| New rules offer safe harbour to IT firms |
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New Delhi, 18 September The finance ministry on Wednesday announced safe- harbour rules for transfer pricing. The notified norms are much easier than the draft rules released by the Central Board of Direct Taxes (CBDT) last month, which have been diluted after companies raised objections. Safe harbour prescribes the limit and conditions within which the price of cross- border transactions with a related company declared by an assessee is not questioned by tax authorities. The rules will give multinational as well as domestic companies having subsidiaries abroad to come for tax estimation with the authorities in advance. The rules came as disputes under transfer- pricing mechanism surged last year. The draft norms had said information technologyenabled services ( ITeS), information technology services ( ITS) and knowledge process outsourcing (KPO) companies with atransaction of only up to ₹ 100 crore would be covered by the rules. This ceiling has now been removed, Revenue Secretary Sumit Bose told reporters here on Wednesday. The industry had argued that the limit was so low that only a few small players would benefit from it and many large taxpayers who received transfer- pricing orders last year would not be covered. The draft rules had also prescribed minimum operating margins for these rules. For ITeS/ ITS sector, it had said only the companies having operating margins of 20 per cent or more in relation to their operating expenses will be covered under the safe- harbour norms. The 20 per cent margin is retained for the companies whose transaction is up to ₹ 500 crore. Those earning more than ₹ 500 crore will have to have operating profit — called safeharbour margin in technical jargon —of 20 per cent of their operating expenses. For KPOs, the operating margin has been reduced from 30 per cent in the draft norms to 25 per cent. Also, Indian companies having subsidiaries abroad were sought to be allowed to come under safe- harbour rules if transactions in the nature of corporate guarantee provided by the parent is up to ₹ 100 crore. That limit has now been removed. However, safe harbour will be available to companies above ₹ 100 crore of transactions only if the subsidiary has been rated to be of the highest rating by a rating agency registered with the Securities and Exchange Board of India. The safe- harbour margin for such transactions will be 1.75 per cent of the amount guaranteed. Also, the definition of what constitutes a KPO is being streamlined. In draft norms, for example human resource outsourcing is also clubbed under KPO which will mean that BPOs could also be part of KPO, Kartik Rao, tax partner at Ernst &Young, pointed out. Diluted version of draft rules widens ambit to cover more MNCs facing transfer- pricing issues, streamlines KPO definition IBM asked to pay tax of ₹ 1,090 cr Gillette asked to pay tax of ₹ 118 cr Vodafone adjustment of ₹ 1,300 cr Hindalco adjustment of ₹ 1,063 cr Microsoft adjustment of ₹ 5,135 cr Shell adjustment of ₹ 15,000 cr I- T NOTICES IN ' 12- 13 |
| Investment by EPFO gets more flexibility |
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New Delhi, 18 September The labour ministry has notified the more flexible investment pattern of 2008 for the Employees Provident Fund Organisation (EPFO), but minus its provision for investment in equity. The notification comes after asix- year tussle between the labour and finance ministries on whether EPFO should invest funds in equity. The pattern notified by the labour ministry entails no investment in equity, as desired by the EPFO, the labour ministry and the Central Board of Trustees ( CBT) of EPFO. According to labour ministry sources, the EPFO now has to prepare the guidelines for fund managers regarding the pattern and it would be implemented only after that. According to the pattern, which will boost investment in private bonds, the EPFO can invest 55 per cent of its funds in government securities, 40 per cent in public sector or in private sector bonds, and the remaining five per cent in the money market. So far, only 10 per cent could be invested in private bonds. However, the pattern notified by the ministry says the restriction of 10 per cent for private sector bonds will continue until the approval of CBT is available for increasing that limit. According to EPFO sources, this can be relaxed once the guidelines are prepared and approved by the CBT. At present, EPFO follows the investment pattern approved by the finance ministry in 2003. While the ministry updated it in 2008, the EPFO remained stuck with the old pattern because of its opposition to the provision in the new pattern that 15 per cent of funds be invested in equity. The finance ministry has been insisting for a long time that the EPFO agree to investment in equity under the investment pattern of 2008. Its argumentwasthatchangingthe pattern was of no use unless the equity component was accepted. However, the labour ministry and the CBT have insisted that retirement funds of the public could not be exposed to market fluctuations. They had even demanded guaranteed returns if investments In equity were to be made. According to the 2003 pattern, EPFO has been putting 40 per cent in G- Sec, 30 per cent in public sector bonds, 10 per cent in private sector bonds, and 20 per cent in securities or public sector bonds. The CBT had recently approved guidelines for selection of private bonds for investment, but because the 2008 investment pattern was not notified, the guidelines were of little help in expanding the portfolio of private bonds. Ministry, however, rules out investment options in equity LABOUR MINISTRY NOTIFICATION EPFO INVESTMENT PATTERN 2003 investment pattern (%) G- Sec 40 PSU bonds 30 Pvt bonds 10 securities or 20 PSU bonds 2008 investment pattern for EPFO (%) G- Secs: 55 PSU or private bonds: 40 Money market: 5 Equity: 0 2008 investment pattern for others (%) Central and state government securities and units of gilt mutual funds: 55 Bonds, rupee bonds of multilateral funding agencies, money market instruments, term deposit receipts: 30 Equity: 15 |
| Sebi's opt- out clause in new rules may hit angel funds |
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Mumbai, 18 September The Securities and Exchange Board of India ( Sebi)' s decision to allow investors in angel funds more power over their investments may leave the funds grappling with implementation issues. Now, fund managers have to secure the approval of angel investors on an individual basis before making an investment, an ' opt out' clause introduced as part of a gazette notification implementing the new rules for angel funds from Monday. "The manager of the angel fund shall obtain an undertaking from every angel investor proposing to make an investment in a venture capital undertaking, confirming his approval for such an investment, prior to making such an investment," the notification said. Every scheme of an angel fund can have up to 49 investors. Bhavin Shah, partner, KPMG, said the move would create hurdles in calculating the internal rate of return ( a measure of profitability or returns). " This will add to the administrative burden for fund managers and create operational challenges," he said. With more investors, the challenges would be greater. Each investor may have a different internal rate of return, depending on the investment profile. Also, there would be no common net asset value and multiple calculations would be required to compute the performance incentive for the fund manager. This might mean different schemes would be needed for different investors or different companies Darshan Upadhyay, partner at Economic Laws Practice, said, " It appears this regulation will require an approval from all investors for making an investment. This may create operational hurdles. For example, what if one investor refuses? Can the manager drawdown the commitments from others who have approved and go ahead with the investment?" he asked. The notification didn't mention the process to be followed if a section of the investors turned down an investment idea. Currently, investor approval was required at times, under special or unusual circumstances such as when an investment manager wished to allocate money outside his mandate, Upadhyay said. However, some feel the new regulations seek to align the practices of individual angel investors with those of pooled funds. Groups of angel investors working together take individual decisions on which companies they want to back. Padmaja Ruparel, president of the Indian Angel Network, said the move was apositive one that could be implemented through separate silos. " It may be the case that in a single fund, there would be a scheme for every investment which, in turn, would have a unique set of investors," she said. Angel funds are a subset of venture capital funds that typically comprise wealthy people investing their own money. Venture capital funds have people who invest money on behalf of several institutions, under a pooled fund structure. The move for greater control was a positive step from an investor's perspective, considering it was a high- risk investment, said Shah. Operational issues, lack of clarity on implementation could play spoilsport CLAUSE FOR CONCERN |Sebi says angel funds need approval from each investor for making an investment |Currently, investor approval is sought only if fund manager wishes to make investment outside his mandate |Move is likely to create difficulties in calculating returns or asset value |Some feel the move seeks to align practices of individual angel investors with those of pooled funds |
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