Monday, 26 March 2012

Pranab tried his best to appease Indian incs! The government today said it has no vindictive intention in retrospectively amending tax laws and has no plans to re-open a large number of old cases, while assuring India Inc that the IT Department will

Pranab tried his best to appease Indian incs! The government today said it has no vindictive intention in retrospectively amending tax laws and has no plans to re-open a large number of old cases, while assuring India Inc that the IT Department will not act like a 'policeman'.On the other hand,the Finance Ministerhas asked SEBI to consider speeding up framing of regulations for alternative investment funds.

Cabinet approves award of NELP IX blocks!

Duty hike may push up inflation by 0.25-0.5% points: Kaushik Basu
Troubled Galaxy Destroyed Dreams, chapter 758

Palash Biswas

Pranab tried his best to appease Indian incs! The government today said it has no vindictive intention in retrospectively amending tax laws and has no plans to re-open a large number of old cases, while assuring India Inc that the IT Department will not act like a 'policeman'.On the other hand,the Finance Ministerhas asked SEBI to consider speeding up framing of regulations for alternative investment funds.

Regulations for alternative investment funds are needed to address the systemic risk posed by unregistered private pools of capital, Mr Mukherjee said in his customary post-budget address to the SEBI Board in the Capital on Saturday.

The government's decision to raise excise and service tax will have marginal impact on prices and may push up inflation by 0.25 to 0.50 per centage points, Chief Economic Adviser Kaushik Basu has said.

"There will be some increase in prices due to increase in excise and service tax...25 to 50 basis points a one time rise in prices," Basu, who also heads a Prime Minister appointed panel on inflation, told reporters.

Faced with rising fiscal deficit, Finance Minister Pranab Mukherjee increased both excise duty and service tax rate to 12 per cent from 10 per cent to generate an additional revenue of Rs 45,940 crore.

Justifying Mukherjee's decision to hike tax rate, Basu, said that in the long run, improvement in fiscal situation will help in moderating inflation.

By raising taxes, Mukherjee planned to bring down the fiscal deficit to 5.1 per cent of the Gross Domestic Product (GDP) from 5.9 per cent estimated in 2011-12.

Inflation, as measured by the Wholesale Price Index (WPI), was 6.95 per cent in February. It remained close to double-digit throughout 2011 before moderating to 8.3 per cent in December.

"We expect inflation to be 6.5 per cent over the next fiscal," he said, adding that the average inflation during the current fiscal would be 8 per cent.

Unlike 2011, Basu said, "I do not expect food inflationary pressure next year. I expect food inflation around the average of 6-6.5 per cent."

Maintaining that there was no trust deficit between the government and industry, Finance Minister Pranab Mukherjee on Sunday said the Centre will make all efforts to implement the decisions it has taken.

Addressing CII members, the Mr. Mukherjee said the trust deficit between industry and government might have been a "concept" in 1970's but the issue has been settled long back.

Stating that India is facing "energy famine", the government today said agitations against setting up of power plants, such as the one at Kudankulam nuclear plant, are preventing the country from achieving its energy requirement.

Stressing that India needed to look beyond coal-fired power plants to meet its massive energy requirements, Finance Minister Pranab Mukherjee said: "...Coal linkages, coal production is fine...But the other sources of energy [need to be exploited] because the country is having energy famine."

He said that the country has never achieved energy target in five year plan periods.

"Last five year plan, our target was 78,000 MW, revised target was 62,000 MW and ultimately we would not achieve more than 54,000-55,000 MW," he said.

The Finance Minister lamented that agitations against nuclear power plants are going on in almost all the states following the Fukushima disaster in Japan last year.

"Almost every state, which earlier showed its interest for the nuclear power plant are coming back and agitation is going on about the acquisition of land because some accident in some parts of the world has completely seconded it...Each and every state, agitations are going on," he said.

Referring to the Kudankulam nuclear plant agitations he said: "Thank God that we have been able to resolve the issue of the Kudankulam".

He regretted that even after the UPA "risked the existence' of the government to bring the civil nuclear cooperation agreement to augment the country's energy supplies "domestic agitations are going on".

Meanwhile,the Cabinet Committee on Economic Affairs, on Friday, approved the award of 16 exploration blocks and rejected bids for 10 blocks due to lower profit petroleum to the government under the Ninth Round of the New Exploration Licensing Policy (NELP).

The CCEA was presented with the recommendations of the Empowered Committee of Secretaries (ECS), which had recommended award of 16 blocks to the first ranked/single bidder.

For the blocks MB-DWN-2010 and MB-OSN-2010/2, the clearance from the Ministry of Defence is still awaited and as such no decision is taken.

The ECS, at its meeting held on February 16, took up 74 bids for the 33 blocks offered under the already delayed NELP-IX round, and recommended to award 16 blocks to the highest bidders. Among the bids that could be impacted by the decision of the CCEA include companies such as Reliance Industries Ltd. (RIL), Oil and Natural Gas Corporation (ONGC), Oil India, Hindustan Petroleum Corporation, Bharat Petro Resources and Indian Oil Corporation.

The blocks recommended for award by the ECS include two shallow water and 12 onland blocks. The ECS rejected bids for seven deep water blocks and three shallow water blocks.

The ECS also rejected Essar Oil's bid for the CB-ONN-2010/11 block despite the company scoring the highest points and having the required minimum net worth of $19.42 million. However, the bid was not considered as the net worth furnished by the bidder, at $142.90 million, included an amount of $256.84 million for advance towards 'global depository shares'. Removing advance for GDS resulted in negative net worth of $113.94 million. Essar Oil furnished, on January 10, opinion from Deloitte Haskins and Sells, saying that bank guarantees and letter of credit were not considered for computation of net worth. The amount involved as on March 31, 2010, was $1,369.46 million. However, the ECS said, as per the Companies Act, 1956, Part I of Schedule VI, share application money and money received against share warrants were not part of the paid-up capital/share capital.

It also rejected bids by Deep Energy and KGN Oil and Gas Pvt. Ltd. for the block CB-ONN-2010/1. Bid by Chinar Commerce Pvt. Ltd. was also rejected for CB-ONN-2010/6 and CB-ONN-2010/7 blocks.The Petroleum Ministry, through the Directorate General of Hydrocarbons (DGH), will take steps to finalise the Production Sharing Contracts within 60 days.

"I can assure, perhaps I can speak on behalf of the government, that no question of trust defict...we are firmly convinced that in the task of the nation building we are partners and there cannot be any trust deficit between the partners," Mr. Mukherjee said.

The government will make efforts to reach consensus on important issues, he added.

"It will be our endeavour to build broad based consensus to implement the decisions which have already been taken and confront issues that need to be addressed," Mr. Mukherjee said, adding that the government would taking "some difficult decisions" in the coming months.

The statement assumes significance against the backdrop of government suspending decision to implement foreign direct investment in multi-brand retail after strong opposition to the move, including from its own ally Trinamool Congress.

Also, the Cabinet had taken an in-principle decision in June 2010 to deregulate diesel prices along with petrol but a formal order on freeing diesel rates could not be issued under political pressure. UPA government's allies do not want diesel prices to be deregulated as it could ignite inflation.

Mr. Mukherjee pointed out that the government has a limited mandate and cannot take all decisions on its own.

"We have a limited mandate and in (such a) case you cannot expect that (whatever) the executive or the government decides, they get it done. Simply, it is not possible and you cannot fix a square in a round hole. Therefore, the mindset has to be changed," he said.

The Finance Minister said the government can do anything when the it has clear and absolute mandate, but when it has fractured mandate, "you carry people (along)".

In the address to industry, he also expressed confidence that the Direct Taxes Code (DTC) will be legislated in 2012—13, and ready for implementation in the following year.

Standing Committee on Finance headed by Senior BJP leader Yashwant Sinha scrutinised the DTC Bill and submitted the report to Parliament on March 9.

On the proposed Goods and Services Tax (GST) regime, the Finance Minister said the government was working on a model-legislation for the new indirect tax regime.

The GST Constitutional Amendment is currently with the Standing Committee on Finance.

The proposed GST would subsume most indirect taxes like excise duty and service tax at the central level and VAT on the state front, besides local levies.

Besides, government would also move ahead with important economic bills related with insurance and banking, he added.

Started in 2008, the post-budget exercise has been carried out for five years.Mr Mukherjee's suggestion comes nearly eight months after the SEBI released a concept paper on this issue. In the absence of regulations on alternative investment funds, many hedge funds and PIPE funds remain as fence sitters and are undecided on investing money in India. A proper regulatory framework for all shades of private pool of capital will help them in deciding their investment strategy for India, according to capital market observers.

SEBI had in its concept paper released in August 2011 stipulated that it would be mandatory for all types of private pools of capital or investment funds to seek registration with the capital market regulator.

It was also specified that funds would have to be close-ended and they could be formed as companies, trusts or body corporate including LLP structure. The alternative investment funds should pool the money from high networth investors, institutional investors or corporates through private placement and should not solicit money from retail investors.

The investors may be locked in the fund for a minimum period of three years or more depending on nature and tenure of fund.

Meanwhile, Mr Mukherjee expressed confidence that the measures outlined in the year's budget will revive private investment and put the economy on the higher growth path.

He also highlighted that the budget has sought to spur growth in capital market by lowering transaction costs and incentivising retail participation.

The Finance Minister also noted that investors are showing an increasing appetite for market linked insurance, credit and investment products. For retail investors, he said there is a case for bringing down the financial costs and increasing access to mutual funds by new distribution channels.

Earlier, Mr U.K. Sinha, SEBI Chairman, apprised the Finance Minister of the state of the securities market and highlighted the important measures taken recently in the realm of investor protection, market development and market regulation.

Infrastructure concerns have always figured prominently in all recent budgets. Budget 2012-13 could hardly have been an exception. The requirement of funds for infrastructure has been mounting year after year. The government has estimated that during the XII Plan infrastructure investment will go up to Rs.50 lakh crore, roughly half of it coming from the private sector. These are huge amounts and call for a substantial step up in public investment as well as concerted action to encourage private capital.Business Line Reports:

The Finance Minister devoted as many as 18 paragraphs in his budget speech to infrastructure and industrial development. In addition, the several steps to boost the financial sector, especially the capital market and banks, will have the salutary effect of boosting infrastructure funding.

Specific measures to deepen the capital market and encourage investment in the infrastructure sector include:

(a) Qualified foreign institutional investors (QFIs) will be allowed access to the corporate bond market.

(b) The IPO process will be simplified to lower the costs and will be made more accessible to investors even in small towns. And

(c) FII investment limits in long-term infrastructure bonds, corporate bonds and government securities have already been raised during the past year.

The assumption is that the measures, which boost equity markets, can stimulate infrastructure funding even though, strictly speaking, the latter is best served by a vibrant secondary corporate bond market. However, as of now the domestic corporate bond market itself needs to be reformed. It was also announced in the budget speech that certain important pending financial sector bills will be pushed through as soon as possible, many in the budget session itself. When enacted, they will widen the financial sector. That would enable foreign investors, including pension funds, insurance companies and others, with a penchant for long period debt instruments to put their money in India.

Simultaneously, dedicated infrastructure funds from India have been allowed to tap the overseas markets for long tenor pension and insurance funds. The first infrastructure fund with an initial size of Rs.8,000 crore was launched in early March. The quantum of tax-free infrastructure bonds that will be available next year is being increased to Rs.60,000 crore, double that of this year.

Public-private partnership

The emphasis on public-private partnership (PPP) for developing infrastructure projects continues and is evident in a number of budget announcements. The facility of viability gap funding, crucial for attracting private capital, is being extended to a number of new areas including irrigation, terminal markets and common infrastructure in agriculture markets. Governance issues in infrastructure development have been addressed: a harmonised list of the infrastructure sector has been approved by the government to help remove ambiguity in the policy and regulatory domain and encourage investment in the infrastructure sector.

Relaxing ECBs

Important as the above steps are, it is the relaxation in the ECB policy as announced in the budget that is both newsworthy as well as controversial.

The changes proposed seek to do away with a number of end-use restrictions of the funds borrowed from abroad, including use as working capital, repayment of rupee loans and the like. It will now be possible to use the ECB route to (a) part finance rupee debt of power projects; (b) capital expenditure on the maintenance and operations of toll systems for roads and highways, if they are part of the original project; (c) working capital requirement of the airline industry for one year, subject to a total ceiling of $1billion; (d) for low cost housing projects and setting up of a credit guarantee trust fund and the like.

Incentivise foreign lending

In a related move, it is proposed to incentivise foreign lending in select sectors including power and airlines. The budget has a proposal to reduce withholding tax on interest payments on ECBs from 20 to 5 per cent for three years.

These proposals have been welcomed by large sections of industry. The cost of borrowing through ECBs should be significantly lower than borrowing from banks in India.

The relaxation on the end-use of foreign currency borrowing is also considered positive as it gives the borrowing companies greater operational flexibility.

Yet, the ECB route is not the magic wand, providing Indian corporates to borrow cheaply without the rigmarole of having to comply with a number of covenants. It is a route, which, many times before, the government has frowned upon, not the least because it saddles the country with short-term debt. The budget relaxations may be intended to shore up external reserves but the debt that the ECBs create can make the external sector vulnerable.

For corporates, the biggest danger is that they carry a huge forex risk. The natural propensity of many borrowing foreign currency loans is not to hedge, even if it is available. With foreign exchange movements being so volatile, many corporates have come to grief.

PM Manmohan Singh invites South Korean firms to make India their manufacturing base

SEOUL: Prime Minister Manmohan Singh today called on South Korea's small and medium sized firms to make India their manufacturing base even as he lauded conglomerates like LG, Hyundai and Samsung for showing confidence in the country after it liberalised its markets in 1991 and becoming household names.

The Prime Minister pointed out that South Korean companies were among the first to show confidence in India after it opened its economy in 1991.

"I invited Korean firms to invest in India in a big way. Companies such as LG, Hyundai and Samsung are already household names in India," Singh said after holding talks with the South Korean President Lee Myung-bak.

"We would like to see small and medium sized Korean companies also making India a base for their manufacturing. I informed President Lee that India is making a huge effort in upgrading our physical infrastructure. We want Korean companies to help us realise this objective and benefit from the opportunities provided by this," he added.

Singh stated that there was still immense potential for further bilateral economic cooperation.

"We have watched with great admiration the transformation of Korea into a developed economy. The people of India admire the determination, capacity for hard work and the spirit of enterprise that characterise Korean people," Singh said at the Banquet hosted in his honour by President Lee.

Bilateral trade between the two countries had crossed USD 20 billion mark in 2011. Singh noted that bilateral trade had risen by 65 per cent over the past two years since the two countries implemented the Comprehensive Economic Partnership Agreement.

Singh and Lee today agreed to enhance the trade target set by the two sides to USD 40 billion by 2015 as against USD 30 billion by 2015 as decided earlier.

Singh arrived here yesterday for a four-day visit to attend a Nuclear Security Summit. The two-day summit begins tomorrow when world leaders will meet over dinner.

Taxing budget may prompt FIIs to come in via Singapore

MUMBAI: In the past one week since the budget, several FIIs have been actively planning to shift their holdings from Mauritius to Singapore to escape taxation by Indian authorities. The General Anti-Avoidance Rule (GAAR) proposed in the Budget, along with the government's stance on the Vodafone case, has deepened fears that their profits from the securities market as well as 'indirect gains' to holders of participatory notes (PNs) issued by them may attract the taxman's attention.

PNs are offshore instruments for trading in Indian stocks. Overseas investors not allowed to trade directly in Indian stock exchanges buy PNs to bet on Indian shares. Most FIIs access Indian stock markets through Mauritius as India's treaty with the country exempts them from short-term capital gains on listed and unlisted stocks. But GAAR, aimed at targeting aggressive tax planning with the use of sophisticated structures, can override the treaty. FIIs believe they will be spared of tax by relocating to Singapore as India's treaty with that country lays down the conditions that FIIs and their PN-issuing entities will have to fulfil to claim tax benefits.

By March 31, all FIIs will have to figure out the possible tax implications on their existing securities as well as fresh investments and issuance of new PNs from April 1. But it's not possible to set up a base in Singapore overnight because the treaty requires an FII to have a full-fledged commercial establishment there with employees and a minimum annual expenditure to avoid tax.

"Once GAAR is introduced, each structure will need to be evaluated on its own merits for treaty eligibility. Considering the uncertainties, many FIIs are looking to move their operations to Singapore or other jurisdictions where they have some traders and business operations," said Shefali Goradia, partner at BMR Advisors, which is advising afew FIIs to restructure their holdings.

According to stock market sources, two US-based FIIs are in the process of moving to Singapore while another FII arm of a large European bank has slowed down the issue of PNs till it has a greater clarity on GAAR. "All structures that lack commercial substance are likely to be challenged from next year," said Goradia.

Even though many FII structures in Mauritius have been capitalised, the funds do not have a regular office in the tax haven. The government's stance on Vodafone and the budget proposal to tax gains from indirect transfer of assets in India have raised concerns over PN holders coming into the tax net. Even though PNs change hands offshore, the underlying assets are Indian shares. In this context, questions have cropped up whether an FII's shifting to Singapore would be able to shield PN holders from the Indian tax department.