Taking a cue from the aftermath of demonetisation, the Finance Minister while presenting the Union budget admitted, that the present tax burden on honest tax payers and salaried employees is unfair.
A crack down on the dishonest and the corrupt and rewarding the honest tax payers, therefore became a centrepiece of the Budget which proposed a slew of measures. For example:
1) If an accountant or merchant banker or registered valuer, furnished incorrect information in a report or certificate, he or she shall be liable to a penalty of Rs 10000 for every such default.
2) A grant of interest in case of refund of excess payment of TDS. At the same time, to ensure timely filing of returns of income, a fee will be levied in case of delay in filing the return.
3) The Government is trying to also broaden the personal income tax next and in this direction reduced the Income Tax rate from 10 to 5 per cent for small taxpayers. At the same time, it imposed a 10% surcharge on taxable income of Rs 5 million.
4) Another proposal is that no person shall receive payment or aggregate of payments of an amount of Rs 3 lakh or more from a person in a day, or in respect of a single transaction, or in respect of transactions relating to one event or occasion except by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account. Contravention of this provision will invite penalty.
Says DTA Consulting principal Deepak Talwar “The push towards greater transparency and tax compliance if implemented well, will ultimately result in improving the economic infrastructure of the country.”
Pointing out that there is an urgent need to protect the poor and gullible investors from dubious deposit schemes, operated by unscrupulous entities, the Finance Minister said that a draft bill to curtail the menace of illicit deposit schemes has been placed in the public domain and will be introduced in parliament shortly after its finalisation.
This Act will be amended in consultation with various stakeholders, as part of our ‘Clean India’ agenda, he added.

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RBI decides to remain cautious, leaves rates unchanged.

In the sixth and final bimonthly monetary policy for 2016-17, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) changed its stance from accommodative to neutral. The policy rates, therefore, were kept unchanged. RBI decided to wait and assess how the transitory effect of demonetisation on inflation and output gap play out.
Deepak Talwar, Principal of DTA Consulting said, “A rate cut at this juncture would have perhaps acted merely as sentiment booster for investors but would not have been a necessary or sufficient incentive to turn more bullish than what it is now.”
“A rate cut would not have changed anything fundamentally for the borrowers,” said Mr. Talwar.
Interest rates, Deepak Talwar pointed out, have moved lower with banks passing on the benefits of previous rate cuts by RBI. “Flushed with funds after demonetisation”, said Principal of DTA Consulting, “banks reduced interest rates. RBI action on policy rate was, therefore, not expected.”
Repo rate, the key policy rate used by RBI, remains unchanged at 6.25%, Bank Rate and Marginal Standing Facility rates at 6.75%.
According to Deepak Talwar RBI was judicious in its assessment of the economy. Taking into account the short term problems the economy faced after demonetisation RBI reduced GVA growth forecast for fiscal 2016-17 to 6.9% , nearly one percent less than 7.8% predicted by India’s Central Statistics Office last year. However in view of the success in remonetising and keeping into account the pickup in manufacturing sector activity RBI predicted growth rate of 7.4% during 2017-18. “This is a fair assessment”, said Deepak Talwar.
MPC of RBI flagged certain issues for turning neutral from accommodative in its policy stance.
First and critical most is the fact that prices now remain sticky with further downward move looking unlikely. The lower food prices due to seasonal factors and also some distress sale of perishables due to demonetisation kept CPI at less than 5% for the quarter but this is not expected to last long.
Second, the global commodity prices are firming up due to expected boost of infra spending in USA and also reduction in oil production causing rise in crude prices. The Indian economy will face price pressure in coming months.
Third and no less critical is uncertain global scenario. The complex political development and protectionist tendencies seen might impact the Indian economy adversely. There may be pressure on rupee exchange rate also.
“RBI was justified in maintaining caution in view of these factors”, felt Talwar. “However for the Indian economy there are several positive factors as well”, said Principal of DTA Consulting.
The remonetisation process has put back liquidity to the consumers. This will increase discretionary spending. “Service sector which suffered due to demonetisation, will get boosted”, said Talwar.
Secondly demonetisation brought in liquidity to the banking system which made banks reduce lending rates. “What RBI rate cuts earlier could not do, demonetisation did at last”, commented Talwar.
Third and no less important is the Union Budget 2017-18 stepped up capital expenditure, provided support to affordable housing and also rural economy. The GVA in 2017-18 is expected to receive a boost. RBI predicted a 7.4% growth rate in the next financial year, 0.5% more than the estimated growth rate of 6.9% in 2016-17.
“Economy can no longer bank of monetary policy to stimulate growth. A lot will now depend on administrative efficiency and introduction of GST”, summed up Deepak Talwar.

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GST rate structure finalized

Overcoming many hiccups India’s GST Council has moved a step closer to introduce the Goods and Services Tax from the next financial year beginning April 1st 2017. The council has agreed on the GST rate structure. The tax rates would range from 5 to 28 percent, with two intervening standard rates of 12 percent and 18 percent. Deepak Talwar, Principal of DTA Consulting felt that though the rates seemed too many “to begin with this is a good step forward”.
The fine tuning of fitment of items under each head will be worked out by a Committee of Secretaries and officials. They will align the products in synchronization with the current tax rates. The GST Council headed by the Union Finance Minister Arun Jaitley and attended by the finance ministers of the States has finalized the rate structure and given the broad guidelines for the officials to decide on the fitment of items.
The broad rate structure is as under:
Around 50% of the items that form part of the consumer price index basket (such as daily food consumption items) will not be taxed at all under GST.
5% tax rate for mass consumption goods like butter, ghee as also common man’s daily use items– While the lists are yet to be rolled out by the GST Council, all essential commodities and services, including education and health care should feature in the list of special concessional rate of 5% (if not zero rated).
12% standard rate – but there has not been any hint even on which goods will fall in this category. It is expected that many mass consumption items will fall in this slab.
18% standard rate – this will be applied on services. The current rate of service tax is 15% inclusive of two cess charged. This will go up. But certain items like soaps, oil, shaving sticks etc. will be cheaper due to lower tax.
28% is the highest slab and will be applicable on cars, white goods. There will be cess on luxury cars, tobacco products, pan masala, aerated drinks and also clean energy cess on coal. The items where cess will not be charged – certain cars, white goods will be cheaper. The cess will be used to compensate loss of revenue of certain producing states due to introduction of GST.
There will be separate rate for gold and precious metals – the rate will be decided later.
The Impact of GST
Inflation – is expected to be lower since most mass consumption items will be charged at lower rates or nil rates. “There will be inflationary effect of higher service tax but the same is expected to be more than neutralized by less charges on mass consumption items,” said Deepak Talwar. According to India’s Chief Economic Adviser Arvind Subramanian on average this should probably serve to lower inflation.
Revenue – most states are expected to earn higher revenue due to larger pool of taxes. States without much manufacturing base, like Bihar, West Bengal, will gain. But manufacturing states like Gujarat, Maharashtra, Tamil Nadu will lose. The estimated loss will be compensated by cess which is expected to yield Rs 50,000 crore ( Rs 500 billion). Such compensation will apply for five years and after four years GST Council will decide if the same will continue or not.

Way Ahead
The Committee of officials will have to work out the details of fitment of products. The same will then be approved by the national Parliament and State Legislatures.”We may see another round of tough negotiation at this stage”, said Talwar.
There will be hectic representations from various industry bodies particularly for fitment of products. The 12% and 18% bracket has kept the options of such pulls and pressures open. How a consensus is reached by the officials will be watched keenly.
The Council need to clear the proposed legislations for the final enactment of GST. Once the same is approved by India’s Parliament and State legislatures GST will be implemented. The Government is hopeful that the new one tax structure for the entire country will come into effect from April 1st 2017.

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Third Bi-monthly Monetary Policy 2016-17

The Reserve Bank of India left the policy rates unchanged as expected. The current policy rates are:

  • Repo rate remains unchanged at 6.5%,
  • Reverse Repo rate remains at 6%
  • Bank rate and Marginal Standing Facility (MSF) rate at 7%
  • Cash reserve rate (CRR) unchanged at 4% of net demand and time liabilities (NDTL)

Passing on of Rate cut by Banks

Prtincipal of DTA Consulting Deepak Talwar echoed what RBI said, “The transmission of the past rate cuts is still a problem area. Banks have failed to match the RBI policy rate cut and pass on the benefit to borrowers.”

At present banks feel that the redemption of FCNR(B) might affect their liquidity and are holding on to the current rates. RBI, however, assured that liquidity is enough and redemption of FCNR(B) – US$ 26 billion – will not impact the monetary framework. Even if the entire amount goes out the economy can completely pay it out. Volatility, even if is there, RBI is geared to manage.
Rate cut and rise in lending activity, according to the RBI Governor, will depend on increase in corporate demand for funds. Cleaning up of bad debts by the Public Sector Banks is also critical. RBI is confident that the recent steps initiated by RBI as regulator, Government as owner and PSBs will gradually lead to a cleaning up of NPAs.

Future Inflationary pressure
On the question of future inflationary pressure RBI is confident that good monsoon will see an easing of pressure on consumer price index. The inflation targeting the fixed at 4% – with a plus and minus 2% range – has been done in consultation with the central bank.

The original target of 5% rate of inflation in March 2017, RBI Governor is confident will be maintained. The one-time impact of pay commission benefits is expected to be modest. But improved agricultural production prospects and continuing disinflation in services inflation will provide additional space to RBI to reduce rates in future. Deepak Talwar, too, was not unduly concerned of a pressure on prices.

Effect of GST
On inflationary impact of GST RBI was not much concerned. The effect of GST on inflation will be seen only in the second half of the next financial year – 2017-18. The very fact that 55% of the CPI basket will be outside the purview of GST  will considerably insulate inflationary effect of GST.

Further the removal of cascading effect will see reduction in rates which will hold the price line. This will reduce transaction cost also.

With GST, base of taxation will expand which will eventually lead to reduction in taxes.

Even if there is some effect on inflation it will be one time.

Implementation of GST is a challenge since it is an enormous exercise. But eventually implementation of GST, according to Governor Raghuram Rajan will lead to increase in the growth rate, “a 2% increase is quite achievable”.

Talwar felt that success of GST will depend on efficient management both at the state and Centre levels.

The next RBI Monetary policy in October 2016 will be decided by the six member Monetary Policy Committee (MPC) which is in the process of being constituted.

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India passes GST bill – Historic change in Indirect tax law

The Goods and Services Tax Bill or GST Bill is a major step towards reforming India’s indirect tax structure. First proposed in 2005, the bill took eleven long years to mature into an act with India’s upper House Rajya Sabha clearing the pending legislation late in the day on 3rd August. Now the bill has to be passed in the house of people LokSabha before the same goes for approval by the legislative assemblies of ar least half of India’s 30 states and Union Territories. This apart, there are three key legislations have to be passed – two by the Centre and one by the respective states. It is expected that these will be passed during the winter sessions of India’s parliament and state legislatures. If the dates are not missed India will see a new indirect tax regime from the financial year beginning April, 2017. Principal of DTA Consulting Deepak Talwar said, “The April 1st target date seems to be tough to manage. There will be several rounds of discussions on the operational role of states and Centre. Hope GST will be imposed within the fiscal year 2017-18.”
The GST is intended to be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the central and state governments. According to the authorities, “GST would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method. This method would allow GST-registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services as part of their normal commercial activity.”
GST will considerably ease the pressure on businesses operating across the states. It will rationalise indirect taxes at a level which will not hurt the pockets of consumers, impact adversely state revenue collection and also hurt businesses by sharply raising rates. “GST will eliminate the cascading of several central and state taxes with a single uniform national tax,”  said Deepak Talwar. This uniformity will eliminate tax disparities and intermediate barriers that make some states more competitive than others in attracting investment. It will to a great extent eliminate barriers against interstate movement of goods and commerce and eliminate inter-state price differentials.
While GST will simplify tax administration as well as tax compliance, many still object to the new tax system. Many in India evade taxes and indulge in innovative bookkeeping . This cannot be done any more after GST comes. For the exchequer the tax base will increase and help improving tax compliance. The scope of evading sales tax at the point of purchase will reduce considerably. It is expected that gradually states will find breathing space to reduce tax rates. The consumer will also benefit by lower incidences of taxation.
There was considerable political slugfest over the GST bill. When the ruling BJP was in opposition it stalled the previous governments efforts tpo enact GST since 2007. Largely due to political opposition Congress too had been blocking GST bill in Rajya Sabha where the Government does not have majority. The bill being a Constitution amendment bill needed to be passed by two thirds of the members present and voting. Finally the agreement could be reached through intense discussion with political parties and also all the states. The agreement reached at the Inter-state council of finance ministers brought all political parties together.
According to Talwar, “There are however certain problems which need to be addressed. If the base GST rate, to be fixed by the inter-state council, is too high GST will be counterproductive. Secondly there will be an immediate impact on prices since services will be costlier due to rise in rate from the current level of service tax. Education, health care and also garment sectors might be impacted which will push up inflationary pressure.”
However with the cleearance of the GST Bill in the Rajya Sabha the Government has signalled its commitment to economic growth. GST is expected to ease pressure on producers and therefore help India to improve its global ease of doing business rank.
The final shape of things to come will be clear only after the legislations on GST rates – two at Centre and one at respective states are passed. As an intent GST bill should prove investment positive for India.

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India’s Public Sector Banks hit by NPA

India’s state owned banks continue to be under stress with a huge pile up of stressed assets. Gross Non-Performing Assets (NPA) of the public sector banks has risen sharply from 2.24% of their total advances in 2010-11 to 9.5% in 2015-16. Quoting an analysis of DTA Consulting, Deepak Talwar pointed out the two factors that have led to this sharp increase.
First the economy faced a sharp down turn due to external factor which resulted in fall in exports and delay in execution of certain infrastructure projects due to rise in commodity prices and problems in getting clearances including land acquisition. This saw a pile of unserviceable debts, said Talwar.
Second the banks had been hiding many of the potential bad loans by ever greening those accounts, a practice that led to increase in NPAs hidden in the books. Due to stricter regulatory norms such hidden NPAs have come to the limelight. Deepak Talwar, Principal of DTA Consulting welcomed strict monitoring of bad debt by regulator.
Government View on rise in NPA
The Government felt that main reasons for increase in NPAs of banks are sluggishness in the domestic growth during the recent past, slowdown in recovery in the global economy and continuing uncertainty in the global markets leading to lower exports of various products like textiles, engineering goods, leather, gems, external factors including the ban in mining projects, delay in clearances affecting Power, Iron & Steel sector, volatility in prices of raw material and the shortage in availability of power have impacted the operations in the Textiles, Iron & steel, Infrastructure sectors, delay in collection of receivables causing a strain on various Infrastructure projects, aggressive lending by banks in past.
The State of PSBs
The sharp rise in NPA saw a sharp deterioration of insolvency ratio of the 25 listed public sector banks. From 13.7% in 2010-11, the insolvency ratio touched 66.31% in 2015-16. Profits of these banks, too, came under severe pressure, recording a total net loss of Rs 176.7 billion (US$ 2637 million) in 2015-16. In the previous financial year 2014-15 these banks had reported a net profit of Rs 363.5 billion (US$ 5425 million).
In a recent reply to India’s upper house Rajya Sabha the Government revealed that 27 state-owned banks had total gross NPA of Rs 4768.16 billion (US$ 71.17 billion) with a GNPA/debt ratio of 9.32%. Out of these eight banks have ended the financial year 2015-16 with double digit GNPA ratio. These banks are (figures in brackets are their respective GNPA ratio)
UCO Bank (16.36)
Indian Overseas Bank (16.16)
Bank of India (15.02)
Punjab National Bank (13.13)
IDBI (12.61)
Bank of Baroda (11.95)
United Bank of India (11.93)
Central Bank of India (11.51)

Quantum wise India’s largest bank State Bank of India has the highest NPA – Rs 829 billion (US$ 12.38 billion). But its GNPA ratio is 6.67%, not alarming. SBI has 9.9% tier-one capital as percentage of its risk-weighted assets. Two other banks, Indian Bank (12.1) and Bank of Baroda (10.8), have maintained capital asset ratio higher than that of SBI.

Talwar identified the four banks that have failed to meet the expected tier-I capital-asset ratio – these are United Bank (7.9) Syndicate Bank (7.8) Indian Overseas Bank (7.8) and UCO bank (7.6). Government has earmarked Rs 250 billion ( US$ 3.73 billion) to recapitalize state-owned banks during the current fiscal year 2016-17. But will this be enough when GNPA ratio threatens to increase? According to the Reserve Bank of India (RBI) the GNPA ratio for Public Sector Banks (PSBs) may go up to 10.1 percent by March 2017. The data of all the banks are not yet available.
Measures taken to address the issue
The government has taken specific measures to address issues in sectors such as Infrastructure (Power, Roads etc.), Steel and Textiles, where incidence of NPAs is high. The government has also approved establishment of six (6) new Debt Recovery Tribunals (DRTs), to speed up the recovery of bad loans of the banking sector, in addition to existing thirty three. Reserve Bank of India (RBI) has also undertaken steps which include
(i) Formation of Joint Lenders’ Forum (JLF) for revitalizing stressed assets in the system,
(ii) Flexible Structuring for long term project loans to Infrastructure and Core industries
(iii) Strategic Debt Restructuring (SDR) scheme.
(iv) Scheme for Sustainable Structuring of Stressed Assets.

These are welcome steps, felt Deepak Talwar. In addition the Government has  issued advisory to banks to take action against guarantors in event of default by borrower under relevant sections of SARFAESI Act, Indian Contract Act & RDDB&FI Act, since in the event of default; the liability of the guarantor is co-extensive with the borrower.
In addition, the Government has recently approved merger of banks – to begin with State Bank of India with its associate banks. Government is expected to disinvest its stake in PSBs in due course. In sum, the efforts are in full swing to nurse back the banking sector.

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Indian Cabinet Expansion – Part II

What was billed as a routine expansion of council of ministers by Prime Minister Narendra Modi turned out to be a major overhaul based on performance. According to Deepak Talwar, Principal of DTA Consulting the exercise of reshuffle has set a new precedence. ” Never did any Prime Minister in India take such an elaborate performance review of various ministries and shifted portfolios accordingly, ” said Deepak Talwar. The cabinet reshuffle sends a strong message that Prime Minister Modi means business.
The heavy weight ministries did not see changes with the incumbents in Finance, Railways, External Affairs, Home Affairs, Defence, Urban Development, Transport, Power remaining undisturbed. “But there are certain rationalizations”, observed Deepak Talwar. For instance, Finance Minister Arun Jaitley has lost the Information and Broadcasting portfolio – an expected step given the work pressure and ill-health of Jaitley. The portfolio has gone to Venkaiah Naidu who lost the critically important ministry of Parliamentary Affairs. Venkaiah was more combative in his approach in Parliamentary Affairs than diplomatic. It has now gone as an additional charge to Anant Kumar, Chemical and Fertilizer minister. Anant Kumar is known as a suave deal maker. Clearly Modi wants smooth operation of Parliament sessions.

There are now two Ministers of State (MoS) to assist Kumar. Mukhtar Abbas Naqvi will have a veteran parliamentarian S S Ahluwalia as the new MoS in the ministry. Both are known as friendly and persuasive. Mukhtar is a Rajya Sabha member while Ahluwalia is from the lower house Lok Sabha.
Non-performance or inability to match the PM’s expectations is apparent in reshuffle of certain portfolios. Most notable is the change of portfolio in the high profile HRD ministry. An ever combative Smriti Irani has been shifted to less prominent Textile ministry. The new incumbent Prakash Javadekar who was holding independent charge of sensitive Environment ministry has been promoted as Cabinet Minister and been given the charge of equally sensitive HRD ministry. Javadekar had steered the Environment ministry competently and has perhaps been elevated as a reward. Performance has helped the Power and Coal minister Piyush Goyal to bag Mines portfolio in addition to the existing ones. But he remains MoS only holding independent charge of these important ministries. Very soon the Government will auction mineral rights. Goyal was successful in auctioning of Coal mines. He now has to oversee auction of non-coal mines.
Shifting of Jayant Sinha, a former investment fund manager and management consultant, from Finance to relatively light weight Civil Aviation has raised eyebrows. He has been replaced with Arjun Ram Meghwal, a former bureaucrat from Rajasthan and Santosh Gangwar a politician from Uttar Pradesh who was holding independent charge of Textile ministry. “There must be some other pressing need to post Sinha in some other portfolio”, said Talwar, Principal of DTA Consulting and a veteran watcher of  political movements in Delhi.
Both Smriti Irani and Jayant Sinha will have their hands full since the Government has turned both Textile and Civil Aviation as new focus areas. In Civil Aviation the senior minister from BJP ally TDP of Andhra Pradesh is not much of a performer. It will depend on Sinha in reviving the sector, including resuscitate or disinvest the Government owned Air India. Revival of Textile sector is critical both politically and economically. Despite apparent demotions, the Prime Minister will look forward to the two young ministers in delivering his poll promises.
The other important portfolio, Telecommunication, has changed hands – from Ravishankar Prasad to Manoj Sinha (MoS Independent charge), who will hold charge of Railways also as junior minister to Suresh Prabhu. Prasad will look after Law and Justice where the incumbent Sadanand Gowda was not performing well. Prasad will have a competent constitutional lawyer P P Chaudhury as his deputy both in Law and Information Technology. Telecom sector will see spectrum auctioning in the current year. Manoj Sinha, an engineer from the prestigious Benaras Hindu University, will have his hand full.
Modi has strengthened External Affairs ministry by inducting reputed journalist and author M J Akbar as MoS. The ministry also has former General V K Singh as MoS with Sushma Swaraj as the minister. Clearly Modi will like to improve India’s relation with West Asia, a region Akbar is familiar with. Quality wise perhaps External Affairs is the strongest in the Modi Government. All the ministers bring in individual track record to improve India’s external relations, a focus area of the Prime Minister.
The new Environment minister is Anil Madhav Dave, a Rajya Sabha member from Madhya Pradesh who has been involved in conservation of the river Narmada.
The detailed portfolio of ministers is available at http://pib.nic.in/newsite/erelease.aspx.
Through the reshuffling Prime Minister has sent a clear message that performance matters.

Among the new entrants in his council also a detailed home work is visible. Most of the new ministers have proven track record in states or in professional life as well as in Parliament.
By inducting ministers from the Scheduled Castes, Dalits and OBC members there is a political message delivered to the states like Uttar Pradesh, Gujarat, Uttarakhand and Punjab where state assembly elections are due. In addition, there is a clear message to ministers who had a penchant to court controversies and issue unwarranted comments. All the five ministers who have been dropped had committed such errors. Failure to handle quietly contentious issues pertaining to respective ministries has been a major factor behind shifting of portfolios of certain apparently heavy weight ministers.
The message is clear. India is open for business under the Government of Prime Minister Modi. He has announced several schemes. Now is the time to implement those with single minded focus. The Cabinet reshuffle illustrates that Narendra Modi will approach the electorates three years later with his report card of performance. The friends and foes of Prime Minister Modi found the reshuffle as much unexpected as did the critics and commentators. Clearly Modi means business.

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