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Thursday, November 12, 2009

Perils of the new Direct Tax Code for long term investors

A new (draft) Direct Tax Code (DTC) from April 2011 has been proposed by the Hon'ble Indian Finance Minister in Aug 2009. The DTC has undergone quite favorable analysis. Sample articles like this: New tax code: Pay 10% tax on Rs 10-lakh salary, or Decoding the direct tax code.

Unfortunately, what articles like these have not brought out is the massive impact on long term investors of one simple clause which removes the distinction between Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). Currently, LTCG on equity is taxed at 0%, while STCG is taxed at 15%. After April 2011, a gain on account of transfer of equity will be taxed at personal taxation slab rates, irrespective of when it was acquired. In essence this means that the taxation of 0% on LTCG on equity is being abolished with retrospective effect!

Capital gains are voluntary, i.e. chargeable to tax when profits are booked. Imagine that you invested in equity for many years and remained invested through the vagaries of the stock market. Along comes April 2011, and any sale of these long term assets will attract a tax of upto 30%. But what will the intelligent investor do? Sell all these assets in March 2011, thus attracting no tax on the LTCG.

But since we all are intelligent investors (hic), everyone and his uncle will be getting rid of equity when 2011 comes around. My prediction: we are going to see the biggest stock market crash in history. Hang around and have fun.

PS: Whats the government thinking? Huh? Isn't that an oxymoron? Anyway, if you think this is one irritating little clause that has been slipped in by the babus in Dilli, then please do your bit as a shining new Indian by writing a Comment on Direct Taxes Code and please do take some time to Rate the Direct Taxes Code.

Friday, October 30, 2009

Airtel and Citibank: change for the better?

Whats up with Airtel and Citibank? These two companies had offered me mediocre service in the past. And in some instances had also caused me much grief. But things sure seems to have changed for the better.

Citibank service seems to have become superlative. Customer service touch points are excellent. The online access is quite perfect and serves all my needs, so are the account statements, the informative emails and messages I receive, etc etc. I haven't been mischarged for some unwanted service in a long long time. In fact Citi even gallantly reversed a charge on my credit card when (by oversight) I didnt pay the full amount due a couple of months ago. Finally, a couple of things have recently happened which have turned me into a delighted customer: I got an email from Citi asking whether I would like my credit card replaced free of charge since I'd swiped it recently in Thailand and they "foresee a possibility of misuse". (BTW, I'd similarly replaced my Citi credit card some years ago when Citi asked me after I'd used my card in some other country.) And Citibank has started soliciting feedback for service touch point interactions. Which needless to say, is a must for organizations engaged in the service industry.

Airtel service also seems to have become superlative. Customer service touch points have become far better, specially for prepaid mobile service. Service in general was quite excellent for Airtel broadband, but the prepaid mobile service used to be downright sucky. Call drops rates were quite high, invariably at the start of the minute which used to be quite frustrating. Trying to reach a service exec would leave one floundering in a flurry of button presses while navigating the IVRS maze. Call drops are a thing of the past (I hope). Its much easier to reach a service exec these days. The personnel are better trained, they speak better, they interact better, and they provide meaningful answers for a change. Finally, a couple of things have recently happened which have turned me into a delighted customer: My call charges have been reduced by Airtel. Cynical me says they were forced to do so what with all the fancy new offers floating around by Reliance and Docomo and Bee-Bop-Boo. But the fact remains that have reduced the charge without intervention by me. And like Citibank, Airtel has started soliciting feedback for service touch point interactions via toll free SMSes!

Thursday, October 08, 2009

Getting to BIAL early in the morning

Hahahah... how unlivable can this city be?

I need to catch a 6 am flight tomorrow and have been trying to figure out the cheapest way to get to the new Bangalore International airport. I need to get there no later than 5 am, which means I need to leave at about 3:30 am from where I stay (JP Nagar).

The earliest BMTC Vayu Vajra Volvo Service bus from Jayanagar IVth block is 4am, while the earliest from BTM Layout is 4:30. For obviously reasons, I cant take either.

I called up BMTC airport kiosk to find out other options, and they said that buses from Majestic will leave at 3:00am, 3:30 and 3:55. Excellent.

But having past experience with the likes of BMTC I called up the Kempegowda Bus Stand to cross check. These guys had a different story. They said between 12:00 am and 4 am, Vajra buses are every hour only. So no buses at 3:30 and 3:55. Good thing I cross checked.

Armed with this info, I called up Celcabs which is the official feeder service for BIAL buses and they said there are no buses from Majestic before 6 am!

(On a side note, I was surprised how helpful the guys were. They refused to take a booking unless I was quite sure that I would get a bus at 3:00 am. Which of course I was not.)

Then I started checking the net for information on traveling on the Volvos at night and chanced upon the scanned schedules of the BIAL service in BMTC Vayu Vajra Volvo Service to Airport (BIAL) Timings and Schedule, which bears out what Celcabs said.

Finally, I thought I would call up the special BMTC number given for Route 9 on the last scanned schedule page to cross check all the info yet again. The first number is always busy. The second goes to someone's residence!

BMTC, I bow down before your superior service.

Tomorrow I will take my trusted cab service, Easycabs to the airport and hang the expense.

Welcome all to the armpit of the world: Namma Bangaluru.

PS: Big thanks to Vinay for taking the huge trouble of scanning and posting the BMTC Vajra schedules!

Friday, July 10, 2009

Example for new Perqusite Tax versus old Fringe Benefit Tax

An example for the previous post "FBT removed in Budget 09-10. Time to rejoice? Think again."

An employee is awarded X shares under an RSU plan, with a vesting date 4 years in the future. The RSUs are awarded at face value, say INR 2.

4 years later, on the vesting date, the stock price is at an all time high of INR 102 i.e. the FMV = INR 102. After the vesting date, irrespective of when the employee exercises his options (i.e. buys the shares from the company), the notional value per RSU is already fixed = INR 100. Even if the employee exercises his options later, he has to pay FBT of about INR 34 per option when he exercises.

Say, after the vesting date, the employee waits for another 6 months or a year before deciding to exercise. Now consider a market crash, as has happened. IT stocks being particularly susceptible, would steeply drop. The stock price drops to INR 32. The RSUs are almost worthless now! The notional capital gain is INR 30 per RSU. While the employee has to pay INR 34 to the government per RSU. Unless one is sure that the stock price will increase drastically in the future, there is no point in exercising the RSU. (And if someone says he is sure about the stock market, he's either stupid or joking.)

With the new taxation rules, the same situation is much better. Say, the employee decides to exercise at INR 32, he will pay a perq tax of about INR 9 (at a marginal tax rate of 30%).

Even without a market crash, one is perhaps better off since the price of stocks varies over a period of time. Perhaps the stock price was at an all time high around the vesting date (as in the example above, at INR 102). A few months later, any number of real or imaginary concerns can bring down the price sharpely. Say the stock price drops to INR 62. Thus the perq tax that needs to be paid is about INR 18. Thats nearly half the previous FBT per RSU.

Finally, after exercise of the stock options, the employee should wait for a year before making a sale, which would be a long term capital gain and hence exempt from tax.

Tuesday, July 07, 2009

FBT removed in Budget 09-10. Time to rejoice? Think again.

In yesterday's Indian Union Budget 2009-10, the Fringe Benefit Tax (FBT) has been proposed to be abolished. The FBT has been a pain for ESOP holders, ever since ESOPs were brought under FBT in 2007. Since then, Employee Stock Option Plans (ESOPs) have had to pay the FBT on the notional value of the ESOPs. The notional value of the ESOPS = Fair Market Value on vesting date - exercise price. And the FBT rate was a huge 30% per cent plus applicable surcharge plus education cess. Note that the FBT was actually an employer tax which was happily being passed by most employers to the employee. Nothing like being an employer in India, right?

Anyway, since then, companies (esp in the IT sector) have been trying to get the FBT removed. And it seems that their efforts have borne fruit. And everyone is rejoicing. For instance see article: Goodbye FBT… ESOPs just got better again! in India Infoline, FBT abolition should help attract talent in the Deccan Herald, Budget is clicking the right buttons to improve IT infrastructure in The Financial Express. But these articles are almost certainly mis-educating the general public.

Contrary to what you might think, removal of FBT does not mean that taxation of ESOPs will stop. All that has happened is that the taxation in the hands of the employer has been shifted to the employee. So ESOPs, among other items will be treated as perquisite in the hands of the employee and taxed at the prevalent slab rates. Which for most of us will change nothing at all.

The only silver lining that I can see is in the calculation of the notional value of the ESOPs. Previously, the employee had no say in the matter, the notional value was the difference between the Fair Market Value on vesting date - exercise price. Now it will be Fair Market Value on exercise date - exercise price. The vesting date is not under the employee's control, but the exercise date is. Prices of stocks fluctuate... by waiting for an opportune time, one could decide the exercise date at a point where the stock price is agreeably low, and hence reduce the FMV. A long term sale subsequently will reduce the capital gains to 0, hence one can profit from a low FMV.

Example for new Perqusite Tax versus old Fringe Benefit Tax.

Thursday, June 25, 2009

Liquor sold above MRP - 5

Ah, I have some new knowledge. From The Standards of Weights and Measures (Packaged Commodities) Rules, 1977:
23. Provisions relating to whole sale dealer and retail dealers:
(2) No retail dealer or other person including manufacturer, packer and wholesale dealer shall make any sale of any commodity in packaged form at a price exceeding the retail sale price thereof.

(4) Where, after any commodity has been pre-packed for sale, any tax payable in relation to such commodity is revised, the retail dealer or any other person shall not make any retail sale of such commodity at a price exceeding the revised retail sale price, communicated to him by the manufacturer, or where the manufacturer is not the packer, the packer and it shall be the duty of the manufacturer or packer, as the case may be, to indicate by not less than two advertisements in one or more newspapers and also by circulation of notices to the dealers and to the Director in the Central Government and Controllers of Legal Metrology in the States and Union Territories, the revised prices of such packages but the difference between the price marked on the package and the revised price shall not, in any case, be higher than the extent of increase in the tax or in the case of imposition of fresh tax higher than the fresh tax so imposed:

Provided that publication in any newspaper, of such revised price shall not be necessary where such revision is due to any increase in, or in imposition of, any tax payable under any law made by the State Legislatures:
Provided further that the retail dealer or other person shall not charge such revised prices in relation to any packages except those packages which bear marking indicating that they were pre-packed in the month in which such tax has been revised or fresh tax has been imposed or in the month immediately following the month aforesaid.

(5) Nothing in sub-rule (4) shall apply to a package which is not required under these rules to indicate the month and the year in which it was pre-packed.

The text above in bold is all I need. It is quite clear that old stock cannot be sold at a higher price. Now I've to check the packaging date of the liquor bottles that I'm still hanging on to to file a case.

Saturday, May 16, 2009

Liquor sold above MRP - 4

In another article (Yeddyurappa ‘castes’ the dice for LS polls) I find:

The share of profit by the retail liquor sellers would be reduced and without increasing the minimum retail price of the IMFL.

The additional excise duty on IMFL would also be reviewed. The government orders would be issued shortly.

And what the hell is "minimum retail price"?? Never heard of such. BTW, IMFL = Indian Made Foreign Liquor.

From another article, No cheers over beer, wine in Karnataka:

Having refrained from announcing duty hikes for liquor and related products in his budget a week ago, chief minister B S Yeddyurappa succumbed to the pressures of a sharply depleted treasury, and, on Friday said that additional excise duty (AED) would be increased on alcoholic beverages while the profit margin of liquor retailers would be decreased.

Also, the structure of AED on the IMFL (Indian made foreign liquor) would be revised. However, in the same breath, the chief minister said: “Steps will be taken so that the MRP (maximum retail price) on the IMFL won’t go up steeply.’’

These proposals have been included in the budget for 2009-10. Unlike excise duty, which is Rs 45 per litre, AED varies with respect to the price of liquor.

Presently, in the state, the retailers are entitled for a profit margin of 20%. This will come down with the new move. “We are yet to work out how much of AED to increase and how much of reduction to make in the profit margin,’’ said a senior official of the excise department.

Liquor sold above MRP - 3

Salient facts of Excise duty, from Central Excise -A guide to Assessees:

Central Excise duty is an indirect tax which is levied and collected on the goods/commodities manufactured in India. Generally, manufacturer of commodities is responsible to pay duty to the Government. This indirect taxation is administered through an enactment of the Central Government viz., The Central Excise Act, 1944 and other connected rules- which provide for levy, collection and connected procedures. The rates at which the excise duty is to be collected are stipulated in the Central Excise Tariff Act, 1985.

Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under entry No. 51 of list II of Seventh Schedule to the Constitution and it is called 'State Excise'. The Act, Rules and rates for excise on liquor are different for each State.

So, liquor Excise Duty is a state subject. Now interestingly I see in this article: Liquor, beer to cost more in Karnataka:

He imposed additional excise duties on Indian made foreign liquor (IMFL), beer and other low alcohol beverages to net Rs 820 crore more revenue from the excise during the coming year. The exact amount of the additional excise duties on liquor is yet to be worked out and will be notified shortly in view of the commencement of the excise year from July 1 (2009).

Last I heard we were still in May.

Liquor sold above MRP - 2

Its amazing that there's hardly any information on the internet about the Excise department of Karnataka, current excise duty, increase, circulars, etc. I do find a bunch of complaints about liquor being sold above MRP. And some heartening articles.

94 liquor shops licences suspended

Liquor price goes up even before order comes into force which is interesting coz it says:

According to Shubhakar Ajiri, depot manager of KSBCL, retailers were not authorised to sell their old stocks at new rates even after the rates were increased. Unlike petroleum products, liquor should be sold at the rate at which it was procured from the KSBCL depot, he said.

Liquor sold above MRP - 1

A couple or so weeks ago I bought many bottles of liquor from Spencers Retail in Koramangla. All the prices charged were above MRP. There were 3 excise department notices that some brands of beer have been increased in price from such an such date (TBD). However, there was no notice for the 6 or 7 different alcohol brands I was purchasing. I called for the manager, spoke to him, explained to him the problems.

1. The purchase price of fresh stock of liquor might have gone up, but that does not mean the old stock was purchased at the higher price.
2. MRP on liquor was made mandatory from (AFAIK) Nov 06. That means the MRP is the final price on that old stock and all taxes have been paid already, and as far as MRP rules go, the price cannot be changed on old stock.
3. Excise duty in India is different from sales tax / service tax / VAT. Its a point of origin or manufacture duty, hence this duty is already charged, whether the sale is made or not. (I need to check into the legaclity of Excise duty increase after the MRP has been printed on the bottle.)
4. Notice was not published for the brands I was purchasing.

He in turn called up his manager, they brought their files for inspection and showed me that the price that they had purchased the beer brand that I'd bought was higher than the MRP printed. And the price that they were selling at was higher than their purchase price, which is of course valid. So I asked for a letter from them stating that they were selling the liquor above MRP and there was no notice. He of course refused.

I purchased all the liquor and took a bill. That makes my posistion secure. Now to find out whether I am in the right, and if so how to nail these buggers.

Sunday, April 12, 2009

BJP advertising on Google mail






This is rich, just saw a sponsored link in my gmail exhorting the cause of the BJP and Advani. What a joke. "Determined leader" indeed. The way I see it, this is what is the BJP is determined to do if we bring it to power:

divide India into little insular potholes,
turn this secular country into a stomping ground for religious fanatics,
wave the saffron flag from every lamppost,
satify their sadistic urges under the guise of moral policing,
repeat a few more ayodhyas and godhras,
and in general timewarp us back to 15th century overnight.

Saturday, February 21, 2009

"The stubborn facts of our economic crisis - the 11th hour"

If you have a grasp of macro economics and want to read a well written, non-jargony, compelling essay about the US economic crisis (and by extension, the world), I would recommend that you give this a dekko: 11th Hour.

IF the article is correct in its facts and conclusions (and I have no reason to believe that it is not), then we are in for a deeply troubled time, and the world economic situation is not going to quite recover by 2010.