Application Assignment

(Assignment to be submitted) (180 min)

Study the budgets of 2010-11 and 2011-12 Assess the impact of the changes in the tax structure on your Company by using at least 3 variables of your companys financial statement. (8 Marks)

Since our company is not listed, exact company financials are not available. But I have briefed the tax structure applicable to us, and marked major variations in it over the last five years. We being an Indian telecommunication equipment vendor with most of the sales locally, are subject to excise duty over hardware, and service tax over software and services. CST is applicable on overall sales. In 2009, for recovery of financial crisis, excise duty was cut from 14.42% to 8% and service tax to 10%. Also in the previous year itself the CST was reduced from 3% to 2% against Form C. So overall during the year of 2009-2010 we saw are duties paid getting dropped substantially with respect to the revenues. During the year 2010, the excise duty was hiked to 10%, and the service tax was reverted to the 12%, but still since the major component of Sales was hardware it provided, better tax performance to the pre-2008 times. Since, the current budget is looking at raising the excise duty to 12%, it would again raise the duties on sales for us. We were till recently claiming the tax holiday provided in Union territory(Pondicherry), so there was no CST applicable against Form C, and 2% without Form C. But this year onwards CST would be applicable for production in Pondicherry too. Excise duty, Service tax and GST are passed on to the end customer, but it claims VAT exemption on their final delivery.

Which currency other than Indian rupee has a greatest influence on your Business. Track changes in the ER of that currency vis a vis Indian rupee over last 2 years and Discuss how the changes in the exchange rate of that currency has impacted. What do you think is the future of that currency in the current global scenario? (8 Marks)

Since other than India, our major customer are partners based in US, USD has the greatest influence on our business. Changes in Exchange rate over the last two years are shown as follows,

The exports over these 2 years can Q-on-Q basis is as follows; Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 18.4 42.8 27.0 20.1 6.8 24.0 18.2 In crores. Since exports is not the major part of our sales, but lot of our manufacturing and raw material procured are from International markets, the effect of the rising dollars has adversely affected our organsation only. It has majorly reflected in our rising production cost over the last two years. Alongwith, the slowdown in the growth of the telecom sector overall impact on the performace, as it has impacted the sales also over the last 2 years. Overall, in the recent scenario prevailing in the India, the ER for dollar is expected to be high itself, but it also provides us an opportunity to focus on the International sales front to improve on the overall performance. Also, there are already plans to move content manufacturing and procurement from local markets to reduce the impact of the high ER.

What extent has the variation in interest rates have affected cost of capital of your company? Give data indicating the variation and its impact for last 5 Years. (b) Would you recommend debt as a source of fund over equity on the basis of your findings above? (9 Marks)

Again as not listed, these parameters are not directly available,

So I have mapped the benchmark interest rates in India for comparison purpose,

The benchmark interest rate has been at steady 7 % for 2 years, dropping to a a record low of 3.25 percent in April of 2009, but since then have risen again and currently stands at around 8%. During this period of 2009-10, debt to equity ratio dropped to 0.33 from 1 in March2008. Thus, it shows since of the lower interest rates, our company went to higher borrowing during this period, for expanding. The sales over this period also showed nearly 80-100% YoY increase. But since the year 2010, there is steady rise in the interest rates, reaching to above 8% at the start of this year. Also, it has coincided along with the downturn in telecom equipment market resulting in overall sales to fall. So currently looking at the negative market outlook, and the higher interest rates Equity would be more preferred source of fund than debt.