Posts Tagged ‘Indian Economy’

India will get the right to tax capital gains on investments channelled through Mauritius under an amended tax treaty it signed with the Mauritius. The amendment to the 1983 India-Mauritius treaty, which will come into force on 1 April 2017, will also apply to the India-Singapore treaty, shutting two lucrative investment routes preferred by foreign investors. The India-Singapore treaty links the capital gains tax regime to that provided in the India-Mauritius treaty. Around 50% of foreign direct investment into India comes through Mauritius and Singapore, according to Indian government data. Some 34% of it is channelled through Mauritius and 16% through Singapore.

In addition, the amended India-Mauritius double taxation avoidance treaty has also provided for a limitation of benefit clause that will ensure that only genuine Mauritius-based companies get the benefit of the bilateral tax treaty. Only those Mauritius-based companies that have a total expenditure of more than Rs.27 lakh in the preceding 12 months will be able to benefit from the tax treaty. Treaty has also provided a two-year transitionary phase wherein the capital gains will be taxed at 50% of the existing tax rate; the full domestic tax rate will be applicable from 2019-20, provided the limitation of benefit clauses have been adhered to.

Under the earlier bilateral agreement between India and Mauritius, capital gains from sale of securities have been taxable only in Mauritius, where the levy is close to zero.

One big positive is that there will be no retroactive impact on any investment made till 1 April 2017.The changes in the treaty should be seen in the light of India’s commitment to base erosion and profit shifting and the impending general anti-avoidance rules that will come into effect on 1 April 2017.

How we got Mauritius to agree?

  • India’s determination to implement GAAR from 1 April,2017,
  • Global pressure built up after panama papers and so many other tax heaven in which the global community is against such arrangements, wherein companies get away with double non taxation, and
  • The urgency the government has put on this matter. Negotiation started back from 1996 and pursued until now.

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What was the need for the amendment?

This is the third major amendment in recent times to the Negotiable Instruments Act 1881, prompted by dishonour of cheques in lakhs, shaking the credibility of the instrument, confidence of business community and choking courts. The 1988 amendment introduced penalty for issuing cheques which get dishonoured for want of fund in the bank. Since that provision, Section 138, was found insufficient to deal with the menace, the penalty was increased from one to two years imprisonment after a summary trial. Even this has not resolved the problem and at present 1.8 million criminal cases are before magistrates’ courts and appellate courts. One of the devices employed by dishonest drawers is to challenge the jurisdiction of the courts, stalling the proceedings. This was tried to be resolved by the Supreme Court in its 2009 judgment in Dashrath Rupsingh case.

What does the present amendment do?

The amendment adopts the basic principles laid down by the Supreme Court in the above case (Dashrath RupSingh case) regarding jurisdiction of courts and improves upon it in the light of the representations made by various stakeholders, including industry associations and financial institutions. Complications had arisen because a cheque was issued in one place on one bank, and presented in another place to another bank. The payer company might be in one corner of the country and the payee might be in another. The payee therefore had to chase the accused in distant places and even if he won, appeals would be filed in another court and arguments will continue for years. The Supreme Court found that even high courts had differed on the question of the choice of courts which should try the case. The present amendment removes such legal bottlenecks and speeds up the trial. Now the question of jurisdiction cannot be raised as the law is clear.

The new provision states that the holder of the cheque can file a criminal complaint before a magistrate where he resides and tendered the cheque. He need not go to the place where the cheque was issued or other courts. After this clarification, there is a single place to file the complaint. Litigation expenses will come down, and the drawers of cheques, including company directors will be more careful while signing such cheques. The government feels that these procedural changes will be fair to both parties.

What happens to cases already pending?

According to the newly introduced Section 142A, all cases which were pending in any court, whether filed before it or transferred to it shall go before the court having jurisdiction under the new procedure.

What is the other important proposed change in the Bill?

The new law also cures a deficiency in the definition of “a cheque in the electronic form”. The law as it stood presumed drawing of a physical cheque and signature. With the advance in technology it needed to be updated. Therefore, it is explains that “a cheque in the electronic form” means a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature. The Negotiable Instruments Act borrows definitions of technical expressions from the Information Technology Act 2000.

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Accrual Accounting System vs Cash Accounting System:

While cash accounting recognises a transaction only when money changes hands , accrual accounting recognises the transaction at the time it is made, thereby providing more current snapshot. The fourteenth Finance Commission strongly recommended for adoption of accrual based accounting system. It is a means to an end, the end being reforms in public financial management and therefore greater accountability and a greater need for operations of the government to be on commercial lines. The method according to the experts, provide a more accurate picture of the company’s financial position. However it is more complex accounting system than cash accounting which the government uses currently and so is more expensive and time consuming to implement.

Need for Accrual based accounting system:

  1. Accrual accounting is useful in some specific cases such as comparing the cost of public hospitals with private hospitals, for example and in ascertaining why the government is so uncompetitive and why the private players are in a better position.
  2. Budget heads of accounting needs modernisation. The present classification system goes back to around 1974. It has undergone some minor changes, nothing major. What’s happened is that with the greater complexities of the government’s fiscal operations, the need for greater transparency of information and its correct depiction has also become very, very important. A report by the Comptroller and Auditor General of India had found that the archaic classification system had resulted in 11 heads of government spending where more than 50 per cent of the expenditure had no details of how and where the money had been spent. They had simply been classified as ‘other expenditure’. This classification system, called the Chart of Accounts, is like the DNA of the budgetary system.

Challenges in Implementing Accrual based accounting System :

  1. Its relevance to certain departments becomes crucial but most government departments and ministries are policy-oriented ministries. So what if you knew about their assets and liabilities? Accounting information must have relevance.
  2. Another issue with adopting accrual accounting is the cost and time involved. “There are heavy costs involved. Also, experience shows the timeframe for implementation is around 10-15 years for a government of our size. And then there is the issue of the states. If the Centre moves to the accrual system, what happens to the states? Do you have a dual set of statements? Or will you get all the states on board?
  3. In India, our focus isn’t so much to run fiscal surpluses, which may be the focus, say, in Australia but because of our other social sector priorities and heavy subsidy element; our focus is on balancing the budget somehow or the other and remaining within fiscally prudent levels of deficit


The Controller General of Accounts has asked the government to be careful in adopting the accrual method of accounting considering the costs involved as only a few of its departments can benefit. We should tread this subject in a careful manner. There is no such thing as a big-bang approach. And even if you’ve heard of some advanced countries that have made this transition, like Australia, New Zealand, South Africa, UK, you must understand that the background to the introduction of accrual accounting was not that it was an end by itself.

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RBI Governor Rajan gave three keys for  how India should engage with rest of the world in these stressful time:

One, Importance to be given to the ‘macroeconomic stability’. India is being seen as a beacon of economic stability across the world, even as the fall in global demand and commodity prices, especially oil prices, has sent other emerging economies into a tailspin. Fiscal expansion in such economies as Brazil became unsustainable in a very short period of time. India, too, faced growth deceleration, steep current account deficits, sharp rise in inflation and expanding fiscal deficits in the wake of the financial crisis of 2008-09.

                                                          However, unlike most of its peers, India has staged a remarkable comeback — despite two back-to-back droughts — on the count of macroeconomic stability. As against 2013, India’s inflation and deficits are well within prudential limits. The last leg of this stabilisation agenda is to clean up the stressed assets in the banking sector so that banks can lend again.

Second, If macroeconomic stability is the necessary condition for next round of growth than ‘Structural reform’ typically one that increase competition , foster innovation , and drive institutional change  will provide sufficient condition. The debt-fuelled demand in the run-up to the Great Recession actually hid a fall in global potential growth, which, in turn, was perhaps due to the fall in productivity growth.

However, India is better placed than developed countries to raise productivity. That’s because unlike firms in those countries, which are already working at the productivity frontier and can increase it only through innovation, in India, such improvements can happen by simply removing existing bottlenecks. By the availability of roads, for instance — a key area of focus in the latest budget as well. Similarly, suggested improving human capital, with better educational and vocational institutions, simplifying business regulation and taxation, and increasing access to finance.

Three, India must also change the way it deliberate at the global forums. This is unfortunate that these forums are still dominated by the old powers. India needs to raise its intellectual capacity, through better think-tanks and universities, as well as build coalitions with other countries, to push its agenda effectively.

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The debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP). A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.

For developed countries debt to GDP ratio of 60% is the safe limit, while for developing countries it stands at 40%. Anything above these number can be termed unsustainable levels. India’s Debt to GDP ratio is well above 40% at 65% (2013) which means it may not be sustainable to have such huge liabilities. Only relief is that most of the debt is in local currency that’s why investors still have confidence in Indian economy.

If the Indian economy grows with steady 7.5% rate and fiscal deficit remains at 6%(Centre + State) then according to a study after 10 years of time debt to GDP ratio will come down to a level of around 59.5%.  But State govt restrict their fiscal deficit to 1% collectively, which is quite possible  after 42% devolution, and a total of 4%(Centre + State) then with growth pace of 7.5% we can achieve 47% level. This will require that states with high debt ratio borrow less, and state with less growth potential borrow less too. While Centre which left with limited resources after high devolution to the states stand justified with high level of borrowing (up to 3%). These above assumption also require a moderate high inflation rate of 5% level.

One of the reason for India’s high level of debt to GDP ratio is lower growth in previous years just after 2008 crisis. When combined (Centre + State) fiscal deficit went up to 6% from earlier  4.1% in 2007 and household savings dropped from 11.6% to 7.3%  during same period due to high level of inflation which means a squeeze in corporate investments (earlier 11.6-4.1 =7.5 left for corporate investment while after crisis only 7.3-6=1.3 left for the same).

Here is a need for establishment of an autonomous body to review fiscal performance under the FRBM Act, Similar to the recommendation of Thirteenth and Fourteenth Finance Commission. This could evolve into a statutory Fiscal Council, reporting to Parliament through the finance ministry. Such institutions have been set up in several countries, with somewhat varying mandates.

A Fiscal Council, with technical expertise, would help generate better understanding of the consistency of fiscal stance of each budget with the longer-term fiscal trajectory envisaged under the FRBM Act. It would certainly improve the quality of Parliamentary oversight and also contribute to a more informed public debate. The Council would actually strengthen the hands of the finance ministry, which is otherwise the lone guardian of fiscal prudence, battling other ministries typically keen on expanding expenditure. States as such do not require fiscal council like body because they  can’t borrow without the permission of Centre Govt.

But this does not means that Centre can’t deviate in emergencies. Thus flexibility may also be needed at fiscal targets because of non-cyclical shocks, for example a permanent increase in oil prices. In such a situation the correct approach is to go back to the drawing board, work out the implications for GDP growth and revenues, and determine a new fiscal trajectory, which takes appropriate account of crowding out and the debt/GDP ratio. The pace of fiscal adjustment can always be slowed temporarily without affecting the end period debt-to-GDP ratio target by ensuring sharper reductions in the fiscal deficit in later years. However, the harmful impact on crowding out by going for higher fiscal deficits in earlier years needs to be carefully examined.

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