Category: Personal Finance

How yield on deposits is calculated

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Angry bird Bulbul gets some ‘interesting’ gyaan from agony uncle Babaji who revels in rhyme and reason

Bulbul: Businessmen always get what they want. Cheaper loans they asked for – and now they have it, with interest rates at multi-year lows. But in the bargain, savers and depositors like me are getting squeezed – most banks and companies now offer just about 5-7 per cent on fixed deposits. Not fair!

Babaji: Fret not so much, Bul. What goes up comes down and what goes down comes up. So will interest rates. It’s all temporary.

Bulbul: Whatever, Baba. But for now, I am on a hunt – for the best yields to shore up my already modest interest income.

Babaji: Hunt if you must, but don’t fall for illusions. ‘Cos what you see may not be what you get – especially when it comes to yield in this fickle financial field.

Bulbul: Another rhyming riddle and your fate is sealed! See this baton that I wield?

Babaji: Calm down, Bul. Let me make the complex simple, and see your smiling dimple. You see, when it comes to interest and yields, the simple can compound your problems. It gives you an illusion of more, and you could end up feeling sore.

Bulbul: Now, do you really want a gash and a gore?

Babaji: Nope, here’s the crux to the fore. When it comes to advertised yields, what you see is often an exaggerated number meant to entice you, dear depositor. That’s because many companies that accept deposits do not follow the correct definition of yield.

Bulbul: Pray, explain what you say.

Babaji: Yield, as per finance terminology, should ideally be calculated using the formula for compound interest, that is, Amount = Principal*(1 + Rate)^Period. But several deposit-takers calculate yield applying the simple interest equation, that is, Simple interest = (Principal*Period*Rate)/100. Re-arranging the formulae, the Rate in both the equations gives you the annual yield. Turns out, the simple interest formula churns out a much higher yield than the compound interest formula.

Bulbul: Oh my! Tell me why.

Babaji: Sure, let me try. In a cumulative deposit, the interest earned is reinvested and, in turn, earns interest in the subsequent period. These periodic additions to the capital need to be considered while calculating yield. The compound interest formula does that, the simple interest one does not.

Bulbul: Yelp! An example will help.

Babaji: Say, a company offers annual interest rate of 6.7 per cent on its cumulative deposits for a tenure of 5 years; the interest is compounded annually and Rs 5,000 will grow to Rs 6,915 in 5 years. The company advertises that the yield is 7.66 per cent, using the simple interest formula – while actually, the yield is only 6.7 per cent using the compound interest formula. If you get enamoured by the higher advertised yield, you could end up making a wrong choice. Greed often comes with misery, you know.

Bulbul: Enlightened, thanks. But how do I calculate the correct yield without getting into knots with complex formulae?

Babaji: Simple. Invoke the ‘Rate’ function in Microsoft Excel. It can do the job in a jiffy. Before you take the bait, wait and calculate.

Bulbul: That’s Simply Put.

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What are the less risky options for higher returns on your FDs

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My wife has a fixed deposit of ₹3-lakh in Dena Bank. Now, with the merger of the bank with Bank of Baroda, we would like to discontinue it and switch it over to some other bank. On checking with Indian Overseas Bank, we found they offer 5.2 per cent for 3- to 5- year tenures . I am looking to invest with a horizon of 3-5 years in a safe and less risky asset with a 7 to 8 per cent yield. Please suggest a suitable investment avenue.

— N.P. Desai

Given that the full financial impact of Covid-related moratoriums and concessions on bank financials is not yet known, it is best to stick to larger and financially stronger banks and NBFCs for deposits at this juncture. Switching your deposit out of Bank of Baroda into Indian Overseas Bank (IOB) for a 5.2 per cent rate is not a prudent course of action in this context as Bank of Baroda is a stronger and larger bank. In the quarter ended September 2020, IOB had reported net profits of ₹148 crore, managing a turnaround from losses in the previous year, with gross NPAs of over 13 per cent and capital adequacy ratio of 10.9 per cent. The bank was also placed under RBI’s Prompt Corrective Action framework.

Bank of Baroda, apart from being consistently profitable, had comfortable capital adequacy of 13.2 per cent as of the same date. Given that RBI’s policy rates today are at their lowest levels in two decades at 4 per cent and market interest rates for highly rated entities are at rock-bottom too, you can get a 7 to 8 per cent return only from riskier entities. Given that the rates may go up at least a bit once the economic situation normalises from Covid, locking into these low rates for periods beyond a year is not advisable. Therefore, it is best not to consider 3- to 5-year fixed deposits currently and stick with up to 1 year deposits even if rates seem unappealing.

Having said this, we can suggest three courses of action given the situation. If you would like a slightly higher yield on your fixed deposits, you can consider the one-year post office time deposits offering 5.5 per cent which offer superior safety with a higher return. If you really seek higher returns and don’t mind some risks with it, you can stay with Bank of Baroda for some of your money and diversify into 1- year deposits from small finance banks such as Equitas for say, one-third of the money. Such banks, however, do lend to riskier segments of small borrowers and, therefore, your deposits are subject to higher risks than with the leading commercial banks like Bank of Baroda.

Deposits with top-rated NBFCs such as Sundaram Finance or HDFC which offer about 5.7 per cent on cumulative deposits of up to 1 year can also be an option. If monthly income is your objective, the Post Office Monthly Income Account offering 6.6 per cent is an option to look at too, though the long lock-in of five years is a deterrent. If your wife is a senior citizen you can also consider the post office senior citizens savings scheme offering 7.4 per cent, albeit with a 5-year lock-in period.

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Readers’ Feedback – The Hindu BusinessLine

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The introduction of Portfolio on Sundays has received an overwhelming response. We thank our readers for the appreciation and the useful suggestions.

Like all editorial initiatives from The Hindu Group, HBL Portfolio edition is a good compilation of easy-to-read, unbiased and incisive articles. Now that it is back on Sundays, readers like me can browse at leisure.

—Vinay M Tonse, MD and CEO, SBI Mutual Fund

I am a regular reader of BL for the past four years. I’m delighted to see the new Portfolio on Sundays with refreshing layouts and clear sections and easy-to-refer, useful information on the page sides. Congratulations to the team that delivered this new avatar! One suggestion would be to retain the orange colour theme that was part of the earlier Monday Portfolio. The reason being, reading an orange-themed Portfolio gives a special and exclusive feeling (which the Portfolio is) compared with the regular weekday BL newspaper. Another input would be to include sections/articles related to ETFs, index funds and overseas investment options.

—Karthik Padmanabhan

Our response: We opted for a change in colour, well, just for a change! With passive investing catching on, we are striving to cover more on exchange-traded funds (ETFs) and index funds, be it in the form of tables showing ETF returns, which is now part of our ‘Fund Insight’ page, coverage of new fund offers (NFOs) in the passive category or recommending index funds in our ‘Fund Query’ column. We have also made a start on international investing in the new edition with the coverage on the Airbnb IPO in our December 13 edition. Keep reading for more!

I have always felt that BusinessLine is the best financial newspaper available in the market. I enjoy the in-depth analysis of mutual funds in the Sunday Portfolio edition.

—Sudhir Garodia

I have been reading BusinessLine for the past 10 years. I am an investor. The Sunday edition is very useful, and I have more time to spend on the paper. It would be better if you could increase the font size.

—Namasivayam

Our response: We have increased the font size in some places from today’s edition.

A very good initiative. Require more information on stocks.

—Sathish Bhat Investors require more information on the stock market and up-to-date information on stock exchange rules.

—Radhakrishna

Our response (to the above two comments): We do cover stocks from both the fundamental and the technical perspective, every week. We also give our views on stocks in a particular sector whenever we do a ‘Big Story’ on that sector. We also cover important stock market developments which affect investorsfrom time to time across various pages of Portfolio.

Good to get BusinessLine on Sundays. But details on legal and tax matters, and insurance are missing.

—KR Subramanian

Our response: We write on taxation and insurance matters pertaining to individuals in our ‘Your Money’ and the newly introduced ‘Safe Investing’ pages. We also run query columns on tax and insurance. Legal matters, to the extent it covers investor interest, is covered in Portfolio pages as and when found pertinent.

This comments refers to the ‘Bull charge: Keep safe’ ‘Big Story’ published on December 13. Behavioural biases play a huge role in our investment decisions, how so ever knowledge and information is available through various sources today. Hence, it’s great to go through this article. It should come more than handy for retail investors.

—Bal Govind

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How dividend and buyback are taxed

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Of late, many Indian companies have chosen to reward shareholders either through dividend or buyback. The tax treatment of dividend income as well as capital gains on tendering shares in a buyback offer has undergone significant changes in the last two Union Budgets.

Here’s a low-down on the tax implication of buyback and dividend in the hands of investors.

Buyback is tax exempt

A buyback offer essentially is a scheme by which a company repurchases a certain amount of its outstanding shares.

If you tender your listed shares in a buyback offer that is announced — either through the tender offer route or via open market purchases — on or after August 1, 2019, then the capital gains on sale of shares are exempt from tax in your hands.

The Union Budget 2019 shifted the tax burden on buybacks from taxpayers to companies, which are liable to pay buyback tax at the rate of 20 per cent on the difference between the issue price and the buyback price of the share.

Meanwhile, capital gains accounted in the buyback offer of unlisted companies have already been tax exempt for investors since 2013, when the Finance Act introduced buyback tax on unlisted companies.

Since the capital gain from buyback is an exempt income, any loss incurred from buyback is also not available for set-off/carry-forward purposes. For instance, earlier when capital gains from sale of equity shares were fully exempt from tax, any loss from the same could not be set off. Usually, the set-off feature is useful as it reduces the overall tax outgo.

Generally, under the Income-tax Act, a short-term capital loss can be set off against both short-term and long-term capital gain; and the long-term capital loss can be set off only against long-term capital gain. And any unabsorbed capital losses can be carried forward to eight assessment years, including the assessment year in which the loss was incurred.

In such situations (of incurring losses in the buyback process), one can consider selling shares in the open market instead (if the market price is almost close to the buyback price) to enjoy the benefit of set-off/carry-forward, which are not available in the case of buyback.

Note that since there is no tax implication on buyback in the hands of the shareholder, TDS (tax deducted at source) does not come into picture in respect of companies distributing the buyback proceeds to shareholders.

Dividend — taxable at slab rates

Until March 31, 2020, companies distributing dividends were liable to pay dividend distribution tax at an effective rate of 20.56 per cent to the government from their surplus. And the dividend income in the hands of shareholders was exempt. The only exception was in the case where a resident individual received dividend income from a domestic company/companies of over ₹10 lakh. Here, the excess dividend income was liable to tax at a special rate of 10 per cent. When mutual funds paid dividend, tax at the rate of 10 per cent and 25 per cent on equity and non-equity schemes, respectively, had to be paid by the fund houses and the balance was distributed to investors.

But Budget 2020 abolished the dividend distribution tax on dividends announced by corporates and mutual funds.

Effective April 1, 2020, the dividend distributed by a company (domestic or foreign), or a mutual fund, is taxable in the hands of the investor. Dividend receipts must be disclosed as income and taxes have to be paid as per the taxpayers’ applicable slab rates, both under the old or the new tax regime.

Thank the taxman for some mercy . A deduction is allowed for interest expense incurred on money borrowed to invest in shares or mutual funds paying the dividend. However, the deduction should not exceed 20 per cent of the dividend income received.

The Budget 2020 also imposes TDS on dividend income distribution by companies or mutual funds. If the dividend amount exceeds ₹5,000 annually per resident investor, a TDS of 10 per cent has to be deducted from the dividend proceeds before crediting it to the investor. In order to provide some relief to the tax payers amid Covid-19, the government lowered the TDS rate on dividends to 7.5 per cent for FY 20-21 alone, that is, for dividends paid till March 31, 2021. Note that if the PAN (Permanent Account Number) is not updated or erroneously registered with the depository/ registrar and transfer agent/mutual fund, the applicable TDS rate would be 20 per cent.

Meanwhile, if the resident individual’s estimated annual income is below the exemption limit of tax, she/he can submit form 15G/15H to the company or mutual fund so that no TDS is deducted on paying the dividend.

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Should you go for a job-loss insurance policy?

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In the uncertain times such as the present, it pays to be prepared for an unexpected job loss.

Replacing your previous pay cheque may not be possible, but job loss insurance covers can provide some income support — to the extent of your loan EMI, for a few months, and thus give you a breather. However, before you buy a job- loss insurance policy, read the facts to avoid any surprises later.

Policybazaar.com recently launched a separate vertical to introduce job-loss insurance cover. It lists policies available in the market that offer protection against loss of job due to retrenchment or accidental disability.

Less-talked- about facts

Most of the policies listed in Policybazaar under job-loss insurance are for loss of job due to a disability following an accident. These policies provide a weekly benefit of ₹ 5,000 for 100/104 weeks of disability.

Only three insurers — Shriram General, Universal Sompo General and SBI General — offer cover for loss of job due to retrenchment. Take note that these are not ‘loss of income’ policies but ‘EMI protection’ policies — they cover a loan EMI amount for three months after loss of job. So, unless you have an outstanding loan, you can’t get this policy.

Reasons for dismissal/lay-off that is acceptable under these policies include termination following closure of the company due to poor financial condition or merger/acquisition. They exclude termination due to fraud/dis-honesty/poor performance.

The policy doesn’t pay if unemployment arises due to resignation or retirement or due to health conditions. Further, all policies come with a 90-day waiting period and do not cover contract employees and the self-employed.

For individuals who have a ₹50,000 EMI running for 15-20 years, the annual premium comes to ₹ 7,000-8,000 in the case of Shriram General and Universal Sompo General. So, the insurers ideally charge a premium of 5 per cent on the value of the protection offered — this is not expensive. However, SBI General’s premium for the same value EMI and cover, is high at ₹ 23,300.

Should you go for it?

The ifs and buts in the policy make the ‘EMI protection’ cover unattractive. That said, these covers can be useful when there are mass lay-offs like in the case of Jet Airways, Kingfisher Airlines or, recently, Karvy Stock Broking, where the reason for the loss of job was clear and public.

However, there can be circumstances where you can’t prove that your were removed from the job for no mistake of yours. The, it will be difficult to claim the policy. Employers generally place the blame on a workers’ poor performance for lay-offs. In such cases there may be no termination letter, or even if there is one, it may not specify the reason for the pink slip. Also, there is no clarity on whether an insurer will pay the benefits, if the employee is given notice before termination.

Products that cover loss of job due to accidental disability and offer a weekly income benefit are cheaper than EMI protection covers. Remember that in these policies, insurers place a cap on the weekly benefit they offer at a percentage of the individual’s monthly pay. The benefit under the policy is given only if one’s condition is so bad that he/she can’t report to work for at least one month.

If you are worried about loss of job due to accident-led disability, you can consider buying accident riders with life insurance. You can also go for standalone personal accident policies, but these may work out to be expensive if you look for high sum insured (SI). These policies pay the full SI on death of the insured due to an accident. The compensation will be partial if it is a permanent total/partial disability; in the case of partial disability, the payment will be 25-50 per cent of the S1.

Contingency fund

If you fear job loss, we suggest you build an emergency fund. Every month, set aside at least 30 per cent of your salary and slowly build a kitty of 5-6 months’ salary. Keep this cash in your bank account or in deposits. Also, try to avoid fresh EMIs or unnecesary splurging and renew your health insurance policy if you have missed it.

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Three metrics to look for in NBFC results

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If you’ve invested in fixed deposits with finance companies (NBFCs) or small finance banks (SFBs), the new business risks created by Covid-19 have made it necessary for you to keep a hawk eye on their financials. Borrowers, hit by income cuts, have been delaying loan repayments.

The RBI had directed lenders to declare a holiday (moratorium) on repayments until August 31. The Supreme Court has been hearing a case on extending this holiday, while stopping lenders from recognising bad loans until it decides.

With these developments, the already jargon-packed results from banks and NBFCs have acquired some new terms. Here are three new metrics you need to get a grip on.

Collection efficiency

The collection efficiency ratio is one performance metric that has materially moved NBFC and small finance bank (SFB) stocks in the recent results season. This is the proportion of loans that a lender has collected in the month or quarter to the outstanding dues at the beginning of the period. The closer it is to 100 per cent, the greater the comfort that borrowers are repaying their dues on time.

During the April-June lockdown, sudden income shocks and the inability of collection agents to visit borrowers severely impacted the collection efficiency of SFBs that gave out micro-finance loans.

Equitas Small Finance Bank, for instance, saw its overall collection efficiency fall to 11 per cent in April. But with unlocking and revival, it improved to 94.3 per cent by October. The ratio can vary for different types of loans.

Stage 1, 2 and 3 assets

Earlier, Indian lenders reported their doubtful loans based on defaults they had already incurred. Loans unpaid for over 90 days were treated as non-performing assets (NPAs). But with Ind AS, lenders such as NBFCs are now required to use an “expected credit loss”, or ECL framework, to recognise doubtful loans.

Here, each lender is expected to forecast expected defaults over the next 12 months and over the life of each loan. These are, in turn, classified and disclosed as Stage 1, Stage 2 and Stage 3 loans.

Stage 1 loans are those where the lender has not seen any change in default risk from the time of disbursement. Stage 2 loans are those where there has been some increase in the default risk from the date of giving out the loan, though there is no objective evidence of this.

Stage 3 loans are those where there’s objective evidence of defaults. The proportion of Stage 2 and Stage 3 loans in an NBFC’s books and the provisions against them can tell you if a big spike in NPAs is coming in future quarters.

Proforma NPAs

With the apex court imposing a standstill on recognising defaults after August 31 as NPAs, official NPA numbers reported by lenders no longer reveal the true state of bad loans. To get around this , some lenders have taken to disclosing ‘proforma NPAs’.

Proforma gross and net NPAs tell you what the lender’s NPAs would have looked like, if it had continued to recognise bad loans without applying the court concessions.

Bajaj Finance, for instance, has said that its proforma gross NPAs and net NPAs for the September quarter would have been 1.34 per cent and 0.56 per cent, respectively, instead of the reported 1.03 per cent and 0.37 per cent, had the SC concession not applied. This is a more reliable estimate than that reported.numbers.

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Strong growth still to come for mutual funds: Crisil

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Mutual Fund vs stocks: Which is better for investment in 2021

Mutual fund penetration in the Indian markets is low when compared to its global peers. However, the long term horizon offers potential to capitalise on financial savings. India has an assets under management (AUM) to GDP ratio of 12% and this is after China, which has an AUM to GDP ratio of 13%. The world average AUM to GDP ratio is at 63% with developed markets such as the US and Canada at 120% and 81%. Crisil during its India Investment Research Conclave stated that the mutual fund industry is expected to channelise individual savings going forward. The growth drivers for the Indian mutual fund industry would be the likely pick-up in the economy, growing investor base, higher disposable incomes, greater investible surplus, and deeper geographical penetration.

Better awareness, ease of investing through digitisation and a gradual pick up in corporate earnings expected to support growth. Crisil said assets under management (AUM) in equities saw a CAGR growth rate of close to 13.5% in the decade between March 2010 to March 2020. Additionally, from the period between March 2020 to March 2025, the AUM is projected to be at 15% CAGR.

Ashu Suyash, MD and CEO of Crisil said, “The mutual fund industry has seen a large rate of growth over the last 20 years, that growth rate has been a spectacular CAGR of 18%. Despite such a strong growth rate, the penetration of mutual funds in India continues to remain low, the AUM to GDP ratio is 12%. It just tells us the strong growth that is still to come for the mutual fund industry.” She also explained that globally and in India the theme of investment research, data driven platforms, among others have gained importance.

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How trends in finance, Accounting 2020 have reshaped; banking services see rapid changes

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More businesses have started using online banking, and the dependence on brick-and-mortar branches has diminished considerably.

Prashant Ganti

Over the years, technology has reshaped business functions and accounting is no different. The impact of rapid advances in automation technology, Artificial Intelligence (AI), integrated platforms, cloud-based software, and an explosion of data are felt in the finance world.

Here are a few trends to watch out:

1. Acceleration of cloud-based accounting

Cloud-based accounting solutions have played a major role in the successful transition to pandemic-induced remote working. We have seen several years of digital transformation in just a few months. Beyond enabling anywhere and anytime access, cloud accounting allows:

  • Systematization of remote collaboration, breaking the communication impasse between internal and external entities like accountants, CFOs and business owners.
  • Augmented productivity levels due to elimination of data entry and automation of day-to-day tasks.
  • Ability to glean cross-functional, real-time insights from multiple business sources and provide leading indicators into how a business is going to perform rather than having to pour over past historical information.

2. Technology-driven tax and reporting compliance

We will increasingly see adoption of GDPR model of compliance by design. The passage of GST and e-invoicing in India, VAT in the Middle East, and growing movement towards electronic invoicing in Europe and LATAM is a testimony to the fact that authorities across the globe are implementing technology-driven compliance with a threefold aim: reduce tax evasion, increase compliance, and retain flexibility to implement policy changes.

This means that internal business systems need to be future-oriented and not just address today’s compliance needs. This also has implications for other aspects of business and economy in general. For instance, the electronic authentication of invoices and tax returns done by revenue authorities can allow lenders to judge the potential of the borrower, which in turn could lead to a boom in lending easily.

3. Continuous accounting

In the past decade, we have seen two major technological changes—cloud and mobile. The cloud has ensured that the access to data is continuous, and mobile has allowed continuous transactions with the help of applications. Together, mobile and cloud have ensured that computing is continuous. Despite this advancement, accounting in many companies still works on a batch mode. Companies and accountants still set aside several days for period-close activities. However, today’s technology can help design financial processes that inheres within typical batch processing activities like financial close and continuous accounting, which ultimately results in operational efficiency.

4. AI will be well-entrenched in accounting

Today’s finance function is either uninitiated into AI or only uses limited AI. This is about to change. A pwc study says that a substantial number of financial decision-makers are investing in AI. AI has started playing a bigger role in accounts payable automation and spend management, primarily in the extraction of information from receipts and invoices, detecting fraud and duplicates, and automatic routing of invoices to the next stage of processing. This eliminates much of the data entry.

We can also see AI being increasingly used in AR functions like predicting the likelihood of a customer payment, and cash flow. Furthermore, AI will play a major role in the reconciliation process. All this will transfer a bulk of low-level tasks from the hands of accountants and other financial professionals to a computer, freeing them to contribute to more strategic initiatives.

5. Customer-driven finance and a new lexicon for accountants

Over the next few years, we will see the finance function step beyond its traditional focus areas of cost and compliance, and play a strategic role in the organization. This would mean that finance and accounting will have to be more customer-driven, designing all processes to keep the customer at the center.

This will require all back-office systems and finance to be deeply integrated with other business systems, arming every user, regardless of their role, with relevant information to serve the customer better. In addition to the traditional set of metrics, finance will need to adopt metrics that emphasize customer growth and experience.

6. Self-service finance-governed analytics

We will see the emergence of finance-governed analytics that brings operational, financial and transactional data together in a cohesive manner. With the aid of AI tools like natural language processing, CFOs, accountants and finance professionals can run queries on data spanning an entire organization, supporting operational and strategic decisions.

7. Emergence of the full-stack finance professional

With the evolution of no-code and low-code platforms, accountants and finance professionals cannot just suggest solutions, but also develop them using deep tech to help their organization, removing the over-dependence on IT. This, along with the emergence of self-service analytics, AI and other tools, have paved the way for a full-stack finance professional. A full-stack finance professional will be responsible for managing and minimizing risk and spending, adopting agile finance and maximizing effectiveness, supporting organization-wide decision-making, evangelizing financial shrewdness across the organization, apart from being tech-savvy.

8. Continued convergence of banking and accounting

Banking services have seen rapid development in the last decade. More businesses have started using online banking, and the dependence on brick-and-mortar branches has diminished considerably. Banking services are now being offered through mobile devices, and integrated banking technology is emerging. Accounting and banking are no longer separate entities.

Most modern accounting solutions offer bank integration, making account reconciliation simpler and faster. In the future, as more mobile accounting apps connect with mobile banking apps, business owners might no longer depend on their computers. They could accomplish their banking tasks right from their smartphones.

Prashant Ganti is Vice President at Zoho Corp. Views expressed are the author’s personal. 

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What made WhatsApp payment service possible in India; here’s what Mark Zuckerberg told Mukesh Ambani

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whatsapp, whatsapp pay, digital incusion, payment service, UPIMukesh Ambani said that while Jio brings digital connectivity, WhatsApp now with WhatsApp Pay brings digital interactivity.

WhatsApp has rolled out its payment services after joining hands with India’s leading banks such as SBI, HDFC Bank, ICICI Bank, and Axis Bank. It is expected that the largest messaging app will bring the benefits of India’s digital economy and financial inclusion to a large number of users who were deprived of full access before. In a conversation with RIL Chairman Mukesh Ambani, Facebook co-founder, and CEO Mark Zuckerberg said that WhatsApp payments was launched in India last month, which makes sending money to friends and family through WhatsApp, as easy as sending a message. That was possible because of the UPI system that has been built in India, he added.

In the Fuel for India 2020 event, Mark Zuckerberg further said that his company is working with 140 banks or it is supported by 140 banks and India is the first country in the world to do anything like this. “So, we’re grateful to be able to support this kind of innovation and to help to work, to create more prosperity, and help achieve a more Digital India,” Zuckerberg said.

In the same event, Mukesh Ambani said that while Jio brings digital connectivity, WhatsApp now with WhatsApp Pay brings digital interactivity, and the ability to move to close transactions and create value. Zuckerberg added that with communities around the world now in lockdown, there are a lot of entrepreneurs who need digital tools that they can rely on to find and communicate with customers and grow their businesses. Consequently, he hailed the partnership with Jio saying that this is just something that the partnership can help.

Meanwhile, in regards to the affluent internet connectivity, the Facebook chief highlighted what would have happened if the pandemic had hit a decade earlier when the internet connectivity was still nascent. To bring digital payments to people across segments and especially to the underserved users in India, WhatsApp will continue to support the Government’s efforts to drive financial inclusion with the Unified Payments Interface (UPI), a template that is ripe for global adoption, said a statement by WhatsApp.

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Faceless tax assessments — A paradigm shift

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No one can imagine their lives today without technology, more so amidst the Covid-19 pandemic. Over the past few months, technology has changed the work styles in all sectors — be it private enterprise, the academic world, the government, non-governmental organisations, or in the society at large. The income-tax department, too, has adapted to these changes and has been gradually digitising all areas of compliances and interactions with taxpayers. One such new addition is faceless tax assessments and appeals.

The process of conducting tax assessments has been evolving since the last few years. Initially, the assessments procedure was a face-to-face interaction between the taxpayer (either in person or through their authorised representatives) and the tax authorities. All submissions and related documents were submitted in hard copy during the physical hearings.

In September 2019, the Central Board of Direct Taxes (CBDT) launched the e-Assessment Scheme to carry out regular assessment proceedings electronically for a limited class of taxpayers. The scheme was designed to bring efficiency, transparency and accountability into assessment proceedings.

Taking a step further in this direction, the government on August 13, 2020, launched the ‘Transparent Taxation — Honouring the Honest’ platform, the main features of which are faceless assessment, faceless appeal, and the Taxpayers’ Charter. The government passed the Taxation and Other laws (Relaxation and Amendment of certain Provisions) Act, 2020 on September 29 to incorporate the Faceless Assessment Scheme under the provisions of Income Tax Act, 1961.

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Automated process

Under the faceless assessment process, assessment will be carried out by various centres set up at national and regional levels. The e-assessment scheme also involves specialised technical units, verification units and review units to facilitate smooth conduct of assessment proceedings. The National e-Assessment Centre (NEC) will be the face between the taxpayers and all the units, to facilitate the assessment proceedings in a centralised manner.

The NEC will issue notices to the assessee specifying the basis for selection of his case for assessment. The taxpayer needs to file his response within 15 days from the date of receipt of notice from his income tax online portal.

Upon the issue of a notice, the NEC shall assign the case to a specific assessment unit (AU) through an automated allocation system, ensuring absence of human interface.

The NEC gets the documents/data as required by the AU from the taxpayer and passes the same to it. The AU, based on information available, makes an initial draft assessment order along with the details of penalty proceedings to be initiated (if any). It could either be a clean order or an adverse order, which will then be examined by the NEC in accordance with the risk management strategy by way of an automated examination tool. The NEC will then finalise the assessment and serve the order, or issue a show cause notice, to the taxpayer.

The NEC can even assign the draft order to the review unit through the automated system, if required. The review unit will study the draft assessment order and intimate the NEC of its concurrence or suggest suitable modifications. In case of variation suggested by the review unit, the NEC will send the modifications suggested to a different AU through its automated system.

The new AU after considering the variations suggested by the review unit, will prepare and send the final draft assessment order to the NEC, to issue it to the taxpayer.

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Potential glitches

Faceless assessment is expected to usher positive changes to the assessment system as the taxpayer complies with the process without the need for physical attendance or hard copy submissions with the I-T department. However, it may also pose challenges to taxpayers, such as:

Technical glitches, network connectivity, etc.

The size of the files to be uploaded.

Taxpayers who are not tech-savvy may be reluctant to respond online or would require assistance from a professional consultant.

In absence of face-to-face interaction with tax authorities, submissions are required to be well drafted and error-free to allow the tax officer to understand taxpayer’s submissions and claims correctly.

This may also result in tax additions, especially on issues involving interpretation which are open to divergent views in case taxpayers are not able to articulate well in the submissions. Currently, these issues get addressed during the face-to-face hearings before the officer.

The scheme focusses on bringing transparency in the tax system. However, its effective and seamless implementation is of utmost importance to achieve the desired objectives.

Divya Baweja is a Partner, Preeti Gupta is a Senior Manager and Amanpreet Kaur is a Deputy Manager with Deloitte Haskins & Sells LLP

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