US mortgage crisis: A subprimer
This article was published in TOI on 16/09/2008 which is being reproduced because it very nicely explained that I thought it should be published. What is a sub-prime loan?
In the US, borrowers are rated either as ‘prime’ indicating that they have a good credit rating based on their track record or as ‘sub-prime’, meaning their track record in repaying loans has been below par. Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorized as subprime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers.
Why were sub-prime loans given?
In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. The government also encouraged lenders to lend to subprime borrowers, arguing that this would help even the poor and young to buy houses. With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment.
What was the interest rate on sub-prime loans?
Since the risk of default on such loans was higher, the interest rate charged on subprime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of subprime borrowers defaulting. The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default. Further, lenders devised new instruments to reach out to more sub-prime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised, they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years.
How did this turn into a crisis?
The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among sub-prime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value. Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.
How did this become a systemic crisis?
One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on. As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down. Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed more than half of the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant that they too had to suffer losses — $14 billion combined in the last four quarters – because of declining prices for their collateral and increased default rates. The forced retreat of these two mortgage giants from the market, of course, only adds to every other player’s woes.
What has been the impact of the crisis?
Global banks and brokerages have had to write off an estimated $512 billion in subprime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn). A little more than half of these losses, or $260 bn, have been suffered by US based firms, $227 billion by European firms and a relatively modest $24 bn by Asian ones. Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world’s largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed. The crisis has also seen Lehman Brothers – the fourth largest investment bank in the US – file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalized to prevent them from going under. Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 bn bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector.
How is the rest of the world affected?
Apart from the fact that banks based in other parts of the world also suffered losses from the sub-prime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities. Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and – to a lesser extent – India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.
INCOME TAX – AN OVERVIEW- I
QUICK LOOK
- Income tax is levied on the ‘total income’ of the assessee.
- Income of the ‘previous year’ is taxed in the ‘assessment year.’
- Income is classified into and computed under five categories called ‘heads of income.’
- The basic scheme of income tax is the principle ‘pay as you earn.’
- One must pay his taxes in advance and by the due dates, in the prescribed percentages.
- Deferment in the payment of advance tax would result in the payment of interest.
The income tax basic scheme is explained in brief as:
- Income tax is levied on the ‘total income’ of the assessable entity which is computed under the provisions of the Act.
- The income which are pertaining to the ‘previous year’ is taxed, but in the ‘assessment year.’
- Income tax is charged at the rates being fixed for the year by the annual Finance Act. But the liability to pay the tax is based on the principle ‘pay as you earn.’
Also check Taxable Heads of Income for the definition of
Salary, wages, pension, allowance, etc.
Pay as you Earn
A person is not allowed to wait until 31 March to pay his/her taxes. The Income Tax Act has the provision of ‘pay as you earn.’ This does not pinch a tax payer at the end of the year making a lump sum payment. Such payments are done during the previous year in the form of ‘TDS’, ‘TCS’
and ‘advance tax.’
TDS (Tax deducted at source)
This tax is deducted at the source from the income of the employee by the employer or the payer and paid to the government. It includes salary, interest, commission and contract fees, rent, professional fees, etc. This type of deduction is popularly known as TDS.
Such tax is subject to certain limits and certain conditions.
TDS has to be deducted in respect of payment of income is by way of interest on a term (fixed) deposit in a bank/ co- operative bank & with housing finance company, TDS at 10% +Surcharge (if any) + education cess at 2% + higher secondary education cess at 1%i.e. a total of 10.3% will be deducted at the time of credit or at the time of payment, whichever is earlier. TDS has to deducted if amt exceeds Rs.5000/- up to 31/05/2007 and Rs.10,000/- from 1st June 2007.
No TDS would be deducted if amt of interest is up to Rs.5000/- up to 31/05/2007 & Rs.10000/- from 1st June 2007 (per financial year, per branch)
In case of senior citizen, if he/she estimates that the tax on the income is nil, Form No.15H duly filled and signed is to be submitted in duplicate to the bank. So, no TDS will be deducted. If the total income is less than the threshold limit, Form No.15G (for other than Sr. citizens) is to be submitted to the payer to prevent TDS from such interest. The recipient may apply to the Assessing Officer (A.O) in Form 13 and obtain a certificate authorizing the payer to deduct tax at lower rates or no TDS. If Debenture interest is paid by an A/c payee cheque & does not exceed Rs.25000/- & in case of only notified securities no TDS would be deducted.
TCS (Tax collected at source)
Unlike tax deducted at source, TCS is collected by a seller of certain specified goods at the specified rates on the purchase of the goods and it is remitted to the treasury on behalf of the buyer. In the same way, a person granting a lease or licensee in a parking lot, toll-plaza, etc. collects the taxes at the specified rates as tax paid on behalf of the lessee.
Advance Tax
Advance Tax is paid by the income earner during the previous year. The computing of the liability of advance tax is done by estimating the ‘total income’ for the year, calculating the surcharge and taking into consideration the rebate that will be available. The advance tax is required to be paid in three installments.
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Schedule of Advance Tax: |
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A |
On or before 15 September |
Not less than 30% of advance tax. |
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B |
On or before 15 December |
Not less than 60% of advance tax as reduced by amount paid earlier. |
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C |
On of before 15 March |
Full advance tax as reduced by the amount or amounts if any, paid in earlier instalments. |
If the assessee does not pays the advance tax as described above, an interest of 1% is charged per month for 3 months for the deferment of advance tax installments.
If the total amount of advance tax is not paid on or before 15 March, an interest of 1% is charged
for one month.
Further, if the total advance tax paid is less than 90% of the advance tax payable, the interest at 1% per month is charged for the shortfall in the advance tax paid for the period commencing from 1 April of the assessment year and ending on the date of payment or assessment, whichever is earlier.
CORPORATE TAX RATES
If you want to do business in India you should be prepared to shell out extra money to government in form of taxes as compaired to any other developing countries. In a recent survey counted by major audit firm Ernst & Young, India has high tax rates for cos. along with Brazil
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CORPORATE TAX RATES |
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Emerging Economies |
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Country |
Tax Rate |
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BRAZIL |
34% |
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INDIA |
34% |
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SOUTHAFRICA |
29% |
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MEXICO |
28% |
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MALAYSIA |
27% |
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CHINA |
25% |
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Developing Economies |
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Country |
Tax Rate |
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CANADA |
36% |
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UNI. STATES |
35% |
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FRANCE |
34%* |
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ITALY |
33% |
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U KINGDOM |
28% |
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GERMANY |
26%** |
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NETHERLAND |
26% |
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RUSSIA |
24% |
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*(including social security tax) |
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**(including tax surcharge) |
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Q. “If tax is deposited on or before due date through cheque but en cashed after the due date, whether it can/will be treated as “default in payment?”
A. First of all I take clear provisions regarding the above question.
Service Tax
As far as Service tax is concerned the position is very much clear .As per service tax rules 1994 rule 6 (2A) if the service tax has been deposited through cheque than the date of presentation of cheque to the bank will be deemed date of payment .so for service tax rule is clear.
The rule is reproduced hereunder:
“(2A) For the purpose of this rule, if the assessee deposits the service tax by cheque, the date of presentation of cheque to the bank designated by the Central Board of Excise and Customs for this purpose shall be deemed to be the date on which service tax has been paid subject to realization of that cheque.”
Other important points regarding payment of service tax
- If last date is a holiday - If last day of payment and filing return is a public holiday, tax can be paid and return can be submitted on next working day – CBE&C circular No. 63/12/2003-ST dated 14-10-2003.
- IF payment of service tax made through internet/net banking on or before 8.00pm will be treated on same day and payment made after 8.00 pm will be treated /deemed to be made on next working day. For online payment service tax rules provide one day extra than normal due date.
VAT
Each state has a separate Vat Act and Rules so we have check respective act ,I have found a specific clause under Bihar vat act and it may possible that other act may also have the similar provisions.
vat rules Bihar, rule 27(2) explanation
Explanation For the purposes of calculating penalty, if any, under the Act and the rules, the date of receipt of cheque or draft, as the case may be, by Bank or the treasury or the Circle concerned, as the case may be, shall ordinarily be deemed to be the date of payment by the dealer, save in the case of a cheque, which is dishonored.
Income Tax
The most important and controversial is Income tax. Let’s try to clear the dust from the provisions of Income tax Act, rules, circulars, notification and other relevant act.
- In terms of provisions of Income-Tax Act, 1961 (Act) the payment of taxes i.e. advance Income-Tax, fringe benefit tax, tax deducted/ collected at source are to be made before the specified due dates and even a day’s delay in payment attracts penal interest or may lead to disallowance of expenses in tax assessments/ returns. In cases where taxes are paid through cheque, the date of payment could be the date of tender of cheque to the authorised banker or the date of clearance of cheque from the payer’s account.
- Payments to government accounts were regulated by Central Treasury Rules (Old Rules). As per the said rules when a cheque/draft is honoured the payment shall be deemed to have been made on the date the cheque/draft is handed over to the government’s bankers or to a government officer authorised to receive money on behalf of the government;
- Central Board of Direct Taxes (CBDT) vide its Circular No. 261 of August 8, 1979.This circular is important so reproduced at the end of the post. This Circular was in confirmation to Central Treasury rules clause shown above and according to the cheque tender date to banker will be deemed date of payment subject to realisation of cheque.
- Thereafter, Central Government Account (Receipts and Payments) Rules 1983 (1983 Rules) were framed. These rules provide that the date of payment of government dues tendered in form of cheque/draft shall be the date on which it was cleared and entered in the receipt scroll;
- The question now arises whether the issue to be resolved by Central Government Account (Receipts and Payments) Rules 1983 or by the CBDT circular 261 August 8, 1979?.the same question was decided in the case of PL Haulwel Trailers Ltd reported in 100 ITD 485 before tribunal and it is held that the position that in case of payment of tax by cheque, the date of presentation should be taken as date of payment. While rendering its decision, the tribunal has duly considered the conflict between the Rules, Circular and the provisions of Negotiable Instruments Act, 1881.
- Other than upholding the binding nature of the Circular, the tribunal has observed that under the Negotiable Instruments Act, 1881 it has been held that once the cheque is encashed in ordinary course, it will discharge the drawer from payment, and thus there exists an apparent conflict between interpretation of Negotiable Instrument Act, 1881 and the Rules which have been framed by executive authorities in exercise of powers under Article 283(1) of the Constitution of India.
- The tribunal has thereafter, held that in such a scenario, the law enacted by the Parliament would prevail i.e. Negotiable Instruments Act, 1881 would prevail over the Rules.
- So ,One thing is clear that though the rules of central govt. has been changed but CBDT has not withdrawn the circular issued in this regard so it will binding on tax authority unless it withdrawn.
- CBDT has clarified in its Circular No 678 of January 14, 1994, that if the last date for payment is a holiday, Section 10 of the General Clauses Act, 1897 will be applicable and, accordingly, the assessee can make the payment on the next immediately following working day and, in such cases, the mandatory interest leviable under Sections 234B and 234C would not be charged.
so we can some up the issue with the following that
- if there is a clear provision under the any act/rules./circular/notification/press release then they prevails and cheque tender date will be treated as payment date .
- if there is no such clear provision than for government due “Central Government Account (Receipts and Payments) Rules 1983 “will apply according to which the date of payment of government dues tendered in form of cheque/draft shall be the date on which it was cleared and entered in the receipt scroll;
I have try to find out the latest position regarding above point ,but if you have different opinion then me or you want to add more points to it then please add in the comment sections.
thanks
Circular 261, 8 August, 1979
939. Recording date of tender of cheque and date of its realization on challans for payment of direct taxes is to be done by branch of authorised public sector bank where it is tendered for payment
Clarification 1
1. In terms of rule 80 of the Compilation of the Treasury Rules, if a cheque or draft tendered in payment of Government dues and accepted under the provisions of rule 79 is honored on presentation, the payment is deemed to have been made on the date on which it was handed over to the Government bankers. The need to indicate on the challan the date of tender of the cheque/draft with the authorised public sector bank, was duly taken notice of by the Central Board of Direct Taxes and at the request of the Board, the Reserve Bank issued instructions to all the authorised public sector banks in November 1977 stipulating that the receiving branch should brand either an inward stamp of receipt as soon as the challan is tendered over the counter, or a date stamped with provision for two dates, i.e., the date of tender and the date of the realisation of the cheque. The specimen of the date stamp is as under:
Date of tender…………………………
Received payment Rs……………………….
Rupees…………………………………
Date of realisation……………………..
For……………………………Bank
Authorised Signatory
2. Apart from the above procedure, the Central Board of Direct Taxes has revised the proformae of the various challans and new challan forms with colour bands are being progressively used to replace the existing ones. The new challans for the payment of self-assessment tax have already been introduced from April 1, 1979 and it will be noticed there from that the counterfoils of the challans meant both for the Income-tax Officer and the taxpayer contain separate columns for recording the date of tender of the cheque and date of its realisation. The other challan forms which are being introduced shortly, also contain similar columns.
3. In view of the foregoing, it is hoped that there will be no difficulty in recording, on the challan, the date of tender of the cheque/draft by the branch of the authorised public sector bank where it is tendered for payment of any of the direct taxes.
Circular: No. 261 [F. No. 385/61/79-IT(B)], dated 8-8-1979.
Clarification 2
1. In Boards Circular No. 261 dated 8-8-1979 [Clarification 1] it was stated that the Reserve Bank of India has requested the authorised public sector banks to brand the challan with the inward receipt stamp which should, inter alia, contain the date of tender of the cheque/draft and the date of its realisation. It was also stated therein that the Board was progressively introducing new-colour-band challans which would contain separate columns for recording the dates of tender of the cheque/draft and of its realisation.
2. A question has been raised as to whether the filling up of the dates of tender of the cheque/draft and its realisation in the revised colour-band-challan would be necessary if in the inward receipt stamp fixed by the receiving bank branch this information is filled in.
3. The objective here obviously is to record evidence on the counterfoils of challan about the dates of tender of the cheque/draft and its realisation. If this evidence is recorded in the inward receipt stamp of the bank, there would obviously be no objection if such dates in the challan forms are not filled. In such cases, the filling up of the relevant columns of the challan should not be insisted upon.
Circular: No. 265 [F. No. 385/61/79-IT (B)], dated 11-4-1980.