Contents

Goods and Services Tax .................................................................................................... 5

Inflation ............................................................................................................................... 5
Mergers and Acquisitions .................................................................................................... 5
Trade Development Report 2! "#$%TAD& ....................................................................... '
(ver reliance on s)ort term capital* ................................................................................... '
Regulations for stoc+ exc)anges ........................................................................................ '
%onverti,ilit- of Rupee ........................................................................................................ .
Sustaining India/s gro0t) .................................................................................................... 1
2nd 2inancial Sta,ilit- Report of R3I4 2!! ..................................................................... 1
5alan %ommittee Report 2! ................................................................................................ 1
Microfinance Institutions ....................................................................................................... !2
Mega 2ood 6ar+s .............................................................................................................. !7
Direct Taxes Code
T)e revised draft of t)e DT% released on 5une !'4 2! )as t)e follo0ing features8
!. T)e MAT s)all ,e levied on ,oo+ing profits and not gross assets as 0as mentioned in
t)e earlier draft. Taxing on gross assets 0ill )ave unintended consequences
particularl- in t)e case of loss ma+ing companies and companies )aving long
gestation period.
2. T)e draft stands committed to t)e 99T sc)eme.
7. In t)e case of propert- income4 t)ere is assurance of continuation of deduction of
interest4 su,:ect to a ceiling of Rs !. 5 la+) against nil income from one self;occupied
propert-.
<. Securities Transaction Tax to ,e continued at t)e rate to ,e cali,rated 0it) reference
to flo0 of funds to t)e capital mar+et.
5. (n c)arities
a. Income of non;profit trusts and institutions from t)ose sources 0)ic) are
construed as ,usiness 0ill not ,e exempted.
,. Religious c)arities 0ill ,e exempt4 su,:ect onl- to t)e additional condition of
requirement of registration under state legislation.
c. 2or institutions t)at are partl- c)arita,le and partl- religious4 0)ere t)ere is
specification of ratio of utili=ation of income as ,et0een c)arities and religion4
lia,ilit- 0ould get split up on t)e ,asis of t)e same ratio.
DT% also sa-s t)at ne0 S9>s to ,e setup after April !4 2! 0ouldn/t get profit lin+ed
deduction in taxes. ?T)e commerce ministr- is 0orried t)at t)is 0ould deter ne0 S9>s from
,eing setup@
Sept 2!8 T)e ,ill )as ,een amended and s)all ,e effective onl- from April !4 2!2
!. Tax sla,s )ave ,een revised and narro0ed.
2. MAT at 2 pc
7. Tax on ,ranc) profit at !5 pc
<.
Why do we need a new direct Tax code?
The Current Income Tax Act in India which was enacted more than 50 years ago in
1961, is not in tune with the radical transformation that the economy has undergone
during this period A simple ,sta!le ,ro!ust and modern tax regime is what the
economy needs today Therefore, while presenting the "nion #udget $005%06, the
&o'ernment had announced its intention to re'ise, simplify, rationali(e and
consolidate laws and procedures relating to direct taxes, The purpose of the code
therefore is to consolidate and amend the law relating to all direct taxes, that is
income%tax, di'idend distri!ution tax, fringe !enefit tax and wealth%tax, so as to
esta!lish an economically efficient, effecti'e and e)uita!le direct tax system which
will facilitate 'oluntary compliance and help increase the tax%&ross *omestic
+roduct,&*+- ratio Another o!.ecti'e is to reduce the scope for disputes and
minimi(e litigation
If enacted, when would the DTC 2010 come into force?
In enacted the *irect Tax code $010 would come into force from 1
st
April $01$
What are the salient features of the code?
The main features of the Cod are a single code for all direct taxes with unified
compliance procedures, use of simple language, reducing scope for litigation !y
a'oiding am!iguity, pro'iding flexi!ility to statute so that it can !e modified
according to the needs of growing economy, to ensure !etter understanding of the
laws and pro'isions, attempt has !een made to simplify the laws and reflect them in
the form and consolidate all procedures, the regulatory function of taxing statute has
also !een withdrawn
How is income classified under the DTC 2010?
Income has !een proposed to !e classified into two !road groups% Income from
Ordinary ources and Income from !ecial ources" The former refers to income
from employment, from house property, from !usiness, capital gains and income from
residuary sources Income from /pecial /ources would include specified income of
non residents, wining from lotteries, horse races, etc
0osses arising from 1rdinary /ources would !e eligi!le for set off or carry forward
and set%off against income only from ordinary sources without any time limit
/imilarly losses from /pecial /ources would !e set off against income from /pecial
/ources
What are #road !ro$isions relatin% to salary income under the code?
/alary23mplacement income is proposed to !e computed as the gross salary due, paid
or allowed, minus the aggregate of the specified deductions 3xemptions such as
house rent allowance, lea'e encashment and medical reim!ursements ha'e !een
retained The exemption for medical reim!ursements would !e increased to 50,000
rupees
An allowance to meet personal expenses has !een introduced 0ea'e tra'el concession
and non%monetary per)uisites ha'e !een done away with 4eceipts under the
'oluntary retirement /cheme, &ratuity and Commuted +ension deducti!le from
employment income su!.ect to limits without he condition to ma5e an.y prescri!ed
in'estments
6or purposes of 4esidency, th category of 78ot 1rdinarily 4esident9 is proposed to !e
a!olished and only two categories of taxpayers would remain%'i( residents and non%
residents A citi(en of India or person of Indian origin li'ing outside Indian and
'isiting India will trigger residency !y staying in India for more than 59 days
What are the !ro!osed tax rates under the Code?
For Individuals and Hindu Undivided Families
"pto 4s $00,000% 8I0: $00,001%500,000% 10;: 500,001%1,000,000%$0;: 1,000,001 and
a!o'e %<0; #asic exemption for a resident senior citi(en ,65 years or a!o'e-, is proposed to
!e $50,000 I
For co-operation societies
"p to 4s 10,000%10;: 4 s10,001%$0,000%$0;: 4s $0,001 and a!o'e %<0;
/ocieties other than co%operati'e societies %<0;
For non-profit organizations
"p to 4s 100,000 8il: 4s 100,001 and a!o'e% 15;
For domestic companies -30%
For foreign companies%<0; +rofits of !ranches of foreign companies are taxa!le at 15;
Total Income Tax &ates
=inimum Alternate Tax ,=AT-
=AT is proposed at $0 ; of the ad.usted !oo5 profits in case of those companies
where normal income%tax paya!le is less than $0 percent of the ad.usted !oo5 profits
=AT credit is a'aila!le for 15 years
Wealth tax
>ealth tax is proposed at 1 ; on the 'alue of specified assets held !y the taxpayer on
the 'aluation date ,<1 =arch- in excess of the !asic exemption of 4s 10,000,000
Di$idend Distri#ution Tax 'DDT(
*omestic Companies are lia!le to pay **T at 15 ; on di'idends Any di'idend to a
company or non%resident in respect of which **T has !een paid, is exempt from
income%tax 6or the purposes of computing **T paya!le !y a domestic company, the
amount of di'idend recei'ed !y a domestic company will !e reduced if % such a
di'idend is recei'ed from its su!sidiary or if the su!sidiary has paid **T on such
di'idend An e)uity%oriented mutual fund is lia!le to pay income distri!ution tax of 5
percent Income recei'ed !y unit holders from an e)uity%oriented mutual fund is
exempt from income%tax The life insurer of an appro'ed e)uity oriented life
insurance scheme is lia!le to pay income distri!ution tax of 5 percent *eduction is
a'aila!le to policy holders in respect of income on which such distri!ution tax has
!een paid
!ecial rates for non)residents
The following incomes in the case of non%resident are proposed to !e taxed at special rates?
*i'idend at $0 percent ,other than di'idends on which **T has !een paid-: Interest
at $0 percent: Income recei'ed in respect of units of a fund at $0 percent ,other than
income on which tax on distri!uted income has !een paid-: 4oyalty or fees for
technical ser'ices at $0 percent: Income !y way of insurance including reinsurance at
$0 percent: Income from lottery or crossword pu((le, race including horse race,
games, gam!ling or !etting at <0 percent Tax on non%resident sportsmen or sports
association on specified income at 10 ;
Ca!ital *ains
8o special rates are pro'ided for capital gains under the *TC Capital gains tax is to
!e le'ied at normal rates as mentioned a!o'e @owe'er, in respect of capital gains
arising on transfer of e)uity shares or a unit of an e)uity%oriented fund on which /TT
has !een paid, deduction would !e allowed as follows?
100 percent in case aforesaid in'estment assets are held for more than one year
50 percent in case aforesaid in'estment assets are held for one year or less
2DI in Retailing
3ase Rate Regime for interests
Goods and Services Tax
5ul- 2'4 2!8
A c)ange )as ,een proposed in t)e GST to come into effect from April !4 2!!. T)ree
separate rates )ave ,een proposed8 2A for normal goods4 !2A for merit goods and !'A
for services. T)e centre )as re:ected t)e States/ plea to set a )ig) exemption t)res)old of Rs
!.5 crore for goods4 preferring to )ave a muc) lo0er and uniform exemption limit of Rs !
la+) for ,ot) goods and services. Beeping in mind t)e States/ concerns over loss of financial
autonom-4 it is proposed to leave out petro products and electricit- from t)e am,it of t)e
GST.
Inflation
August 2
2ood inflation )as dipped in last t0o 0ee+s. $on;food inflation )o0ever remains )ig). T)e
solution lies not onl- in monetar- polic- measures ,ut also in removing t)e suppl- side
constraints and raise t)e output of agricultural and industrial sector steadil-.
Mergers and Acquisitions
MCA is ,- far t)e most common route of cross;,order capital flo0s.
% Ac)ut)an led Ta+eover Regulations Advisor- %ommittee DTRA%E )as proposed s0eeping
c)anges in a num,er of crucial issues regarding MCA. Recommendations8
!. T)e open offer trigger limit increased from !5 to 25 per cent.
2. T)e open offer si=e increased from 2 to ! percent.
7. Acquirers cannot ,e represented on t)e ,oard of t)e target compan-.
Trade Development Report 200 !"#CTAD$
Anal-sis of export;led gro0t) strategies
%)ina4 5apan and Sout) Borea )ave relied )eavil- on t)ese strategies
TDR sa-s t)at economic gro0t)4 )o0ever strong4 does not ,- itself generate decent
:o,s to a,sor, t)e la,our surpluses t-pical of developing countries.
More emplo-ment can ,e generated if t)e productivit- gains from investments are
distri,uted equita,l- ,et0een la,our and capital in a 0a- t)at lifts economic demand.
%ver reliance on s&ort term capital'
F)ere t)ere are ceilings for foreign investors in t)e de,t and government securities
mar+ets4 t)e equit- mar+ets are practicall- free from controls. 3ul+ of t)e foreign
institutional mone- goes into t)e equit- sector
T)e flo0 is particularl- strong during certain
2II mone- tends to flee emerging mar+ets in drives. 2II/s action4 to invest or 0it)dra04
is governed less ,- factors specific to India and more ,- circumstances prevailing in
t)eir )ome countries
India/s approac) to 2II inflo0s is conditioned ,- t)e fact t)at t)e- are necessar- to
,ridge t)e current account deficit and provide a small cus)ion in t)e ,alance of
pa-ments.
Regulations for stoc( exc&anges
T)ere are t)ree t-pes of mar+et infrastructure institutions8 stoc+ exc)anges4 clearing
corporations and depositories. 3imal 5alan panel 0as set up to revie0 t)e o0ners)ip and
0or+ing of mar+et infrastructure institutions. T)e recommendations of t)e committee are8
(nl- ,an+s4 insurance companies and domestic pu,lic financial institutions 0it) a net
0ort) of Rs ! cr ,e anc)or investors in a stoc+ exc)ange4 a position analogous to
,ut not identical to promoters.
T)e panel 0ants a 0idespread dispersal of s)are)olding on a stoc+ exc)ange.
T)e- rule out control ,- an- one part-. An anc)or investor can )old 2< per cent of t)e
s)are capital ,ut s)ould ,ring it do0n to !5 per cent 0it)in ten -ears
Inclusion of off and on ,alance s)eet expenses 0)ile calculating t)e limits to
s)are)olding in a stoc+ exc)ange.
Stoc+ exc)anges 0ill not ,e allo0ed to list
o T)is provision reinforces t)e committee/s recommendation t)at t)e ,usiness
of a stoc+ exc)ange s)ould neit)er -ield large profits nor ,e a magnet for
speculative capital
2oreign participation in a stoc+ exc)ange and ot)er mar+et infrastructure institutions
is capped at <1 pc D2DI8 2' pc4 2II8 27 pcE
$o trading mem,er 0ill ,e allo0ed to ,e on t)e ,oard of stoc+ exc)anges except in
t)e case of t)e advisor- committee t)at deals 0it) tec)nolog- and ot)er matters not
directl- concerned to regulation. Dto reinforce demutualisationE.
T)e implications of t)ese recommendations are8
T)ere 0ill ,e no rus) for starting ne0 exc)anges. T)e ,arriers )ave ,een set )ig)
and )et returns capped
T)e report realises t)at t)ere 0ill not ,e an increase in competition
Converti)ilit* of Rupee
Meaning
Gt)e freedom to convert one currenc- into ot)er internationall- accepted currenciesH
T0o t-pes8 %urrent Account and %apital Account
%urrent Account %onverti,ilit-
o 6a-ments due in connection 0it) foreign trade4 ot)er current ,usinesses
including services and s)ort;term ,an+ing and credit
o Interest on loans
o Moderate remittances for famil- living expenses
o Moderate amounts of amortisation of loans for depreciation of investments
%apital Account %onverti,ilit-
o T)e freedom to convert t)e local financial assets into foreign financial assets
and vice versa at mar+et determined rates of exc)ange
o Removal of all limitations 0it) respect to t)e movement of capital from India
to different countries across t)e glo,e
o It also allo0s t)e people and companies not onl- to convert one currenc- to
t)e ot)er4 ,ut also free cross;,order movement of t)ose currencies4 0it)out
t)e interventions of t)e la0 of t)e countr- concerned.
Iistorical 3ac+ground
Gold Standard4 3retton0oods s-stem etc
In India4 current account is full- converti,le 0)ile capital account is partiall-
converti,le
$ort) Borea and %u,a are t)e onl- t0o countries 0)o do not allo0 conversion of
t)eir currencies. T)e- do not participate in t)e international 2(R9J mar+et eit)er. As
a result t)ese currencies are +no0n as ,loc+ed currencies.
29MA4 !111
Defines a capital account transaction as a transaction 0)ic) alters t)e assets or
lia,ilities4 including contingent lia,ilities4 outside India of persons resident in India or
assets or lia,ilities in India
%ommittees
Tarapore %ommittee on %apital Account %onverti,ilit- D!11.E
o 3- R3I under deput- governor S S Tarapore
o It indicated t)at %A% requires t)ree crucial preconditions8 fiscal consolidation4
a mandated inflation target and strengt)ening of t)e financial s-stem
Tarapore %ommittee on 2uller %apital Account %onverti,ilit- D2'E
Impact of %A%
I$R 0ould ,e accepted 0orld over
Ki+el- to ,ring dept) and large volumes in long;term I$R currenc- s0ap mar+ets.
T)us for ,etter mar+et determination of I$R exc)ange rates4 t)e I$R s)ould ,e
converti,le
Advantages of %A%
Disadvantages of %A%
Sustaining India+s gro,t&
IM2 sa-s sustaining India/s gro0t) 0ill require
6olic- tig)tening
Kesser reliance on export;led gro0t)
(verall re,alancing t)at requires moving a0a- from t)is -ear/s D2!E stimulus
policies
2
nd
-inancial Sta)ilit* Report of R.I/ 20
6ositives
Gro0t) )as re,ounded strongl- and t)e financial conditions are sta,le
Despite some volatilit-4 t)e financial sector )as ,een ris+;free
Ris+s
Fidening current account deficit
Lolatile capital inflo0s
Deterioration of some +e- external sector ratios
6ersistentl- )ig) inflation
Recent developments in t)e microfinance institutional structure cause serious
concern
0alan Committee Report 200
%ommittee on Revie0 of (0ners)ip and Governance of Mar+et Infrastructure
Institutions
3ac+ground
Since t)e earl- 24 $S9 )as emerged )as t)e leader in exc)ange space in India
gaining mar+et s)are in turnover rapidl- from <'A in 2;! to .!A eig)t -ears
later and )as dominated t)e entire derivatives trade
It )as surpassed 3S9 and )as introduced man- tec)nological c)anges. It is also a
not;for;profit exc)ange
Rise of Multi;%ommodit- 9xc)ange )as t)reatened $S9/s virtual monopol-.
M%J )ad soug)t to enter t)e stoc+ mar+et t)roug) its su,sidiar- M%J;SJ
M%J 0as refused permission to set up a Stoc+ 9xc)ange ,- t)e S93I o0ing to its
o0ners)ip structure. M%J moved court.
In t)is ,ac+ground4 S93I )ad constituted t)e 3imal 5alan %ommittee in earl- 2! to
loo+ into t)e appropriate o0ners)ip pattern4 ,oard composition4 listing and
governance and competition for stoc+ exc)anges and clearing corporations4 as 0ell
as t)eir interrelations)ip and relations)ip 0it) tec)nolog- providers.
Main Recommendations
?t)e report focuses not :ust on exc)anges ,ut on t)e triad of depositories4 exc)anges
and clearing corporations as t)e t)ree interconnected legs of mar+et infrastructure
institutions@
Restricting t)e profit potential of S9
o Maximum distri,uta,le profits for exc)anges ,e decided upon ,- S93I after
ta+ing into account ris+ free return and appropriate ris+ premium4 0it) an-
additional surplus going to funds t)at ,ac+ clearing operations.
Fit);)olding of listing of exc)anges
Specif-ing o0ners)ip limits of 5A for all entities ot)er t)an anc)or investors in S9
Defines a class of investors M Anc)or Institutional Investors DAIISE M t)at ,e allo0ed
to )old upto 2<A equit- in an exc)ange 0it) t)e total investment ,- all AIIS capped
at <1A. Fit)in ! -ears4 )o0ever4 t)e AIIS 0ould )ave to ,ring do0n t)eir )oldings
to !5A
Restricting anc)or investor status to ,an+s and 2Is. In addition4 t)eir net 0ort) s)ould
exceed Rs ! crore.
%apping varia,le pa- for exc)ange executives
$et 0ort) stipulation of Rs ! crore for clearing corporations
3anning of trading mem,ers from ,oards of exc)anges etc.
Anal-sis of t)e recommendations and t)e issues involved
T)e overarc)ing stance of t)e 5alan %ommittee seems to ,e t)e vie0 t)at exc)anges
serve t)e dual purposes of providing trading services as 0ell as carr-ing out
regulator- functions of screening and monitoring traders and listed companies.
Given t)e pu,lic utilit- nature of t)e MIIs4 it is paramount to ensure t)eir sta,ilit- and
t)erefore restrict t)e field onl- to pu,lic;spirited4 trust0ort)- institutions as promoters
of exc)anges.
Is ,est service qualit- incompati,le 0it) profit;see+ing enterprises 0it) or 0it)out
listing*
o 2or;profit and listed exc)anges )ave ,een t)e recent trend around t)e 0orld.
o In 5anuar- 2!4 private companies accounted for <A of t)e 1 glo,al
exc)anges covered ,- t)e (xford 2inance Group stud-.
o Glo,all-4 listed exc)anges )andle .2 pc of t)e turnover volume 0)ile private
companies anot)er 22 pc.
o T)e committee ma+es suc) a recommendation on t)e presumption t)at a
self;listed exc)ange 0ould ,end t)e rules to maximi=e its o0n s)are value.
o T)oug) private and listed exc)anges )ave 0or+ed in t)e developed
countries4 it ma- not ,e advisa,le under t)e disclosure and government
standards in India.
Anc)or investors
o T)is recommendation is an attempt to provide sta,ilit- to t)e sector and avoid
s)ort;run pla-ers entering t)e fra- to create an exc)ange and sell it off to t)e
sector possi,l- at )uge pu,lic cost.
o 3ut are t)e 3an+s and 2Is an- more trust0ort)- t)an ot)er pla-ers4
particularl- in t)e lig)t of t)e financial crisis*
o India/s ,an+s and 2Is )ave ,een relativel- ,etter regulated. Ience4 t)is
suggestion suits in t)e Indian context
(ne criticism of t)e report )as ,een t)at it 0ould perpetuate $S9/s monopol- and
restrict competition in t)e sector 0)ic) 0ill slo0 do0n innovations in t)is extremel-
d-namic industr- and possi,l- reduce service qualit-.
o T)is is a de,ate ,et0een competition and sta,ilit-
(n t)e 0)ole4 t)e report is a conservative document as far as ris+ is concerned.
Microfinance Institutions
Issues and anal-sis
Alternatives to microfinance8 SIGs*
%ost of finance8 operational expenses account for )alf t)e costs. A,out < pc is t)e
cost of accessing funds. So eit)er of t)ese costs need to ,e reduced for lo0ering t)e
interest rates c)arged on t)e M2I loans.
Report of t)e R3I %ommittee on M2I reforms D%)airman8 N I MalegamE 2!!
o ?T)e R3I constituted t)e committee in (cto,er 2! in t)e 0a+e of
allegations of overc)arging and using coercive recover- practices ,- M2Is
t)at led to a space of suicides in And)ra 6rades)@
o Interest Rate8 M2Is ,e allo0ed to c)arge a maximum interest of 2< percent
on small loans 0)ic) cannot exceed Rs. 25
o Recognition8 2or creation of a separate categor- of non;,an+ing financial
companies D$32%;M2IE for t)e micro finance sector. $32%;M2Is s)ould )ave
a minimum net 0ort) of Rs. !5 crore
o Koans8 Small loans of upto Rs 25 could ,e given to families )aving an
income upto Rs 5 pa. (n repa-ment4 t)e ,orro0ers s)ould ,e given t)e
option of 0ee+l- or fortnig)tl- or mont)l- return of t)e loan
o At least .5 percent of loans extended ,- M2Is s)ould ,e for income
generation purposes. It furt)er recommended t)at a ,orro0er cannot ta+e
loans from more t)an t0o M2Is
o Regulation8 Regulation of t)e M2Is s)ould ,e done ,- t)e $A3ARD in close
coordination 0it) t)e R3I
%ritique of t)e committee/s recommendations
o Interest rate ceilings and ot)er recommendations 0ould adversel- affect t)e
small M2Is 0)o mig)t ,e forced to close do0n
o Similarl-4 t)e requirement of capital adequac- ratio 0ill affect t)e small
pla-ers.
Draft M2I 3ill 2!!
All M2Is to register 0it) R3I
6egs t)e minimum net 0ort) for M2Is at Rs 5 la+)
o Malegaon committee )ad recommended !5 crore
Smaller M2Is once t)e- gro0 ,ig 0ill ,e su,:ected to more stringent scrutin-
T0o advisor- councils created
o M2I Development %ouncil
o State Advisor- %ouncil
Mega -ood 1ar(s
In (ct 2!!4 !5 ne0 mega food par+s 0ere approved to ,e setup in addition to t)e
!5 ongoing pro:ects under t)e Infrastructure Development Sc)eme
T)e setting up of t)e ne0 mega food par+s is expected to facilitate state of t)e art
infrastructure 0it) efficient suppl- c)ain management from farm gate to retail outlets.
T)e pro:ects are meant to ,ring a,out su,stantial reduction of 0astage4 value
addition4 emplo-ment generation and increased income for farmers
T)e sc)eme is tailored to ,e implemented in a mar+et driven manner commensurate
0it) glo,al and national demand
Innovative suppl- c)ain management 0ill ,e t)e +e- to implementation of t)is
sc)eme
T)e timeline for pro:ect implementation of eac) food par+ is 2< mont)s from t)e date
of release of t)e first tranc)e of t)e first instalment
#nder t)e guidelines
o eac) mega food par+ must ,enefit at least ' farmersOproducers directl-
and 25;7 farmers indirectl- and generate a,out < direct and
indirect :o,s
o T)e estimated investment in eac) pro:ect 0ill ,e a,out Rs ! crore in
common facilities is expected to leverage and additional investment of a,out
Rs 25 crore
o T)e annual turnover of eac) pro:ect s)ould ,e Rs 5 crore
o In eac) pro:ect4 an estimated num,er of 7;< food processing industries
must ,e setup
T)e sc)eme is expected to operate in )u, and spo+e model under 0)ic) t)ere 0ill
,e farm proximate collection centres D%%E and primar- processing centres D66%E
0)ic) 0ill set up cleaning4 grading4 sorting and pac+ing facilities4 dr- 0are)ouses4
specialised cold stores4 including pre;cooling c)am,ers4 ripening c)am,ers4 mo,ile
pre;coolers and mo,ile collection vans