Budget wish list-Venture Capitalists ask for Tax Exemption

The Indian Venture Capital Association (IVCA) has asked the 

finance ministry to extend the benefit of tax pass-through on

investments across sectors in the upcoming Union Budget. 

Currently, under the Finance Act, 2007, tax pass-through

benefit has been allowed to investments in only nine sectors 

— information technology, biotechnology,

nanotechnology, poultry, 

dairy, bio-fuels, hotels 

and hospitality centres, 

seed research and chemical 

research & development.

In taxation parlance, 

a pass-through means

an exemption from 

paying taxes by the exempted group. The tax payable by the group

is passed on to the end beneficiary, in this case, the investors 

or limited partners in these VC funds. Funds investing into

non-specified sectors (sectors that do not fall inside the 

exempted bracket) will have to pay tax (on gains) at every exit.

Through its representation, IVCA has asked the government 

to do away with sectoral specification and restore tax pass-through 

benefits across sectors for venture capital funds. 

The industry body has asked the ministry to treat VCFs

(venture capital funds) at par with mutual funds, which are 

automatically exempted from paying taxes at the pool level.

“Non-availability of tax pass-through status could lead to 

higher taxation of income and, therefore, lower returns

for the investors,” said Pranay Bhatia, partner, Economic Laws Practice.

“If tax pass-through benefit is allowed across sectors, as is proposed

under the draft Direct Tax Code, it will alleviate tax interpretation 

challenges which are currently faced by domestic venture capital funds,”

Mr. Bhatia added.

According to IVCA, tax pass-through for select sectors is causing 

tremendous hardships to VCFs in terms of uncertain interpretations 

and operational ambiguity. Moreover, most VCFs are set up in 

the form of trusts. With pass-through unavailable in sectors other than 

those specified, these trusts (or VCFs) will be governed by

the provisions of trust taxation.

Trust laws — according to IVCA — are archaic

and hold good only for private trusts; the provisions

of trust laws are difficult to apply in the context of 

contributory trusts or pooling vehicles (like VCFs),

the industry body said.

“Pass-through basis of taxation without sectoral restrictions 

will resolve several of the current issues in the taxation of 

VCFs. Such a provision will allow the investors in VCFs to 

be taxed on income directly without any revenue loss to the government,” 

said Hiresh Wadhwani, partner, financial services, Ernst & Young.

Venture capital experts are asking the government to maintain parity 

with foreign venture capital funds which are exempted from paying 

tax in India. Currently, there are 137 SEBI-registered domestic VC funds

and 135 foreign venture funds

Budget wish- Insurace Sector

 

The insurance sector feels that in the upcoming
Union budget finance minister, Pranab Mukherjee
should eitherprovide a separate limit for tax benefits under Section
80C of Income Tax Act for investment in long-term
saving instruments, such as insurance or increase the 
present limit of Rs 1 lakh to Rs 3 lakh. The industry is
also opposing the proposed exempt-exempt-tax (EET)
system for insurance sector, which is at its ‘nascent stage’ in India.

Heads of most insurance companies have also
demanded that the Insurance Bill be passed this year,
allowing for 49 per cent foreign direct investment (FDI)
in the domestic insurance sector. At present, only 26 per cent FDI is allowed.

T R Ramachandran, CEO and MD of Aviva India, said,
“We would recommend a separate limit for deductions under
Section 80C for long-term saving instruments, such as life
insurance and pension funds. The deduction under Section
80C also includes short-term saving instruments such as mutual
funds and fixed deposits.”

Deepak Sood, CEO and MD of Future Generali India Life Insurance,
said, “There should be a separate limit for pension plans not inclusive of
Rs 1 lakh limit under Section 80C. This is primarily in view of regulation
of separate pension plans. Besides, under 80C, the limit of Rs 1 lakh should
be raised to Rs 3 lakh to mobilise funds for long-term infrastructure development.”

Under Section 80C of Income Tax Act, one can claim tax deduction of
Rs 1 lakh for investments in savings instruments. The industry is also
demanding that the present limit under Section 80D on health insurance
to be raised from Rs 15,000 to 25,000.

GV Nageswara Rao, CEO and MD of IDBI Fortis Life Insurance, 
said life expectancy has improved and lifestyle diseases are becoming
common. For that reason it has become imperative for people to save
for a comfortable life after retirement. “Annuity received under a pension
n of annuity from tax would be the second item on the wishlist in this budget,” he added.

Amarnath Ananthanarayanan, CEO of Bharti AXA General Insurance,
said, this could give a boost to the health insurance business, especially
to expensive and niche plans. “We think the consumers would take this
benefit and go for higher sum insured and coverage to take care of
healthcare inflation,” he added.

Sood of Future Generali also said that with increase in inflation,
the government must raise the tax deduction limit on health insurance.

Among the other demands, the industry wants the EEE
(exempt-exempt-exempt) tax structure to continue on insurance
investment. Under EEE system, the investment, interest earning
and redemption are all tax-free.

Harpal Karlcut, CEO, Canara HSBC Oriental Bank of Commerce
Life Insurance, said the EEE system should continue in life insurance
to encourage long-term savings.

Several insurance heads expressed their hope that the budget
would give a push to passing the Insurance Bill.

Kapil Mehta,MD & CEO, DLF Pramerica Life insurance, said, “We
would expect the insurance bill to be passed this year which
will bring in much needed capital to the industry.”
The insurance companies are charged service tax of
10 per cent on all charges including mortality charge and
commission paid to the agents, while the same
is zero in case of mutual fund industry.

Tax-saving rush and the wrong steps we take

Feb 14 2010 

 

 

It’s the tax-saving season and the purveyors of tax-saving
investments are out in full force.
For most part, this means insurance companies and their Ulips.

There was a time when tax saving used to be driven by
accountants asking salary-earners to invest in
National Savings Certificates.

That option is still open, but the sales pitch has been taken over
by tele-marketers extolling the virtues of Ulips from at least January
onwards. In fact, the calls actually started in December this time.

The reason was that from January 1, new expense rules meant that
only newer, lower-cost Ulips could be sold.

Therefore, the insurance industry made a special effort in December
to ensnare as many people as possible in the older, higher-cost Ulips.

Anyhow, the real problem is that many of us are still not planning
our tax-saving savings systematically, which is what leaves us
scrambling for options at this time of the year.
As a result, I find that for tax-saving investments,
we tend to think about tax first and investments later.
As long as something saves tax, its characteristics as an
investment are paid less attention to. Much of the time,
waking up late to these investments means they are chosen
more for their convenience than for their suitability as investments.

The time to plan tax-saving investments is much earlier in the year.
In February or March, it’s much more likely that you will make hasty decisions.

When you evaluate tax-saving investments as investments,
the most important parameters are returns, safety and liquidity.
On safety, government guaranteed systems like PPF and the NSC score,
but they have the longest lock-in. Given the mandatory lock-in of tax-saving
investments, it makes sense for most investors to concentrate
their investments into ELSS or equity-linked saving schemes of mutual funds.

There are other options that give equity-linked returns — Ulips

and the new pension system. Of these, Ulips have a long lock-in —

at least 10 years — coupled with high costs and poor transparency.
Moreover, investors have to commit to continuous payments for a
certain period; if they can’t keep up, then the effective cost shoots up
to a ruinous level.

The money that you put into equity tax-saver funds is best spread out
over the year in an SIP. At the end of the year, you could end up catching
a high point of the market.

Anyhow, whether that happens this year or not, it’s still not too late.
Given the volatility in the market, you could still do some cost-averaging
to be on the safe side, perhaps by breaking up your investment into

three equal parts till March 31.

On a different note, there’s a piece of
bad news for honest and regular tax-payers who were looking forward
to the Direct Tax Code. The draft DTC was released by the government
last year. Although the document had some rough edges, its thrust at
simplicity was refreshing. However, things are not looking so bright for
the new code now. Within the government, there seems to be a lot
of rethinking on the DTC.

My belief is that within the government and the bureaucracy,
as well as in the accounting profession, there are a lot of vested
interests who don’t welcome simplicity.

These people’s livelihood and influence depends
on the taxation system being complex and open to abuse,
and they will fight hard against its simplification.
I hope their efforts fail. But at the moment,
things don’t look very good.

Dhirendra Kumar

is CEO of Value Research India.

Zain board clears $10.7b Bharti bid

By International Herald Tribune Feb 14 2010 , New Delhi




Bharti Airtel, the largest Indian mobile phone
company by subscribers, has offered to buy

the African operations of the Kuwaiti telecom

company Zain in a deal valued at about $10.7 billion.

The two companies are now in exclusive talks until the

end of March to work out the details of the deal, said
one person involved in the negotiations who was not
authorised to speak to the press.

This will be Bharti’s second overseas acquisition, after
 it took over Warid Telecom of Bangladesh last month, and
help its stock to get re-rated on the street.

Zain’s assets in Africa have been on the block for about
seven months, and have attracted interest from several other
 telecom companies, including Vivendi and China Mobile.
But Bharti put in the most ‘‘compelling offer,’’ this person said.

Zain, which has 71.8 million subscribers in west Asia and

Africa, said in a statement on Sunday that it had received
an offer for its African operations excluding Morocco and
Sudan, but did not name the bidder.

(News agency reports said Zain’s board met and decided to
accept the Bharti offer. There was no statement from the
Indian company on the development.)

The Zain offer is Bharti’s third attempt to expand outside
 the cutthroat mobile market in India by purchasing something
in Africa. Bharti Airtel has 125 million mobile subscribers.

About 42 million of Zain’s customers are in Africa. The company
is 25 per cent owned by Kuwait’s sovereign fund, the Kuwait
Investment Authority, and any deal is expected to require the
 approval of the Kuwaiti government.

Sometime ago there were reports that BSNL and MTNL too were
interested in Zain. But nothing came of it.

Unlike after its two attempts to take over South Africa’s MTN
 flopped, the Bharti success with Zain will help its stock.
After the failure in South Africa, Bharti’s stock saw a sharp
drop. Most analysts said at the time that for continued growth
 Bharti had to enter markets outside, as margins at home were
under pressure in the face of rising competition.

However, even with Zain in its fold, Bharti’s earning per share
may not see much gain in the short term. The real gain will come
in a few years, after it turns around some of Zain’s loss-making
 operations. Bharti has a proven track record of cutting costs
by outsourcing some functions to hardware suppliers.

Nevertheless, there is a huge opportunity for Bharti to improve
Zain, which is already No. 2 or 3 in most markets it is present in.
 Besides, it will also be able to penetrate other countries which
Zain couldn’t because its operating cost were high.

In the short term, the valuation Bharti is paying for Zain could
cause concern. The Indian company has about $2 billion in cash and
will have to borrow to meet the cash component of the deal, raising
 its interest cost. The long term looks better as Bharti will get
access to Africa where the next round of telecom growth is expected
 to happen.

Zain, one of the Gulf region’s first telecom companies, has been in
turmoil in recent months. Earlier in February, Zain’s chief executive
for nearly a decade, Saad al Barrak, stepped down without giving a
reason for his departure.

Al Barrak oversaw an ambitious expansion plan in recent years
that increased subscribers, but the company’s profitability has
disappointed investors. Zain’s net income for the first nine months
 of 2009, the latest figure available, was $677 million, a 17 per
cent drop from the same period in 2008.

Zain said last summer it would sell its African operations.

Later last year Zain’s second largest shareholder, the Kharafi
group, said it was lining up buyers for a controlling stake in
 the business. This January the Saudi Arabian unit of Zain missed
 some loan covenants, spooking investors. Morgan Stanley cut its
target price for Zain’s stock by 29 per cent in February.

In January, when Bharti bought 70 per cent of Warid Telecom of
Bangladesh at a cost of $700 million (plus $300 million of promised
investments in that market), chairman & managing director
Sunil Bharti Mittal said the deal ‘‘underlines our intent to
further expand our operations to international markets where
we can implant our unique business model.’’

There is agreement among analysts that Bharti has made the right move.
 KPMG’s director for telecom, Romal Shetty said, “In the next three or
 four years India will continue to be the most difficult market
with 12 to 13 operators. Getting into Africa market could be the
right move at the right time for Bharti. It can replicate its India
success in Africa. Moreover, the average revenue per connection
in Africa is much higher than in India.”

The managing director of Taurus mutual fund, R K Gupta, said,
“Costumer growth in India will become stagnant in three to four
years and Bharti has to look out for growth beyond Indian geography.
 Africa is an unexplored territory where growth can happen. Besides,
the acquisition of Zain will add to Bharti’s subscriber numbers and revenue.
The only major area of growth in India is 3G.”

An investment banker who wished to remain anonymous said the Zain
acquisition would help Bharti beat the pressure on its margins,
which have seen a decline.