Stocks
Nifty, Sensex are trendless – Thursday closing report
However, a large move is coming soon
 
We had mentioned in Tuesday’s closing report that Nifty, Sensex were on the cusp of a sharp move and that Nifty will decline sharply if it closes below 7,750. The major indices in the Indian stock markets were range-bound during Thursday’s trading and closed with small gains of upto 0.71%.The trends of the major indices during the day’s trading are given in the table below:
 
 
Heightened chances of key economic legislations getting passed during Parliament's winter session coupled with hopes of a stimulus package in European Union buoyed the Indian equity markets on Thursday. Initially, both the bellwether indices of the Indian equity markets opened on a weak footing but gained strength in line with their Asian and European peers. Furthermore, better-than-expected outcome of the derivatives expiry cheered investors.
 
The government on Thursday announced indirect tax incentives for India's stressed shipbuilding industry in a bid to give a push to the sector. The finance ministry notified it had exempted all raw material parts used in the manufacture of ships, vessels, tugs and pusher crafts and the like from customs and central excise duties. The export oriented units (EOUs) too will be eligible for this incentive. These benefits were earlier available if the manufacture was in a customs bonded warehouse, which condition is being withdrawn, the statement said. "Instead, these exemptions will now be subject to actual user conditions," the ministry said. The shipping ministry told parliament late last year that it had asked the Reserve Bank of India and the finance ministry to relax some of the financial regulations on banks engaged in corporate debt restructuring (CDR) of shipyards. Shipping is highly capital intensive and depends largely on the debt market to finance its acquisitions.
 
South Korean Hyundai Motor Company's Indian subsidiary on Thursday said it has achieved the milestone of selling four million cars in the country. "Hyundai today is a 10-product strong brand with class leading products ranging from Eon to Santa Fe. Hyundai has since inception focussed on 'Make in India' products, made for the world," Y.K. Koo, managing director, was quoted as saying in the statement issued by Hyundai Motor India. "Hyundai is the largest exporter and largest premium car manufacturer in India, catering to the growing needs and demands of the aspirational Indian customer. Hyundai has witnessed success as the fastest growing sales milestone and we assure our commitment to the Indian car market," he added. Nineteen years ago when most multinational car companies were focussing on the mid-segment car market, Hyundai took on market leader Maruti Suzuki with its small car Santro. Santro was India's first "tall boy" design car that rode into the new car buyers' market. The South Korean company also made India its major car sourcing point for its global market.
 
The benchmark DAX index at the Frankfurt Stock Exchange on Wednesday rebounded and closed up by more than 200 points. The European Central Bank (ECB) will have its monetary policy meeting at the beginning of December and the central bank has signalled that it stands ready to extend the asset purchase program, Xinhua news agency reported. The blue-chip DAX index went up by 235.55 points and closed at 11,169.54 points. 
 
Wednesday was a market holiday for the Indian stock markets. Moody's Investors Service on Wednesday said the failure to implement reforms by passing the GST and land bills in parliament could potentially hurt investments amid weak global growth and prove to be a "downside factor" for Indian companies. "It seems highly unlikely that the major reforms will get enacted by the upper house of the Indian parliament where the ruling coalition is in minority. A failure to implement these reforms could hamper investment amid weak global growth," Moody's vice president Vikas Halan said in a report. "The government is unlikely to win a majority in the upper house if it keeps losing state elections like it did recently in Delhi and Bihar. Opposition parties are unlikely to allow key reforms to go through," he added. The constitution amendment bill for Goods and Services Tax (GST) has been passed by Lok Sabha, and is pending in the Rajya Sabha, where the ruling NDA does not have majority. Minister of State for Finance Jayant Sinha told reporters on Monday that the government is making efforts to convince the opposition about the GST bill.
 
According to Moody’s, on Wednesday, among the upside factors include further government measures that could sustain the GDP growth at 8% plus, leading to a broad-based improvement in corporate credit metrics. Also, improvement in the global macroeconomic environment leading to stabilising commodity prices and credit markets would be positive, it said. Sector-wise, Moody's expects upstream oil and gas companies to benefit from lower fuel subsidy burdens, although low crude and domestic natural gas prices will continue to hurt profitability. However, refining and marketing companies should benefit from healthy margins as demand growth outpaces expected capacity additions, Moody's said. Moody's negative outlook for the steel industry reflects elevated leverage and an extended period of low prices owing to continuing steel imports, while the negative outlook for metals and mining companies reflects bleak global commodity prices. In real estate, Moody's expects demand to improve in 2016 on the back of lower interest rates, although approval delays could postpone project launches for property developers. In the auto sector, Moody's said that retail sales volume will grow 6% in 2016 on sustained growth in passenger vehicles sales and recovery in commercial vehicle sales.
 
The move by stock markets regulator SEBI to introduce an abridged prospectus with a new IPO application form does not solve either the purpose of transparency or the retail investor interest as it raises several questions than simplifying the procedures, say market analysts. The SEBI has issued a notification introducing a ten-page format -- five sheets, printed on both sides -- replacing the 100-page version of the prospectus, to be issued with IPO application forms. The new format will be effective December 1, 2015.  It provides for increasing the font size of the application form, but at the same time abridges the material information that ought to be given to the investor about the company and its business. For instance, as a legal expert says, the all-important risk factors section which normally runs into 35 to 40 pages is supposed to be condensed to 500 words. Even the section on the company’s business is supposed to be not more than 500 words. Market analyst Arun Kejriwal, director of KRIS research, says “the increase in font size on page One which has to be filled by applicant is welcome because one can read the columns without using a magnifying glass.” 
 
But, he says, the guidelines on inside pages leave much to be desired. For instance, the selection of risk factors becomes subjective. “There is a lot of ambiguity as to which factor is important and which is not. This could result in playing with fire,” he says. Appreciating SEBI’s consistent efforts to make stricter compliance norms and increase the number of disclosures to the investor community, a top corporate lawyer said the latest move defeats the very purpose for which SEBI has been working.
 
Market experts, on Wednesday, opine that the retail investor will be unable to take his decision on investing in IPOs on the basis of limited information given in the ten-page booklet. This could lead to increased retail apathy to IPOs, they aver. A close watch of the retail participation in primary markets recently shows that the segment’s participation has been quite discouraging and, as per media reports, SEBI itself has taken a serious view of this.
 
Withdrawal of tax exemption for research and development is likely to negatively impact India's innovation efforts, pharma major Dr Reddy's Laboratories said on Wednesday. While welcoming the move to simplify taxation laws, Reddy's said withdrawal of R&D weighted deduction is potentially counter-productive and likely to negatively impact India's innovation efforts. The Central Board of Direct Taxes (CBDT) has proposed to reduce the tax exemption offered on investments made for scientific research from the current 200% to 100%. Meanwhile, the stock of Dr Reddy’s fell sharply on Thursday after the CBDT proposal, by 8.21% to close at Rs3,110.35 on the BSE.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 

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Kerala HC judgement gives relief to e-commerce ventures
The absence of a separate taxonomy for the expanding e-commerce industry has put the e-commerce world into a dilemma. A recent judgment from the Kerala HC will be of much relief to the e-commerce companies
 
E-commerce is the new buzzword not just among consumers but seemingly also the revenue authorities. It seems that the income tax authorities are finding ways and collect revenue from e-commerce sector with their customized tax rules. In the past, several e-commerce firms such as Amazon, Snapdeal, Flipkart have been victimised due to hostile claims raised by the revenue department . In the absence of any standard tax norms for the e-commerce sector, various e-commerce portals are finding it difficult to accommodate the demand notices being hurled by the tax authorities.
 
Recently, the Kerala High Court dismissed the groundless claims raised by the tax authorities under Kerala vat law to Flipkart and Myntra (Writ petition no. 5348 & 6916) stating that the tax authorities did not satisfactorily deal with objections of petitioners (Flipkart and Myntra in this case). Further, the High Court held that the tax authorities shall be certain about the nature of transactions, for instance, whether the transaction is an intra-state sale or an inter-state sale or if at all the petitioner is supposed to be charged under the respective tax laws before issuing any show cause notice to the assessee. 
 
Facts of the case
 
There were two writ petitions pertaining to the two online portals, discussed as follows:
Under writ petition no. 5348 — the assessee/ petitioner (Flipkart), an online service provider was aggrieved by the penalty orders passed against it by the authorities under Kerala Value Added Tax Act, 2003 (KVAT). The authorities have imposed penal provisions under section 67 (Offences & Penalties) of KVAT subject to the breach of the provisions of section 20 (Filing of returns) & 40 (Maintenance of true and correct accounts by dealers) of the KVAT. 
 
Under writ petition no. 6916 — the assessee/ petitioner (Myntra) was engaged in the business of sale and purchase of goods and services on its online portal. Myntra was a registered dealer under KVAT and regularly paid tax on local and inter-state sales taking place from its business premises in the state of Karnataka.
 
Contention of the parties
 
In case of writ petition no. 5348, Flipkart was not engaged in the business of sale and purchase, but served as an intermediary by proving buyers and sellers and acted as a common platform to trade, hence it was not subject to penal provisions. Further, it was contended that even if Flipkart was required to file any returns or pay any claims, the tax authorities should have at least given an opportunity of being heard under section 22 (Assessment in case of non-filing of return and filing of defective return) of the KVAT before imposing penal provisions. 
 
Also, the applicability of vat laws arises in the case of intra-state sales. Flipkart, further asserted that the sales were affected in the course of inter-state sales by a retailer registered on its portal, hence falling under the purview of CST regime and not under vat laws. 
In the case of writ petition no. 6916 — Myntra was aggrieved that the order of penalty, impugned in the writ petition, which finds that the sales effected to its customers in Kerala are local sales and it is on the said premise that the petitioner has been proceeded against under the penal provisions of the KVAT Act and Rules.
 
Judgment
 
The Kerala High Court held that before determining whether to impose penalties or not the petitioner should have been given a due opportunity of being heard in this regard. The High Court further stated that even before getting into the question of imposing penalty, the assessing officer should evaluate whether there is an offence at all committed by the assesse on evading tax or otherwise. The High Court very rightly mentioned that the duty of the revenue is not to usurp taxes but to keep the essence of Article 265 of the Constitution alive, which is no tax shall be levied or collected except by the authority of law.
 
Further, it is clarified in the judgment that it is now well settled that show cause notices issued by statutory authorities, more so when they propose the imposition of penalty on an assessee, cannot pre-determine the guilt of an assessee. The notices issued cannot confront an assessee with definite conclusions as regards the commission of an offence by him as, otherwise, it would make a mockery of the process of quasi-judicial adjudication.
 
The show cause notice issued cannot conclude the guilt of the petitioner. On the contrary, the show cause notices are issued so that the petitioner can take his defense and prove his innocence. 
 
Before taking any action, the tax authorities should be well versed with the genesis of transaction and legalities encompassing the same.
 
In an attempt to promote ease of doing business in India, the authorities should take utmost care to keep the aforesaid judgment under consideration.
 
(Shruti Agarwal works at Financial Training Division of Vinod Kothari & Co)

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COMMENTS

R S Murthy

1 year ago

Excellent. Will our tax authorities at least follow fir practices hereafter, shedding their ego.

`Insurers are easier target for tax department than auto dealers'
 The department of revenue is going after the non-life insurance companies for wrongly availing themselves of Cenvat credit instead of automobile dealers as it is easier to target the former in terms of numbers, a senior official of an industry body said.
 
The Chennai zonal unit of the finance ministry's Directorate General of Central Excise Intelligence had in August issued summons to general insurers for wrongly claiming Cenvat credit of Rs.1,200-2,500 crore ($180 million-$377 million) on bogus invoices of car dealers.
 
"Some errant auto dealers who did not remit the service tax component of the payments made to them for outsourced services have caused the department of revenue to investigate from the insurance company point of view of Cenvat credit. Rather than go after the dealers, the tax authorities have gone after the 23 insurance companies - easier target in terms of numbers," R. Chandrasekaran, secretary general, General Insurance Council of India, told IANS in an email interview on Wednesday.
 
The council represents the interests of non-life insurers in the country.
 
According to him, the show cause notice to the general insurers may be on procedural or documentation shortcomings.
 
"Insurance companies have availed the services from automobile dealers and have paid for the services as well as service tax on such services," Chandrasekaran said.
 
He said the insurance companies would attend to the show cause notices and reply to the department and would show proof as requested and furnish all information needed.
 
"So far they have given the details and documents called for during investigations and would do so even during the show cause notice process," Chandrasekaran added.
 
Queried as to the reason and timing of the insurance regulator setting up a committee to bring clarity and transparency in payouts made to auto dealers when the investigation is being done by the government, Chandrasekaran said: "IRDAI (Insurance Regulatory and Development Authority of India). is the regulator of insurance business and has set up the committee to see how the systems and practices could be improved."
According to him, automobile dealers provide details of comprehensive insurance coverage as part of their value added services to vehicle buyers.
 
"The dealers do get paid for outsourced services (there are IRDAI guidelines on outsourcing) which are not for solicitation of business but for other associated customer service activities which otherwise would be carried out in the office of the insurance companies," Chandrasekaran said.
 
"The total payment made, including commission for procurement of business, and the payment for outsources services which varies from company to company based on their cost structure - perhaps the combination of both as a percentage of premium may be referred to in a ministry note... I have not seen this ministry note and hence cannot say anything beyond this," he added.
 
The union finance ministry has said the IRDAI regulations do not allow any person other than insurance agents and insurance brokers approved by IRDAI, to sell vehicle insurance policies.
 
Further the maximum brokerage/commission payable for selling insurance policies is also capped at 10 percent of the premium.
 
To circumvent these regulations, the insurers ask the car dealers to raise invoices to show that they have provided services such as advertisements, renting of computers/ printers, training, arranging customer awareness programme and others, the finance ministry said.
 
"As these services were never provided by the car dealers, their invoices are not permissible documents under the CENVAT Credit Rules, 2004, and the Service Tax Rules, 1994, for availing Cenvat credit by the insurance companies.
 
"These facts have been confirmed by the employees of the insurance companies and the car dealers in their voluntary statements. The estimated incorrect Cenvat credit involved in this case is Rs. 1,200-2,500 crore," the finance ministry said.
 
Chandrasekaran added: "As the matter is already between the insurance industry and the tax authority, the raking up of the issue by the media at this juncture is not necessary."
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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