Pocket Book on Finance

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A Pocket Book Of Finance(A Finance Primer)

CONTENTS

I. Introduction 3

II Types Of Business Organisation 5

III The Trade License 38

IV Sources Of Funds 40

Investment banking, Personal Banking, Insurance, Stock market,Mutual Funds, Money Market and Secondary Market and IPO(Initial Public Offering)

Stock markets, IPOs or Initial Public Offerings, Fixed Deposits,Secured / Unsecured Deposits, Mutual Funds, Derivatives,Commodities Exchange, Money Market and Primary andSecondary Markets

V Provident Fund & Employees State Insurance 65

VI Service Tax 71

VII How To Read A Balance Sheet, Trading and Profit 79

And Loss Account, Some Important Ratios

Evaluation Of The Cash Flow Of A Company, Evaluation OfFinancial Reports, Balance Sheet, Profit & Loss Account AndOther Statements From The Point Of View Of Shareholders OfA Company

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A Little Of Project Reports

VIII Income Tax & Wealth Tax 105

IX Excise Duty 116

X Professional Tax 119

XI VAT & Central Sales Tax 120

XII Glossary 124

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CHAPTER I

INTRODUCTION

WHAT IS THIS BOOK ALL ABOUT? WHY SHOULD YOU BUY IT?

As the name of the book suggests it is meant for laymen who are not

acquainted with the technicalities of finance or the intricacies of fiscal laws like the

Income Tax Act or the Service Tax Act and others. This small book will of course not

make somebody a professional, but for the newcomer it will provide just that amount of

information, knowledge of which will cause the person to take pre emptive action by

taking professional help to comply with regulations and prevent negative consequences

from legal infractions or non compliances.

Every professional be he a Chartered Accountant or Lawyer or any consultant will tell

you that most clients will come up with questions such as

(a) For my new project should I do it as a partnership firm, proprietorship concern or

an incorporated company?

(b) I am going to form 3 proprietorship concerns, how do I get PAN cards for them?

(c) When Do I file my income tax returns?

(d) Am I required to pay Advance Income Tax?

(e) What kind of funding should I try for with respect to my new project

(f) What kind of facilities can be had from banks

(g) Give me some understanding on this Balance Sheet

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(h) Are my employees eligible for Provident Fund or Employees State Insurance

benefits?

After going through this book the reader will have answers to all these questions and

more, and armed with this kind of knowledge he or she can take part in informed

discussions with his/her consultant and the quantum of time required to be spent with

the professional will be substantially reduced.

To sum up, knowledge acquired from this book will make a person aware of finances

and need for adherence with financial laws and therefore he or she will take action to

ensure compliances before being sucked into or being bogged down by legal pitfalls

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CHAPTER II

TYPES OF BUSINESS ORGANISATIONS

Well, you have decided that you would like to go to business on your own and not work

for anybody else. That is not a bad idea because doing a business of your own means

being your own boss and you are responsible for your actions particularly as to whether

you make a success out of your efforts, and if unfortunately no, in most cases we dont

think it will serve any purpose to blame anybody else but yourself. So, as a general rule

of thumb before getting into anything new in the business world, the best thing would be

to have a preliminary or an initial discussion with your lawyer or Chartered Accountant

about pre-commencement things to be done before you actually start making income and

collecting money into your bank account.

The first thing to do here is decide the type of organisation

that you are going to choose to be the engine of your business efforts. There are many

options available in this regard and the listing below will give the ones that are generally

most popular in India and the order in which they are given is more or less the order of

simplicity with which you can get started using that particular type of organisation:

1. The Proprietorship concern

2. The Partnership concern

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3. The Limited Liability Company

4. The Co-operative Society

5. Societies incorporated under the Societies Registration Act

Now, in the following sections we shall discuss the important features of each type of the

above forms of organisation which may help you to decide what should be done and

would help you in your discussions with your consultant or Chartered Accountant or

lawyer in this regard.

What is the proprietorship concern? This is the simplest form of organisation

available and the name itself suggests what the organisation is all about. It means that you

are the sole owner of this type of business. There is no one else with whom you are

obligated to share the profits, everything is yours, you are liable for the Income Taxes

that may be due because of the income that you earn out of the success of this business

and you are answerable for anything that may need to be said to any authority in any

matter concerning the conduct of the business of this type of establishment.

So, how do you get started to form a proprietorship concern? A couple of years ago

it was very simple. In the beginning, you had to decide what would be the name of your

concern.. Well, you could select any name you like, but there are certain restrictions as to

what would be allowable under the law. For example, you cannot use a word or a

collection of symbols or alphabets that may not have any plausible meaning in that

sequence, where the word or other sequence is a trade mark of anybody. That is, it is the

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trade mark of some commercial organisation and once it is there, they have exclusive

right to the use of that name or mark. Let me give you a simple example of things that

happened some years ago. In those days and even now when you want to make a

photocopy you say Lets get a Xerox of this document or else Lets make a Xerox of

these documents. So, many businesses sprouted all over the country and they used the

word Xerox in the name of that establishment and prominently displayed it in the sign

boards outside their business premises. For example, there could be Agarwal Xerox or

Mehta Xerox or anything else that could use this word Xerox.

Now, it so happens that the word Xerox was the subject

matter of a copyright or a trade mark of Xerox Corporation and for a long time, people in

India especially in the metros, had made the use of this word in the name of their

organisation without inviting the attention of anybody else. One day a newspaper

advertisement appeared, an ad issued by a firm of solicitors probably, where it informed

people that it was illegal for anybody to use the word Xerox in the name of an

organisation and anybody doing so would be required to stop it and change their name to

something else. Of course, the first advertisement did not warn of any dire consequences

but everybody could guess of things that would have come if they didnt do the necessary

amendments in the name of their establishment. So, that is one restriction while selecting

the name of your organisation, but I have seen many organisations that have the same

name and I have not come across of any instance where there has been made any legal

issue of such duplication in the commercial name of their organisation. Though

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it would be interesting to see what would have happen, if a cheque belonging to one

Company went off to another Company of the same name and that kind of a case I

havent heard of as yet too.

So, having decided on the name of the Company, say for example X Y Z & Co,

remember you cannot use Private limited or those famous abbreviations Pvt.Ltd. which

many youngsters find difficult to pronounce without a vowel anywhere in sight. Why

cant we use those words? We will get to know of that when you come to the section on

Limited Liability Companies.

Having decided the name of the business, in earlier

days establishing a proprietorship concern would have been as simple as say for example

making a rubber stamp of your Company, in this case X Y Z & Co. with a gap of about a

centimeter and then the famous words proprietor and you are signing in between after

impressing the stamp on any document. So, that is your rubber stamp over there but there

could be pitfalls in doing a simple thing such as making a rubber stamp. It generally used

to cost Rs.20 earlier but now I think prices have gone to Rs.40 plus, at least in the

biggish cities, and may be in the metros even more. Of course, it depends on the number

of words that there will be on your rubber stamp. Then you take delivery of your rubber

stamp, but before that make sure there is no spelling mistake over there.. These days

however, it is not just sufficient to have the rubber stamp only, you would be in most

cases be in need of a Trade Licence . Anyway, those who would like to know about the

trade license, which is the subject matter of Chapter III, you could fast forward to that

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chapter and read something about it and rewind back to here, to continue about the

proprietorship concern.

The Trade License is important for many things, for many reasons. In many cases postal

authorities will not deliver letters to your office unless you have a Trade License,

evidencing the establishment of the concern. The courier services do not insist on this

kind of a trade license. They are commercial people more interested to deliver their

letters and getting a return out of such service. The trade license would also be required

while trying to open a bank account. In the earlier days, opening of bank account was not

very difficult, you just had to go with your rubber stamp to the bank, fill up the form then

put your signatures in the place given for specimen signatures in the account opening

application, introduce yourself by someone who has an account with the bank and within

an hour or two, you will probably have your cheque book and your pass book ready for

you. These days however, when you try to open a bank account even if it is a

proprietorship concern, you could need an address proof and that kind of an address proof

would be a telephone bill or an electricity bill or a pass book, if you have an account in

another bank. Apart from this, the bank could ask you also for your PAN Card, though

we will talk about PAN Card later in the chapter on Income Tax (chapter VIII).

Let us add here that in the case of proprietorship concern, you would not have the PAN

Card in the name of your business say for example XYZ and Co .but the PAN Card

would be in the name of yourself as a proprietor i.e. it will be in your individual name

and that would be accepted without question by anybody. So, if you have 10

proprietorship concerns you will not be having 10 PAN Cards, but just one in your own

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name. And again you will not have 10 Income Tax Returns for your 10 proprietorship

concerns, but there will be one consolidated return containing the results of clubbing all

the incomes whether plus or minus of all the different organisations and other incomes

which may be generated from non-business sources. So, this is how a proprietorship

concern is established and you could do it very fast. You could do it even in a day though

opening a bank account will take sometime nowadays but this kind of a concern is the

easiest to establish.

You are now ready to get into the actual business of getting

orders executing them and letting the revenues roll in, though of course there will be

matching expenses, which hopefully will be much lower then what is coming in.

At the outset, you could possibly require registration in certain

departments of the Government depending on what type of business you are in, for

example, if you are in the business of selling goods then you could possibly require a

sales tax registration or VAT registration all of which will be discussed in one of the

subsequent chapters that will be coming up later. Again for example if you are starting a

hospital or a nursing home you could possibly be required to be registered or have some

kind of a license from the Health department and if you are an educational institution you

could possibly be registered with the Education department or with the All India Institute

for Scientific Education and any other statutory body or authority, though we are not

going to touch these things in detail over here as they are outside the purview of this

book.

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You can of course enter into an agreement on behalf of your proprietorship concern in the

name of the Company, i.e. in the name of the business organisation, you could make a

rent agreement if you are taking some space in rent or you can purchase your house or

office space in the name of your proprietorship concern and you could get electrical

connection, water connection, telephone connection in its name too. You could then

prepare a project report depending on whether you require it to be submitted to someone

who could possibly be supporting you either by giving you orders or he could be funding

you. He, she or the funding organisation could be giving you the finance to establish the

organisation, acquire the assets, do the trial runs, get the working capital assets in

position so that your ready to start manufacturing if you are a manufacturer or do the

necessary stocking so that you can start making sales, and anybody who comes looking

for a particular product in your organisation would not have to go away because you

didnt have that kind of a product in your inventory.

Financial Conduct

Even regarding financial conduct, the proprietorship concern is probably the least

restrictive in that it gives you sufficient leeway to do as you please. For example, if you

need to go to a marriage of your sister or your wifes sister and you need to buy her an

expensive present all you could do is probably write a self cheque and withdraw the cash

and show that amount in your individual name as withdrawn by the proprietor and it is

not likely to be objected by anyone except, maybe your banker, if you have borrowed

money a lot and he says that you are drawing money from his loans and using it for non-

business purposes.

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As long as you are using the money for personal reasons out of what is surpluses

generated by you in the course of business then there will probably be no

one who could object to that, provided of course you do pay your taxes which of course is

something that we all have to live with and which is of course expected from all of us.

There are certain situations where the proprietorship concern could be a bit of a risk. This

is because it is oppositely positioned visa vis the limited liabity protective cover

available to body corporates or Limited Companies, which we shall discuss in the

subsequent section of this chapter. Now, what is this? What it exactly means is that when

you have a proprietorship concern your liability is not limited i.e .you may be liable to

pay money to people because of certain circumstances, and proceedings can be drawn

against you, with respect to all your assets whether they belong to the business or not.

Now, you may say that if you dont have any loans then the risk factor is eliminated,

which is true, in fact to a very high extent it is eliminated but there are still circumstances

where certain liabilities could occur. For example, if for some kind of mis-happening,

somebody in your restaurant or in your hotel gets sick because of some food poisoning or

the other ,then if legally it is proved that your organisation was responsible for that mis-

happening, you could be liable to compensate the person or class of persons for damages

that they may have suffered because of the physical distress that they may have had to

undergo. In such cases and in cases for example, your business has ground to a halt,

it could be reasons which may not be your fault, for example, say a new research break-

through results in a competing product which has more attractive features, more utility

value and can be manufactured at a much lower cost than what is possible with the use of

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your product, then it is very likely that your business will very fast take a dip and unless

you re-define your strategy and go to some other product line, you could be out of

business. In that case, if for example you are indebted to banks or financial institutions to

a large extent, then things could be bad because they would take steps against your

properties and try to appropriate those assets after obtaining a court order and use the

funds obtained by realizing the assets against the amounts due to them i.e. to the financial

institutions or the banks. Now, if you are lucky and the sale of assets is sufficient to repay

what is owed to your lenders then the balance, if any comes to you and may become

available to you for starting some other business venture. If however, there is a short fall

then your lender can proceed against your personal assets and that gives a queasy feeling

to a lot of people and that is the reason that people like the Limited Liability Company.

Now, they could go for your car, they could go for your jewellery and if that is not

sufficient to liquidate those debts, then they can go for your house and sell it, adjusting

the proceeds against their debts and even if that is not sufficient to repay them then in

most cases it is a full stop to their efforts and there is little much they can do except lick

their wounds for sometime and forget the whole thing as some kind of a bad experience,

the lessons of which would prevent them from happening again in the future. So, things

could be really bad if you cannot pay out your loans and realization of your assets is in-

sufficient to clear all your liabilities, then in the worst case scenario you may be

completely out of all your assets

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The Partnership Concern:

The next form of organisation which is one step higher up in the ladder of complexity

associated with its creation is the firm or partnership concern. Well, everybody knows

what is a partnership, in that it involves more than 1 person who come

together to carry on the business venture whether it is a service organisation or a trading

organisation or a manufacturing organisation or any other business that there could be.

There is a law i.e. the Indian Partnership Act which governs the formation of partnership

concerns, the legal restrictions regarding the code of conduct, both financial and

otherwise, there are specifications as to how the constitution of the partnership can

change, be amended, added to and sometimes totally dissolved i.e. taking the partnership

concern out of the business by liquidating its existence. Well, in a nutshell we can say

that a partnership is a joint effort of persons who come together, where they have agreed

to do business jointly and decide that they would share the profits of their efforts in a

ratio that is decided in the outset i.e. at the time of the formation of the firm and the

corresponding ratio in which they stand to loose because of the depletion of the resources

of the firm because of negative business happenings. Well, a partnership concern too is

not very difficult to form. In most cases, it involves just the creation of a partnership deed

i.e. a legal document which specifies the terms of the partnership. First of all it specifies

the name of the persons who enter into the partnership, then there could be a specification

regarding the name of the partnership firm, the business of the partnership could be

specified in this deed and there could be specifications regarding the sharing of profits,

i.e how it will be shared by the partners in what proportion and the ratio in which losses

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Having drawn out the partnership deed, it is just a matter of typing it into an appropriate

stamp paper, at the current rate you need a Rs.100 stamp paper on which to type in your

partnership deed and for additional copies you could do it in Rs.10 or Rs.20 stamp paper

depending on which one is available because sometimes there are pretty prolonged

shortages in the availability of stamp papers of certain denominations. Of course this

deed of partnership has to be signed in each page by all the partners and in the last page it

has to be signed by all the partners too, but the deed has to be witnessed by at least two

unrelated persons who shall put their signatures and specify their names in full

preferably giving their addresses.

So, this is the basic partnership deed but you could take it one step further, in the sense,

that you could record the creation of this deed with the government authorities, which is

generally the Sub Registrar of the concerned district where you have drawn up the

partnership deed. In this case you are supposed to sign the partnership deed in front of

the Sub Registrar of the district and the partners too should be identified by a lawyer,

who puts his signature on the document as having vouched the identity of the concerned

partners who constitute the signatories to the indenture.

So, this is a registered partnership deed which may not be necessary, but which some

people would like to do and some in cases particularly now-a-days it is required if you

want to do an additional registration which is required to be done under the Registrar of

Firms and Societies of the concerned state. We shall take up this method a little later.

Having registered your partnership deed, the original then remains in the custody of the

Sub Registrars office and since you would always require a copy of your deed to be

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submitted to different places, for example, the most likely first use would be the opening

of a bank account, then your banker would naturally insist on the partnership deed to see

the authorization for opening a bank account, and as said earlier, who are the people who

are going to sign the account opening forms and thereafter sign the cheques withdrawing

money and making payments to people. So, certified copies will be needed to be applied

in the Sub Registrars office as and when required and in most cases at the time of the

registration of the deed itself, certain certified copies are taken to take care of all possible

combination of persons who may require the partnership deed. However, in most cases,

people who need the deed may ask for a photocopy of it, which again is certified by one

of the partners by a rubber stamp and at best the person who uses the partnership deed in

a photocopy form will say, May I have a look at the original which is available with you

or with the certified copy given by a Sub Registrars office and after having been

satisfied with himself that the photocopy is in agreement with the original, he or she

would probably return it to you.

Regarding the registration of the firm with the Registrar of Firms and Societies, there is

generally a form to be filled up in this regard.. In the earlier days, partnerships were

almost never registered under the Registrar of Firms and Societies but now many banks

which may lend money to the firms, insist that such firms should be registered with the

Registrar of Firms and Societies. And as indicated in the form all the partners have to

sign this partnership registration form and their signatures have to be certified generally

by a CA or a lawyer or it could be a Gazetted Officer.

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As stated earlier, in the case of partnerships like proprietorship concerns you have to

decide on the name and the same restrictive regulations apply in the selection of the name

as they do to proprietorship concerns and there is no difference between the two forms of

organisation in this regard. There could be two firms with the same name and I know of

firms which have actually been formed with identical names. However, it must be

understood that unlike the proprietorship concern, where it is the proprietor who is the

sole reason behind the organisation, in the case of partnership firms, it has a distinct legal

identity i.e. in courts of law proceedings can be drawn against it separate from its

promoters i.e. the partners. The first difference that may strike you in the case of a

partnership firm is that you need to have a PAN Card in the name of the firm which is not

possible in a proprietorship concern. But if you would have the Pan Card in the name of

the firm and since the firm is a distinct legally recognized organisation, unlike a

proprietorship, there will be no photograph over here and however much, you would like

to have a photo of an attractive partner of the concern, I am sorry to say that that would

not be possible though it may be good for business. The PAN Card would of course state

the date of incorporation of the firm which in most cases would be contained in the

partnership deed and there would of course be no fathers name over here because the

concern does not come into existence from natural procreational procedures.

So, that is the partnership deed that you have made and now you are ready to do

business. Like the proprietorship concern, the first thing would be to have a Trade

License and once you have the trade licence, you could open a bank account, apply for

loans, go to the post office and ask your friendly postman to deliver letters to the firms

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recognize it as a deductible item from the income of your business and to that extent the

firms income that would be subject to tax would get reduced.

1.The sleeping partner

As the name suggests is a person who is a partner in the firm but who does

not actually take part in the day-to-day running of the business or even otherwise not at

all involved in the conduct of the business of the firm. Such a person may have invested

cash or other assets that are required to do the business of the organisation or could be a

person whose reputation increases the desirability of the concern to potential customers

who may be swayed in your direction away from competitors because he has that

appeal that makes him an asset to your firm.

2.The Managing partner

As the term suggests the managing partner is a person who is entrusted with

the management of the affairs of the firm. Generally, there is not more than one

managing partner though there could be and in most cases they are generally

compensated for their efforts by giving them an extra salary that is deducted from the

profits of a firm and the residual that is available is then divided amongst the partners in

the agreed profit sharing ratio.

3.The Financial partner

A financial partner would be, as is obvious, someone who has invested

money required to carry on the business and who is not involved in the day-to-day

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some point or the other. In that case, in most cases the legal heirs stand to get the

deceased partners share collectively, to get whatever would have been due to him from

the partnership firm if he had decided to quit it and I guess that is how accounts would be

settled in the case of the death of a partner.

3.The Limited Liability Company

This is the form of organisation which would make the share holders of a Company

happy, which you as the promoter would be the principal one and you would be

protected from the risk associated with unlimited liability. This is the Limited Liability

Company and the word limited is always there at the end of the name of your corporation

and this brings a sense of security in investors or equity share holders because here is a

company where if something goes wrong then the risk of the investor or the share holder

is limited to just those amounts which he owes to the company in respect of amounts due

from him as his contribution to the shares of the company. As said earlier, unlike in the

proprietorship concerns and partnership concerns, here if because of some business

disaster you are out of it and you have heavy debts then your borrowers can only proceed

against the company to the extent of available assets and have those assets realized and

the proceeds adjusted against their loans, and if there is any surplus left that could be

utilized in the appropriate manner as allowed by the Companies Act, which determines

the way in which the company is to be administered and its business conducted.

Therefore, the amounts due are to be paid from the realizations of the sale of companys

assets and if they are insufficient to repay the amounts due to the lenders or money of to

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write a self cheque and withdraw it from your companys account and use the money for

personal reasons. There are restrictions as to how you will take money out from a

corporation for your personal benefit. We will come to this point later, after you had a

little information about how we can go about forming a company and how expensive it is

and how long it takes. Before we go into the details of this, we would like to point out

certain things that are important to know regarding the limited liability company.

In fact, there could be 2 types of limited companies, there is a third one too, which is very

rarely used but there are essentially 2 types of a company namely:

1.Private Limited Company

2.Public Limited Company

As the word private in Private Limited Company suggests the

share holdings in Private Limited Companies are generally restricted to a limited number

of persons consisting generally of relations, friends and business associates who are

known to each other or professionals who come in to the conduct the business in an

efficient manner. And in the case of a Private Limited Company you must have a

minimum of two share holders and a minimum of two directors and the total number of

share holders shall in no case exceed 50, except that in certain cases employee

shareholders of the company may not be counted in determining whether the upper limit

of the 50 shareholders has been crossed or not.

Now, the other type of company that is used is a Public Limited Company, where the

word Private does not precede the limited at the end of the name. The essential

ingredients of a Public Limited Company are that it must have a minimum of seven share

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holders and 3 directors and the upper limit of the shareholder count of 50 that is

applicable to private limited companies is over ruled here. In the case of private limited

companies the share holdings of persons may not be transferred to the persons who may

not be allowed by the Board of Directors of the company or by the document known as

the Articles of Association of the company which we shall discuss in detail later. This

document, the Articles of Association is the listing of the provisions which have to be

adhered to while conducting the management and business of the company. In case of a

public limited company, the shares are freely transferable and the directors or the share

holders cannot block the transfer to anyone they dont approve and that is you cant

blackball anyone who you dont want to be a shareholder of your company. Another

important thing about the public limited company is that it can publicly raise money from

investors by following the necessary provisions, the legal provisions, in this regard and

which cannot be done by a private limited company.

Another interesting ingredient which has been relatively recently incorporated in the

Companies Act is that the minimum paid up capital of a company, whether private or

public must be at least Rs.1,00,000 which was not the case some years back.

So,what is this body corporate? It must be remembered that a

company like a partnership concern has a distinct legal existence. You could refer it to as

an artificial juridical person which can be proceeded against by the law and which is

responsible for the conduct of its affairs or complying with various provisions of the laws

that may be applicable to corporates, like for example The Service Tax Act, The

Employees State Insurance Act, The Workmens Compensation Act or other Acts. The

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share holders too are distinct from the company but they have the ultimate say

in how the business actually has to be conducted ,though the share holders are not

directly involved in the day-to-day management of the business. In fact, all companies

are managed by a Board of Directors and as told earlier there should be a minimum of 2

directors in case of private limited company and 3 in the case of a public limited

company.

How to form a limited liability company?

The clauses below give the steps involved in the formation of a limited company

whether private or public limited:

1. Decide on the name of the company, select three or four additional alternative names

and have the name approved by the ministry of the company affairs.

2. Decide on the value of the authorized capital (all this will be discussed later).

3. Decide on the first directors and the promoters of the company.

4. Draft the Memorandum of Association and the Articles of Association and have them

printed.

5. Have the Memorandum and Articles signed by the promoters of the company and then

have them stamped with adhesive stamp of the requisite amount.

6. Make ready the form nos. 1, 18 and 32.

7. Have the necessary Memorandum and Articles and the forms filed in the ministry of

company affairs website and pay the requisite fees.

8. Go with an authorized professional to the appropriate registrar of companys office and

have the companies registered.

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The Name Of The Company

The name of the company has to be approved by the department of company affairs

through the registrar of companies and there are certain restrictions in according the

availability of a particular name to the company. For example if your company is small as

indicated by the size of the authorized capital, you may not be allowed to use words such

as enterprise or corporations which brings images of a huge size. When deciding about

the name of the companies select three or four additional names in case the first and

second are not available then you have alternate names which could be approved

provided they are available. Remember in the case of limited liability companies no

duplication in the name is allowed.

The Authorised Share Capital:

The authorized share capital of a company represents the upper limit of the extent to

which shares can be raised or issued by the company. Therefore, if your authorized

capital is Rs.5lakh then you cannot have more than Rs 5 lakh worth of shares in the

company. So, when deciding what should be the authorized capital of the company, make

an assessment of how much would be necessary to be raised by the company as share

capital. This would depend on the magnitude of the project cost in order to commence

the business of the company. Another thing, registering a private limited company is

expensive and as the authorized capital increases the fees payable for registration of the

company also increases. There is no need to have a limited liability company with an

authorized capital of 50lakhs if you need only 10lakhs as equity share capital. So, this is a

point that you could discuss with your chartered accountant or lawyer or consultant in

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So, it can be said that the share holders control the company through the directors they

appoint. And another appointment that the shareholders make is the auditors of the

company. who will verify and audit, the accounts of the organisation annually and the

board shall have that audited accounts in the form of the profit & loss account and

balance sheet, submitted in a meeting of the shareholders at the Annual General Meeting.

The Annual General Meeting:

The agenda for this meeting mostly comprises of election of directors, adoption of

auditors report and discussion on the accounts statements, the declaration of dividends

which is a source of earning in respect of shares held by the share holders of a company,

appointment of Auditors. Apart from this any other matter can be discussed with the

permission of the chairman of the Annual General Meeting.

The financial Conduct:

As we have seen earlier in the case of proprietorship and partnership firms withdrawing

money from the business is as simple as writing an account payee cheque or a self cheque

to the person who needs the money and thereafter, there is very little that any one can

object to such a course of action. As stated earlier the only person who is likely to object

is if a lender thinks that his money, the money that he has lent is being used for personal

considerations, then that would be a legitimate injunction against that kind of financial

conduct.

However, in the case of limited liability company the shareholders can get

salaries only if they are directors of the company and that too involved in the

administration management affairs of the business of the company.and in which case the

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The essence of a co-operative society is that certain persons get together for mutual

benefit by co-operating with each other in the pursuance of certain business or

commercial activity. However, there is a difference in the shareholders right from that of

a limited liability company in the sense that in a limited liability company your voting

rights in the affairs of the company depends on how much shares you hold in the

company. The more shares you hold the more votes you have with you to swing decisions

your way. However, in the case of a co-operative society irrespective of the share

holdings of individual shareholders their voting right is the same for everybody.

Similarly, the Board of Directors or the management of a co-operative

society is generally statutorily required to be changed after a specified period of time.

The time period is specified in the concerned Act and the government of the particular

state has a say in the composition of the Board of Directors of the co-operative society.

Like the limited liability company the co-operative society is a taxable

entity on its own and is liable to pay income tax in respect of profits earned by the co-

operative society in the course of its business.

A Society Registered Under The Societies Registration Act.

Non-governmental organisations or NGOs for short are combination of people who

come together to carry on some object of public utility and earning profit is not part of

their objective except that it could be incidental to the carrying on of their normal

activities.

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look at it to find it if it is valid for the current year. So, that is a trade license a very

simple document and whether you are a partnership or proprietorship or limited liability

company or co-operative society or any other organisation you are liable to have a trade

license.

The trade license has to be renewed annually.

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Chapter IV

Sources Of Funds From Banks And Other Financial Institutions

Also Investment banking, Personal Banking, Insurance, Stock market,Mutual Funds, Money Market and Secondary Market and IPO(Initial Public Offering)

Stock markets, IPOs or Initial Public Offerings, Fixed Deposits,

Secured / Unsecured Deposits, Mutual Funds, Derivatives ,

Commodities Exchange, Money Market and Primary and

Secondary Markets

Suppose you have decided to commence business on your own, there is a likelihood that

you may not have all the funds that may be necessary to make your venture operational.

In that case, apart from your own funds, which is called your capital contribution to your

business, you will need to borrow funds from elsewhere. You may decide not to borrow

from your friends or relations in which case a more agreeable source of funds would be

people whose business it is to provide funds for business such as banks and other

financial institutions.

Some Examples OF Borrowings Possible From Banks And Financial Institutions

Now, there are various types of funds that are available from banks. Let us discuss this in

a little bit of details so that it can give you an idea of what are the facilities that can be

made available to you .

Term Loans

In order to purchase the fixed assets for a business, banks provide term loans which can

be secured or unsecured. A term loan as the name implies is a loan which is repayable

over a number. of years in either equated monthly installments or quarterly installments

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or by bi-annual or annual installments. For example if you are in the business of taxi

hire, you will need money to buy taxis in which case banks can provide you the necessary

term loan to buy those fixed assets that you require for the business. So, if you are a

manufacturer, you may require funds for buying plant and machinery, if you are a non-

manufacturing concern you may still require a term loan, for example for buying

computers, furniture and fixtures, Air Conditioners, and other office equipment and

fixtures such as showroom facilities for stocking of goods for retail sales or wholesale

marketing The term loan carries a fixed rate of interest and it is generally the case that if

your total cost of plant and machinery is, say Rs.5 lakhs, it is very unlikely that you will

get all the Rs.5 lakhs from the bank. They would insist on a margin to be contributed as a

owner of the firm and this margin percentage varies according to the policy of the bank.

It can be as low as 25% or it could be as high as 40%-50%. In this case if the bank insists

on a margin of 25% then the owner will have to bring in 1.25 laks and the bank would

give a term loan of 3.75 lakhs. So, this is the term loan. It can be secured and it is

generally the case that it is secured by the assets acquired. The assets are hypothecated

to the bank or financial institution which finances the acquisition and in case you are

unable to repay the loan the bank has the option of arranging for the sale of the assets

and use the proceeds to be adjusted against the loan given to you and the surplus if any

left after the repayment of the loan is made over to you , or if there is deficit, call for

alternate funds from you to make up the deficit in the loan that could not be satisfied by

the proceeds of the sale of the assets. So, this in a sense in a nutshell is the term loan.

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Overdraft in the current account and cash credit:

Thesetwo types of finance, the overdraft in the current account and the cash credit are

used to finance the working capital needs of your business. Now, what exactly is working

capital. Working capital is the investment made by you in respect of goods, materials,

stores and spare parts that are required by you to make the make the products ready for

sale, or if you are a trader that amount invested by you in finished goods which you will

sell to your customers . For example to start a business and you need to stock up, say,

Rs.10 lakhs of goods in order to sell them from your retail outlet. In that case, here again

the bank will not give you a cash credit limit or an overdraft facility against a current

account to the whole extent of Rs.10 lakhs required by you. Here also they will insist on

a margin of 25% at the minimum generally, which means they would be able to give a

limit of Rs.7,50,000/- and the shortfall of Rs.2,50,000/- you have to make up from your

own resources or alternate sources of borrowings. Now, this cash credit limit or overdraft

limit is generally secured, that means the bank holds a security against the advance made

to you in the cash credit account by hypothecating the goods that you purchase using

those funds and which will be sold and the earnings then deposited into the cash credit

account and again reused to acquire fresh material. Cash credit limits and conditions are

set out in the banks sanctioning letter. If for example, they say that they grant you a limit

of Rs.1lakh, then when the cash credit account is set up and you get the necessary cheque

book to operate the account, you can write cheques to a total of Rs.1lakh and you will

have to make up any interest that may be charged in that account so that at no point of

time the balance in the cash credit account overshoots the limit set up by the bank. It is

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Letter of Credit or LC:

Now, thisis an important financing device available from banks. For example, suppose

you have an order from a party not in your state or out of where you are, for the supply

of certain of goods that you deal in, and let us assume that the whole transaction is

Rs.10lakh. Then you can make an arrangement with your customer that he should obtain

an irrevocable letter of credit in a particular bank in your name. What happens then is

that as soon as you ship the goods ordered by your customers and you submit the

shipping documents to the bank where the letter of credit has been made in your favour

then the amount due on the letter of credit , say for example Rs.10lakh is paid to you

from the letter of credit account of your customer into the bank account of your choice.

Shipping documents are railway receipts , transporters bills, airway bills along with your

invoice. On the reverse side if you are buying from a foreign seller or from anyone else

outside your town or state or even from your city then your seller who is going to sell

you the goods may insist that you open an irrevocable letter of credit in his name to the

extent of the amount due in the supply order. For example if you order goods worth

Rs.5lakh from an international seller he may insist for a letter of credit of Rs.5lakh. In

that case you open an irrevocable letter of credit in your bank on behalf of your seller. As

soon as the seller dispatches the goods to you, submits the shipping documents to the

bank which has issued the letter of credit or LC then the amount of Rs.5lakh gets

transferred to the sellers account.

Letter of credits are also in most cases secured advances given by the bank and you are

expected to repay them within a specified period, which is mentioned in the sanctioning

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the organisation and then partake in the surplus generated from such disposal and in

many cases the profits earned by the venture capitalist by using this source of fund is

phenomenal. This source of fund is generally taken recourse to by people and

organisations who may not have access to conventional sources of funds discussed in the

earlier section on the sources of funds. Typically venture capitalists are either

institutional investors or very rich i.e high. net worth individuals who have a lot of

surplus cash and use this money to invest in what could be considered to be risky

ventures but if successful the returns could be phenomenal.

ANGEL CAPITAL

Angel capital is similar to venture capital in the sense that they provide equity to firms

generally involved in a start-up business in a high-tech area and with the expectation that

with the sale of the shares through a public issue or the sale of the company phenomenal

profits shall accrue to the original investors of angel funds. Now, since the angel funds

are similar to venture capital let us look to a few important differences between venture

capital and angel capital in order to bring out the essential characteristics of each.

Angel investors are generally rich investors acting alone or in consortium and .

Venture capital on the other hand is predominantly provided by the corporate

organisations, though high net worth individuals could also be involved in providing

venture capital funds.

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In the case of angel capital the amount of investment is limited compared to that of

venture capital fund and could be as low as $25,000 to a upper limit of $100,000 and

where the investors are acting in groups the total amount of angel capital provided is

more or less limited to a value of about $1million. Venture capital on the other hand

starts from about US $500000 and can be as high as $10million and even more. In case of

angel investors they do not restrict themselves only to high-tech areas unlike venture

capitalists who more or less predominantly focus their investments in high-tech

organisations Angel investors on the other hand look more for growth and potential for

earning super profits. So, these are the essential differences between venture capital and

angel capital.

PUBLIC ISSUE OF SHARES

Unlike private limited companies public limited companies can issue shares to the public

by inviting applications where the terms of the issue of shares are set out in a document

called the prospectus. Now, the shares that investors acquire by subscribing to the public

issues are tradable in the stock exchanges because such shares are what is known as listed

in the stock exchanges. Depending on the investors mood shares can be subscribed many

times more than what the company intends to raise as fresh capital. In such a case the

surplus has to be refunded and the allotment of the shares to the different applicants has

to be done according to the guidelines of the Companies Act and the stock exchange

of India who has to be consulted before such shares are issued. Public issue of shares are

generally undertaken by companies which are big and it is unlikely that small companies

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will undertake public issue because of the cost associated with the handling of such an

issue.

DEBENTURE ISSUE

Debenture issue is another source of fund that is available to public limited companies.

Unlike equity shares that that we discussed earlier debentures are debt instruments in the

sense that people who own debentures in a company have a claim to recover that money

from the company if there is a default and such instrument is from the point of view of

the company issuing debentures a debt of that company. Therefore, debenture holders

are not entitled to dividends from the company unlike equity share holders but they are

entitle to interest specified in the contract or prospectus i.e. issued at the time of inviting

applications to acquire debentures in the company. Debentures are also negotiable

instrument in the sense that they can be transferred freely and traded in the stock

exchanges and the current holder is entitle to the redemption proceeds if the company

decides to pay off its debts under its debentures. It may be mentioned here that currently

debenture issue is not very prevalent or used as a source of fund by companies though it

used to be done in the earlier years.

FCCB or FOREIGN CURRENCY CONVERTIBLE BONDS

As the name of this source of fund suggests, money from this source is sent in foreign

currency by the person making the investment for the purpose stated in the contract

calling for the investment of money. These foreign currency convertible bonds are debt

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instruments in the sense that they are entitled to a fixed range of interest though in order

to make them attractive to the investors they are sometimes given a stake in the profits of

organisation which uses these funds. Foreign currency convertible bonds have periodic

payment of interest and as well as of principal as per terms contained in the instrument

calling for the investment of such fund. The name convertible within such an

investment source suggests that at the option of the investor after an efflux of time or the

happening of some event the investor may at his option ask for the conversion of his bond

into equity from which date onwards he would no longer be entitled to interest but he

would be entitled to other forms of profit repayments such as dividends paid by a

company and also profits also from the sale of such shares in the stock exchanges

because such equity shares would necessarily be tradable in the stock market. Another

plus point of the foreign currency convertible bond is that it is cheaper than another

source of financing that we will discuss later and that is External Commercial

Borrowings that is available to certain companies and organisations.

DEPOSIT / FIXED DEPOSIT

Companies both private and public can take deposits, sometimes also called fixed

deposits from other people where such deposits carry interest at a particular rate. The rate

of interest on fixed deposit cannot exceed 12.5% and such deposit cannot be made

repayable on demand or repayable less than 6 months or more than 36 months of their

acceptance. There is another limitation regarding fixed deposit in the sense that there is

an upper limit to which a company can accept deposits from people and other

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time but there has been various banking innovations and adaptation which makes the

personal banking function more convenient and a pleasant experience to maintain

Opening of a bank account in earlier days involved ,generally, the

filling up a form, making an initial deposit having yourself introduced by another account

holder in the bank and within an hour or two generally you could have your cheque book

and initial pass book and you are ready to operate your bank account. Now, these days

however, the act of opening a bank account an take a couple of days because there are

directives, Reserve Bank Regulation/directives that before opening a bank account apart

from having a new client identified or introduced by a person already having an account

in the bank he will have to produce his user ID or personal identity proof which is

generally in the form of a bank pass book , driving license or a copy of a life insurance

policy or educational certificate. Apart from this he or she would also have to provide an

address proof which will vouch for the address given to the bank. In some cases even

if you are not an income tax assessee banks can still insist on a PAN card prior to

opening of your bank account.

Now-a-days, with the widespread use of computers, internet and mobile cell phones

certain convenient facilities have been offered by the bank to carry on your banking

function in your personal accounts. For example if you are a cell phone user you can

apply for mobile alerts of transactions that happen in your accounts , like for example,

that certain money has gone out from the account because of having paid by somebody

by cheque, then the fact of having that money paid isintimated by a SMS. Apart from

this deposits are informed and any other operation such as thatof charging interest is

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the tenure of the insurance policy the person is assured of receiving the sum assured plus

certain pre-agreed share in the surpluses that arise from investment of the premiums.

Now, at the other end of the scale there could be a lure for bigger profits by having your

premium funds invested in a relatively high risk manner involving stock market

operations like purchasing of equity, or preference shares, or debentures and upward

movement in the value of these investments will be available to the holder of the

insurance policy. There can be a reverse happening in the sense that money may be lost

by the holder of the insurance policy if there is a downward fall in the prices of shares,

debentures over a period of time. Insurance policy features also provide option to the

holder of the life insurance policy to switch his funds between different types of

investment avenues in terms of the associated risk. For example at a particular point of

time when the stock market does not look profitable, then low risk deposits such as

govt. bonds are selected or in case where the share market is moving upward it may

direct that a major part of the funds may be transferred to the equity or preference shares

where higher returns may be had by the policy holder.

Apart from Life Insurance you can have poliices on kids, for example , because of

the high cost of education you can also have an education policy where you insure

yourself such that the policy may mature at a time when it is time to pay for high

school fees or college fees. If you have such an insurance policy then you may not need

to take an educational loan to finance your childs education expenses.

Apart from these type of insurance policies there are two additional

categories of insurance i.e.

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a. accident insurance

b. medical insurance

Accidental insurance is moneys that comes to the policy holder suffering from an

accident injury and that money can be used to meet medical expenses or make up for

lost of earnings while undegoing medical treatment .

Medical Insurance is important particularly for elf employed people and as well as

company employees or other organisations where their health expenses are not

reimbursable, in that case if they have medical insurance policy then hospital bills, cost of

medicines and even loss of income is compensated by the insured company during the

treatment process.

Leveraged Buyout

A leverage buyout is a process of acquiring one company by another company using

borrowed money to make the acquisition. The amount of money that may be borrowed

could be as high as 100% but it is generally the case that 90% is borrowed funds and the

balance is equity funds of the shareholders of the acquiring company. Because of this

high risk of debt compared to equity and the associated risk of having such high amounts

of debt these bonds have earned themselves disparaging nomenclature junk bonds. The

assets that are acquired from the bonds are given as collateral against the bonds and as

well as the assets of acquiring company so this is a leveraged buyout. Though leveraged

buyouts are common features in developed economies but not so in developing

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economies like India, Pakistan or other Asian countries who have not made it to

developed economies.

Stock markets, IPOs or Initial Public Offerings, Fixed Deposits, Secured /

Unsecured Deposits, Mutual Funds, Derivatives , Commodities Exchange, Money

Market and Primary and Secondary Markets

Stock Market

Stock market or stock exchange is a place where financial instruments like equity shares,

preference shares, debentures, govt. bonds can be bought or sold at rates prevailing on

that particular date. For example if you have shares in a public limited company and you

want to sell them, instead of looking for a buyer on your own you can instruct a broker to

sell the shares for you at a particular price and he will sell it if the price is at least equal

or more than what you have said, though before selling it at a lower price than the base

price he may call you and ask to take your go ahead for affecting the sale. Therefore,

stock markets, you could say provide the opportunity and facility of acquiring financial

instruments in the form of shares or bonds, or in disposing of securitiesfor a particular

price if you require funds for a particular purpose. In order that a particular bond or a

share of a company allowed to be sold in the stock market, that company will have to

have its shares listed in the stock exchange by paying necessary fees and submitting

necessary forms and agree to comply with the terms and conditions of the stock market.

So, this is the stock market.

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Now a days , however, unlike in the earlier days where it is very essential to go through

a broker either to purchase or sell shares and the broker takes some sort of commission

and affects your sale and hands over the proceeds at the appropriate time, it is possible to

go online in respect of shares and other securities by having what is known as a demat

account with a financial institution or a bank. Once a particular demat account is set up

then to the extent of money that you have in that account or to the credit limit that is

allowed to you can buy and sell shares online and a complete account is maintained in the

database of that account of your holding. You can use your holding to have it

hypothecated as a collateral against loans or financial facilities that you may avail from

someone, particularly a bank or financial institution. Accounts are generally kept by the

banks and they obviate the necessity of brokers, you can do it directly online and you can

ultimately move the shares without having to go to the company with the share

certificate and ask them to transfer them to you. It happens online and the record is

made of your holdings on different shares in that account of yours.

Equity Research

Equity research is the function of making the analysis of the value of particular shares in

the short term or long term. It takes into account various factors like what is the earning

per share of the company, what is the value of shares prevailing in the market at that

particular time and the technology aspect of the organisation whether it is up to date or

likely to become redundant because of new technology innovation and using these kind

of information you make a valuation on the share of a particular company both in the

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short term and in the long term. When it is long term some imaginary factors come into

play, such as future expectations of the financial scenario likely to prevail in the long

term. So, the price of such shares depends upon future expectation of what the financial

picture going to be like in the future.

IPO or Initial Public Offerings, Primary And Secondary Market

IPOs are initial shares and bonds issued first time to the public for being raised as capital

. It is a transaction which happens between an investor and the company . So, this is

known as an Initial Public Offering and it happens once only. When a particular share

or bond is put up for initial public offering there is a document called the prospectus

which contains the terms and conditions of the issue and the prospects of the company

issuing the shares. Application money from the potential share holders is collected

generally through various branches of banks and after the money is received if there is a

surplus the excess has to be refunded and from the balance shares are allotted to

different share holders in the manner and ratio that is stipulated by the stock exchange

regulatory authority and also done in consultation with the stock exchange regulatory

authority. So, this is the initial public issue. Anyone who acquires shares can later on sell

them through stock exchange to potential buyers and here the deal that does not involve

company. Its a deal between two investors, so this kind of a thing is known as a

secondary market operation. A primary market is the market where direct capital is

raised from potential investors and in the secondary market liquidity is made available to

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the shareholder by having the ability to sell the shares in the stock exchange to potential

customers . So, this is essentially the primary and secondary market.

Mutual Funds

Mutual funds are funds set up for investment from many investors who do not have the

time or information to research and decide which company shares to buy and in what

quantities and price. This is left to a specialist and the fund is created by investments

from investors and this fund is under the control of those who know how to invest

and do it in such a way that the wealth of the investors in the mutual funds is maximized

to the utmost .. Mutual funds can be redeemed at market prices by selling the

shares/securities in the market or make additional investments depending on the terms

and condition of the mutual fund.

An investor is allotted units in the fund depending on how much he has invested and the

market value of invested securities divided by thr total unir is known as the Net Asset

Value orNAV for short.

Derivatives

The derivatives is a financial instrument whose value depends on the underlying assets

backing/controlling it. For example a loan due from someone or the value of assets held

by some one as evidenced by the legal instrument confirming the control is known as a

derivative. Such instruments have value and they can be traded in a derivatives exchange

just like any other exchange or financial marketplace. For example if a person has a

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warehouse receipt of a lot of tons of rice then it can be traded in the derivative market

for having it sold/purchased in the market so that the ultimate holder of the document

will have a right to withdraw the rice contained in the warehouse to sell it or do whatever

he wants to do with the derivative. Such derivatives are therefore known as financial

instruments and the underlying asset could be anything, not only agricultural products it

could be loans, it could be landholdings, or residential loans or anything else and they are

known as derivatives.

Commodities Exchange

A commodity exchange is similar to stock exchange but the only difference over here is

that instead of shares and financial instruments here commodities are traded.

Commodities can be anything it could be agricultural, non-agricultural commodities that

are required for consumption or investment by any person or organisation involved in

the cultivation/manufacture. Trading is done in the form of documents evidencing

possession or a right to the commodities, for example the receipts of a particular

warehouse for agricultural commodities or different kinds of commodities and these

can be traded in the commodities exchange just like a share transaction in stock

exchange. Of course there could be fluctuations in the prices there could be ups and

downs depending on how you position yourself with reference to the commodity. You

may earn a huge profit if there is a rise or in the reverse you may suffer a loss if there is a

rise or you may gain/profit if there is a diminishing in the value of the commodity. In

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India the commodity exchange have started becoming online and in such kinds of

commodity exchanges like NCDEX, you can trade through the internet by being

registered and complying with the rules and regulation and the fees required for being

enabled to trade in that exchange. So, this is what commodity exchange is all about.

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Chapter V

The Contributory Profident Fund Act and The Employees State Insurance Act

The Contributory Provident Fund Act:

If you are a businessman then you may be liable to deduct Provident Fund from the

salaries of your employees, make a matching contribution of your own and have the

combined sum deposited into the bank account of the fund by a challan for Provident

Fund payment along with the some administrative charges. Now, when are you liable to

deduct Provident Fund and make payments after making a matching contribution of

your own ?

1. If you are doing business with power and you have 10 or more employees whose

salary is less than or equal to Rs.6,500/- then you are liable to deduct from the salary,

provident fund and make your own matching contribution of the deduction and have it

deposited to the bank by a challan in respect to Provident Fund deduction and

contribution.

2. If you are doing business without power and you have 20 or more employees whose

salaries is less than or equal to Rs.6,500/- then again you are liable to deduct Provident

Fund make your own matching contribution and administrative charges and have the

resultant sum deposited under the Provident Fund head account in a nationalized bank.

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Now, what is the meaning of salary which is required to be less or equal to Rs.6,500/- in

order to make an employee eligible for Provident Fund benefits. Salary in this case is

Basic Pay plus Dearness Allowance and all other allowances are ignored. Amount of

Provident Fund deduction and percentage of matching contribution where in respect of an

employee a deduction has to be made of Provident Fund shall be made at 12.0% of basic

pay plus Dearness Allowance. Therefore, if an employee earns Rs.5,000/- per month i.e.

basic pay plus Dearness Allowance then a deduction of Rs.600/- has to be made from the

salary of the employee, reducing his take home pay to Rs.4,400/-. Along with the

Rs.600/- deducted from the employee, the employer has to make another matching

contribution of Rs.600/- from his own pocket or resources, and make the same

calculation with respect to all the employees eligible for Provident Fund deduction.

Apart from the total value of all deductions plus contribution an administrative charge

which is 1.61% of the Provident Fund deducted plus employers contribution. The

Resultant sum has to be paid by challan into the Provident Fund account with the

government.

The due date for depositing Provident Fund dues plus contribution with the bank.

The challan for Provident Fund payment along with the necessary form has to be

deposited into a relevant nationalized bank which is generally the State Bank of India and

this should be done within the 20th of the succeeding month i.e. for the salary of April the

Provident Fund dues has to be deposited within the 20th of May. A copy of the form 12A

and challan evidencing the payment of Provident Fund dues has to be deposited with the

concerned Provident Fund office by the 25th of the succeeding month.

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Apart from the payment of Provident Fund dues, a yearly return has to be made in Form

3A , 6A with the relevant Provident Fund office. This Form 3A , 6A in respect of year

ended on 28th February has to be filed within the 25 th of March immediately following

the end of the 12 months period . .

Registration under the Provident Fund Act:

Before you begin deducting Provident Fund and making your own matching contribution

along with administrative charges, you have to register yourself under the Provident Fund

Act with the relevant Provident Fund office of your area. The procedure of registration is

as follows:

1. The form Business Number Allotment Form , Coverage Proposal Form, Forms 2 and

5A has to be filled up.

2. Documents such as Pan card copy , Trade License has to be annexed with the

necessary registration form.

3. The Provident Fund for the first month has to be paid by draft favouring the concerned

Commissioner of Provident Fund of that area.

After that you will be entitled to registration and then you can normally make your

Provident Fund deductions and contribution and make them over to the bank by a

relevant Provident Fund challan.

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The Employees State Insurance Corporation Act:

Employees may be covered under the Employees State Insurance Corporation Act

depending on the salaries they earn and if they are covered then employees state

insurance has to be deducted at a particular rate from their salaries. The employer has to

make a certain contribution in respect of each covered employee at a percentage rate

specified in the Act and make over the total by a challan under the Employees State

Insurance Contribution Act. Employees covered by the ESIC Act are entitled to medical

benefits in the relevant ESIC hospitals and other facilities as specified details under the

Act.

When is a concern liable to deduct employees state insurance and

make contributions of its own.?

1. If you are carrying on business with power and have 10 or more employees drawing

less than or equal to Rs.10,000/- as salary, inclusive of all allowances then you are liable

to deduct employees state insurance contributions and make them over to the concerned

bank account of the Employees State Insurance Corporation via a challan.

2. If you are carrying on business without power and you have 20 employees drawing

salary ,inclusive of all allowances, of less than or equal to Rs.10,000/- then again you are

liable under the Employees State Insurance Corporation Act.

The quantum of deduction to be made and a contribution percentage

to be made by the employer.

The employer is liable to deduct from the employees salary 1.75% as employees state

insurance corporation contribution. And to this 1.75% of a particular employee, the

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employer has to pay another 4.75% of the salary as the employers contribution , make a

similar calculation for all the employees covered by the Act and pay over the total to the

relevant bank account for ESIC contribution via a challan.

Due date for depositing Employees State Insurance Corporation contribution:

The due date for making over the Employees State Insurance Corporation payments due

to be made by an employer is to be done within the 20th of the succeeding month i.e. for

an employer in respect of salaries for the month of April the payment of Employees State

Insurance Corporation contribution has to be made within the 20

th

of the succeeding May.

Half yearly returns:

Half yearly returns in the prescribed form i.e. form 5 has to be made by the employer

within 42 days following the end of the 6 months period i.e. 6 months period ended on

September, the half yearly return has to be made within the 12th of November, for the

half year ended on March the half yearly return has to be filed within the 11 th of May of

the relevant year.

Registration Under The Employees State Insurance Act:

Like the Provident Fund Act before you begin to make Employees State Insurance

Corporation deductions and make the contributions over to the Government, you are

obliged to have your organisations registered under the Employees State Insurance Act.

The procedure for obtaining the registration is the following:

1. A form 01 has to be filled and signed by the principal officer of the organisation in

most cases it is the owner of the organisation.

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2. The following documents are to be annexed along with the application for registration:

a. Trade License

b. PAN card copy

c. Address Proof

The due date for depositing the Employees State Insurance Corporation contribution with

via challan is to be done by the 20th of the succeeding month..

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CHAPTER VI

The Service Tax Act

The Service Tax Act specifies the categories of services in respect of which service tax is

payable by the person providing taxable service at the rate specified under the Act. Now,

most services fall within the Service Tax Act and in all 132 numbers of service

categories have been specified as liable to Service Tax . The listing of the services is as

follows:=

LIST OF TAXABLE SERVICES

Note: The list of services and the periodicity for filing returns and payment of taxes and

registering are sometimes subject to change from year and so regarding current

compliance confirm with your lawyer or CA or The Internet

1. Advertising services

3. Air travel passenger booking services

5. Air Transport

7. Air Travel Agents Services.

9. Associations Membership.

11. Architect

13. Auction service

2. Advertisement services

4. Airport service

6. Asset management services

8. Automated teller machine operation,

maintenance or management service.

10. ATM Operation, Maintenance or

Management Services.

12. Authorised Service Stations for Motor

Vehicles Servicing or Repair.

14. Beauty Parlours.

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15. Business Exhibition Services.

17. Banking and other financial services

19. Business support services.

21. Cargo handling services

23. Chartered Accountant

25. Clearing and forwarding service

27. Commercial Training and coaching

29. Coaching services.

31. Commodity Exchange Service.

33. Construction of residential complexes.

35. Consultancy Services.

37. Content development and supply

39. Cost Accountant

41. Credit card, debit card, charge card or

other payment card service.

43. Cruise Travel.

45. Customs Clearing service

47. Development & Supply for

telecommunication, advertising and on-

line information Services.

16. Business auxiliary services

18. Broadcasting service.

20. Cable operator.

22. Catering Outdoor catering service

24. Cleaning services

26. Clearing and Processing House Service

28. Clubs or associations Membership

30. Company Secretary

32. Construction of Commercial or

Industrial Building services

34. Construction or renovation of

commercial / industrial buildings or

pipelines or conduits Services.

36. Consulting Engineers Services.

38. Convention service

40. Courier services

42. Credit Rating services

44. Custom House Agents Services.

46. Design services

48. Dry cleaning service

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49. Dredging services

51. Engineering consultation

service/Consulting Engineers Service.

53. Event management service.

55. Fitness Centre Services.

57. Fashion designing service.

59. Franchise service.

61. Health and fitness service.

63. Insurance Auxiliary Services General

Insurance service.

65. Insurance Business Services (General

Insurance).

67. Intellectual property services.

69. Internet accessing facility.

71. Investment Management Service.

73. Management or Business Consultant.

75. Mandap keeper service.

50. Erection, commissioning or installation

services.

52. Exhibition Business exhibition

service.

54. Financial Services.

56. Foreign Exchange broker Services.

58. Forward contract services.

60. Habitat Services.

62. Information Technology Software

Service Development of software,

provision of advice and acquiring right

to use.

64. Insurance Auxiliary service.- Life

Insurance service.

66. Insurance Business Services (Life

Insurance)

68. In