Govt may not raise taxes, streamline international taxation in upcoming budget

New Delhi: The government is likely to plug loopholes in international taxation to swell its kitty, since it does not have too many options to raise taxes in the upcoming budget due to proposed rates in new direct and indirect tax regimes and high inflation, reports PTI.

Rising inflation is not only hitting the common man, but will also make the task of the government to increase its tax-GDP ratio difficult, sources said.

Facing this difficult task, the government may try to strengthen its international taxation rules like Mutual Agreement Procedures (MAP), transfer pricing, revision in double taxation avoidance agreements to make its exchequer richer in 2011-12.

This will also be done because the government is also not expected to get windfall from non-tax revenue next fiscal, as it received this fiscal from the sale of spectrum for high speed mobile and broadband services. The Centre received Rs75,000 crore more than the budget estimates on this count.

With a target to bring down fiscal deficit to 4.8% of the gross domestic product (GDP) during 2011-12 from the estimated 5.5% this fiscal, the government has to see for more revenues or cut its expenditure.

On revenue front, the hands of the government are tied since it has already proposed new tax slabs in the Direct Taxes Code (DTC) bill, currently with the standing committee of Parliament.

In the DTC bill, introduced by Union finance minister Pranab Mukherjee last year, the government seeks to widen tax slabs to levy 10% rate on income between Rs2 lakh and Rs5 lakh, 20% on Rs5-Rs10 lakh and 30% above Rs10 lakh.

Currently, income between Rs1.6-Rs5 lakh attracts 10% tax; Rs5-Rs8 lakh 20% and beyond Rs8 lakh 30%.

The government is likely to retain these rates and wait for DTC Act to come into force from 1 April 2012. However, it may tinker with threshold limit, sources said.

Since it is also in talks with states to bring Goods and Services Tax (GST) from the same date, the government might also not change indirect tax rates.

The Centre has proposed higher 10% tax on goods (each from the Union and state governments’ side) and lower 6% tax. Besides, it suggested that services should attract 8% rate by the Centre and states each. All these rates are suggested to move to 10% over a three-year period.

Though not much breakthrough is happening on negotiations with states on GST, the government is likely to keep indirect taxes unchanged to give a signal about its commitment to the new indirect tax regime, sources said.

However, it should be noted here that GST would not replace customs duty. Here also the government is likely to refrain from raising the rate because of high inflation.

In fact, most food items already have nil customs duty, the source said. The government has recently removed 5% customs duty and 4% countervailing duty on onions after its retail prices skyrocketed to Rs75-Rs80 across the country. Since then, prices have eased a bit.

High inflation is also likely to send the government plans to increase its tax-GDP ratio into a tailspin.

This is because the tax-GDP ratio is calculated on nominal size of the economy. It means that if the economy grows by say 9% and inflation by 10%, the nominal GDP would be 19%, making it difficult to raise the tax-GDP ratio.

The sources said rising GDP would not yield so much on taxes front to raise tax-GDP, if inflation continues to be at high levels.

The tax-GDP ratio had risen to over 11% during 2007-08 from 8.2% in 2001-02, but has since then declined to about 10% last fiscal.

As such, the government will try to settle more cases under MAP, seek consultations from those who have specific knowledge of transfer pricing and revise double taxation avoidance agreement with countries to seek details of money evasion, the sources said.

MAP refers to a dispute settlement mechanism of MNCs having offices in India.

The sources said more than Rs7,000 crore was received under MAP in the last one year, and this amount may increase manifold in the coming years.

Recently, India and the United States signed a memorandum of understanding for resolving cases under MAP.

The resolution of disputes under MAP basically relates to transfer pricing rules. Transfer pricing rules refers to calculation of taxes of MNCs in different countries.

The sources also said India is currently renegotiating 65 double taxation avoidance agreements out of total 79 to revise secrecy clause, so that tax evasion could be checked.

DTC also has proposals like controlled foreign corporates and general anti-avoidance rule (GAAR) to plug in loopholes in international taxation.


Weekly Market Report: Further decline?

Large investors seem to have come back from the holidays in a mood to sell. The Sensex has lost 869 points in four days and may go down further by 1,000 points

Although the year and the week began with the opening gap of 112 points on the Sensex, suggesting that the market will continue with the rally that began on 10th December 2010, 3rd January was the only day in this week when the market ended positive. It seems that the large investors came back from the holidays in a mood to sell. So, while on Monday the market was up, the next four days saw relentless selling pressure. Beginning 4th January 2011 till today, the Sensex has lost 869 points, the bears finishing off in style with a 493-point loss on Friday, the last day of the week.

The big selling is coming from foreign institutional investors. They broke the trend of continuous buying between 24th December 2010 and 4th January 2011 (net inflow Rs4,694.25 crore) by turning massive sellers for the next three days. Throughout this period, from 24th December till 6th January, domestic institutions were net sellers on each day, (net outflow Rs2,871 crore).

Today, the Sensex fell 493 points, to a 16-day low of 19,691.81 (the Nifty fell 143.65 points), easily breaking multiple supports along the way. The next support is at 19,500 (Nifty 5,850), but it is unlikely that this would hold. The last time when the market went down, the Sensex lost 2,000 points. We have lost 1,000 points so far and more losses are in store.

On the first day of the week, the Indian market opened with smart gains, touching the day's high in initial trade. However, range-bound trade amid bouts of profit booking at higher levels resulted in a tepid close in the green. The market opened in the green on Tuesday, tracking the Asian markets. The Sensex and the Nifty touched their intra-day highs in early trade, but soon slipped below the neutral line, as investors resorted to profit booking.

The absence of any major triggers and a sell-off by institutional investors resulted in the key indices falling on Wednesday. Profit-taking, along with a steep rise in the weekly food inflation numbers, kept the indices range-bound and they closed lower for a third day on Thursday.

Today, the indices slid below their crucial levels in late morning trade. Analysts attributed the trend to concerns over the sharp rise in food inflation. There was no respite and the market continued its southward journey and ended the session with a deep cut.

Overall, the market tumbled 4% during the week, with the Sensex losing 817.28 points and the Nifty declining by 229.90 points.

Tata Motors (up 2%) and Reliance Industries (up 1%) were the only gainers on the Sensex during the week. Bajaj Auto (down 15%), Tata Motors (down 9%) and ICICI Bank (down 8%) were the major decliners.

All sectoral indices ended in the red with the BSE Auto, BSE Realty (down 7% each) and BSE Bankex (down 6%) ending as the top losers.

The seasonally adjusted HSBC Purchasing Managers' Index (PMI)-a headline index designed to measure the overall health of the manufacturing sector-stood at 56.7 in December, slightly lower than the November reading of 58.4. The latest number pointed to a marked improvement in business conditions in the manufacturing sector. While the rate of growth slowed, it remained above the long-run series average.

December data signalled a marked rise in new business received by manufacturers in India. However, the latest expansion in new order volumes was slightly weaker than in the previous survey period. Growth of new business received from overseas markets also eased marginally at the end of 2010, but remained strong and comfortably above the historical trend.

India's exports in November rose by 26.5% to $18.8 billion compared to $14.9 billion in the corresponding month a year ago, and the government is confident that outbound shipments will touch $215 billion this fiscal. Imports grew by 11.2% in November to $27.7 billion, while the trade imbalance for the month was $8.9 billion.

During the April-November 2010 period, outbound shipments were worth $140.2 billion compared to $110.6 billion in the previous corresponding period, while imports stood at $221.9 billion in the period, against $179 billion in the corresponding period in the year before. The trade deficit stood at $81.6 billion during April-November this fiscal.

India's service sector growth declined in December from a four-month high in the previous month, according to the HSBC Markit Business Activity Index, based on a survey of nearly 400 companies. The index fell to 57.7 in December from 60.1 in November, its strongest reading since July 2010. The December reading marked the 20th consecutive month that the key index of services in Asia's third-largest economy has been above the 50 mark.

Soaring vegetable prices led to a sharp rise in food inflation at 18.32% for the week ended 25th December, from 14.44% in the previous week. This has set off speculation that the Reserve Bank of India (RBI) could step in by tightening monetary policy to check further escalation of commodity costs. The number is close to the high of 19.90% a year ago.

On the global front, manufacturing purchase manufacturers' indexes (PMIs) for December indicated that the rate of expansion in the global manufacturing sector is accelerating. On the flip side, France, India, China, Greece and Australia reported weaker growth.

In the Eurozone, the manufacturing sectors in France and Germany continue to be robust, while Ireland, Italy and Spain surprised on the upside. The manufacturing sector in the UK accelerated to a very buoyant 58.3. The US manufacturing sector grew in December for the 17th straight month. The Institute for Supply Management's (ISM) purchasing managers' index rose to 57 from 56.6 in November, slightly below analysts' expectations.

In Asia, Japan's PMI improved slightly but the manufacturing sector remains in the grip of a recession. The acceleration in the tigers in Asia-China and India-has moderated somewhat, while growth in Taiwan is accelerating. Emerging Europe continues be robust.


GoM set up to look at ‘paid news’ issue

New Delhi: Taking cognizance of the issue of 'paid news', the government has constituted a Group of Ministers (GoM) to examine the matter in detail and suggest remedial measures, which could include imposing heavy penalties on media houses found indulging in such practices, reports PTI.

The GoM, which would be headed by finance minister Pranab Mukherjee, would suggest a comprehensive policy and institutional mechanisms to tackle paid news, sources said.

It would primarily be looking into the report on paid news prepared and submitted by the Press Council of India (PCI).

The other members of the GoM would be home minister P Chidambaram, law minister Veerappa Moily, urban development minister Jaipal Reddy, agriculture minister Sharad Pawar and human resource development Minister Kabil Sibal.

Giving more powers to the PCI and linking financial penalties to a certain percentage of annual turnover of media houses are some of the measures to be explored by the GoM, the sources said.

The phenomenon first came to light in the run-up to 2009 general elections when certain media houses are alleged to have indulged in this practice.

Since then, the matter has been vigorously debated by the Editors Guild and the Press Council of India.

A sub-committee of the Press Council, comprising Paranjoy Guha Thakurta and K Srinivas Reddy, had conducted the inquiry on the behalf of the PCI.

The report traced the emergence of paid news phenomenon over years and had concluded that in pursuing its quest for profits, certain media organisations had sacrificed good journalistic practices and ethical norms.


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