Perks tax rules replace FBT

Valuation of cars goes through a revision.

Employees will now have to pay taxes on perquisites given to them by their employers as the Central Board of Direct Taxes has notified the much-awaited rules for valuation of the benefits.

With these rules, the fringe benefit tax (FBT) being paid by employers for giving non-cash benefits, including cars and employee stock options (ESOPs), to employees will be abolished and replaced with a regime that will tax the perquisites in the hands of the employees. It could mean less take-home pay for employees.

The rules are largely the same as what were prevalent before the introduction of FBT by finance minister P Chidambaram in 2005, though there are changes in the valuation of cars. Employees provided with cars will now have to pay tax on a monthly valuation of Rs 1,800 for the vehicle and Rs 500 for chauffeur if the car capacity is less than 1.6 litre. For cars above that category, valuation will be Rs 2,400 for car and Rs 900 for chauffeur. The valuation prior to introduction of FBT was Rs 1,200 a month.

The government was earning Rs 6,000 crore annually from FBT. While welcoming the switchover to the new rules, experts say the replacement of FBT with taxation of perquisites collected as tax deducted at source (TDS) from employees will lead to a marginal fall in its revenue. "It is unlikely to be revenue neutral because FBT was being charged on notional value but now it is specific," said Rajesh Srinivasan, senior director, Deloitte.

Srinivasan said FBT was causing complications for companies, though certain issues were still not clarified.

"Overall it is a good move. Primarily, the difference is that taxes were earlier being picked by employers and now employees are picking up the tab," he added. For those in the higher income bracket, it might not lead to higher taxes since the government abolished the income tax surcharge of 10 per cent last July. But for those in the middle and lower income group, it might lead to a higher tax outgo.
   

WALLET WATCH
PERK	TAX PRINCIPLE
Employer-owned accommodation	Depending on city, 7.5-15% of basic salary added to income
Leased/rent paid by employer	Actual rent, or 15% of salary, whichever is lower added to income and taxed
Company-owned car for personal use	Actual expenses, driver's salary added to income and taxed*
ESOPs	Difference of mkt value & grant price added to income & taxed
Interest-free/concessional loan (except medical reasons)	Interest component to be added to income
Salary to sweeper, gardener, PA	Added to income
Gas, electricity, water expenses	Added to income
Free/concessional education	Added to income
Company sponsored vacation	Added to income
Gift/vouchers of over Rs 5,000	Added to income
Club membership/annual fees on credit card (other than official)	Added to income
*For part-official, part-personal use depending on engine capacity, up to Rs 3,300/month added to income

Among the grey areas, he said that since the budget came in July, companies had already paid the first instalment of advance FBT in June. The government would need to clarify whether this FBT would be treated as TDS of employees.

Another area which requires clarity is the calculation for international workers. In the case of FBT, the government had issued FAQs (frequently asked questions), which were issued for apportionment. "Now, we need to know whether the same FAQs are applicable or a fresh notification will be issued," said Srinivasan.

With respect to taxing of other benefits like accommodation and employees stock options, the rules remain the same as earlier. The valuation on ESOPs is based on the distinction between shares of listed and unlisted companies. In the case of FBT, employers were paying the tax to the government for giving ESOPs and were recovering it from employees. Now, the employees will directly pay the tax.

While government employees will be taxed after the deduction of licence fee from the valuation arrived according to the city of accommodation, in the case of government employees on deputation to public sector companies and private sector employees, the tax will be on entire valuation.

Source: BS Reporter / New Delhi December 19, 2009, 0:33 IST

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Some sectors to track in 2010

As a very eventful 2009 draws to a close, it is time to put on your thinking cap to identify investment candidates for 2010. The stock markets are currently trading at fair values. Hence, generating good returns in 2010 will not be as easy as it was in 2009. Investors have to research in depth to identify potential winners. Opportunities for investments could arise in areas or sectors that are in the process of positive change. Sector approach to investing may yield higher returns if investors can identify major change in trends and fundamental shifts that occur in a sector periodically. In 2009, the metals and auto sectors out-performed the index by a wide margin. Who could have ever guessed in the beginning of 2009 that the sector that would lead the markets out of its deep recession will be the auto sector? The auto sector was an underdog for a long time and is performing well now. In hindsight, you can see that the excise duty cuts in the form of stimulus were the trend-changers for the auto sector. Investors who had picked this sector for investments last year would have made handsome returns.

 

Sector Focus

Sectors that could perform well in 2010 could be banking, power, retail, automobile, telecom, pharmaceutical and real estate. Telecom and real estate sectors look interesting from a value investor's perspective. These sectors are highly under-valued and suitable for investors with some patience and ability to wait. The banking sector would probably be the best-performing sector in the first half of next year. On a relative basis, it may offer much better returns to investors than many others.           Here are some of the probable top performers in 2010:

 

Banking

The outlook for the banking sector has improved in the last six months with the uptrend in the GDP numbers . With the implementation of Basell II accord, the sector is poised for a structural change. There will be a spate of consolidation and investments through FDI bringing in some major positive changes in this sector. Technology initiatives such as ATMs, telephone banking, online banking and web-based products are the fundamental shifts in the banking sector. Banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee-based income. Public sector banks have been restructuring their businesses by incremental provisioning for non-performing assets. All banks have captured a high proportion of low cost deposits with better penetration in the semi-urban and rural areas, thereby reducing their cost of funds. Small public sector banks are targets for consolidation and hence are very attractive investments at the current juncture.

 

Power

The Electricity Act of 2003 was the game changer in the power sector. The licensing requirements have been reduced, and a generation company will be free to enter the distribution business and vice-a-versa . The Act also contains provision for securitisation of accumulated dues. Restoration of the financial health of boards and improvement in their operating performance is the key to profitability in this sector. On an overall basis, power distribution has been a loss making business. But privatisation is expected to change that. The distribution business has already been privatised in Delhi. Following Delhi's example, many States like Uttar Pradesh, Gujarat and Maharashtra are privatising their distribution circles. As some areas in the country are power surplus and others deficient, trading in electricity has brought a sea change in the structure of the industry. The potential for power trading is huge and the sector is in the process of change.

 

Telecom

There are several broad divisions in the telecom sector. Telecom companies have grown big till now on voice. However, going forward, the ability to carry data holds the key to success. Earlier, telecom companies made a lot of money from landlines and wireless telephony. Now, the biggest gains are being made on the data side. If you go back 10 years, the penetration of telephony was small. However, it has grown now. Over the next decade, data will probably play the same role. Data traffic is still modest. This change from voice to data can transform the profitability in this sector. The ability to identify the shifting sands in any sector can help an investor generate additional returns. Investors can invest in top companies in these sectors after consulting their financial advisors.

By Shubha Ganesh, ET Bureau

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2010 may be a positive year for Indian investors: Credit Suisse

Domestic equities are likely to be volatile in the January-March quarter of 2010 on concerns the government may draw back fiscal stimulus, the Reserve Bank of India (RBI) could absorb money supply and over bubbles in asset prices worldwide, said Credit Suisse.

But investors should add exposure to shares in this period, according to the investment bank, which remains confident of India's growth prospects.

Credit Suisse is optimistic about Indian equities in 2010. "2010 is expected to be a positive year for Indian equities, though the move will not be as linear as in 2009," said the investment bank in a report co-authored by analysts Toral Munshi and Chirag Shah.

The S&P Nifty has risen almost 98% from its lows on March 9, led by share purchases by global investors worth over $15 billion. This sharp jump has sparked fears about a bubble in global equity markets, including India's, because most global economies are still struggling to come out of recession, while inflation is on the rise, partly driven by surplus money.

With global policymakers indicating their intent to mop up some of the money supply early next year on expectations of rising inflation, investors are pondering to what extent will such moves impact investor sentiment.

"While strong GDP and earnings growth parameters are supportive for equities, the withdrawal of monetary and fiscal stimulus is likely to weigh on investor sentiment in the first quarter," the Credit Suisse analysts said.

The investment bank expects RBI to raise the cash reserve ratio (CRR) — the amount of cash banks need to deposit with the central bank — in early 2010, followed by hike in repo rate — the rate at which banks borrow from RBI — of 125 basis points during the year.

 

"The 125 basis points of tightening repo rate, though substantial, should be viewed in the context of the 425 bps reduction from October 2008 to April 2009," the analysts said.

Investors will closely watch the government's actions to drive economic growth in 2010, according to Credit Suisse. Share sales of public sector companies, deregulation of the oil sector and reforms in the pension and insurance sectors are expected in 2010, the investment bank said.

"This would send a positive signal to investors and can attract significant capital flows into the country, a key requirement for sustaining India's growth momentum," the analysts said.

"While the government's intention itself was enough to drive momentum in 2009, the conversion of intention to action will be the key driver of investor sentiment in 2010," according to them.

"On the other hand, inability or disappointment in implementing reforms can lead to a P/E (price to earnings) derating," they added.

Source: 19 Dec 2009, 1048 hrs IST, ET Bureau

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We still don't know truth about Satyam

The big scare from the Satyam fraud, one year on, is how ill-prepared the Indian state is to take action against a corporate fraud committed on such a massive scale. One year into the 'anniversary', the prime accused in the case, Ramalinga Raju, has still not made any sworn statement before any level of the judiciary.

Of course, there is every possibility that Raju and his core team will still be successfully prosecuted on at least some of the sections of the Indian Penal Code and will spend some years behind the bars. But there is little chance any of the investigating agencies will crack the two key questions of where all the money went and who had their hands in the till, beyond the immediate top management team at the erstwhile Satyam.

What are the bases on which one can be reasonably sure that these puzzles are unlikely to go away? Without any light shed on these questions, the largest ever fraud in Indian corporate history will remain just as it is today, without any answer. Let us examine the money trail first.

The Raju brothers had apparently been inflating the receipts of the company for years, with the aid of all possible tricks. This included software forgery, which must have been the easiest bit for them to do to generate false receipts and expenditure bills.

The company was, therefore, presumably siphoning the money off somewhere. It could have been real estate or the share markets. In either case, the agencies have not tracked this trail. If they had done so there would have been arrests at those ends—we have heard none on that score. So either they are dead ends or the money never came in. The second case would be very surprising, as it would raise questions on why then should the promoters have resorted to the elaborate cover up. If the idea was to ramp up the price of the shares and then offload, surely there were easier means of doing. Till the time Raju was arrested, the shares he had offloaded were definitely nowhere near to justify the scale of the jugglery.

To recount the chain of events, on December 16, then Satyam CEO Ramalinga Raju made a startling announcement that the company will invest $1.6 billion in Maytas Infrastructure, run by his son. The plan was slammed by the institutional investors, because of which he was forced to retract before the night was out. Finally, he sent an explosive letter on January 7 to Sebi accepting responsibility for cooking the books for a long time, amounting to Rs 7,800 crore.

The company going by the records audited by the Hyderabad-based Price Waterhouse, had invested the sum principally in various fixed deposits of banks. This is the bigger surprise in the revelations. For years, the sum was reflected in the annual accounts of the company, along with, as it now turns out, fictitious deposit numbers. Why didn't the banks named in the reports blow the whistle on them? But neither the CBI nor the more culpable Serious Fraud Investigation Office (SFIO) has taken up this strand to its logical conclusion. Are we scared that some bank bosses could lose their jobs? That is unlikely, so the stakes must be higher here, too.

This is the second question. There were more hands in the till than the Raju brothers. The CBI charge sheet pins the blame on the brothers and the audit firm Price Waterhouse. The SFIO probe does even less. This is incredible. A fraud of such proportions just could not have been managed within such a small group, planning against an entire system of checks and balances. If, as it indeed turns out, these people had been able to plan it out without any outside help, then we ought to rewrite huge sections of our audit rules, Company laws and even the Sebi Act to prevent malfeasance of this scale. There is no evidence of that happening. The proposed amendment in the Company Act predates the Satyam case and very few sections are planned to be rewritten subsequently.

The implication therefore is plain. The rules were okay; instead the fraud took advantage of loopholes that only positions of power could provide. That would also provide the answers to the question of why Raju milked the system for so long. He had a fine company and a finer set of clients, as the recent success of Mahindra Satyam attests to. That was a good enough road to prosperity, unlike Ponzi schemes of guys like Bernie Madoff in the US. This is also possibly the reason why Raju has not had to make any suo motu statement so far. As we had said at the beginning of this year, the Satyam saga is turning out to be an example of a cover-up, rather than a full-blown investigation.

subhomoy.bhattacharjee@expressindia.com

Source: http://www.financialexpress.com/news/column-we-still-dont-know-truth-about-satyam/554494/0

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Insurance: Should you buy from your banker or your agent?

BELIEVE it or not, cream made me realise I might be being taken for a ride with my investments. Here's what happened. I was at my local grocer's, buying cream to make Risotto, a traditional Italian rice dish. The grocer asked me not to buy packaged cream and that fresh cream was now available a short walk away. I was touched. This man had given up a sale at his shop in my best interest! Back home, while relating the incident to my mother, I was given a small dose of reality. She said the new shop was, in fact, owned by the grocer's brother. My lesson for the day: There is a vested interest in everything you are asked to buy. So when my relationship manager told me interest rates on deposits might fall and I should quickly shift to mutual funds, the new cynical me was suspicious. Why was the relationship manager recommending another product in favour of his own? Sure enough, I learnt that banks have now morphed into Jacks of all trades. When they sell products other than their own, they earn a fat commission. They make more money through commissions than on deposits. So the next time your relationship manager praises a new insurance policy, you would best take it with a pinch of salt. But then, since your agent also earns commission on your purchase and there is no cost change for you, why not just buy from your bank? We list some pros and cons if you want to buy insurance from your bank. The downside Service: Your banker will not pamper you with doorstep services like your agent. But if you are a priority customer for your bank, you can expect the works. Trust: If you have a child, an agent is more likely than your banker to know about and advise you how to invest for the little one. Your agent and you are likely to share a closer relationship of trust. Variety: Sometimes, your bank may not offer you all the policies that an insurance company has in its portfolio. Insurance expert Rajesh Relan says, "Some banks select a few products from the product basket, depending on the needs and suitability of their customer segments." Decide whether the policy the bank offers fits your requirements. If it doesn't, you are better off with your agent. The upside Simplicity: A transactional relationship already exists between you and the bank, so paperwork and payment processing will be simple. One-stop shop: Your bank can offer you the entire range of financial products instead of buying from multiple places. This gives you a single window view to your investments. Specialised products: Some life insurance companies design a special product to be sold through a bank which does not involve too many formalities or medical tests. You can opt for this policy only through a bank, and not through other channels. (You will be asked for many medical declarations.) Banks are slowly replacing agents worldwide because they are a one-stop destination in today's time-crunched world. My lesson for the day: Even if recommendations are made with vested interests, they might not be totally wrong for you. The fresh cream did, in fact, make all the difference to the Risotto I made! Source: ttp://wealth.moneycontrol.com/features/planning/insurance-should-you-buy-from-your-banker-or-your-agent-/5833/0 Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.

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Does investing in quant funds make sense now?

You can avoid fund manager risk through quant funds as these invest in stocks sifted through a formula; ETFs give the same at lower cost.

Your mutual fund manager is not the only one who can help you pick and choose stocks. Even computers, these days, can sift through hundreds of stocks, based on a complex mathematical formula that is fed into them, and arrive at the ones they think you should put your money in. That is what quantitative or quant funds do.

India's first quant fund—Religare AGILE Fund (RAF; formerly, Lotus India AGILE Fund)—is about to complete two years. But its track record, so far, has been uninspiring. The only other one, Reliance Quant Plus Fund (RQP; earlier Reliance Index Fund) isn't much better.

Poor performance

Though quant funds have been popular abroad (about $1.5 trillion lie in these in developed markets), many took a beating in the 2008 market crash. In India, quant funds haven't really taken off. RAF underperformed its benchmark, Nifty index, and diversified equity funds by 6 and 5 percentage points, respectively, in 2008. Rising markets in 2009 haven't helped it much either. Religare's fund has returned 45% against 73% by the Nifty and 75% by equity funds. Reliance's fund did better—it lost just around 36% last year (since the time it got converted into a quant fund), but has managed to give 74% so far this year.

Reality check

Typically, quant funds test the portfolio over the past 10 or 15 years and run simulated schemes to see if the model works. This is largely based on the assumption that the market would move the way it did in the past. And that's its biggest drawback. Says US-based mutual fund tracker Morningstar's associate director of fund research, Michael Herbst: "Traditional models have not been too effective at predicting the kind of market turmoil we saw in recent years. Because they are built on historical data, many will fight the last war in terms of preparing for the last market crisis instead of the next one."

So, the fund manager may not like a stock, but doesn't usually have a choice. For instance, despite Religare's fund holding on to Punjab National Bank in 2009, Religare MF's diversified equity fund sold the scrip. "The kind of volatility we saw last year would not have been predicted by quant models even if they had studied market movements for the past 10 years," says Vetri Subramaniam, fund manager, RAF.

Volatility, such as the market crash of 2008 followed by a sharp recovery in 2009, is said to be the single largest enemy of quant funds. Despite markets having recovered since early 2009, it took a few months for RAF's quant model to adjust to the trend and pick the right stocks. After lagging for the first six months of 2009, RAF picked up—it returned 16% in the past three months, outperforming all other large-cap equity funds.

Some quant funds such as RQP prefer to have some active management. After shortlisting 20 scrips on parameters such as price movement, sales growth, profit figures and earnings per share, the fund manager gets to decide how much he wants to invest in them. The fund manager can also look beyond these 20 scrips if he doesn't feel confident investing in the ones the formula throws up. "We aim to beat the index," says fund manager Krishnan Daga.

Despite claiming to limit or, in some cases, absolve you of the fund manager's risk as compared with a normal equity fund, quant funds aren't as passive as index funds. You are still at the mercy of the computer model devised by your fund house. Also, their passiveness comes at a cost. While RQF charges an expense ratio of 2.5%, RAF charges around 2.4%—almost the maximum an equity fund can charge—thanks also due to a small corpus size.

Should you invest?

Not all quant funds are avoidable though. Apart from the model itself, what differentiates one from the other is also how effective the model is under various market conditions and how much the fund house is willing to invest in maintaining the model. Yogesh Kalwani, head (investment advisory), BNP Paribas-Private Banking, however, points out, "Developed markets have a long history, are far more efficient and hence provide more evidence. Indian markets lack depth in terms of volumes and transactions and hence quant models do not effectively project future market trends."

Ultimately, the proof lies in the pudding. As quant funds seldom reveal their models, you wouldn't know for sure their efficacy unless you have seen their track record. Further, Indian markets are expected to experience high bouts of volatility time and again. Unless your quant fund proves its track record across market cycles, you better stick to index- or exchange-traded funds if you want to avoid fund manager's risk or diversified equity funds if you prefer active management.

Kayezad E. Adajania

Source: http://www.livemint.com/2009/12/14210841/Does-investing-in-quant-funds.html

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BSE advances opening bell; bigger extension for NSE?

The Bombay Stock Exchange (BSE) on Tuesday announced it was extending trading time by seven minutes. The BSE stock market would, from December 18 (Friday) onward, open at 9.45 am instead of 9.52 am.

The closing time would, however, remain the same at 3.30 pm, the BSE said.

The Securities and Exchange Board of India (SEBI) recently allowed stock exchanges in India to extend their trading hours and allowed a maximum possible window of trading between 9am and 5pm.

The SEBI move was prompted by a long-standing demand by the stock exchanges for allowing extension of trading hours to capture more trading from international investors, especially from Asian countries like Singapore where exchanges open much early, Indian time.

However, soon after the regulator gave stock exchanges the go-ahead, opinion in the stock market fraternity was vertically divided with several brokers and brokerages saying lack of infrastructure could prove a hindrance to extend market hours to the full window of 9am to 5pm.

Market experts said the latest move by BSE would not have a major impact on the markets. "There would have been a major impact in case it was preponed by, say, half an hour or 45 minutes. But a 10-minute pre-ponement will not have too much of an impact," Ambareesh Baliga of Karvy Stock Broking said.

F&O expiry advanced

The BSE also said futures and options (F&O) expiry would be advanced to two Thursdays prior to the last Thursday of the month. Currently, F&O expiry takes place on the last Thursday of the month.

The block deal period though remains unchanged: between 9:55 am to 10:30 am.

NSE to follow with bigger extension?

Sources say BSE's rival, the National Stock Exchange (NSE), may go beyond 10 minutes extension of trade timing and may extend trading by 30–60 minutes.

The NSE top brass would meet members of the exchange on Wednesday to take stock of the situation and decide on its course of action, it is learnt.

If the NSE responds with a bigger extension, the BSE would again sure respond. The BSE decision could thus spiral into something bigger than the 10-minute extension that has currently been implemented.

Source : Moneycontrol.com

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Rate action concerns looming on markets: Experts

Not for the first time in recent months, the benchmark Nifty has started to drift down soon after reaching the 5,200 level. Equities on Tuesday sold off and the 50-share Nifty index closed at 5,033 down 72 points.

The stock market has consistently failed to break out of its range it has got into after a stupendous six-month rally between March and August that took place on the back of Indian economic recovery after the financial crisis last year.

Even as growth has rebounded, the Indian macro-economic setup is seeing concern on the inflation front with food prices spiralling at 19% growth and the wholesale price index — the broader parameter — also on the rise at close to 4%.

Concerns that the Reserve Bank of India (RBI) may move to withdraw some of the liquidity it had induced into the economy last year to tame inflation, the market has something to worry about, says Jitendra Sriram of HSBC.

"The RBI may wait for trade to pick up but if inflation becomes a further worry, it will take action sooner rather than later. It may choose to withdraw liquidity first in the form of CRR hike and then hike interest rates later," he told CNBC-TV18 in an interview.

Sriram pointed that global clouds could also get darker with a US Fed meeting lined up to discuss the prospects of stimulus withdrawal.

"There has been the fear of rate hikes," said Investment SP Tulsian, "but Tuesday's down move was led by ICICI Bank posting disappointing advance tax numbers."

Sources said ICICI Bank had posted advance tax of about Rs 301 crore versus Rs 625 crore last quarter, signaling that earnings could come in lower. The stock was down Rs 25 (3%) to Rs 825 in a weak market on Tuesday.

Stock/sector view

Banks: If the market corrects from current levels, trader-active financial stocks like ICICI Bank, Axis Bank, IDFC and IFCI would sell off further, Tulsian said.

Real estate: "Property is closely linked to what happens with financials. If interest rates rise, these stocks could face headwinds in the short term," Sriram said. "However, most real estate companies have cleaned up their balance sheets, reduced debt and leverage and that's a good trend."

Telecom: The industry has been facing immense pricing war whose full impact will be felt in the January or April quarter, Sriram said, but added that for the long term, it was pure domestic play. "It is a great consumption proxy and India is one of the market that is still growing. For the longer term, I would be looking at the sector definitely whenever there are meaningful corrections in that space."

Reliance Industries: For the short term, Sriram said Reliance would face pressure both on refining margins and its petrochemical business but longer term, it was a buy.

DB Corp IPO: Tulsian did not view the issue of DB Corp, a media company that publishes the Dainik Bhaskar newspaper, as cheap. "I am not convinced with the discount of Rs 2 offered to retail investors. If I compare this company with that of HT Media and Deccan Chronicle, I find it a bit expensive at Rs 210."

Published on Tue, Dec 15, 2009 at 19:56   |  Updated at Tue, Dec 15, 2009 at 21:14  |  Source : Moneycontrol.com

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