Short Notes

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Write in brief

HEDGING

Hedging means reducing or controlling risk. This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes.

Hedging is a two-step process. A gain or loss in the cash position due to changes in price levels will be countered by changes in the value of a futures position. For instance, a wheat farmer can sell wheat futures to protect the value of his crop prior to harvest. If there is a fall in price, the loss in the cash market position will be countered by a gain in futures position.

NEGOTIATION

Negotiation is a dialogue intended to resolve disputes, to produce an agreement upon courses of action, to bargain for individual or collective advantage, or to craft outcomes to satisfy various interests. It is the primary method of alternative dispute resolution.

Negotiation occurs in business, non-profit organizations, government branches, legal proceedings, among nations and in personal situations such as marriage, divorce, parenting, and everyday life. The study of the subject is called negotiation theory. Those who work in negotiation professionally are called negotiators. Professional negotiators are often specialized, such as union negotiators, leverage buyout negotiators, peace negotiators, hostage negotiators, or may work under other titles, such as diplomats, legislators or brokers.

Performance Bank Guarantee

A performance BG (also called performance bond) states that in the event of failure to perform an agreed task the beneficiary can raise a claim on the bank. example: Party A wins a tender to supply party B with equipment for US$ 1 billion. Party A submits a performance bond. Thereafter party A backs out because it feels it cannot deliver on the agreed price and will incur a loss. The beneficiary (party B) will claim against the performance bond for failure to perform the contract.

A financial guarantee is a very broad and general guarantee that can be issued by a bank to ensure that party A fulfils its financial obligations to party B. Typical example is party B is a manufacturer & seller of goods and party A is a newly established buyer & distributor of those goods and requests a credit limit of USD 1 million. Party B will request party A to arrange a Financial Guarantee stating that Party B will receive payment of upto USD 1 million upon submission of proof of delivery of goods by party B to party A (typically Invoice and signed Goods Receipt Note).

CENVAT

Cenvat, or the Central Value Added Tax, is a component of the tax structure employed by many countries in the western section of Europe. The inspiration for Cenvat is derived from a tax system that is generally referred to as VAT, or a Value Added Tax. Both Cenvat and VAT are designed with the express purpose of minimizing a cascading effect when it comes to taxes on income, goods and services, and other forms of tax revenue. The aim of Cenvat is to aid in maintaining a tax structure that is considered equitable for both the citizens incurring the tax and the government that is collecting the tax revenue.

One notable example of Cenvat can be found in India. Originally designated as a modified value added tax, this approach placed some limits on the type of taxation that could occur on goods used in the manufacturing process of finished consumer products. Modvat was later designated as Cenvat, and continued to function as a means of promoting industry within the country while still receiving some form of tax revenue from the effort.

It is helpful to think of Cenvat as an incentive that encourages the production of goods within the country, rather than outsourcing the production to countries where the economic and tax climate is more favorable. By providing a credit on the taxes associated with materials used in the creation of finished goods, the government makes it more attractive for manufacturers to maintain operations within the country. This of course leads to the creation of more jobs for the citizens within the community and provides income for the purchase of products within the country. By reducing the tax burden for the end user of the materials, Cenvat opens the door to a more stable economy within the country, and a better standard of living for its citizens.

Under the best of circumstances, the application of Cenvat can accomplish three goals. First, the structure for Cenvat requires a tax collection procedure that is fairly transparent and easy to follow. Second, the benefits associated with Cenvat help to cut down on tax evasion and creative bookkeeping. Last, the use of Cenvat ultimately leads to an overall increase in collected tax revenues by keeping more citizens employed and thus able to pay taxes on salary and wages.