Indian Economy - News & Discussion Oct 12 2013

[panduranghari]

I don’t understand the comment. What does Maruti have to do with not executing a project here in 2015. Even prior to 1991 the majority of the Indian economy particularly consumer was private sector. Think houses, construction, clothes, food(though distorted), restaurants, publishing, transportation, cement, fertilizer, even banking. If I were to venture a guess I would say 90% of Indian economy even prior to 1991 was private. Even excluding agriculture which was 50% +- of economy back then.

+100.

I agree. According to Goldman Sachs, India became a market economy in 1991. That's patently misleading statement.

[vina]

Whether anyone else chooses to do so elsewhere or not is irrelevant. This isn't a case of someone trying to make the sun rise in the west, as you portray it

AH. WELCOME TO YINDIA JEE. MAKE IN YINDIA.

We will do what we want, whether it makes sense or not, whether it is consistent or not, whether it is stable or not. You will be Cap Gains Today, Biz Income Tomorrow. For 10 years your income is not MAT applicable, then in the 11th year, we change our mind, and make you pay MAT for the previous 10 years. Oh, from the 11th year onwards, it is not MAT anymore.

You want me to talk about transfer pricing ? WTF. We decide what transfer pricing is, whehter it makes sense to your not, or it my prerogative.

Nokia plant in Chennai you ask. So what if it is closed. You say transfer pricing is a problem. Dang. Come and make in Chennai if you want. But however it is much cheaper to import from Chennai. Are you stupid or what ? Put up with the baboon crazy of transfer pricing and potential massive liabilities, while it is cheaper to import from China and sell here, and no hassles and at best you pay a lil baksheesh to the right folks in cushtums. !

Welcome to India. MAKE IN YINDIA!

[Suraj]

For 10 years your income is not MAT applicable, then in the 11th year, we change our mind, and make you pay MAT for the previous 10 years. Oh, from the 11th year onwards, it is not MAT anymore.

Again, you're wrong. I suggest this article, which provides an excellent summary:
Brouhaha over MAT - Kudos to FM for no-nonsense Reply

does it not mean that all such profits or gains made in the past were taxable? It is not something which has jumped on them from nowhere. There is no retrospectivity about it. All the FIIs and their advisors were aware of it. Now that the Department has begun serving notices they have decided to play unfair with the interests of the Exchequer by raising dust and smoke over the issue in the name of investment climate in the country.

Let's now go to the Advance Ruling decision which seems to have given such an idea to the Revenue to bring FIIs' profits under the MAT-fold. In the case of Castleton Investment Ltd (2012-TII-36-ARA-INTL) the then Chairman of the Authority Justice P K Balasubramanyan noted that "Section 115JB of the Act overrides section 34 to 48 of the Act. So by reading section 115JB as confined in its operation to domestic companies alone, one may be doing violence to the special scheme of taxation adopted for taxing certain companies. Unless there are compelling reasons no such interpretation is justified. There is no compelling reason to jettison the scheme of taxation adopted by the Act by reading down section 115JB as confined in its application to domestic companies alone."

Before this ruling came in August, 2012, the Revenue probably had no such idea to collect MAT from FIIs doing roaring business on the Indian bourses. But as soon as the ruling was brought to their notice they had inescapable reasons to commence their homework and compile all such relevant data relating to FIIs' investments and the quantum of profits earned. Of course all such homework takes time and they began to serve notices at a moderate pace. What accelerated their pace appears to be the prospective exemption granted by the Finance Minister in the Union Budget. Having noticed that it was not the advance ruling alone which was on their side but also the FIIs themselves who lobbied hard and got the exemption. Getting the exemption makes it clear that they were liable to MAT in the past.

The Revenue is learnt to have served notices on more than 90 FIIs raising a demand of more than USD five billion. In the days to come when the Revenue gathers more information and data it would obviously serve more notices and such number can be several hundreds if one goes by the sheer number of FIIs operating in India. It is learnt that more than 600 FIIs are registered with the SEBI and all such FIIs have invested funds in trillions since 1993 in our bourses. If they have invested trillions they have also made huge profits and all such profits found tax shelter in the India-Mauritius or India-Singapore Double Taxation Tax Treaties. A good number of them are Foreign Portfolio Investors (FPIs) now. As long as they had the umbrella of DTAAs over their heads they were safe and went back home totally untaxed. Now that MAT is applicable to them, the DTAA shelter will not work and the MAT provisions will override the tax treaty beneficial provisions as per some experts' views reported in the media. It is certainly a tricky question and needs more examination.

Kudos to Jaitley and the CBDT for withstanding the pressure of international investors groups which have now begun to seek RETROSPECTIVE EXEMPTION after having succeeded in flaying the retrospective taxation by the previous regime at the Centre. In no-nonsense manner Mr Jaitley has rightly said that if FIIs are aggrieved they have a right to challenge it in a court of law but they cannot dub every demand raised against them as 'tax terrorism'. Interestingly, the present demand of the FIIs also goes to prove the point that too much of swooning and red-carpet-approach do not necessarily work in the interests of the economy.

In summary, FPIs sought retroactive exemption from MAT, despite knowing all the while that they were liable. Now that the exemption is no longer on offer, they're simply turning around and claiming that there's a retroactive taxation claim upon them. It's particularly revealing that these FPIs don't pay tax at all, not in India, not in their home countries. And they have a problem with paying taxes.

[nandakumar]

Let me put in my two cents worth on MAT and Foreign Portfolio Investors (FPI) controversy. It all started with the question of applicability of Indian tax law on profits (capital gains) made on transfer of overseas assets which had an underlying in Indian assets that were so significant that the foreign asset was nothing more than a mere piece of paper. I am referring to the profits made by Hutchison when they sold their Indian mobile telephony business to Vodafone. Why the IT department went after Vodafone when it was Hutchison that gained on the stake sale is another story. Anyway the Supreme Court ruled that the income tax law as it stood at the time when the transaction took place was such that a transfer of shares of a shell company did not attract capital gains tax and hence Vodafone was justified in not deducting tax at source while paying the sale consideration to Hutchisons. Despite a victory 'fair and square' by Vodafone, the ruling dispensation in Delhi expected that Vodafone would show its appreciation in tangible terms (financially) for legislative forbearance on the issue. Vodafone politely declined as the litigation had already cost Vodafone 10% of the tax demand. So retrospective amendment was passed to nullify the effect of SC judgment. To add insult to injury the Government also introduced the so called anti-avoidance rules or GAAR. The latter act really spooked the FIIs or FPIs as they are called now. What the GAAR did or at least the FPIs feared it would, is to nullify the effect of an earler SC judgment (Azadi Bachao Andolan versus Union of India) which was on the issue of taxation of investment gains by FIIs. The SC held that a certificate of residency issued by a foreign government must be taken prima facie as evidence that they are not residents of India for tax purposes. This was a victory for FIIs because they contended that they were Mauritian residents and hence the IT department's argument that they were sitting in India and carrying out an investment business in India, is false. As a result of the SC judgment in the Azadi Bachao Andolan case the FII case for treating their gains as capital gains which was subject to zero rate of taxation under Mauritian tax law and which Indian tax authorities were obliged to recognise, under the Double Taxation Avoudance Agreement between India and Mauritius got strengthened. The GAAR was seen as reopening the whole dispute on taxation of FIIs/FPIs. The Govt then hurriedly came out with the amendment that GAAR implementation would be postponed for the time being. The IT department is now saying to the FIIs that GAAR may be temporarily suspended but you still are liable to pay MAT. Jeitley is saying that there is no MAT in the future. But if some departmental action has been already initiated those must be gone through whole process. Aberdeen (one of the affected FIIs) went to Court and obtained a stay on recovery proceedings. Others too, are expected to follow suit. That is where the matter stands.

[vina]

As a result of the SC judgment in the Azadi Bachao Andolan case the FII case for treating their gains as capital gains which was subject to zero rate of taxation and which Indian tax authorities were obliged to recognise, under the Double Taxation Avoudance Agreement between India and Mauritius. The GAAR was seen as reopening the whole dispute on taxation of FIIs/FPIs

You summed up the Pakistan that the Govt has created perfectly. Despite losing the cases in the supreme court, it is creating a bigger Pakistan and wallowing in it.

If I can add to what you wrote, specifically this part which I am quoting, different FIIs were classifying their incomes differently , all because of the mess this Capital Gains Vs Biz Income which historically has been the case in India where the exact same tax authority classified it under different heads in different years ( I am talking of the Priyamvadha Birla case here regarding cap gains/ biz income).

So what the govt did was classify all FPI investments as capital assets by modifying Sec 2(14) of the Income Tax act. So all their income from gains will be capital gains from 1st Apri 2015. While the classification earlier was biz income for both FIIs and domestics, what this did was give clarity to FIIs ALONE , while leaving the domestic guys classified as biz income. This coupled with the CBDT "circular" not taxation of trusts, leaves the domestic guys in the Kakkoose. So much for "nationalist" government. Kick your own folks in the teeth , while bending over backwards for the Goras. I would have had more respect for this govt if they stuck by their stand on MAT and said, we are abrogating the DTAA for Capital Gains, come what may. But no, the govt goes groveling to the FPIs.

[Supratik]

Which would have happened in a socialistic economy. Which is why I said the majority of India was private sector market based even back in 1991. It is a misreading to say that India was a socialistic economy back then and that was the problem. It was not.... ..in fact even now this is not the problem...

I don't think you understand what a market economy is. There can be various degrees of socialism from Fabian socialism to Communism. India was somewhere in between with a command economy and restricted private sector activity. If you think India was a market economy before 1991 then I have nothing more to say.

[panduranghari]

That's another one lakh crore in red by the distribution companies. Jeez, just too many things need fixing.

Fixing. These things cannot be fixed. They need to be redesigned to allow the corpses to be taken off the ventilators. How long can you keep a dead patient in a bed and waste resources on it?

[panduranghari]

Private sector bank NPA figures aren't better because they're immune to defaults or have vastly better standards, but because they're mostly too small to lend to the more default prone sectors (as opposed to private consumers who are generally good credit risks), and also because they're better at restructuring debt:

Once restructured, the debt no longer categorizes as non-performing, at least for a period of time. In other words, this is an accounting difference between private and public-secotor bank NPAs. Of course, restructuring debt can reduce the debt load, but that does not necessarily guarantee that it will not go bad again.

The bolded bit is very misleading. In many ways its like a Junkie going into rehab and tries best to stay away from hard core drugs but is put on Methdone as an analogue to the hard core drug. It gives them a feeling they are healing. But in reality the painful process means the bank has to just accept that the loan has gone bad. Move on. Restructuring just is another fancy term by MBA types to window dress the real problem.

[Suraj]

I have a different take on the ABA vs Union of India case, and GoI's attempt to nullify that amendment using GAAR: the India-Mauritius DTAA came into being in 1983. Shorn of all frills, it's a DTAA between a very large economy, and a tiny tax haven, that served as a conduit, because they have a 3% CG rate. At one time, it helped minimize the costs of investing in India. India today is no longer interested in maintaining that route. Instead, it prefers that FPIs avoid such tax dodges, and pay their fair share. Recategorizing CG as income, and otherwise asserting that FPIs are PEs, is part of this.

Action against the misuse of tax havens is not restricted to India. FATCA, and the Stop Tax Havens Misuse Act in US, are examples of similar efforts to eliminate their intermediary role. Proponents of the current system argue that any change is a negative, because it is 'arbitrary' or whatever. That's simply handwaving. Everything changes. Mauritius was once a good way for us to encourage investment in India. It no longer is . Here's the kicker - we'll do things the way we deem fit, which is that FPIs will invest in India and pay taxes on their gains in India, and we'll squeeze the Mauritius route out of the picture one way or the other. Until then, FPIs will scream bloody murder, but ultimately there's too much money to be made in India, for them to carry out their bluff.

[panduranghari]

the question is do we want tax inversion? ie Injun companies incorporating in tax havens to avoid paying Indian tax?

other question is that do we want FIIs to profit from Indian equities market without paying a dime of tax ? ie an investor putting in 1 million in equities , selling the equity when its value is 1,4 million and not paying a dime on the 400k hence earned. What is in it for India in such an arrangement ?

Sure they can invoke treaties and other evasive maneuvers ..But we too can seize their assets...

But we do not want to seize assets. The old style American business model of strip the land and exploit the resource but not pay any tax does not help anyone but the capitalists and the local politicians who is in the pocket of capitalist. The GOI is saying come and do business here and make money too, but you cannot exploit us like EIC did. We make the rules and we expect you to stick to them. The stink raised by FPI is because they are not investors. They are mainly speculators.

[Supratik]

@RamaY


Businesses are inherently risky propositions e.g. in tech start-ups typically 2 out of 3 ventures fail. If you have a bankruptcy law it is going to encourage more entrepreneurship. As an example, the jute industry in WB failed in the 70s-80s. The factories got locked out, the assets got frozen, the labour became jobless. If there was an exit strategy the owners would have utilized the assets and repurposed them for productive activity. The labor would gain too as it can generate jobs elsewhere and get absorbed. It is good for the economy as a whole.

[vina]

Until then, FPIs will scream bloody murder, but ultimately there's too much money to be made in India, for them to carry out their bluff.

Last I saw, the tax rates for FPIs is ZERO for both Biz Income & Cap Gains, while I doing exact same thing pay max marginal rate! So much for the "nationalist" govt. Kick your folks in the teeth and be a doormat for the Goras!

[nandakumar]

I have a different take on the ABA vs Union of India case, and GoI's attempt to nullify that amendment using GAAR: the India-Mauritius DTAA came into being in 1983. Shorn of all frills, it's a DTAA between a very large economy, and a tiny tax haven, that served as a conduit, because they have a 3% CG rate. At one time, it helped minimize the costs of investing in India. India today is no longer interested in maintaining that route. Instead, it prefers that FPIs avoid such tax dodges, and pay their fair share. Recategorizing CG as income, and otherwise asserting that FPIs are PEs, is part of this.

Action against the misuse of tax havens is not restricted to India. FATCA, and the Stop Tax Havens Misuse Act in US, are examples of similar efforts to eliminate their intermediary role. Proponents of the current system argue that any change is a negative, because it is 'arbitrary' or whatever. That's simply handwaving. Everything changes. Mauritius was once a good way for us to encourage investment in India. It no longer is . Here's the kicker - we'll do things the way we deem fit, which is that FPIs will invest in India and pay taxes on their gains in India, and we'll squeeze the Mauritius route out of the picture one way or the other. Until then, FPIs will scream bloody murder, but ultimately there's too much money to be made in India, for them to carry out their bluff.

There is no doubt that the money coming from Mauritius is not sui generis. Equally, the residency certificate issued by the local authorities is completely bereft of substance although fully in compliance with the legal formality. I mean, even the leanest and meanest of organisation structures for a portfolio operation of an average FII with Mauritian mailing address would require packing more people per square foot than what a sweat shop in Bangladesh turning out garments for Walmart would consider as reasonable. India knew this all along but went along with the charade. For two reasons, in my opinion. One, we needed foreign capital and if it meant offering a benign tax regime (to the point of saying even zero rate would be okay) then so be it, was the official reasoning. Two, the routing of funds through the Mauritian route was having a positive effect on the mauritian economy. I recall reading somewhere that it added a few percentage points to the local GDP. From a geo-political standpoint, we needed Mauritius on our corner of the ring rather than on the side of China or Pakistan. In fact everytime the Government of India wanted to tighten the DTAA provisions there was pressure from the Mauritius Government. India would back off. In my view, this is unlikely to change in the near term.
On the point that Vina is making that namely the Indian tax regime is favourable to foreign capital compared to domestic investors, my answer to that is, portfolio capital (as opposed to FDI) has always enjoyed a more benign tax regime. Not just under Indian tax tax laws but many other emerging economies as well.

[vina]

portfolio capital (as opposed to FDI) has always enjoyed a more benign tax regime. Not just under Indian tax tax laws but many other emerging economies as well.

True,including with the US. Note however, NO country in the world classifies the same income under different classifications (CG vs Biz Income) solely based on place of origin of money. All of them enjoy CG classification. For e.g., as a US tax resident even if you do day trading in the US cap markets, it will be classified as short term capital gains and taxed at 30%!

This classification is important. Classifying the short term CG as biz income means that under a trust structure (which is what is used in India), thanks to the CBDT "circular", even long term equity investments (for e.g., if you hold INFY for more than 1 year) will get clubbed as biz income and you pay max marginal rates!

[Virupaksha]

90% of trusts in India are tax avoidance business vehicles and it is a well known loophole for money laundering, if simply the directors of trust change.

[nandakumar]

Vina
The portion extracted from your last post as below is not clear to me:
This classification is important. Classifying the short term CG as biz income means that under a trust structure (which is what is used in India), thanks to the CBDT "circular", even long term equity investments (for e.g., if you hold INFY for more than 1 year) will get clubbed as biz income and you pay max marginal rates!
I am not really a tax expert but have followed the controversy over FII taxation more as a concerned citizen. So can you please explain this?

[Theo_Fidel]

I don't think you understand what a market economy is. There can be various degrees of socialism from Fabian socialism to Communism. India was somewhere in between with a command economy and restricted private sector activity. If you think India was a market economy before 1991 then I have nothing more to say.

Yes, It is certainly possible we are not on the same page on this one. My divider is the ownership of the production. At least from my small snap shot India was not a socialist economy. The problem has always been that we have focused on the 'commanding heights' etc, your mention of Maruti is a classic example, without realizing these were a relatively small slice of the economy even back then. Take the case of the USA Airline industry till 1978. Till deregulation in 1978 the GOTUS decided things like routes, fares and schedules. Yet no one would have said this was a socialistic economic system. Because all ownership was private. In a typical socialistic economy, at what ever level/version/form, the means of production themselves are owned by the people/workers, etc. So while the PSE/PSU were owned by the state in India this never really spread to the majority of the economy. The majority of production in India has always been privately owned. Esp. if one includes agriculture. No matter what the bureaucrats said. To me this says market economy.

In the Deloitte-Touche report below it is clearly stated that the PSE contribution to GDP varies from 22%-24%. Share of organized employment though is only 11%.
http://www.deloitte.com/assets/dcom-ind ... india1.pdf

In any case my point stands that India's problems have nothing to do with 'transitioning' from a 'socialistic' to a 'market' economy. I would be curious to know what you think the source of India's problems were/are.

[vina]

...have followed the controversy over FII taxation more as a concerned citizen. So can you please explain this?

This is a bit complicated, but let me explain. This is not about FII taxation, but taxation in general of capital markets.

See, it is like this. In India, there has always been a gray area between whether an investment is capital gains or business income. The law says that if you pay security transaction tax, and it is an exchange traded instrument it is capital gain. However, it is subject to multiple "tests" which will decide whether it is a stock in trade (for eg, a brokerage/commodity dealer inventorying stocks /commodities for trade will be considered buisness income, while an "investor" will be considered invesment income based on subjective tests which are subject to varying interpretations) . Thumb rule is equity investment is considered as and derivatives (F&O) is interpreted as business income (though everythign should be same class, they are all capital assets) through the way the current case laws and tortured interpretation through litigations.

To cut the long story short , the reason why most investments (VC, PE, Hedge funds, collectively called AIFs) were structured as trusts is because trust act allowed 1) Pass thrus and 2) less cumbersome overheads in terms of reporting and regulatory requirements compared to company and parternships etc.

Now when the Modi govt came to power, and there was high flying rhetoric about this and that, the CBDT came out with a "circular" which basically cut out the pass through whether the trust was determinate or indeterminate and said, that the taxation would be at the level of the trust and not at the hands of the beneficiary and the taxation would be at maximum marginal rates / applicable rates.
This basically shocked the industry. It seemed that the left hand didnt know what the right hand was up to. So what it did was that no sane investor would invest in any India registerd AIF anymore and it would be impossible to attract investors from abroad as well. The industry was up in arms, and in the budget they allowed pass throughs to AIF Category I and II (ie VC and PE funds) , but inexplicibly Cat III (hedge funds were left out).

So what is the big deal? It is this, in the absence of pass throughs, per the trust act , even if there is a single rupee of business income (ie, if a hedge fund does hedge using derivatives , which will be considered business income) then the entire income of the trust (such as long term equity investments) will be classified as business income and taxed at maximum marginal rates.

Now coming to FIIs, they usually come through DTAA (Singapore , Mauritius & Netherland) and they choose to pay their biz income & capital gains tax in any jurisdiction. So whether you classifed their income as biz income (as earlier) or cap gains (as now) it didnt matter. They pay zero tax on thier investments. Now, an FII can do high frequency day trading ( like many do, and pump in trades via black boxes) , their trading income fully escapes tax in India because of DTAA.

Contrast this with a poor AIF investor. Even in case where pass throughs are avaialable and taxed at the resident individual's hands, the derivative part will still get taxed at MMR!

Also, domestic Mutual Funds pay no tax (they got grandfathered from the UTI act 1969 or so). The unit holders get taxed either as long term CG or STCG depend on the period of their holding. So MFs which are arbitrage funds, ie, invest actively in equity derivatives and also receive interest income , are classified as "equity oriented" and their unit holders pay at best STCG and if held over 1 year, 0 % as LTCG!. Like the FIIs, MFs too can do anything, including day trading if they choose, they will pay zero tax.

So huge regulatory arbitrage all around. The FIIs get away with literally murder. The MFs are the prodigal children. The fleding AIFs are literally the scum. And then there is a collective whine about lack of effective ecosystem for multple asset classes (VC, PE & hedge funds) . How will it exist, when there are huge regulatory hurdles which basically tell everyone, dont incorporate here, and if at all you need to invest in India, go incorporate in Singapore !

The entire tax business is so tortured, it is criminally idiotic. Naturally, all VCs are advising their investee companies to incorporate in Singapore (Flipkart for eg, is Singapore incorporated) and if at all there is a chance of listing, advising them to list overseas (also because valuations overseas are more attractive). As for others like PE and Hedge Funds, perish the thought with the current kind of regulations that you will attract global big money. Even attempting domestic money is close to impossible, if any prospective investor has to pay 33% tax. Why will he do it , even if he is tax exempt (in the case of Cat III, the taxation is at trust level, no pass thru) , when investing in a MF route is zero % tax, , or send the money out and invest in SGX Nifty (if you want India exposure) or other market (you are not round tripping here, just investing abroad) and you can do anything you want and pay zero taxes !

Easy solution, clarify that institutional investments are capital assets , like was done for FIIs, and make the taxation at a unit level like was done for MFs (either LTCG or STCG) at the hands of the investor! It not rocket science, zero revenue loss (the govt makes nothing anyways out of these guys now), but no, wont happen !

[Suraj]

On the point that Vina is making that namely the Indian tax regime is favourable to foreign capital compared to domestic investors, my answer to that is, portfolio capital (as opposed to FDI) has always enjoyed a more benign tax regime. Not just under Indian tax tax laws but many other emerging economies as well.

I don't think he's making a convincing point here. The combination of arguments made imply that on one hand he favors past status quo policy stability, as opposed to 'idiotic' changes. On the other hand, he vehemently argues about the idiocy of the existing rules and demands change. While the larger 'fix the system' rant is clear, the conflicting arguments underline that the poster doesn't quite appreciate the magnitude of the task at hand / doesn't care / is politically motivated, or a combination of these. Not a constructive discussion but venting steam, which is fine as long as it's clear it's just a rant.

Tax policy changes rarely work our in an elegant manner, anywhere. The fact that everything's so complex makes the change painful. All manner of stakeholders who are beholden to the existing state of affairs, misstate the situation to suit their own interests. For example, the handwaving about 'retroactive taxation', which in reality, was simply an effort to ensure that an informal retractive exemption understanding was not removed.

The Mauritius route once served a purpose. It was our Macau or HK route for inbound capital. Just as those two entities are being squeezed out, we're in the process of squeezing out the Mauritius route. These FPIs pay 3% CG in Mauritius, and no tax either in India or in their home countries. They won't get any love from anyone except Mauritius, in the modern economic world, where either US or India will be happy to tax them at their domestic rates, rather that let them keep using a tax haven and wave their hands about shrieking about tax terrorism when we try to take them on. It is in their best interests long term, to work with us, rather than complain about 'retroactive taxation' or worse, 'tax terrorism'. They once had the ability to play the 'don't challenge the exemption or else there will be capital flight' card, but no longer. Just look at the moneycontrol FPI inflow data. For all the talk about capital flight, inflows were at an alltime high last year, as are forex reserves.

[nawabs]

It’s time India Inc stopped whining

http://www.thehindubusinessline.com/opi ... yndication

[SSundar]

It’s time India Inc stopped whining

http://www.thehindubusinessline.com/opi ... yndication

Very well-written article. Seems almost un-Hindu-like (pun intended). I checked out the bio of the author. Impressive.

For business cycles to take off significantly, disruptive innovation and new opportunities need to be available. IT companies boomed when the world economy was expanding and needed their services. Now, IT is hurting. Telecom has matured and is settling down. In the U.S., these plateaus are usually broken through technology innovation. Indian companies are now paying the price for not innovating enough all this time. Since companies cannot accomplish a breakthrough, the government could aid by opening up one or more sectors to full competition. Hopefully, "Defence Make-in-India" and "Smart Cities" are it.

[nawabs]

“The Indian tax system needs a complete overhaul”

http://www.thehindubusinessline.com/opi ... 074284.ece

Interview with S Mahalingam, member of the tax reforms commission

[vina]

The combination of arguments made imply that on one hand he favors past status quo policy stability, as opposed to 'idiotic' changes. On the other hand, he vehemently argues about the idiocy of the existing rules and demands change. While the larger 'fix the system' rant is clear, the conflicting arguments underline that the poster doesn't quite appreciate the magnitude of the task at hand / doesn't care / is politically motivated, or a combination of these.

. This is the problem with the classic Indian Baboongiri, who think that what they are doing in an alternate make believe world is somehow so smart that when someone else says , guys that is plain dumb and cant work it is difficult to digest.

Take the much ballyhooed REITs in the current budget. Globally those are massive investment vehicles. No that REIT business wasn't tried out earlier in India, it was, first under Chidambaram, but it was still born. Why cos the REITs didnt have pass thrus (a classic Indian Baboongiri, REITs everywhere in the world have it, cant work without it)! So the current repacked REITS will have pass thrus, will they take off, I doubt it.

Take inflation index bonds. They never wanted to issue it (well, then the RBI /Banks are exposed to inflation risk on deposits, they love taking in cheap money and giving back wampum), made a totally flawed product of the kind that existed nowhere else in the world, and cant work. Result.. People went and bought gold in massive quantities as an inflation hedge and to earn real returns. Net result, you had a massive deficit in last years of UPA II (gold and oil broke the bank) and now we have a "Gold Monitisation Scheme" , which is a massive money laundering /black money forgivness and to earn returns on ill gotten wealth scheme (you walk in with gold, no questions asked, you earn interest and you can get gold back).. but still , take it from me will no take off. (which black money guy will be idiotic enought to come and expose his holding to a bank and then lay himself open to a possible future investigation), as for the small maid/cook etc, no way they will walk into a bank and deposit gold and do some paperwork. Too indimidating for them and they dont understand it and the bank baboo talks down to them and couldn't care. Oh, finally the RBI relented and they now have inflation indexed bonds. Please look it up and see how much they have sold! Barely anything. Wrong product and wrong place and time. Who will buy inflation indexed bonds in a falling interest rate environment?

R Vaidya , the IIM prof (much loved in BRF) might be all for this gold monetisation business, Modi might love it, but my bets are that this gold business is still born (of course I would love to be proven wrong and I do hope they succeed) . It is like this "Getting Black Money Back from Switzerland" a red herring. Makes for nice headlines, but is really a waste of time. No maid/cook/housewife is going to come and give gold to the banks and no big black money guy/gold bar & coins owning guy will either.

Take it from me, there is a local VC ecosystem coming up, but then even if it is staffed with local guys, it will be more global/US focused, with investee companies incorporating elsewhere and exiting elsewhere. Same case if PE funds and Hedge Funds if they have to grow to any signficant size.

Most damning of all is debt markets. They are simply nearly non existent in India. The RBI indulges in financial repression, the govt debt market is a totally different silo from the other capital markets (you tyipcally have a different registry for GOI Bonds under RBI, you dont trade that in a demat account, the trading system is different), all for a reason, to prevent the market setting the price of debt, but RBI and Govt babus setting price of debt by fiat, and basically keeping the debt market mai-baap with PSU /Govt owned banks so that they dont lose control to do fiat/command -control.The less said about corporate debt the better. The secondary market is so illiquid that no one bothers and few companies even raise debt here in India these days.

Interest rate derivatives were banned! Can you believe it. Can you have a bond market without one. Now after the mountain went into labor and delivered a mouse, we have a half assed one, with liquidity in two or three specific tenors. There are no interest rate Options. Just futures. There is no specific yeild curve, beyond what you mathematically construct via boot strapping . God save you if you actually think one exists and try investing in it. No STRIPS / nothing.

Structured products - Non existent. Okay, ICICI and others push some securitisation deals every now and then and also the micro finance guys who do it so that other banks meet thier "priority lending" targets. Nothing much to write home about.

Commodities- Again a political hot potato. It exists now, doesnt exist some other time, out of bounds for institutional investors, prone to scams and ill regulated (okay with the SEBI take over, things could change).

Point is, the entire thing is so idiotic! Each of these are huge multi trillion spaces globally, and for an economy of India's size should be massive, and not the microscopic ants that they are.

As for the finance minstry and others, no , they couldnt be bothered. Not removing the entire Command/Control mai baap of he 70s, re-looking how capital is raised and managed here and creating a modern , hacking through the retrogade and "unique" to India babu/mantri created idiocies (just copy pasting global best laws and the supporting tax and legal ecosystem would work best, but no, our IAS baboons are the smartest cookies in the world, the modern day Prussians, who with their rule books can do anything from running an R&D lab to creating the structure for a SPV) , the focus is rather on a whack a mole , arbitrarily tweaking around in the margins, the focus seems to be on a shakedown of cash whether fair or foul to feed a run away spending beast!

No one knows WTF are they trying to do and why. IF there is any plan at all, beyond writing this circular to address this particular point or not, consequences and distortions be damned. Everything is so piece meal. There is no broad strategy ! Are we going to have vibrant capital markets in India where capital is raised easily and efficiently functions well for all market participants (the guys raising capital and supplying it and the other participants), will we be able to raise capital to support the economy' both to finance growth and also our old age ?

The financial system is still in most parts mindset and regulatory wise stuck in the command and control days. It will be fine if it works, but it fails miserably unfortunately in most areas. The idea behind that you have a large network of nationalised banks via which you grab the savings and then do the command control economy babugiri and everything will peachy from funding the LCA program to building sewage treatment plants for Bellandur lake is a disastrous failure.

Are we reforming it ? Oh no, not at all. Look at the big "intitiative" in the budget. The "GIFT" (an international finanacial and trade centre). It is so fantastic. We export our capital markets to Singapore and Dubai in the first place thanks to our command control fetish and irrational tax and other laws, then try to set up a "free zone" within our own borders to attract them back from Singapore and Dubai! A basically an alternate zone ,where the locals will see foreigners doing exact same thing as they are doing in Mumbai , but the"favoured" guys in the GIFT , betting away with far better terms and regulations!

The GIFT business is basically this. Modi built a large building/ complex in Gujarat with zero occupancy and jobs. In short a failure. This GIFT busienss is to somehow desperately get it staffed and make it succeed.Atleast for Singapore and Dubai, they are giant free trade zones/ entreport themselves, free capital flows, in and out, a legal and tax system tuned for that, and they attract business from OTHERS (namely India and other neigbhours). Here this GIFT business , is basically exporting India business from Mumbai to Ahmedabad facilitated via far better tax terms and regulations! Surely I suppose no one is suggesting that companies from Gulf, S.E Asia and Pakistan are going to come and raise money and trade their indices and products in GIFT!

This entire thing needs massive wholesale reforms and a full re architecting. But what we get are disjoint piecemeal stuff which create more distortions and a major stated initiative to fill a giant empty building.

If I could sum up what is going on in capital markets it is in one sentence.

We dont care about the multi billion opportunity spaces we never allowed to come up in India, but our focus is making sure that a failed empty building in Gujarat gets occupied

[NRao]

It’s time India Inc stopped whining

http://www.thehindubusinessline.com/opi ... yndication

Very well-written article. Seems almost un-Hindu-like (pun intended). I checked out the bio of the author. Impressive.

For business cycles to take off significantly, disruptive innovation and new opportunities need to be available. IT companies boomed when the world economy was expanding and needed their services. Now, IT is hurting. Telecom has matured and is settling down. In the U.S., these plateaus are usually broken through technology innovation. Indian companies are now paying the price for not innovating enough all this time. Since companies cannot accomplish a breakthrough, the government could aid by opening up one or more sectors to full competition. Hopefully, "Defence Make-in-India" and "Smart Cities" are it.

+1.

Economic theories can only take the economy to some level. After that (as you stated) it needs innovation.

Thus China - as one can see - is asking for innovation, since their eco cannot expand any further based on the normal eco engine.



One Q: Why is India not taking advantage of the huge "middle income" group within India (as opposed to looking outside India). That itself should provide a huge driver for growth.


Cannot say much about "Make in India", but the smart cities effort will not produce good results (outside of PR/marketing). India has too many structural problems that need to be sorted out.

[Suraj]

"REITs didn't work because there was no passthru mechanism before . They still won't work even though there is one now."
"GIFT, which is a long way from being built still, is a failure, because <noise>"
"Decades worth of accumulated bad economic policies have not been fixed in one year! Government is a failure!"

Unfortunately, further posts on the same lines will lead to action for disrupting the thread with trolling .

[SSundar]

One Q: Why is India not taking advantage of the huge "middle income" group within India (as opposed to looking outside India). That itself should provide a huge driver for growth.

The question to ask is "What products and services does this middle income group buy? Is there any way I can make them buy more of that?"

Is it possible that this market is saturated for the typical products this "India Inc." tries to sell?

[nandakumar]

Vina
Thanks for the trouble you took in putting it all down. As you said it is a bit complex. Naturally a lot of it went over my head. I need to read it more carefully and will respond if there is anything I can add to it.

[nandakumar]

Suraj
I want to respond to the observation below in your recent post:
They once had the ability to play the 'don't challenge the exemption or else there will be capital flight' card, but no longer. Just look at the moneycontrol FPI inflow data. For all the talk about capital flight, inflows were at an alltime high last year, as are forex reserves.
How do you reconcile this claim with the stated official policy articulated by Jaitley in media interviews post budget in favour of a benign tax regime for FPI capital? He was, if I understand correctly, saying that prospectively there will be no fresh MAT notices to FPIs either on their past investment profits or on what they would earn post April 1, 2015?

[Austin]

Forex Reserves Hit New Record High of $354 Billion

Country's foreign exchange reserves surged by $1.745 billion to touch a record high of $353.876 billion in the week to May 15, helped by the increase in foreign currency assets, according to RBI data.

[A_Gupta]

The secondary market is so illiquid that no one bothers and few companies even raise debt here in India these days.

[/quote]

What does "these days" mean? Indian corporations doubled their debt 2010-2014, and that in rupees.

[Suraj]

How do you reconcile this claim with the stated official policy articulated by Jaitley in media interviews post budget in favour of a benign tax regime for FPI capital? He was, if I understand correctly, saying that prospectively there will be no fresh MAT notices to FPIs either on their past investment profits or on what they would earn post April 1, 2015?

I don't think it was an action borne out of any kind of threat from FPIs. They can claim that the tax regime is adversarial and that it will lead to capital flight, but data between Mid 2014 and the present shows the opposite. There's a post right under yours reporting record high forex reserves too.

[nandakumar]

I agree that the policy response was not triggered by any threat overt or otherwise, from FPIs. But I think the Government believes that portfolio flows play a useful role in the current state of the economy and must do everything not to upset the equilibrium. So, no MAT notices on portfolio profits going forward, as Jaitley has said repeatedly, must be seen in that light. Not directing the CBDT to rescind show cause notices in the pipeline, or withdrawing judicial processes already underway would have caused a furore besides giving a lever to the opposition. The present Govt didn't want that. That is how I see it. Will post a detailed write up on the legal aspects of MAT tomorrow.

[nandakumar]

There has been a lot of debate and posts on the subject of Minimum Alternate Tax (MAT) on FIIs/FPIs. The consensus opinion on this forum is that the Government is justified in doing so. But the issue, to my mind at least, is not so open and shut as it appears on surface. I have done some research on this subject and therefore want to share it with members of this forum. So take it for what it is worth.
“We are reasonable, so for the future I have waived it. But the tax demand after winning the case, if I waive off, we will be like a tax haven ....how would I be answerable to Parliament that after the case I just waive Rs 40,000 crore".
This is what the Finance Minister, Arun Jaitley said, on Minimum Alternate Tax (MAT) while talking to NDTV. He went on to say that his Government was being reasonable and so it has waived the tax for the future. He then went on to ask rather rhetorically how he can answer the Parliament if he were to waive off Rs 40,000 cr due from the Foreign Institutional Investors (FIIs).
But common sense would suggest that it is not such an insurmountable obstacle. After all, if a certain future conduct is regarded as ‘reasonable on certain moral/legal principles it must be just equally so, for the past as well. If, as he is saying, that the Government ought not to demand in future, that FIIs pay tax (or rather, give them the freedom to offer it tax under some other jurisdiction such as Mauritius) on their capital gains because that is the reasonable thing to do, the FIIs would have a counter to that. They can easily turn around and ask the question as to how it is reasonable to subject their past incomes to tax if what they have been doing in the past was nothing more different from what they are going to be doing in the future.
The other thing is the Government of the day, legally constituted and enjoying the majority support of members of the Lok Sabha has the authority to stop any executive action that it deems as oppressive in nature or is something that is born out of an overzealous approach by the tax administration while interpreting some provisions of tax law. For, any failure to do so would be against broader national interest, something that they as elected members of the Parliament and constituting a Government, are enjoined upon to foster. So the notion that the political authority cannot intervene in administrative matters even if it is convinced that it is the right thing to do is an incorrect understanding of the relationship between administration and the political leadership that oversees it.
Of course, this Government has come into existence in the backdrop of egregious political interference in sensible administrative decisions of the bureaucracy as scams in allocation of 2G spectrum and coal mine blocks has demonstrated. So it has become difficult for the political authority to override executive initiatives. That said, it is still no excuse for not doing the right thing when arms of the Government exceed their brief.

Even a legal analysis would show that the Rs 40,000 cr tax demand on the foreign institutional investors that the Finance Minister referred to, in his interview, would show it to be one that is not built on very strong grounds.
The IT department’s action springs from a ruling of the Authority for Advance Ruling (AAR) on a specific case referred to it by a prospective foreign investor (Castleton Investment Limited) in the Indian market. The AAR is a quasi-judicial body constituted under the income tax law to give a ruling on the tax implication of a transaction that an overseas investor proposed to undertake. It had ruled in this particular case that even FIIs who enjoyed a right to subject any source of income in India to the provisions applicable to that transaction under the tax law of another country with whom India has entered into a Double Taxation Avoidance Agreement (DTAA), they are nevertheless subject to the operations of Minimum Alternate Tax (MAT). It needs to be mentioned that the application of the tax law of a foreign country to this particular source of income arising in India, would have been more beneficial to the tax payer than the quantum of tax imposed as MAT.
The tax authorities have since reopened the assessment of incomes already completed for a number of other FIIs seeking to impose a MAT levy on their past incomes. This was the Rs 40,000 cr mentioned by the FM in his interview.
Now, it is a well recognised principle of taxation that there ought to be a certain degree of finality to assessment in all cases where a tax payer has neither falsified any record nor otherwise concealed any income. As individuals who are paying taxes on our incomes, we can easily see the merit of this proposition. The only exception to this principle is where the authority realises that there has been a mistake that is ‘very apparent’ and is so evident on the face of the record, it warrants the reopening of a completed assessment. The tax authority would have us believe that there has been such an erroneous application of the law (omitting to impose tax levy under MAT) that is so basic that it is a fit case for reopening even completed assessments.
Now, for a little background on the ‘AAR’. It is in the nature of a tax opinion that is binding on the income tax department and is meant to operate prospectively on a transaction of an individual investor. At best it can also be sought to be applied prospectively, to a set of other investors who are similarly placed. Given this factual position, is AAR the appropriate judicial forum for laying down the law on applicability of MAT on FIIs to the point that even completed assessment can be reopened on the ground that there has been an ‘apparent mistake’? No doubt, opinions of AAR bear the stamp of judicial application of mind to a question of fact or law or both. But giving it, a character and effect similar to that of findings of an appellate tribunal under the income tax law or the higher judiciary (High Court/Supreme Court) is to vest it with a responsibility that is far beyond what had been intended by the Legislature.
The MAT as it exists today has evolved through many legislative attempts in the past. The common theme, which can be gleaned from budget speeches of Finance Ministers and memorandum explaining various provisions of the Finance Bills before being enacted by the Parliament, is that there are a number of companies which have legitimately earned to right not to be burdened with a tax demand. They can’t even be accused of employing questionable tax dodges to escape taxes. But nevertheless they can be seen as having sizeable disposable incomes. It is only fair that they be called upon to pay some tax at this point in time but the same can be adjusted against their legitimate tax dues in later years where such dues have been arrived at by the proper application of various provisions of the income tax law.
In other words MAT was meant to be nothing more than an advance tax against legitimate future levies that is certain to befall tax payers. Such adjustments (against legitimate future levies) may well be at some distant point in time. But there should be a reasonable expectation that profits computed in accordance with provisions of the income tax law must at some point of time converge with profits that have been recognised by adopting conventional principles of accounting. Absent this convergence, the levy by way of MAT exceeds the legislative mandate.
In the case of FIIs incorporated in countries with whom India has a tax treaty and where these countries have subjected capital gains to ‘nil’ rate of tax or at least a rate of tax that is lower than the rate applicable under MAT, one can be sure that the former would elect themselves to be subject to the tax jurisdiction of treaty countries. In other words, that tax (under the Mauritius tax law or for that matter, any other country with whom India has a DTAA) for purposes of Indian income tax law will always be a sum lower than that payable under MAT. The imposition of levy under MAT thus fails the ‘convergence’ test (between book profits and tax profits) which is fundamental to the structure of law on MAT.
The Department has also drawn comfort from the fact that AAR had based its ruling on the fact that the section imposing MAT has enacted that it applies, ‘notwithstanding anything contained in any other provision of this Act’. But the section (Sec 90) which confers on foreign investor the right to invoke the beneficial features of a DTAA has this to say: ‘ in relation to the assessee (FII) to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Though the language employed in Section 90 (2) does not contain the phrase ’notwithstanding anything contained in any other provision of this Act’ the effect seems to be just the same.
The Vienna Convention on Law of Treaties enjoins upon signatory nations not to unilaterally abrogate or amend specific clauses in bilateral tax treaties. No doubt, India is not a signatory to the Vienna Convention. But there is no reason not to recognise the salutary principle of no unilateral amendment. There is even less case for such abrogation with retrospective effect as the tax department has sought to do.

[wig]

MAT( minimum alternate tax) under section 115JB applies to corporate bodies.
AMT ( Alternate Minimum Tax) under section 115JC to 115JF applies to LLP, Firm, Indivudual, HUF and any other person.

there are any number of persons ready to argue for or against MAT because it affect foreign corporates along with Indian corporates.
Very few raise the issue of AMT which affect practically everybody else and mostly local tax payers who are engaged in business above a certain financial level.
Just some thoughts

[vina]

Deleted

[Suraj]

Even a legal analysis would show that the Rs 40,000 cr tax demand on the foreign institutional investors that the Finance Minister referred to, in his interview, would show it to be one that is not built on very strong grounds.

What's often neglected is that this tax demand is not new. It's an accumulated sum. This is not retroactive taxation. It's an elimination of an informal exemption that the FPIs previously sought retroactively. The previous administrations simply kicked the can down the road, something this administration chose not to do. The FPIs negotiated a retroactive exemption with each new administration, something they could not do with this one.

The GoI definition of a PE does not require the abrogation of the India-Mauritius DTAA. Whether or not they've a registered presence in Mauritius is not going to protect them, and they know it. Their Mauritius presence is a shell entity, solely meant to exploit tax haven benefits. They would have been much better off utilizing the US-India DTAA. But no, that wouldn't be 'convenient', because they'd owe US or India taxes. These FPIs can't go back to GOTUS and complain about our 'tax terrorism' as they put it, because GOTUS would ask 'how about the taxes you owe us, then ?'

Of course, Jaitley offers them no future action . Wipe the slate clean, accept PE presence in India, and therefore pay GoI taxes, and there's no question of ever being subject to future action of this kind , after all. Fighting the tax man is a futile exercise. They can't run because the India market is too lucrative, and they can't hide because Mauritius is too small to protect them, and the US would want its own pound of tax flesh.

[Suraj]

Frozen Carrots, Fruity Pepsi: India’s Weapons in Inflation Fight

The workers extracting mango pulp, freezing carrots and packing spring rolls in southern India are the foot soldiers in Indian Prime Minister Narendra Modi’s inflation war.

The complex is one of four government-backed “mega food parks” intended to jumpstart a nascent food processing industry. Modi plans to help build another 38 to reduce wastage that sees a third of all fruits and vegetables tossed in the trash, pushing up prices for India’s 1.2 billion people.

The effort is more crucial than ever after his government agreed with the central bank to target consumer price inflation at about 4 percent in the next few years. Since food prices account for about half of India’s CPI basket, Reserve Bank of India Governor Raghuram Rajan has little scope to reduce interest rates if they aren’t contained.

[kmkraoind]

IMO, western approach of freezed vegetables may not be a good idea for India. In India, we do not have big freezers (even power consumption will shoot up). We should look into dried vegetables. Already there are some tech for carrots, methi and cabbage, but we need more R&D for this aspect. JMT.

[Suraj]

The cost of power to refridgerate foods should be balanced against the opportunity cost of a full 33% of all produce being lost to spoilage . If anyone can look up the numbers, it would be very helpful, but my guess is the cost of electricity would be vastly lower than the lost food, and the incremental gain in the rest on account of inflation. The end result would be that it's way more preferable to invest in refridgeration. Drying is just one other option, but which may not suit everyone because the refridgeration would provide for longer availability of seasonal foods that appear fresh, and the population would come to expect such availability.

[amit]

The cost of power to refridgerate foods should be balanced against the opportunity cost of a full 33% of all produce being lost to spoilage . If anyone can look up the numbers, it would be very helpful, but my guess is the cost of electricity would be vastly lower than the lost food, and the incremental gain in the rest on account of inflation. The end result would be that it's way more preferable to invest in refridgeration. Drying is just one other option, but which may not suit everyone because the refridgeration would provide for longer availability of seasonal foods that appear fresh, and the population would come to expect such availability.

Suraj,

IMO you are spot on when you say the opportunity cost of 33 per cent vegetable and fruits wastage far outweighs electricity cost. Building a huge network of cold storages is only one part of the solution. There's one missing element here. And that's the need for refrigerated containers and trucks to transport cold storage products from the godowns to the retail markets.

Additionally, once you refrigerate vegetables/fruits you need to keep them that way till they are picked up at retail outlets by buyers.

The question is, who is going to invest in the several thousand refrigerated trucks and containers as well as the supply chain that's required to ensure smooth system whereby farming produce is picked up from the fields, transferred to cold storages and then distributed across the country to retail shops?

In my view this can't be done with our traditional Mandi system and we need organised retail. I know you think FDI in organised retail is no big deal and not a priority area, but I fail to see who is going make the investments that are required to stop this 33 per cent wastage (I'm happy to see that, at least now, this wastage figure is being recognised. Several years ago when we had a discussion on this subject, a lot of folks - not you - scoffed when I mentioned this wastage number, which has been around for almost a decade - meaning that nothing has been done to minimise it).

I just hope the government does not get into this business because as the FCI experience has shown it's not something that the government can do efficiently.

Another point: IMO, it's instructive to note that while average farm sizes in China is as small as in India, vegetable produce - including fast perishable leafy vegetables like spinach - have flooded the markets in Southeast Asia. This is despite quality control issues - like pesticide content - being present.

Despite producing better quality and tastier vegetables, no Indian produce, expect some extotic stuff like Alphonso mangoes and of course onions are available outside of India. I postulate the lack of efficient food distribution supply chains is the reason behind this. Again, who is going to invest in these supply chains and who has the technical knowhow to set them up properly?