While there is much political criticism of black money stashed abroad, many Indians are now waking up to the possibilities of bringing back money saved abroad without violating the Indian laws
Every political party, in particular, the Bharatiya Janata Party (BJP) is criticising the government of allowing black money to be stashed abroad. But there is more to this practice of Indians saving or investing money abroad over the years. There is much stress in the economies and markets in foreign countries, and assets acquired abroad in earlier years by Indians are sometimes depressed now. Many Indians are eager to bring the money back to India, if the government would permit it within the existing laws in India. These issues were discussed in a session by international investment and taxation expert Anil Harish at a Moneylife Foundation seminar on Tuesday, 13 December 2011.
Simultaneously, the Indian government is also trying to get a fix on overseas assets of Indians and exploring the possibility of bringing them under the tax net. Recently, an employee of the foreign bank HSBC gave a list of 700 names of Indians with their overseas bank account particulars to the French government. This was forwarded to the Indian government. The list was taken up for investigation by the Income Tax department. It was found that money stashed abroad could be in trusts, companies under trusts, personal accounts of individuals and numbered accounts of individuals in foreign banks. The I-T department went in for search and seizure operations in some cases of resident Indians and also sent notices to the account holders in the case of non-resident Indians. This is causing tension to Indians, who suddenly have to answer questions on assets abroad.
One example that Mr Harish narrated is of a non-resident Indian, who was questioned by the I-T department. He agreed that he had overseas accounts in London, America and Geneva. The officer wanted to know more about the HSBC account in Geneva. The non-resident admitted that he had $2.5 million in that account and the officer politely corrected him that there was $2.4 million in the account. Clearly, the officer already had the information from the French government through the HSBC employee.
Indians with foreign accounts are being questioned on whether the money emanated from India and whether the income was accrued in Indian transactions or operations. The government is questioning them whether the old remittances are legal and whether there is any tax liability which has been avoided. If found out, these accounts would also come under the Indian government’s tax net.
The Indian government has already given an undertaking to the Supreme Court that there would be no more amnesty schemes to bring back black money saved abroad. With foreign economies already in difficulty, Indians are looking for creative ways to bring back such money back into India legally.
Mr Harish came up with the illustration of a client with money saved abroad, who wanted to bring it back to India. He had litigation with a relative and he was eager to comply with the tax laws and bring the money back. It related to a remittance of $1 million made in the year 1999. By the year 2004-05 it had increased with interest to $1.2 million and by now to $1.5 million. To do so, his approach was to pay income tax in India for the $300,000 of interest income from 2004-05 to now, and if required pay the penalty for late payment, and to bring back the $1.5 million. The I-T department usually limits its investigations to seven years of returns filed by the individual.
Giving an international flavour, Mr Harish referred to the USA, where there is a Voluntary Disclosure Scheme for overseas accounts. Even if there is no tax liability, there is need to disclose the existence of the accounts and to give balances over a period of time. Not complying with the law could lead to the payment of penalty of 25% of peak balances in such accounts from the year 2003.
Thus, there is much excitement and activity in India and abroad, to both investigate money saved abroad, and to bring it back to India, by complying with the laws of the country.
While WPI inflation moderated in November, core inflation as measured by non-food manufactured WPI inflation is still above the RBI's comfort level. This may make the central bank to take a pause after increasing repo, reverse repo and CRR rates 13 times since March 2010
The Reserve Bank of India (RBI) is most likely to keep policy rates unchanged at its meeting on 16th December, say economists. They feel that while wholesale price index (WPI) inflation has moderated in November, core inflation as measured by non-food manufactured WPI inflation, is still above the RBI’s comfort level and this may make the central bank to take a pause and keep repo, reverse repo and CRR rates unchanged.
“Given the balance between inflation and growth, we expect the RBI to hold the policy interest rate steady over the remaining months of the current fiscal. We think cuts in the repo rate could begin in mid-2012. We assign only a small probability to an easing in the repo rate before second quarter of 2012, unless there is a major deterioration in global economic and financial market conditions,” said Barclays Capital in a note.
In October, the RBI, for 13th time since March 2010, increased repo (the rate at which the RBI lends money to banks) and reverse repo (the rate at which the RBI borrows from banks) rates by 25 basis points (bps) each to 8.5% and 7.5%, respectively to control inflation. The series of rate hikes has cumulatively increased interest rates by 525 bps in the last 20 months.
Expressing similar views, Goldman Sachs, in a research report, said, “While we continue to believe that sequentially falling inflation and much weaker growth will prompt the RBI ease monetary policy, our expectation of the sequence of easing remains first injecting liquidity through open market operations (OMOs), which the RBI has been doing, then cut the reserve requirement ratio of banks in January, followed by repo rate cuts in March 2012. As such, we assign only a 30% probability to a cash reserve ratio cut on 16th December. We continue to expect the RBI to cut policy rates by an above-consensus 150 bps in 2012.”
WPI inflation moderated to 9.11% year-on-year (y-o-y) in November from 9.73% in October, slightly higher than market expectations due to sharp deceleration in food inflation and stable manufacturing inflation. However, non-food manufactured inflation (which the RBI refers as core inflation) increased in November to 7.9% from 7.6% in October due to an increase in the prices of metals (1.5% month-on-month or m-o-m), chemicals (0.4% m-o-m) and non-metal minerals (0.9% m-o-m).
For the week that ended on 3rd December, food inflation fell to a nearly four-year low at 4.35% reflecting a decline in prices of essential items like vegetables, onions, potatoes and wheat. Food inflation, as measured by the WPI, stood at 6.6% in the previous week. It was recorded at 10.78% in the corresponding period last year. This is the lowest rate of food inflation since the week ended 23 February 2008, when it stood at 4.28%.
A big headache for Indian policymakers at the moment is the unrelenting slide in the rupee. With the dollar in great demand and macro-economic fundamentals weak, the pressure is likely to continue on the Indian currency. Continued weakness in the currency is pushing up the cost of imports like edible oil, fuels and metals. For example, while the global crude oil prices rose by nearly 20% in November 2011 compared to a year earlier, the rupee price of oil shot up by around 40% due to currency depreciation.
Although India is a relatively closed economy, the rupee is a pro-cyclical currency and cyclical challenges are likely to outweigh seasonal positives into first quarter of 2012. Analysts expect the rupee to weaken further due to growth concerns and capital outflows. “We expect little near-term relief for the trade deficit, as exports slow and the reduction in the import bill is limited by oil imports and investors’ huge appetite for gold. As such, we do not expect rupee strength to resume until economic expectations bottom out, spurring portfolio flows back into Indian markets,” said Standard Chartered Research in a note.
Recently, there has been much debate about whether the RBI should cut the cash reserve ratio (CRR). “The still-elevated November inflation rate will offset market pricing of immediate CRR cuts by the RBI, despite the lower lower-than-expected industrial production numbers, as well as tight liquidity conditions. We continue to expect the RBI to inject liquidity via OMOs and not via CRR cuts over the near term—until March 2012 under our base case—as CRR cuts would likely stoke inflation expectations, which are just beginning to fall,” added Barclays Capital.
The liquidity deficit in the banking system of Rs880 billion, well above the RBI’s comfort level of Rs600 billion has increased expectations of a CRR cut from its current level of 6%. According to Standard Chartered, the RBI will be in no hurry to signal a change in stance this week. “Following recent comments from the RBI that the CRR is also considered a monetary policy tool, a cut in the CRR appears unlikely. In terms of supporting banking-system liquidity, we expect the RBI to continue with its OMO. Any rate cuts will thus have to wait until second quarter of 2012 when WPI inflation cools to 6.5% to 7%,” Standard Chartered said in a report.
The government and the RBI have accepted that high interest rates may hurt the country’s growth prospects, but the apex bank has underlined that bringing inflation under control is its major agenda.
The fall in food inflation comes as a silver lining for the government at a time when the economy is experiencing a slowdown, with GDP growth dipping to 6.9% in the second quarter, the lowest rate of expansion in over two years. Industrial production has also witnessed a contraction, with output shrinking by 5.1% in October. Headline inflation, which also factors in manufactured items, has been above the 9% mark since December 2010.
The RBI has hiked interest rates 13 times since March 2010 to tame demand and curb inflation. In its second quarterly review of the monetary policy in October, the central bank had said it expects inflation to remain elevated till December on account of the demand-supply mismatch before moderating to 7% by March next year.
Nagesh Kini, who was auditor of general insurance companies, believes that the Insurance Ombudsman is a great option due to low cost, simple procedures and speedy redressal, even though it may take longer than mandated
Nagesh Kini has been an auditor of general insurance companies and General Insurance Corp. He is now an activist on consumer, finance, civic and environment issues. He believes that the Insurance Ombudsman is a great option due to low cost, simple procedures and speedy redressal, even though it may take longer than mandated. Excerpts:
Moneylife (ML): We have an Ombudsman office that forms a part of the Alternative Dispute redressal (ADR) mechanism for the insurance sector, but what are the pre-requisites before approaching the Ombudsman?
Nagesh Kini (NK): All insurance companies have an in-house redressal mechanism to resolve disputes. This should ideally be the first step to resolve the issues. It is advisable to file an application first to the insurance company’s grievance cell. Though this is not a hard and fast rule. When the Ombudsman is approached directly before approaching the in-house grievance cell of the company, it may ask the policyholder to address the matter first to the redressal cell of the insurer. Other pre-requisite is that the policyholder needs to file a declaration with the Ombudsman stating that he had not filed or would withdraw any application filed before other forum or court.
ML: In what ways the Ombudsman’s office is beneficial to a policy holder? What would encourage one to approach the Ombudsman?
NK: There are several benefits to approach the Ombudsman such as…
a. There is a speedy redressal.
b. It is cost efficient, because there is no need to appoint a lawyer, no court fees etc.
c. It is less adversial because the procedure is very simple. A simple application is to be filled up which is sent to the insurer for its response. On receipt the Ombudsman can call both for a personal hearing before delivering his verdict.
ML: Is the Rs20 Lakh pecuniary jurisdiction of the Ombudsman sufficient in the present time?
NK: Keeping the inflation in mind, the pecuniary jurisdiction of the Ombudsman needs to be enhanced. Mediclaim policies that fall under the ‘personal claims’ may often exceed Rs20 lakh. Medical expenses in the operations like Cardiac and cancer have gone up substantially.
ML: Can a group insurance policy holder approach the Ombudsman’s office?
NK: Yes, though the group insurance is discounted premium as a group of people or employees are covered under the same policy, claims can be filed by an individual.
ML: Well… on paper an Ombudsman has to clear a matter/case within 90 days from the date of filing, does it reflect in practice?
NK: It seldom happens because of operational constraints like manpower, money, budget and stationery. It is not always possible for the Ombudsman to deliver his verdict within 90 days. Generally it takes more time to clear an application. In many cases, it can take six to nine months. Also there may be procedural delay like when either of the parties do not appear at hearing or delayed response from insurers or when relevant documents are not filed.
ML: Ombudsman’s jurisdiction is also limited to claims related to ‘personal lines’ aspect. But where would a policy holder go who has taken fire insurance for his business.
NK: A dividing line needs to be cleared upon this point. This is because take for e.g. a car, which is in the name of the company, but is used for personal purpose by the company official. Where would he go to claim the insurance, the Ombudsman or the Civil Court, assuming that the claim is within the pecuniary jurisdiction of the Ombudsman?
ML: What is the scope for appealing on the Ombudsman’s order?
NK: The Ombudsman’s order is binding on the insurer. The verdict is not binding on the policy holder, who can appeal the order in the Civil or the Consumer Court.
ML: Is the Ombudsman better than Consumer forum or Civil Court?
NK: Yes. Appealing to the Consumer forum or Civil Court defeats the purpose of the Ombudsman because the Ombudsman was established to save on time and cost. By going back to the Consumer forum and Civil Courts the policy holder will have to repeat all the legal formalities, like appointing lawyers.
ML: How can the appeal aspect of the Ombudsman order be made efficient than what we have discussed above?
NK: I think there should be a separate, higher mechanism at state or at the central level as an appellate body. This would obviate the need of going back to the Consumer forum or the Civil Courts.
ML: Should the pending Insurance cases in the Civil and Consumer Courts be transferred to a ‘New Insurance Judicial’ body in order to streamline the insurance cases?
NK: No. Rather the cases should be transferred to the Ombudsman because setting up a new body in the government is a big hassle. By doing so, the urge to improve the existing ombudsman office would be realized. What is advisable is to make the existing mechanism more efficient than to set up newer bodies.
ML: What would be your overall suggestions to make the present ADR mechanism of the insurance sector more efficient?
NK: Increase the pecuniary jurisdiction of the Ombudsman to at least Rs50 lakh. Improve operational constraints like manpower, office space, infrastructure and computers. On the appeal aspect, the civil and the consumer courts should be replaced by Insurance Appellate Tribunal.