Original DTC was pro-middle class. Now it is Pro-rich. Do you agree?

“Old wine in a new bottle”

This is centered around expectations to minimize tax exemptions, but widen tax slab on personal finances.

The government is quite confident of replacing archaic Income Tax Act with DTC from April 1, 2011
THE DIRECT TAXES CODE PROPOSES TO introduce considerable novelty like reduction in corporate tax rate and widening of personal income tax slabs. They can give a new direction to taxation system. However, there is a little bit of uncertainty on them at this stage, following changes proposed in the original taxes code. The DTC has tinkered with the short-term capital gain tax charged from investors. Individual investors will now have to pay tax on 50% of the gains earned. The rate of short-term capital gain tax would be according to the income tax slab of that individual. For corporates, the short-term capital gain tax would be calculated at 30% after deducting 50% from the overall gains. In an overall positive reaction to the DTC Bill, the Dalal Street experts said that the new code is in favour of the common man and can even boost retail participation in stock market. On the long-term basis, the move will give a big push to the inclusive growth agenda. Retail investors will get a big booster from the proposal,” CNI Research CMD Kishore P Ostwal said. The DTC Bill seeks to increase tax exemption on income from Rs 1.6 lakh to Rs 2 lakh and fix the corporate tax at a flat 30%. Echoing a similar view, Geojit BNP Paribas Assistant vice-president Gaurang Shah said, “On long-term basis it is a healthy and a positive move for retail investors, who will have more money to invest in the market.” On the Distribution Dividend Tax, which will be at 15%, Ostwal said, “It will slightly affect the cash proportion of smaller companies. THE PROPOSED NEW DIRECT TAXES LAW will take away the special treatment that women have so far enjoyed and force individuals to overhaul the way in which they plan their savings.
Women will be put on the same footing as men. Tax-free savings schemes will be fewer, with the government knocking off many from among the 16 odd available now. DTC has been cleverly packaged. The total amount of amount of tax deduction that will be available to individuals, including interest on housing loans will be around 3 lakh, roughly the same as now.

The new Bill has only tinkered at the fringes, with no significant benefits for the aam admi. The re-packaging of the savings schemes will significantly lower the savings potential”, said Sandip Mukherjee, executive director, PwC. “The exemption of 2 lakhs is four time the per capita income, which is a generous limit,” countered a senior tax department official. The maximum a person can save on her tax burden is 24,000 and that too if she earns more than 8 lakh a year.

Why?

The potential revenue loss from exemptions has forced the government to scrimp on the hikes in the threshold levels of personal income tax.

DTC Bill is good for the market but not for the ordinary man. One of the highlights of the DTC was the introduction of the Exempt Exempt Taxation (EET) system of taxation on savings schemes as against the prevailing Exempt-Exempt-Exempt (EEE) system. Under the EET system of taxation of savings, a tax payer would get a tax breakon contributions to specified saving schemes (eg Public Provident Fund) as well as on any accretion/ accumulation of income in such account. However, any withdrawals would be taxed at the time of withdrawal or receipt. This would lead to drain in the savings of the tax payer when it would be required the most (eg after retirement). The DTC bill also proposes to retain corporate tax at 30 per cent, but without surcharge and cess. With them, the current tax liability on corporates comes to over 33 per cent. The government also conceded to the industry demand not to levy minimum alternate tax (MAT) on assets but book profits of the companies. So, it had to dilute earlier proposal of cutting corporate tax to 25 per cent, sources said. Tax experts said this proposal will provide much needed relief to the industry and bring the levy on par with global standards, though the industry wanted it to be reduced to 25 per cent. However, the government raised MAT to 20 per cent from 18 per cent, but it should not make much of a difference since with surcharge and cesses, MAT currently comes to 19.33 per cent.

Is GST VAT? What are the hurdles involved in implementing it?

Everybody is keenly awaiting for the proposed GST draft which will replace the existing system of VAT in India. VAT is value added tax (on products). GST is like VAT but applies to Services also (apart from products). In India, we have VAT and Service Tax whereas in many countries you have only GST. VAT and GST is a tax on consumer expenditures and in theory should not fall on business activities. When a business operating in a VAT/GST country buys goods or services it pays tax to the supplier, which is called an input tax. When the same business sells goods or services, whether to another business or to a final consumer, it is required to charge tax, which is called an output tax. The business then must periodically total the input tax and deduct it from the output tax, paying the excess to the government agency responsible for collecting it.
GST is India’s most ambitious indirect tax reform, which seeks to stitch together a common market and reduce costs to replace the current fragmented regime. In India Dual GST would be implemented 20% & 12% split evenly between state and center. CST (Central Sales Tax) would be scrapped in a GST regime.
Hurdles:
I am opposed to it...it is unethical to tax luxury cars & sugar at the same rate says kerela FM.
1. Opposition from states: At present, the states are opposing the 12% single GST. Arriving at an acceptable GST rate has been bogged down by differences among the states and also between states and other entities like the TFC task force on GST architecture. Thumb rule is that larger the number of taxes subsumed in GST, lower will be the revenue neutral rate. The states have been reluctant to subsume all taxes into GST as it would mean loss of power to unilaterally change some taxes. Two drafts of the proposed new tax regime failed to find acceptability by states and the third has been referred to empowered committee of state finance ministers.
2. Improper Structure: There is much debate on the likely aggregate rate of the GST. It is also possible that several other design elements of the GST can undergo changes.
3. GST requires constitutional amendments currently the Centre cannot impose tax beyond manufacturing and states cannot levy service tax. Unlike Direct Tax Code (DTC), GST is a transaction-based tax and hence can be introduced any time.

RBI – Sole Objective – to control Inflation

Overview:
The Preamble of RBI describes its function as to regulate issue of Bank Notes and keeping of reserves with a view to securing monetary stability in the country.
Role of RBI
1. Bank of Issue: Issues Bank notes of all denominations
2. Acts as Government banker & advisor, agent to Central and State Governments.
3. Controller of Credit
4. Custodian of Foreign Reserves
5. Supervisory functions : settles disputes arising among other banks under its ambit.
Inflation – A concern
Inflation is a grave concern, given the vast disparity between the rich and poor. Skyrocketing inflation robs the poor, and hurts others.
RBI follows a multiple indicator approach to arrive at its goals of growth, price and financial stability- rather than targeting inflation alone. Rbis OBJECTIVES R often conflicting with each other>>> It looks confused, ineffective and does not effectively tackle inflation but effectively stunts the growth pattern of the economy.
RBI should clear itself from this confusion and control inflation while maintaining growth. It should be reactive rather than proactive, as monetary policy is most effective when it is forward-looking. RBI’s autonomy should not be compromised either in fact or in perception
Why it is not possible?
Constraints imposed by the political system pulls down autonomy of RBI. Transparency is the best example.
RBI’s decision to strip Dr KC Chakrabarty of important portfolios. Monetary policy being dictated by a powerful governor/finance ministry & Subbaraos decision to reverse an increase in pension for RBI retirees.
Some have even mockingly dubbed RBI as the finance ministry’s ‘department of monetary policy execution’.
Solution: Operational Independence
1. RBI should seek government approval only on matters where the RBI Act (1934) calls for such approval. It should articulate need for changes in the Act. Autonomy is never given, it is earned and taken.
2. There should be a clear paradigm to adopt. By all means, let the RBI's fight against inflation continue. The US Fed Reserve, which is the RBI's model, does not have to resort to CRR. control is through the price of money i.e, interest rate and not the quantity. The Fed does not sequester resources of the banking system by raising CRR for it has zero CRR. Even if the Fed's monetarist model is followed, one has to allow borrowers to get credit at least at a price. Both quantity and price cannot be controlled at the same time, which is what the RBI is doing.

FDI In Education

India’s education sector has become a prized one with the UPA mulling over issues like opening up the sector for foreign participation. Moreover the foreign education Institutions Bill which was earlier withdrawn after strong protests from the left parties now finally sees the light of day- however several universities have indicated that they will not be setting campuses in India.

But the ministry says that it is working on several ways to increase FDI participation, which will not just be restricted to setting a base. One must understand that “FDI encompasses a whole range of initiatives in the education sector- from JVs, twinning arrangements, skill developments, and universities.

PROS OF FDI

1. FDI would solve problem of lack of funding- resulting in expansion.

2. Quality education would prevent outflow of Indian students and $4 billion spent by them- thus less expensive and retention of domestic talent achieved.

3. Increased competition leading to - international competitiveness, change of curricula, increased responsiveness to students needs, technological Innovation, improved infrastructure.

4. Degrees offered to be internationally comparable and acceptable.

5. Creation of new institutions to generate employment.

CONS OF FDI

1. Money power of foreign institutions would attract best teachers and students from local institutions.

2. Main motive is profit making.

3. Since competition entails cost reduction, infrastructure, would find least investment and also teachers and non-teaching staff being appointed without necessary qualifications.

4. These institutes charge high fees resulting in local private institutions raising their fee to establish competitiveness– end burned on students

5. These institutes would tend to repatriate as much profit as possible back home - accelerating outflow of foreign exchange.

Looking at both the pros & cons its clear that if implementation as well as elimination of the drawbacks is achieved FDI can work wonders. One must understand that the industry is presently facing a dearth of skilled manpower that may hit its competitiveness. Opening up the sector seems like the only way out.

One must understand that FDI is not just restricted to universities. Its slated that primary and secondary education will attract that largest FDI. At the end of the day “FDI is not about universities alone. It’s about empowerment of 220 million children who will not be going to universities,”

“FDI in education sector is a channel of international benchmarking and should be welcome. But it should be monitored and regulated well, keeping in mind the national interest.”

Sumitomo Corporation

Sumitomo Corporation – The story of Copper derivatives

Incident:

This study is a classic example of – ‘Running on the top of the tiger not knowing how to get off without being eaten.’

Yasuo Hamanaka, the chief copper trader at Japan's Sumitomo Corporation caused $2.6 billion losses to the company through his unauthorized trading activities in the physical and futures market in copper at the London Metal Exchange. It was the largest unauthorized trading-related loss incurred by any Japanese company during that time.

Analysis:

Initial Profits – Result of Manipulation

Yasuo Hamanaka the head trader of Sumitomo Corporation manipulated the world copper prices through his operations on the LME (London Metal Exchange) copper futures market over the period of 1991-95. This artificial increase in copper price resulted in increased profits for Sumitomo Corporation from selling copper. Moreover Hamanaka was reporting inflated trading profits to the top management by showing invoices of fictitious option trades, which he had created through a nexus with some brokers. Whenever any hedge fund or speculator who was aware of manipulation tried to take short positions, Hamanaka invested more money into his positions thus sustaining the high price. However despite these faulty practices no action was taken against Hamanaka because of the profits he generated for the company.

Lack Of Transparency

Successful manipulation of the copper prices was possible due to lack of transparency in the reporting positions of large clients at LME.

Action Taken Too Late

During late 1995, due to increased copper production facilities particularly in China, copper prices started declining. This was ominous for Sumitomo as they had long positions in the futures market. Hamanaka failed to get rid of his positions. He tried to recover the losses by taking huge positions in copper commodity futures on the London Metal Exchange. However the huge volume of trading attracted the attention of the exchange and it gave a warning to Hamanaka. Hamanaka then struck a deal with Merrill Lynch for US $150 Mn, which enabled him to trade via Merrill at LME. Later however when LME started investigating on the alleged manipulation of copper prices Hamanaka was taken off from his position of head trader. This brought the short traders and hedge funds into the act causing the copper prices to fall further on LME.

Lack of Proper Managerial Supervision and Operational Control Systems

Transactions were made solely by Yasuo Hamanaka himself. He abused Sumitomo's name, and continued on with unauthorized trading and even borrowed money from several banks without any authorization from his seniors. Hamanaka a middle-level manager got so much power only because of the fact that he had helped Sumitomo garner a lot of profits in the past. He was given a great deal of responsibility by the company, a star trader status and his only regulators were overseas, far from Tokyo.

Lack of Monitoring

Trading in commodities and financial instruments was not being properly monitored by the government regulatory agencies and by the companies undertaking these transactions. This conclusion can be derived from the fact that in a short span of 16 months three major derivative disasters were seen:

· UK's 233-year-old Barings Bank, which lost $ 1.4 bn in February 1995 due to Nick Leeson's unauthorized trading activities in the Singapore futures market

· Japanese bank Daiwa which lost $1.1 bn in America's Treasury bond market in September 1995 due to the unauthorized trading activities of Toshihide Iguchi.

· Japan's Sumitomo Corporation $2.6 billion losses due to unauthorized trading activities in the physical and futures market in copper at the London Metal Exchange.

The debacle was the result of Sumitomo's poor managerial, financial and operational control systems. Due to this, Hamanaka was able to carry on unauthorized trading activities undetected by the top management. The vesting of excessive decision power on a single employee and failure to implement the job rotation policy were the other reasons cited.

Damage Control Measures

In order to control mounting losses, Sumitomo began aggressive liquidation of its uncovered positions in the copper physical and futures market under its new president Kenji Miyahara. It cancelled its plans to buy back 20 million of its shares and award Yen 120 million ($1.1 million) of bonuses to its senior managers. Sumitomo was able to overcome the losses since it had a net worth of $6 bn and another $8 bn in hidden reserves. The losses estimated to be $2.6 bn amounted to only 10 per cent of Sumitomo's annual sales.

Conclusion & lessons learnt from derivatives

“Derivatives” are complex bank creations that are very hard to understand, but the basic idea is that you can insure an investment you want to go up by betting it will go down. The simplest form of derivative is a short sale: you can place a bet that some asset you own will go down, so that you are covered whichever way the asset moves.

Particularly, the Sumitomo case resulted in tighter internal supervision and control procedures by trading firms and financial institutions the world over. Disclosure must lead to a serious introspection among various financial regulators and trading firms to improve the existing regulation and supervision procedures.

Regulators have now become more aware and proactive than ever before as the possibilities to manipulate the markets have become more practical with the advent of complex and high leveraged instruments like derivatives. Prevention here is always better than prosecution. Companies should also restrain themselves from vesting too much power on a single employee and follow a job rotation policy. By entering into fictitious trades and manipulating accounts, Hamanaka successfully misled the management to believe that he was making huge profits. Sound operational and monitoring system need to be in place to keep track of activities of traders. Successful traders might require more, not less, scrutiny.

What needs to be done in the future?

1. Resolving and Prosecuting Insider Crimes

2. Reducing False Positives

3. Protecting Customer Data

4. Investigate irrational spurts in revenue as much as drop in profitability.

5. Fix the remuneration and fix the bonus as a fixed percentage of the CEO’s salary

6. Create policies and procedures on risk management and educate the employees regarding the same.

“Major crises are major opportunities for change”