Author: CA Vijaykumar Puri

Introduction

The concept of brand valuation has gained significant importance in recent years due to the increased awareness of the value of intangible assets. A brand is one of the most valuable intangible assets a company can possess. It represents the identity and reputation of the company in the market, and therefore, it is essential to measure its financial value. Brand valuation is the process of determining the monetary value of a brand. In this article, we will explore the different methods used for brand valuation and the importance of brand valuation for businesses.

The Importance of Brand Valuation

Brand valuation is essential for several reasons. Firstly, it helps companies understand the financial value of their brand. Knowing the value of their brand can help companies make better business decisions. For example, a company may use the value of its brand to negotiate better terms with suppliers or attract investors. It can also help companies prioritize investments in brand-building activities.

Secondly, brand valuation helps companies measure the effectiveness of their branding efforts. By comparing the value of the brand before and after a marketing campaign, companies can determine the impact of their efforts on the brand’s value. It can also help companies identify areas where they need to focus their branding efforts.

Thirdly, brand valuation can be used to identify potential risks to a brand’s value. For example, if a company operates in a highly competitive industry, it may be at risk of losing market share to its competitors. By regularly valuing the brand, companies can identify potential risks and take corrective action to protect the brand’s value.

The Methods of Brand Valuation

There are several methods used for brand valuation. The most common methods are as follows:

1. Cost-Based Method

The cost-based method involves estimating the cost of creating a brand from scratch. This includes the cost of developing a name, logo, and other branding elements, as well as the cost of marketing and advertising. This method is usually used when a brand is new or when the brand’s value is not well-established.

2. Market-Based Method

The market-based method involves analyzing the prices of similar brands in the market. This method is based on the assumption that the value of a brand is determined by the price that consumers are willing to pay for similar brands. This method is commonly used in industries such as real estate, where the value of a property is determined by the prices of similar properties in the same area.

3. Income-Based Method

The income-based method is the most commonly used method for valuing brands. This method involves estimating the future earnings that are attributable to the brand and discounting those earnings to their present value. This method is based on the assumption that the value of a brand is determined by its ability to generate future earnings.

There are two main approaches to the income-based method:

a. Relief from Royalty Method

The relief from royalty method involves estimating the royalties that a company would have to pay if it were to license the use of the brand to a third party. This method is based on the assumption that the value of a brand is determined by the amount of money that a company would save by owning the brand instead of licensing it.

b. Multi-Period Excess Earnings Method

The multi-period excess earnings method involves estimating the future earnings that are attributable to the brand and discounting those earnings to their present value. This method is based on the assumption that the value of a brand is determined by its ability to generate future earnings, as well as its ability to generate excess earnings.

Factors Affecting Brand Valuation

Several factors can affect the value of a brand. Some of the essential factors are as follows:

Brand Awareness

Brand awareness refers to the degree to which a brand is known by potential customers.

The level of brand awareness is a significant factor in brand valuation. A brand that is widely recognized and has a positive reputation is likely to have a higher value than a brand that is relatively unknown or has a negative reputation. Companies can increase brand awareness through various marketing and advertising efforts, such as social media, search engine optimization, and content marketing.

2. Brand Loyalty

Brand loyalty refers to the degree to which customers are willing to purchase a particular brand over other brands. A brand with a high level of loyalty is likely to have a higher value than a brand with a low level of loyalty. Companies can increase brand loyalty by providing high-quality products or services, offering excellent customer service, and creating a positive brand image.

3. Market Position

The market position of a brand is another essential factor in brand valuation. A brand that is a market leader in its industry is likely to have a higher value than a brand that is a follower or a new entrant. Companies can improve their market position by offering unique products or services, having a strong brand identity, and providing exceptional customer service.

4. Financial Performance

The financial performance of a company is also a critical factor in brand valuation. A company that has strong financial performance, such as high revenue and profits, is likely to have a higher brand value than a company with weak financial performance. Companies can improve their financial performance by implementing effective cost management strategies, expanding their product or service offerings, and increasing their market share.

5. Competitive Environment

The competitive environment in which a brand operates is another critical factor in brand valuation. A brand that operates in a highly competitive industry may have a lower value than a brand that operates in a less competitive industry. Companies can improve their competitive position by developing innovative products or services, offering superior customer service, and creating a strong brand identity.

Conclusion

Brand valuation is an essential tool for companies to understand the financial value of their brand. There are several methods used for brand valuation, including cost-based, market-based, and income-based methods. The income-based method is the most commonly used method and involves estimating the future earnings that are attributable to the brand and discounting those earnings to their present value.

Several factors can affect the value of a brand, including brand awareness, brand loyalty, market position, financial performance, and the competitive environment. Companies can improve the value of their brand by implementing effective marketing and advertising strategies, providing high-quality products or services, offering excellent customer service, creating a strong brand identity, and improving their financial performance.

In today’s highly competitive business environment, companies must have a clear understanding of the value of their brand. By valuing their brand regularly and taking steps to improve its value, companies can maintain a competitive advantage and achieve long-term success.

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Should you require any further information or clarification, please feel free to get in touch with us at contact@vprpca.com

Finance Bill 2023 has been passed in the Lok Sabha today (24th March, 2023) with 64 amendments proposed to the Bill.

There are a few last-minute changes and were not originally part of the proposals during the Union Budget.

A few key amendments to the Finance Bill 2023 are as follows:

1. Increase in tax rate for Royalties and Fees for Technical Services under the Income-tax Act, 1961

The tax rate under section 115A of the Act for taxation of royalties and fees for technical services is 10%. Based on the amendment passed in the Lok Sabha, the rate is proposed to be increased to 20%. This rate will further be increased by applicable surcharge and cess.

This will result in more claim of tax treaty benefits as most international treaties provide a tax rate of 5% or 10% or 15% (which are more beneficial than the new rate of 20%). Further, tax treaty rates are not increased by surcharge and cess.

Thus, even the withholding tax rates and related compliances will increase.

The impact of this will be that the cost of importing technologies as most Indian deductors have to withhold tax on a gross-up basis.

2. Removal of indexation benefit for debt oriented mutual funds

If any mutual fund has Assets under Management (AUM) less than 35% in equity instruments, then it will be classified as a debt-oriented mutual fund.

Further, irrespective of period of holding, the income will be taxed as per slab rates without any indexation benefit (in line with the tax treatment of Fixed Deposits).

3. Income from (Real Estate Investment Trust) REITS/InvITs (Infrastructure Investment Trusts) to be taxed as Income from other sources rather than being taxed as Capital gain.

4. There has been a 25% hike in the STT (Security Transaction Tax) on options.

5. Offshore banking units operating in Gift city (Gujarat International Finance tec-city) to get 100% deduction on income for 10 years.

The Finance Bill 2023 is currently pending before the Rajya Sabha. Once it is passed by the Rajya Sabha, it shall become a law upon receiving Presidential assent.

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Should you require any further information or clarification, please reach out to us at contact@vprpca.com

“Super rich? Here is super tax”

Today, we look at one amendment which proves that the Government is proactively reading news articles.

What is the law now?

If you sell a residential house or shares in a company and earn huge capital gains, then you are liable to pay capital gains.

But if you invest the money in a residential house (subject to few conditions), the entire amount of capital gains would be tax exempt.

This provision was originally introduced in order to ensure availability of housing for everyone.

But, the super rich were misusing it to save tax.

There were news reports everyday that various super rich businessmen and startup owners were buying luxurious house properties worth tens of crores in a South Mumbai/ Delhi etc

They were using this exact exemption to avoid capital gains taxes on sale of the shares in their startup.

Since they were technically investing in a residential house, they were not liable to capital gains tax.

What is proposed by Budget 2023?

The capital gains exemption cannot exceed INR 10 crores. So the taxpayer will end up paying capital gains tax on the amount exceeding Rs 10 crores.

Observations/ Verdict –

This is a favourable amendment from the Treasury’s perspective but raises a few important questions –

1. The market for luxury homes is already stagnant (the supply is much higher than the demand). This amendment will affect the market even further w.e.f 1 April 2023.

2. Section 54/ 54F provide for withdrawal of exemption in case the new asset (residential house) is sold within 3 years i.e. the cost of acquisition of the house will be considered as 0. If the asset (where cost is restricted to INR 10 crores) is sold within 3 years, the taxpayer will have to pay taxes on the entire sale consideration, which does not seem to be the intent of the law. A consequential amendment should be made in this provision as well.

3. Seemingly, the limit of INR 10 crores is per person and not per asset. So if an asset which was held in a joint ownership is sold and a new asset is purchased in joint ownership too, it will prompt misuse of this exemption which is not line with the Government’s intention.

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Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.

“So good that the only question remains – Pehle kyu nahi kiya?”

Today, let us look at one of the most beneficial amendments (on a ground level) proposed in the Budget 2023.

Let us take a scenario.

Mr. Raman is running a business providing professional services. He raises an invoice of Rs 1,00,000 on Mr. Modi for providing financial planning services on 25 March 2022.

But Mr. Modi is a busy man. He settles the invoice only on 25 October 2022. He pays Mr. Raman Rs 90,000 (after withholding TDS at the rate of 10% – INR 10,000)

Mr. Raman follows accrual basis of accounting. So, he had to record the invoice dated 25.03.2022 in FY 2021-22 itself and offer it to tax.

Mr. Modi however follows cash basis of accounting. He recognised the expense of Rs 1,00,000 in FY 2022-23 i.e. on the actual date of payment. Consequently, TDS was deposited in Q2 of FY 2022-23.

As per existing Income tax Rules, Mr. Raman can claim credit of TDS (Rs 10,000) only in the year when he offers the income to tax i.e. FY 2021-22.

But the TDS was actually withheld and deposited in FY 2022-23. Thus, the credit will reflect in Form 26AS only in FY 2022-23.

Due to this rule, Mr Raman cannot claim TDS credit in FY 2022-23, since he is not offering the income to tax in that year!

This was absurd – as the taxpayer was paying the same amount twice.

This problem was arising when the assessees were following different methods of accounting or there was a difference in recording the entries.

Practically, what was happening –

1. On advice from their CAs, people like Mr. Raman would defer their invoice date to FY 2022-23 and claim TDS credit in that year; or

2. People would go ahead and claim the TDS credit of INR 10,000 in FY 2022-23 itself. If caught or served with tax notices, they would have to pay the tax.

3. (Rare) On bad tax advice, people would claim fictitious TDS credit of Rs 10,000 in FY 2021-22 itself. This would usually result in direct notice from Income Tax denying the TDS credit (as it was not reflecting in Form 26AS).

As you can see this rule was absolutely unnecessary and unfair. The taxpayer should not pay double tax for some administrative fault.

The validity of this Rule was contested in the Courts as well.

Now, Budget 2023 has rectified this –

Where income is included in the ITR filed by the assessee and tax is deducted in subsequent years, then an application can be filed by the assessee within 2 years from the end of FY in which TDS was withheld.

So, in our example, Mr. Raman can file the form (to be prescribed) with the tax officer by 31 March 2025 (since tax was deducted in FY 2022-23).

What if scrutiny assessment has already taken place or intimation under section 143(1) is already issued? Nowadays, intimations and refunds are processed within 24 hours of filing the returns!

No worries, the law requires the tax officer to pass a rectification order. In that rectification order, the tax officer will grant TDS credit which will be then received by the assessee.

Overall, this is one of the most beneficial amendments on the ground level.

The author concurs with this view and would only point out one thing –

The real efficacy of this provision will lie in the application form (yet to be prescribed) and required supporting documents. Hopefully, it is in faceless mode.

Secondly, the tax officer would want to verify the genuineness of the transaction. Hopefully, this does not require any indemnity bond to be executed (it unnecessarily increases hassle and cost).

After all, this is a routine and recurring issue. It deserves a simple way out.

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Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.

Budget 2023 Series #2 – Tax collection at source for overseas tours and remittances

“Kahin pe nigaahein, kahin pe nishaana”

Today, we look at one of the most controversial proposed amendments in Budget 2023.

Currently, section 206C(1G) of the Income-tax Act, 1961 provides TCS provisions at –

– 5% for any overseas tour packages

– 5% for any foreign remittances under Liberalised Remittance Scheme (LRS) above Rs 7 lakhs per year in aggregate

TCS functions in a way that the receiver of income adds the specified percentage (5% in our case) to the invoice value and deposits it with the Government.

So, any one buying a foreign tour worth Rs 10 lakh for their family would have to effectively pay Rs 10.5 lakhs (Rs 10 lakh + 5%). The credit for this Rs 50,000 can be claimed while filing the income tax return.

Now, Budget 2023 proposes to revise these limits to-

– 20% for overseas tour packages

– 20% for LRS remittances without any threshold limit (except for medical and educational purposes)

These are highly controversial just due to the sheer magnitude of the change.

Let’s break them down individually –

LRS remittances

Under Foreign Exchange Management Act, 1999, an Indian resident can remit amounts overseas upto USD 2,50,000 per year (approx. INR 2 crores) without approval of the RBI.

Remittances under LRS are made for various purposes like foreign education, medical treatments, investments in foreign real estate or foreign stocks, transferring money to relatives etc

The Income-tax law is already levying TCS of 5% on remittances above INR 7 lakh.

By increasing the rate from 5% to 20%, the Government is deviating from the intention of these TCS provisions.

The reason for introduction of TCS on these transactions was that the Income tax Department could monitor and track the foreign remittances.

Fair enough.

The intention was never to block the money involved in such remittances.

But now, the intention seems to have moved away from “tracking” and is now to “redirecting” funds into India itself.

But this will have far reaching negative consequences as well

For instance, if Mr. Nirmal is sending Rs 10 lakh for living expenses to his daughter Ms. Sitha who is studying abroad. He would now have to remit Rs 12 lakh for this!

Increasing rate of TCS on LRS remittances is surely a weird way of saying “Invest in India”.

Overseas tour packages

The Government brought the earlier TCS of 5% for dual reasons –

1. Collect data of individuals going on foreign trips (one can argue that linking passport with PAN would have been an easier route)

2. Discourage foreign tourism by blocking 5% of TCS (thereby promoting domestic tourism)

While the first objective was fulfilled, the second objective could not be fulfilled.

The number of Indians flocking abroad has skyrocketed, especially in the aftermath of Covid lockdowns.

So, what was the only route to promote domestic tourism?

No, it was not to develop better infrastructure or provide incentives to develop the tourism industry!

Instead, it is to put a larger dent in the pockets of the middle class looking for a luxurious vacation.

To put it in numbers in terms of the above example, anyone paying Rs 10.5 lakhs for a foreign tour would now have to pay Rs 12 lakhs for the same package.

This is aimed to promote domestic tourism instead of going on foreign tours.

Let’s put this into perspective –

I went on a solo trip to Kedarnath last year. While it was thoroughly enjoyable due to the sheer divinity in the place, I would not recommend anyone to visit Uttarakhand on a solo trip.

The infrastructure is really poor and in the name of tourism, people are trying to loot every penny from tourists.

I was blessed to have met locals in Uttarakhand who guided me correctly and saved me from being overcharged or misdirected. But everyone may not be this lucky.

There is no security or regulation to control the miscreants and the law enforcement is usually hand in glove with them.

And I am Indian; I can only imagine what poor foreign tourists would be going through.

Forget attracting foreign tourists, the current status of our tourism infrastructure is in shambles.

I do not mean to sound negative or condemn the beauty of India.

I have been to the Swiss as well and can say with pride that the views in Kashmir and Uttarakhand are no less.

But a good view and climate is not the driving force for tourism development.

For tourism to flourish, the Government should focus on building a better infrastructure rather than making foreign travel more expensive.

So, when the Government is proposing the said amendment in TCS regulations, the rich businessmen would not mind this much – they would pay lesser advance taxes instead.

But the salaried middle class will stand to lose the most.

The Government is literally holding a gun to their head – either shell out more money or “enjoy” your vacations in India (at your own risk).

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Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.

“Shiny optics, disturbing reality”

Everyone is talking about the biggest amendments proposed by Budget 2023 in relation to personal income tax.

But we need to read between the lines to see a disturbing reality.

Let us see how –

– We now know that the Government of India is promoting a shift from old tax regime to new tax regime.

– One of the salient features of new tax regime is that most deductions and exemptions available under Income tax law are not available in the new regime.

– This has potentially far-reaching consequences which are not easily recognisable.

To understand the consequences, let us first see the logic behind deductions and exemptions.

Let us take a step back into the basics of the functions of a Government.

– Every civilised society is bound to protect and provide a healthy lifestyle to all its citizens. For this purpose, the Government levies and collects taxes.

If you see most European nations, they have high tax rates but provide highly subsidised free healthcare and education for its citizens.

– This concept is popularly called “social security”.

– But the case of India is different. The Government, despite based on socialist principles, is unable to provide social security for its citizens directly.

– There are various reasons behind this – huge population, lack of infrastructure, problems in distribution methods, instability in Governments and policies etc

– So, in order to compensate for this lack of social security measures, the Government of India provides certain exemptions and rebates under Income tax law.

– Let us take the example of Section 80C deductions. Most of the deductions are allowed to promote a healthy lifestyle amongst the Indian populace – for example, deductions for life insurance policies, fixed deposits, housing, provident funds etc are designed to promote a habit of savings and stability, better quality of life amongst Indians.

– The Government is unable to provide social security for its citizens and hence, indirectly provides it through various deductions and exemptions in tax law.

Now, coming back to the shift in tax regime –

Since the Government is promoting the new tax regime which does not allow deductions and exemptions, this also means that the Government is indirectly reducing social security for its citizens.

The healthy habits which we have inherited from our parents (invest in provident fund, insurance, deposits, housing etc) are all being subtly reversed.

PPF is one great example (and I personally use it as well) – It is an EEE instrument i.e. the investment in PPF is exempted, the income from PPF is exempted and maturity proceeds are tax exempt too.

Even though forced, the PPF would give good returns. Today, it gives 7.1% interest rate which is tax free – certainly advantageous for an individual!

But with phasing out section 80C deductions, there is a huge chance that people will stop investing and saving.

The reason? There are many but one biggest reason at the macro-economic level is that the Government wants to promote spending of money.

So if Mrs Sheetal was incentivised to invest Rs 2 lakh a year to save taxes, if you take that incentive away, will she still invest Rs 2 lakh?

In an ideal world where everyone is financially disciplined, that would be true. But we do not live in an ideal world.

We live in a world where luxury is being made more affordable and savings are drastically reducing.

It is easier than ever to spend on luxury items.

Add more usable income in the hands of individuals, we can be sure that they would not be saved in “boring” fixed deposits or “boring” life insurance policies.

It will be used to satisfy momentary urge of online shopping or a down payment on that Mercedes.

YOLO, right!?

What benefit does the Government get from this?

If a common man spends more, that would lead to increase in the consumption in the economy.

An increased consumption would mean an increased GDP and growth rate.

All of which ties up with $5 trillion economy dream.

So, India will progress, right? What’s the harm, you may ask?

But the real question we need to ask – Progress will be at what cost?!

We have seen this exact model in developed countries like the United States.

People are hooked to consumption. They have no habit of savings within them.

(On a side note, in the US there is a mandatory 401(k) investment which promotes savings. The comparable provident fund in India is not mandatory for employees making more than Rs 15,000 a month)

But when there is high consumption, the economy grows at a sharp pace but individual savings are low.

This makes the country vulnerable to the bad effects of economic crises.

What was the reason that the economic crisis like those of 2008 hardly affected India?

Economists say that it is the strong savings culture – we traditionally spend less than we make. So, when the global economic growth slowed down, no one was left out on the street.

One can argue that this is one of the biggest reasons why India has been relatively immune to the ongoing 2023 recessionary crisis as well.

Let’s face it – market downturns happen. It is the economic cycle and no one can stop it.

But if we take away those savings, we are leaving India susceptible to huge recessions.

If unchecked, this new tax regime can be a silent killer of the fundamental principles of the Indian society.

Maybe not in 2 years or even 5 years, but 10 years from now – the effects of this “consumption culture” will be felt. And it will not be pretty.

Who is the biggest loser?

The biggest loser from this entire fiasco is definitely the middle class.

In case of an economic recession and people are living paycheck to paycheck, who will be hit by a sudden increase in prices and a simultaneous economic slowdown?

Listen, the rich have enough to fend for themselves in a rainy day (or year), and the poor will definitely be bailed out by the Government through populist schemes.

It is the middle class which will be left hanging and depressed, like always.

The new Income tax regime, which is marketed as a saviour for the salaried middle class, can become the reason why the middle class will become susceptible to economic recessions!

Oh, the irony!

What is the way forward?

In any civilised society, the Government cannot force its citizens to live in a good way. Instead, a good living has to be incentivised and promoted through various means or schemes.

What the Government needs to do is promote social security in some form or the other. The best and ideal way is by giving tax breaks (which is currently the case). In case the Government wants to stop giving tax breaks, the best incentive is to develop a scheme for the middle class where the Government will fund a certain portion of the savings or investments.

However, for any of this to happen, the lawmakers have to look at the repercussions of their actions in the future.

The first step lies in recognising the danger of removing incentives to save. The remedies will follow!

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Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.

It is common knowledge now that the compliances under Companies Act, 2013 are tiresome. They are only getting stricter.

In this light, it does not make sense that the compliances applicable to Reliance Industries Ltd are same for compliances of Chotu and Motu Pvt. Ltd.

The Government had introduced the concept of “small company” under section 2(85) of the Companies Act, 2013.

W.e.f 15 September 2022, the criteria has been amended to include a company which has

– Paid up share capital of upto Rs 4 crores;

– Turnover of Rs 40 crores

Benefits / exemptions for small company

1. Board Meetings:

Small companies doesn’t have a wide range of business so it’s not required for small companies to hold 4 board meetings in year, small companies may hold only 2 board meetings in a calendar year, i.e. one Board Meeting in each half of the calendar year with a minimum gap of 90 days between the two meetings.

2. Rotation of company auditors:

It is not necessary for small companies to follow the condition laid in Section 139(2) of the Companies Act 2013, which mandates the rotation of auditors every 5 years (individual auditors) and every 10 years (firm of auditors).

3. Exemptions for Board’s Report:

Matters to be included in Board’s Report mentioned in Rule 8 of Companies (Accounts) Rules, 2014 do not apply for small company.

4. Annual Return:

Annual Return of a Small Company can be signed by the company secretary alone, or where there is no company secretary, by a single director of the company.

5. Remuneration details in Annual Return :

As per section 92 of Companies Act, 2013 private companies are require to give a details of remuneration of directors and key managerial personnel , but in small companies only “aggregate amount of remuneration drawn by directors” is required in annual return.

6. Cash Flow Statement:

A small company needs not to include Cash Flow Statement as part of its financial statement.

7. Exemptions for Audit Report:

Small companies are not required to give report on internal financial controls with reference to financial statements and the operating effectiveness of such controls in audit report.

8. Lesser penalties for Small Companies under Section 446B of the Companies Act, 2013:

If a small company fails to comply with the provisions of section 92(5), section 117(2) or section 137(3), such company and officer in default of such company shall be liable to a penalty of upto 50% of the penalty specified in such sections.

As we can see, a small company has various concessions granted to it. Many SMEs will get covered in the new definition of small company.

It is important for companies to assess and avail the benefit of lesser compliances of a small company.

Thank you for reading.

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