CORPORATE GOVERNANCE

The most influential parties involved in corporate governance include , Government agencies and authorities, Stock exchanges, Management (including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line management, shareholders and auditors). Stakeholders ( may include lenders, suppliers, employees, creditors, customers)

 A board of directors is to play a key role in corporate governance. The board has the responsibility of endorsing the organization's strategy, developing directional policy, appointing, supervising and remunerating senior executives, and ensuring accountability of the organization to its investors and authorities.

All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation.

1. Directors, workers and management receive salaries, benefits and reputation, 2. Investors- expect to receive financial returns. 3. Lenders- expect specified interest payments, while returns to equity or dividend distributions or capital gains on their stock. 4. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; 5. Suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. Many parties may also be concerned with corporate social performance.

POPULARLY ESPOUSED (ADOPT) PRINCIPLES OF CORPORATE GOVERNANCE

Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.

 Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfil its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making

 Disclosure (publicity) and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

MECHANISMS AND CONTROLS

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse (poor) selection. For example, to monitor managers behavior, an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability. Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals.

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.

Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting

Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.

Remuneration:

Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

INCOME TAX ACT

Tax as a source of revenue to the government: The government can generate revenue through various sources. The sources may be direct or indirect. Income tax is a direct tax (source) to the treasury. It is one of the most important sources of revenue to the government.

Assessment year [Sec 2(9)]: It refers to 12 months starting from 1st day of every April of a particular year and ending on 31st day of every March of the next year.

Assessment Year [AY] = 01-04-2010 to 31-03-2011

Previous Year (Sec 3): It refers to 12 months immediately proceeding the particular assessment year. If the assessment year is 2010 11, the previous year may be 2009 10. Previous Year [PY] = 01-04-2009 to 31-03-2010

Assessee [Sec 2(7)]: It refers to the following person as per income tax act 1. Any person who is liable to pay tax or 2. Any person who is liable to pay interest or penalty or 3. A person who is deemed to be an assessee as per the act or 4. A person who is considered as default assessee by the act or 5. Any person on whom proceedings of loss is carried out or 6. Any person on whom some assessment of fringe benefits is carried out or 7. Any person who is entered for refund of tax.

Types of Assessee:

There are three types of assessee, 1. Ordinary Assessee 2. Deemed Assessee 3. Assessee in default

1. Ordinary Assessee It means one who has to pay any tax, penalty and interest to the income tax authority or who is eligible for any refund of tax from the authorities.

2. Deemed Assessee It is also known as representative assessee. This type of assessee is not only responsible for his income but also responsible for income of the other person to whom he acts as a representative.
For a Minor For a non resident For deceased person (with will) For deceased person (without will) Guardian Agent Executor - Legal heir/Eldest in family

3. Assessee in Default If any person fails to fulfill his duty or obligation, then he is termed as assessee in default. For e.g.: If a person who should submit a return of income fails to do so then he is assessee in default. If an employer who is supposed to deduct tax at source fails to do so then he will also be termed as an assessee in default.

Person [Sec 2(31)] Person includes the following, 1. Individual Any natural human being created by God (male, female, minor, lunatic, idiot, etc.,) and not any artificial person or deity. 2. An Hindu Undivided Family [HUF] which consists of all persons who are lineally descended from a common ancestor including wives, sons and unmarried daughters. 3. A firm as defined by the partnership Act.

4. A company as defined by the companies Act. 5. An AOP Association of Persons or BOP Body of Individuals 6. A local authority or municipal corporation. 7. Any artificial juridical person created by law. E.g.: Universities, bar councils, etc.,

Income [Sec 2(24)] The Income Tax Act does not define the term Income. It has specified certain things, which can be brought under the concept of income. The following are some of the points that can be brought under the concept of Income. 1. Profit and gains. 2. Dividend. 3. Voluntary Contribution to any trust created wholly or partly for charitable purposes. 4. Value of any benefit or perquisites either in cash or kind. 5. Profit in lieu of salary. 6. Any allowances given to the assessee.

7. Any special allowances or benefits. 8. Any sum paid as obligation by the company. 9. Any capital gains chargeable u/s 45. 10. Any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort. 11. Any sum received by the employee as contribution to any provident fund or superannuation fund or any fund set-up under the Employee State Insurance Act. 12. Any sum received under key man insurance policy.

Features of Income Any benefit in cash or kind can be considered as income of the assessee and can be taxed if one is clear about the features of the income. 1. Income must be from a definite source in order to get it taxed. 2. Self-generated income cannot be taxed. Therefore income must be from outside. 3. Legal as well as illegal income is taxed. The Income Tax Act does not make any difference between legal and illegal incomes. 4. It is not necessary that the income should be in form of money. It can also be in form of kind. 5. Income earned may be temporary or permanent.

6. Pin money (Pocket Money) received by house wife is not considered as an income. 7. Any amount received due to devaluation of currency is taxable income. 8. If income is diverted without receiving, it is not taxable income. (Diverted Income) 9. If income is collected and then distributed that income will be taxable income. 10. Any loss is also included under the concept of income. 11. In case there is any dispute regarding title of the income, the beneficiary will be taxed. 12. Revaluation of assets and excesses if any cannot be considered as income.

Gross Total Income and Total Income [Sec (14)] Gross total income refers to the sum total of various heads of incomes such as salary, house property, business or profession, capital gains, and other sources. It should be calculated as follows, Income from salary xxxxx Income from the house property xxxxx Income from business or profession xxxxx Income from capital gains xxxxx Income from other sources xxxxx __________________ Gross Total Income xxxxx __________________

Total Income or Net Income The excess of gross total income after allowing deductions under section 80 is termed as Total Income. It should be calculated as follows,
Gross Total Income Less: Deduction u/s 80 xxx xxx ______________ Total Income or Net Income xxx ______________

Agricultural Income Sec [2(1A)]

Agricultural income is fully exempted from tax u/s 10(1). It refers to 1. Any rent or revenue derived from land. 2. Any income derived from such land, which is used for agricultural operations. 3. Any income from a farm house. 4. Any income derived from saplings or seedlings grown in a nursery will be deemed as agricultural income.

Exempted Income U/S 10 Section 10 of income tax act deals with the exempted income 1. Agricultural income 2. Receipts from HUF 3. Partners share in the firm. 4. Interest on securities / bonds for non-residents. 5. Interest on specific saving certificates.

6. Value of leave travel concession. 7. Royalty or fee for technical services. 8. Gratuity. 9. Commuted pension. 10. Leave encashment. 11. House rent allowances. 12. Interest on retirement benefits, etc...

Income from Salary U/S 17(1) How salary is defined? The term Salary includes, 1. Wages 2. Any annuity or pensions 3. Any gratuity 4. Any fees, commission, perquisites etc..

5. Any advance salary 6. Any payment received by an employee in respect of leave not availed by him during service. 7. A total sum accredited to the credit of employees recognised provident fund to the extent chargeable to tax. 8. Transferred balance in a recognised provident fund to the extent it is taxable.

Simple Format to Compute Salary Income

Basic Items: 1. Basic salary / wages / remuneration /pay 2. Special pay 3. Bonus 4. Fees 5. Commission 6. Advance salary 7. Arrear salary

xxx xxx xxx xxx xxx xxx xxx

Allowance 1. Fully taxable allowance 2. Partly taxable / partly exempted allowance 3. Fully exempted allowance Perquisites 1. Taxable for all [specified and unspecified] 2. Taxable for specified employees only 3. Exempted for all [specified and unspecified]

xxx xxx Nil

xxx xxx Nil

Special items 1. Gratuity 2. Pension 3. Leave encashment 4. Provident fund Gross salary Deductions u/s 16 1. Standard deduction 2. Entertainment allowance 3. Professional / employment tax xxx xxx xxx

xxx xxx xxx xxx xxx

xxx

Income from salary

xxx

Income from House Property

Definition: Sec -22 of the income tax act-1961 deals with house property income. Income from house, building, bungalows, and go downs are taxed under this head. Under this head, tax is not based upon the actual income; it is based upon the annual value.

Exempted house property incomes The following are some of the property incomes, which are exempted from tax 1. Annual value of one self- occupied property 2. Property used for own business or profession 3. Property held for chartable purpose 4. Property income of a political party. 5. Property income for a trade union.

6. Property income of a hospital or other medical institution. 7. Property income of an approved scientific research association. 8. Property income of a local authority. 9. Annual value of any one place of an ex-ruler. 10. Income from a farm house. 11. Property income of a game association.

Simple Format: Gross Annual Value [GAV] Less: Municipal tax paid by owner Net Annual Value [NAV]
Deduction u/s 24 1. Standard deduction 30% of NAV xxx 2. Interest on borrowed capital paid or due xxx Income from House Property

xxx xxx xxx

xxx
xxx

INCOME FORM BUSINESS PROFESSION: Definition: Provisions regarding calculation of profits and gains of business or profession are dealt under sections 28 to 44 of Income Tax Act 1961. Incomes that are Taxed under Business Profession The following are the income, which are taxable under this head as per section 28. 1. Profits and gains of any business profession carried on by the assessee during the current previous year. 2. Profits and gains of managing agency. 3. Income from speculative transactions. 4. Income derived by a trade or profession or similar association from specific service performed for its members.

5. Any interest, salary, bonus, commission or remuneration due or received by a partner of a firm. 6. Any sum received under a key man insurance policy including bonus. 7. Money received for not to share any patents, copyrights, trademarks etc... 8. Profits on sale of a licence granted under imports control order 1955. 9. Cash assistance received or receivable by any person against exports under any scheme of the government of India.

Simple Format: Net profit as per P & L A/c Add: 1. Disallowed expenses 2. Business income not credited in P & L A/c 3. Under- valuation of closing stock 4. Over-valuation of opening stock

xxx xxx xxx xxx xxx

Less:1. Non business income credited in P & L A/c 2. Allowed expenses not debited in P & L A/c 3. Over-valuation of closing stock 4. Under- valuation of opening stock
Income from Business

xxx xxx xxx xxx

xxx xxx

Income from Capital Gains:

Capital Assets [Sec 2(14)] It refers to property of kind whether fixed or circulating, movable or immovable, tangible or intangible held by an assessee including property of his business or profession. Capital assets include good will, leasehold rights, jewellery, shares, manufacturing license etc.

Short term capital assets: 1. It refers to any asset, which is held by the assessee for not more than 36 months immediately prior to the date of transfer. 2. In case of shares, securities listed in any recognised stock exchange, unit of UTI, unit of Mutual Funds if the assessee holds asset for not more than 12 months immediately prior to date of transfer.

Long term capital assets: Any asset, which is held for more than 36 month or 12 month as the case may be , will be returned as long term capital asset. In other words all assets other than short term capital assets are called long term capital assets.

SIMPLE FORMAT: For short term capital gain: [54B, 54D, 54G and 54GA] Sale consideration of the asset xxx Less: 1. Expenditure in connection with transfer xxx 2. Cost acquisition of the asset xxx 3. Cost of improvement of the asset xxx xxx STCG xxx

For long term capital gain: [54, 54B, 54D, 54EC, 54F, 54G and 54GA] Sale consideration of the asset xxx Less: 1. Expenditure in connection with transfer xxx 2. Index cost of acquisition xxx 3. Index Cost of improvement xxx xxx LTCG xxx

INCOME FROM OTHER SOURCES Section 56 of income tax act deals with income from other sources. It is the last residuary head of income. That is any income which is not chargeable in the other sources of income such as salary, house property, business or profession and capital gain will be charged to tax under this head of income.

Incomes that are taxed under other sources: 1. Dividend charged by the foreign company. 2. Pension received by the legal heirs of an employee. 3. Winnings from lotteries, crosswords, puzzles, races, card games, gamblings etc. 4. Income from plant machinery or furniture etc,. 5. Interests from securities bank deposits.

SIMPLE FORMAT:
1. Dividend from foreign company 2. Interest from securities 3. Casual income 4. Income from letting of plant and machinery, furniture building etc. 5. Family pension 6. Royalty 7. Examiner ship remuneration 8. Other income not included in salary, house property, business or profession, capital gain xxx xxx xxx xxx xxx xxx xxx xxx

Income from other sources

xxx

Deductions form Gross Total Income The Income Tax Act has prescribed various deductions which can be claimed as deduction from gross total income while calculating the total taxable income. Section 80C In respect of life insurance premium, PF, subscription to certain equity share or debentures. Section 80 CCC In respect of contribution to pension fund of LIC (Jeevan Suraksha) Section 80 CCD In respect of contribution to pension scheme of central government Section 80 D In respect of medical insurance premium Section 80 DD In respect of medical treatment and deposits made for maintenance of handicapped dependents.

 Section 80 DDB In respect of medical treatment Section 80 E In respect of repayment of loan taken for higher education. Section 80 G In respect of donation Section 80 GG In respect of rent paid Section 80 GGA In respect of donation to scientific research and rural development Section 80 GGB In respect of donation given by companies to political parties Section 80 GGC In respect of donation to political parties

 Section 80 IA In respect of industrial infrastructure development. Section 80 IAB In respect of enterprises engaged in development of special economic zone. Section 80 IB In respect of industrial undertakings other then infrastructure development. Section 80 IC In respect of profits and gains from certain under takings or enterprises in the state of Himachal Pradesh, Uttaranchal, Sikkim and North eastern state. Section 80 ID In respect of profit and gain from specific area like national capital territory of Delhi and district of Faridabad, Gurgaon, Ghaziabad. Section 80 IE In respect of profit and gain from specific under takings North eastern state.

 Section 80 JJA In respect of profit and gain from business of collecting and processing of bio-degradable waste. Section 80 JJAA In respect of employment of new regular women by a company. Section 80 LA In respect of certain income of offshore banking units. Section 80 QQB In respect of royalty to authors. Section 80 RRB In respect of royalty on patents. Section 80 U In respect of disabled persons.

VAT Value Added Tax

VAT Value Added Tax VAT has come in to India in the form of MODVAT in 1986, renamed as CENVAT in 2000 and finally as VAT from 1st April 2005. It is nothing but multi staged tax or multi point tax calculated at each stage or point. MODVAT was at central level whereas VAT is at state level to replace local sale tax.

VAT Mechanism: For goods that are imported and consumed in a particular state, the first seller pays the first point tax, and next seller pays tax only on the value addition done leading to a total tax burden exactly equal to the last point tax. Input VAT: It refers to the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by the manufacturers. Input tax means the tax paid or payable under this act by a registered dealer to another on the purchase of goods in the course of business for resale or for manufacture of taxable goods or for use as containers or packing materials or for the execution of works contract. Output VAT: It refers to the total tax calculated on the sales price.

Sales not governed by VAT Act: The followings are the sales which are not governed by VAT Act, 1. Interstate trade or commerce (coming under central sales tax). 2. Sales which takes place outside the state. 3. Sales in the course of export or import.

VAT in India: In India presently out of 29 states 27 states have favoured VAT above 550 items are covered under VAT, VAT Rates: Natural and unprocessed local products (including petrol, diesel, liquor and lottery) VAT rate is exempted. Drugs and medicines, agricultural and industrial inputs, capital goods and declared goods VAT rate is 04% Precious items like gold, Bullion, Silver and Jewellery VAT rate is 01% All items which do not come under point 1 to3

Methods of calculating VAT

Subtraction Method Tax rate applied on the difference between value of output and the cost of output is termed as subtraction method. It is also known as product approach. VAT = Value of Output -- Cost of Output

Addition method In this value computed by adding all the payments payable to factors of production [ eg. Wages, salaries, interest etc]. this method is also termed as income approach. Tax Credit method Under this method the tax paid on inputs is set - off from the tax collected on sales. This method is more popular and India follows this method which is similar to CEDNVAT. Under this method tax is calculate as follows. VAT = Output Tax Input Tax

Advantages of VAT 1. It is simple to calculate 2. It bring more transparency in tax 3. It is for dealers to have self- assessment in term of submission of returns upon setting off tha tax credit. 4. It makes tax administration more simple which leads to reduction in cost involved in revenue collection. 5. Accountability and transparency in this system can be achieved since self assessment will be supplemented by audit mechanism

Points to know regarding VAT 1. If tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over the end of the next financial year. 2. Any unadjusted input tax credit at the end of the second year is eligible for refund. 3. Input tax credit on capital goods is also available for traders and manufacturers. 4. Tax credit on capital goods can be adjusted for a maximum of 36 equal months. 5. Each state may at their option reduce this no. of instalments.

6. Certain capital goods are not eligible for input tax credit. 7. For all exports made out of the country the tax paid within the state will be refunded in full within three months. 8. Tax invoice, cash memo or bill with date and signature of the dealer or his employee is must. 9. Dealers having gross annual turnover above Rs. 5 Lacs should register compulsorily. 10. New dealer will be allowed in 30 days time from the date of liability to get registered.