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| January 27, 2017 |
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Impact 
The Union Budget 2017-18 is around the corner. Expectations are running high, and every citizen is anxious to know what's in store.
On the back of demonetisation that apparently spooked the economy, the Union Budget 2017-18 assumes extraordinary importance. It provides you with a pilot's view of which section of the economy is going to receive what and how much budgetary support. It also speaks about Government’s revenue expectations.
Much like household budgets, even the national budget faces constraints; because expectations from various sections of the society are never-ending. Challenged by such difficulties, the union Governments of all times have brainstormed to come up with unique ways (one being playing around with taxes), whereby it doesn’t turn out to be a much of a burden on the fiscal situation of the country.
Sometimes, the purpose of imposing new taxes goes beyond merely generating more revenue. For example, higher tax on cigarettes, is also intended to discourage people from smoking.
As you may be aware, digital payments have become a fad these days. Since demonetisation took effect, the Government has been encouraging businesses and households to shift to digital payments. Less-cash economy has been a motto. The Government had appointed a Committee under Andhra Pradesh Chief Minister, Mr Chandrababu Naidu, to suggest ways of promoting digital economy.
The Committee submitted its report to the Prime Minister recently, and one of the recommendations is: imposing cash transaction tax on high-value transactions. The Committee has advised to levy a Banking Cash Transaction Tax (BCTT) in the forthcoming Union Budget for transaction worth Rs 50,000 and above. Besides, the Committee has recommended placing a ceiling on the proportion of cash utilisation in high-value deals.
Some of the other key suggestions of the Committee are…
- The Government should offer all non-income tax assessees and small merchants a subsidy of Rs 1,000 for buying smartphones.
- No retrospective taxes for merchandisers allowing digital payments. They should also be entitled to some relief in prospective taxes as well.
- All businesses purchasing Aadhaar-backed payment systems shall be given 50% subsidy
- Banks should lower the Merchant Discount Rates (MDRs), a fee they charge merchants accepting card payments as they utilise the payment infrastructure.
- Further, there should be no MDRs for Aadhaar-backed payments and the payments made to the Government entities via digital payment systems.
- Government departments should turn more digital and encourage digital payments. Public Distribution Systems (PDS) is a good example.
- Tax concessions for people using digital payment systems for meeting their expenses over and above a certain percentage of their income.
- Aadhaar should be made compulsory to satisfy Know Your Customer (KYC) procedure. This would require the Government to amend certain provisions of to the Prevention of Money Laundering (Amendment) Act, 2012.
The experts are divided on the primary recommendations of the Committee. While no one opposes the idea of digital economy, many differ with the Committee recommending BCTT.
Mr Praveen Khandelwal, the National Secretary General, of the Confederation of All India Traders expressed, "It is a welcome step towards faster adoption of digital transactions. Traders need not worry as ultimately it will be paid by consumers."
Mr Naveen Surya, Chairman, Payments Council of India, echoed Mr Khandelwal’s views saying, “The Government should tax heavy cash transactions and use the proceeds to augment digital infrastructure.”
In contrast, Mr Rahul Garg, leader, direct tax of PwC opines, “BCTT will discourage big cash transactions and may dampen demand in the short run, particularly for small businesses. It should be considered only when the demand cycle has picked up.”
To discourage any further speculations on the subject, the Finance Ministry clarified that, it has not decided anything on introducing BCTT as yet.
It’s noteworthy that, in the past, BCTT was withdrawn on reasons that the taxmen had enough mechanism to detect black money and discourage money laundering. If the Government were to reintroduce it, a sound reasoning to counter the stand of the then Government is warranted.
On the other hand, Mr Naidu has expressed his confidence in the recommendation of the Committee and their effectiveness in promoting the digital economy. While speaking to media, he said, “We have submitted the recommendations to Prime Minister Narendra Modi today and are fairly confident that some of these will be incorporated in the Union Budget.”
On February 1, 2017, we will come to know whether or not BCTT will be revived.
However, what can be said with reasonable certainty is the Government is likely to announce some more measures to promote the digital economy.
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Impact
If you are someone who is worried about the current cash-withdrawal restriction, then there is good news for you...
By the end of February 2017, RBI is likely to eliminate weekly restrictions placed on cash withdrawals from banks and ATMs. As of now, there is an upper limit of Rs 10,000 a day and Rs 24,000 for a week on a savings account. While current accounts have a weekly limit of Rs 1 lakh.
Presently, bankers are hopeful that the situation will return to normal either by the end of February or by early March. However, there is still some scepticism among citizens.
The primary reason for this is the controversial stance of the RBI on the whole issue of demonetisation.
Whether or not the RBI was consulted is another topic of discussion, but even if we dissect the implementation of the scheme, RBI has done a shoddy job. This raised many eyebrows, and some eminent voices in the industry, including the former RBI Governors who have expressed their concerns about RBI’s credibility under the current circumstances.
To add more fuel to the fire, recently, the RBI Governor failed to provide a clear deadline as to when the situation would be resolved. A few days ago, he appeared before the Parliamentary Standing Committee on Finance that grilled Dr Urjit Patel over demonetisation. However, the RBI Governor reiterated that the 60% of remonetisation has already happened. But that was the easiest way to dodge the question.
Some members of the Parliamentary Standing Committee headed by Mr Veerappa Moily wanted to grill the RBI Governor further on the subject, when senior members, including former Prime Minister, Dr Manmohan Singh, saved Dr Patel by intervening actively.
While this was done to save the image of the RBI as an institution, many questions still remain unanswered about such goodwill gesture.
On the other hand, Bhartiya Reserve Bank Note Limited (BRBNL), a RBI subsidiary that undertakes the printing of currency took help of a special defense to dodge a specific question on demonetisation.
While answering this question—“How much currency of new Rs 2,000 and Rs 500 was printed before the announcement of cessation of Rs 500 and Rs 1000 as legal tender was made on November 8", the BRBNL riposte was it will pose a threat to the sovereignty and integrity of India.
How long such cover-ups would continue is a critical question at this juncture.
Demonetisation has given rise to more questions than it has answered. It seems RBI was either completely unaware of the move or it was absolutely unprepared for the implementation of such a massive operation.
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Impact
Seldom does India’s capital market regulator bend before industry resistance. But recently the Securities and Exchange Board of India (SEBI) moderated its stance on the ‘fee-based’ model mutual fund houses use. This is a very crucial development considering SEBI’s intent of segregating ‘advisors’ from ‘distributors’.
Retracting from its earlier position, making the mutual fund industry migrate from the current 'commission-driven model' to the 'fee-based' model, the capital market regulator seems to have made its mind up to allow the co-existence of both models.
SEBI has bought more time to study the implications of such a high-impact transition thoroughly.
Taking a serious note of the rampant mis-selling of mutual fund schemes, SEBI pondered on discontinuing the commission-oriented model. This effort had received a special impetus from the Sumit Bose committee recommendations.
The Finance Ministry had appointed a committee under the chairmanship of Mr Sumit Bose to curb the mis-selling of financial products and rationalise the distribution of incentives. The committee report highlighted the self-serving approach adopted by a majority of agents and distributors of financial products. According to the report, the mis-selling was prevalent at all stages of the product cycle—at the point of sale, post-sales, and/or even at both stages. The most affected segments that receive recurring complaints are insurance, mutual funds, and pensions plans.
To read more about this story and Personal FN's views over it, please click here..
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Impact
If you look closely at the mutual fund advertisements and other scheme related promotional literature in their current form, some significant drawbacks glare out. Although the data related to scheme performance is accurate, performance details are not presented in the most appropriate manner.
But there's a breakthrough on this front now.
At the annual meeting held on January 14, 2017, the Securities and Exchange Board of India (SEBI), made some crucial improvements to the advertising code for mutual funds.
What has change now?
- The current practice of showing the 12-month absolute performance of the schemes for last 3 years, will be discontinued. And as per the revised guidelines, the mutual funds will have to depict the returns generated by the scheme on compounded annualised basis—popularly known as CAGR (Compounded Annual Growth Rate) returns. Therefore, now onwards, mutual funds will disclose CAGR returns for 1-year, 3-year, and 5-year period and will also provide investors with CAGR returns since inception.
- And there is one more change. Presently, the mutual fund schemes are allowed to calculate the returns as on the last day of the quarter immediately preceding the day of advertisement. But now they will have to show returns as on the last day of the month which immediately precedes the advertisement release date.
- Moreover, disclosing the performance of other schemes managed by the same fund manager will be presented in the advertisement.
To read more about this story and Personal FN's views over it, please click here.
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Merchant Discount Rate: The rate charged to a merchant by a bank for providing debit and credit card services. The rate is determined based on factors such as volume, average ticket price, risk and industry. The merchant must set up this service with a bank, and agree to the rate prior to accepting debit and credit cards as payment.
(Source: Investopedia)
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Quote: "At least 40% of all businesses will die in the next 10 years... if they don't figure out how to change their entire company to accommodate new technologies
"- John Chambers
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