Business Environment- Unit III- UPTU

UNIT III

Direct & Indirect Taxes (MODVAT), (CENVAT), Competition Act 2002 & FEMA Acts, Business Ethics, Corporate Governance, Philosophy and strategy of planning in India.

Difference between direct and indirect taxesPoint of

differenceDIRECT TAX INDIRECT TAX

Incidence & Impact

A tax is said to be direct ‘when impact and Incidence of a tax are on one and same

person.

If impact of tax is on one person and incidence on the another, the tax is

called ‘indirect’

BurdenDirect tax is imposed on the individual organisation and

burden of tax cannot be shifted to others.

Indirect tax is imposed on commodities and allows the tax burden to shift.

Viability of

payment

Direct taxes are lesser burden then indirect taxes to

people as direct taxes are based income earning ability

of people.

Indirect taxes are borne by the consumers of

commodities and services irrespective of financial

ability as the MRP includes all taxes.

Administrative

viability

The administrative cost of collecting direct taxes is

more and improper administration may result in

tax evasion.

Cost of collecting indirect are taxes is very less as

indirect taxes are wrapped up in prices of goods and services and

cannot be evaded

Taxpayers

Collected from the people actually earning their

income.

Collected from someone or intermediary other

than the person or entity that would normally be

responsible for the taxes.Imposed

on Income, wealth and property Goods and services

Classification of TAXES

• DIRECT TAX

• INCOME TAX• CORPORATION TAX• PROPERTY TAX• INHERITANCE TAX• GIFT TAX• WEALTH TAX

• INDIRECT TAXES

• CENTRAL EXCISE• CENTRAL SALES TAX• CUSTOMS DUTY• SERVICE TAX• OCTROI ETC.• VALUE ADDED TAX (VAT)• SECURITIES TRANSACTION

TAX (STT)

Levy of taxes

CENTRAL GOVERNMENT

• INCOME TAXES(EXCEPT ON AGRICULTURE)• CUSTOMS DUTY• EXCISE DUTY (EXCEPT ON LIQUOR)

STATE GOVERNMENT

• TAX ON AGRICULTURE• EXCISE ON LIQUOR• BOTH CST AND LST

LOCAL AUTORITIES

• OCTROI

• MUNICIPAL TAXES

• TAXES ON HOUSE PROPERTY

Concept of Central Sales Tax (CST)

• CST is an indirect tax as the burden falls on consumer• CST act came into force on 1.7.1957• This act applies to whole of India, including J&K• It is levied by Central Government on TAXABLE

TURNOVER of Inter-state sale of goods made by registered dealer in ordinary course of business.

• It is payable in the state in which movement of Goods commences.

• It is assessed, collected and administered by State Government.

CENTRAL SALES TAX ACT-1956

CONDITIONS

1. There should be a dealer2. Should be a registered dealer3. He must carry on any business4. Sale should take place5. Sale may be to a regd. or unregd. buyer6. The sale should be of goods. 7. The sale can be of declared goods (goods of specific importance)8. The sale should take place in course of inter state 9. The sales should not be within the same state.10.The sale should not be outside India

DEFINITIONSDEALER U/S 2(b).He is a person one who is involved in the activities of buying, selling, distributing the goods

directly or indirectly either for cash or for deferred payment ,for commission, brokerage etc.

DEALER INCLUDES1. Local authorities ,co-operative societies, A company, association of persons, firms..2. Suppliers, broker, del creder, commissioner, etc.3. An auctioneer(govt, agent, etc)

REGISTERED DEALER SEC 7• A person should register himself u/s 7

• The registration may be:

• VOLUNTARY REGISTRATION OR • COMPULSORY REGISTRATION

SALE -2(G)

SALE INCLUDES • A transfer of goods for money • Transfer of goods for money’s worth• Transfer of goods on an agreement to pay on deferred system• Hire purchase system and installment system.

POINTS TO BE REMEMBERED– Sale may be to a registered buyer or unregistered buyer.– Element of price is essential.– Free supply is not sale.– Quantity discount is not a sale.– Mortgage is not a sale.– Depot transfer is not a sale.

GOODS-2(d)

• Goods means any article, thing, commodity, and which is movable ,however goods DOES NOT INCLUDE: Newspapers, actionable Claims, stocks, Shares, Securities.

• DECLARED GOODS –SEC 2(C)– Declared goods are goods of special importance. If declared goods

are sold there are certain benefits which can be obtained by the dealer, which is not available for the ordinary goods.

– Cereals ,Pulses, Coal Including Coke But Not Charcoal, Cotton Waste , Hand Made Garments, tobacco, Raw Tobacco, Cheroots Of Tobacco ,Jute, Oil Seeds, Cotton In Unmanufactured Form ,Crude Oil,sugar, khandsare Sugar, Aviation Turbine Fuel, refused Tobacco, Cigars ,Hides And Skins, Woven Fabrics Of Wool.

INTER STATE SALE

• Once the goods are taken out of dealers place then final destination should be taken into consideration and not the route through which goods are transferred.

BASIS OF CHARGE

• When all these conditions are satisfied then CST will be levied AT SPECIFIED RATE ON TAXABLETURNOVER which will be based on sales and not on profits.

Rates of CSTForm C

The sales tax on inter-state sale is 4% or the applicable sales tax rate for sale within the State whichever is lower if the sale is to a dealer registered under CST.

Form DSale to government is taxable @ 4% or applicable sales tax rate for sale within the State whichever is lower.

Form E1This form is issued by the dealer who makes the first inter-state sale during movement of goods from one State to another.

Form E2This form is issued by the second or the subsequent seller when the goods move from one state to another in a series of inter-state sales by transfer of documents of title.

Form FThis form is issued when goods are dispatched to another state as a consignment or to the branch of a dealer in another State. The CST is not payable if there is only inter-state stock transfer and there is no sale.

Form HThis form is issued by an exporter for purchase of goods. The purchase of goods is for an export order or in pursuance of an export order.

Form IThis form is issued by a dealer located in a Special Economic Zone (SEZ). No CST is levied when sales is made to a dealer located in SEZ.

Value Added Tax

• The value added tax was introduced as an indirect tax into the Indian taxation system from 1 April 2005.

• The existing General Sales Tax Laws were replaced with new Value Added Tax Acts .

• VAT is a tax, which is charged on the “Increase in Value” of good and services at each stage of production and circulation.

• It is charged by registered VAT businesses

VATValue added tax is a tax payable only on value added to commodities and on the services rendered. A comprehensive form of VAT covers the value added at all three levels, i.e.1) manufacturing,2) wholesaling and 3) retailing.

Rate of TAX (VAT)

• Rate of Tax:

Schedule ‘A’ – Essential Commodities (Tax free)- Nil

Schedule ‘B’ – Gold, Silver, Precious Stones, Pearls etc. - 1%

Schedule ‘C' – Declared Goods and other specified goods - 4% Other goods w.e.f. 1/5/10 - 5%

Schedule ‘D’ – Foreign Liquor, Country Liquor, Motor Spirits, etc. - At specified rates

Schedule ‘E’ – All other goods (not covered by A to D) - 12.5%

• VAT is a tax charged at each point of trade in goods. The charge is levied only on the difference between the value of a product and the cost of producing it, so that there is no duplication in tax calculation. Thus, as an SME, you will have to pay VAT when raw material is bought by your business, and you have to charge VAT to your customers or clients when a sale is made. Note that VAT is applicable only on physical products, and not on services. For services, a separate indirect tax, known as the service tax is levied.

• At the level of the centre, a Central Value Added Tax (CENVAT) or Excise duty is charged, the rate of which was increased to 12% from 10% in the last budget. Then there is the State VAT, which is essentially a sales tax charged by the State Government. State VAT varies across different states, and being a state subject, changes in these are not announced in the Union Budget.

Contd..

MODVAT• Stands for Modified Value Added Tax• Introduced in April 1, 1986.• It primarily aimed at avoiding cascading effect

of duty on duty and ensuring that duty is paid only on the value added at each stage of production.

• The scheme extended to capital goods also with effect from March 1, 1994.

From MODVAT to CENVAT• MODVAT scheme was restructured into CENVAT (Central

Value Added Tax) scheme. • A new set of rules 57AA to 57AK , under The Cenvat Credit

Rules, 2004, were framed and whatever restrictions were there in MODVAT Scheme were put to an end and comparatively, a free hand was given to the assesses.

• Under the Cenvat Scheme, a manufacturer of final product or provider of taxable service shall be allowed to take credit of duty of excise as well as of service tax paid on any input received in the factory or any input service received by manufacturer of final product.

CENVAT An Input duty relief scheme. Designed to reimburse the user manufacturer with the duty paid

on the inputs . Prevents cascading effect of duty on final products. CENVAT scheme covers Capital goods and all inputs barring motor

spirit (petrol), and high speed diesel and LDO. It covers all final products except matches. For textiles, CENVAT scheme is optional. This scheme applies to whole of India except Jammu and Kashmir.

CASCADING EFFECTA tax based on selling price of a product has a cascading effect whereas VAT is a multi point tax i.e. no cascading effect.Example:

Under Sales tax Law Under VAT Law

X ltd to Y ltd X ltd to Y ltd

Sale Price 1,00,000 Sale Price 1,00,000

ADD: Sales tax @10%

10,000 ADD: VAT @ 10% 10,000

Total Sale Price 1,10,000 Total Sale Price 1,10,000

Y ltd to customer Y ltd to customer

Cost for purchase 1,10,000 Cost for purchase 1,00,000 (excluding VAT)

ADD: expenditure incurred

50,000 ADD: expenditure incurred

50,000

1,60,000 1,50,000

ADD: Profit @20% 32,000 30,000

1,92,000 1,80,000

Sales Tax @10% 19,200 VAT @10% 18,000

Total Sale price 2,11,200 1,98,000

By X ltd 10,000 By X ltd 10,000

By Y ltd 19,200 By Y ltd

VAT collected 18,000

Less: Input tax credit

10,000 8,000

Total 29,200 Total 18,000

Sales Tax/VAT to be paid to the Government

CENVAT CREDIT RULES, 2004

• Rule 2 – DEFINITIONS• Rule 3 – Availment of CENVAT CREDIT • Rule 4 – Conditions for allowing CENVAT CREDIT• Rule 5 – Refund of CENVAT CREDIT• Rule 6 – Obligation of manufacturer of dutiable & exempted

goods• Rule 9 – Documents and Accounts• Rule 10 – Transfer of CENVAT CREDIT• Rule 14 – Recovery of CENVAT CREDIT wrongly taken• Rule 15 – General penalty

Rule 2 - Definitions1)Capital goods; means the following goods all goods falling under chapter 82, 84, 85, 90. Components, spares and accessories. Moulds and dies. Refractories and refractory materials. Tubes, pipes and fittings thereof. Pollution control equipment. Storage tank. above goods can be used ;1) In the factory of the manufacturer of final products.2)Outside factory for generation of electricity for

captive consumption.

2) Exempted goods; means goods exempted from whole of duty and include goods which are chargeable to NIL rate of interest.

3) Exempted Services; means taxable services which are exempted from the whole of the service tax.

4) Final product; means excisable goods manufactured or produced from inputs or using input services.

5) First stage dealer; means a dealer who purchases goods directly from o The manufacturer or from depot or from premises of the

consignment agent or from any other premises.o An importer or from the depot of an importer or from

premises of the consignment agent of importer.

6) Input; meanso All goods used in the factory by manufacturers for

manufacturing final products.o Any goods including accessories the value of which is

included in the value of final product.o All goods used for generation of electricity for captive use.o All goods used for providing output services excluding –

LSD (Low Speed Diesel), HSD (High Speed Diesel) etc.

7) Input Service; means any serviceo Used by a provider of taxable service for providing an output serviceo Used by a manufacturer , whether directly or indirectly, in relation to the

manufacturer of final products and clearance of final products upto the place of removal, and includes services like advertisement or sales promotion , market research, accounting etc.

Rule 3 – Availment of CENVAT CREDITA manufacturer / service provider can take CREDIT of Basic Excise Duty. Special Excise Duty. Additional duty of excise on (Textile and Textile articles) Additional duty of excise on (Goods of Special Importance) National Calamity Contingent Duty (NCCD) Education Cess on Excise duty. Countervailing duty (of custom duty) Service tax.

Rule 4 – Conditions for allowing CENVAT CREDIT

The cenvat credit in respect of inputs may be taken immediately on the date of receipt of inputs.

The cenvat credit in respect of capital goods to be availed within a period of 2 years i.e.;a) 50% immediately when capital goods are received and b) balance 50% in the next financial year.

Credit allowed to a manufacturer even if capital goods are acquired by him on lease, hire purchase or loan agreement.

Credit is allowed even if any inputs or capital goods are sent to job worker place for further processing, but goods must be received back within 180 days.

Cenvat credit is allowed even in respect of jigs, fixtures, moulds and dies.

Cenvat credit is not allowed on the goods used for office use. Cenvat credit will not be allowed on that part of capital

goods that represents depreciation. The commissioner of central excise having jurisdiction over

the factory of manufacturer, who has sent the input outside his factory to a job worker, may by an order allow final products to be removed from promises of job worker. So, a job worker can avail the cenvat credit on behalf of manufacturer.

Rule 5 – Refund of CENVAT CREDIT

For goods to be exported under bond, credit on inputs or input services can be used for the payment of duty on any final product cleared for home consumption or for export.

Where for any reason, such adjustment is not possible, the manufacturer shall be allowed refund of such amount subject to conditions.

Rule 6 – Obligation of manufacturer of dutiable and exempted goods

Cenvat credit is not allowed on quantity of inputs and input services used exclusively in manufacture of exempted goods/services. For this purpose the manufacturer or output service provider may follow either of the following two methods :-

Maintain separate accounts for different goods. If he does not maintain separate accounts and he avails cenvat

credit on inputs or input services, then 6% of total price (excluding all taxes) shall be paid on clearance of final product from factory.

Rule 9 – Documents and Accounts

The Cenvat Credit shall be taken on the basis of any of following duty paying documents :- Invoice issued by :- a) A manufacturer b) By an importer c) A first stage dealer d) A consignment agent A supplementary invoice issued by a manufacturer or importer. A bill of entry. A certificate issued by an appraiser of custom. A Challan evidencing the payment of service tax. An invoice, bill or Challan issued by a provider of input service.

CENVAT RETURNS

Manufacturer of final products.

month By 10th of next month.

Provider of output service.

Half yearly return

By the end of the month following

the particular half year.

First stage or second

stage dealer,

quaterly By 15th of next month after the

end of the quarter.

Rule 10 – Transfer of cenvat credit

If a manufacturer shifts his factory to another site or factory is transferred on account of change in ownership due to sale, merger, amalgamation, lease or joint venture, then, he shall be allowed to transfer the cenvat credit lying unutilized in his account after taking approval of assistant or deputy commissioner.

However transfer of cenvat credit shall be allowed only if stock of such inputs too has been transferred to the new unit.

Rule 14 – Recovery of cenvat credit wrongly taken

Where the cenvat credit has been taken or utilized wrongly, the same along with interest shall be recovered from the manufacturer under provisions of section 11A and 11B of Central Excise Act 1944.

Rule 15 – Confiscation and penalty

If a person, takes wrong cenvat credit in respect of input or capital goods, or without ensuring that appropriate duty on such inputs or capital goods has been fixed or contravenes any of the provisions of the cenvat credit rules, then he shall be liable to penalty not exceeding the duty on excisable goods or Rs. 10,000 whichever is high his goods shall also be liable to consification.

Rule 15A – General Penalty

A general penalty upto Rs. 5000 can be imposed in case of contravention of any of the provision of CENVAT CREDIT RULES 2004, for which no specific penal provision exists.

Difference between MODVAT and CENVAT

Basis of difference

MODVAT CENVAT

1) Meaning It stands for Modified Value added tax.

It stands for Central Value added tax.

2) Existence It is an old scheme/ predecessor scheme and no more in existence.

It is a new scheme/ successor scheme and has replaced MODVAT.

3) Provision for Capital goods

It has separate provisions for capital goods.

It contains combined rules for capital goods and inputs.

4) Declarations It requires submission of declaration in respect of inputs and capital goods.

CENVAT does not require any such declaration.

5) Statutory registers It prescribe statutory registers RG23A, 23B and RG23C, RG23D to be maintained.

Such registers are not required under CENVAT, but records have to be maintained.

6) Provisions for Waste and Scrap

It contains separate provisions for Waste and Scrap.

It does not contain separate provisions for it.

7) Scope of definition/Scope of scheme for Capital goods.

Narrow definition of Capital goods.

Widened definition of Capital goods.

8) Credit on Capital goods Credit on capital goods can be taken immediately .

It has to be taken in two yearly installments of 50% each.

9) Credit availability Credit can be availed only on duplicate copy of invoice.

CENVAT can be availed on any copy of Invoice.

10) Installation of Capital goods With regard to capital goods, credit can be availed only if the capital goods are installed and ready to put into use.

No such condition exists in CENVAT.

Competition Act, 2002

• Competition

Is “a situation in a market in which firms or

sellers independently strive for the buyers’

patronage in order to achieve a particular

business objective for example, profits, sales or

market share” (World Bank, 1999)

“Competition” is an age-old phenomenon

Benefits of Competition:

• Companies : Efficiency, cost-saving operations, better utilization of resources, etc.

• The Consumer : Wider choice of goods at competitive prices

• The Government : Generates revenue

BUT…………………………

….Benefits of Competition………all these benefits are lost if Competition is

UNFAIR or NON-EXISTANT

• Choice of CARS in the olden days

• MTNL Monopoly : The position today

• Airlines : INDIAN AIRLINES : JET : SAHARA

• Indian Railways : The monopoly continues….

It is not necessary that there are a large number of producers/suppliers to have competition conditions.

A single producer can exist and provide a competitive atmosphere provided entry of new firms is easy and not costly.

Entry barriers can be due to the market position of incumbent firms, legal barriers or strategic barriersIncumbent firms may use their power as “first

Movers” to block entry.Legal barriers include licensing and other

Government regulations

Contd…Strategic barriers are generally erected by

incumbent firms in the form of artificial and sudden price reduction with a view to thwarting new entry.

Contestability of markets ensure competitive conditions in the market.

Competition is expected to enhance allocated and productive efficiency so as to maximize economic welfare.

Monopoly (market) power tends to lead to inefficient allocation of sources and discourages innovation or introduction of better technology.

OBJECTIVES OF COMPETITION LAW & POLICY

Promoting economic efficiency in both static and dynamic sense

protecting consumers from the undue exercise of market power

facilitating economic liberalization, including privatization. Deregulation and reduction of external trade barriers

Preserving and promoting the sound development of a market economy

OBJECTIVES OF COMPETITION LAW & POLICY

ensuring fairness and equity in market place transactions

Protecting the ‘public interest’ including in some cases considerations relating to industrial competitiveness and employment

Protecting opportunities for small and medium business

Competition Law It is a tool to implement and enforce competition

policy and to prevent and punish anti-competitive business practices by firms and unnecessary Government interference in the market.

Competition Law generally covers 3 areas:

– Anti - Competitive Agreements, e.g., cartels,

– Abuse of Dominant Position by enterprises, e.g., predatory pricing, barriers to entry and

– Regulation of Mergers and Acquisitions (M&As).

Contd… The need for Competition Law arises because

market can suffer from failures and distortions, and various players can resort to anti-competitive activities such as cartels, abuse of dominance etc. which adversely impact economic efficiency and consumer welfare.

Thus there is need for Competition Law, and a Competition Watchdog with the authority for enforcing Competition Law.

Elements of Competition Policy

• Putting in place a set of Policies that enhance competition in local and national markets.

• A Law designed to prevent anti competitive business practices and unnecessary government intervention.

Competition Policy

• It includes Reforms in certain Policy areas to make these more pro-competition:-

• • Industrial policy• • Trade policy• • Privatization/disinvestment• • Economic Regulation• • State aids• • Labour policy• • Other such policies

Industrial Policy

• Industrial Policy has to address and reform licensing

requirements, restrictions on capacities, or on foreign

technology tie ups, guidelines on location of

industries, reservations for small scale industry, etc.

These adversely affect free competition in the market.

Trade Policy• Trade policy has important implications for

development of competition in the markets. Measures

for liberalisation of trade promote greater competition

e.g. reducing tariffs, removal of quotas/physical

controls, investment controls, conditions relating to

local content etc.

Privatization/Disinvestment

• Thus privatization of state owned enterprises is important element of competition policy.

• However, in privatization/ disinvestment process, care is to be taken that state monopoly is not replaced by private monopoly.

Privatization/Disinvestment

• Empirical research has found that state- owned enterprises generally tend to be less efficient than private owned firms, for reasons such as manager compensation, low incentives, lack of direct accountability, hard budget constraints for managers, etc.

• State owned enterprises are generally insulated from market forces and receive protection/benefits such as government imposed barriers to entry, price regulation and subsidies.

Economic Regulations• New legislation and regulations to promote

competition and to bring about restructuring of major industrial sectors is essential. Legislation to aim at separating natural monopoly elements from potentially competitive activities, and the regulatory functions from commercial functions, and also create several competing entities through restructuring of essential competition activities and to create a competitive environment .

• Examples:– Electricity sector– Telecommunications sector– Ports

State Aids• Several state aids create unequal operating conditions for businesses. Examples:– Subsidies– Tax rebates– Preferential loans– Capital injection

• Experience suggests that such policy measures rarely have successful results and destroy incentives for firms to become efficient.

• Temporary specific state- aid for well stated public purpose can be justified.

Evolution of Competition Law• Before MRTP Act came into force (1970), limited

provisions existed under :– The Indian Contract Act– Directive Principles of State Policy (Non-enforceable)

• The MRTP Act brought in a four-pronged thrust :– Concentration of economic power – Restrictive Trade Practices– Monopolistic Trade Practices – Unfair Trade Practices

MRTPs vis-à-vis Competition ActUnder the Competition Act :

– No provision for Unfair Trade Practices

– Only Consumer Courts will have jurisdiction

– Pending cases will be continued by MRTPC for 2 years

– After 2 years :

• All cases (except Disparagement Cases) will be transferred to National Commission under CPA

• All Disparagement Cases will be transferred to Competition Commission

Status of the Competition Commission

• It is a body corporate

• It has Regulatory and quasi-judicial powers; functions through Benches

• Each Bench shall consist of at least two Members and one of such Members must be a judicial Member

Suo Moto Inquiry

• Commission has suo moto power to enquire whether an Anti-Competitive Agreement or Abuse of Dominant Position causes or is likely to cause an appreciable adverse effect on competition

• This power must be exercised within one year from the date combination has taken effect

Anti-competitive Agreements

These are agreements which cause or are likelyto cause an appreciable adverse effect oncompetition within India:

• Horizontal Agreements:These are between and among competitors who are at the

same stage of production, supply, distribution, etc.

These are presumed to be illegal

Examples: cartels, bid rigging, collusive bidding, sharing ofmarkets, etc.

Anti-Competitive Agreements

Vertical Agreements:• Vertical Agreements are between parties at different

stages of production, supply, distribution, etc.

• These are not presumed illegal; are subject to rule of reason.

Examples: tie-in arrangements, exclusive supply/distribution agreements, refusal to deal.

Agreement• Any arrangement or understanding or action in

concert –

Whether or not such arrangement or understanding is formal or in writing

Or whether or not such understanding or arrangement is intended to be enforceable by legal proceedings

Adverse effect on competition• Creation of barriers to entry

• Driving existing competitors out of market

• Benefits to consumers

• Benefit to Scientific and technical knowhow

Agreements presumed to have adverse effect

• Directly or indirectly determines purchase or sales price

• Limits or controls production, supply, technical know how

• Shares the market or sources of production • Results in bid rigging or collusive bidding

CCI orders against Anti-competitive agreements

• Penalty equal to three times the amount of

profit made out of such agreement or 10% of

average turnover of the cartel for preceding

three years whichever is higher

• Modification directed to the agreement

Powers of Competition Commission as Regards Agreements

After the inquiry into the Agreement, Competition Commission can:

direct parties to discontinue the agreement

prohibit parties from re-entering such agreement

direct modification of the agreement

impose penalty upto 10% of average turnover of the enterprise

PROTECTION OF INTELLECTUAL PROPERTY RIGHTS

• Competition Act

The prohibition on horizontal and vertical

agreements do not restrict the right of any

person to impose reasonable restrictions to

protect any of his rights under the

Copyright Act, the Patents Act, the Trade

and Merchandise Marks Act, Designs Act

For those who would want to know more about anti competitive agreements --- pls. visit the site given below; it is a good ppt by CCI

• http://www.competition-commission-india.nic.in/Capacity_Building_Initiatives/Investigating_Anticompetitive_Agreements.pdf

Abuse of Dominance• “Dominant position” is defined as a position of

strength which enables the enterprise– to operate independently of competitive

forces in the market, or– to affect its competitors or consumers in its

favor.

• No mathematical or statistical formula is adopted to “measure” dominance –

Abuse of Dominant PositionIncludes practices like:

• • Unfair or discriminatory conditions or prices,

• • Limiting or restricting production or technical/scientific development,

• • Denial of market access, and

• • Predatory pricing.

Power of the Competition Commission

– After inquiry into abuse of dominant position, the Competition Commission can order:

• discontinuance of abuse of dominant position

• impose a penalty upto 10% of the average turnover of the enterprise

Combinations Regulation

• Combinations, in terms of the meaning given to them in the Act, include mergers, amalgamations, acquisitions.

• in order to establish whether the higher concentration in the market resulting from the merger will increase the possibility of collusive or unilaterally harmful behavior, it must first be established as to what the relevant market is

Contd…

Horizontal Mergers

Vertical Mergers

Conglomerate Mergers

Pre-Notification• The requirements for prior notification

Relevant Product MarketPhysical characteristics or end-use of goods

Price of goods or service

Consumer preferences

Exclusion of in-house production

Existence of specialized producers

Classification of industrial products

Factors to be considered while determining Dominance

• Dominant position linked to a host of factors

• Market share of enterprise

• Size and resources of enterprise

• Size and importance of competitors

• Commercial advantage of enterprise over competitors

Relevant Geographic market

• Relevant geographic market can be defined as the area in which products are available at approximately the same price given transport costs and any increase in demand can be met from neighboring areas profitably

Mergers and Acquisitions

• Commission is expected to regulate “Combinations”, i.e.,

large mergers, acquisitions, etc. likely to have appreciable

adverse effect on competition.

• Threshold:

For single enterprise

• – Assets > Rs.1000 crores

• – Turnover > Rs.3000 crores

Mergers and Acquisitions

Threshold:

For group of enterprises

• – Assets > Rs.4000 crores

• – Turnover > Rs.12000 crores

Similarly, threshold is provided for overseas groups.

Mergers & Acquisitions

• Notification of Combination to Commission is voluntary

• • If notified, Commission to take a decision within 90 days on the combination. Decision may allow, disallow, modify, etc. the combination.

Powers of Commission

• Cease and desist order

• Impose penalty up to 10% of turnover.

• In case of cartel, penalty can be 10% of turnover or 3 times of profit illegally gained from cartel activity, whichever is higher.

Powers of Commission

• Recommend to Government the division of dominant Enterprise

• Various penalties ranging from Rs.1 lac upto Rs.1 crore are also provided for failure to comply with direction/order of Commission.

Competition Advocacy• The Competition Commission of India, in terms of

advocacy provisions in the Act, is enabled to participate in the formulation of the country’s economic policies and to participate in the reviewing of laws related to competition at the instance of the Central Government.

• Commission is required to take measures for promotion of Competition Advocacy, creating Awareness and imparting Training about competition issues [Section 49(3)]

Contd…

• Advocacy means competition promotion through non-enforcement measures

• For promotion of competition advocacy and creation of awareness about competition issues, the Commission may:-

i) Undertake appropriate programmes / activities etc.;

ii) Encourage and interact with the organizations of stakeholders, academic community etc. to undertake activities, programmes, studies, research work, etc. on competition issues;

Foreign Exchange Management Act (FEMA)

Statutory Basis for Exchange Control

The Foreign Exchange Regulation Act, 1973 (FERA 1973), as amended by the Foreign Exchange Management (Amendment) Act, 1999, forms the statutory basis for Exchange Control in India.

FOREIGN EXCHANGE MECHANISM

The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA came into force on the 1st day of June, 2000.

FEMA consolidate and amend the law relating to foreign

exchange facilitating external trade and payments promoting the orderly development and

maintenance of foreign exchange market in India 49 sections in the Act

FEMA (1999)

Authorized Person:Authorized under the Act to deal in foreign exchange

Capital account transaction: Alters the assets or liability

Currency: Currency notes, Money order, cheque, drafts etc…

Currency Notes: Coin and bank notes

Currency Account Transaction: Transactions other than capital account transactions

Indian Currency: Indian rupees

Important Terms (Sec-2)

Export:Goods and services from India to outside

Foreign Currency:Other than Indian currency

Foreign Exchange:Means foreign currency

Foreign Security:Security expressed in foreign currency

Import:Goods and services from outside to India

Security:Shares, Stock etc as defined in the Public Debt Act of

1994

Repatriate to India:Realized foreign exchange to India

Service:Banking, Financing, insurance etc…

Transfer:Sale, Purchase, Exchange etc…

Non-Resident Indian (NRI):Citizen of India residing outside

Overseas Corporate Body (OCB):A company, firm etc.. Owned at least 60% by NRIs

Person of Indian Origin (PIO):Citizen of country other then Bangladesh and Pakistan, if

Any time held Indian passport or Either of his parents or grandparents was citizen of India The Person is spouse of an Indian citizen

The FEMA, is applicable-To the whole of India.Any Branch, office and agency, which is situated

outside India, but is owned or controlled by a person resident in India.

Broadly speaking FEMA, covers, three different types of categories, and deals differently with them. These categories are:a) Personb) Person Resident In Indiac) Person Resident Outside India

To Whom Act is Applicable ?

For the purpose of provisions, a person shall include any of the following:

1. An individual2. A Hindu Undivided family3. A company4. A Firm5. An association of persons or a body of individuals, whether

incorporated or not,6. Every artificial judicial person, not falling within any of the

preceding sub clauses, and 7. Any agency, office or branch owned or controlled by such

person.

A. Person

1. A person who has been residing in India for more than 182 days, in the last financial year. This means if a person has to be assessed, as to whether he is person resident in India, for any offence committed in August 2001, then he should be residing in India for more than 182 days during April 2000 to March 2001

2. Any person or body corporate registered or incorporated in India, or

3. An office, branch or agency in India owned or controlled by a person resident outside India, or

4. An office, branch or agency outside India owned or controlled by a person resident in India.

B. Person resident in India

• Simply putting it, "a person resident outside India" means "a person who is not resident in India"

C. Person resident outside India

Prohibits dealings in foreign exchange except through an authorized person

Make any payment to or for the credit of any person resident outside India in any manner

Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner

Enter into any financial transaction in India for acquisition or creation or transfer of a right to acquire, any asset outside India by any person

Provisions in Section 3

SECTION 4 – Restrains any person resident in India from acquiring, holding,

owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act.

SECTION 5 – deals with current account transaction Any person may sell or draw foreign exchange to or from an

authorized person if such sale or drawl is a current account transaction

SECTION 6 - deals with capital account transactions. This section allows a person to draw or sell foreign exchange

from or to an authorized person for a capital account transaction.

Provisions in Sections ……

Transactions having international financial implications matters are regulated by Exchange Control:a) Purchase and sale of and other dealings in foreign

exchange and maintenance of balances at foreign centers

b) Procedure for realization of proceeds of exportsc) Payments to non-residents or to their accounts in

Indiad) Transfer of securities between residents and non-

residents and acquisition and holding of foreign securities

e) Foreign travel with exchange

Transactions Regulated by Exchange Control

f) Export and import of currency, cheques, drafts, travelers cheques and other financial instruments, securities, etc.

g) Activities in India of branches of foreign firms and companies and foreign nationals

h) Foreign direct investment and portfolio investment in India including investment by non-resident Indian nationals/persons of Indian origin and corporate bodies predominantly owned by such persons

i) Appointment of non-residents and foreign nationals and foreign companies as agents in India

j) Setting up of joint ventures/subsidiaries outside India by Indian companies

k) Acquisition, holding and disposal of immovable property in India by foreign nationals and foreign companies

l) Acquisition, holding and disposal of immovable property outside India by Indian nationals resident in India.

SECTION 7 - deals with export of goods and services. Every exporter is required to furnish to the RBI or any

other authority, a declaration etc. etc. regarding full export value.

SECTION 8 and 9- casts the responsibility on the persons resident in India

who have any amount of foreign exchange due or accrued in their favor to get same realized and repatriated to India within the specific period and the manner specified by RBI.

SECTIONS 10 and 12 - deals with duties and liabilities of the Authorized persons

authorized dealer, money changer, off shore banking unit or any other person for the time being authorized to deal in foreign exchange or foreign securities.


To comply with RBI directions

Not to engage in un authorized transactions

Ensure compliance of FEMA provisions

To produce books, accounts etc…

DUTIES OF AN AUTHORIZED PERSON

To deal in or transfer any foreign exchange

Receive payments by order

To open NRO, NRE, FCNR, NRNR, NRSR accounts

To sell or purchase foreign exchange for current account

transactions

To sell or purchase foreign exchange for permissible

capital account transactions

POWERS OF AN AUTHORISED PERSON

Verifying the correctness of any statements,

information or particular

Obtaining information which such authorized person

has failed to furnish

Securing compliance with the provisions of Act

Powers of Reserve Bank of India

SECTION 13 –Any contravention, under FEMA, may invite following kinds

of penalties: If, the amount against which offence is quantities, then

penalty will be "THRICE" the sum involved in contravention. Where the amount cannot be quantified the penalty may be

imposed up to two lakh rupees. If, the contravention is continuing everyday, then Rs. Five

Thousand for every day after the first day during which the contravention continues.

Further in addition to the penalty, any currency, security or other money or property involved in the contravention may also be confiscated.


SECTION 14 – If a person fails to make full payment of the penalty

imposed with in a period of 90 days, he shall be liable to civil imprisonment.

SECTION 15 – Empowers the Directorate of Enforcement and Officers

of the Reserve Bank of India as may be authorized by the central Govt. in this behalf to compound the offences.

SECTION 16 – Empowers the central Govt. to appoint the as many

adjudicating authorities as it may think fit for holding enquiries.


SECTION 17 – Empowers the central Govt. to appoint one or

more special Directors to hear the appeals against the orders of the Adjudicating Authorities.

SECTION 18 – Empowers the central Govt. to establish Appellate

Tribunal to hear appeals against the orders of Adjudicating Authorities and special Director.

SECTION 19 – It makes provisions as regards appeals to Appellate

Tribunal.


SECTION 20 – Composition of Appellate Tribunal.

SECTION 21 – Qualifications for appointment of Chairperson

member and Special Director.SECTION 22 –

Term of Office.SECTION 23 –

Terms and Conditions of service.SECTION 24 –

Vacancies.


SECTION 25 – Resignation and Removal.

SECTION 26 – Member to act as Chairperson in certain circumstances.

SECTION 27 – Staff of Appellate Tribunal and Special Directorate.

SECTION 28 – Power of Appellate Tribunal and Special Director.

SECTION 29 – Distribution of business among benches.

SECTION 30 – Power of Chairperson to Transfer cases.


SECTION 31 – Decision to be by majority.

SECTION 32 – Right of Appellant to take assistance of legal practitioner

or CA and of Govt. to appoint presenting officer.SECTION 33 –

Members, etc to public servants.SECTION 34 –

Civil court not to have jurisdiction.SECTION 35 –

Appeal to High Court.


SECTION 36 to 38 – Directorate of Enforcement enforcement of the provisions of the Foreign Exchange

Management Act prevent leakage of foreign exchange

Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments.

Acquisition of foreign currency illegally by person in India. Non-repatriation of the proceeds of the exported goods. Unauthorized maintenance of accounts in foreign countries. Siphoning off of foreign exchange against fictitious and

bogus imports land by. Illegal acquisition of foreign exchange through Hawala


Electronic Corporation India Limited To tie up with international companies for local

manufacture of computers To increase the local content to a point of "self sustenance".

Tie up between ECIL and IBM Import of computers was carefully regulated, depending on

ECIL’s production capacity, and the entry of the local private sector was controlled.

The Implementation of FERA (in 1977) led to exit of IBM from India. Because FERA restricts any foreign company from holding

40% shares but IBM had 70%.

Indian Computer Hardware Industry

Business ethics

MEANINGEthics is a set of rules that define right and wrong conduct.

Business ethics can be defined as written and unwritten codes of principles and values that govern decisions and actions within a company. In the business world, the organization’s culture sets standards for determining the difference between good and bad decision making and behavior.

Long termism in business• Issues of corporate ethics have taken the form of short-termism vs. long-

termism• If businesses are focused on long term stability and growth, they are

ethical:– Short term strategies, aimed at earning per share for the year in question,

compromise on longer interests• Warren Buffet has often stressed on long term strategies• Investigations into Fannie Mae suggested that the entire senior

management was intensively focused on earnings guidance• Capital market orientation of companies force them to be tempted by

short term targets:– Increasingly, the entire system of how companies are evaluated by analysts,

investors and stock markets leads to a short term approach– McKinsey survey [March 2006] shows that companies are focused on short

term strategies due to market pressures

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3 Models of Management Ethics

Three Types Of Management Ethics

115

3 Models of Management Ethics

1. Moral Management—Conforms to high standards of ethical behavior.

2. Immoral Management—A style devoid of ethical principles and active opposition to what is ethical.

3. Amoral Management—– Intentional - does not consider ethical factors– Unintentional - casual or careless about ethical

considerations in business

Developing Moral Judgment

6-23

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Making Ethical Judgments

Behavior or act that has been committed

Prevailing norms of acceptability

Value judgments and perceptions of the observer

compared with

Warren Buffet’s rule of thumb for ethical conduct

• “…I want employees to ask themselves (when they are in doubt about whether a particular conduct is ethical or not) whether they are willing to have any contemplated act appear the next day on the front page of their local paper – to be read by their spouses, children and friends – with the reporting done by an informed and critical reporter.” [Berkshire Hathaway’s code of ethics]

Stakeholder Versus Shareholder

Shareholder Perspective Stakeholder Perspective Those who approach ethical

decision making from a shareholder perspective focus on making decisions that are in the owners' best interest. Decisions are guided by a need to maximize return on investment for the organization’s shareholders.

Stakeholders may include: employees, suppliers, customers, competitors, government agencies, the news media, community residents and others. The idea behind stakeholder based ethical decision making is to make sound business decisions that work for the good of all affected parties

What is Ethical Behavior?. In many situations lines between right and wrong are blurred. Such situations can lead to ethical dilemmas. When faced with ethical dilemmas, it’s important to consider outcomes of the decision-making process. One way of dealing with ethical dilemmas is by using the four way test to evaluate decisions. This test involves asking four questions:

Is my decision a truthful one? Is my decision fair to everyone affected? Will it build goodwill for the organization? Is the decision beneficial to all parties who have a vested interest in the outcome?

A company’s managers play an important role in establishing its ethical tone. If managers behave as if the only thing that matters is profit, employees are likely to act in a like manner. A company’s leaders are responsible for setting standards for what is and is not acceptable employee behavior. It’s vital for managers to play an active role in creating a working environment where employees are encouraged and rewarded for acting in an ethical manner.

WHO IS RESPONSIBLE FOR CREATING ETHICS IN AN ORGANIZATION ?

Other Factors Impacting Organizational EthicsCorporate culture

Existence and application of a written code of ethics Formal and informal policies and rules Norms for acceptable behavior Financial reward system System for recognizing accomplishment Company attitude toward employees How employees are selected for promotions Hiring practices Applications of legal behavior Degree to which professionalism is emphasized The company’s decision making processes Behaviors and attitudes of the organization’s leaders

7 Principles of Admirable Business Ethics

• 1. Be Trustful• 2. Keep An Open Mind• 3. Meet Obligations• 4. Have Clear Documents• 5. Become Community Involved• 6. Maintain Accounting Control• 7. Be Respectful

Overview of issues in business ethics

Corporate social responsibilityfiduciary responsibility, stakeholder

concept v. shareholder conceptindustrial espionage.

General business ethics• Ethics of human resource management• Ethics of sales and marketing• Ethics of production• Ethics of intellectual property, knowledge

and skills

IMPORTANCE OF ETHICS

IMPORTANCE OF BUSINESS ETHICSPUBLIC EXPECTS BUSINESS TO EXHIBIT HIGH

LEVELS OF ETHICAL PERFORMANCE AND SOCIAL RESPONSIBILITY.

ENCOURAGING BUSINESS FIRMS AND THEIR EMPLOYEES TO BEHAVE ETHICALLY IS TO PREVENT HARM TO SOCIETY.

PROMOTING ETHICAL BEHAVIOR IS TO PROTECT BUSINESS FROM ABUSE BY UNETHICAL EMPLOYEES OR UNETHICAL COMPETITORS.

HIGH ETHICAL PERFORMANCE ALSO PROTECTS THE INDIVIDUALS WHO WORK IN BUSINESS.

Coke & Pepsi in India

Today, more from the world of product safety. This time the story is about Coke and Pepsi, and allegations that the versions of their products manufactured in India contain unacceptably high levels of pesticides.

world’s biggest brand names, known for wooing customers around the world, are facing a credibility crisis in one of their crucial emerging markets.

RELIGIOUS VIEWS ON BUSINESS ETHICS

SWAMI VIVEKANAND VIEWS ON ETHICS

• THE BASIS OF INDIAN SUBJECTIVITY LIES IN THE BELIEF OF GOD.

• HE SUGGESTED THE FUNDAMENTAL LAW OF ETHICS

• “DON’T INJURE OTHERS, LOVE EVERYONE AS YOUR OWNSELF UNIVERSE IS ONE”

IN ORDER TO WIN THE GAME, YOU NEED TO PLAN. TO PLAN INFORMATION IS IMPERATIVE. GET IT THROUGH LEGAL & ETHICAL MEANS. IN LIFE AND BUSINESS, ETHICAL STANDARD MUST BE SET,ETHICAL STANDARD MUST BE SET,ETHICAL STANDARD MUST BE MET.

Ethics are important not only in business but in all aspects of life because it is an essential part of the foundation on which of a civilized society is build. A business or society that lacks ethical principles is bound to fail sooner or later.

CONCLUSION