GST Bill passed: India gets tax regime that’s globally competitive, economically gainful

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Time was when an importer had to fork out as much as 220% customs duty and individuals were made to pay up to 97% income tax. The Indian tax system has undergone a sea change since then and the passage of the GST Bill by the Rajya Sabha on Wednesday capped the struggle of successive governments for a tax regime that is globally competitive and economically gainful.

From an abysmal level of less than 5% in 1960s, the country’s tax-to-GDP ratio rose to an all-time high of 11.89% in 2007-08 and stood at 10.7% in the last fiscal. While it’s still less than the 18-19% in some developed nations, the proposed GST regime promises to change it for the better. And as India gears up to embrace this regime, a look at the evolution of its tax system over the years suggests there are plenty that can be looked at with optimism.

One of the country’s most important indirect tax reforms started in one of its darkest hours, by one of its most eminent economist-finance ministers. In 1991, when the country was on the cusp of a balance of payment crisis, Manmohan Singh presented his “epochal budget”, drastically cutting the peak customs duty from 220% to 150%. He offered tax concessions for software exports and set up a commission under Raja Chelliah to suggest tax reforms.

He announced: “The time has come to expose Indian industry to competition from abroad… As a first step in this direction, the government has introduced changes in import-export policy, aimed at a reduction of import licensing, vigorous export promotion and optimal import compression.” The country’s peak customs duty now stands at 13.5%; for non-agricultural goods, the peak customs duty is even lower, at 10%.

While the steady reduction in the customs duties since 1991-92 forced the domestic industry to improve their competitiveness, the tax concessions announced by Singh led to the emergence of global IT giants like TCS, Infosys and Wipro. Even Chelliah, who later suggested broadening the tax base and levying lower and less differentiated rates, came to be called by some “the father of India’s tax reforms”.

In 1994, Singh also introduced a service tax (5%) on three services—telephone bills, non-life insurance and tax brokerage—seeking to cash in on the fast-growing services segment, which was making up for some 40% of the country’s economy. The service tax base and rates were steadily raised over the years. It’s no wonder that the service tax collection rose from a paltry R400 crore in 1994-95 to R2,10,000 crore in the last fiscal.

In 2000, the then finance minister Yashwant Sinha effected major rationalisation in the excise duty structure to introduce a single Cenvat rate of 16%. In 2004, with the integration of service tax with the Cenvat chain government sought to reduce the cascading effect of indirect taxes on ultimate consumer of goods and services. In 2005, the value-added tax regime kicked in, as the government decided to rationalise the sales tax system.

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SEBI proposes changes in ITP norms to attract more firms

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The Securities and Exchange Board of India (Sebi) on Friday proposed changes to the Institutional Trading Platform (ITP), to draw more companies to it. Comment on the discussion paper has been invited till August 14.

Introduced in 2013, the platform allows companies, particularly in information technology (IT), to list without necessarily doing an Initial Public Offer of equity. So far, only around 40 companies are listed on the ITP platforms of the BSE or the National Stock Exchange.

IT companies to qualify on this platform need Qualified Institutional Buyer (QIB) shareholding of at least 25 per cent; other companies need 50 per cent. Sebi has proposed to expanded the definition of QIBs to investors such as family trusts and individual foreign investors. Also, to do away with the 25 per cent cap on single investors listed on the platform.

Further, it proposes to reduce the minimum institutional investor participation, from 75 per cent to 50 per cent. Also, to increase the ceiling on allotment to individual institutional investors from 10 per cent to 25 per cent to a single entity. Sebi has also proposed to make market making compulsory for a minimum of three years for an issue size of less than Rs 100 crore.

More important, it has proposed to ease trading lots on the ITP platform from Rs 10 lakh to Rs 5 lakh. Interestingly, Sebi has also proposed to rename ITP as  ‘high-tech start-up & other new business platform’.

Source: http://www.business-standard.com/article/markets/sebi-proposes-changes-in-itp-norms-to-attract-more-firms-116072901316_1.html

Online biz firms to give contact details on their portals

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Companies which conduct online business will now have to provide on their websites details about their registration with the government, as well as information about persons to be contacted for grievances.

The government’s move to introduce the requirement comes against the backdrop of instances where people have been duped by way of fraudulent activities, including through online platforms. Tweaking the rules for incorporation of companies, the government has also put in place stricter conditions for conversion of unlimited liability companies into a company limited by shares or guarantee.

The corporate affairs ministry has amended the rules for incorporating a company under the Companies Act, 2013.

Now, “every company which has a website for conducting online business or otherwise, shall disclose/publish its name, address of its registered office, the Corporate Identity Number (CIN), telephone number, fax number, if any, e-mail and the name of the person who may be contacted in the case of any queries or grievances on the landing/home page of the said website”. CIN is the unique number allotted to an entity after getting registered under the Companies Act.

As for conversion of an unlimited liability company into a firm company limited by shares or guarantee, the ministry has made the norms stricter.

Under the amended rules, after conversion, name of the company should not be changed for one year and it will also not be allowed to give dividend unless past debt and liabilities are cleared.

In this regard, the ministry said “past debts, liabilities, obligations or contracts do not include secured debts due to banks and financial institutions”.

The Corporate Affairs Ministry, which is implementing the Companies Act, has already effected a number of changes to various rules under this legislation as part of larger efforts to protect investor interests as well as improve ease of doing business.

Most provisions of the Companies Act, 2013, came into effect from April 1.

Source: http://www.business-standard.com/article/companies/online-biz-firms-to-give-contact-details-on-their-portals-116080100026_1.html

FDI inflows rise 7% to $10.55 bn in Q1

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Foreign direct investment (FDI) inflows grew 7 per cent to $10.55 billion during the first quarter against $9.88 billion in January-March 2015.

According to the Department of Industrial Policy and Promotion (DIPP) data, the sectors, which attracted maximum FDI during the period, include computer hardware and software, services, telecommunications, power, pharmaceuticals and trading business.

In terms of countries, India received maximum overseas inflows from the US, Singapore, Mauritius, Japan and the Netherlands.

An official said with the government further liberalising foreign investment policies for services sector in the Budget, more inflows would come.

The government has recently relaxed FDI norms in about eight sectors, including defence, civil aviation, food processing, pharmaceuticals and private security agencies.

Foreign investment is considered crucial for India, which needs around $1 trillion for overhauling infrastructure sector such as ports, airports and highways to boost growth.

A strong inflow of foreign investments will help improve the country’s balance of payments situation and strengthen the rupee value against other global currencies, especially the US dollar.

 

Source: http://www.thehindubusinessline.com/economy/fdi-inflows-rise-7-to-1055-bn-in-q1/article8916909.ece

Stressed asset business ready to take off

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Companies in the distressed assets business have patiently waited for close to a decade to strike gold but got regularly sidestepped by banks that won’t part with their lemons at a reasonable rate.

The wait could come to an end soon, as the burgeoning bad debt burden and their humongous provisioning requirement is putting capital-starved banks in serious jeopardy, with no resolution in sight. The word has spread, bringing in its wake an army of globally savvy vulture funds that are sweeping down to get a chunk of the share.

These investors have ready cash and the government is on their side, allowing the sponsors to hold 100 per cent in a fund, and arming them with the Bankruptcy Code that would give the firms and banks power to wind down a company in mere 180 days, say sector watchers.
Banks, though, are still resisting, sometimes with such unreasonable demands like asking for 100 per cent of the principal amount or more, to offload the bad debt. But, experts say, unless banks become experts in recovering their dues themselves, the lenders won’t be able to hold for long.

“Banks have to offload the bad debts in the market but it remains to be seen how the market emerges,” said Birendra Kumar, managing director (MD) of International Asset Reconstruction Co.

Following the Reserve Bank’s (RBI’s) asset classification norm, a bank has to categorise a stressed loan as a loss and provide an amount equal to it on their books if it remains so for more than three years (provisions increase progressively from 15 per cent to 25 per cent, 40 per cent and then 100 per cent, depending on the age of the bad debt).

“Banks know they can hold the assets for one or two years only. After three-four years, they will have to get rid of it anyway. Otherwise, they not only incur heavy provisions; the assets also lose their viability,” said Siby Antony, MD at Edelweiss ARC.

Bad debts in Indian banks have worsened progressively in the past few years and are now at about Rs 6 lakh crore, up from Rs 4.5 lakh crore in December 2015 and Rs 2.52 lakh crore in December 2013. In the interim, the minimum provisioning requirement has gone up from five per cent to 15 per cent, and capital infusion by the government is not even enough to cover the total capital erosion that banks have witnessed.

TIME TO CLEAR DEBTS
  • Banking sector NPA stood at Rs 5.94 lakh crore in March 2016
  • There are 15 asset reconstruction companies in India; 10, or more  applications awaiting approval
  • RBI directed asset reconstruction companies to pay 15% in cash and rest in security receipts
  • Experts predict emergence of  cash deals
  • Recently, Brookfield and SBI floated $1-billion stressed funds
  • The govt has also directed banks to float distressed funds
  • Bankruptcy Code will give more teeth to recovery

While it is true that Indian banks have managed to recover and upgrade some of the loans, this is not even 15 per cent of the total stress. And, much of the book clean-up has been done by selling the assets to asset reconstruction companies (ARCs).

Typically, ARCs issue security receipts (SRs) to banks and pay about 15 per cent of the asset price upfront. They then act as an agent for banks to recover the dues, earning a spread. ARCs can also buy assets upfront and recover the dues for themselves but that is hardly followed in India. However, this practice could change, with distress funds from round the world setting up shop in India with a deep pocket, ready to buy assets in all-cash deals. According to Birendra Kumar, banks are now reluctant on selling assets on SR basis, as it takes years to recover the due, but the cash discounts offered by the banks is not good enough to attract buyers of stressed assets.

“It would continue to be a mix of SRs and cash. Global players would generally prefer to buy on cash basis, and banks in such situations will have to offer a higher discount,” said Kumar.

According to various estimates, in India, banks sell stressed assets at not more than a 40-45 per cent discount. In the case of a cash deal, globally the practice is to sell assets at not more than 25-30 per cent of the value. “The current size of the ARC industry is a matter of conjecture, given the lack of authoritative data. However, based on the agency’s discussions with market participants, it is understood that SRs are outstanding to the tune of Rs 60,000 crore, backed by NPAs (non-performing assets) close to Rs 1 lakh crore as at end-March 2016,” says a report from India Ratings (Ind-Ra).

About 71.4 per cent of the SRs rated by Ind-Ra belong to the small and medium enterprises segment. Large corporates constitute 9.6 per cent and retail (individuals) account for 19 per cent.So far, 15 ARCs have been given a licence by RBI and at least 10 more are pending with the central bank. Global vulture funds and stressed fund specialists like JC Flowers & Co, Eight Capital Management LLC, SSG and KKR are partnering with domestic firms such as Ambit Holdings, Piramal, etc, for the ARC business. Besides, Brookfield Asset Management, a stressed funds specialist, in partnership with the country’s largest lender, State Bank of India (SBI), is floating a fund to take advantage of the distressed market. The Brookfield-SBI venture has committed $1 billion to start with, underscoring the market’s potential.

Meanwhile, the existing ARCs continue to suffer from lack of capital and the stipulation that assets can be purchased only after paying up at least 15 per cent upfront. This has limited their ability to take large exposure.

“The challenges the older ARCs face are inadequate capital and specialist management expertise to drive turnarounds of acquired stressed assets. The ARC industry has capital of $400-500 million, with the total of stressed assets in the banking sector estimated to be $130 billion,” said Nikhil Shah, the MD at Alvarez & Marsal India, a turnaround specialist. Shah says the new funds that are coming to India will change the game in favour of asset resolution.

“The older ARCs have not demonstrated capability in reviving acquired stressed businesses. The new entrants are expected to be more aggressive in implementing measures like management changes and deploying significant primary capital in the businesses to improve value,” he added.

“The Bankruptcy Code, with its time-bound resolution, will provide ARCs and stressed assets funds more teeth to execute changes in a shorter time frame.”

However, Antony of Edelweiss ARC does not believe the new stressed fund managers would do something drastically different. “With the new relaxation in the Budget, where the government allowed sponsors to hold up to 100 per cent stake in an ARC and allowing 100 per cent foreign direct investment in ARCs via automatic route, the capital issue of ARCs have been addressed,” said Siby of Edelweiss, adding the legal structure is also getting fixed and that will allow stressed funds to grow exponentially. Now, if only banks would listen to reason and lower their prices for stressed funds, a flurry of activity in India’s stressed assets market would become the norm.

 

Source: http://www.business-standard.com/article/finance/stressed-asset-business-ready-to-take-off-116072801716_1.html

Foreign capital flow into EMs climbs to $25 billion

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Emerging markets (EMs) have witnessed an inflow of $25 billion from foreign portfolio investors in this month so far, says a report.

Equity flows were the dominant driver this month, with an estimated $14.6 billion in inflows, while debt flows were more moderate at $10.2 billion, according to the report by the Institute of International Finance.
Inflows were dominated by EM Asia, followed by Latin America, while EM Europe and Africa, West Asia saw modest outflows.

“Regionally, EM Asia saw total inflows of $19.1 billion, followed by Latin America with inflows of $8.7 billion, while there were modest outflows from EM Europe and AFME,” the report noted.

Portfolio flows to EMs rose to $24.8 billion in July from $13.3 billion in the preceding month. Prior to that, EMs saw an outflow of $12.3 billion in May.

“In fact, July marked only the second month over the past year where portfolio flows were above their long-term average of $22 billion,” it added.

The recovery in flows during the past few months follows a period of exceptional weakness in EM portfolio flows that began with China’s mini-devaluation almost a year ago and saw cumulative outflows of $81 billion from EMs, compared to $96 billion during the global financial crisis.

Source: http://www.business-standard.com/article/markets/foreign-capital-flow-into-ems-climbs-to-25-billion-116072800946_1.html

Extension of Due Date – Filing of Income Tax Return for Assessment Year 2016-17

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Income tax department has issued order that due date of filing of returns of income for the Assessment Year 2016-17 has been extended from July 31, 2016 to August 5, 2016, for those assessees, whose due date was originally 31 July 2016.

 

The relevant circular issued by CBDT in this regard is available at http://incometaxindia.gov.in/Lists/Latest%20News/Attachments/54/order-extension-india-2016.pdf  for ready reference.

 

Please visit http://incometaxindiaefiling.gov.in/ for filing your ITR.

 

Tax return filing is mandatory for Individuals whose income is above the taxable limit.

 

As per CBDT Notification number 225/195/2016 dated 29.07.2016, due date is extended from 31.07.2016 to 05.08.2016 in case of tax payers, not liable for audit, as per the revised due date  August 5, 2016.