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Increase in FDI - Indian Accounting & Tax Senario Affected or Influenced?

By Sudhindra Kumar, Assistant Manager – Indirect Taxes, Mphasis

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Sudhindra Kumar, Assistant Manager – Indirect Taxes, Mphasis

The Role of Accounting in Business

Running a small business often requires owners to have experience in various business functions. Producing goods or services, conducting economic forecasts, creating marketing strategies, and accounting for financial information are just a few responsibilities of a small business owner. Above all, accounting plays an important role in small business management, helping track financial information for business functions.

Facts

Strong accounting systems may be the difference between creating a successful small business and filing for bankruptcy. The Small Business Administration (SBA) reports that two-thirds of new businesses survive for at least two years and only 44 percent last four years. Reports state that the main reasons for small businesses failing is poor capital structure, overspending when starting a business, lack of cash reserves and poor accounting controls.

Features

Small businesses use a mix of management/ financial accounting with business operations which focuses on the allocation of business costs to goods or services, creating budgets for business functions and preparing financial information for business decisions. Financial accounting prepares financial statements listing sales revenues, expenses, assets, liabilities and cash flow for the small business. Both types are used to secure external financing or report financial performance to business stakeholders. 

Function

Accounting information allows business owners to assess the efficiency of their business operations. Prepared financial statements can be compared to industry standards or to a leading competitor to determine how the small business is doing. Business owners may also use previous references to create trends for analyzing and forecasting future sales.

Considerations

Small business owners can purchase accounting software programs for tracking, recording and reporting financial information. While small or home-based businesses can use spreadsheets or other basic programs. Specialized accounting software helps business owners maintain accurate financial records. Computerized accounting systems can compute payroll taxes for employees too.

Expert Insight

Business owners may consider hiring a public accounting firm or individual certified public accountant (CPA) to create or review a company's accounting system. Hiring a public accountant is often expensive for many small businesses. However, the experience and expertise they bring to analyze small business accounting may be invaluable. Small business owners may also use them to prepare business tax returns.

Tax Consulting - Overview

Tax Consulting or planning involves conceiving and implementing various strategies in order to minimize the amount of taxes paid for a given period. For a small business, minimizing the tax liability can provide more money for expenses, investment or growth; thus making tax planning a source of working capital. Two basic rules apply to tax planning. Firstly, a small business should never incur additional expenses only to gain a tax deduction. While purchasing necessary equipment prior to the end of the tax year can be a valuable tax planning strategy, making unnecessary purchases is not recommended. Secondly, a small business should always attempt to defer taxes when possible which enables the business to use that money interest-free or even earn interest on it until the next time taxes are due.

Experts recommend that entrepreneurs and small business owners conduct formal tax planning sessions in the middle of each tax year. This approach gives them time to apply their strategies to the current year as well as allow them to get a jump on the following year. It is important to maintain a personal awareness of tax planning issues in order to save money. Even if they employ a professional bookkeeper or accountant, they should keep careful tabs on their own tax preparation to take advantage of all possible opportunities for deductions and tax savings. Whether or not an entrepreneur enlists the aid of an outside expert, he or she should understand the basic provisions of the tax code.

FDI Increase – Impact on Accounting and Tax Scenario in India

Globalization and liberalization brings lots of new innovative products to the world like Foreign Direct Investment, which are available in different forms currently. The 1991 economic reforms of India have generated strong interest in foreign investors and turning India into one of the favourite destinations for global FDI flows. The FDI inflows are growing at about 20 times since the opening up of the economy. Further, it gives immense opportunities to Indian industry for up gradation of technology, gaining access to global managerial skills and practices, optimizing utilization of human and natural resources and competing internationally with higher efficiency. FDI in India has enabled to achieve a certain degree of financial stability, growth and development to sustain and compete in the global economy. Most importantly FDI is central for India’s integration into global production chains including MNCs spread across the globe. The relaxation of norms by the government has also created a vast opportunity for foreign players who are competing for a greater role in the Indian market.

Stability and transparency in tax regime along with clarity in tax laws can have far reaching impact on investments in any country. The taxation policies in India remain inherently complex despite the government’s initiatives to simplify and redesign it. In the recent years, India has witnessed several tax disputes with respect to cross border transactions involving big MNCs. Facilities regarding Tax Holiday and Tax Rebate should be confirmed so that the investors could be attracted so far.

FDI is always contributing in the positive growth towards the economy of one country due to the investment by another country or country’s people. The effectiveness of Global economy depends upon the investor’s perception. If investment is aimed at long terms investment in the social-economical development, it is said that the investment contributes positively towards global economy. If it is short term for the purpose of making profit, it may be less significant and lead to negative effect. The FDI may also be affected due to the government’s trade barriers and policies for the foreign investments and lead to less or more effective contribution in economy as well as GDP and GNP of the country.

India's economy is mostly dependent on its large internal market. External trade accounts for just 20% of the country's GDP. Until the liberalization in 1991, India was largely and intentionally isolated from the world markets, to protect its economy and to achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while FDI was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals which were needed for nearly 60% of new FDI in the industrial sector.

Rising interdependencies across national tax policies could have various outcomes. Firstly, some countries could individually and unilaterally undercut their tax rates on the mobile base, forcing their partners to do the same if they want to keep their share of the European mobile base; this would lead to a tax competition, i.e. a "race to the bottom". Secondly, EU countries may consider a policy aiming at limiting the scope for tax competition through the imposition of minimum tax rates and the standardisation of tax bases; this would be tax harmonization.

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