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  Voice of Change Confidential and for private use of PKF S&S and SRKB staff only PKF SRIDHAR & SANTHANAM Chartered Accountants ISSUE 3, 2009     In this issue… this issue… Partner Speaks… CA Ramakrishnan S LAGAAN – What? When? Why? CA Venkatraman G IFRS – an Indian perspective Mr. Hari Chandrasekaran Shining Stars Celebrations Fun Corner   ‐1‐  www.pkfindia.in   PKF SRIDHAR & SANTHANAM Chartered Accountants Partner Speaks…   and we will know how the systems Hello everyone! Doing an constraints: audit under time Also when doing interim audit look at One major issue facing all of us is how to do an audit within the limited time available to us effectively. function. CA Ramakrishnan S. ramki@pkfindia.in Co.law provisions were not applicable to it. During the year the Company may have become a subsidiary of a Public company. Now all provisions which apply to Public companies will the previous audited financial be applicable to this private company statements and also compare with too! financial statements and audit report of other good companies (preferably in Also preferably the same team should not go for an audit time after time; partners, leader and staff shall be rotated to give the audit a new view. This actually happens in staff normally A re-look at our own earlier work is a very healthy thing to do. but we should do this to leaders and partners too. The best solution to a good audit is audit of an audit. free to challenge earlier. any The Happy auditing! More often than not we are waiting for the final results or financial statements or schedules as of the date of BS to come. same industry) so we will know that nothing major has been missed. My suggestion is –try and avoid this waiting by seeing whatever is available –for instance if details of outstanding liability are available only till Sep 08 when you are doing Dec 08 review, look at Sep 08 and compare with Mar 08 (last audited) even if it has been seen previously by some one else. It virtually becomes an internal peer review. Also feel conclusions reached decision to do something may have been taken when the Company was different but may not be valid today. An example: there was a private Ramki This way we will know if an item itself has been totally omitted to be provided company which was privately owned by two individuals before and many   ‐2‐  www.pkfindia.in   PKF SRIDHAR & SANTHANAM Chartered Accountants LAGAAN – What? When? Why?  LAGAAN – What? Since when? Why? What is LAGAAN? We are all familiar with the Oscar-nominated Aamir Khan’s film LAGAAN. Hey…but wait…I am not going to tell you about this movie…..! I am going to tell you the history of Lagaan in India and why Lagaan is required. taxes were levied on land and on moveable property such as the Saladin title in 1188. Later on, these were supplemented by introduction of poll taxes, and indirect taxes known as "Ancient Customs" which were duties on wool, leather and hides. In India, the system of direct taxation as it is known today has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras. The wise sage advised that taxes should be related to the income and expenditure of the subject. He, however, cautioned the king against excessive taxation and stated that both extremes should be avoided namely either complete absence of taxes or exorbitant taxation. According to him, the king should arrange the collection of taxes in such a manner that the subjects did not feel the pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances. The detailed analysis given by Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times. Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, rawmaterials and also by rendering personal service (see the difference……In today’s world, only MONEY speaks…!!).   CA Venkatraman G Venky1309@gmail.com However, it is Kautilya’s (popularly known as CHANAKYA) Arthasastra (321-296 BC), which deals with the system of taxation in a real elaborate and planned manner. This well known treatise on state crafts written sometime around 300 B.C., when the Mauryan Empire was at its glorious upwards move, is truly amazing, for its deep study of the civilisation of that time and the suggestions given which should guide a king in running the State in a most efficient and fruitful manner. A major portion of Arthasastra is devoted by Kautilya to financial matters including financial administration. The Mauryan system, so far as it applied to agriculture, was a sort of state landlordism and the collection of land revenue formed an important source of revenue to the State. The State not only collected a part of the agricultural produce which was normally one sixth but also levied water rates, octroi duties, tolls and customs duties. Taxes were also collected on forest produce as well as from mining of metals etc. Salt tax was an important source of revenue and it was collected at the place of its extraction. Kautilya described in detail, the trade and commerce carried on with foreign countries and the active interest of the Mauryan Empire to promote such trade. Goods were imported from China, Ceylon and other countries and levy known as a vartanam was collected on all foreign commodities imported in the country. There was another levy called Dvarodaya which was paid by the concerned businessman for the import of foreign goods. In addition, ferry fees of all kinds were levied to augment the tax collection. LAGAAN means TAX. History of taxation (Lagaan-ation!) is more than 2000 years old!! The Income Tax Act which is in vogue today was first enacted only in the year 1922. The present Income Tax act as it stands today (you all know) was brought into effect from 1961. “LAGAAN – Since when and why” "It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold" --Kalidas in Raghuvansh eulogizing KING DALIP It is a matter of general belief that taxes on income and wealth are of recent origin but there is enough evidence to show that taxes on income in some form or the other were levied even in primitive and ancient communities. Nearly 2000 years ago, there went out a decree from Ceaser Augustus that the entire world should be taxed. In Greece, Germany and Roman Empires, taxes were also levied sometime on the basis of turnover and sometimes on occupations. For many centuries, revenue from taxes went to the Monarch. In Northern England,   ‐3‐    www.pkfindia.in   PKF SRIDHAR & SANTHANAM Chartered Accountants A big portion was collected in the form of income-tax from dancers, musicians, actors and dancing girls, etc. This taxation was not progressive but proportional to the fluctuating income. Few examples of types of taxes collected: Excess Profits Tax General Sales-tax levied on sales Sale and purchase of buildings was also subject to tax Even gambling operations were centralized and tax was collected A tax called yatravetana was levied on pilgrims..!! All kinds of liquor were subject to a toll of 5 percent Tax evaders and other offenders were fined too. source of income for the State. According to him, tax was not a compulsory contribution to be made by the subject to the State but the relationship was based on Dharma and it was the King’s sacred duty to protect its citizens in view of the tax collected and if the King failed in his duty, the subject had a right to stop paying taxes, and even to demand refund of the taxes paid (wow!). The present day tax system is in many ways similar to the system of taxation in vogue about 2300 years ago. According to the Arthasastra, each tax was specific and there was no scope for arbitrariness. Precision determined the schedule of each payment, and its time, manner and quantity being all pre-determined. The land revenue was fixed at 1/6 share of the produce and import and export duties were determined on ad-valorem basis. The import duties on foreign goods were roughly 20 per cent of their value. Similarly, tolls, road cess, ferry charges and other levies were all fixed. His over all emphasis was on equity and justice in taxation. The affluent had to pay higher taxes as compared to the not so fortunate. People who were suffering from diseases or were minor and students were exempted from tax or given suitable remissions. Kautilya also laid down that during war or emergencies like famine or floods, etc. the taxation system should be made more stringent and the king could also raise war loans. The people engaged in commerce were to pay big donations to war efforts. Taking an overall view, it can be said without fear of contradiction that Kautilya’s Arthasastra was the first authoritative text on public finance, administration and the fiscal laws in this country. His concept of tax revenue was a unique contribution in the field of tax administration. It was he, who gave the tax revenues its due importance in the running of the State and its far-reaching contribution to the prosperity and stability of the Empire. It is truly a unique treatise!! BIRTH OF THE ADMINISTRATION: • INDIAN TAX • The underlying philosophy was not to exploit or over-tax people but to provide them as well as to the State and the King, immunity from external and internal danger. The revenues collected in this manner were spent on social services such as laying of roads, setting up of educational institutions, setting up of new villages and such other activities beneficial to the community. According to Kautilya, the power of the government depended upon the strength of its treasury. Kautilya emphasized that the King was only a trustee of the land and his duty was to protect it and to make it more and more productive so that land revenue could be collected as a principal • • • Organizational history of the Income-tax Department starts in the year 1922. The Incometax Act, 1922 gave a specific nomenclature to various Income-tax authorities. In 1924, Central Board of Revenue Act constituted the Board as a statutory body with functional responsibilities for the administration of the Income-tax Act. The amendments to the Income tax Act, in 1939, made one vital structural changes appellate functions were separated from administrative functions; a class of officers, known as Appellate Assistant Commissioners, thus came into existence. Separation of executive and judicial functions in 1941 brought the Appellate Tribunal into existence World War II brought unusual profits to businessmen. During 1940 to 1947, Excess Profits Tax and Business Profits Tax   ‐4‐    www.pkfindia.in   PKF SRIDHAR & SANTHANAM Chartered Accountants • • was introduced and their administration handed over to the Department (These were later repealed in 1946 and 1949 respectively). In 1951, the 1st Voluntary Disclosure Scheme was brought in. Birth of CBDT: By 1963, the I.T. department, burdened with the administration of several other Acts like W.T., G.T., E.D., etc., had expanded to such an extent that it was considered necessary to put it under a separate Board. Consequently, the Central Board of Revenue Act, 1963 was passed. The Central Board of Direct Taxes was constituted, under this Act. The developing nature of the economy of the country brought with it both steep rates of taxes and black incomes. In 1965, the Voluntary Disclosure Scheme was brought in followed by the 1975 Disclosure Scheme. Finally, the need for a permanent settlement mechanism resulted in the creation of the Settlement Commission. • • • Taxation System in India Indian taxation system is highly organized and well developed. The entire tax structure of the country is managed by a three-tier federal arrangement, comprising of the Union Government, the respective State Governments and the various Local Bodies. Keeping in accord with the provisions of the Indian Constitution, the authority and power to levy various taxes and duties is distributed amongst these three governmental tiers, in a planned manner. The Union Government holds power to charge taxes like Income Tax (except on agricultural income), Custom Duties, Central Excise and Service Tax. State Governments are empowered to levy taxes like VAT (Value Added Tax), Sales Tax, (taxes on intra-state sale of goods in states where VAT is not in force), Stamp Duty (duty on transfer of property), Land Revenue (tax on land), State Excise (duty on manufacture of alcohol), and Tax on Professions. State Governments can also impose taxes on various agriculture incomes. Since April 1, 2005, most of the State Governments in the country have substituted Sales Tax with Value Added Tax. The various Local Bodies of the country also have their own command as far as the taxation structure is concerned. They are authorized to levy Tax on Properties (buildings, etc.), Octroi (tax on entry of goods for use within areas of the Local Bodies), and also Taxes on Utilities like drainage, water supply and the like. Moral: 1. Duty of every citizen is to pay taxes to the government 2. Duty of a responsible government is to utilize the tax so collected for the benefits of the citizen • From the last decade, the taxation structure in India has witnessed major reforms and amendments. Tax Laws have been rationalized and the tax rates have also been streamlined to a great extent, leading to better enforcement, simplified payment modes and fair play. This is the (hi)story of LAGAAN!   ‐5‐    www.pkfindia.in   PKF SRIDHAR & SANTHANAM Chartered Accountants   IFRS – an Indian perspective Harmonization of accounting standards has long been a day dream for global accountants. With the EU backed IFRS getting adopted by world-wide financial audience it is critical that Indian financial diaspora understands what it takes to landdown in an IFRS setting. At the outset, it should be recognized that the last 56 Accounting Standards issued by ICAI has been largely influenced and meant to converge with IFRS. Hence it is only a matter of years before Indian AS gets replaced with IFRS. As an immediate prognosis, IFRS would emerge as the global financial language, provide faster access to global markets, reduce the cost of capital and eliminate multiple reporting requirements. Basic concepts under IFRS: There is no need to panic for nonWith 8 IFRSs, 31 IASs, 12 IFRICs and 11 SICs there has been sea change the way IFRS as an economic model has shaped up corporate balance sheets outside India. With over 130+ countries transitioning towards it, IFRS has become a truly global standard. Infact, SEC accepts IFRS without • Business Combinations • Intangible Assets • Property, Plant and Equipment Hari Chandrasekaran(Ex- article - 1998-2001) hari.chandrasekaran@dnbtransunion.com  Indian CA becomes a global resource which commonality did not exist so far. • Consolidated financial statements Chak de, Indian CA. Abbreviations used: IFRS- International financial reporting standards EU – European Union IAS – International Accounting standards IFRIC – International Financial Reporting Interpretations Committee SIC- Standing Interpretations Committee SEC - Securities and Exchange Commission (US) FPI – Foreign Private Issuer • reconciliation for FPI and is proposing IFRS for all US companies. IFRS compliant Indian companies. They are expected to transition from 2011-12. However, listed entities • No legal override • Substance –vs- form • Usage of Fair Value • Time value of money Are we geared up? Yes, Indians can Important areas where key differences emerge between Indian GAAP and IFRS: understand and apply IFRS with limited training and become a force to reckon with. In this process, the need to prepare last year's comparables under IFRS making it effective for them from Apr 2010 itself. So there is little time available.   ‐6‐    www.pkfindia.in   PKF SRIDHAR & SANTHANAM Chartered Accountants Celebrations Congrats to the ‘TPL Mumbai’ Team comprising… Ananthkrishnan Dhiraj Birla Anita Chinnari Vijay Kaushik BEL Bangalore team and the IFL team for their excellent performance. • HAPPY BIRTHDAY Following buddies celebrate their B’Day in the upcoming fortnight. All in SANDS family wishes these CAs & budding Future CAs Many More Happy Returns and a Great Future!!!!!!!!!! • BHARADWAJ on 1st Feb • ABISHEK. R on 2nd Feb • SEGAR THAICHAYINY on 4th Feb • BALAJI V PRABHU on 7th Feb • SRIDHARAN. N on 12th Feb • Kamali on 13 th Feb   ‐7‐    www.pkfindia.in   PKF SRIDHAR & SANTHANAM Chartered Accountants Fun Corner Funny Traffic signs… Thanks to web •   ‐8‐    www.pkfindia.in