RBI hails fiscal measures, but evasive on rate cuts

RBI deputy governor Subir Gokarn said the focus on increasing revenue through higher indirect tax mop up and the move to cap subsidies under 2% of the gross domestic product (GDP), are a very reliable way to contain chances of fiscal slippages

Mumbai: The Reserve Bank of India (RBI) on Friday welcomed the Budget proposal to bring down fiscal deficit to 5.1% saying the strategy of increasing indirect taxes and capping subsidies are reliable measures to control deficit, reports PTI.

It, however, said this will not have any immediate bearing on the central bank’s monetary policy stance.

“Budget proposals are an important consideration, and positive development, but the monetary stance is not going to be influenced by only one factor”, deputy governor Subir Gokarn said.

He said the focus on increasing revenue through higher indirect tax mop up and the move to cap subsidies under 2% of the gross domestic product (GDP), are a very reliable way to contain chances of fiscal slippages.

“It (fiscal deficit target) is a reasonable reduction in the deficit which is what we wanted to see from our standpoint. Also the fact that it is coming from the revenue side which is more controllable in terms of realisations, which also suggests that the risk of slippages are that much low,” Mr Gokarn told reporters at the RBI headquarters here.

He also welcomed finance minister Pranab Mukherjee’s move to cap subsidies under 2% of GDP next fiscal, saying it will give a fillip to the process of fiscal consolidation.

Mr Gokarn, who handles monetary policy at the Mint Road, said exceeding this cap will result in fertiliser, diesel and food prices going up. The monetary policy will take into account the inflationary pressures which would come out through such increases, he added.

Mr Gokarn listed the movement of crude prices along with GDP data and other factors like monsoon to be a key determinant of the way the monetary policy will move.

He also said pegging GDP growth at 7.6% for the next fiscal and average inflation at 6.4% are also not ‘unrealistic’.

In his Budget speech, Mr Mukherjee pegged FY12-13 fiscal deficit at 5.1% of GDP, lower than the revised figure of 5.9% for FY11-12. He also said the government will have to borrow a net of Rs4.79 lakh crore to bridge this gap.

Deputy governor HR Khan who was also present at the review, admitted the government borrowing programme is a ‘challenge’ and said RBI will meet the finance ministry officials before 31st March 31 to draw up the borrowing calendar for the next fiscal.

Mr Khan further said other announcements like opening the corporate bond market to qualified investors and relaxations on the external commercial borrowings front for aviation and power sectors will reduce pressure on the external sector.

On the tight liquidity in the system, Mr Gokarn said it would ease from the first week of April onwards.

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Decision on railway minister unlikely before Monday

A meeting of the Congress Core Group was held on Friday, ahead of the discussion on the Railway budget in Parliament next week, amid speculation as to who will reply to the discussion as railway minister Dinesh Trivedi’s fate hung in balance

New Delhi: A decision on the fate of Railway Minister Dinesh Trivedi is unlikely before Monday, reports PTI.

An indication to this effect came last night after the Congress top brass including prime minister Manmohan Singh and party chief Sonia Gandhi deliberated deeply on the strategy ahead in the backdrop of the Trivedi issue and the Uttarakhand crisis.

The meeting of the Congress Core Group was held ahead of the discussion on the Railway budget in Parliament next week amid speculation as to who will reply to the discussion as railway minister Dinesh Trivedi’s fate hung in balance.

Consultations by the Congress leadership were held amid signals that the government was in no hurry about the exit of the railway minister, projecting it as the internal matter of the ally Trinamool Congress.

Congress high command feels that there appears to have been a re-thinking over the Trivedi issue inside the TMC giving the ruling party much needed time, sources said.

TMC chief Mamata Banerjee has written to the prime minister seeking Trivedi’s replacement.

The TMC has emerged as the most troublesome ally of the Congress at the Centre at a time when its options have been limited by the outcome in the assembly polls in five states.

Party source said the Core Group also discussed the situation in Uttarakhand, where the four-day old Congress government is facing a severe crisis.

Embattled chief minister Vijay Bahuguna Friday rushed to Delhi and had a meeting with Ms Gandhi, a day after 17 Congress MLAs, mostly loyalists of Union minister Harish Rawat, refused to take oath in the state assembly to register their protest against choice of Mr Bahuguna for the top post.

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Economy & Nation Exclusive
No service tax on financial leasing services

The Union Budget 2012 has introduced universal service tax. All services other than those that are negative-listed are liable to service tax. However, as the transfer of right to use is completely taken out from the purview of service tax, operating lease and financial lease are completely out of service tax

The Union Budget 2012 has introduced universal service tax-that is, all services other than those that are negative-listed are liable to service tax. The negative list is a narrow band of 17 services. The markets in general and the consumers have reacted adversely to this. The reaction is natural-as service tax is an indirect levy and affects cost of goods and services across the board. Given the list of 17 services, there is apparently no exemption for banking and financial services, and consequently all banking services, other than merely interest have come for service tax.

However, an interesting point that emerges is-what about leasing contracts? It is a matter of common knowledge that the option to lease capital goods, instead of taking a loan, was quite popular in the early 1990s in India when introduction of sales tax, and later on, introduction of service tax, made that business very complicated. Recently the Supreme Court in the case of Association of Leasing and Financial Services upheld the levy of both service tax and sales tax on certain lease transactions. It should be noted that "transfer of right to use goods" is included in the definition of "sale" under sales-tax/ VAT laws. Financial leasing was also covered by the definition of "banking and financial services" under service tax.

With the introduction of universal service tax, a question that comes is-what will be the position of operating leases and financial leases for service tax purposes?

Universal definition of "services"
The service tax law as proposed in the Budget has introduced a universal definition of "service". The proposed section 65B (44) of the Finance Bill defines "service" to mean any activity carried out by a person for another for consideration, includes a "declared service", but excluding  a transfer of title in goods or immovable property, transaction in money or actionable claims, and services by an employee to an employer. All other services are included within the framework of services, unless they are covered by the negative list given in Section 66D.

The concept of "declared services" is perhaps clarificatory and assertive-to state the legislative intention that these services will, without getting into whether there is an element of service involved in such activities or not, be necessarily included in the definition of "services". Therefore, all declared services are services.

Transfer of right to use goods:
The finance minister has repeatedly stated that the introduction of universal service tax is to pave the way for a comprehensive GST. Under a comprehensive GST, it cannot be that the same activity is liable to tax under two separate heads. Therefore, the overlaps between sales tax/VAT and service tax, which exist currently, get eliminated under GST.

In light of the fact the "transfer of right to use" is defined as "sale" under sales tax/VAT laws, there is a good reason to say that a transaction involving transfer of right to use goods should not come under service-tax law.

Now, in light of this, let us have a look at the list of "declared services" under Section 66E. Item (f) provides for the following: (f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods (emphasis supplied).  The first few expressions-hiring, leasing, licensing, etc-are intended to cover transactions of leases. But then the excluding expression-"without a transfer of right to use goods" would mean, wherever there is a transfer of right to use goods, the transaction will not be a declared service, and therefore, not a service. The idea of "declared services" is to explicitly include certain services and that explicit inclusion clause explicitly excludes a case where there is a transfer of right to use goods, the exclusion should be given effect to.

A question that may come up is-if the idea is to exclude transfer of right to use goods, then why would the law include leasing, hiring, etc. After all, what is leasing other than the transfer of right to use goods. In fact, the present service tax law also has a clause-65 (105) (zzzj) which covers supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliance. This clause flows from the ruling of the Supreme Court in Bharat Sanchar Nigam  and  other rulings which distinguished between "transfer of right to use" and "provision of right to use", such that in transactions where control is not handed over, the transaction will not amount to a transfer of right to use.

There is a good justification in the proposed amendments intending to exempt "transfer of right to use goods"-as discussed earlier. Transfer of right to use goods is chargeable to sales-tax/VAT, and hence, it is logical that service tax should not override on the domain occupied by sales tax.

Consequence on financial and operating leases:
In our view, as the transfer of right to use is completely taken out from the purview of service tax, we are of the view that operating lease and financial lease are completely out of service tax.

We are of the view that this is clearly a booster for the leasing industry, which is seemingly reviving. VAT continues to apply, but VAT is offsettable.

Good days are back for the leasing industry!

(Vinod Kothari is internationally recognised as an author, trainer and expert on specialised areas in finance, including securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments, microfinance, etc.)

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