INDIAN ECONOMY KEY CONCEPTS

noreply@blogger.com (K Sankarganesh) — Sat, 03 Sep 2016 08:55:00 +0000

MF distributors may subscribe to gold bonds

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BSE has decided to permit mutual fund distributors to subscribe to sovereign gold bonds issue for their respective clients, through the bourse’s mutual fund platform. The 5th tranche of sovereign gold bonds will open from today to September 9. “Sovereign gold bond scheme (SGB) will be open for subscription on BSE StAR MF Platform from tomorrow September 1, 2016, to Friday September 9, 2016 for mutual fund distributors (MFDs) to subscribe to the issue for their client,” BSE said in a circular today.“The facility shall be available only on BSE StAR MF Web Portal and shall be available for transaction in demat mode,” it added. The Finance Ministry had on Tuesday said that applications for the bonds will be accepted from September 1 for nine days and the bonds will be issued on September 23. — PTI

noreply@blogger.com (K Sankarganesh) — Sat, 03 Sep 2016 08:54:00 +0000

Meet on SEZs to address tax concerns under GST regime

ARUN S

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Government to seek inputs from international experts on SEZ policy revamp

Tax clarity:The workshop is also an attempt to convince the Finance Ministry on the need to ensure tax exemptions to SEZs.— FILE PHOTO

The Commerce Ministry will convene a stakeholder workshop on Special Economic Zones (SEZ) on September 5.

The meeting, to be attended among others by Finance Ministry officials and international SEZ experts, is being held amid concerns expressed by the SEZ sector about the lack of clarity in the proposed Goods and Services Tax (GST) regime regarding upfront exemptions of taxes and duties for SEZ developers and units.

Diminished interest

The workshop comes in the backdrop of diminished investor interest in SEZs due to concerns including those on the tax burden due to the FY’12 Union Budget imposing a 20.5 per cent Minimum Alternate Tax (including cess) on SEZ developers and units as well as Dividend Distribution Tax (DDT) on developers.

The Commerce Ministry and the SEZ sector had sought exemption or at least reduction of MAT and DDT on SEZs.

Significantly, the meeting will have as participants, representatives from the Dubai-based World Free Zones Organization (World FZO) who will give their views on the future of SEZs in India under the GST regime as well as on global best practices relating to SEZs, official sources said.

The World FZO was set up to “bring together free zones from around the world to enable them to achieve shared objectives and address common issues.”

The workshop will also be attended by officials from the Australian Trade & Investment Commission (or Austrade) as well as South Africa’s experts on SEZ & Value Added Tax, they said. Efforts to get suggestions from global experts on the SEZ policy follow a similar attempt made by India in May this year along with several countries bordering the Indian Ocean to develop a regional framework to cooperate on SEZ-related issues.

Participants at the meeting in May at the Iranian Port of Chabahar had also considered forming a “joint FTZ” among the Indian Ocean Rim Association-member countries since most of these FTZs are situated or are being built in coastal regions.

P.C. Nambiar, Chairman of the Export Promotion Council for EOUs and SEZs (EPCES) and the Secretary of the World FZO, told The Hindu , “The government needs to amend the SEZ Rules to ensure that idle capacity in SEZs is converted to productive capacity. Such a move will strengthen the ‘Make in India’ initiative.”

Mr. Nambiar, who is also on the Board of Directors of the World FZO, said the government must identify the land lying idle in the Central/state-government SEZs, de-notify them as SEZ land and instead use it for creating infrastructure or for manufacturing units that would cater to the domestic market.

Tax exemption

During the meet, to be held in New Delhi, the Commerce Ministry will also seek suggestions for greater ease of doing business in SEZs. The workshop, where Finance Minister Arun Jaitley will be the chief guest, is also an attempt to convince Finance Ministry officials about the need to ensure upfront exemptions of taxes and duties to SEZ developers and units in the new GST regime.

There are about 329 notified SEZs of which 204 are operational. As on March 31, 2016, SEZs had attracted almost Rs.3.8 lakh crore worth of investments.

noreply@blogger.com (K Sankarganesh) — Sat, 03 Sep 2016 08:53:00 +0000

India at 35th rank in World Bank logistics index

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India has jumped 19 places to the 35th rank in the World Bank’s Logistics Performance Index 2016. The report, brought out every two years, measures countries across six components—customs, infrastructure, international shipments, logistics quality and competence, tracking and tracing, and timeliness. “Improvement in India’s rank in Logistics Performance Index adequately establishes steady performance in our competitiveness in manufacturing and trade that also acts as one of the growth driver of Make in India Programme,” the government said in a statement. The World Bank, however, said that the Indian numbers come with a caveat. “The LPI measures performance at key international gateways in countries such as India and China, but does not address how easy or difficult it is to move goods to the hinterland,” the report noted. — Special Correspondent

noreply@blogger.com (K Sankarganesh) — Sat, 03 Sep 2016 08:51:00 +0000

How ‘dark matter’ influences inflation

BUSINESS

August 28, 2016

Updated: August 29, 2016 11:53 IST

RADHAKRISHNAN GOPALAN

COMMENT (10) · PRINT · T T

Urjit Patel.

All eyes will be on Urjit Patel, who has been appointed RBI Governor, and his every action will come under scrutiny.

With the government naming the new Reserve Bank of India (RBI) Governor, there is a lot of interest in what it means for monetary policy and specifically interest rates going forward. Will it mean continuity or a departure from the path charted by Dr. Raghuram Rajan? What should the Governor focus on both in the short-run and in the long-run?

Even before taking office, I believe Dr. Urjit Patel has won half the battle in making a successful transition. For this, I congratulate mostly the Government. Let me explain.

Ignorance, inflation

While a lot of ink is spent on talking about the factors that affect inflation such as oil prices, monsoon, Government spending, global demand and interest rates, often missing in these discussions is how much we don’t know about what determines inflation.

I want to call this ignorance, “dark matter” or “expectations about the future”. Inflation is an aggregation of individual prices for goods and services. When traders set these prices, they do so based on their expectations about the future demand and supply conditions, including that for money. Where do these expectations come from? Nobody knows. Even in developed countries, where regulators are supposed to know more about how the economy works, central bankers are currently fighting a losing battle with inflation. In India, Dr. Rajan developed a reputation for being a hawk with regard to inflation. I cannot but believe that such a reputation played a role in affecting people’s expectations. Now that Dr. Patel is viewed as someone cast in the same mould, the foot that the RBI has on the throat of high inflationary expectation is not going to relent and this is half the battle won.

The next arena where Dr. Patel’s performance will be judged is the foreign exchange market. That market is facing the prospect of both an imminent increase in U.S. interest rates and the redemption of about $20 billion of FCNR deposits. In this area, the best the RBI can do is have a war chest and be willing to use it to tamp down volatility. The outgoing Governor (and Dr. Patel) have talked about the ripple effects of a Fed rate increase on emerging markets. Unfortunately, there is nothing else they can do. India is too small a trading partner for the U.S., to take the externality into account in setting interest rates. Given how anticipated these events are, I believe that the RBI has plans in place to deal with any possible volatility in the currency market. The third area that has attracted the attention of both monetary authorities and commentators is the speed of monetary transmission. There is widespread criticism that the banks are not passing on the rate cuts to the borrowers. The question is what to do about this. Here, not only do I disagree with what the RBI has done, but I also strongly believe that the RBI has worsened the situation.

In its efforts to speed up the transmission of monetary policy, the RBI has pursued an aggressive policy of prescribing how banks should determine their prime lending rates. Banks have been told to rely on their marginal – instead of average – cost of funds to set their lending rates. This is a misguided intervention and is taking the country backward in its march towards a market-based economy. The regulator – whose primary responsibility is to manage the risk in the banking system – should not have any role in specifying how banks set their lending rate. That should be left to the discretion of self-interested banks. If Adam Smith’s invisible hand is not let to do its work here, I am hard pressed to think where else it will be given a free rein!

Poor timing

Second, through the arbitrarily imposed deadline of April 2017 for banks to clean up their balance sheets, the RBI has worsened banks’ ability to pass on the lower interest rates to the borrowers. While no one argues with the need for banks to clean up their balance sheets, one can definitely quibble about the timing. Ideally, cleaning up of bank balance sheets should coincide with rising asset prices and equity infusion from the main shareholder, in this case the Government. This will enable banks to continue lending even when making large provisions. At the height of the financial crisis in the U.S., the federal reserve allowed banks a moratorium on marking some of their distressed assets to market because of the recognition that it would result in the banks booking significant losses, which in turn would erode their equity and their ability to lend to aid recovery. The RBI’s deadline of April 2017 for banks to clean up their balance sheets is arbitrary. Monetary transmission will be impeded if banks are forced to record NPAs without equity infusion from the Government.

For those interested in research in finance and economics, India offers an attractive laboratory because Indian regulators are among the most active. They keep tinkering with the rules constantly and this affords a number of “natural experiments” for researchers. At the cost of hurting myself, I think what India needs are humble regulators who realise that the economy is over-regulated, command-and-control is not the way forward and that it is imperative to do less and stay in the background.

The author is Associate Professor of Finance, Olin Business School, Washington University, St. Louis.

noreply@blogger.com (K Sankarganesh) — Thu, 01 Sep 2016 02:40:00 +0000

PSBs need more capital to deal with NPAs: RBI

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Reserve Bank made a strong case for providing more capital to public sector banks to deal with the problem of stressed assets and get back to a position from where they can start generating internal accruals.

“Indian banks got into stress before implementation of Basel III and revised IFRS which provide protection against system level stresses...so we have to find more capital for supporting banks today. Of course government of India has supported entire AQR (asset quality review) exercise that we have done,” RBI Deputy Governor N.S. Vishwanathan said.

“The government has been supportive and they have provided requisite capital for the public sector banks. We need to ensure that stressed asset build-up is contained so that banks get back to generate adequate internal accruals,” he said.

Mr. Vishwanathan also said that provision coverage ratio (PCR) has witnessed a decline in the last few months. — PTI

noreply@blogger.com (K Sankarganesh) — Thu, 01 Sep 2016 02:37:00 +0000

‘GST rate above 18% could stoke inflation’

SPECIAL CORRESPONDENT

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Industry wants 6 months time for hassle-free roll-out

New order:Trade groups also want a single centralised registration of suppliers of services.— FILE PHOTO: AFP

Industry lobbies are backing the Congress Party’s demand that the standard rate of Goods & Services Tax (GST) should not be allowed to breach the 18 per cent mark as it would stoke inflation.

The demand was made during an interaction with the Empowered Committee of State Finance Ministers on Tuesday. They said higher rates could fuel price gains. The chambers of business also said they required sufficient time to put in place the IT infrastructure.

Reasonable rate

A Federation of Indian Chambers of Commerce & Industry (FICCI) delegation led by its past president Harsh Mariwala sought a minimum of six months from the date of the adoption of the GST Law by the proposed GST Council to prepare for hassle-free roll-out of the new indirect tax regime. The delegation said it preferred a “reasonable” standard rate that would check inflation as well as evasion while ensuring compliance.

“For industry, which seeks to be competitive in the global marketplace, a standard rate of 18 per cent will be advantageous,” said Naushad Forbes, President, Confederation of Indian Industry (CII).

The CII is committed to the deadline of April 1, 2017 for the roll out of the GST, Mr. Forbes said.

The average standard rate of value-added tax in high-income countries is 16.8 per cent while that in emerging market economies is 14.1 per cent although rates in countries like China and Mexico are a little higher than this, he pointed out. “India should position itself correctly in order to boost exports and generate employment,” he said.

Assocham called for a relaxation in the penal and prosecution provisions in the first two years after the roll out of the GST except in case of tax fraud or non-deposit of collected taxes.

Chairman of the Empowered Committee and West Bengal Finance Minister Amit Mitra said that the concerns raised by the chambers would be looked into by the committee and the proposed GST Council, including the arrest and prosecution provisions. He sought suggestions on the quantum of penalties.

Centralised registration

Another demand was that there should be single, centralised registration of suppliers of services operating across states rather than multiple, state-wise registrations.

noreply@blogger.com (K Sankarganesh) — Thu, 01 Sep 2016 02:36:00 +0000

Cabinet nod for permanent residency to FDI investors

BUSINESS » ECONOMY

NEW DELHI, August 31, 2016

Updated: August 31, 2016 23:20 IST

SPECIAL CORRESPONDENT

COMMENT · PRINT · T T

The residency status is available to all foreign investors except those from Pakistan

The Union Cabinet approved a scheme to grant permanent residency status (PRS) to all foreign investors, except those from Pakistan, subject to the relevant conditions.

“The scheme is expected to encourage foreign investment in India and facilitate the Make in India programme,” the government said in a statement. “Under the scheme, suitable provisions will be incorporated in the visa manual to provide for the grant of PRS to foreign investors.”

The PRS will be granted for a period of 10 years with multiple entry, the Centre added.

“In order to avail this scheme, the foreign investor will have to invest a minimum of Rs.10 crore to be brought within 18 months or Rs.25 crore to be brought within 36 months,” the government said. “Further, the foreign investment should result in generating employment to at least 20 resident Indians every financial year.”

The Cabinet also gave its ex-post facto approval for the foreign direct investment (FDI) policy amendments announced by the Centre on June 20, 2016, which opened up FDI norms for almost all sectors including food manufacturing, defence, broadcasting, pharmaceuticals, civil aviation, animal husbandry and single-brand retailing.

Development Fund

The Cabinet also gave its approval to create a Project Development Fund (PDF) with a corpus of Rs.500 Crore “for catalysing Indian economic presence in Cambodia, Laos, Myanmar and Vietnam”.

The PDF is to be housed in the Department of Commerce and operated through the EXIM Bank.

The PDF will be governed by an inter-ministerial committee under the chairpersonship of the Commerce Secretary.

noreply@blogger.com (K Sankarganesh) — Thu, 01 Sep 2016 02:34:00 +0000

Do we need a minimum wage law?

OPINION » COMMENT

September 1, 2016

Updated: September 1, 2016 00:19 IST

G. SAMPATH

COMMENT · PRINT · T T

THE HINDU

“Even in post-liberalisation India, no industry lobby can openly argue that contract workers should be paid less than permanent workers for the same work.” Picture shows members of major trade unions protesting against anti-labour policies, in New Delhi, in 2011. — File photo: Ramesh Sharma

The number crunching over an appropriate minimum wage belies the fact that the state and industry only pay lip service to it

In April this year, Union Labour Minister Bandaru Dattatreya announced that thegovernment will raise the minimum wage for contract workers to Rs.10,000 per month. It would do so, he said, through an executive order. The executive order never came. What did, however, were news reports on industry’s opposition to the proposal. In July, the proposal had been shelved.

This week, in a bid to get trade unions to call off their All India strike on September 2, the governmentagain announced a hike in minimum wages, but only for unskilled non-agricultural workers, from Rs.246 to Rs.350 per day, or Rs.9,100 per month. The central trade unions, barring the Rashtriya Swayamsevak Sangh-affiliated Bharatiya Mazdoor Sangh (BMS), have dismissed the hike as meaningless and announced that they will proceed with the strike.

This chain of events raises many questions: What is an appropriate minimum wage? How does one arrive at it? Does India still need something like a minimum wage?

Many reasons have been adduced for scrapping the minimum wage. The most important one is the doxa of liberalisation, which dictates that the market and not the government should determine prices so as to preserve efficiency and competitiveness. This was the objection raised by industry and heeded by the government.

The second reason to scrap the minimum wage, especially now, is that it contradicts the National Democratic Alliance (NDA) government’s flagship ‘Make in India’ initiative. For foreign capital to make in India, Indian labour has to remain cheaper than Chinese, Vietnamese, Cambodian and Bangladeshi labour.

Third is a logic that is popular among economic reformers: scrap it if it’s not working. Neither industry bodies nor the state nor unions can claim that the Minimum Wages Act (MWA) is seriously implemented. India anyway has still not ratified the United Nations’ Convention No. 131 (adopted in 1970) on Minimum Wage Fixing. So why not scrap the MWA?

Why have a minimum wage?

MWA is one of the first laws of independent India, legislated in 1948, even before we had a Constitution in place. Why was it enacted?

The real motive was to buy peace on behalf of a national bourgeoisie that had to manage a working class that was far more militant in those days. But there were other reasons as well. India was a poor country with a major surplus of labour. There were too many jobs where labour did not have the bargaining power to demand a wage sufficient to survive on. Conditions where employers get away with paying workers too little generate several social costs, such as poverty, malnutrition, endemic debt leading to bonded labour, and child labour, which could be avoided through fair wages.

Three levels

The Tripartite Committee on Fair Wages, appointed in 1948, defined three different levels of wages: a living wage, a fair wage, and a minimum wage. Living wage is what a human being needs to get the basic essentials of food, shelter, clothing, protection against ill-health, security for old age, etc. A fair wage is lower than the living wage and takes into account efficiency, from the employer’s perspective. Minimum wage is similar to the fair wage except in two respects: it is even lower, and has a statutory dimension. Today, there is broad consensus among patriotic businessmen and nationalist policymakers that mandating a living wage or even a fair wage for Indian workers is a ridiculous idea not worth discussing. What’s left on the table is the minimum wage. How much should it be?

The resolution passed at the 15th Indian Labour Conference in 1957 mandates taking into account five factors for calculating the minimum wage: 1. The wage must support three consumption units (individuals); 2. Food requirement of 2,700 calories a day; 3. Clothing requirement of 72 yards per worker’s family; 4. Rent for housing area similar to that provided under the subsidised housing scheme; 5. Fuel, lighting and miscellaneous items of expenditure to constitute 20 per cent of the minimum wage. In 1991, the Supreme Court called for adding another 25 per cent to the wage yielded by the above calculation in order to take into account children’s education, medical requirements, etc.

If calculated using these parameters, some estimates put the minimum wage at Rs.26,000 per month. This is the amount Central government employee unions are demanding from the Seventh Pay Commission, which had fixed their minimum wage at Rs.18,000.

Minimum wage via pay parity

But figures such as Rs.26,000 or even the Rs.10,000 mooted by the Labour Ministry sound fantastical in comparison to the official minimum wage in some parts of India, which can dip as low as Rs.1,650 a month (Puducherry, agriculture, 2013). Typically, the actual minimum wage is close to or less than Rs.4,800, currently the National Floor Level Minimum Wage.

Ironically enough, despite the MWA not being taken seriously by anyone, even a pro-reform government such as the one in power dare not speak of scrapping it, preferring instead to undermine it.

As A.K. Padmanabhan of the Centre of Indian Trade Unions (CITU) puts it, “If a government is serious about ensuring that contract workers get better wages, it would amend the Minimum Wages Act to stipulate that permanent and contract workers get the same pay for same work. But this government has not touched the Act.”

Even in post-liberalisation India, no industry lobby can openly argue that contract workers should be paid less than permanent workers for the same work. The NDA government has a brute majority in the Lok Sabha. No party in the Rajya Sabha will oppose an amendment mandating pay parity between permanent and contract workers. So, if there is one ‘labour reform’ that can be said to have universal consensus as well as logic on its side, it is this simple amendment. In one stroke, it would raise the minimum wage of contract workers by bringing it on a par with permanent worker wages, and encourage their regularisation. But neither the United Progressive Alliance in its time nor the NDA now is interested in passing such an amendment. It is not hard to fathom why, or who benefits from this pay differential.

sampath.g@thehindu.co.in

Keywords: Labour Ministry, minimum wage, labour unrest, contract workers, Minimum Wages Act (MWA)

noreply@blogger.com (K Sankarganesh) — Fri, 26 Aug 2016 15:34:00 +0000

Banks to issue Masala bonds, RBI opens currency markets

BUSINESS » ECONOMY

MUMBAI, August 25, 2016

Updated: August 25, 2016 23:25 IST

SPECIAL CORRESPONDENT

COMMENT (2) · PRINT · T T

The RBI has proposed to limit exposure of a bank to a business group to 25 per cent of its capital.

Bonds will help lenders with funds for infrastructure and affordable housing

The Reserve Bank of India (RBI) has announced a raft of measures to boost investor participation and market liquidity in both the corporate bond and currency markets.

The central bank will allow commercial banks to issue rupee bonds in overseas markets — known as Masala bonds, both for their capital requirement and for financing infrastructure and affordable housing, according to an RBI statement.

“Accepting many of the recommendations of the Khan Committee to develop the corporate bond market, it has been decided to enhance the aggregate limit of partial credit enhancement (PCE) provided by banks, permit brokers in corporate bond repos, authorise the platform for repo in corporate bonds and encourage credit supply for large borrowers through market mechanism.”

It has been now been decided by the regulator that the aggregate PCE that will be provided by the financial system for a given bond issue will be increased from the present level of 20 per cent to 50 per cent of the bond issue size, subject to the PCE provided by any single bank not exceeding 20 per cent of the bond issue size and the extant exposure limits.

RBI said it has also been decided to seek suitable legal amendments to enable it to accept corporate bonds under the Liquidity adjustment Facility (LAF).

Hedge transactions

In order to ease access to the foreign exchange market for hedging in over the counter (OTC) and exchange-traded currency derivatives, the RBI has allowed entities exposed to exchange rate risk, both resident and non-resident, to undertake hedge transactions with simplified procedures, up to a limit of $30 million at any given time.

“The exposed person will be free to access any market (OTC or exchange) and use any of the permissible products at his discretion,” according to the RBI. Banks can also allow the customer an open position limit of up to $5 million. “This is intended to improve liquidity and depth in the foreign exchange market and the limit will be revised from time to time.” The RBI said since exposure of Indian entities to commodity price risks has been accentuated by the growing integration of the Indian economy and increasing volumes of cross border trade, a working group will be formed to review the guidelines for hedging of price risk by residents in the overseas markets.

To enhance participation in the corporate bond market, the RBI has decided that brokers authorised as market makers will be allowed to participate in the corporate bond repo market. “This measure is expected to meet their funding and securities requirement arising out of market making activities,” according to the RBI. Currently, banks, primary dealers, mutual funds, insurance companies are only allowed. In addition, foreign portfolio investors have been allowed to transact in corporate bonds directly without involving brokers.”

Exposure norms

PTI reports:

With an aim to reduce risk in banking sector, RBI has proposed to limit exposure of a bank to a business group to up to 25 per cent of its capital, down from the existing 55 per cent, the central banks said in a Draft Large Exposures (LE) Framework.

noreply@blogger.com (K Sankarganesh) — Wed, 24 Aug 2016 02:54:00 +0000

Understanding inflation targeting

OPINION » LEAD

December 8, 2014

Updated: December 8, 2014 01:27 IST

C. RANGARAJAN

COMMENT (21) · PRINT · T T

Inflation targeting re-emphasises the primacy of price stability as the objective of monetary policy. Given the rigidities in the economy and lags in policy impact, it must be operated with flexibility

Inflation targeting is back in the news and this is welcome. I have always held the view that the dominant objective of monetary policy is the maintenance of price stability. Inflation targeting gives precision to the concept of price stability.

In any monetary policy framework, a key ingredient is an enunciation of its objectives. This aspect has assumed increased significance in the context of the stress being laid on the autonomy of central banks. Autonomy goes with accountability, and accountability in turn requires a clear statement of goals.

The case of price stability as the major objective of economic policy rests on the assumption that volatility in prices creates uncertainties in decision-making. Rising prices adversely affect savings while making speculative investments more attractive. These apart, there is a crucial social dimension, particularly in developing countries. Inflation adversely affects those who have no hedges against it, and this includes all poorer sections of the community. This is indeed a very strong argument in favour of the maintenance of price stability in emerging economies.

“Apart from monetary policy, regulation of the financial system, particularly the banking system, is entrusted to central banks in most countries. There has to be close coordination between these two functions.”

Price stability and growth

A crucial question that arises in this context is whether the pursuit of the objective of price stability by monetary authorities undermines the ability of the economy to attain other objectives such as growth. In short, the question is whether there is a trade-off between inflation and growth. There is a general consensus that over the medium and the long term, there is no such trade-off and an environment of low inflation is most conducive to faster economic growth. However, there could be such a possibility in the short term. By injecting greater demand and thereby generating higher inflation, higher growth may be achieved. However, to sustain this growth, the authorities may have to generate higher and higher inflation. This will end up as a self-defeating exercise.

What then is the tolerable level of inflation? At very low levels of inflation, there may not be any adverse consequences on the economy. However, in every economy, given its structure, there is always a certain level of inflation beyond which costs of inflation begin to rise steeply. It is this inflation threshold which can provide guidance to policymakers. Interestingly, the Chakravarty Committee, of which I was a member, regarded the acceptable rise in prices as 4 per cent. Several studies in the Indian context have estimated that the threshold level of inflation may be around 6 per cent.

Other objectives

Questions have been raised about the robustness of such models. Even large econometric models are not in a position to capture all the costs of inflation. This order of inflation is however higher than what developed countries normally aim for. This will have some implications for the exchange rate of the currency and Current Account Deficit. In the Indian context, it is best to work towards an average of 4 per cent and take strong action if it touches 6 per cent. This will amount to inflation targeting with a band, as recommended by the Urjit Patel Committee. Such a commitment will also dampen inflation expectations.

Does the focus on inflation targeting by monetary authorities mean a neglect of other objectives such as growth and financial stability? Hardly so. What inflation targeting demands is that when inflation exceeds the threshold level, the primary focus of monetary policy must be to bring it back to the desired level. It is sometimes claimed that the financial crisis of 2008 in the United States and western Europe sounded the death knell for inflation targeting. There is continuing debate on whether the crisis was precipitated by monetary policy failure or regulatory failure. Countries like Canada and Australia, which were committed to inflation targeting, were not caught in the crisis.

Central banks have multiple functions. Apart from monetary policy, regulation of the financial system, particularly the banking system, is entrusted to central banks in most countries. There has to be close coordination between these two functions. For the crisis itself, regulatory lapses have to take major responsibility while monetary policy in these countries might at best have played a facilitating role. The low interest rate regime which prevailed because of low inflation could have created an environment favourable for high risk-taking. A rise in asset prices should have alerted the monetary authorities and they should have taken appropriate action. Inflation targeting does not preclude other objectives from the purview of monetary authorities so long as inflation remains within the comfort zone. The control of inflation becomes its exclusive concern only when inflation crosses the acceptable level.

Can it be done?

Can the Reserve Bank of India (RBI) or for that matter any central bank effectively implement an inflation mandate? Do they have enough instruments to achieve the goal? The ability of the central banks to control inflation when such inflation stems from excess demand is normally conceded. It is when inflation is triggered by supply shocks that some doubts are raised. Such supply shocks are most common in countries like India where agricultural production is subject to the vagaries of nature. Even when inflation is triggered by food inflation, monetary policy and fiscal policy have a role to play. If food inflation lasts long, it gets generalised. Wages rise leading to a general cost push inflation. If head line inflation exceeds the acceptable level, monetary policy must act at least to ensure that the return on financial assets is positive in real terms. In a situation of supply shocks, it may take longer for monetary policy to bring down inflation. The recent experience with inflation in our country is a good example of this. That is why the inflation mandate must provide for a range and a time frame for adjustment which should not be too short. Nevertheless, monetary policy must act irrespective of what triggered inflation. Obviously, supply side management is needed in situations of supply stock and that should be the responsibility of the government.

Institutional framework

The appropriate institutional framework for implementing the inflation mandate also raises certain questions. The first issue is on who should determine the acceptable level of inflation. In most countries which have adopted inflation targeting, the target is set by the government or Parliament. This appears to be appropriate in as much as the acceptable level of inflation is not purely an economic issue. However, once a mandate is prescribed by the government or Parliament, the monetary authority should be left with full autonomy to use whatever instruments that are available to it to implement the mandate.

The second issue relates to an appropriate price index which should be used to monitor inflation. In India, we have monitored inflation by mostly looking at the wholesale price index. That was because of the easy availability of this index. Until recently, we have had no composite retail price index. Since the objective of inflation targeting is to minimise the impact of price rise on people, the appropriate index will be retail inflation.

The third issue relates to institutional arrangements within the monetary authority to take policy decisions consistent with an inflation mandate. In several countries, a technical monetary policy committee is constituted with members drawn from the central bank, from the government and from outside experts. My preference would be to constitute a committee of the board of the RBI to do this. This is what was done when the Board for Financial Supervision was set up. While constituting the central board of the RBI, this aspect of the work of the bank must also be kept in view.

Inflation targeting re-emphasises the primacy of price stability as the objective of monetary policy. Given the rigidities in the economy and the lags in policy impact, it must be operated with flexibility.

(Dr. C. Rangarajan is former Governor of the Reserve Bank of India.)

Keywords: price stability, Indian economy, monetary policy, inflation, RBI, Current Account Deficit, GDP

noreply@blogger.com (K Sankarganesh) — Wed, 24 Aug 2016 02:52:00 +0000

Pact binds RBI to inflation target

BUSINESS » ECONOMY

NEW DELHI, March 3, 2015

Updated: March 3, 2015 11:52 IST

PUJA MEHRA

COMMENT (9) · PRINT · T T

Reuters
The Reserve Bank is committed to bringing inflation below 6 per cent by January 2016.

Will try to bring figure down to 6% by Jan. 2016

The Centre and the Reserve Bank of India signed an agreement last month under which the central bank will prioritise controlling price rise above the other objectives of the monetary policy — interest rates and the foreign exchange rate.

The agreement formalised a policy the Reserve Bank had been following since January 2014, which is a significant development in monetary policy formulation championed by Governor Raghuram Rajan.

The Reserve Bank is committed to bringing inflation below 6 per cent by January 2016. The consumer inflation target has been set at 4 per cent, with a band of plus or minus 2 percentage points, for the financial year 2016-17.

Under the agreement, the central bank will be deemed to have missed its target if consumer inflation remains above the 6 per cent level for three consecutive quarters during 2015-16 or if it remains below 2 per cent for three consecutive quarters during the year 2016-17.

The bank will have to explain to the government the causes, and what steps it intends to take to steer inflation back within a given time if it misses the target.

The rate of consumer price inflation was 5.11 in January.

noreply@blogger.com (K Sankarganesh) — Wed, 24 Aug 2016 02:46:00 +0000

Law to tax indirect transfers is not bad in itself at all

Mukesh Butani , managing partner at BMR Legal has just published a book on the knotty issue of tax disputes in India — a top concern for global investors. Here, he discusses how well tax disputes have been managed, what to watch for in an era of new domestic tax paradigms such as the impending Goods and Service Tax regime, and a global crackdown on cross-border tax arbitrage.

Edited excerpts:

What’s your prognosis of the tax disputes landscape often blamed for India’s uncertain investment climate?

Tax disputes typically remind people of courts. But they arise at the lowest level where the taxpayer says ‘x’ and an officer says something different, eg, ‘y’. What you do to avoid going to the trial stage? Why does it have to be settled only by the Supreme Court? The normal process of how courts administratively lookat disputes has to change. One reason is that disputes in the post-liberalisation era are of very different from those that occurred in earlier in India’s post-Independence history. If you do a fast-forward of how disputes will occur in the future, it’s going to be even more different. For example, with the imminent GST law you need to actually rewrite the entire jurisprudence to interpret the law judicially. Cross-border tax disputes will occur because of new regimes such as Base Erosion and Profit Shifting norms, for which there are no precedents. So you have to look at disputes very differently even in the courts. We will have to look at alternative dispute resolution, tax arbitration, mutual agreement procedures. For example, how should transfer pricing disputes on questions of valuation, not law, be settled? India got negative press because of Nokia, Vodafone, Microsoft, IBM, Flipkart and Amazon, because traditional forums for resolving disputes and jurisprudence are not going to help you settle these kind of disputes. Foreign investors feel there’s no clarity, certainty or consistency.

Is it a legacy issue owing to the inability to push tax reform?

We have been responsive to legislative changes and directional tax policy changes, in the last 25 years. After granting a spate of tax holidays to spur industrial growth in the nineties, we realised they should have a full-stop somewhere. But on aspects like dispute resolution and administrative practices, we haven’t moved, else we wouldn’t have seen record disputes.

Do you sense reluctance on administrative reforms?

I think the intent is there. But it’s a gigantic ecosystem. It’s like trying to bring the economy back to growth mode. We keep having this philosophical debate about when India will touch 9-10% growth… is it practical with the internal challenges? We have just got (our hands) around inflation thanks to crude oil prices, but we still have a problem of NPAs, corporate debt and recapitalisation of banks. The government is talking of a national litigation policy and getting rid of obsolete laws. There is a move to set up dedicated tax benches. If you look back at the history of tax administration, you will not find any one government that has issued 23 notifications to address issues of ease of doing business. At the highest political level, you have the PM who says India has changed, is being reformed with a red carpet, not red tape — that is empowerment at a macro level. The message takes time to percolate down which is not easy, because you are dealing with-red tape there.

Former Finance Minister P. Chidambaram recently said he would have scrapped the retrospective tax that has spooked foreign investors by now…

The common man became aware of retrospective tax changes only due to Vodafone. That assumed significance because here was a company that won the case and the law was changed. The manner in which it was done came up for questioning. On a standalone basis, retrospective amendment is not bad in law and some are in favour of taxpayers. I have shown a trend to demonstrate a direct correlation between past actions and FDI, and how retrospective amendments rose in 2012. There are some very expensive lessons we have learnt. Suffice for me to mention that if a law can be amended retrospectively, it can also be repealed retrospectively. But there are implications of that repeal. Take the infamous fringe benefits tax that was criticised a lot. Pranab Mukherjee, as finance minister, repealed it in two years. But he didn’t do it retrospectively as it would have meant people who were taxed had to be given refunds. But this law is different.

Is this still a headache for investors?

To be fair, in an era of BEPS and General Anti-Avoidance Rules, this law had to come. The question was: should it have been applied retrospectively? I don’t think that law to tax indirect transfers is bad per se . The debate is only on the retrospective aspect.

Many people are getting notified about the end of LPG subsidy citing income over Rs.10 lakh a year, though the Centre has said it is not using I-T records for this.

Taxpayer confidentiality is a big debate in the world. If LPG users are getting notices about ceasing subsidies as they are earning more than Rs.10 lakh, it means one department is using data collected by another. If one government agency makes use of my income tax data, it raises a question of taxpayer rights — a very big issue globally. In the western world, this will never be allowed. Part of the fundamental rights is the right to confidentiality of information, the right to a fair trial and right to be heard. Then there are moral rights like getting good infrastructure. That debate has not come up in India.

noreply@blogger.com (K Sankarganesh) — Sat, 20 Aug 2016 03:50:00 +0000

Government expects tax revenues to increase after GST roll-out

By ET Bureau | Aug 18, 2016, 02.31 AM IST

‘Sri Lanka-India economic pact may soon be a reality’

T. RAMAKRISHNAN

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The proposed Economic and Technology Cooperation Agreement (ETCA) between India and Sri Lanka, which would be an improvement over the existing Free Trade Agreement (FTA), may soon be a reality.

Indicating this, Y.K. Sinha, India’s High Commissioner in Colombo, used the 70th Independence Day as the occasion to tell critics and sceptics of the ETCA that “it is up to Sri Lankans themselves to decide on the contours of any agreement that they sign with a foreign country”. However, there has to be “genuine debate and discussion” among stakeholders in Sri Lanka, he added.

Mr. Sinha, who hoisted the tricolour flag at his residence here on Monday morning, referred to the latest round of discussion on the pact in Colombo last week and expressed the hope that the agreement, when signed, would be of mutual benefit to both countries. It will be a “win-win situation for all”.

India-Sri Lanka bilateral trade stood at $4.6 billion last year, of which Indian exports were valued at about $4 billion, said the diplomat. Nearly 60 per cent of Sri Lankan exports were making use of the FTA whereas 90 per cent Indian exports did not use the channel. “It is obvious who has benefitted more from the FTA,” he said.

Mr. Sinha added that as per the latest estimates, India’s economic growth rate was expected to touch 8 per cent during the current financial year.

Bilateral trade stood at $4.6 billion last year, of which Indian exports were valued at $4 billion

noreply@blogger.com (K Sankarganesh) — Sat, 20 Aug 2016 03:44:00 +0000

NEW DELHI, August 15, 2016

After Punjab National Bank and United Bank of India, more banks are likely to soon start a facility wherein an account holder can verify his income tax return on e-filing site even without having netbanking.

Electronic Verification Code (EVC) can be generated by pre-validating the bank account on the e-filing portal of the Income Tax Department.

“PNB and UBI have launched this facility which will facilitate the account holders, who may not have a netbanking account, to e-verify their return. Other banks are expected to launch this facility,” the Central Board of Direct Taxes (CBDT) said. It also said EVC can be generated by pre-validating a Demat Account on the e-filing portal.

“NSDL and CDSL have launched this facility which will facilitate the account holders to e-verify their return,” it said.

Customers of State Bank of India, Axis Bank and Canara Bank can generate EVC through the respective bank’s automated teller machines. Other banks are also expected to offer this facility soon, the tax department said.

As per the latest data, the e-verification facility of IT returns was used by over 75.3 lakh taxpayers till August 5 against 32.95 lakh taxpayers last year till September 7, 2015. Of these, Aadhar based e-verification was used by 17.68 lakh taxpayers during the current year. — PTI

noreply@blogger.com (K Sankarganesh) — Sat, 20 Aug 2016 03:42:00 +0000

Pledging PF to buy home may soon become reality

Retirement fund body EPFO may soon introduce a scheme to allow its over 4 crore subscribers to pledge their provident fund to buy low-cost houses and use the account to pay equated monthly instalments.

“We are working on a housing scheme for members of the Employees’ Provident Fund Organisation (EPFO). Under it, members will be allowed to pledge their PF accumulations to buy homes,” Labour Secretary Shankar Aggarwal told PTI.

He added that the proposal will be placed before the EPFO’s Central Board of Trustees meeting expected next month.

Once approved by the CBT, the scheme will be available for the subscribers.

Finer points of the scheme, as to what extent subscribers will be eligible to avail loans and what will qualify as a low cost house, are yet to be worked out.

Aggarwal further said: “We don’t want to impose anything on the subscribers. Therefore, we will not buy land or build houses for them. They will be free to choose their own homes from the open market.”

The panel had suggested this scheme for low income formal workers who are EPFO subscribers and could not buy a house during their entire service period. Under the scheme, there will be a tripartite agreement between member, bank/housing agency and EPFO for pledging future PF contributions as EMI payment. — PTI

noreply@blogger.com (K Sankarganesh) — Sat, 20 Aug 2016 03:38:00 +0000

Govt notifies revised tax treaty with Mauritius

PTI | Aug 13, 2016, 06.51 PM IST

NEW DELHI: Government has notified the revised tax treaty with Mauritius under which India will impose capital gains tax on investments routed through the island nation from April 1 next year in a bid to curb tax evasion.

The protocol amending the agreement between India and Mauritius, signed on August 24, 1982 for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment, was signed at Mauritius on May 10, 2016.

India and Mauritius had signed the revised Double Taxation Avoidance Convention (DTAC) after prolonged negotiations at Port Louis.

Under the amended treaty with Mauritius, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from April 1, 2019.

This concessional rate would however apply to a Mauritius resident company that can prove that it has a total expenditure of at least Rs 27 lakh in that nation and is not a 'shell' company with just a post office address.

As per the revised treaty, investments made prior to April 1, 2017, will be protected from new tax provisions.

The island nation with just 1.3 million people was the biggest single source of foreign direct investment into India in 2014-15, accounting for about 24 per cent of USD 24.7 billion foreign direct investment (FDI).

The three-decade-old taxation treaty is said to have been misused by many Indian and multinational companies to avoid paying tax or to route illicit funds.

Top Comment

well done... though its just the beginningSumit Dubey

India had been insisting on review of the treaty since 2006 as it felt a chunk of the funds were not real foreign investments but Indians routing cash through the island to avoid domestic taxes, a practice known as "round tripping".

It wanted to ensure firms in Mauritius that invest in India are not just 'shell' and instead have substantial operations in the island, such as paying staff there, before qualifying for treaty terms of getting exemption from payment of capital gains tax in India.

noreply@blogger.com (K Sankarganesh) — Sun, 14 Aug 2016 16:50:00 +0000

Ministry wants SEZs’ tax sops to continue

ARUN S

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There is lack of clarity in the proposed GST regime

Tax-free enclaves:As per the current norms, SEZs are tax and duty-free enclaves.— PHOTO: K.R. DEEPAK

The Commerce Ministry has raised with the Finance Ministry the Special Economic Zone (SEZ) sector’s concerns about the lack of clarity in the proposed Goods & Services Tax (GST) regime on the continuation of tax & duty exemptions, official sources said.

According to the Commerce Ministry, many tax and duty incentives have been offered to SEZ units and developers in the current SEZ policy to help them attract investments, and in turn, generate employment and boost exports. Pointing out that the proposed GST regime does not provide clarity on these SEZ-related incentives, the Commerce Ministry sought continuation of the tax and duty exemptions, the sources said.

As per the current norms, SEZs are tax and duty-free enclaves and are deemed to be foreign territory for purposes of taxes, duties and trade. Parliament recently passed the amended GST Bill.

The proposed GST regime will subsume central & state level taxes, and the new model will include a Central GST, IGST for inter-state supplies and SGST for intra-State supplies.

The Commerce Ministry had on Wednesday held a meeting with representatives from Export Promotion Council for Export Oriented Units and SEZs (EPCES), the apex body for SEZs and EOUs. The EPCES — which had asked the consulting firm EY to study the impact of GST on SEZs & EOUs — submitted to the commerce ministry the EY study’s key recommendations.

As per the commerce ministry, incentives offered to SEZ units include duty-free import and duty-free domestic procurement of goods for development, operation and maintenance of SEZ units. SEZ units are also exempted from Central Sales Tax (CST), service tax and State sales tax. These incentives should continue, it said.

Maintain sops

Incentives offered in the present SEZ-related policy to SEZ developers include exemption from customs/excise duties for development of SEZs for authorised operations approved by the SEZ Board of Approval, besides exemption from CST and service tax. These exemptions also should be maintained in the GST regime, the ministry said.

Rahul Gupta, vice chairman, EPCES, said there was no clarity in the model GST law on customs & excise duty exemptions available to SEZs for export & import activities.

Also, currently there is no excise duty on raw material procurement by SEZs from Domestic Tariff Area (or DTA, which is the area outside the SEZs but within India) as such procurement is treated as exports from DTA to SEZ. Besides, procurement by SEZs does not attract CST and even Value Added Tax (states such as Tamil Nadu do not levy VAT on such transactions, while many other states do not grant VAT exemption to SEZs for the same).

Zero ratings

The relevant provision in the model GST law which specifies the kind of supplies that can be zero-rated (where there is no tax on supplies & where suppliers will be eligible to claim input credit) should include supplies from DTA to SEZ, the EPCES said , adding that the model GST law should be amended to this effect.As on June 7, 2016, there were 329 notified SEZs, of which 204 are operational. As on March 31, 2016, SEZs have attracted Rs.3.76 lakh crore worth of investment and provided employment to nearly 16 lakh people. Exports from SEZs in FY’16 were Rs.4.67 lakh crore.

noreply@blogger.com (K Sankarganesh) — Sun, 14 Aug 2016 16:48:00 +0000

Giving India a global-scale bank

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The proposed merger of the State Bank of India with its five associate banks and the Bharatiya Mahila Bank is a long-delayed and welcome move on the path to banking consolidation, especially among state-owned lenders. SBI’s takeover of its five subsidiaries and the three-year-old niche provider of banking services for women will, once consummated, vault the merged entity higher up the rankings ladder on the global banking stage. The resultant benefits to the lender and the economy are evident. The increased balance sheet size will enable the bank to obtain better pricing on both internationally sourced funds and domestic deposits, thus helping it lower lending rates and improve profitability. The added branch network and customer base will also help it expand reach and enable the lender to rationalise resources across the board. There are various estimates of the potential cost savings, with one projection putting the possible reduction in cost-to-income ratio at 1 percentage point. The lender’s increased size, in terms of assets, will also give it the requisite muscle to take on new competition from larger banking entities that are likely to be created by consolidation in the banking industry. The Bank Board Bureau has been tasked with overseeing a restructuring among public sector banks in keeping with the government’s aim of reducing the number of state-owned lenders and improving their financial health.

The merger will, however, pose its unique set of challenges. The scale of the task is substantial given the total staff strength. With more than two lakh employees, the parent will add close to one-fifth that number by way of additions posing a huge test in terms of integration of roles, salary, perquisite and pension structures and, no less importantly, work cultures. Much of the opposition from the bank unions stems from concerns relating to these issues. Customers of the smaller, community or regional market-focussed subsidiaries such as the State Bank of Travancore may be discomfited by having to deal with a larger, more impersonal lender, one where the size of their accounts may be viewed as comparatively marginal. For regulators, the new entity will throw up interesting oversight issues. Already identified by the Reserve Bank of India as the country’s key Domestic Systemically Important Bank, or too big to fail in simple terms, the enlarged SBI’s capital adequacy norms will climb and may require far more by way of infusion of funds than the Centre has committed so far. But such challenges must not be used to undermine the obvious benefits of merger.

noreply@blogger.com (K Sankarganesh) — Sun, 14 Aug 2016 16:47:00 +0000

Reserve Bank to study why Indians spend large money to buy gold

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The Reserve Bank of India (RBI) has set up a committee to study Indian household financing pattern and why they spend large sum of money on gold.

The panel will look at various facets of household finance in India and to benchmark India’s position vis-à-vis both the peer and advanced countries, it said in a statement on Thursday. The panel headed by Tarun Ramadorai, Professor of Financial Economics, University of Oxford, will have representation from financial sector regulators, SEBI, IRDAI, PFRDA apart from RBI. It will consider “whether, how, and why the financial allocations of Indian households deviate from desirable financial allocation and behaviour (eg., the large household allocation to gold).”

The committee has also been asked to benchmark the current depth of household financial markets in India vis-a-vis those in other major world markets and to identify areas of priority for growth and change. To characterise and evaluate households’ demands in formal financial markets (for assets such as pensions as well as liabilities such as home loans) over the coming decade, is another key term of reference given to it.

Financial products

RBI further said that the panel would evaluate the “design of new systems and the redesign of existing systems” of incentives and regulations to encourage and enable better participation by households in formal financial markets.

The terms of reference also include assessing the role of new financial technologies and products (robo-advising, automatically refinancing mortgages) in the cost-effective provision of high-quality and suitable financial products to Indian households while containing risks.

The committee is expected to submit its report by end July 2017.

The demand for formal financial market investment product like pension as well as liability product like home loan from the Indian household was discussed during the meeting of the Sub Committee of Financial Stability and Development Council (FSDC-SC) held in April.

It was decided that a committee should be set up to look at various facets of household finance in India and submit a report, RBI said. — PTI

The committee is expected to submit its report by end July 2017.

Goods and Services Tax (GST), explained

noreply@blogger.com (K Sankarganesh) — Thu, 04 Aug 2016 04:21:00 +0000

The Constitution (122nd) Amendment Bill comes up in RS, on the back of a broad political consensus and boosted by the ‘good wishes’ of the Congress, which holds the crucial cards on its passage. Here’s how GST differs from the current regimes, how it will work, and what will happen if Parliament clears the Bill.

The Goods and Services Tax (GST), the biggest reform in India’s indirect tax structure since the economy began to be opened up 25 years ago, at last looks set to become reality. The Constitution (122nd) Amendment Bill comes up in Rajya Sabha today, on the back of a broad political consensus and boosted by the ‘good wishes’ of the Congress, which holds the crucial cards on its passage. Here’s how GST differs from the current regimes, how it will work, and what will happen if Parliament clears the Bill.

Stage 1

Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.
In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).

Stage 2

The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.
A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 – 13).

Stage 3

In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.

How it would be in a non-GST regime?

In a full non-GST system, there is a cascading burden of “tax on tax”, as there are no set-offs for taxes paid on inputs or on previous purchases.

Thus, if we consider the same example as above, the manufacturer buys raw materials/inputs at Rs 100 after paying tax of Rs 10. The gross value of the shirt (good) he manufacturers would be Rs 130, on which he pays a tax of Rs 13. But since there is no set-off against the Rs 10 he has already paid as tax on raw materials/inputs, the good is sold to the wholesaler at Rs 143 (130 + 13).

With the wholesaler adding value of Rs 20, the gross value of the good sold by him is, then, Rs 163. On this, the tax of Rs 16.30 (at 10%) takes the sale value of the good to Rs 179.30. The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchase from the manufacturer.

The retailer, thus, buys the good at Rs 179.30, and sells it at a gross value of Rs 208.23, which includes his value addition of Rs 10 and a tax of Rs 18.93 (at 10% of Rs 179.30). Again, there is no mechanism for setting off the tax on the retailer’s sale against the tax paid on his previous purchase.

The total tax on the chain from the raw material/input suppliers to the final retailer in this full no-GST regime will, thus, work out to Rs 10 + 13 + 16.30 + 18.93 = Rs 58.23. For the final consumer, the price of the good would then be Rs 150 + 58.23 = Rs 208.23.

Compare this Rs 208.23 — with a tax of Rs 58.23 — to the final price of Rs 166, which includes a total tax of Rs 16, under GST.

Also read | Looking forward to GST becoming reality, says FICCI

What’s it like in today’s mixed scenario?

Currently, we have Value-Added Tax (VAT) systems both at the central and state levels. But the central VAT or CENVAT mechanism extends tax set-offs only against central excise duty and service tax paid up to the level of production. CENVAT does not extend to value addition by the distributive trade below the stage of manufacturing; even manufacturers cannot claim set-off against other central taxes such as additional excise duty and surcharge.

Likewise, state VATs cover only sales. Sellers can claim credit only against VAT paid on previous purchases. The VAT also does not subsume a host of other taxes imposed within the states such as luxury and entertainment tax, octroi, etc.

Once GST comes into effect, all central- and state-level taxes and levies on all goods and services will be subsumed within an integrated tax having two components: a central GST and a state GST.

This will ensure a complete, comprehensive and continuous mechanism of tax credits. Under it, there will be tax only on value addition at each stage, with the producer/seller at every stage able to set off his taxes against the central/state GST paid on his purchases. The end-consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Also read | GST and federalism: Some questions BJP must answer

What will the Bill in Parliament today do?

It basically seeks to amends the Constitution to empower both the Centre and the states to levy GST. This they cannot do now, because the Centre cannot impose any tax on goods beyond manufacturing (Excise) or primary import (Customs) stage, while states do not have the power to tax services. The proposed GST would subsume various central (Excise Duty, Additional Excise Duty, service tax, Countervailing or Additional Customs Duty, Special Additional Duty of Customs, etc.), as well as state-level indirect taxes (VAT/sales tax, purchase tax, entertainment tax, luxury tax, octroi, entry tax, etc). Once the Bill is passed, there will only be a national-level central GST and a state-level GST spanning the entire value chain for all goods and services, with some exemptions.

WHAT GOES?

Central taxes That The GST will replace

# Central Excise Duty
# Duties of Excise (medicinal and toilet preparations)
# Additional Duties of Excise (goodsof special importance)
# Additional Duties of Excise (textiles and textile products)
# Additional Duties of Customs (commonly known as CVD)
# Special Additional Duty of Customs (SAD)
# Service Tax
# Cesses and surcharges in so far as they relate to supply of goods or services

State taxes That The GST will Subsume

# State VAT
# Central Sales Tax
# Purchase Tax
# Luxury Tax
# Entry Tax (all forms)
# Entertainment Tax (not levied by local bodies)
# Taxes on advertisements
# Taxes on lotteries, betting and gambling
# State cesses and surcharges

Also read | Confident of getting GST passed in Parliament: Rajnath Singh

The GST Council

WILL CONSIST of the union Finance Minister (chairman) and MoS in charge of Revenue; Minister in charge of Finance or Taxation, or any other Minister, nominated by each state
DECISIONS WILL be made by three-fourths majority of votes cast; Centre shall have a third of votes cast, states shall together have two-thirds
MECHANISM for resolving disputes arising out of its recommendations may be decided by the Council itself

The levy of GST

BOTH Parliament, state Houses will have the power to make laws on the taxation of goods and services
PARLIAMENT’S LAW will not override a state law on GST
EXCLUSIVE POWER to Centre to levy, collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST)
CENTRAL LAW will prescribe manner of sharing of IGST between Centre and states, based on GST Council’s views

What’s Out of GST…

Alcoholic liquor for human consumption
Petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel — GST Council will decide until when

… AND What’s In

Tobacco, tobacco products. Centre may impose excise duty on tobacco

The journey so far…

Budget 2006-07: GST by April 1, 2010, announced. Subsequently, Empowered Committee (EC) of state Finance Ministers tasked with drawing up roadmap and design

April 2008: EC, headed by the then West Bengal Finance Minister Asim Dasgupta, submits report to the central government, which offers its views and comments in October and December of that year. Joint working groups are then set up to examine options on exemptions and thresholds, taxation of services and inter-state supplies, etc

November 2009: EC releases its First Discussion Paper

March 22, 2011: The Constitution (115th Amendment) Bill is introduced in Lok Sabha; is referred to Parliamentary Standing Committee on Finance, which submitted its report on August 7, 2013. Bill lapsed as term of the Lok Sabha ended in 2014

December 19, 2014: Constitution (122nd Amendment) Bill introduced in Lok Sabha

May 6, 2015: Constitution Amendment Bill passed by Lok Sabha

May 12, 2015: Bill referred to a 21-member Select Committee of Rajya Sabha headed by Bhupender Yadav

July 22, 2015: Select Committee submits its report

Monsoon and Winter Sessions 2015, Budget Session 2016: Bill not tabled in the face of opposition led by the Congress and persistence of sticking points

…And Ahead

The President shall constitute the GST Council

The GST Council shall make recommendations on:

# Taxes to be subsumed
# Exemptions
# Model GST laws, Principles of Levy, etc.
# Threshold for exemption
# Rates, including floor and bands
# Special rate/rates for specified period
# Date from which GST to be levied on crude, high speed diesel, natural gas, aviation turbine fuel and petrol
# Special provisions for the Northeast, J&K, etc.

Parliament will have to pass legislation on central GST (CGST) and Integrated GST (IGST)

All 29 states and 9 UTs will have to pass their state GST (SGST) Acts

Dates of implementation of CGST, SGST and IGST have to be negotiated and synchronised

Also read | GST to be simple with 1 pc additional tax removal, say experts

TAX GAINS

BIGGEST BENEFIT is that it will disincentivise tax evasion. If you don’t pay tax on what you sell, you don’t get credit for taxes on your inputs. Also, you will buy only from those who have already paid taxes on what they are supplying. Result: a lot of currently underground transactions will come overground.

LOWER TAX RATES will follow from GST covering all goods and services, with tax only on value addition and set-offs against taxes on inputs/previous purchases. Right now, we have more tax on fewer items; with GST, there will be less tax on more items. Ideally, no good or service should be tax-exempt, as this will break the input tax chain.

noreply@blogger.com (K Sankarganesh) — Thu, 04 Aug 2016 02:21:00 +0000

Now, iron out the wrinkles

R. KAVITA RAO

OPINION » COMMENT

August 4, 2016

Updated: August 4, 2016 02:55 IST

COMMENT · PRINT · T T

The Hindu

FIGURING IT OUT: “Given that both the Union and State governments get considerable revenues from the existing indirect taxes which are sought to be replaced by the GST, the regime needs to generate enough resources.” A view of a provison shop in Chennai.

For the GST regime to be successful, it is important to not only reduce the costs of compliance within the system but also make more effective the costs associated with evasion.

Finally, the first step towards implementation of the Goods and Services Tax (GST) has been taken. From a state where the entire discourse was on the benefits of GST and the failure of India to implement such a landmark tax, there will now be a shift to discussing the structure of the tax and the forms and hurdles in implementation of GST.

This is a major achievement for the government given the considerable effort put in towards consensus-building. It is also a major step for the economy since the introduction of the GST is expected to knit the economy into a single common market which, in turn, will allow investment to benefit from economies of scale and facilitate more streamlined supply chain management. In other words, efficiency in the economy can be improved. While there have been concerns about inflation, experience internationally as well as India’s experience with value-added tax (VAT) have shown that while prices might spike in the initial months of introduction, this does not result in sustained inflation. This is therefore a big moment which needs to be appreciated before we embark on the next series required to be completed before the tax rolls out in the country.

Challenges ahead

Turning to the next set of challenges that might come and need to be addressed, there are three important challenges here. The first relates to the administration of the proposed GST regime. The advantages with the GST depend on a change in perception of the stakeholders on two fronts: one, the GST needs to emerge as a regime which is easier to comply with when compared to the other regimes in existence at present. Two, the administration should be perceived as being more vigilant so that evasion becomes more difficult in the GST that in the present regime.

Why are these important? The expected benefits from the GST are intrinsically related to a larger number of potential taxpayers believing that it is an advantage to be within the GST regime and a distinct disadvantage to be outside it. Any tax system involves certain costs for the taxpayers, in terms of tax payable as well as the cost of being in the regime in terms of record-keeping and other compliance requirements. Being outside the tax regime offers certain advantages since these costs need not be borne. However, there is a potential cost if a non-compliant dealer is caught and subjected to the punitive measures defined in the system. For the GST regime to be successful, it is important to not only reduce the costs of compliance within the system but also to make more effective the costs associated with evasion so as to induce a behavioural shift.

Viewed in this light, the few details that are available on the possible structure of GST administration raise a few concerns. While the tax base for the Centre and States is to be the same, it is proposed that both would continue to have separate administrations. The GST Network, the IT backbone for the new regime, will reduce taxpayer interface with departments for activities like registration and filing of returns. But for the rest of the functions, it is not clear whether there would be coordination between the departments or whether the taxpayer will face two tax departments with the possibility of two litigations as well! For the small taxpayers, it is suggested that there might be a simplified regime, in the sense that they might be monitored by only the State tax departments. But for the rest, it looks like there would be two tax administrations.

The second challenge in the proposed regime is reflected in the form that the draft GST legislation has taken. In the recent past, the Department of Revenue has placed in the public domain a draft GST bill for comments from stakeholders. Unfortunately, parts of the draft bill appear to be too keen to safeguard the interest of the tax departments and in the process introduce an element of interpretation into the regime, thereby expanding the scope for litigation. To give an example, the tax regime proposes that the value to be subject to tax would be transaction value, which can be different from the value on the invoice. For transactions between related parties, the draft legislation lays out a number of inclusions over and above the invoice value to determine the value of transaction. This is done to guard against problems of mispricing and any potential loss of revenue on this count. But given that the GST regime would require a large number of companies to undertake related party transactions, this particular provision could lead to a number of litigations. These might not contribute to a perception of a compliance-friendly tax regime.

The tax test

The third challenge relates to the rates of tax for the GST regime. The challenge here can be summarised as follows: a high rate of tax is not considered desirable for voluntary self-compliance. This is even more applicable where the rate of tax shows up on the invoice — the consumer and the taxpayer would like to negotiate on whether the invoice is necessary or not. In other words, transactions could remain outside the domain of the GST, which would defeat the purpose of the GST. However, given that both the Union and State governments get considerable revenues from the existing indirect taxes which are sought to be replaced by the GST, the regime needs to generate enough resources. The challenge for the decision-makers in GST, i.e. the GST Council, would be to balance these two concerns. A GST regime with a single rate of tax is not under consideration.

While having fewer rates of tax is considered a desirable feature since it would reduce the incentive to misclassify supplies to minimise tax liability and incentivises individuals to remain within the ambit of GST, expanding the number of rates allows for certain supplies to be deemed luxuries which can be then be taxed at a higher rate, allowing the others to be taxed at a lower rate. The big challenge is to determine what rate structure to adopt so as to incentivise compliance and at the same time generate enough revenues. Clearly, the reduction in rates of tax cannot be left on the doorstep of improved compliance in the short run since that would place the governments at a substantial revenue risk. How this decision plays out would influence to a certain degree how successful the reform measure would be.

In other words, there are still a few major decisions to be taken before we can witness the roll-out of the GST. There are still a few challenges that need to be addressed. But given that the first step has been taken, it would stimulate efforts to iron out the other difficulties and resolve the other challenges. At least now, the commentators on the Indian economy would need to think of something else to comment about!

R. Kavita Rao is a Professor at the National Institute of Public Finance and Policy, Delhi.

noreply@blogger.com (K Sankarganesh) — Thu, 04 Aug 2016 02:20:00 +0000

The age of GST dawns

AJIT RANADE

OPINION » LEAD

August 4, 2016

Updated: August 4, 2016 02:54 IST

COMMENT · PRINT · T T

SURENDRA
edit page 040816 Surendra

As the most important indirect tax reform since 1947, it will create a single market and push competitiveness. It represents a historic political consensus, but there are potential implementation problems.

The introduction of a unified goods and services tax (GST) across the nation is the most important indirect tax reform since Independence. It has taken almost 16 years from the date of inception of the idea, formation of a task force, to passage in Parliament. It represents a Herculean, nationwide, multi-party consensus-building exercise which is finally bearing fruit.

The upside of GST

It has huge implications. First, it addresses a serious impediment to our competitiveness. Without the GST, there are multiple points of taxation, and multiple jurisdictions. We also have an imperfect system of offsetting credits on taxes paid on inputs, leading to higher costs. Further there is cascading of taxes — that is, tax on tax. Interstate commerce has been hampered due to the dead-weight burden on Central sales tax and entry taxes, which have no offsets. All this will go once the GST is in place. It will enhance the ease of doing business, and make our producers more competitive against imports.

Second, the adoption of the GST is an iconic example of what Prime Minister Narendra Modi has called “cooperative federalism”. It represents a national consensus, an outcome of a grand bargain struck together by 29 States and seven Union Territories with the Central government. The States agreed to give up their right to impose sales tax on goods (VAT), and the Centre gave up its right to impose excise and services tax. In exchange they will each get a share of the unified GST collected nationally. The anticipated additional gains in efficiency, competitiveness and overall tax collections are what drove this bargain.

Third, once the GST is in place, it means a unified, un-fragmented national market for goods and services, accessible to the smallest entrepreneur. Companies need not maintain stock depots to avoid paying interstate taxes. This will free up some capital. All this will add to demand, and also efficiency. The National Council for Applied Economic Research and others have estimated that national GDP growth can go up by one percentage point on a sustained basis.

Fourth, because the structure of claiming input tax credit is linked to having proof of taxes paid at an earlier stage in the value chain, this creates interlocking incentives for compliance between vendor and customer. No more questions from a vendor: “Would you like that with receipt or without receipt?” Because of this inherent incentive, the total taxes paid, and hence collected, may go up significantly. This provides buoyancy to the GST. In fact, a significant part of the black economy will enter the tax-paid economy.

The potential downside

All of this constitutes the upside of adopting the GST. Its roll-out represents a rare and historic political consensus. But that should not blind us to its potential downside, or the devil lurking in the details of its implementation. Here are some issues to consider.

First is the question of the uniform GST rate. What should it be? An early report of the Finance Ministry from 2003 mentioned a rate of 12 per cent. Over the years this rate drifted higher, and the focal number being discussed now is 18 per cent. What determines this number?

The empowered committee of finance ministers uses a concept called “Revenue Neutral Rate” or RNR. The RNR is that uniform rate which when applied will leave all States with the same revenue as before. So no State should lose out by signing up to the GST. But this approach is faulty, since unless we try it for a year (or more) we won’t be able to gauge the buoyancy of the GST. In trying to assuage the fears of States, the calculation of the RNR has been loaded by every possible existing tax (like entry tax, octroi, etc.). This has caused the RNR to steadily escalate upward. At one point, the National Institute of Public Finance and Policy mentioned 26 per cent. The higher the RNR (and hence GST rate), the more is its inflationary impact. This is a sure way of killing the golden egg-laying goose. A better approach is to keep the GST rate low initially, and promise to fully reimburse losing States by the end of the year. Everyone may be in for a pleasant surprise by GST buoyancy. But this tax buoyancy will stop working beyond a certain threshold (like say 18 or 20 per cent). The focus on the RNR is self-defeating.

Taxation and litigation

The second issue is that the GST is an indirect tax. By their very nature, indirect taxes are regressive because they affect the poor more than the rich. India’s ratio of indirect to direct tax collection is 65:35, which is exactly the opposite of the norm in most developed countries. India’s ratio of direct tax to GDP is one of the lowest in the world, and it badly needs to expand the direct tax net. Only 4 per cent of India pays income tax, but practically all Indians pay indirect taxes in one form or the other. Direct tax rates have been falling, and indirect tax rates rising. For instance, service tax (an indirect tax) used to be 5 per cent in the 1990s and is now more than 15 per cent. The Swachh Bharat cess, or frequent increase in excise duty on petrol and diesel are all recent examples of regressive indirect tax. Unless a rate cap is adopted, the GST rate could easily drift higher, further hurting India’s income inequality. To meet their fiscal needs, it is always tempting for governments to tweak indirect taxes higher, since the work of expanding the direct tax net is so much harder. This temptation must be curbed with a rate cap.

The third issue is of tax litigation. Approximately Rs.1.5 lakh crore is stuck in litigation related to Central excise and service taxes. On the other hand the State-level VAT is administered in a way that empowers tax officials to dispose of cases quickly. Disputes involving Central taxes go though an appeal and tribunal process, and can drag on for years. But empowered staff under the Sales Tax Commissioner can dispose of valid grievances of State-level VAT payers much faster. This difference is called the “review” versus “revise” approach to tax disputes. It is important that the GST approach leans towards the more efficient State-level model.

State of the States

The fourth issue in implementing the GST is the governance within the GST Council. It is a de facto council of States, along with representatives from the Union Finance Ministry. It seems that one State will get one vote, irrespective of its size. This seems unfair. An economically larger State, contributing a bigger chunk of the GST pie, should have a greater say. Similarly, the special needs of smaller States should also be heeded. For instance, the Northeast States had to be assuaged already with a lower threshold for GST exemption, because if a higher (uniform) threshold were adopted nationally, then nearly all businesses of the Northeast would become tax-exempt.

Finally, the issue of States’ autonomy. India will be a unique large democracy that adopts a nationwide GST, with virtually no taxing powers to the States. In the United States, the States have power to impose sales and income taxes. Within the European Union (EU), each member country retains fiscal autonomy, and also the freedom to breach the fiscal deficit of 3 per cent of GDP. Indeed virtually all members of the EU have breached that limit. In India, what if a State wants to undertake a special spending programme to respond to a State-specific situation, such as a disaster? In 1982, the Chief Minister of Tamil Nadu upgraded a midday meal scheme which his opponents criticised as being an empty promise and fiscally reckless. In response he raised taxes on goods (not possible in a GST regime), and made the programme so successful that it is praised to this day, not just in India but also around the world. It achieved the double objective of better nutrition for children and better school attendance. Similarly in the drought crisis year of 1972, the Maharashtra government imposed a profession tax on city dwellers (not possible under the GST) to fund an innovative programme called the rural “Employment Guarantee Scheme (EGS)”, which three decades later was acknowledged nationally as the inspiration behind the National Rural Employment Guarantee Act. The GST regime should remain sympathetic to this issue of States’ fiscal autonomy. We have not even mentioned here what happens to the third tier, i.e. local bodies.

The GST is obviously not a panacea for all ills of India’s economy. It is nevertheless a revolutionary and long-pending reform. It promises economic growth and jobs, better efficiency and ease of doing business, and higher tax collection. We hope that its imperfections and potential pitfalls will be sorted out as we roll it out.

Ajit Ranade is a Mumbai-based economist.

noreply@blogger.com (K Sankarganesh) — Thu, 04 Aug 2016 02:12:00 +0000

GST Bill: Green light for ‘one nation, one tax’

NATIONAL

NEW DELHI, August 4, 2016

Updated: August 4, 2016 02:28 IST

PUJA MEHRA

COMMENT · PRINT · T T

Reuters

The GST will have two components keeping in mind the federal structure of India: the Central GST (CGST) and the State GST (SGST).

Barring the AIADMK, which staged a walkout on the plea that it violated federalism, all others, including the Congress, voted for the Bill.

After being subject to months of haggling and histrionics, the Goods & Services Tax (GST) finally had its historic day in the Rajya Sabha with the passage of the Bill to amend the Constitution, paving the way for what is popularly referred to as the concept of “one nation, one tax.”

Barring the AIADMK, which staged a walkout on the plea that it violated federalism, all others, including the Congress, voted for the Bill.

Led by the former Finance Minister P. Chidambaram, the Congress, supported by members of some other parties, made a valiant effort to extract an assurance from Finance Minister Arun Jaitley that as and when he would introduce the subsequent legislation to operationalise the GST, it would be as finance rather than money bills. This was to ensure that they would also be voted in the Rajya Sabha.

However, Mr. Jaitley refused to yield, stating that he could not give a commitment on future legislation whose contours would be decided by the Centre and the States together.

Also read: Editorial | Good sense triumphs on the GST

The Rajya Sabha passed the constitutional amendment by two-thirds majority, as all parties, except the AIADMK, pledged support. The amendments moved by Mr. Jaitley were also put to vote. The Bill will now be returned to the Lok Sabha for its approval.

The constitutional amendment will enable both the Centre and the States to simultaneously levy the GST, which will subsume all indirect taxes currently levied, including excise duties and service tax. It will be levied on consumption rather than production.

Two components

The GST will have two components keeping in mind the federal structure of India: the Central GST (CGST) and the State GST (SGST).

The shift to the GST regime will lead to a uniform, seamless market across the country. It will be a uniform rate, will check evasion, and boost growth rates, Mr. Jaitley said initiating the debate.

Earlier in the day, lead speaker for the Congress, Mr. Chidambaram, made it clear that the main Opposition party will support the long-pending Bill only if the government gave firm assurances on two things: keeping the GST rate capped at 18 per cent in the subsequent legislation needed for the GST’s roll-out and bringing forth these as financial bills rather than money bills, which the Upper House will not just discuss but also vote on.

Jaitley hopes GST rates will be moderate

The Union Finance Minister also refused to give an assurance on demands put forth by Congress leader P. Chidambaram and others but did give the Rajya Sabha his word that the government will go by the Constitutional provisions and precedents at the time of bringing in the subsequent GST Bills.

The Congress members voted in favour of the Bill.

The Finance Minister said that his discussions with States led him to believe that the rates would be moderate and less onerous than the combined burden of the Central and State taxes on goods and services, which comes at present rates to about 27%. However, he said that it was not possible for him to give an assurance on legislations that had not yet been drafted. Before the Bill was put to vote, the AIADMK members staged a walkout from the House.

Putting on record that the GST was originally initiated by his predecessor, Mr. Chidambaram, Mr. Jaitley expressed gratitude to leaders of all political parties for the consensus that he was able to build on the Bill. “A legislation of this kind cannot be made on the basis of a partisan approach…,” he said.

noreply@blogger.com (K Sankarganesh) — Thu, 04 Aug 2016 02:11:00 +0000

On-tap bank licence not for big corporates

BUSINESS » INDUSTRY

MUMBAI, August 1, 2016

Updated: August 1, 2016 23:49 IST

SPECIAL CORRESPONDENT

COMMENT · PRINT · T T

The Hindu

The Reserve Bank of India (RBI) building in Mumbai, File Photo: Vivek Bendre

Final guidelines mandate Rs.500 cr. as minimum capital.

Large industrial houses, whose income from non-banking sources is over 40 per cent of total will not be eligible to set up a universal bank in the country, the Reserve Bank of India (RBI) said on Monday. However, they are allowed to pick up 10 per cent stake in banks.

Final guidelines

In the final guidelines on on-tap licensing, the central bank has allowed individuals with 10 years of experience in banking and finance, as well as business groups with 10 years’ track record to promote universal banks. For business groups with more than Rs.5,000 crore in total assets to be eligible for a licence, their income from non-financial businesses should not account for 40 per cent or more in terms of total assets/in terms of gross income.

“Large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10 per cent,” RBI said in its guidelines statement.The existing non-banking financial companies (NBFCs) that are controlled by residents and have a successful track record for at least 10 years will also be eligible. However, an NBFC, which is a part of the group where the non-financial business of the group accounts for 40 per cent or more in terms of total assets/gross income, is not eligible, the banking regulator clarified.

The bank should have a minimum capital of Rs.500 crore and should list on the stock exchanges within six years of commencing operations, RBI said. The bank shall open at least 25 per cent of its branches in unbanked, rural centres. The bank should also maintain a capital adequacy ratio of 13 per cent in the first three years of operation as compared to 9 per cent in existing banks.

NOFHC requirement

Setting up of a non-operative financial holding company (NOFHC) has not been made mandatory for individuals and standalone promoting entities that do not have any other group entities. For others, the RBI has mandated that at least 51 per cent stake in the NOFHC should be owned by the promoter group.

“No shareholder, other than the promoters/promoter group, shall have significant influence and control in the NOFHC,” the norms said.

The promoters should hold a minimum of 40 per cent stake in the bank, locked-in for a period of five years, but the stake should be brought down to 15 per cent within 15 years.

After setting up the bank, the NOFHC will not be allowed to set up any financial services entity for three years, the RBI said.

A Standing External Advisory Committee (SEAC) will be set up by the RBI to vet the applications. The committee would send its recommendations to the Internal Screening Committee (ISC), consisting of the Governor and Deputy Governors. The ISC would then submit its recommendations to the Committee of the Central Board of RBI for the final decision to issue an in-principle approval, which would be valid for 18 months.

Unsuccessful applicants can appeal against the decision to the Central Board of Directors, within one month of being rejected. Names of applicants and successful candidates would be made public, the RBI said.

Keywords: RBI, Reserve Bank of India, Capital

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OPINION » COMMENT

For the GST regime to be successful, it is important to not only reduce the costs of compliance within the system but also make more effective the costs associated with evasion.

The age of GST dawns

OPINION » LEAD

As the most important indirect tax reform since 1947, it will create a single market and push competitiveness. It represents a historic political consensus, but there are potential implementation problems.

GST Bill: Green light for ‘one nation, one tax’

Barring the AIADMK, which staged a walkout on the plea that it violated federalism, all others, including the Congress, voted for the Bill.

On-tap bank licence not for big corporates

BUSINESS » INDUSTRY

Final guidelines mandate Rs.500 cr. as minimum capital.

September 1, 2016

Updated: September 1, 2016 00:19 IST