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Change - Law needs to move with time

P.R. Sethuraman , Last updated: 01 November 2016  
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Change is a sine qua non. It is like oxygen to sustain life.  No change will hang. Without change, one has to get stuck that is suffocating. No change in hand reveals itself. To move with time is change that takes forward.  Even then, one has to confront than adopting a change?  Why? Because it can be either a normal growth that is natural or can be a change in the corridor of a development involving progress through evolution in hither too unchartered territory thanks to the sixth sense that is the ‘sole and soul’ prerogative of human kingdom.

That change comes in many ways to serve the needs of society that makes phenomenal transformations thanks to the integration of societies over the periods. Today’s change is advancing day in and day out, nearly reducing the world to a global village due to technological advancements and  as a result, today ‘if there is cold in America, one has to sneeze it here’. Therefore, one has to rise to the occasion to cope up with the increased technological improvements taking place in and around with all its attended consequences on employment, competition, a new way of life viz a viz old bend of mind stuck up in old religious mind set.

The purpose of the article is to deal with on the consequential changes warranted on rules of law and regulatory requirements on business/ industrial domain.

Need for a change to consolidate Retirement Benefits: The Insolvency and Bankruptcy Code, 2016 that was passed by Parliament and received the president’s assent on 28th May 2016 is going to dispense with the compulsion of complying with several overlapping laws and adjudicating forums to deal financial failure and insolvency of corporates, partnership firms and individuals in India, when once the system - infrastructure is put in place. This obviates the necessity of chasing the result through the prism of multifarious Acts. Again, both the houses of Parliament have already passed GST that have integrated multiple indirect taxes imposed both by central and state governments into one indirect tax regime whereby corporates and other business communities are relieved of handling multiple tax structures facilitating proper focus on business. Why not the same logic shall not work for retirement benefits that are barely only three in numbers - Provident funds, Gratuity obligations and Superannuation Funds of which the last is optional and hence not obligatory. But, the first two are compulsory as per the requirements of respective laws. But, the problem centres on the different applicability and eligibility norms that are not highlighted here for brevity.  If these different norms are ironed out, there could be an easy way out to merge both the acts for easy compliance. Gratuity entitlement is roughly half a month salary for each completed year of service that is a little over 4 % per month that could be spread between pension and lump sum payment.  May be a proper dialogue should proceed between employers and employees for level playing.  Will it see the light of the day?

Change of approach needed in computing bonus under Bonus Act: Coming to the Bonus Act, look at the plight of workers. Profit for allocable surplus is calculated by applying the rates of depreciation prescribed under the Income Tax Act which is generally on the higher side as compared to book depreciation applicable under the Companies Act. But, what is the rate applied for Managerial remuneration? It is at the rates as per the Companies Act. Why this discrimination? On the top of this, to arrive at allocable surplus, 7.5 % of paid up equity capital and 5.0 % on reserves both at the commencement of the accounting year is further subtracted. But, there is no such deduction for computing managerial remuneration. Is it not a blatant discrimination, if not what is this tantamount to? Why Communist Parties of India considered being spoken persons of working class are conspicuous by silence on this issue? Are they aware of this? This point is to be addressed by the Parliament to remedy the biased approach.

One argument that could be advanced is while Managerial remuneration is sealed to 11% of the profits computed under the Companies Act, it is 60% or 67% as the case may be, to compute allocable surplus for the payment of bonus. This is obviously because the number of persons coming under managerial person is very much limited as compared to work force coming under Bonus Act. Here again, it is not to be misconstrued  as against giving more remuneration to higher ups but to serve level playing in the computation of profit on the both the score. Will it see the light of the day?

Need for change in approach to direct tax: Income tax no doubt is one of the sources of revenue for any government but also should primarily serve as the leveller. One of the important canons of taxation is capacity to pay, that’s so long given go by for political survival. People getting income more than a crore is bulging. The remuneration of actors per film is in crores. Their advertisement and brand revenues are increasing in geometric proportion. Players, particularly cricketers’ income are mind boggling and their advertisement and brand values are no less than actors.  Managerial income has increase by leaps and bounds since liberalization. But, the tax rate beyond Rs.10 lacs income is the same except for temporary surcharge on income beyond 1 crore. Why? No reason or rhythm. It’s mainly to appease the class for vote bank politics.  In fact, the rate of tax should progressively increase by increasing more slabs for level playing at least beyond every crore, subject to a maximum reasonably fixed. Also, there is  a need for a different approach in the tax policy of elders beyond seventy-five years, especially when they had drawn meager income during working period and medical expenses have mounted. Will it see the light of the day?

A change for fair play –a need for a relook of rotation of auditors envisaged under the Companies Act 2013: Rotation is no doubt is of cosmic important. The earth rotates and the other planets rotate around the Sun but in a defined and settled route. Even working capital should rotate for better management of capital. Coming to rotation of auditors, nobody disputes the logic and importance of rotation of auditors in the context of ensuring independence. But, the present scenario for rotation appears is a little premature and disturbing in the present environment where it is apprehended there will no level playing since the so-called big four can sallow middle level firms. Rotation can wait for time when level playing is possible. Until then, it is better to consider a via media for joint auditors for companies beyond, say, Rs. 1000 crores turnover or Rs. 500 crores net worth or beyond an acceptable reasonable limit. This is absolutely required in upholding faire play in the audit profession. Let it not fall on the deaf ears. Let ICAI and MCA raise to the call to save the audit community from falling to a cartel. Will it see the light of the day? The MCA has constituted an Expert Group through its order F.NO.17/112/2016-CL-V dated 30th September 2016 to examine among other things adverse impact of rotation and recommend a suitable remedy- say joint audit. A time frame is given and it is hoped the impact of rotation is toned down by paving the way for joint audit on an acceptable parameter so that audit profession is saved from doom.

Need for change in the name of IIMs to IIM&G: Since independence, a number of Indian Institute of Managements have been started at different intervals across the country to cater to the business managements drawing faculties with in-depth knowledge of business management across various spectrum from research to practical  expertise in running the affairs of wide-ranging industries  But, there is a sea change in the industrial atmosphere over the periods more so due to technological improvements across the globe necessitating movement of man power reducing the world to global village. There is every possibility that human kingdom may settle in the other planets that may be sooner than later. Therefore, the shareholders and other stake holders spread across may need proper governance in place for taking proper investment decision. 

Not long ago, when controlled economy was ruling the roost, it was known as Corporate Management. Today, in a globalized environment when economy is opened up for foreign competition, it is elevated to the status of Corporate Governance. What’s the difference between the two? In this women’s era, whence ladies are occupying higher echelons of society and at helm of affairs, they are perhaps a little allergic to the word ‘management’ since it smells something masculine! They may perhaps want a word more common in gender. It’s why governance is more sought after! Joke apart, ‘management’ means a job given got it done. It is managing an affair or a work entrusted. It is nothing more or less than that.

Today, when corporates are spreading their wings across the globe and their activities enlarge leaps and bounds, investors need proper assurance and transparency for adequate returns on their investment to ensure that a mechanism is devised that’s known as corporate governance. The importance of corporate governance is more felt and pronounced today aftermath corporate scandals in U.S.A in the case of Enron and WorldCom.

The word ‘governance’ is used in a wider spectrum. It includes ‘management’ and covers much more to deliver to the globalized environment.  Governance with reference to corporates may be internal and external. ‘Internal’ with reference to a corporate includes maintenance of proper records; proper internal check, internal control, internal financial control, a new parlance in the new Companies Act and internal audit; and proper delegation of powers as distinct from devolution of powers. On the other hand, ‘external’ covers compliance of relevant laws, adhere to concerned regulatory authorities and take necessary steps to ward off any evil and adverse impact of  domestic and foreign competition, cut throat or otherwise.

With this background, is it not it is high time for IIMs are elevated to the status of Indian Institute of Management and Governance (IIM&G)? Name should inspire and let us change to reflect the aspiration of the time. Will it see the light of the day?

Conclusion:

The above are some of the changes among plenty more that deserve immediate attention. Though for ruling dispensation, these proposals may be scary in the present political environment; these changes are harbinger of opportunities to herald in a just move forward.


Published by

P.R. Sethuraman
(Chartered Accountantant)
Category Audit   Report

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