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    Service tax on sale of space or time for advertisement was introduced with effective from 01.05.2006. This entry covers other modes of advertisements like advertisements in internet, motion pictures, television serials, video and music albums, mobile phones, ATMs, films and television serials. The said entry also covers advertisements on vehicles and buildings. However, the sale of space for advertisement in print media is exempted from the levy. The subject levy continued without any major changes till 30.06.2012.

    When the taxation of services is shifted from the positive base to the negative base with effective from 01.07.2012, the sale of space or time for advertisement was notified in the negative list under Section 66D of Finance Act, 1994. Entry (g) of Section 66D ibidread as ‘selling of space or time for advertisements other than advertisements by broadcast by radio or television’.

    In the negative list based taxation, the sale of space or time for advertisement other than advertisements by broadcast by radio or television are not subjected to service tax. The entry (g) was continued in the statue without any changes till 30.09.2014. With effective from 01.10.2014, the entry (g) in Section 66D ibid was replaced with new entry which read as ‘selling of space for advertisements in print media’.

    That is to say, only from 01.10.2014, selling of space for advertisements in print media is only not subjected to service tax. All other forms of advertisements are subjected to service tax including advertisements in internet. From the above, it is clearly evident that for the period 01.07.2012 to 30.09.2014, selling of space or time for advertisements in internet or website are not subjected to service tax because of the entry in the negative list during such period. To summarise, we wish to present the taxability of the said service at different points of time as under:

    S.No.

    Period

    Taxable

    Not Taxable

    1.

    01.05.06 to 30.06.12

    All

    Print Media

    2.

    01.07.12 to 30.09.14

    Television and Radio

    All

    3.

    01.10.14 to till date

    All

    Print Media

     

    In this article, we shall understand as to what constitutes sale of space or time for advertisements on the internet platform by taking a case study.

    Let us say, there is a company located in India ‘AwesomeLtd’ who aggregates or develops content. Awesome Ltd can exploit the content by placing it on their website www.awesome.com and earn revenue by selling the space of their website to various advertisers. Alternatively, if Awesome Limited thinks that the percentage of people visiting their website is low, they can enter an agreement with Google Inc, United States of America to display their content in www.youtube.com .

     

    Let us assume that Awesome Limited has entered an agreement with Google Inc to host their content in YouTube. Google Incenters agreements with various other parties depending upon the content to place their advertisements either in the beginning, middle or end of the content, thereby generating advertisement revenues. Google Inc shares such advertisement revenue with the Awesome Limited based on the agreement entered among them.

    Since Google Inc is located in non-taxable territory and Awesome Limited is located in taxable territory and the consideration is received in convertible foreign exchange and the consumption of the service as per Place of Provision of Service Rules, 2012 is in non-taxable territory, Awesome Limited has claimed the said services as export of services and accordingly not subjected to service tax.

    Now, the question that has to be answered for the purposes of service tax is ‘Whether Awesome Limited is engaged in sale of space or time for advertisement for the period 01.07.2012 to 30.09.2014?’

    Consequences – If services provided by Awesome Limited are ‘Sale of Space or Time for Advertisement’:

    Before answering the above question, let us try to understand the impact of the transaction if the response to the above is ‘Yes’. Awesome Limited shall not be eligible to call the services provided by them as to ‘Export of Services’, since one of the condition specified in Rule 6A of Service Tax Rules, 1994 shall not get satisfied. One of the conditions specified in Rule 6A ibid is that the service exported shall not be one which is mentioned in Section 66D of Finance Act, 1994.

    If the service is called ‘sale of space or time for advertisement’, then the said service for the period 01.07.2012 to 30.09.2014 is mentioned in negative list and accordingly the services provided by Awesome Limited shall not be qualify as export of services, since negative list services cannot be exported in light of Rule 6A of Service Tax Rules, 1994.

    Once the said services cannot be called as ‘export of service’, then the services provided by Awesome Limited shall become an ‘exempted service’ as per Rule 2 (e) of Cenvat Credit Rules, 2004 because the definition of ‘exempted service’ excludes only export transactions which satisfy the conditions mentioned in Rule 6A of Service Tax Rules, 1994.

    The moment the services provided by Awesome Limited are treated as an ‘exempted services’, the obligation to reverse the cenvat credit as per Rule 6 of Cenvat Credit Rules, 2004 arises. Accordingly, Awesome Limited shall reverse 7% of the value of exempted services (income generated from Google Inc) and restrict the cenvat credit accordingly or apply proportionate formula as prescribed in sub-rule (3A) of Cenvat Credit Rules, 2004.

    1There are various methods in which a website sells advertisement to advertisers namely Cost Per Mille (CPM), Cost Per Click (CPC) or Cost Per Action (CPA) and others. In the current article, we are not dealing with the types of advertisements as our discussion is restricted for the purposes of service tax.

     

    Analysis – Whether services provided by Awesome Ltd are ‘Sale of Space or Time for Advertisement’:

    In order to fall under the category of ‘Sale of space or time for advertisements’, the pre-requisite is to have such space or time, so that the same can be exploited to generate income and accordingly service tax shall come into play. Hence, the question that has to be answered is whether Awesome Limited has either space or time to call the services provided by Awesome Limited as ‘sale of space or time for advertisement’.

    To answer the above question, we have to understand the business model involved herein. As stated above, Awesome Limited has entered an agreement with Google Inc to display the former’s content on Google Inc’s website. As part of the agreement, Awesome Limited is only entitled to create a page or channel on www.youtube.com (with only very restricted rights), which displays prominently the brand/logo of Awesome Limited.

    Google Inc based upon the content decides the advertisements to be displayed either as a part of the content or on the page. Based on revenues generated, Awesome Limited shall be entitled for a share of the revenue for granting Google Inc a right to display the content. Further, Awesome Limited is not allowed to include any promotions, sponsorships or other advertisements as part of the content supplied to Google Inc.

    Hence, from the above it is evident that Awesome Limited does not have either space or time, since the website/page where content is hosted for public viewing does not in any way belong to them. Hence, the question of selling of space or time for advertisement does not arise.

    Hence, in this context, it can be concluded that Awesome Limited is not engaged in ‘sale of space or time for advertisement’, the services involved are mere content supply and accordingly the said services does not fall under the entry (g) of negative list and accordingly the services provided by Awesome Limited shall be export of services and the reversal of cenvat credit is unwarranted.

    The law pertaining to taxation of digital transactions is in nascent stage and CBEC has to come with various business models involved in digital era and accordingly clarify the taxability of such modelsso that litigations may be avoided.

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    Introduction:

    The Finance Budget, 2016 has proposed excise duty levy on manufacture of both branded and unbranded Jewellery which is effective from 01.03.2016. Since then the entire Jewellery sector across India are under protest demanding the Central Government to roll back the same. It has been close to a month since the levy is brought into effect but the protests are being continued by the sector with unfettered perseverance.

    On the other hand, in order to convince and pacify the sector, a committee has been constituted by Central Government to suggest the modalities for imposition of excise duty on Jewellery. A circular vide No. 1021/9/2016-CX dated 21.03.2016 has been issued in this regard. In the midst of these developments, the sector is making efforts to understand the duty applicability, the practical implications both from financial and compliance wise. Hence an effort is made to introduce the duty applicability, the valuation to be adopted and compliance to be undertaken in the form of the following FAQs.

    1. From when the levy of excise duty on manufacture of jewellery comes into effect?

    The levy is effective from 01.03.2016. Notification No 12/2016-CE dated 01.03.2016 has substituted Entry 199 of Notification No 12/2012-CX dated 17.03.2012, thereby bringing the levy into effect.

    1. Is excise duty applicable for the jewellery being finished goods as on 29.02.2016?

    Yes. Since the duty has come into effect from 01.03.2016, the finished goods lying in stock at the workshop as on 29.02.2016 shall attract excise duties when they are cleared on or after 01.03.2016. In case the finished goods are cleared by 29.02.2016 from workshop but lying as stock in showroom and are sold subsequently on or after 01.03.2016, then no excise duty is required to be paid on this stock lying at showroom as excise duty is applicable only when it is required to be paid at the time when the finished goods are removed from factory/workshop.

    1. Whet her all kinds of jewellery are covered under the excise ambit?

    Excise duty is applicable to manufacture of all kinds of jewellery except articles made up with plain silver. However, if the silver articles are studded with diamond, ruby, emerald or sapphire the manufacture of same shall also be subjected to excise duty. Thus jewellery made of gold, platinum and other precious metals whether or not studded with diamond, emerald or sapphire and silver jewellery studded with diamond, emerald or sapphire attracts excise duty.

    1. Whet her only manufacture of branded jewellery is subjected to excise duty?

    Excise duty is presently applicable on the manufacture of branded and unbranded jewellery. Hence, manufacture of all kinds of jewellery whether branded or unbranded shall attract excise duty except those specified in FAQ 3.

     

    1. What is the rate of excise duty on the manufacture of articles of jewellery?

    Excise duty is payable either at 1% of the value of excisable goods or 12.5% of such value at the option of manufacturer. The option of paying excise duty at 1% comes with a condition that no credit of excise duty or additional customs duty paid on inputs and capital goods shall be availed. If the rate of excise duty is adopted as 12.5%, the credit of excise duty paid on inputs and capital goods can be availed.

    1. Whether the service tax paid on renting of premises and other eligible services by manufacturer can be availed as cenvat credit if the manufacturer is opting to pay excise duty @ 1%? Would the eligibility change if the excise duty is paid at 12.5%?

    There is no restriction of availment of credit of service tax paid on input services for the manufacturer. Hence, he can avail the credit of service tax paid on input services even he is opting for discharge of excise duty @ 1%. However, credit is allowed to be taken only on those services which qualify as input services in light of the definition of ‘input service’ given under CENVAT Credit Rules, 2004. The answer remains same even if the manufacturer wishes to pay excise duty @ 12.5%.

    1. Is excise duty applicable on all class of manufactures? Is there any relaxation to small and medium category like goldsmith/artisan?

    In terms of Rule 12AA of Central Excise Rules, 2002, only the principal manufacturer i.e. the person who is getting the jewellery manufactured through job worker is required to obtain registration and pay excise duty on the jewellery manufactured by job worker.

    The phrase ‘job worker’ has been defined under the said rule. Accordingly, it means any person engaged in manufacturing of Jewellery on behalf and under the instructions of another person who supplies any inputs or goods so as to complete a part or whole of the process ultimately resulting in manufacture of jewellery. Thus a gold smith/artisan is said to be a jobworker when he engages in manufacture of jewellery for a retailer out of the inputs like gold, platinum etc supplied by such retailer.

    Hence, the retailer who gets the jewellery manufactured through gold smith/artisan has to mandatorily obtain registration and discharge excise duty. Gold smith/artisan (job worker) is relieved from the excise formalities.

    1. Are there any other benefits/privileges available for Job worker under Rule 12AA of Central Excise Rules, 2002?

    As per Rule 12 AA of Central Excise Rules, 2002, the job worker is not obliged to obtain registration with central excise authorities. Further, he is not required to maintain any books of accounts/records evidencing the process undertaken for the principal manufacturer. Hence, the job worker is free from all compliances pertaining to central excise.

     

     

     

    9. What are the obligations on principal manufacturer under Rule 12AA of Central Excise Rules, 2002?

     

    The manufacturer should obtain registration, maintain accounts and pay excise duty on such manufacture undertaken by him either directly or through job worker. The responsibility in respect of the accountability of the goods sent to the job-worker premises shall be on manufacturer.

     

    10. What are the benefits/privileges available for principal manufacturer under Rule 12 AA of Central Excise Rules, 2002?

     

     

    The principal manufacturer has the following benefits/privileges

     

     

    a. In case CENVAT Credit is availed by him on inputs, He can send inputs (goods) to the job-worker premises without reversal of credit subject to other conditions.

    b. He can remove the jewellery manufactured in his factory to the job-worker for further manufactu ring without payment of duty.

    c. He can remove the jewellery manufactured in the factory of job-worker directly to a customer’s place by paying appropriate excise duty without bringing the goods to his premises.

     

    11. What is the procedure for regist ration with central excise authorities?

     

     

     

    The manufacturer has to obtain central excise registration by filing an online application on www.aces.gov.in. The registration shall be granted within 2 working days.

     

    12. I have heard that registration under central excise shall not be granted unless the premise is physically verified by the authorities. Does this hold good for the jewellery manufacturers also?

     

     

    The manufacturers of articles of jewellery are exempted from physical verification. The registration shall be granted within 2 days once an application is made online. The necessary documents shall be sent to the central excise authorities vide post.

     

    13. I am a retailer having manufacturing activity at multiple premises. In such a case, should I opt for separate registration for each premise or is there any option where I can get all premises registered as one unit?

     

    The retailer has given an option of registering a single premise where the manufacturer has a centralised billing or accounting system in respect of jewellery manufactured or produced by different factories or premises. Further, such premise should have the accounts/records showing receipts of raw materials and finished excisable goods manufactured or received back from job workers are kept.

     

    This place could be at the option of the manufacturer. It can be a workshop where all the details of jewellery manufactured including that of other workshops are maintained or a corporate office of the manufacturer where entire records are maintained or even a showroom of the manufacturer.

     

     

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    1. Whether the premises of gold smiths/artisans shall also be required to be registered by Principal Manufacturer under Central Excise?

    As discussed under FAQ 7, with respect to jewellery manufactured by job-workers (gold smith/artisan), the responsibility to maintain records and pay excise duty is on Principal Manufacturer. However this does not require him to register a job worker premises under Central Excise. Thus there is no need for Principal Manufacturer to register the premises of gold smiths/artisans.

    1. As a manufacturer of Jewellery, when do I need to assess the excise duty amount? What are the steps/measures to be taken at that point of time?

    As discussed in FAQ 3, excise duty is on manufacture of Jewellery. The duty is to be calculated at 1% or 12.5% of the value of excisable goods. Excise duty payable is to be assessed at the time of removal of excisable goods from Factory. In case of Jewellery, it is to be assessed at the time of removal of Jewellery from workshop.

    When the Jewellery is to be removed from workshop, the value of such Jewellery is to be arrived at and the corresponding excise duty shall be arrived at. The manner in which the value of Jewellery is to be arrived are discussed in subsequent FAQs.

    Accordingly, an invoice under Central Excise is required to be issued. The invoice issued should contain Excise registration number of manufacturer, the details and address of Consignee, description of Jewellery, Excise tariff classification code of Jewellery (sub-heading 7113), value of Jewellery and the corresponding excise duty payable shall also be mentioned.

    The jewellery shall always be removed from workshop to any other location only under the cover of an invoice as mentioned above. Such invoice shall be prepared in triplicate. Original copy is for Customer/Consignee, duplicate shall be issued to the transporter or any person mobilising the Jewellery from workshop to other location, triplicate copy shall be for the records of manufacturer.

    1. I am a manufacturer having a showroom and workshop at the same location. The jewellery manufactured at workshop is displayed in the showroom and sold to customers. What is the value on which excise duty is required to be paid?

    As discussed in FAQ 15, excise duty payable is to be calculated on the basis of the value of excisable goods as prevailing at the time when goods are removed from the factory of a manufacturer. In case of Jewellery, each workshop of the Principal Manufacturer is treated as factory. In the instant case, both workshop and showroom are at the same location. Therefore registration can be obtained declaring workshop and showroom as single premise.If it is so, then the Jewellery manufactured is treated as removed from factory (workshop) only when Jewellery is sold to a customer.

    In such case, value of excisable goods is based on the actual transaction value i.e. the price at which the jewellery sold to a customer is applicable. Thus in such cases, excise duty is payable on the actual price at which the jewellery is sold to customer.

     

     

     
    1. I am a manufacturer with several workshops and a showroom. The jewellery manufactured at workshop is moved to showroom for display and stocking and then sold to customers. How does a manufacturer arrive at value of Jewellery? When does excise duty is required to be paid by him?

    As stated in FAQ 15, excise duty payable is to be calculated at the time of removal of jewellery from factory i.e. workshop. But no sale is happening at this point of time as the jewellery is merely removed to showroom. Whenever excisable goods are removed from Factory to a depot/showroom,the value of any excisable goods removed from Factory to depot/showroom shall be based on ‘Normal Transaction Value’ of such goods as prevailing at a depot/showroom.

    Normal transaction value is price at which greatest quantity of similar goods are sold at the depot/showroom at the time nearest to the time of removal of excisable goods from Factory. Let us understand this concept with a practical example.

    Example: On 10th March 2016,fivegold chains of a particular design are removed from workshop to showroom. On 9th March, 2016, the said gold chains are sold to three customers in the following manner.

    Customer

    Quantity

    Price per gold chain (Rs.)

    A

    1

    50,000

    B

    2

    47,000 (Total 94,000)

    C

    3

    45,000 (Total 1,35,000)

     

    On 12th of April 2016, all the five gold chains are sold to customers at a price of Rs. 52,000 each.

    As discussed above, ‘Normal Transaction Value’ is the price at which greatest quantity is sold at the showroom at the time when goods are removed from workshop. In the above example, gold chains are removed from workshop on 10th March 2016. At the time nearest to this point i.e. 9th March, 2016, gold chains of that particular design are sold to three customers. The highest quantity sold is three in case of customer ‘C’. The price at which those chains are sold to customer ‘C’ is the ‘Normal Transaction Value’ i.e. Rs 45,000 per chain.

    As five chains are removed from workshop to Showroom, the value of these goods shall be valued at Rs 2,25,000 (45,000*5). Excise duty payable is to be calculated at 1% or 12.5% of this value. As stated in the above example, on 15thApril, 2016 these gold chains are sold to customers at a higher price of Rs. 52,000 each. This action will not increase the amount of excise duty payable on those gold chains.

    On the other hand, it has been stated by CBEC vide Circular No. 1021/9/2016-CX dated 21.03.2016 that Principal Manufacturer can value the excisable goods on the basis of first sale invoice value. Under the existing Central Excise Law, there is no concept of valuing excisable goods on the basis of First sale invoice. Also, there is no explanation given as what is first sale invoice value, whether it is the price adopted for first invoice raised during a day or otherwise. What would be the position if there is no such sale happening at the showroom on the day the Jewellery is removed from workshop?

     

    In the humble opinion of paper writers, Circular of CBEC can only clarify the legal position existing and it cannot lay down a law on its own in contrary to the existing law laid down by Parliament/Central Government. In view of this, we have totally ignored this concept of first sale invoice value.

    1. I am a manufacturer with showroom and workshop at different locations. I have received an order from a customer for sale of Jewellery of a particular design. The price agreed is Rs. 2,50,000/-. The Jewellery is manufactured at the workshop and then directly delivered to the customer.

    In the instant case, Jewellery manufactured at the workshop is sold to customer at an agreed price of Rs. 2,50,000/-. As sale is happening at the time of removal of jewellery from workshop, the value of excisable goods can be considered at Rs. 2,50,000/-. Accordingly excise duty payable is to be calculated.

    1. I am a Principle Manufacturer getting my Jewellery manufactured through Job-worker (gold smith/ artisan). I am buying gold in the market and supplying to the Job-worker for manufacture of Jewellery. In consideration to the work undertaken by Job-worker, I am paying him certain agreed amount as job work charges. Is it sufficient to pay excise duty only on the job work charges or do I need to pay even on the value of gold supplied by me?

    Excise duty is payable on the value of excisable goods manufactured. It will not take into consideration that whether entire raw material is borne either by the person manufacturing (Job-worker) the excisable goods or the person buying such manufactured goods (Principal Manufacturer). Duty is required to be paid eventually on the value that the finished goods fetch in the market.

    Thus excise duty is payable on value of finished goods taking into consideration the value of gold supplied by Principle Manufacturer. The manner in which such value is to be determined is explained in subsequent FAQs.

    1. I am a Principle Manufacturer getting my Jewellery manufactured through Job-worker (gold smith/artisan). The jewellery manufactured by Job worker is removed to the showroom for display/stock purpose. It is subsequently sold to the customers. How doI arrive at value of Jewellery?

    As discussed in FAQ10, the Principle Manufacturer has a benefit/privilege under the aforesaid Rule 12AA that he can obtain excisable goods manufactured by Job worker to his showroom without paying any excise duty. Accordingly, Jewellery can be brought to the showroom of Principle Manufacturer without paying any excise duty.

    Excise duty in such case is to be calculated at the time when Jewellery brought to showroom is sold to a customer. Duty payable is calculated on the basis of the price at which the jewellery is sold to customer.

    1. I am a Principle Manufacturer getting my Jewellery manufactured through Job-worker (gold smith/artisan). I have agreed to sell particular Jewellery to a Customer at Rs 2,50,000/-. The jewellery manufactured by Job worker is directly sent to the customer. How do I arrive at the value of the Jewellery? Is there any special procedure to be followed in such cases?

    As discussed in FAQ10, the Principle Manufacturer has a benefit/privilege under the aforesaid Rule 12AA that he can directly sell the Jewellery manufactured by Job-worker from Job-worker’s premises. Value of this Jewellery shall be at the price at which it is sold to customer that is Rs. 2,50, 000/-.

     

    In case of direct removal from Job-worker’s place to customer’s location, the procedure prescribed is to be followed; accordingly, the Principal Manufacturer has to prepare an invoice in triplicate by filling in all details except for date and time of removal of Jewellery.

    The original (Customer’s copy) and duplicate copies (transporter’s copy) of the invoices are sent to the Job-worker. The Job-worker shall enter the details as to date and time of removal of Jewellery to customers’ premises in original and duplicate copy of invoices. The said details are informed to the Principal Manufacturer for updating in triplicate copy of invoices. The Jewellery shall be removed to Customer’s location under duly filled in original and duplicate invoice copies.

    1. Apart from excise duty, sales tax/VAT is also applicable upon sale of manufactured Jewellery. Which of these duties/taxes is to be charged first? If excise duty is charged first, then whether VAT is chargeable on price including excise duty or otherwise?

    Excise duty is chargeable upon manufacture on the value of excisable goods. It is clearly spelt out under the law that any CST/VAT collected from customers shall be excluded from the value of excisable goods. On the other hand, there is no corresponding specific provision under VAT laws to exclude excise duty collected from customers. Further State VAT laws and CST law are not integrated with Central Excise Law to facilitate any cross credits of VAT/CST and excise duty. In view of this reason, CST/VAT shall be calculated on the price of Jewellery including excise duty collected.

    Accordingly, excise duty is to be charged first on the actual price (excluding all taxes) of the Jewellery. Subsequently VAT is to be charged on an amount equal to the sum of actual price of jewellery and excise duty charged.

    1. Is there any value based exemption (similar to turnover based exemption under VAT) for the principal manufacturer? Is the principal manufacturer is liable to pay excise duty from the first clearance in the year?

    The principal manufacturer is exempted from excise duty for the value of clearances till Rs 6 Crores in the current year subject to a condition that the value of clearancesin the preceding financial year is less than Rs 12 Crores. Please note that the value based exemption is optional and not mandatory.

    1. I am a manufacturer and turnover for the Financial Year 2015-16is 11 Crores. What is the exemption available for me in the current Financial Year 2016-17?

    As stated in the response to FAQ 23, the manufacturer shall be eligible for an exemption from payment of excise duty till Rs 6 Crores in the current financial year. Clearances post Rs 6 Crores shall be subjected to excise duty.

    1. I am a manufacturer and turnover for the Financial Year 2015-1 6 is 12.1 Crores. What is the exemption available for me in the current Financial Year 2016-17?

    Since the turnover pertaining to preceding financial year has exceeded Rs 12 Crores, the manufacturer shall not be eligible for the exemption for the first Rs 6 Crores clearances. Entire clearances made in current Financial year 2016-17 are subjected to excise duty.

     

    1. I am a manufacturer and turnover for the Financial Year 2015-16 is 14 Crores. However, out of the said turnover, 3 crores pertaining to sale of jewellery which is not manufactured by me but purchased from another retailer. What is the exemption available for me in the current Financial Year 2016-17?

    In order to eligible for exemption of Rs 6 Crores for the current financial year, the condition that has to be satisfied is that the preceding financial year turnover should not exceed Rs 12 Crores. Only sale of jewellery that was manufactured by retailer either on his own or through gold smith/artisan shall alone be considered for this purpose. The turnover for this purpose shall not include the turnover on which no excise duty is required to be paid for any reason. In the instant case Rs 3 crores worth jewellery traded is being purchased from another dealer and is not manufactured. Hence, the turnover of Rs 3 Crores stands excluded from the total turnover and since the balance turnover is Rs 11 Crores (14-3), which is less than Rs 12 Crores, the manufacturer shall be eligible for an exemption of Rs 6 Crores in the current financial year.

    1. As per FAQ 2, the sale of finished goods attracts excise duty on clearancein March, 2016, however the SSI exemption as detailed above is applicable on yearly basis, is there any value based exemption for the month of March, 2016?

    Since the duty is applicable from 01.03.2016, an exemption has been provided for the clearances affected in the month of March, 2016. The manufacturer is exempted till clearances amounting to Rs 50 lakhs subject to a further condition that if the previous Financial year turnover i.e. of FY 2014-15 does not exceed Rs 12 Crores.

    1. I am manufacturer paying excise duty. Am I obliged to file any returns to the central excise authorities?

    Yes, manufacturers of Jewellery are required to file periodical returns. In case a manufacturer has chosen the option of paying excise duty at 1% without CENVAT Credit on inputs and capital goods, then he is required to file a simple return in form ER-8, once for every quarter by 10th of immediately following month.

    In case of a manufacturer who has chosen the option of paying excise duty at 12.5% by availing CENVAT Credit on inputs and capital goods, then he is required to file return in Form ER-1, once for every month by 10th of the immediately following month. In case if the turnover of the said manufacturer in the previous financial year does not exceed 12 crores, he can file return in Form ER-3 once for every quarter by 10th of the immediately following month.

    1. I am manufacturer who is charging excise duty upon removal of jewellery from workshop/showroom as discussed in previous FAQs. As duty is charged on these removals, I need to pay this amount to Central Government. What is the date on which I am supposed to pay such excise duty?

    Generally, the manufacturer is liable to pay excise duty pertaining to the removals made during a month by 6th of succeeding month. In case of a manufacturer, whose turnover in previous financial year does not exceed Rs. 12 crores, he can pay excise duty once in a quarter. The due date in such cases is 6th of month following the end of a quarter.In case of March month or quarter ending with March month, duty is payable by 31st March itself.

     

    Say for example, a Principle Manufacturer has cleared Jewellery worth of Rs. 4 Crores during the month June, 2016. The excise duty is charged at 1%. Thus total excise duty charged during the month is Rs 4 Lakhs. This amount of 4 lakhs is payable to the account of Central Government by 6th of July, 2016. However, it was clarified vide Circular 1021/9/2016-CX dated 21.03.2016 vide Para 6 that excise duty liability for the month of March 2016 can be discharged along with the payment of duty for the month of April 2016. Hence, the duty for the March and April 2016 shall be payable by 6th of May, 2016.

    1. Who is responsible for any loss or destruction of goods before clearances are made?

    Excise duty is levied upon manufacture of Jewellery. Duty is payable even if the goods are not sold to customers and are eventually lost or destroyed before clearing from workshop. In such cases, the manufacturer is not absolved from payment of excise duty and he is required to pay excise duty on the value of such goods lost or destroyed.

    However, the Central Excise law provides that if such loss or destruction is due to natural causes or unavoidable accidents then Principal Commissioner or Commissioner of Central Excise may waive the requirement to pay duty on such lost/destroyed goods. Thus excise duty is not required to be paid on lost or destroyed Jewellery only if the above mentioned officers permit so.

    The above privilege of duty waiver by Principal Commissioner or Commissioner is applicable only in the event the loss or destruction happens in the Factory/workshop. If the loss or destruction happens during transit of Jewellery then no such duty waiver is applicable and excise duty has to be mandatorily paid in such cases.

    1. What are the records I have to maintain as a manufacturer for the purposes of central excise?

    The manufacturer is not required to maintain any special records for the purposes of central excise. The manufacturer’s private records or records for State VAT authorities or records maintained for Bureau of Indian Standards shall suffice for the purposes of central excise.

    However, under Central Excise Law, it is mandatory for all manufacturers to maintain a daily stock account indicating the opening balance quantity of finished goods on a particular day, the quantity manufactured during the day, the quantity cleared during the day and the closing balance by the end of the day. In order to meet the requirement of maintaining this record by jewellery manufacturers, it has been clarified that a simple private record maintained by them indicating the said details would be sufficient.

    Disclaimer: The above FAQs are designed only for edifying the readers on the basics of excise duty applicability and the compliance to be undertaken considering the fact that duty applicability on Jewellery manufacturers is at nascent stage. The views expressed therein are on the basis of specified facts and assumptions. The information given above is not intended for any decision making. Neither the paper writers nor M/s SBS AND COMPANY LLP, Chartered Accountants shall take any responsibility for any decision taken on the basis of above information. It is advisable to consult a qualified professional before taking any decision on any of the above discussed subject matters.

    For further queries, you may drop a mail to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it. or reach us @ 95-81-00-03-27 or 97-00-73-46-09.

    Tags:

    It is important to note that the Income tax website does not have the option of recovering the old password. However, what you can do is that you can reset and create a new password and after creating a new password, you would be able to login through the new password.

     

    There are 2 methods of resetting the Income tax efiling password which have been described below :

    1. Through Income Tax Website
    2. By sending email to Income Tax Department

     

    1. Through Income Tax Website

     

    To reset the password on the income tax website, just click the login button and then click the ‘forget password’ option. You would now be required to enter your PAN No. and the Captcha Code displayed on the link and then click the ‘submit’ option. On submitting these details, you would be given 4 ways of recovering your Income Tax efiling password:

     

    1. Answer Secret Question

     

    1. Upload Digital Signature Certificate
    2. Enter e-filed acknowledgement number and Bank Account Number
    3. Using OTP Pins

     

    Method A: Answer Secret Question

     

    • In case you opt for this option, you would be required to mention Date of Birth (Date of Incorporation in case of companies)
    • Choose the secret question you had furnished at the time of creation of your account on the income tax website

     

    • Answer the secret question you have choosedand click Submit option

     

    Method B: Upload Digital Signature Certificate

     

    If you have previously registered your digital signature on the income tax website, you can also reset your password by simple uploading your digital signature.

     

    Method C: Enter efiling acknowledgement number & Bank Account Number

     

    • The acknowledge number would be mentioned in all income tax returns. You can furnish the acknowledgement number of any income tax return filed previously.
    • In case you don’t have your Income tax return, you can easily download it from your mailbox as well. Income tax Department. Always sends a copy of the ITR-V to your mailbox.

     

     

     

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    Method D: Using OTP Pins

     

    • After selecting this option you are required to choose any of the 2 options on the screen, one is Registered Email ID and Mobile Number and other is New Email ID and Mobile Number
    • On selecting any of those options, 2 pins are sent to your email and mobile number(one to mail and other to the mobile number)

     

    • Provide the 2pins in the places givenand click the ‘validate’ option
    • You can reset and confirm the new password

     

    After completing the details required in any of the above 4 manners, a new link would open up requiring you to create a new password. You can now login to your account using the newly created password.

     

    Note: You can login to your account after 12hours of resetting the password but not immediately.

     

     

    1. By sending mail to Income Tax Department.

     

    If the taxpayer is unable to reset his password through any of the above means, he can send a mail to This email address is being protected from spambots. You need JavaScript enabled to view it. requesting them to reset the password with the below mentioned details: -

     

    üPANNumber

     

    üTaxpayers Name

    üDateof Birth/Date of Incorporation

    üFather’s Name

    üMailing Address

     

    You would receive a reply from the income tax department. Within 48 hours and then you can reset your password on the Income tax efiling website.

    Tags:

    We all are in an era of globalization with increased economic development due to the strengthening of ties between countries. This has been possible due to a rise in sale / transfer of goods, services, technology, intellectual property etc., from one country to another, irrespective of the distance between the two. The markets that have stayed untapped for long have also become a part of this global village now. To ease inter-country trade and to develop connections with all the possible nations of the world, the Governments of all countries have started entering into agreements with each other. 

    What is DTAA? 

    DTAA refers to Double Taxation Avoidance Agreement. 

    In simple terms, DTAA is a bilateral agreement entered into between two countries. 

    There are two rules for any income being taxed: 

    Rules for taxation of income 

    Source Based Taxation

     

    Income is to be taxed in the country in which it originates irrespective of the residential status of  the recipient of income

     

    Residence BasedTaxation

     

    Income is to be taxed in

     

    the    place of residence

     

    (domicile or place of

     

    incorporation) of the tax

     

    payer

     

     

     

    If both rules were to apply to a business entity, the cost of operating at an international scale would turn out to be high and such cross-border businesses would become less attractive and deter the process of globalisation.

     

    What is double taxation?

     

    Where a taxpayer is a resident in one country but has some income whose source is in another country, it gives rise to possible double taxation.

     

     

    If countries would have not entered into trade ties, the process of globalization would have collapsed at its budding stage as no person / entity would want to pay tax twice on the same income. One of the most significant results of globalization is the noticeable impact of one country’s domestic tax policies on the economy of another country. This has led to the need for incessantly assessing the tax regimes of various countries and bringing about indispensable reforms.

     

    To understand the basic purpose of the bilateral agreements in avoiding double taxation let us take a small example:

     

    Mr. R is a resident of India for tax purposes. He earns certain income in Country Y during one of his visits. In which country would he be liable to pay tax for the income earned from Country Y??

     

    Mr R

    (Resident of India)

     

     

     

    Income from

     

    Country Y

     

     

     

     

     

     

     

    In Country Y

     

    In India

     

     

     

     

    As per laws of Country Y

    As per Indian laws

    (Source Based Taxation)

    (Residence Based Taxation)

     

     

     

    DOUBLE TAXATION OF

     

    THE SAME INCOME!!

     

     

     

    As shown in the above diagram, the income would be taxed twice, i.e.,

     

    ØAsperthe tax laws of Country Y, Mr. R would have to pay tax in Country Y on the income earned there. ØThesame income is liable to tax in India as Mr. R is a resident in India (the global income of a resident

     

    is taxable in India).

     

    If we assume that no trade ties have been entered between the two countries, we can visualize the situation of Mr. R whose income is being taxed twice – first in the source country (i.e., Country Y) and then in the home country (i.e., India).

     

    Double taxation causes risk to cross border transactions. Elimination or mitigation of multi-level taxation is done by various entities through network of tax treaties.

     

     

    Double taxation could be;

     

    Types of Double

     

    Taxation


    ‘DTAA’!!!!! – No more a stranger!

     

    Economic

     

    Taxation in two or more

    states but in the hands of

    d i f fe r e n t t a x p ay e rs

    [e.g. business profit and

    dividend  in  different

    countries].

     

    Juridical

     

    Two or more states levy

     

    taxes on same entity on

     

    same income for identical

     

    periods

     

     

     

    Tax treaties safeguard against juridical taxation

     

    Models of Treaties for avoidance of double taxation:

     

    There are three main models of treaties based on which each country develops its own bilateral trade agreement with another country.

     

     

     

     

    OECD

     

    Model

     

     

     

     

     

     

     

     

     

    Models

     

    of

    treaties

     

     

    UN                                                                                                     US

     

    Model                                                                                           Model

     

     

    • OECD (Organization for Economic Co-operation and Development) Model

     

    The following are the main features of the OECD Model:

     

    ØItemphasizes on residency based taxation i.e., the right to tax all income rests with the home country only.

     

    ØThismodel is usually adopted by developed countries in case of treaties entered with other developed countries.

     

    ØTheOECD Model is regularly updated to amend provisions to be in line with the interest of the law making bodies and the taxpayers.

     

    2)     UN Model

     

    The following are the main features of the OECD Model:

     

    ØThismodel emphasizes on source based taxation i.e., the right to tax all income rests with the country where the income originates from / has its source from.

     

    ØThismodel is usually adopted by developed countries in case of treaties entered with developing countries or for treaties entered into between two developed countries.

     

    • US Model

     

    The following are the main features of the OECD Model:

     

    ØTheUSModel is different from OECD and UN Models in many respects

     

    ØUSModel has established its individuality through radical departure from usual treaty clauses under

     

    OECD Model and UN Model.

    ØThismodel is used by USA for all treaty negotiations.

     

    DTAA and India

     

    Section 90 of the Income-tax Act, 1961 (“Act”) empowers the Central Government to enter into tax treaties with the Government of any foreign country / specified territory. The ranking of the treaties in the legal system depends on the country’s view on international taxation / constitutional arrangements.

     

    Various treaties have developed over years between the Indian Government and the Government of other countries to promote global trade. Such treaties are known as DTAA. At present India has entered into DTAA with 88 countries out of which 85 have been in force. DTAAs are negotiated under public international law and governed by the principal laid down under the Vienna Convention on the law of treaties of 1969 (“VCLT”) (considered to be the genesis of DTAA).

     

    DTAA are bilateral conventions aimed at addressing potential tax conflicts. In essence, DTAA reflects allocation of taxing rights amongst member countries.

     

     

    In most of the countries, DTAA prevails over domestic law. In some countries, DTAA is treated at par with the domestic law (example - US).

     

    India follows rule of source based taxation for non – residents, i.e., receipt, deemed receipt, accrual or deemed accrual. As per section 90 of the Act, a non-resident taxpayer has option to be taxed as per the tax treaty or as per domestic tax laws, whichever is more beneficial.

     

    Main objectives of DTAA:

     

    The basic objectives of DTAA are:

     

    ØLimitexercise of taxing powers in cross-border situations ØAvoidance of double taxation

    ØRational / equitable allocation of income between two countries ØPromotion of cross border trade and investment

     

    ØDefinition of uniform principles, rules, procedures etc. to facilitate recovery of tax duesØExchange of information to combat tax avoidance and tax evasion

     

    Relief under the Act:

     

    Under section 90 and 91 of the Act, relief against double taxation is provided in two ways:

     

    Unilateral Relief:

     

    Under section 91 of the Act, an individual can be relieved from double taxation by Indian Government irrespective of whether there is a DTAA between India and the other country concerned. Unilateral relief to a tax payer may be offered if:

     

    ØTheperson or company has been a resident of India in the previous year ØTheincome should be taxable in India and in another country with which there is no tax treaty ØThetax has been paid by the person or company under the laws of the foreign country in question.

     

    Bilateral Relief

     

    Under Section 90, the Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms.

     

     

    Types of DTAA

     

    Types of DTAA

     

     

     

     

     

    Comprehensive                                                                                                      Limited


    ‘DTAA’!!!!! – No more a stranger!

     

    Comprehensive  DTAAs

    are those which cover

    almost  all  types  of

    incomes covered by any

     

    model    convention.

    Many a time a treaty

    covers wealth tax, gift

    tax,  surtax  etc.  too.

    DTAA Comprehensive

     

    Limited DTAAs are those

    which  are  limited  to

    c e r t a i n t y p e s   o f

    incomes only, e.g. DTAA

     

    between  India  and

    Pakistan is limited to

    shipping  and  aircraft

    profits only

     

     

    Examples of Comprehensive DTAA:

     

    • Australia

     

    • Nepal
    • US
    • China
    • Bangladesh
    • Netherlands
    • Norway Canada
    • Cyprus
    • Singapore
    • France
    • Germany
    • South Africa
    • Sri Lanka
    • Spain
    • Thailand
    • Italy
    • Japan
    • UK
    • Mauritius
    • Vietnam and many more countries

     

     

    Examples of Limited DTAA:

     

    • Pakistan

     

    • Afghanistan
    • Iran
    • Bulgaria
    • Ethiopia
    • Switzerland
    • UAE
    • Yamen Arab Republic
    • Russian Federation
    • Saudi Arabia
    • Uganda
    • Oman
    • Lebanon
    • Czechoslovakia
    • Kuwait

     

    Sources for interpreting DTAA

     

    DTAA embodies general / indefinite terms which are much open to interpretation. It is very challenging in achieving coherence in interpretation of DTAA’s due to:

     

    • Difference in interpretative principles of member countries and

     

    • Absence of rigid procedure for interpretation of terms

     

    For interpreting the same, following should be used:

     

    Primary Sources (besides

    DTAA)

     

    Secondary sources

     

     

     

     

     

     

    - VCLT

     

     

    - Memorandum

    of

    - OECD M odel Convention

    understanding (‘MoU’)

     

    and Commentary

    - Protocol

     

     

     

    - UN  Model  Convention

    - Preamble

     

     

     

    and Commentary

    - Succeeding treaties

    /

     

     

     

    parallel

    treaty

    or

     

     

     

    comparative language

     

     

     

     

    - International decisions /

     

    revenue / administrative

     

    rulings, and practices in

     

    other countries

     

    - International / Indian

     

    commentaries

     

     

    Points to be noted:

     

    It is pertinent to note the following points:

     

    ØFurnishing of a valid Tax residency certificate is the foremost condition for claiming tax treaty relief.

     

    ØAlltaxtreaties are not uniform i.e., each treaty codifies respective understanding between parties.

    The conditions need not be uniform in all treaties; E.g. Limitation of benefit clause in some treaties like Singapore

     

    ØScopeof income may vary. E.g. India US tax treaty has a narrow definition of FTS;

    ØThe‘Most Favored Nation’ clause exists in some treaties, i.e., Most Favored Nation (“MFN”) clause links bilateral agreements by ensuring that the parties to one agreement are not subjected to a treatment which is less favorable than the treatment provided to other parties under similar agreements. In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country.

     

    It is imperative to analyze conditions of respective treaty depending on country of residence of the taxpayer.

     

    With the increasing cross-border connectivity and huge complexities involved in tax planning, a detailed understanding of how such agreements work parallelly with the Act is the utmost need of the hour!!

    Tags:

    What is Credit Rating?

     

    Credit Rating is an opinion of the credit rating agency on the relative ability of person upon fulfilling the financial commitments or debt service obligations when they arise on the basis of the available information at the particular point of time. Credit rating establishes a link between the return & risk.

     

    Credit rating is usually expressed by alphabetical or symbols which are simple and easily understandable. Normally, the credit rating agencies publish the explanations for the symbols mentioned as well as rationale for the ratings assigned.

     

    Why Credit Rating?

     

    With the increasing market changes in the Indian Economy, investors value systematic assessment of two types of risk namely “Business Risk”&“Payment Risk” arising out of linkages between money, capital, and foreign exchange markets.

     

    With a view to protect small investors, who are the main targets for the unlisted corporate debt in the form of fixed deposits credit ratings are made mandatory.

     

    India was perhaps the first amongst developing countries to setup a credit rating agency in 1988. The function of credit rating was institutionalised when RBI made it mandatory for the issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating compulsory for certain categories of debentures and debt instruments.

     

    Objective of Credit Rating:

     

    By definition, the main objective of credit rating is an opinion on issuer’s capacity in servicing the debt.

     

    So, therefore, the credit rating agencies conventionally does not rate equity as the servicing period is not known.

     

    Credit Rating Agencies:

     

    Credit rating Agencies are the companies that assign credit ratings on the ability of the debtor on fulfilling the financial commitments. An agency may rate the instruments, debt repaying obligations for short term & long term of the individuals/ company/ firm, etc.

     

    The Credit Rating Agency in India must be a company and is regulated by SEBI and registration with SEBI is mandatory for rating the business.

     

     

     

     

     

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    Types of Credit Rating Agencies in India:

     

    There are four standardised credit rating agencies in India:

     

    1. CRISIL (Credit Rating Information Services of India Limited)

     

    1. ICRA (Formerly called Investment Information Credit Rating Agency of India Limited)
    2. CARE
    3. ONICRA Credit Rating Agency Pvt. Ltd

     

    Process of Credit Rating by the Credit Rating Agencies:

     

    1. Pre-Analysis and document collection

     

    1. Finalization of assignment and detailed questionnaire is prepared
    2. Customer and referral feedback is collected
    3. In-depth analysis of the business unit
    4. Site visit scheduled and data collected
    5. Draft Report and rating proposal
    6. Report evaluation by rating committee
    7. Final evaluation is made and rating is given to the business unit

     

     

    How the ratings are given?

     

    ITEM

    RATIO-RANGE

    PARAMETERS

     

     

     

    Current Ratio

    Over 1.50

    20

     

    1.33 to 1.50

    16

     

    1.20 to 1.33

    12

     

    1.10 to 1.20

    8

     

    1.00 to 1.20

    4

     

    Below 1.00

    0

     

     

     

    TOL/TNW

    Above 4.5

    40

     

    4.25 to 4.50

    8

     

    4.00 to 4.25

    12

     

    3.50 to 4.00

    16

     

    1 to 3.50

    20

     

    Below 3.00

    0

     

     

     

     

     

     

     

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    Credit Ratings

     

     

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    PBIT/Interest

     

    Over 3.00

     

     

     

     

     

     

     

     

    2.50 to 3.00

     

    10

     

     

     

     

     

    2.00 to 2.50

     

    8

     

     

     

     

     

     

    1.75 to 2.00

     

    6

     

     

     

     

     

     

    1.50 to 1.75

     

    4

     

     

     

     

     

     

    Below 1.50

     

    20

     

     

     

     

     

     

     

     

     

     

     

     

    PAT/ Net sales

     

    Above 15%

     

    10

     

     

     

     

     

    13-15%

     

    8

     

     

     

     

     

     

    11-12%

     

    6

     

     

     

     

     

     

    9-10%

     

     

    4

     

     

     

     

     

     

    7-8%

     

     

    2

     

     

     

     

     

     

    Less than 6%

     

    0

     

     

     

     

     

     

     

     

     

     

     

     

     

    ROCE

     

    20%

     

     

    10

     

     

     

     

     

    Below 10%

     

    0

     

     

     

     

     

     

     

     

     

     

     

     

    Current Asset Holding

    120 days

     

    15

     

     

     

     

     

    Above 185 days

    0

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    S.NO.

     

    RATING

     

    SYMBOL

     

    COMPANY SCORE

     

     

     

     

     

     

     

     

     

     

    1

     

     

    Highest Safety

     

    A+

     

    Above 90

     

     

     

     

     

     

     

     

     

     

    2

     

     

    High Safety

     

    A

     

    Between 80 & 90

     

     

     

     

     

     

     

     

     

     

    3

     

     

    Fairly High Safety

     

    A-

     

    Between 70 & 80

     

     

     

     

     

     

     

     

     

     

    4

     

     

    Moderate Safety

     

    B

     

    Between 60 & 70

     

     

     

     

     

     

     

     

     

     

    5

     

     

    Low Safety

     

    C

     

    Between 50 & 60

     

     

     

     

     

     

     

     

     

     

    6

     

     

    Very Poor

     

    D

     

    Below 50

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Credit Ratings

     

     

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    Credit Rating Agencies globally:

     

    The “Big Three” credit rating agencies controlling around 95% of the rating business are as follows;

     

    • Moody’s Investor Service

     

    • Standard & Poor (S&P)
    • Fitch Ratings

     

    Credit Ratings:

     

     

    MOODY’S

    S&P

    FITCH

     

    MEANING

     

    Aaa

    AAA

    AAA

     

    High Quality, Extremely strong capacity to meet its financial

     

     

    commitments.

     

     

     

     

     

     

    Aa1

    AA+

    AA+

     

    High  Quality,  Very  Strong  Capacity  to  meet  financial

     

    Aa2

    AA

    AA

     

    obligations with very low credit risk, but susceptibility to long-

     

    Aa3

    AA-

    AA-

     

    term risks appears somewhat greater.

     

    A1

    A+

    A+

     

    High Quality, Strong Capacity to meet financial obligations but

     

    A2

    A

    A

     

    is somewhat susceptible to the adverse effects/ economic

     

    A3

    A-

    A-

     

    conditions are likely to weaken the obligor's capacity.

     

    Baa1

    BBB+

    BBB+

     

    Medium grade, Adequate capacity to meet the financial

     

     

    obligations

     

     

     

     

     

     

    Baa2

    BBB

    BBB

     

    Adverse conditions on changing the circumstances.

     

    Baa3

    BBB-

    BBB-

     

    Likely to lead weekend the obligor’s capacity on adverse

     

     

    conditions.

     

     

     

     

     

     

    Ba1

    BB+

    BB+

     

    Lower medium grade, Less vulnerable but faces major

     

    Ba2

    BB

    BB

     

    ongoing  uncertainties  exposure  which  would  lead  to

     

    Ba3

    BB-

    BB-

     

    inadequate capacity to meet financial commitments.

     

    B1

    B+

    B+

     

    Lower medium grade, More vulnerable but faces major

     

    B2

    B

    B

     

    ongoing uncertainties exposure will likely weaken to meet

     

    B3

    B-

    B-

     

    financial commitments.

     

    Caa

    CCC

    CCC

     

    Poor  Quality,  Currently  vulnerable  depending  on  the

     

     

    favorable conditions

     

     

     

     

     

     

    Ca

    CC

    CC

     

    Poor Quality, Currently highly vulnerable

     

     

    C

    C

     

    Currently highly vulnerable for non-payment

     

    C

    D

    D

     

    Failed to pay or more of its financial obligations

     

     

     

     

     

     

     

    Types of Credit Rating:

     

    • Corporate Ratings

     

    • Sovereign Ratings
    • Instrument Ratings

     

    Corporate Credit Ratings:The opinion of an independent agency regarding the likelihood that a corporation will fully meet its financial obligations as they come due is known as corporate credit rating.

     

     

     

     

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    Credit Ratings

     

     

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    Sovereign Credit Rating:The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad.

     

    Instrument Credit Rating: The Credit Rating done on the credit worthiness of corporate or government bonds are called instrument credit rating.

     

    Users of The Credit Rating:

     

    • Investors

     

    • Borrowers
    • Lenders

     

    Benefits of Credit Rating:

     

    To Company:

     

    1. Motivation for Growth in their own efforts

     

    1. Lower Cost of Borrowings from Banks & Financial Institutions
    2. A company with the higher credit rating can attract the investors of different strata of the society and the degree of the timely payment of principal and interest.

     

    1. Reduction in costof public issue and debt t.

     

    To Investors:

     

    1. Assurance of Safety

     

    1. Helps in Investment decisions
    2. Regular review of the ratings of a particular instrument
    3. Easy understandability of the investment proposal

     

    Demerits of Credit Rating:

     

    1. Possibility of Biased Rating and Misrepresentations by the rating committee

     

    1. Highly rated instruments may not disclose the material facts
    2. Ratings are given depending on the given past and present known facts of the company but it is difficult to predict the future in case of changes in the environment in the business by way of political, government, legal, social, technology, etc.

     

    1. Problems for new companies as there is no existing data available for rating the company.

    Downgrading of credit ratings of a particular instrument in case the expectations set is not reached by the company.

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