Union Budget 2017: Economic Survey says reforms to power India potential growth

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India’s economy could grow at 6.5-6.75% in the current financial year and might not gather significant momentum next year but that doesn’t warrant a fiscal/monetary easing, according to Economic Survey 2016-17 tabled in Parliament on Monday. Projecting a 0.25-0.5% demonetisation-induced reduction in the FY17 gross domestic product (GDP) growth relative to the 7% annual expansion the country would have otherwise reported, the survey cautiously estimated FY18 growth within a broad low-equilibrium range of 6.75-7.5%.

A clutch of states in India have suffered from an “aid curse” — that is, a negative effect on redistributive resource transfers on fiscal effort and governance quality — the survey noted and invited a debate on universal basic income (UBI) for households in these states.

Direct UBI transfers to the households could be a more efficient way to reduce poverty, cementing the recent gains in redistributive efficiency through the JAM (Jan Dhan, Aadhaar and mobile) platform, the authors of the survey felt, but they cautioned against UBI implementation until the tax-GDP ratio showed tangible rise.

“There is a big potential to improve the weak targeting of current (anti-poverty) schemes,” chief economic adviser Arvind Subramanian said, amid rumours that Wednesday’s Union Budget might launch a pilot UBI.

According to the survey, the short-term effect of the note ban on the economy will be less adverse than many others predicted: The International Monetary Fund (IMF), for instance, saw a 1 percentage point growth reduction in FY17; the Reserve Bank of India had pegged a 0.5% loss in growth. The IMF, Subramanian said, relied on an “over-optimistic baseline”.

Given that growth was 7.2% in the first half of this fiscal and the survey assumption is against the baseline scenario of around 7% FY17 growth, the forecast is that second-half growth, at worst, could be around 6%.

This is still a bit more optimistic than what many independent analysts prognosticated — Morgan Stanley Research, for instance, put H2 FY17 growth at 5.5%.

However, the survey appreciated the limitation of capturing informal activity in the national income data, suggesting the pain of note recall might have been more severe. A set of structural reforms could take the economy towards the potential real GDP growth of 8-10%.

As for FY18, exports, which are “recovering”, based on an uptick in the global economy — the IMF has projected global growth to rise to 3.4% in 2017 from 3.1% in 2016 — would be a significant growth driver, the survey said, but admitted that the outlook for private consumption was less clear (oil prices are a potential drag while low interest rates might help a smart recovery in spending on housing and consumer durables). It also said candidly that given the sticky TBS or twin balance sheet problem, private investment was unlikely to recover from the FY17 level (fixed investment, according to the central statistics office, declined 0.2% this fiscal and investment as a share of GDP is now seen at 29%, down 5 percentage points from FY12). Demand-driven remonetisation, a push to digital payments using incentives, bringing land and real estate into the goods and services tax (GST) net, lowering tax rates and stamp duties and improving the tax system would help take growth back to trend in FY18, it said. However, the threat of trade tensions among major countries prevailed, especially given the Trump administration’s proclivity to step into a protectionist groove.

Giving the fiscal outlook for the Centre, the survey warned that the increase in tax-GDP ratio of about 0.5 percentage point each in the last two years owing to the oil windfall would disappear in FY18: “Excise-related taxes will decline by about 0.1 percentage point of GDP, a swing of about 0.6 percentage points relative to FY17,” it said. According to Crisil Research, about a third of the likely excise revenue of Rs 2.3 lakh crore in FY17 could be ascribed to excise duty increases on petroleum products. There would be windfalls from cessation of the RBI’s liability with respect to demonetised banknotes not returned to banks and the new income disclosure scheme PMGKY. Revenue potential from GST could, however, take some some time to be fully exploited.

While a committee on fiscal consolidation is believed to have recommended some well-defined escape clauses to provide the fiscal support to consumption and investment in the near term, the survey noted that primary balance (obtained after netting interest payments from the fiscal deficit) needed more attention. “The vulnerability is the country’s primary deficit… Put simply, India’s government is not collecting enough revenue to cover its running costs, let alone the interest on its debt obligations.” Although the survey noted that there was nothing extraordinary about this (other emerging market economies too run primary deficits), given India’s rapid rates of growth, its primary deficit should have been much lower than others.

This is still a bit more optimistic than what many independent analysts prognosticated — Morgan Stanley Research, for instance, put H2 FY17 growth at 5.5%.

However, the survey appreciated the limitation of capturing informal activity in the national income data, suggesting the pain of note recall might have been more severe. A set of structural reforms could take the economy towards the potential real GDP growth of 8-10%.

As for FY18, exports, which are “recovering”, based on an uptick in the global economy — the IMF has projected global growth to rise to 3.4% in 2017 from 3.1% in 2016 — would be a significant growth driver, the survey said, but admitted that the outlook for private consumption was less clear (oil prices are a potential drag while low interest rates might help a smart recovery in spending on housing and consumer durables). It also said candidly that given the sticky TBS or twin balance sheet problem, private investment was unlikely to recover from the FY17 level (fixed investment, according to the central statistics office, declined 0.2% this fiscal and investment as a share of GDP is now seen at 29%, down 5 percentage points from FY12). Demand-driven remonetisation, a push to digital payments using incentives, bringing land and real estate into the goods and services tax (GST) net, lowering tax rates and stamp duties and improving the tax system would help take growth back to trend in FY18, it said. However, the threat of trade tensions among major countries prevailed, especially given the Trump administration’s proclivity to step into a protectionist groove.

Giving the fiscal outlook for the Centre, the survey warned that the increase in tax-GDP ratio of about 0.5 percentage point each in the last two years owing to the oil windfall would disappear in FY18: “Excise-related taxes will decline by about 0.1 percentage point of GDP, a swing of about 0.6 percentage points relative to FY17,” it said. According to Crisil Research, about a third of the likely excise revenue of Rs 2.3 lakh crore in FY17 could be ascribed to excise duty increases on petroleum products. There would be windfalls from cessation of the RBI’s liability with respect to demonetised banknotes not returned to banks and the new income disclosure scheme PMGKY. Revenue potential from GST could, however, take some some time to be fully exploited.

While a committee on fiscal consolidation is believed to have recommended some well-defined escape clauses to provide the fiscal support to consumption and investment in the near term, the survey noted that primary balance (obtained after netting interest payments from the fiscal deficit) needed more attention. “The vulnerability is the country’s primary deficit… Put simply, India’s government is not collecting enough revenue to cover its running costs, let alone the interest on its debt obligations.” Although the survey noted that there was nothing extraordinary about this (other emerging market economies too run primary deficits), given India’s rapid rates of growth, its primary deficit should have been much lower than others.

Source: http://www.financialexpress.com/budget/economic-survey-2017/union-budget-2017-economic-survey-says-reforms-to-power-india-potential-growth/531664/

Tax avoidance rules: POEM norms to take effect from April, 2017

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Confirming that India’s so-called POEM regulations — which are meant to ascertain the residential status of companies and use it to curb tax avoidance — will take effect from April 1, the Central Board of Direct Taxes (CBDT) on Tuesday issued the final guidelines in this regard. While the draft Place of Effective Management rules issued in December 2015 had caused a stir in the industry for being out of sync with transnational business realities (under pressure from businesses, Budget FY17 deferred POEM activation by one year), the new draft narrowed the scope of the tool and sought to allay most concerns of the investor community about its potential improper use/misuse.

The CBDT has made it clear that POEM’s intent is  not to target Indian multinationals, which have legitimate business activities outside India, but to pin down shell companies  and firms created for retaining income outside India although the real control is exercised from India.

In what would reduce the chances of an assessing officer invoking the POEM provision without proper evaluation, the new rules state that she will need approval of a three-member collegium of her senior officers for triggering the test. Also, it has now been clarified that POEM guidelines won’t apply to companies having turnover or gross receipts of Rs 50 crore or less in a financial year. The regulations, the CBDT said, would apply for assessment year 2017-18 (FY17) and further.

“The guiding principles issued by the CBDT seeks to address some of the practical issues which could arise in application of the POEM test. The guideline strikes the right balance between providing certainty to taxpayers as well as ensuring that offshore companies with no substance or activities, which are controlled from India, are subject to Indian tax jurisdiction,” Rajendra Nayak, tax partner, EY India, said.

The POEM principle — which has found traction with tax authorities in capital-exporting countries and the OECD — was included in India’s I-T Act via the Finance Act, 2015 with the express purpose of discouraging the creation of shell companies with Indian shareholders in foreign jurisdictions to avoid tax residency in India. If a company is treated as resident in India, its worldwide income is taxable here, while only the India-sourced income of foreign companies is taxed. Although the tax rate on foreign companies is higher (40% versus the marginal rate of 30% for domestic firms), subjecting worldwide income to taxation could potentially increase the tax liability of many MNCs with Indian stakeholders. In fact, the real reason behind POEM is the tax department’s intent to curb corporate structures allowing passive foreign income — royalty, dividend, capital gains, interest income and the like — of firms incorporated in foreign countries with Indian ownership, escaping the tax net here. Tuesday’s draft, analysts said, gives further guidance on “active business outside India” test especially with respect to determination of passive income, total asset base, number of employees and payroll expenses in India and outside.

The new norms provide that if board of directors delegates authority to make key management decision/commercial decision to the promoter or strategic/legal/ financial advisors, the place of effective management will be the place where such persons makes those decisions.

Rakesh Bhargava, director, Taxmann, said: “In the final guidelines the CBDT has provided adequate safeguards to ensure that POEM guidelines does not become an oppressive tool in the hands of revenue to harass genuine assessees. Now, assessing officer can ascertain the residential status of foreign company on the basis of POEM guidelines only after taking two-stage approval; first approval is required before initiating any proceedings and second approval is needed before giving any final finding on residential status of foreign company.”

Giving additional clarifications, the CBDT said the decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company’s POEM. However, the circular added, the shareholder’s involvement can, in certain situations, turn into that of effective management. “Therefore, whether the shareholder involvement is crossing the line into that of effective management is one of fact and has to be determined on case-to-case basis only,” the circular said.

Furthermore, the guidelines stressed that day-to-day decisions taken by junior or middle management of a company wouldn’t be taken into account for determining POEM. However, in certain situations where the person responsible for operational decision is also the one responsible for the key management and commercial decisions, it will be necessary to distinguish the two type of decisions and assess the location where the key management and commercial decisions are taken.

Source: http://www.financialexpress.com/economy/tax-avoidance-rules-poem-norms-to-take-effect-from-april-2017/521170/

CBDT tightens screws on shell companies

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The Central Board of Direct Taxes (CBDT) on Tuesday issued the much-awaited “guiding principles” for determination of a Place of Effective Management (PoEM) of a company, scotching speculation that the Budget may see its removal from the statute book.

Put simply, PoEM means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

The CBDT guidelines come barely two months before the end of fiscal year 2016-17, in which PoEM had become legislatively effective, giving little time for Indian multinationals to prepare for the new regime.

The main objective of introducing PoEM was to ensure that companies incorporated outside India but controlled from India do not escape taxation here. It also brings in the concept of residency of corporates with internationally accepted principles, say tax experts.

Girish Vanvari, National Head of Tax, KPMG in India, said that the guidelines stress on substance over form. “They attempt to differentiate between shareholder control, management control and routine decisions. Whilst the guidelines are comprehensive, they are subjective on substance and can be challenged for interpretation in many places,” he said.

Narrower application

Rohinton Sidhwa, Partner, Deloitte, Haskins & Sells LLP, said that what has been released has a narrower application than what was originally proposed. They are also supplemented with examples on isolated facts that will not lead to a PoEM as also illustrative interpretations. The legislative amendment was effective from April 1, 2016, whereas the guidelines are being released only today, Sidhwa pointed out.

Hitesh Sawhney, Partner — Direct Tax, PwC, said thatCBDT has clarified that the intent of PoEM provisions is to target shell companies/companies that are created to retain income outside India and not Indian MNCs engaged in business overseas.

Stress on substance

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said that the finalised guidance relies on substance over form and that routine operational decisions shall not be relevant for PoEM determination.

“Also a panel of three commissioners is to affirm the proposed decision of the assessing officer on the PoEM of a foreign company. Hopefully, this will not impinge upon the right to appeal by the foreign company before a judicial forum,” he added.

Now that the final guidelines are out, will the government go ahead with a Controlled Finance Corporation (CFC) structure or not? Says Daksha Baxi, Executive Director, Khaitan & Co: “My personal view is that CFC is a better anti-avoidance provision, less prone to subjectivity and therefore less litigative.” It seems that at least for the current year, where PoEM is applicable, the government wants to ensure that the provision can be properly implemented, she said.

Rahul K Mitra, Head of Transfer Pricing & BEPS, KPMG in India, said: “With guidelines for PoEM out, it looks like they may not be introducing CFC.”

Jiger Saiya, Partner – Direct Tax, BDO India, echoed his thoughts, saying the “government seems inclined towards implementing the PoEM framework rather than introducing an alternative measure.”

Source: http://www.thehindubusinessline.com/economy/cbdt-tightens-screws-on-shell-companies/article9499358.ece

Demonetisation hits Indian economy; IMF cuts FY18 growth 100bps, 40bps on note ban alone, to 6.6%

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The downward revision, if it translates into reality, will let China temporarily reclaim the fastest growing major economy tag from India

The International Monetary Fund on Monday slashed India’s gross domestic product (GDP) growth forecast by 100 basis points (bps) to 6.6% in FY17 and by 40 bps to 7.2% in FY18, citing a consumption slump after the demonetisation of high-value notes.

The downward revision, if it translates into reality, will let China reclaim, albeit temporarily, the fastest growing major economy tag from India. China’s economy is now expected to grow by 6.7% in 2016, 10 bps higher than the fund’s October 2016 forecast. The communist country is expected to clock 6.5% in 2017, 30 bps higher than estimated earlier, again ceding the fastest growing economy status to India.

graph-10

“In India, the growth forecast for the current and next fiscal year were trimmed by 1 percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative,” the IMF said in its latest World Economic Outlook Update.

The revision comes barely four months after it revised upward by 20 bps India’s FY17 GDP growth to 7.6% in October 2016. The IMF’s cut in growth outlook for India is sharper than the recent World Bank’s 60 bps reduction in its India GDP growth outlook to 7% for FY17. In its first advance estimate, India’s Central Statistical Office has projected that the economy will slow to 7.1% in the current financial year from 7.6% in 2015-16. Given the post-demonetisation hit to consumption and investment, many analysts said these might prove to be overestimates.

Global growth for 2016 is now estimated at 3.1%, in line with the IMF’s October 2016 forecast. Economic activity in both advanced economies as well as emerging market and developing economies is forecast to accelerate in 2017-18, with global growth projected to be 3.4% and 3.6%, respectively, again unchanged from the October forecasts.

Advanced economies are now projected to grow by 1.9% in 2017 and 2% percent in 2018, 0.1 and 0.2 percentage point more than in the October forecast, respectively. As noted, this forecast is particularly uncertain in the light of potential changes in the policy stance of the United States under the incoming Donald Trump administration.

Source: http://www.financialexpress.com/economy/demonetisation-hits-indian-economy-imf-cuts-fy18-growth-100bps-40bps-on-note-ban-alone-to-6-6/510822/

Tamil Nadu joins UDAY scheme

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The southern state, which became the 21st state to join Ujwal Discom Assurance Yojana (UDAY), is also one of four states with largest accumulated debt of over Rs 40,000 crore.

After having dithered for over a year, Tamil Nadu on Monday signed up for the center’s scheme for revival of financially stressed state-owned power distribution companies. The southern state, which became the 21st state to join Ujwal Discom Assurance Yojana (UDAY), is also one of four states with largest accumulated debt of over Rs 40,000 crore.

With Tamil Nadu on board, UDAY has now covered 92% of country’s discom debt. “Tamil Nadu would derive an overall net benefit of approximately Rs 11,000 crores through UDAY, by way of savings in interest cost, reduction in AT&C and transmission losses, interventions in energy efficiency, coal reforms etc,” the government said in a statement. Other states with huge debt burden include Haryana, Rajasthan and Uttar Pradesh, all of which are part of the scheme.

According to the scheme, the state government will take over 75%of debt amounting to Rs 30,420 crore from the discom. The scheme also provides for the balance debt to be re-priced or issued as state guaranteed discom bonds, at coupon rates around 3-4% less than the average existing interest rate.

“The state would have savings of about Rs 950 crore in annual interest cost through reduction of debt and through reduced interest rates on the balance debt,” the government said. It added that reduction in aggregate technical and commercial (AT&C) losses and transmission losses to 13.5% and 3.7% respectively is likely to bring additional revenue of around Rs 1,601 crores to the state distribution company.

UDAY was launched by the power ministry on November 20, 2015 with an aim to reduce financial distress among state discoms as it has been preventing them from buying power.

Source: http://www.financialexpress.com/economy/tamil-nadu-joins-uday-scheme/502490/

India’s share of global economy to increase: Lars Heikensten, Executive Director, Nobel Foundation

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“Digitisation is part of our lives and necessary but it does have consequences”.

India’s share of global economy to increase: Lars Heikensten, Executive Director, Nobel Foundation

Lars Heikensten, executive director of the Nobel Foundation, said he expects India’s share of the global economy to increase while commenting on the role of the country in the emerging world order, ahead of the biennial Vibrant Gujarat Global Summit.

“For decades, the western world has been standing up for democracy, science and facts. Now these values are being questioned. Democratic countries like India, which also have a growing role in the world, need to step up. I think the policies of India are important,” he said. “The world needs more of values that India has been building since the 40s.”

The investor summit will for the first time see the participation of a galaxy of Nobel Laureates apart from various heads of state and global corporate leaders. The Nobel Foundation is the institution that manages the Nobel prizes for physics, chemistry, medicine, literature and peace.

Heikensten emphasised the need for adequate infrastructure to connect people to the digital economy. “In my country Sweden, everyone is connected today. With more people being connected in India, you will see people shifting to digital transactions,” he added.

He also addressed the digital divide and the need to bridge this chasm. “Digitisation is part of our lives and necessary but it does have consequences,” he said.

Heikensten has been governor of the Swedish Central Bank and held various positions in the Swedish ministry of finance, including that of director general and head of the economic affairs department.

“There are risks (with digitisation) and IT policies need to address these issues,” he told ET. “This is not something that will solve itself. People have been left behind in the process and I expect we shall see more and more academic debate on how to keep fairly equal, at the same time we have good economic development… The populist movements in the western countries reflect that people are left behind.”

He said that Sweden, for instance, has become less equal over the years.

“This is not the whole story part but an important part of the story,” Heikensten said. “But it is still very equal compared to the United States where there are wider income differentials between people.”

The link between digitisation of the economy and inequality is not a straightforward one. However, he pointed out that this marks the way forward and said that “we will see more and more countries moving towards digitisation as lot less cash is being used now than before.”

He said that India was one of the countries buying notes from Sweden.

Source: http://economictimes.indiatimes.com/articleshow/56533782.cms

Yellen Sees No Serious Short-Term Obstacles for U.S. Economy

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Federal Reserve Chair Janet Yellen said the U.S. economy faces no serious short-term obstacles, though it must deal with important long-term challenges of low productivity and growing inequality.

“Unemployment has now reached a low level, the labor market is generally strong and wage growth is beginning to pick up,” Yellen said Thursday in a meeting with educators. “Inflation has moved up from a very low level, and it’s a little bit under our 2 percent objective, but it’s pretty close.”

The Fed increased interest rates last month for the first time in a year, to a range of 0.5 percent to 0.75 percent, after judging that near-term risks to the outlook “appear roughly balanced.” Policy makers also indicated they expect to hike three times in 2017, according to the median estimate of their quarterly forecast.

Unemployment was 4.7 percent in December, a slight uptick from November when it reached 4.6 percent, its lowest level since 2007. The Fed’s preferred gauge of inflation, minus food and energy components, was 1.6 percent in the 12 months through November.

Yellen said productivity, a “key determinant” of living standards over the long term, remained at historically low levels and economists were struggling to understand why. Related to low productivity, she said a greater share of income gains were going to workers with higher education, causing inequality to rise in the U.S.

Education and workforce development have been frequent topics of discussion for Fed officials in recent years as technology continues to drive changes in the workplace. Yellen told graduating college students in Baltimore last month that career success will increasingly be linked to education.

Yellen on Thursday was speaking to teachers gathered in the board room at the Fed’s headquarters in Washington and, via web cast, to others through the country. She also touted reforms to banking regulation that followed the financial crisis aimed at making the financial sector safer and more resilient.

“These are very important changes,” Yellen said. “I certainly wouldn’t want to see them rolled back.”

Members of the incoming administration of President-elect Donald Trump have said they will seek to dismantle the 2010 Dodd-Frank Act, the principle legislative response to the crisis.

Source: https://www.bloomberg.com/news/articles/2017-01-13/yellen-sees-no-serious-short-term-obstacles-for-u-s-economy