THE GOLDEN SPARROW ON SATURDAY FEBRUARY 28, 2015
PUNE
MONEY MATT ER S
“You have to meet the needs of consumers. If consumers are becoming health conscious, I cannot go in the opposite direction.” — Amit Jatia, Westlife Development
Signpost IES says inflation easing India’s economic survey pegged growth at more than 8 per cent for the next fiscal and said inflation was now declining, while also setting the agenda for reforms needed to further drive the expansion, prune wasteful expenditure and promote productive investment. On inflation, the survey said, there has been a fall of over 6 percentage points since 2013, even as the external sector, which includes exports and inflow of foreign funds, was returning to a path of strength. Industrial growth has also picked up now. It aslo reports on the farm sector. Foodgrain production for year 2014-15 is estimated at 257.07 million tonnes and will exceed that.
Himachal MP gets enhanced grant Himachal Pradesh BJP MP Anurag Thakur thanked Prime Minister Narendra Modi for the enhanced grant of Rs 40,625 crore to the revenue deficit hill state as recommended by the 14th Finance Commission.”The prime minister is aware of problems faced by the hill states and therefore even if it meant the straining of its own finances, the central government has accepted the recommendations of the 14th Finance Commission in letter and spirit,” he said in a statement. The hill state received the grant out of the Rs 1.95 lakh crore allotted to 11 revenue deficit states. Thakur said the 13th Finance Commission had recommended states’ share in central taxes at 39.5 percent but the then UPA government scaled it down to 32 per cent.
Prabhu sharply hikes freight rates Railway Minister Suresh Prabhu sought to hike goods rates on a host of items between 2.1 per cent and 10 per cent in his maiden budget, to garner 13.5 per cent additional revenues on this count. “Then freight structure for the Base Class-100 has been proposed to be increased by 10 per cent,” an explanatory statement on freight, appended with the budget documents showed, indicating the hike sought in the most basic goods such as salt for human consumption. The minister also proposed to reduce the number of classifications to ascertain freight rates, as also rationalise the distance slabs.
“Flow of funds from the government to FCI is erratic. Corporates are also exposed to cut in payment for short deliveries, equality rejections.” —Tejinder Narang, grain analyst
Will the Budget set right the distortions? Financial markets are hopeful that the Budget will clarify different and confused tax provisions regarding investment vehicles such as mutual funds and private equities
Kickstarting investment cycles through fiscal measures is crucial for the demand cycle in turn, says CRISIL report
VINOD KOTHARI & NIDHI BOTHRA All over the world, there are clear rules for being eligible for passthrough status, but unfortunately, the principles on representative taxation in India have never been designed to tax collective investment devices. These principles have been created over the years to tax trusts where tax payers may create pools of assets/ income which beneficially belong to a tax payer, but are not legally his. Therefore, there are situations where such a “representative assessee” is required to pay tax at maximum marginal rate (MMR) which defeats the purpose of these collective investment vehicles at the first place. The least what Finance Minister Arun Jaitley should do, in Budget 2015, is to set right the highly distorted scene of taxation of investment vehicles. These vehicles include the private equity (PE) funds and venture capital funds (VCFs), collectively called alternative investment funds (AIFs), securitisation vehicles, real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). Lest you should think these are some esoteric instruments that don’t matter to the country’s economy in general, you are actually mistaken. Each of these investment vehicles is crucial for the country’s economy: • A large part of the foreign direct investment into the country comes through these vehicles. Over years, private equity funds have brought billions of funds into the country. The India Private Equity Report, 2014 states that in 2014, Indian PE industry did deals worth $11.8 billion - lower than the 2011 levels which were at $14.8 billion. It is important to note that capital is much more important than debt- capital and is like the foundation of a business on which the edifice of debt is built. • Securitisation activity is crucial for the business model of the nonbanking finance companies in the country which supplement bankers’ access to the so-called priority sector lending market. NBFCs are instruments of financial inclusion, and their business model substantially hinges on securitisation.
Private sector will not kick-start investment cycle MONEYLIFE DIGITAL TEAM
• REITs have been proposed in the last Budget, but have not taken off at all. REITs are expected to be crucial in reviving or unlocking investments in commercial real estate. Commercial real estate has a substantial multiplier effect - it brings employment, affects core sector industries, and so on. Tax issues continue to baffle funds: Currently, the tax law pertaining to taxation of investment conduits is either legislatively uncertain, or is lopsided. The different taxing principles under the Income Tax Act, 1961, for taxing different forms of investment vehicles in India are as follows: • Mutual funds, taxed under Section 115 R • Venture capital funds, taxed under Section 10 (23FB) read with Section 115U • Alternative investment funds – no tax provisions, hence, taxed under normal tax principles of representative taxation • Securitisation trusts – taxed under Section 115TA to 115TC (Chapter XII EA) • Real estate investment trusts – Section 10 (23FC), 10 (23FD) and 10 (38) read with Section 115 UA • All other collective investment vehicles – no tax provisions, hence, taxed under normal tax principles of representative taxation The various fund structures
existing in India are covered by different tax regime. Even though the fund structures are similar, the practice of applying different tax principles on them is not clear. This divergence creates much ambiguity on the whole. In some investment vehicles there is a partial pass-through and in some cases there is representative taxation made applicable. While the intent with which each of these vehicles is set up is similar, the tax implications vary across vehicles. Most of these vehicles are set up in a trust form (a non-charitable business trust) and there have several issues with regard to such trusts being revocable, determinate, discretionary or otherwise. The critical issue in taxation for consideration, for all these conduits is whether there will be a pass-through for tax purposes, or the fund is a tax-opaque entity. A pass-through taxation is the most convenient form of taxation, as the investors pay their own taxes, and the fund as a collective investment device is not required to pay any taxes at the fund level. All the more there is no duplication of taxes or leakage of taxes. The tax officer taxes the fund; the distributions made by the fund may not be chargeable to tax. (Vinod Kothari is a chartered accountant, trainer and author. Nidhi Bothra is executive vice president at Vinod Kothari Consultants)
Promulgating ordinances, while showing the Narendra Modi government’s positive intent, are not enough for corporates and investors to commit big money, says CRISIL, the ratings agency. Debottlenecking steps taken by demand. This seems to be the real the new government at the Centre reason behind the hesitation to commit and tailwinds from the crash in crude larger monies,” says Prasad Koparkar, oil prices have infused sanguinity into Senior Director, CRISIL Research. the economy, even pushing growth CRISIL said its survey sample up mildly. In addition, with inflation is fairly representative, as the polled hovering inside the Reserve Bank companies accounted for about 45 of India’s (RBI) target and current per cent of the capex undertaken by account deficit reined in, India is truly all National Stock Exchange-listed a bright spot among emerging markets. companies, excluding the banking, However, ratings agency CRISIL financial services and insurance sector, says domestic investments are not in 2013-14. forthcoming. “We believe till “Without an upturn such time there is great in capital investments, improvement in demand without job creation, visibility, the private without putting more sector will prefer to money in people’s wait and watch than hands, and without intrepidly commit expanding capacities to more skin. In such a meet future demand, it scenario, the ability is hard to see the current of the government to pace of economic kick-start investments growth increasing and through fiscal measures sustaining. --especially given the Promulgating additional elbow room - CRISIL report ordinances, while afforded by falling showing the crude prices – is crucial government’s positive intent, are not because that can initiate the demand enough for corporates and investors cycle,” it added. to commit big money. The prognosis, Raman Uberoi, President for thus, is clear. It is time to facilitate a Ratings at CRISIL, said, “The revival in the investment cycle,” the message coming through is crystal ratings agency said. clear: as things stand, there is only CRISIL’s survey of 192 listed, one way to kick-start the all-important public and private sector companies -investment cycle, and that is through from key sectors such as infrastructure, public investment. The onus is on the energy, metals, cement, auto, pharma government to do the initial heavy and textiles - showed a 4 per cent lifting.” decline in capex plans for 2015-16. CRISIL said it believes this is Even more bothersome was an 11 where spending on infrastructure – per cent syear-on-year decline in the specifically, roads, urban infrastructure capex plans of private sector companies and railways – is crucial because they polled. Notably, this will follow have a significant multiplier effect of already subdued spending expected in creating demand for steel, cement, 2014-15, it said in a report. capital goods and commercial vehicles, “If there is one thing corporates and spurring investments in the – are looking for, it is better visibility manufacturing space as well. in terms of a sharp improvement in @moneylife.in
“The private sector will prefer to wait that commit askin.”
NEFT: ‘Never Ending Financial Trouble’ for bank customers
Banks have no responsibility to match perfectly the account number with the beneficiary name as mentioned by the remitter. This makes the customer run from pillar to post for grievance redressal. Why is the RBI so unconcerned? National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement System (RTGS) are great technological products for remittance of funds. However, both require considerable improvement in implementation to make them not only customer friendly but a safe and secure remittance system that can sustain the trust and confidence of the using public. Now that the Reserve Bank of India (RBI) is in the verge of granting many more licences to set up what are called specialized “payment banks” exclusively catering to the remittance business, it is all the more necessary to upgrade the prevailing systems with built in safeguards. This would ensure that customers feel safe in using these modern systems. These problems enumerated in the aforesaid two articles can be summarized as under: 1. Banks, who receive the remittance, do not furnish full information of the remitter when they credit the amount to beneficiary’s account. This can give rise to questions being raised by tax authorities who could even construe these credits as income in the hands of the beneficiaries
and taxed accordingly. This can put the receiver in a dilemma for no fault of his. 2. Apart from the name of the remitter, the full address of the remitter and the purpose of remittance should also be furnished for the use of the receiver. In the absence of this information, it will put both the remitter and the beneficiary in a bind. 3. A number of businesses that accept online payments for sale of products, subscriptions, memberships etc. do require full information about the remitter and the purpose of remittance without which, they are left vulnerable to harassment by different tax authorities as well as by their auditors who may not give a clean report in their balance sheet. 4. Another issue with NEFT fund transfer is the delay. According to RBI policy, banks need to afford credits to beneficiary accounts or return transactions (un-credited for whatever reason) to the originating / sponsor bank within the prescribed timeline. RBI has also instructed banks that compensation as stated above is paid suo-moto to the customer without necessitating a request for the same by the customer. Whether this is complied
the beneficiary as mentioned by the remitter as per the guidelines of RBI. The onus of furnishing the correct account number, no doubt, rests with the remitter, but unfortunately, there is no enabling environment to ensure that the remitter does not commit any mistakes while mentioning the account number in the application for remittance. This is because; there is no standardization in the numbering of bank accounts as prevalent in mobile telephone numbers.
with by banks is anybody’s guess. What are the problems encountered by remitters? Every remitter is anxious to ensure that the remittance reaches the right beneficiary to whom it is intended at the earliest possible time. But if it does not get credited to the right beneficiary for whatever reasons, the remitter will have to face the music and run after the banks to recover the money from the wrongful recipient of the amount. The chances of money going into the wrong account are again two fold. If the remitter mentions the beneficiary’s name correctly, but
inadvertently mentions wrong account number of the beneficiary, the amount will be credited to the wrong account mentioned therein without matching name of the beneficiary. Secondly, if the remitting bank by mistake mentions the wrong account number while transmitting the message to the receiving bank, here again, the money will get credited to the wrong account, as the receiving bank is not required to match the name of the account holder mentioned in the remittance instructions. This is because, banks have no responsibility to perfectly match the account number with the name of
What are the improvements required to strengthen the NEFT system? The first and the foremost improvement required is to ensure that the amount reaches the intended beneficiary only at all costs. To enable this, the most important requirement is to standardize account numbers across all banks which will reduce the chances of making mistakes by the remitter and the remitting bank as well. All mobile numbers are of 10 digits all over the country irrespective of the operator, making it user friendly and easy to record wherever required. But the numbers of bank accounts vary from 10 digits to 15 digits, as different banks follow different system of allotting account number for accounts opened with them. For instance, SBI has 11 digits in their account numbers; where as ICICI Bank has 12 digits, Canara Bank has 13 digits, Indian Overseas Bank has 15 digits, while Citibank has only 10 digits.
If nearly 900 million mobile numbers can be restricted to 10 digits, it is certainly possible to restrict the bank accounts to a maximum of 10 or 12 digits and make it uniformly applicable for all banks in the country. This is, however, not to say that the name of the account holder should not be considered while affording credit. In an environment of technological improvements taking place every day, there is no reason why it is not possible to develop suitable software to perfectly match the account number with the name of the account holders as specified by the remitter. If customers are properly guided to provide both the account numbers and name of the beneficiary correctly, they would certainly comply with this requirement in their own interest, to ensure that the remittance goes through without any hitch. RBI should certainly ask the banks to find out plausible solution to this problem so that the entire system is perfected to provide safe and secure remittance system to the banking public. There are a number of instances, where the amounts have been credited to wrong beneficiaries without matching name of the beneficiary, due to wrong account numbers either given by the remitters or wrongly communicated by the remitting bank, which has resulted in inconvenience and, in some cases, even loss of money to the customer or the remitting bank. @moneylife.in