Regulations
Government accepts Shah panel report on MAT inapplicability

The Income Tax department had sent notices to 68 FIIs demanding Rs602.83 crore as MAT dues of previous years, and these FIIs, in turn, moved court challenging the demand

 

The government on Tuesday accepted the recommendations of the Justice A.P.Shah committee on the applicability of the vexed minimum alternate tax (MAT) on foreign instituitional investors (FIIs), and said it has decided to effect an appropriate amendment to the Income Tax Act.
 
"Through the amendment the government proposes to clarify that MAT provisions will not be applicable to FIIs/FPIs (foreign portfolio investors) not having a place of business/ permanent establishment in India, for the period prior to April 1, 2015," the finance ministry said in a statement here.
 
"The committee has recommended that section 115JB of the Income Tax Act may be amended to clarify the inapplicability of MAT provisions to FIIs/FPIs," it added.
 
"This will send a positive signal to the investors abroad. It only shows that the government is concerned about the issue of inconsistency and uncertainty in taxation," committee chairman Shah told reporters here.
 
Addressing a press conference earlier, Finance Minister Arun Jaitley said: "Today (Tuesday) I have accepted on the recommendation of CBDT and department of revenue, the report of Justice A.P. Shah dated August 25."
 
A senior official here told IANS that "the income tax department will soon issue instructions to assessing officers on how to deal with cases relating to applicability of MAT for periods prior to April 1, 2015, to the effect that they will not pursue the tax notices already sent".
 
"The legislative changes will happen in Finance Act next year," he said.
 
The Income Tax department had sent notices to 68 FIIs demanding Rs.602.83 crore as MAT dues of previous years, and these FIIs, in turn, moved court challenging the demand.
 
The CBDT had earlier said it will not raise any new demands for payments, and will take no coercive action to pursue claims that have already been filed under MAT.
 
"If order (on levying of MAT on FIIs) is in appeal, then we can certainly tell our assessing officer (that) please don't take it further; don't agitate it further and this is exactly what we did in Shell and Vodafone tax cases," CBDT chairperson Anita Kapur told reporters.
 
"Shell and Vodafone cases went against us and once we accepted that judgment, we told our officers, please don't do future assessments and please don't further agitate these in appeals," she said.
 
In the 2015-16 Budget, Jaitley had exempted FIIs from paying MAT with effect from April.
 
Even after Jaitley's announcement, the Income Tax department sent notice to at least 90 foreign portfolio investors.
 
With the uncertainty created by MAT, foreign investors sold Indian shares and bonds of around $630 million on May 6, marking the biggest single-day sale since January 2014.
 

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Nifty, Sensex will record further losses - Tuesday closing report
But Nifty is falling on lower and lower volumes
 
We had mentioned in Monday’s closing report that Nifty, Sensex look weak again and that as long as Nifty closes below 7,980, the trend is down. Most of the indices in the Indian stock market suffered a decline of more than 2% down on Tuesday. Almost all the sectors were trading in the red. Heavy selling pressure was seen in metal, banking, realty and consumer durables sectors. 
 
 
The slide in Asian markets and below-expected macro data sobered investor sentiments in the Indian equities markets on Tuesday, leading the Sensex to close 2.23% down.
 
The barometer 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE) tanked by 586.65 points or 2.23%. Bearish sentiments were also witnessed at the wider 50-scrip Nifty of the National Stock Exchange (NSE). It ended the day's trade at 185.45 points or 2.33 percent down at 7,785.85 points. 
 
Analysts cited negative cues emanating out of Asian markets, especially the continuous slide in the Chinese exchanges to be the catalyst for the sharp fall in the domestic bourse. 
 
Among the Asian markets, Japan's Nikkei plunged by 3.84%. Hong Kong's Hang Seng plummeted by 2.24%. China's Shanghai Composite Index dropped by 1.28%.
 
The massive implosion in the Chinese markets which has by some estimates eroded 40%-45% of the entire stock value coupled with yuan devaluation and lower factory output has spooked the world markets. 
 
Other factors which subdued the markets were below-expected first quarter (Q1) gross domestic product (GDP), eight core industries (ECI) and purchasing manager’s index (PMI) figures. All these macro data points were below market's estimates.
 
The Q1 GDP came in at 7%, showing signs of slowing vis-a-vis the 7.5% expansion in the quarter before. But the growth was much higher than 6.7% registered in the first quarter of the last fiscal.
 
The ECI for select factory output slowed to 1.1% growth in July from an increase of 3% in the previous month, mainly due to a fall in steel production and marginal growth in coal. The select factory output index rose by 4.1% in July 2014.
 
The Nikkei India Manufacturing PMI (Purchasing Manufacturer’s Index) for the last month stood at 52.3. This is marginally down from July's 52.7. An index reading of above 50 indicates an overall increase in the manufacturing sector, below 50 an overall decrease.
 
Sector-wise, all 12 sub-indices of the BSE ended the day's trade in the red. The S&P BSE banking, automobile, capital goods, consumer durables and healthcare indices came under intense selling pressure.
 
The S&P BSE banking index plunged by 713.55 points, the automobile index receded by 472.84 points, the capital goods index contracted by 442.05 points, the consumer durables index declined by 272.67 points and healthcare index decreased by 263.78 points.
 
Major Sensex gainers during Tuesday's trade were: Sun Pharma, up 0.34% at Rs.900.75.
 
The major Sensex losers were: Axis Bank, down 5.24% at Rs.480.15; Hindalco Industries, down 5.18% at Rs.75.90; Tata Steel, down 3.93% at Rs.216.20; BHEL, down 3.91% at Rs.217.65; and Vedanta, down 3.80% at Rs.94.85.
 
The top gainers and top losers in the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given below:
 
 
Among European indices, the DAX was at 9,964.45, down 2.88%, and the FTSE 100 was at 9,964.45 2, down 3.08%

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RBI releases draft guidelines on interest rate methodology
The Reserve Bank has brought out draft guidelines for banks adopting marginal cost of funds methodology while calculating base rates, which it thinks are more sensitive to changes in policy rates
 
The Reserve Bank of India (RBI) on Tuesday, released draft guidelines on base rates for helping transmission of monetary policy rates to banks’ lending rates. The revised methodology in the draft guidelines consist components of base rate, spread, and actual lending rates on the loans determined by adding the components of spread to the base rate in all cases.
 
"It is expected that the guidelines would be helpful in the medium term goal of banks pricing their floating rate loans linked to an external benchmark. The components of base rate will include cost of funds, negative carry on cash reserve ratio (CRR)/statutory liquidity ratio (SLR), un-allocable overhead costs and average return on networth," RBI said in a release.
 
At present, banks are following different methodologies in computing their base rate – on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities). Base rates based on marginal cost of funds should be more sensitive to changes in the policy rates. In order to improve the efficiency of monetary policy transmission, the Reserve Bank said it will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their base rate. 
 
Earlier in its first bi-monthly policy, the central bank had said that for monetary transmission to occur, lending rates have to be sensitive to the policy rate.
 
Based on supervisory findings and discussions with banks, the RBI has reviews its extant guidelines on computation of base rate as well as the methodology for determining lending rates. The banks will now be required to compute their base rare on revised methodology. 
 
a) Components of Base Rate
The components of base rate will include cost of funds, negative carry on CRR/SLR, un-allocable overhead costs and average return on networth which will be calculated as under:
 
(i) Cost of Funds
 
The marginal cost of funds should be used for computing the cost of funds. The marginal cost should be arrived at by taking into consideration all sources of fund other than equity. Cost of deposits should be calculated using the latest interest rate/card rate payable on current and savings deposits and the term deposits of various maturities. Cost of borrowings should be arrived at using the average rates at which funds were raised in the last one month preceding the date of review. Each of these rates should be weighted by the proportionate balance outstanding on the date of review.
 
ii) Negative carry on CRR and SLR
 
Negative carry on the mandatory CRR arises because the return on CRR balances is nil. Negative carry on SLR balances may arise if the actual return thereon is less than the cost of funds.
 
(iii) Unallocable overhead cost
 
The unallocable overhead costs should comprise solely of costs incurred for the bank as a whole and, hence, not allocable to any particular business activity/unit. These components would be fixed for 3 years, subject to review thereafter. 
 
(iv) Average Return on networth
 
Average return on net worth is the hurdle rate of return on equity determined by the Board or management of the bank. It is expected that the component representing ‘return on networth’ will remain fairly constant and any change would be made only in case of a major shift in the business strategy of the bank.
 
(b) Spread
RBI said, as per its circular issued on 19 January 2015, banks should delineate the components of spread with the approval of their Boards. For the sake of uniformity in these components, broad components of spread finalised by Indian Banks' Association (IBA) should be adopted by all banks.
 
(c) Interest Rates on Loans
The actual lending rates on the loans will be determined by adding the components of spread to the base rate in all cases, the central bank said.
 
(d) Time frame for implementation
RBI says the proposed effective date of these guidelines would be 1 April 2016. Banks should submit a road map clearly indicating the time frame for adopting the above to the Department of Banking Supervision within two months from the date of the final circular, RBI said.
 
Comments or feedback can be e-mailed or sent by post to the Chief General Manager, Directives Division, Department of Banking Regulation, Reserve Bank of India, Central Office, 13th Floor, Shahid Bhagat Singh Marg, Mumbai- 400 001 on or before 15 September 2015, the central bank said.
 

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COMMENTS

MG Warrier

1 year ago

It is time banks started taking note of realities concerning interest rates. There is a limit up to which the demand for 'rate cuts' by RBI can cover up the real culprit in the prvailing high interest rates on loans and relatively low deposit rates. The present draft guidelines released by RBI should be an eye opener for big banks and even IBA. The need for high margins is a function of high NPAs, inefficient fund management, sagging employee morale which affects incremental business(both deposit mobilisation and credit expansion). A regulatory or supervisory organisation will not be in a position to 'apply mind' for the institutions it regulates or supervises. It is in banks' interest not to allow things to go back to olden days when interest rates were regulated.

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