Diesel price deregulation will depend on inflationary pressures, says revenue secretary

Govt to react to increasing fuel prices globally as the situation unfolds; official says difficult to tell how high prices will go

New Delhi: The government today said that a decision to free diesel prices from government control will depend on the inflation situation. "We had announced last year that a decision would be taken at an appropriate time to deregulate diesel, the government hasn't changed its decision... We have to see how the inflationary pressures go and take a decision," revenue secretary Sunil Mitra told journalists on the sidelines of an Assocham function.

On the rising crude prices globally, Mr Mitra said that the government would react as the situation unfolded. "It would have been inappropriate for us to take a stand (in the Union Budget) on how much petroleum is going to cost," he said.

Crude oil prices in the international market are ruling above $100 a barrel and with the crisis in Libya and some West Asian countries continuing, they may go up further, reports PTI.

Although food inflation declined from 20.2% in February 2010 to 9.3% in January 2011, it still remains a concern. Headline inflation in January at 8.23% is above the comfort level of around 5-6%.

Mr Mitra said it was impossible to assess the ramifications of the current crisis. "... It is impossible to say now where it is going to go, whether it will affect Saudi Arabia or Iraq and other sources from where we get oil. So this is something that we will have to react to as the situation unfolds," he explained. He said that if global crude prices increased, petrol prices would also increase, as it is deregulated.

Answering some questions on the Goods and Services Tax regime (GST), Mr Mitra said that as the Budget was over, he would talk to the Empowered Committee of State Finance Ministers to take the issue forward. "We have been tied up with the Budget, we will now sit down and work on that... We will have to discuss this, have a talk with the empowered committee and take a decision," he said.


MFs give agents more time for biometric cards, KYD norms

Market regulator SEBI in September 2010 had ushered in a major overhaul of the way mutual funds were sold with the introduction of biometric cards and stringent licensing norms for distributors to weed out agents indulging in frauds

New Delhi: Mutual funds have given their distributors one more month to comply with stringent identity verification norms wherein agents are required to get biometric cards that carry information like finger-print impressions, reports PTI.

Market regulator the Securities and Exchange Board of India (SEBI) in September 2010 ushered in a major overhaul of the way mutual funds were sold with the introduction of biometric cards and stringent licensing norms for distributors to weed out agents indulging in frauds.

As per the SEBI direction, all fund houses were asked to comply with 'Know-Your-Distributor (KYD)' norms before the grant or renewal of registration of distributors.

While the norms were implemented for new distributors with effect from 1 September 2010, existing distributors were required to comply with the new requirements by February 2011.

However, the mutual fund industry body Association of Mutual Funds in India (AMFI) has now extended this deadline by another month and asked the existing distribution registration holders to comply with the new KYD norms by the end of March.

The distributors and some fund houses, too, were not very keen on the new set of rules and had been lobbying hard for its annulment, said an official at a leading fund house.

The fund houses and distributors were hopeful of some reprieve after UK Sinha, formerly chairman of AMFI and chief of fund house UTI MF became the SEBI chairman last month.

The new requirements have not been done away so far, but AMFI has now extended the deadline for completing KYD process by existing registration by one month.

The fund houses would suspend payment of commissions to distributors not completing the KYD process by March 2011.

The agents would be required to get biometric cards that would carry an impression of their right hand index finger and help in immediately checking the distributor's record for any possible irregularities in the past.

The KYD norms, devised on the lines of KYC (Know-Your-Customer) norms followed by banks and other financial service providers, would require distributors to submit identity and address proofs, PAN and bank account details.

Besides keeping a check on agents indulging in fraudulent activities, the move is also aimed at weeding out non-serious agents and those indulging in mis-selling activities.

There are more than one lakh distributors working for about three dozen fund houses in the country.

Previously, grant of registration needed a certificate for having passed an AMFI certification examination, two photographs and payment of a registration fee.

However, pursuant to a directive from market regulator SEBI, the AMFI certification has been replaced by a certification programme for distributors conducted by the National Institute of Securities Markets (NISM).

Furthermore, the new KYD norms would require distributors to go through a stringent verification process that would look into the past record of the distributors to minimise the risk of mis-selling and other potential fraudulent activities.

In a circular to the fund houses on the new KYD norms, AMFI had said: "As you are aware, there are increasing numbers of instances of financial frauds played on the investors by Mutual Fund distributors/their employees."

"As one of the measures to control this situation, SEBI has advised AMFI to tighten the procedure for distributor registration. On reviewing the current procedure for registration of distributors, it was decided by the board to introduce a more stringent Know-Your-Distributor (KYD) process involving obtaining relevant documents and validation of such documents, personal verification and biometrics."

The fund houses would also require to initiate steps to ensure correctness of the information furnished by the distributors and conduct their in-person verification.


SEZs: From 'hot picks' to leftovers, the story of changing policies

The move to remove tax sops with regard to SEZs seems at odds with the governmental policy and may spell the death knell for SEZs—once a hot favourite among corporates

Special Economic Zones (SEZs), once the hot favourite of Corporate India (as well as politicians and bureaucrats) have been dealt a body blow by the finance minister. In his Budget speech, finance minister Pranab Mukherjee said, "I propose to increase the rate of Minimum Alternate Tax (MAT) from the current rate of 18% to 18.5% of book profits to keep the effective rate of the MAT at the same level. As a measure to ensure equal sharing of the corporate tax liability, I propose to levy MAT on developers of Special Economic Zones as well as units operating in SEZs."

Following the announcement, SEZs and units operating in SEZs would now lose the MAT exemption, which they currently enjoy. SEZ developers would also be subject to a dividend distribution tax (DDT) at the rate of 15% on dividends distributed to their shareholders.

Currently, SEZ developers are exempt from paying DDT and the Budget proposals would cumulatively give rise to tax costs of around 30%, which can distort cash flows.

"The decision to levy MAT on SEZ developers and units in SEZs is a bit sad and will certainly prove to be a dampener for investors. I think the euphoria associated with SEZs is now fading with regular changes in policies. India needs to look at other countries which have stable regimes & rules for SEZs. A few exporters may look or shift units overseas if they found the environment there more beneficial and less restrictive compared with India," said Jatin Mehta, chairman, Export Promotion Council for export oriented units (EoUs) and SEZs (EPCES) and chairman and managing director, Su-Raj Diamonds & Jewellery Ltd.

The levy of MAT on units set up in an SEZ and developers of an SEZ was not unexpected, especially given that the proposed Direct Taxes Code (DTC) provides for imposition of MAT on income earned by units set up in an SEZ or by a developer of an SEZ.

However, this is nonetheless a move which raises questions as to the direction of the governmental policy with respect to SEZs.  

Dinesh Kanabar, deputy chief executive and and chairman for tax at KPMG, said, "The imposition of MAT on SEZ developers and units is retrograde as it seeks to impose tax on income received from investments made with a commitment of tax exemption. This is advancing the negative impact of the DTC and should have been avoided."

The government is keen on SEZs being one of the engines of growth of the economy and therefore promotes their growth, on the grounds that creation of SEZs will benefit the country in terms of creation of additional employment, world-class infrastructure and help make development uniform by creation of these zones in different regions of the country.

On the other hand, the move to remove tax sops with respect to SEZs seems at odds with the avowed governmental policy.

"While the 2011 Budget does have a number of welcome features, especially on the non-tax front, the withdrawal of specific tax benefits for SEZ developers and units and changes to the service tax regime may not augur well for the industry. The government will lose credibility in the eyes of investors if it frequently resorts to retrospective amendments, policy changes and introduction and revocation of incentives," said Nishith M Desai from Nishith Desai Associates (NDA), in a statement.

Echoing the same views, Emkay Global Financial Services Ltd, said in a report, "Sunset (clause) to the exemption granted to SEZs from 1 June 2011 in terms of MAT exemptions and exemptions from the application of DDT provision will be a big negative for fresh investments in SEZ development."

Earlier in April 2000, with a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances, absence of world-class infrastructure, unstable fiscal regime and with a view to attract larger foreign investment, the Indian government announced its SEZ policy.

After extensive consultations, the SEZ Act, 2005, supported by the SEZ Rules, came into effect on 10 February 2006, providing for drastic simplification of procedures and for single-window clearance on matters relating to Central as well as State governments.

In addition to the seven Central government SEZs and 12 State or private sector SEZs set up prior to the enactment of the SEZ Act, formal approvals have been accorded to 575 proposals out of which 348 SEZs have been notified. According to data from the Ministry of Commerce, there are 130 SEZs operational in India.

As per the provisions of the SEZ Act, the units of the SEZs are allowed duty-free goods for setting up SEZ units, exemption from service tax, MAT and Central Sales Tax (CST).

SEZ Units are allowed 100% Income Tax (I-T) exemption on export income under Section 10AA of the Income-Tax Act for the first 5 years, 50% for the next 5 years thereafter and 50% of the ploughed-back export profit for the next 5 years. Also, sales into the domestic tariff area by SEZ units attract all duties including countervailing duties.

Unfortunately, the government introduced the new DTC Bill in August 2010, which tried to alter the special benefits and provisions provided in the SEZ Act. The DTC Bill proposes that the SEZs notified on or before 31 March 2012 will get income-tax benefits while units in SEZs that commence commercial operations by March 2014 shall be allowed profit-linked deductions permitted under the Income Tax Act, 1961.

"These provisions do not meet the requirements of the SEZ scheme fully, and would very seriously affect employment, exports and investment in the SEZs," an official from the EPCES had said at that time.  

NDA further said that a peculiar problem might also arise with respect to the MAT credit that would be available with a unit or a developer for setting off against future tax liability. In quite a few cases, especially in the case of developers, in the first couple of years of their tax holiday, the MAT credit with respect to such years may lapse or be on the verge of lapsing by the time such developers are taxable under the normal tax provisions, since the MAT credit can only be carried forward for a period of 10 years.

It is pertinent to point out here that a unit set up in an SEZ or a person developing an SEZ is entitled to a 100% tax holiday for a period ranging from 5 to 10 years. Further, in case of a foreign investor investing in a unit set up in an SEZ or a developer of an SEZ, claiming a tax credit in its home tax jurisdiction for the MAT paid in India may pose a challenge, the tax and law firm added.

Another key concern that this move raises is that a taxpayer is entitled to certainty in terms of tax law, so as to plan his or her economic affairs, and the removal of these tax sops has a regressive impact in many ways which adversely affects taxpayers who would have based their business models on the availability of these very benefits and incurred additional expenses to move into or develop an SEZ.

One suspects that this proposal may face stiff opposition in the coming weeks, NDA concluded.


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