Archives: Publication

Business confidence up on economy boost, investment climate: NCAER

NEW DELHI: Business confidence index continued to show upward trend for the quarter ended June 2014 on improving economic conditions and positive investment climate economic think-tank NCAER said today. The index rose by 17 per cent in June 2014 over April 2014 this year the think-tank said. “Out of the four components of BCI three showed improvement reflecting higher expectations of overall economic growth financial position of the firms and investment climate for the overall economy improved” the National Council of Applied Economic Research (NCAER) said in a release. However as per the Business Expectations Survey conducted by NCAER the marginally lower ratings on capacity utilisation remain an area of concern. Also the Political Confidence Index (PCI) for June quarter surged by 20 per cent over April 2014. All eight components of PCI reflect higher optimism in this round it said. NCAER said the regional distribution of responses reflects mixed perceptions and except the South the other three regions registered higher level of optimism. It said firms with an annual turnover between Rs 100-500 crore showed the highest percentage increase in confidence over the last round of survey. The distribution of firms by ownership type reveals improvement in both public and private sector firms in the present round of the survey. “Increases in production domestic sales exports and pre-tax profits are expected. There is also a positive outlook with respect to employment and wages. The prices of inputs as well as the ex-factory prices of outputs are slated to rise” it said. About PCI public sector firms registered falling confidence levels as against the positive outlook shown by private sector firms in terms of political management of economic policies. “Business plans for capacity expansion expanding into new lines of business and improvement of quality and efficiency depend heavily on favourable budget. There is anticipation of an increased tax rate in the budget of the new government” said the NCAER survey. 

The new young: Sonalde Desai

Only 28 per cent of men aged 20-29 and with a college degree had a salaried job in 2005 which had slowly grown to 33 per cent by 2012.

 

From Naxalbari to the Arab Spring our popular imagination has seen the youth as the harbinger of revolution that breaks down the bastions of privilege. How do we reconcile this with the decisive victory that modern Indian youth have handed to the BJP whose manifesto focused on entrepreneurship rather than redistribution? I would like to argue that a large number of first-time voters combined with fertile social and economic conditions made for a perfect storm. On one hand modern Indian youth are at the vanguard of a social transformation that reflects rising education economic aspirations and participation in global culture. On the other hand their lives are circumscribed by limited opportunities and deeply conservative social mores. So it is not surprising that a manifesto which promises to increase economic opportunities while protecting a conservative social fabric finds resonance with them.

 
Levels of education have risen sharply in the past decade and along with them the aspirations and expectations of the youth and their parents. The India Human Development Surveys (IHDSs) organised by the National Council of Applied Economic Research (NCAER) and the University of Maryland document a striking increase in enrolment ratios in the age group of 18-22. This survey of about 42000 households was conducted in 33 states and Union Territories in 2004-05 and then again in 2011-12 and it allows us to examine recent changes in Indian society. These surveys show that while only 25 per cent of youths aged 18 were studying in 2004-05 this proportion rose sharply to 40 per cent by 2011-12. It is well recognised that primary school enrolment is near universal now. However the increase in enrolment at the tertiary level over the past decade is particularly striking.
 
Unfortunately in spite of this rise in enrolment and vast government programmes like the Sarva Shiksha Abhiyan obtaining quality education remains a challenge at all levels. At the primary level ASER surveys of about 300000 children as well as smaller IHDSs show that basic skills like the ability to read a simple paragraph have not improved and even show a marginal decline over time. This has led to a crisis of confidence in government schools. In 2004-05 about 28 per cent of children aged 6-14 were in private schools; by 2012 this had grown to 33 per cent. At the college level faculty shortages have placed a tremendous strain on established university systems and have led to the growth of private colleges of dubious quality.
 
Rising parental and youth aspirations reflected in increased enrolment and the growth of private schooling often collide with very slow growth in employment opportunities in the formal sector. Only 28 per cent of men aged 20-29 and with a college degree had a salaried job in 2005 which had slowly grown to 33 per cent by 2012. While this change reflects the fruits of the economic growth of the past decade it still implies that two-thirds of the young men with college degrees are unable to find a regular salaried job.

This paradox of rising aspirations and limited opportunities in the economic arena is matched in the social arena by the paradox of rising globalisation and conservative social mores. We see a growing assimilation with global culture through television and social media but this seems to have little impact on social norms.
 
Exposure to television and digital media grew by leaps and bounds between 2005 and 2012. Households with a television have gone up from 48 per cent in 2005 to 62 per cent in 2012. Computer literacy has also grown with 19 per cent of 18 to 22-year-olds having at least rudimentary computer skills in 2012 compared to 8 per cent in 2005. Nearly 18 per cent of the youth have some access to the internet either on a computer or on a mobile phone. Growth in rudimentary English skills facilitates this integration with global culture. The proportion of 18 to 22-year-olds who can speak some English has grown from 28 per cent to 45 per cent. Those who can speak fluent English have gone up from 5 per cent to 10 per cent.
 
However the integration with global digital culture has done little to change a deep-seated social conservatism. In spite of rapidly rising participation in higher education and a slower rise in age at marriage 41 per cent of youth aged 18-22 were married in the year 2012. Moreover arranged marriages continue to dominate — nearly 94 per cent of the married women in their 20s surveyed by the IHDS claimed to have had parental involvement in the choice of a husband. This socially embedded mindset is reflected in many different domains. For example even in 2012 22 per cent of the youth aged 18-22 lived in households where at least someone practiced untouchability; a further 7 per cent lived in households where it would not be acceptable to have a Dalit come into the kitchen or share utensils.
 
These paradoxes bring the youth movement of 2014 closer to the Nav Nirman movement of the early-1970s than the leftist youth movements of the 1960s. The Nav Nirman Andolan of 1974 was led by middle-class students from Gujarat whose demand for corruption free governance brought down the Congress state government and was the training ground for Narendra Modi. Many lessons from this movement were incorporated in the BJP’s election strategy of 2014.  In retrospect it is not surprising that the contrast between rapidly rising aspirations and slow growth in opportunities in the economic sector and continued conservatism in the social arena created fertile ground for a manifesto that emphasised economic opportunities along with social conservatism.
 
The writer is senior fellow National Council of Applied Economic Research and professor of sociology University of Maryland. Views are personal express@expressindia.com.
 
 

India Makes Progress on GST Implementation

DELHI – India moved closer towards implementing a Goods and Services Tax (GST) with the conclusion of the latest meeting by the Empowered Committee of State Finance Ministers this Wednesday.

While numerous hurdles remain central and state Finance Ministers agreed on several important items that are expected to speed up the implementation process:
  • Two-part levy: Central GST and State GST;
  • Common threshold for the levy of GST: All businesses with annual turnover of more than Rs 10 lakh (US$16480) for general states and Rs 5 lakh (US$8240) for special-category and north-eastern states;
  • Harmonize GST exemption lists nationwide: 96 items exempted by States and 243 items by the Center.
The proposed GST will replace several existing taxes including the central level excise tax and service tax and state level VAT entertainment tax lottery tax and electricity duty with one single tax thus facilitating the consolidation of a single market across the country and allowing for greater supply chain efficiency and economies of scale.
The Central Sales Tax (CST) which is levied by the Center on inter-state movement of goods but collected by the states has been a major obstacle towards moving the GST proposal forward as some states are concerned about the loss of revenue they would face with the phasing out of the CST.
More industrialized states such as Gujarat Maharashtra and Tamil Nadu which derive 70 to 80 percent of their revenue from state taxes are most concerned about the potential change in tax base with the GST. By shifting taxation from production to consumption industrialized states which currently export most of their products to other states around the nation will face significant losses in tax revenue since the levies will instead go to states where the products are sold.
Prior to Wednesday’s meeting Finance Minister Arun Jaitley had assured states that the Center would compensate their loss in CST revenue of about Rs. 34000 crore (about US$5.6 billion) over a three-year period appeasing some of the concerns.
Full implementation of GST could raise India’s GDP growth by 0.9 to 1.7 percent according to the National Council of Applied Economic Research (NCAER).
However although Jaitley had committed to resolve all outstanding issues by the end of the year challenges remain before the GST can be realized.
Differences remain over the degree of control between states and the Center over central GST. Below the Rs 1.5 crore limit the Center wants to keep legal control and give states administrative control but states are asking for both. Above the limit dual-control is agreed upon.
States are also pushing for high-tax products such as petroleum alcohol and tobacco out of the GST purview.
Some are also concerned that the proposed GST structure will infringe on states’ financial autonomy by removing a large portion of their own revenue source.
A new GST Constitutional Amendment Bill will be drafted for the winter session of Parliament to replace the current one which was first introduced in 2011. To pass the bill must secure votes from two-thirds of lawmakers in both houses of parliament and half of the 29 states.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice providing corporate establishment business advisory tax advisory and compliance accounting payroll due diligence and financial review services to multinationals investing in China Hong Kong India Vietnam Singapore and the rest of ASEAN. For further information please email india@dezshira.com or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news commentary and regulatory insight.

States drop compensation hurdle for proposed Goods and Services Tax

With State Finance Ministers having dropped the issue of compensation in lieu of a cut in the central sales tax from the agenda of their upcoming meeting on implementing the Goods and Services Tax (GST) the major hurdle appears to have cleared in reforming India’s indirect tax regime.

 

Seen as a key to facilitating industrial growth and improving the business climate in the country the GST Bill requires to be passed by a two-thirds majority in both houses of Parliament and by the legislatures of half of the 29 states to become law.

 

In line with the Bhartiya Janta Party’s (BJP) position on the GST as facilitating industrial growth Finance Minister Arun Jaitley had told the states that their concerns over its design and issues related to compensation for revenue loss on account of rolling out GST and phasing out the central sales tax (CST) regime would be suitably addressed.

CST was one of the major roadblocks for a GST which was originally scheduled to come into from April 1 2010.

While CST is levied by the centre on inter-state movement of goods but is collected by the states the issue of compensation arose because the centre cut CST from four percent to two percent in phases after state-level value added tax (VAT) was introduced from April 1 2005.

By subsuming most indirect taxes levied by the centre and the states such as excise service tax VAT and sales tax GST proposes to facilitate a common market across the country leading to economies of scale and reducing inflation through an efficient supply chain.

The previous UPA government had introduced a bill in parliament proposing a GST council and a dispute resolution panel for fixing the rate of the new tax for both states and the centre. However the bill had received stiff opposition from the states including the BJP-ruled ones like Gujarat and Madhya Pradesh.

“States are likely to lose substantial revenues in the new regime” Madhya Pradesh Chief Minister Shivraj Chouhan wrote in a letter to Jaitley adding that states’ experience in receiving compensation for CST losses in the past was not very satisfactory.

“Unfortunately article 268A has not been operationalized in the last 10 years. Kindly operationalize the Constitution (88th Amendment) Act and fulfill the promise made during the previous NDA regime till we have the required IT infrastructure to effectively deal with the complexities in the proposed GST regime” he wrote.

“Some states have been apprehensive about surrendering their taxation jurisdiction others want to be adequately compensated. I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST” Jaitley had said in his maiden budget speech in the Lok Sabha in July.

On the design of GST states are insisting that petroleum and alcohol be kept out of its purview . The Empowered Committee of state finance ministers has also demanded that the centre’s share of GST should be made a part of the divisible pool between the centre and the states.

The finance minister has assured parliament that the government will seek to move the amendments to the constitution this year itself for implementing GST besides already assuring states that he would clear their CST compensation dues of about Rs.34000 crore ($5.5 billion) over a three-year period.

States like Gujarat Madhya Pradesh and Uttar Pradesh which were earlier standing in the way of GST have now said they are not opposed to it as long as their concerns are addressed.

Full implementation of GST could lift India’s gross domestic product (GDP) growth by 0.9-1.7 percentage points according to a study by the National Council of Applied Economic Research (NCAER).

Wednesday’s meeting between the states and the centre that will take the discussions on GST to the next level will be the first after the presentation of the budget for 2014-15 in the Parliament.

The progressive personal, corporate and indirect tax rates in the country compel people to evade tax and accumulate black money

In reply to an RTI query the Union finance ministry   said the UPA II government had commissioned a study in 2011 to ascertain the quantum of illegal money in the Indian economy. It said the study was being carried out by Delhi-based National Institute of Public Finance and Policy (NIPFP) National Council of Applied Economic Research (NCAER) and National Institute of Financial Management (NIFM) in Faridabad Haryana. Though the report was submitted to the ministry in December 2013 neither former Finance Minister Chidambaram nor his successor Arun Jaitley   placed it in parliament.

According to the terms of reference the study  was expected to bring out the nature of activities that encourage money laundering examine causes and conditions that result in generation of unaccounted money and suggest ways and means for detection and prevention of unaccounted money .The study was also mandated to suggest methods to be employed for bringing to tax unaccounted money kept outside India and to estimate the quantum of non-payment of tax due to evasion by registered corporate bodies.
Now the Special Investigation Team (SIT) on black money constituted by the Narendra Modi government on May 27 in compliance with a Supreme Court directive is studying the report. According to the report the quantum of black money in India now amounts to 75 per cent of the country’s GDP (Gross Domestic Product). It is also reported that the annual growth rate of black money is higher than the annual growth rate of GDP.
The generation of black money in India is driven mainly by the higher education sector real estate deals and mining income. As per the report real estate deals top the list followed by the black income generated by those mixing PDS kerosene with diesel and capitation fees collected by professional colleges.
An integral part of most third-world and many first-world economies black money refers to the money generated from underground economic activities like drug trafficking illegal weapons trading terrorism prostitution and selling counterfeit and stolen goods. The genesis of black money is from untraceable and hence untaxable business dealings that are not reflected in a country’s GDP computations. It is the result of cash based system in which transaction records are kept in secret account books. The Wanchoo Committee in its report in 1971 described black money as a “cancerous growth in the country’s economy which if not checked in time will surely lead to its ruination”.
 The capital gains on real estate is the most important source followed by large scale manufacturing film industry smuggling and under/over invoicing of foreign trade. Black money surfaces in the parallel economy and is mainly used in land deals gold purchases and corruption.
Earlier estimates on quantum of black money range between $ 500 billion to $ 1400 billion. A study by Global Financial Integrity has estimated the illicit money outflow to be $ 462 billion. In February 2012 the CBI director had said that Indians have $1500 billion of illegal funds in secret bank accounts located in foreign tax havens. According to latest reports India has received 24085 data on tax evasion and dubious funds stashed abroad in financial year 2013-14.
Evading tax
The progressive personal corporate and indirect tax rates in the country compel people to evade tax and accumulate black money. Many professionals like doctors advocates and chartered accountants hide their real income and escape from taxes ranging from 50 to 70 per cent. According to the report just 1.8 per cent of registered legal professionals file tax returns including just 6.7 per cent of registered chartered accountants 42.8 per cent of registered medical professionals and 35.2 per cent of nursing homes. As Benjamin Franklin said “Nobody is a gentleman in the matter of payment of tax.” The FDI route is being used for taking black money out and bringing it back into India. In 2011 unrecorded foreign assets worth $89190 million were accumulated in India.
The country needs to go after corrupt officials as well as business monopolies and initiate genuine campaigns against corruption. Last year’s trial and punishment of high profile Chinese politician Bo Xilai and several other corrupt officials in China are examples of genuine initiatives to fight corruption and black money.
The one time option of Voluntary Disclosure of Income Stream(VDIS) to encourage Indians to bring back black money stashed abroad has had limited success. We have several legislative and regulatory measures to control black money. The public servants in India can be penalised for corruption under the Indian Penal Code 1860. Prosecution section of the Income Tax Act 1961 Foreign Exchange Management Act Prevention of Money Laundering Act 2002 Prevention of Corruption Act 1988 the Benami Transactions (Prohibitions) Act 1988 and the Corrupt Public Servants (Forfeiture of Property) Bill 1999 are all powerful legislation existing to curb black money. What is required is the necessary political will for the effective implementation of these legislation and regulations.
Unconventional measures such as compulsory bank account deposits of cash sales by even petty shop owners co-ordinated functioning between sub-registrar offices sales tax and service tax departments with the Income Tax Department to ensure that there is no mismatch between transactions conducting audit for sub-registrar offices for differences in the value registered for the properties in the same locality fixing limits for cash sales receipts and payments in cash demonetising higher denomination currencies and inserting new higher denomination  currencies with chips to  track through GPS the bulk transport and exchange of such currencies etc could help reduce the genesis and circulation of black money  in the economy.  Besides setting up the SIT the new government at the Centre seems to be serious about checking cross border tax evasion and tax frauds. What is immediately required is strict actions under the already existing direct tax laws.
(The writer is professor of economics at Christ University Bangalore)

    Get updates from NCAER