Wednesday, June 11, 2008

RBI Study on Courier/Postage Charges of Banks

The Reserve Bank of India has today placed on its website the details of courier/postage charges levied by banks for information to the public.

It has been reported to the Reserve Bank of India that many banks charge for various services offered by them disproportionate to the cost incurred by them. It was decided to conduct studies in the matter and as a first study, information in respect of courier/postage charges levied for collection of outstation cheques and for sending statements/cheque books, etc., to the customer was collected. The results of the study have been compiled in the form of a table that has been put on the Reserve Bank's website (www.rbi.org. in). The Reserve Bank of India will be conducting such studies from time to time in respect of other charges and will put the results on the website.

Alpana Killawala
Chief General Manager

Press Release : 2007-2008/1574

Sunday, June 8, 2008

Properties vacant for a year entitled to vacancy allowance

The Income-Tax Appellate Tribunal (ITAT) Mumbai has ruled that a property which has remained vacant for a year is entitled to vacancy allowance. This means that you will not have to pay tax on the rental value of your property if it has been vacant for a full year.

This decision goes against the practice of tax officers who levy tax on the rental value of a property even if the property remained vacant for a full year. They normally allow vacancy allowance if the property is vacant for a part of the year. In the department's view, since the property is vacant for a full year, it's not let out at all and therefore the question of vacancy allowance does not arise.

The ITAT ruling was given in the case of Amrit Petroleum for the assessment year 2001-02 . The company was represented by tax lawyer Jignesh R Shah. Mr Shah argued that the property remained vacant despite the best efforts of the owner to find a client and therefore the owner is entitled to the vacancy allowance for full year.

The department usually takes a stand that such vacancy allowance is allowable only when the property is vacant for a part of the year and not for the full year. According to the provisions of the Income-Tax Act, if a taxpayer owns an immovable property which is not used for the purposes of his business, he is liable to pay tax on the annual letting value (ALV) of the property.

The tax is levied on the income-earning potential of the property, and not on the income generated from the property. However, if the property is let out and is vacant for a part of the year, the assessee is entitled to proportionate relief called "vacancy allowance" — earlier under Section 24(1)( ix) of the IT Act and now under Section 23(1)( c) of Act. The tribunal held that when vacancy allowance was allowed under Section 24(1)( ix), the same is allowable even if the property is vacant for the whole year.

Finance ministry dragged to HC over SEZ tax sops

In one of the first cases against the finance ministry's objections on tax exemptions to Special Economic Zones (SEZ) and what could trigger a spate of similar litigations across the country, the Delhi High Court has issued notice to the government on a petition challenging an official circular in this regard.

Directorate General of Export Promotion in the finance ministry had issued the circular in question in April saying service tax exemption cannot be availed if the services were not rendered by the service provider from within the SEZs.

The circular, also meant for implementation by all its field officers, adds that Cenvat credit (on excise duty) will not be available on the inputs used by manufacturers making supplies to SEZ developers.

The petitioners are Jindal Stainless Ltd and its managing director RG Garg. The company is in the process of operationalising a SEZ in Orissa to manufacture and export stainless steel and has already obtained the notification from the government. They said the circular was an erroneous interpretation of the SEZ Act and Rules and therefore was contrary to it.

To support their claims, the petitioner has pointed out that the Section 51 of the SEZ Act has over-riding powers in case of inconsistencies with the provisions including in those contained in any other law.

The court on Wednesday asked the government to file its reply within a fortnight. The petitioners would have to file their rejoinder within two weeks thereafter. The case would come up for hearing by July-end.

According to the petitioner, the only condition in SEZ Act and Rules for availing service tax exemption is that the services have to be used for carrying out the authorised operations (those approved by the Board of Approval for SEZs in the commerce ministry) of the SEZ developer and/or the unit.

However, since services are intangible in nature, there is no statutory condition that services have to be rendered from within the SEZ as specified by the circular, the petitioner added. "The location of the service provider or the place of rendition of service is entirely irrelevant for the purpose of this exemption," they said in the petition, adding that there was no requirement that the service has to be consumed within the SEZ or rendered within the SEZ.

Cenvat credit scheme allows for utilization or refund of input credit for all exports. In this case, sales by manufacturers in the domestic tariff area (DTA, or area outside SEZs) to SEZ developers are treated as exports for which those suppliers can avail tax concessions and input credits. But the circular prevents these manufacturers/suppliers from availing any fiscal benefit.

Tarun Gulati, petitioner's counsel and partner at Economic Laws Practice, said most crucial services such as banking, insurance, accounting, architecture, courier and port services to SEZs operations could be rendered without being physically present in the SEZ. "People have invested thousands of crores in setting up SEZs on the basis of tax benefits promised by the government. Therefore, the finance ministry's move to take away those benefits is unfair," he said.

Moreover, the petitioner claimed that the issuance of such a circular is not within the jurisdiction of the DG (export promotion). If any circular has to be issued, it can be done only by the CBEC, and that too it can only be beneficial in nature, they added. For such drastic changes like taking away tax exemption, the government will have to go in for an amendment of the SEZ Act itself, they said.

Finance ministry has been against giving tax breaks to SEZs saying it would lead to huge revenue losses. Citing a study, it showed that the revenue drain would be to the tune of Rs 102,621 crore from 2006-07 to 2009-10. However, the commerce ministry (the nodal ministry for the SEZs) says the revenue loss estimates are notional.

The total incremental investment in the SEZs so far is over Rs 70,400 crore. The government has set a target of Rs 1,25,000 crore for exports from SEZs for 2008-09, an 86% increase over the last fiscal. During 2007-08, shipments from the tax-free enclaves have been projected at Rs 67,088 crore, an increase of 200% in two years. The zones have generated employment for over 2.8 lakh people. The commerce ministry has so far given formal approval to 467 SEZ proposals, of which 225 have been notified so far. The newly notified SEZs are providing direct employment to 97,993 people.

Thursday, June 5, 2008

Overseas Investments - Liberalisation / Rationalisation

Investment in WOS/JV's in excess of 400% of Networth is now allowed in specific sectors. Relevent RBI Circular is enclosed.


CIRCULAR NO

48/RBI., Dated: June 3, 2008


Attention of Authorised Dealer Category – I (AD Category – I) banks is invited to A. P. (DIR Series) Circular No. 59 dated May 18, 2007, A. P. (DIR Series) Circular No. 68 dated June 01, 2007, A. P. (Dir Series) Circular No. 11 dated September 26, 2007 and Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, on Overseas Direct Investments. As announced in the Annual Policy Statement for the Year 2008-09 (paras 131 and 132), the Regulations governing overseas investments have been further liberalised as under :

2. Overseas Investment in Energy and Natural Resources Sectors

In terms of A. P. (Dir Series) Circular No. 11 dated September 26, 2007, an Indian Party is allowed to make direct investment in Joint Ventures and / or Wholly Owned Subsidiaries outside India up to 400 per cent of the net worth as on the date of the last audited balance sheet, under the Automatic Route. With a view to provide greater flexibility to Indian parties for investment abroad, it has been decided, in consultation with the Government of India, to allow Indian companies to invest in excess of 400 per cent of their net worth, as on the date of the last audited balance sheet, in the energy and natural resources sectors such as oil, gas, coal and mineral ores. The investments in excess of 400 per cent of the net worth shall be made only with the prior approval of the Reserve Bank. AD Category - I banks may, therefore, refer such cases to the Reserve Bank in terms of the procedures laid down in A. P. (Dir Series) Circular No. 68 dated June 1, 2007.

3. Investment in Overseas Unincorporated Entities in Oil Sector

(i) In terms of A. P. (DIR Series) Circular No. 59 dated May 18, 2007, Navaratna Public Sector Undertakings (PSUs) are allowed to invest in overseas unincorporated entities in oil sector (i.e. for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India, without any limits, under the automatic route. This facility is now extended to ONGC Videsh Ltd (OVL) and Oil India Ltd (OIL).

(ii) With a view to further liberalise the procedure, it has now been decided, in consultation with the Government of India, to allow a similar facility to other Indian entities to invest in overseas unincorporated entities in oil sector. AD Category – I banks may allow remittance up to 400 per cent of the net worth of the Indian company after ensuring that the proposal has been approved by the competent authority and is duly supported by a certified copy of the Board Resolution approving such investment. Applications by Indian companies, other than by Navaratna PSUs, ONGC Videsh Ltd (OVL) and Oil India Ltd (OIL), for investment in excess of 400 per cent of the net worth of the company as on the date of the last audited balance sheet, in overseas unincorporated entities, where such investments are approved by the Competent authority, should be referred by AD Category - I banks to the Reserve Bank for prior approval, as per the procedure laid down in A. P. (DIR Series) Circular No. 68 dated June 1, 2007.

(iii) All investments in unincorporated entities overseas would be required to comply with the reporting requirements as prescribed in Regulation 15 (iii) of Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004], as amended from time to time. Further, all such investments in unincorporated entities overseas by both Navaratna PSUs and other entities will be required to be reported in form ODI, including Annual Performance Report (APR) [cf A. P. (Dir Series) Circular No. 68 dated June 1, 2007].

4. Capitalisation of Exports

In terms of Regulation 11(1) of Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004], as amended from time to time, an Indian Party making direct investment outside India in accordance with the Regulations, by way of capitalization, in full or part of the amount due to the Indian Party from the foreign entity on account of payment for export of plant, machinery, equipment and other goods / software to the foreign entity, has to obtain the prior approval of the Reserve Bank where such export proceeds have remained unrealized beyond a period of six months from the date of exports. In order to align this provision with the Foreign Trade Policy, Indian parties may, henceforth, approach the Reserve Bank for capitalization of export proceeds only in cases where the exports remain outstanding beyond the prescribed period of realisation.

5. Necessary amendments to Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security), Regulations, 2004] are being issued separately.

6. AD Category - I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

7. The directions contained in this Circular have been issued under Section 10 (4) and 11 (1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law.

RBI/2007-2008/352

(Salim Gangadharan)
Chief General Manager-in-Charge

Export Proceeds can now be realised in 12 Months

A. P. (DIR Series)

CIRCULAR NO

50 /RBI., Dated: June 3, 2008
Export of Goods and Services- Realisation and Repatriation of Export Proceeds-Liberalisation

Attention of Authorised Dealer Category – I (AD Category- I) banks is invited to the provisions of sub-regulation (1) of Regulation 9 of the Notification No.FEMA.23 /2000-RB dated May 3, 2000, as amended from time to time, in terms of which the amount representing the full export value of goods or software exported should be realised and repatriated to India within six months from the date of export.

2. Reserve Bank has been receiving representations from Exporters / Trade bodies to extend the period of realisation of export proceeds in view of the external environment. It has, therefore, been, in consultation with Government of India, announced in the Annual Policy Statement for the Year 2008-09 (para 134) to enhance the present period of realization and repatriation to India of the amount representing the full export value of goods or software exported, from six months to twelve months from the date of export, subject to review after one year. The provisions in regard to period of realization and repatriation to India of the full export value of goods or software exported by a unit situated in Special Economic Zone (SEZ) as well as exports made to warehouses established outside India with the permission of Reserve Bank remain unchanged.

3. Necessary amendments to Notification No. FEMA.23/RB-2000 dated May 3, 2000 [Foreign Exchange Management (Export of Goods and Services) Regulations, 2000] are being notified separately.

4. AD Category - I banks may please bring the contents of this Circular to the notice of their constituents and customers concerned.

5. The directions contained in circular have been issued under Section 10(4) and 11(1) of Foreign Exchange Management Act, 1999 (42 of 1999) and without prejudice to permissions / approvals, if any, required under any other law.

RBI/2007-08/354

(Salim Gangadharan)
Chief General Manager-In-Charge

Tuesday, June 3, 2008

Chinese cabbie helps thief rob own home!

A Chinese cabbie unwittingly became the getaway car driver for a thief who robbed his own home.

Shen, of Huainan city, picked up the passenger at a bus stop at around 3 am and helped him load the things he was carrying into the boot of the cab.

That was when he noticed the man also had in his possession a fish without a tail - just like the one waiting in the freezer at Shen's home, reports the Daily Telegraph.

"I noticed he had a fish without a tail, and I thought how much it looked like the fish in my freezer at home. But then I laughed at myself for even having the thought," he said.

He put it down to freaky coincidence.

However, when he returned home, he was not prepared for the sight waiting for him.

He revealed that he had found his house broken into and his possessions - including the tail-less fish - missing.

Police later arrested a 56-year-old man who faces charges of burglary and theft.

Monday, June 2, 2008

CST Finally reduced to 2% w.e.f. 1st June'08

CENTRAL SALES TAX REDUCED TO 2% FROM 1 ST JUNE, 2008
Jyaistha 9, 1930
New Delhi: May 30, 2008
Ministry of Finance issued a notification today, bringing into effect from 1 st June, 2008 the new reduced rate of CST of 2 per cent on inter-State sales of goods. The notification of new CST rate of 2 per cent in place of earlier 3 per cent is in accordance with the announcement made by the Union Finance Minister in his budget speech to Parliament in February 2008 that the rate of Central Sales Tax would be reduced.
The rate of CST on inter-State sale of goods to registered dealers (against Form-C) shall now be the lower of 2 per cent and the rate of VAT or State Sales Tax applicable. This reduction forms a part of the roadmap for phasing out CST completely by 31 st March, 2010.
The Central Government and the Empowered Committee of State Finance Ministers have further agreed that the compensation for revenue loss to the States in any year arising from the lowering of CST will be limited to the proportionate loss based on the actual collection of CST in the relevant year. The Empowered Committee will also make every effort to prevail upon the State Governments to impose VAT on textiles as also to increase the general VAT rate from 4 per cent to 5 per cent within the financial year 2008-09 as per agreement reached earlier.

RBI releases Draft Guidelines for Off-balance Sheet Exposures of Banks

RBI releases Draft Guidelines on Prudential Norms for Off-balance Sheet Exposures of Banks

The Reserve Bank of India today released on its website, draft guidelines on prudential norms for off-balance sheet exposures of banks for comments and feedback. Comments/feedback on the proposals contained in the draft guidelines may be sent within two weeks by email or by fax to 022-22705691 or to the Chief General Manager-in-Charge, Department of Banking Operations & Development, Reserve Bank of India, Central Office Building, 12th Floor, S.B.Singh Marg, Mumbai-400001.

It may be recalled that Paragraph 165 of the Annual Policy Statement of the Reserve Bank of India for 2008-09 proposed to review current stipulations regarding conversion factors, risk weights and provisioning requirements for specific off-balance sheet exposures of banks and prescribe prudential requirements as appropriate, in view of the recent developments in the global financial markets. Accordingly, the requirements were reviewed and it is proposed to bring about certain modifications, as outlined in the draft guidelines, to the existing prudential norms applicable to the off-balance sheet exposures of the banks.

G. Raghuraj
Deputy General Manager

Press Release : 2007-2008/1528

Appendix

Draft Guidelines on Prudential Norms for Off-balance Sheet Exposures of Banks – Capital Adequacy, Exposure,
Asset Classification and Provisioning Norms

At present, paragraphs 2.4.3 and 2.4.4 of the 'Master Circular on Prudential Norms on Capital Adequacy', DBOD.No.BP.BC.4/21.01.002/2007-08 dated July 2, 2007, stipulate the applicable credit conversion factors (CCF) for the foreign exchange and interest-rate related contracts under Basel-I framework. Likewise, paragraph 5.15.4 of our circular on 'Guidelines for Implementation of the New Capital Adequacy Framework' DBOD.No.BP.BC. 90/20.06.0001/2006-07 dated April 27, 2007, prescribes the CCFs for these contracts under the Basel-II framework. Further, in terms of paragraph 2.3.2 of the 'Master Circular on Exposure Norms', DBOD.No.Dir.BC.11/ 13.03.000/2007-08 dated July 2, 2007, the banks have the option of measuring the credit exposure of derivative products either through the 'Original Exposure Method' or 'Current Exposure Method'.

2. In accordance with the proposal contained in the paragraph 165 (reproduced in Annex 1) of the Annual Policy Statement for the year 2008-09, released on April 29, 2008, it is proposed to effect the following modifications to the existing instructions on the above aspects:

2.1 Credit Exposure – Method of computing the credit exposure

For the purpose of exposure norms, banks shall compute their credit exposures, arising on account of the interest rate & foreign exchange derivative transactions and gold, using the 'Current Exposure Method', as detailed in Annex 2.

2.2 Capital Adequacy – Computation of the credit equivalent amount

For the purpose of capital adequacy also, all banks, both under Basel-I as well as under Basel-II framework, shall use the 'Current Exposure Method', as detailed in Annex 2, to compute the credit equivalent amount of the interest rate & foreign exchange derivative transactions and gold.

2.3 Provisioning requirements for derivative exposures

Credit exposures computed as per the 'current exposure method', arising on account of the interest rate & foreign exchange derivative transactions, and gold, shall also attract provisioning requirement as applicable to the loan assets in the 'standard' category, of the concerned counterparties. All conditions applicable for treatment of the provisions for standard assets would also apply to the aforesaid provisions for derivative and gold exposures.

2.4 Asset Classification of the receivables under the derivatives transactions

It is reiterated that, in respect of derivative transactions, any amount receivable by the bank, which remains unpaid for a period of 90 days from the specified due date for payment, will be classified as non-performing assets as per the 'Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to the Advances Portfolio', contained in our Master Circular DBOD. No. BP.BC.12/ 21.04.048/2007-08 dated July 2, 2007.

2.5 Cash settlement of derivatives contracts

Any restructuring of the derivatives contracts, including the foreign exchange contracts, shall be carried out only on cash settlement basis.

3. The foregoing modifications will come into effect from the financial year 2008-09. The banks will, however, have the option of complying with the additional capital and provisioning requirements, arising from these modifications, in a phased manner, over a period of four quarters, ending March 31, 2009.


Annex 1

Extracts of paragraph 165 from the
Annual Policy Statement for the year 2008 - 09

b) Off-Balance Sheet Exposures of Banks

165. The Reserve Bank has, in the light of domestic developments, taken steps to strengthen the prudential framework in respect of on-balance sheet exposures of banks. Such measures included additional risk weights and provisioning requirements for exposures to specific sectors. In view of the recent developments in the global financial markets and drawing from suggestions for ensuring financial stability, it is proposed:

  • to review current stipulations regarding conversion factors, risk weights and provisioning requirements for specific off-balance sheet exposures of banks and prescribe prudential requirements as appropriate. The guidelines in this regard would be placed on the Reserve Bank's website by May 15, 2008


Annex 2

Para 5.15.4 of the RBI circular DBOD.No.BP.BC.90/20.06.001/2006-07 dated April 27, 2007 on the New Capital Adequacy Framework may be substituted by the following text:

"5.15.4 Current Exposure Method

i) The credit equivalent amount of a market related off-balance sheet transaction calculated using the current exposure method is the sum of current credit exposure and potential future credit exposure of these contracts.

ii) Current credit exposure is defined as the sum of the positive mark-to- market value of these contracts. The Current Exposure Method requires periodical calculation of the current credit exposure by marking these contracts to market, thus capturing the current credit exposure.

iii) Potential future credit exposure is determined by multiplying the notional principal amount of each of these contracts irrespective of whether the contract has a zero, positive or negative mark-to-market value by the relevant add-on factor indicated below according to the nature and residual maturity of the instrument.

Table 9 : CCF for market related off-balance sheet items

Residual Maturity

Credit Conversion Factor

Interest rate contracts

Exchange rate contracts & Gold

One year or less

0.50%

2.00%

Over one year to five years

1.00%

10.00%

Over five years

3.00%

15.00%

iv) For contracts with multiple exchanges of principal, the add-on factors are to be multiplied by the number of remaining payments in the contract.

v) For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date. However, in the case of interest rate contracts which have residual maturities of more than one year and meet the foregoing criteria, the CCF or "add-on factor" applicable shall be subject to a floor of 1.00 per cent.

vi) No potential future credit exposure would be calculated for single currency floating/floating interest rate swaps; the credit exposure on these contracts would be evaluated solely on the basis of their mark-to- market value.

vii) Potential future exposures should be based on effective rather than apparent notional amounts. In the event that the stated notional amount is leveraged or enhanced by the structure of the transaction, banks must use the effective notional amount when determining potential future exposure. For example, a stated notional amount of USD 1 million with payments based on an internal rate of two times the BPLR would have an effective notional amount of USD 2 milllion. "