & Regulation) (IDRA) Act 1951 categorically states that a proposed project shall not be located within 25 kms from the periphery of the standard urban area limits of cities having a population of more than 10 lakhs according to 1991 census. The only exception permissible is - industries in electronics, computer software and printing & other non-polluting sectors and all such industries, provided they are located within industrial areas designated by the State Governments before July 24, 1991.

In consonance with its new mindset the Indian Cabinet found this restriction an unnecessary hurdle in setting up of industries, which clearly merits removal from the rule-book. And happily enough, it seems to be on its way out.

Move aside ‘old order’…there’s work to be done here!

‘Department of Pharmaceuticals’ created

Cognizant of the need to give the Pharmaceutical industry a definite fillip - particularly to the R&D aspect, the Indian government has created a brand-new Department of Pharmaceuticals under the Ministry of Chemicals and Fertilisers. Notification to this effect was issued recently.

This Department will be responsible for the following:

• Drugs and Pharmaceuticals, excluding those specifically allotted to other departments;
• Promotion and co-ordination of basic, applied and other research;
• Development of infrastructure, manpower and skills in this sector along-with management of related information;
• Education and training including high-end research and grant of fellowships in India and abroad; exchange of information and technical guidance on all matters relating to pharmaceutical sector;
• Promotion of Public–Private–Partnership in pharmaceutical related areas;
• International co-operation in pharmaceutical research, including work related to international conferences;
• Inter-sectoral coordination - between organizations and institutes under the Central and State Governments, in areas related to the subjects entrusted to the Department;
• Technical support for dealing with national hazards in the pharmaceutical sector;
• All matters relating to National Pharmaceutical Pricing Authority including related functions of price control/ monitoring;
• All matters relating to National Institutes for Pharmacy Education and Research;
• Planning, development and control of, and assistance to, all industries dealt with by the Department.

Apart from the above, the Department will also be in charge of certain public sector drugs and pharmaceuticals companies e.g. Hindustan Antibiotics Limited, Indian Drugs and Pharmaceuticals Limited.

Clearly, a much-needed shot in the arm to improve the health of the pharmaceutical sector.

Mobile Phones for making payments–RBI guidelines

There is no gainsaying the fact that the modern version of the mythical lamp of Alladin is none other than the multi-functional, much-adored mobile phone. The latest use this wonder-gadget is being put to is for making payments for sundry services, ranging from utility bills to cinema tickets.

But before this becomes an everyday reality, some guiding mechanism needs to be in place. Towards this, the Reserve Bank of India (RBI) is finalizing the Operative Guidelines for banks on mobile payments. The Draft Guidelines were placed on RBI website for comments from interested parties and the process is expected to take some time. Meanwhile, RBI has cautioned the banks (which have already started offering mobile payment services to their customers) that due care needs to be taken since such transactions entail a number of attendant issues that need careful examination. Hence banks are advised to keep on hold any such services till issuance of the final Guidelines.

However, it has been clarified that RBI has no objection for use of mobile channel to provide basic services such as mobile alerts for credit or debit entry, balance enquiry etc. which merely provide information.

Security for ECB

Under the External Commercial Borrowings (ECB) guidelines, the choice of security to be provided to the overseas lender/supplier (for securing ECB) is left to the borrower. However, creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject to specific Regulations of RBI.

As a rationalisation measure, the RBI has considered the proposals for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees, on behalf of the borrower, in favour of the overseas lender.

As an enabling step it has been decided to allow Authorised Dealer Category I Banks to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate/personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower. All that is needed is for the Banks to satisfy the conditions laid down by RBI, before they issue ‘no objection’.

Playing by the rules…No double taxation please!

The applicant, a foreign company incorporated and based in Singapore, offers a full range of real estate services to its local and international clients. It has also developed certain international client relationships and in accordance with the global policy, various offices provide referral services to other group offices, wherein one group Office would refer client to other group office, depending on the requirements of the clients. In respect of such referrals, as per the applicant, each serving group Company is liable to pay a ‘referral fee’ to the referring group company in accordance with the international fee-sharing rules of the group.

The AAR on the facts and in the circumstances of the case held that the receipt on account of the referral fee arising to the applicant would not be taxable in India, having regard to the provisions of the Income Tax Act and the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. No tax is attracted either under the head business income, or royalty income or income by way of FTS. Consequently there will be no obligation to withhold any tax under section 195 of the Act, while making remittance abroad.

Not at all ‘royal’ty……………..

The Authority for Advance Ruling (AAR), a quasi judicial body dealing in tax issues related to foreign companies, has held that monthly payments made by the Indian arm of a company to an overseas entity for voice and data services provided through telecom networks, is not ‘royalty’ and hence not taxable.

Basic Wage and Leave Encashment

The question before the Supreme Court, in a recently decided case was whether the amount received by encashing the earned leave is a part of "basic wage" under Section 2(b) of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 requiring the employer's contribution on a pro-rata basis. In many cases the employees do not take leave and encash it at the time of retirement or encashment happens after his/her death. These can be deemed as uncertainties and contingencies–by way of an option available to the employee. However some employees may avail it and some may not. In other words, the test of universality is not satisfied. Accordingly the Court held that ‘basic wage’ was never intended to include amounts received for leave encashment and therefore there was no obligation on the employer’s part towards pro rata contribution.

They grow old but they never die!!

“Is there an expiry date for stamp papers?” was the question posed to the Supreme Court in a recent case. The apex court ruled that there isn’t. Examining closely Section 54 of The Indian Stamp Act, 1899, the court observed that it nowhere prescribes any expiry date for use of a stamp paper. The Section merely provides that a person possessing a stamp paper for which he has no immediate use (which is not spoiled or rendered unfit or useless), can seek refund of the value thereof by surrendering such stamp paper to the Collector, provided it was purchased within the period of six months next preceding the date on which it was so surrendered.

The stipulation of the period of six months prescribed in section 54 is only for the purpose of seeking refund of the value of the unused stamp paper, and not for use of the stamp paper. Section 54 does not require the person who has purchased a stamp paper, to use it within six months. Therefore, there is no impediment for a stamp paper purchased more than six months prior to the proposed date of execution, being used for a document.

Another interesting point before the Court was the validity of a document made on two stamp papers purchased on 25.8.1973 and 7.8.1978. The Trial Court and the High Court doubted the genuineness of the agreement dated 5.1.1980 because it was written on two stamp papers purchased on 25.8.1973 and 7.8.1978.

However the Supreme Court held that a document cannot be termed as invalid merely because it is written on two stamp papers purchased by the same person on different dates. Elaborating further the Court observed that the fact that very old stamp papers of different dates have been used, may certainly be a circumstance which can be used as a piece of evidence to cast doubt on the authenticity of the agreement. But that cannot be clinching evidence.

It is advisable however to check the Rules made by the State Government before taking such chances. Similarly, it may be safer to secure any bona-fide transactions by using recently purchased and consecutively numbers stamp papers to obviate any difficulties later.