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Finance Ministry to look into applicability of 20% tax on ongoing share buybacks by listed cos

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The Finance Ministry on July 12 said that it will look into the applicability of 20 percent tax proposed in Budget 2019 on the going share buybacks by listed companies.

Finance Secretary Subhash Chandra Garg, speaking at a CII event, said the proposed tax on listed companies is aimed at discouraging share buybacks and encouraging investments.

Asked if the government would consider grandfathering those share buybacks which are already underway from the proposed levy, Garg said, "I am not in a position to say whether that (grandfathering) can work or not, but we will discuss it with the revenue department."

In her Budget speech, Finance Minister Nirmala Sitharaman proposed that listed companies shall be liable to pay additional tax at 20 per cent in case of buyback of share, as is the case currently for unlisted companies.

The move was aimed at discouraging the practice of avoiding Dividend Distribution Tax (DDT) through buyback of shares by listed companies. DDT is paid by companies who distribute their profits to their shareholders in the form of dividends.

Garg said that buyback is mainly undertaken by those companies which have cash but see no investment opportunities.

"Our preference would be they invest so that there is no need to do a buyback. In this economy, how the buyback is being done in digital economy space, there also an enormous opportunity (for investment) to exist ... Our objective was to close the arbitrage ... the intent is to encourage investment," he said.

Share buybacks offer a route for companies to return some wealth to their shareholders, while potentially boosting their stock prices. In a share buyback, a company will absorb or retire the repurchased shares, and rename them as treasury stock.

Buying back stock is also a route to make a business look more attractive to investors. By reducing the number of outstanding shares, a company's earnings per share ratio are automatically increased.

Budget 2019: OMCs may save Rs 500 crore a year on withdrawal of merchant discount rate

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Oil marketing companies will save Rs 400-500 crore annually every year with the proposed removal of merchant discount rate (MDR), two company executives said.

MDR is a card transaction fee paid by the merchant — in this case, the fuel company—and shared by banks which put up the swipe machine and issue the card, and payment networks like Visa and Mastercard.

MDR is not passed on to customers.

In her maiden Budget speech, Finance Minister Nirmala Sitharaman said that no MDR shall be imposed on merchants who allow their customers to make payments through low-cost digital payment modes.

“There are low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain debit cards, NEFT, and RTGS," she said.

The Finance Minister said the Reserve Bank of India (RBI) and banks will absorb these costs from the savings that will accrue to them on the account of handling less cash as people move to these digital modes of payment.

Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation, have been bearing MDR on behalf of their dealers for more than a year now.

“Withdrawal of MDR is a welcome move. This will result in a yearly savings of up to Rs 500 crore for the oil marketing companies," said a senior official from an OMC, one of the two people cited earlier on the condition of anonymity.

Surcharging and high MDR charges are two of the reasons impeding growth and sustenance of digital payments despite measures being taken to promote it, according to a study by the Indian Institute of Technology, Bombay, released in March.

Unauthorised surcharging has burdened the payment system users with huge additional costs, according to the study by Ashish Das, a professor of statistics.

It is estimated that the merchants were burdened with nearly Rs 10,000 crore towards credit card MDR fee in 2018 alone as against the overall cost of Rs 3,500 crore towards debit card MDR, even as in value terms, credit and debit card transactions are almost similar at Rs 5.7 lakh crore each in 2018. “We had been in discussions with the banks to reduce this financial burden, but to no avail. It’s a good move," said the second official mentioned above on the condition of anonymity.

Budget 2019: Here is what corporate India wants from the Finance Minister

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Our Finance Minister, Nirmala Sitharaman is all set to present her first Budget. Though she has the benefit of unhindered support from the legislation due to a stable government, coming to power with a clear and substantial majority, there are a lot of expectations from her.

She has to ensure that the Union Budget not only fulfils the electoral promises made by the ruling party but also ensure a revenue-neutral budget so that there are no substantial losses incurred by the exchequer; and the long term economic objective of the government can be met.

Therefore, in consideration of these current contexts, the Indian corporate sector, with which the present finance minister has engaged on several occasions to discuss budgetary provisions, has the following expectations:

  • Reduction in corporate tax rates:

India has one of the highest corporate tax rates, amongst competing economies, which clearly affects its score in the ‘Ease of Doing Business’ index. To address this issue, the erstwhile Government, in 2015, had proposed a reduction in corporate tax rates, along with the corresponding withdrawal of exemptions in the next four years.

Presently, the diminished tax rates are only applicable to a certain category of corporates which fulfil some specific criteria. Corporates expect that the government will implement a universal corporate tax rate of 25 percent.

They also expect the benefit to be extended to partnerships firms and Limited Liability Partnerships, as well thus allowing the benefits to flow into the Micro, Small and Medium Enterprises (MSME) sector.

  • Road map to Direct Tax Code:

The stipulated date for the task force to submit its draft report on the Direct Tax Code has been extended till July 31, 2019. Since this is close to the Budget day, it is expected that the government may clarify the possible direction of the code so that the nation and general populace gets a preview of what may be the direct tax structure of the country in the near future.

  • Angel Tax woes:

Start-ups have been a part of the political agenda since the erstwhile NDA-led government declared its flagship, Make in India programme.

Start-ups are seeking greater convenience of creating and doing business, which in turn allows them to focus more on innovation rather than compliance issues, thus fostering growth in the economy.

They expect single-window clearance to be available for compliance. Moreover, to boost employee retention and wealth creation of employees, they seek undemanding regulations on Employee Stock Option Schemes (ESOPs).

From a tax perspective, the present scenario with regard to the issuing of shares by closely held companies is fraught with unnecessary challenges.

If a closely held company issues its shares at a price more than its fair market value, then the amount received in excess of the fair market value is taxable as income from other sources, under section 56(2) (vii) (b) of the Income Tax Act (the Act).

To motivate and invigorate budding entrepreneurs, the government relaxed the interpretation attributed to the definition of start-ups and has made companies with sales of up to Rs 100 crore (previously, the exemption limit was Rs 25 crore) eligible for angel tax relief.

However, in this budget, the start-up community expects a complete exemption from tax under Section 56(2) (vii) (b) of the Act.

  • Transition to Ind-AS:

One of the major developments in the accounting arena recently has been the migration of companies from I-GAAP accounting standards to Ind-AS. This entails a major shift from the principles of traditional accounting with which Indian corporates are still in the process of reconciliation.

In addition, the Indian tax laws are geared to handle items of adjustments under I-GAAP. However, there are no clear principles of treatment of typical adjustments arising from Ind-AS.

A majority of the Ind-AS adjustments are fair value adjustments and it would be desirable to have specific treatments being prescribed in the Act to account for such adjustments, to ensure uniformity of taxation and reduction in potential litigation.

  • Thermal power sector:

The sector, which is the major contributor to India’s energy demands, faces gnawing concerns over the availability of fuel, the poor financial health of distribution companies and competition from the renewable energy sector.

The sector is expecting a re-institution of the deduction of an amount equal to 100 percent of the profits and gains derived from power generating business. The government may consider extending the sunset clause to provide relief to the power industries.

However, such expectations may be overly optimistic, considering the government’s clear intention to rationalise corporate tax rates and eliminate incentives gradually.

  • Anti-avoidance and anti-abuse measures:

India has been the tip of the spear, in the battle against tax avoidance, with Indian policymakers constantly augmenting the legal framework counter mechanisms used for tax avoidance and treaty abuse.

A recapitulation of the Budget proposals made in the last decade is a clear indication of this intention and showcases several important measures adopted by India in consonance with the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) Action Plans.

The key anti-avoidance measures include General Anti-Avoidance Rules (GAAR), Place of Effective Management (POEM), indirect transfer taxation. The prominent BEPS related measures include equalization levy, Country by Country Reporting (CbCR) for transfer pricing, and Significant Economic Presence (SEP) based concept. One may expect further such adoptions, in the upcoming Budget.

India, in an attempt to tackle the problem of taxing the digital economy (Under BEPS Action Plan 1), introduced the concept of SEP in the Union Budget 2018. This was a gratifying step as far as taxation of the digital economy was concerned. However, the implementation of SEP provisions, especially in its current form, may create some concerns.

Previously, the government had invited comments and suggestions from stakeholders on the revenue and user thresholds, for the application of SEP provisions, but the final clarification/notification from the government is still awaited.

As these provisions are likely to impact key global digital economy players, the international tax community is watching with interest. The government is expected to introduce the clarifications/rules in the upcoming Budget.

  • Issue of tax refunds:

Currently, there exists the practice of issuing a tax refund through cheques. This method should be completely substituted by direct online fund transfers. This change should be implemented on a war footing, as this would end many taxpayers’ grievances regarding refunds. This change in method will also reduce/eliminate manipulation and corrupt practices.

It remains to be seen if the government can meet all these expectations while ensuring sound economic growth.

Copy Denmark, and good jobs will follow

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There is a view that export-led growth will enable India to increase the supply of quality jobs and the country’s problem is not high unemployment, but low wages. This argument points to the experience of the Asian Tigers which have all been able to experience long periods of high growth, along with rapid growth in trade.

First, globally in recent years, the link between growth and jobs has become weak so that the current development experience is in part one of jobless growth. If the pace of creation of fresh jobs lags a respectable economic growth rate, then creation of enough jobs becomes the key concern. The quality of jobs created then takes second place.

The US economy has been experiencing an extended period of good growth and gradually falling unemployment levels to now historic lows. For long, both growth and falling unemployment had no impact on wage rates. It is only recently when all the slack in the job market has been reined in that wage rates have started to go up.

In the post-war period, first Japan, and then South Korea and Taiwan, began with poor levels of domestic demand as they slowly crept out of war-induced poverty. To grow fast, these economies had to perforce look beyond borders for demand and markets to address. Conversely, the large US economy grew nicely on the basis of ample domestic demand with foreign trade accounting for a rather small part of its GDP.

India, with a similar large domestic market, did not have to look outward for demand and growth momentum. Additionally, economic priorities were different during the years of planning and low growth. It is only after the policies of economic liberalisation came that India lowered trade barriers and adopted a supportive exchange rate policy. This caused exports to boom and the economy to grow fast.

Modi Sarkar 1.0 was marked by rising trade barriers, stagnant exports, high unemployment and, as it now turns out post-Arvind Subramanian’s calculations, very average rates of growth. Where do we go from here?

Additional jobs in India are created not by high tech large and medium industries, but right at the bottom of the economic structure by micro and small enterprises. At the grassroots, units employ maybe a handful of people, are unincorporated, and the proprietor’s family budget and that of the business are indistinguishable.

As ease of doing business at this level prevails and there are no shocks like demonetisation and GST, successful businesses will grow, slowly get incorporated and then started bringing their employees under provident fund, thus taking the first step in creating quality jobs. The recent rise in provident fund memberships, which was first wrongly interpreted as a sign of more jobs being created, has been in fact a sign of pick-up in the creation of formal jobs with stability returning at the bottom of the business pyramid after the twin shocks mentioned earlier had spent themselves out.

But there is still a long way to go. The current reality on the jobs front, as pointed out by Mahesh Vyas, is depressing. Over three-fourths (77 per cent) of employees have vulnerable jobs and the unemployment rate among the young (15-25 age group) is three times the overall unemployment rate. A recent rise in employment is seen as largely unregulated sectors adding jobs by accommodating footloose or low skilled workers.

What Modi Sarkar 2.0 must do is contained in the exhortation of Praveen Khandelwal, Secretary General of the Confederation of All India Traders, who said “there should be one licence instead of more than 28 licences for conducting businesses and their yearly renewal should be abolished as it causes great harassment and corruption”.

While such a step will create informal jobs, a World Bank-ILO study finds that policies to expand exports and improve workers’ skills can be very effective. It finds that increased exports will boost average wages, in particular for skilled, urban, experienced and male workers. To widely share the benefit of exports, it is necessary to particularly help women and the youth in raising their skills levels.

But simply raising the ease of doing business and lowering trade barriers will not be enough. Policy making will have to be far more proactive. In this, there is a global model to follow – Denmark. It has a unique combination of high mobility between jobs, low job security, and high rates of unemployment benefit which make up its unique “flexicurity” model. Plus, critically, there is a well-developed system of adult vocational training.

Thus, what India must work towards is the following combination -- labour market flexibility, limited period of unemployment dole and workers knowing they have a life ahead of periodic retraining to acquire new skills which can find them jobs in firms that have adopted new technology. Once this model slowly gets into place, exports will do well as will the availability of quality jobs.

Govt to phase out licensing requirement for businesses: Report

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The government is looking to phase out the licensing requirement of businesses in an attempt to reach the top 50 in the World Bank’s “ease of doing business” ranking, according to a report by Business Standard.

According to the report, the Department for the Promotion of Industry and Internal Trade (DPIIT) has given a draft Cabinet note on a policy proposed for inter-ministerial consultation.

It will assess whether the licensing should be scrapped or replaced by a registration process. If licenses cannot be scrapped in some cases, the renewal obligation can be done away with, the draft suggested.

or start-ups, the draft states that the compliance burden needs to be capped to an hour a month. "Ministries would need to come out with a plan on how they would reduce the compliance burden in terms of cost and time," an official with the knowledge said to the paper.

Other measures in the draft suggest reforms for self-certification and random checks. This will work in cases where first-time violators will receive advisory while repeated violators may be penalised.

With the unemployment rate at a 45-year high and economy in a slump, this move may boost the business sentiment and create employment. It is also expected to increase Foreign Direct Investment (FDI) which fell for the first time in six years by one percent to $44.4 billion.

The union cabinet is likely to deliberate on the policy in July.

Piyush Goyal takes stock of draft National Logistics Policy

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Minister of Commerce and Industry and Railways, Piyush Goyal, on June 27, reviewed the draft National Logistics Policy.

The minister proposed an action plan for the implementation of the policy prepared by the Department of Logistics, which comes under the Commerce Ministry.

"The draft policy has been prepared in consultation with the ministries of railways, road transport and highways, shipping, and civil aviation. Forty-six partnering government agencies (PGAs) inputs were analysed in detail for consideration in the policy," the commerce ministry said in a statement.

Goyal has asked these four ministries to work with each other to bring down India's logistics costs from the current 14 percent of the gross domestic product (GDP) to 9 percent.

"In the meeting, all aspects of logistics related to railways, civil aviation, shipping and inland waterways, road transport, ropeways warehousing and cold chain were discussed in detail," the release said.

The minister also directed line ministries to ensure that foodgrains, fruits and vegetables reach from farm to market with a minimum wastage of time.

He also said that a central scheme for cold chain across the country, especially for fruits, vegetables and perishables, may be made part of the action plan of the draft logistics policy so that it improves efficiency and reduces the loss of farmer's produce.

"During the review meeting issues relating to rail freight rationalization and freight policy for dedicated freight corridor, having immediate implications for modal shift, were discussed at length," the release said.

Goyal also directed that the logistics department must be a part of consultation process whenever any new road, railway, airport and shipping port project is being considered to ensure holistic planning.

India’s logistics sector is highly fragmented, and the aim is to reduce the logistics cost from the present 14 percent of the GDP to less than 10 percent by 2022.

As per the Economic Survey 2017-18, the Indian logistics sector provides livelihood to more than 22 million people, and improving the sector will facilitate a 10 percent decrease in indirect logistics cost, leading to a growth of 5 to 8 percent in exports.

Further, the survey estimated that the worth of Indian logistics market would be around $215 billion in next two years compared to about $160 billion currently.

"The commerce and industry ministry is formulating the logistics policy so that India’s trade competitiveness grows, more jobs are created, India’s performance in global rankings improves and paves the way for India to become a logistics hub," the release said.

Budget 2019: 'Tax-Free bonds, innovative PPP models needed to boost infra sector'

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With the NDA government being re-elected, expectations have been high for big economic reforms by the government in the upcoming Budget 2019. All eyes are on the government to take measures to stimulate the economy and focus on job creation.

Infrastructure is one of the sectors where several measures are expected from the budget to push investments and develop the infrastructure in the country.

Infrastructure today is one of the key drivers for the Indian economy and includes several sub-sectors like roads, railways, power and urban infrastructure to name a few.

As per reports, India needs investment to the tune of Rs 50 lakh crore in the infrastructure sector by 2022 to have sustainable development in the country.

To achieve this, large investments are expected towards key segments like roads, railways, waterways, etc. The investments are expected to come through budgetary support and through raising external resources.

One of the biggest deterrents of spending has been the lack of funding options. With stress in the banking system, funding towards the sector has been affected.

To reduce the dependence on budgetary allocation, raising funds through other means have become crucial. Asset monetization is one such funding avenue which the government is likely to significantly focus on.

The launch of the first Toll-Operate-Transfer model for roads has been very successful and similar model may be replicated in other sectors within the sector as well.

The government may also consider the reintroduction of tax-free bonds to raise funds that would be directly utilised to boost infrastructure investment.

Additionally, the introduction of an innovative PPP model like hybrid annuity or raising foreign capital through investment trusts are steps that can be taken to revive investments.

Investments in key infra segments:

As far as the road sector is concerned, the government in FY18 launched the Bharatmala program that would entail Rs 7 lakh crore of cumulative investment from FY18-22.

In the Interim Budget in February 2019, the government provided for ~Rs 1.5 lakh crore including internal and external budgetary resources (IEBR) for road sector in FY20.

We expect the allocation to be at similar levels in the budget, in line with the annual investments envisaged under the Bharatmala program.

In the interim budget, total allocation towards railways rose to Rs 1.58 lakh crore, the highest ever. We expect the budget to maintain the elevated allocation as railways revenues have been lower than targets.

Fresh investments are therefore required to improve the revenues and support the expected pickup in the economy.

Similarly, we expect a strong focus on other infrastructure segments like irrigation, aviation, rural roads, and metros. The funding for these segments is likely to remain robust.

Viral Acharya's resignation: A look at the reasons why RBI and govt have been at loggerheads

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With the resignation of RBI Deputy Governor Viral Acharya, the central bank has seen its second key exit in recent times.

Acharya's decision to step down comes six months before his tenure ends.

This is not the first time in the recent past that an RBI senior official has quit before the expiry of their term. In December 2018, RBI Governor Urjit Patel had resigned nine months before his term ended.

The rift between RBI and the government came out in the open in 2014 with differences over composition of the MPC.

The government's original draft bill had suggested that four out of seven members of the MPC would be appointed by the government. A central bank panel had later recommended a five-member panel where three would be from the RBI.

It was finally agreed that the MPC would have three members from the RBI – the Governor, Deputy Governor and another official – and three government-appointed members. The Governor gets the deciding vote in case of a tie.

In 2016, the then RBI Governor Raghuram Rajan was at the receiving end of comments from BJP MP Subramanian Swamy over the former's policies on inflation.

Swamy had even written a letter to Prime Minister Narendra Modi seeking Rajan removal from the post. Swamy accused Rajan of an "apparently deliberate attempt to wreck the Indian economy," and called him "mentally not fully Indian."

Rajan became the first RBI Governor in two decades who was not offered a second term. Urjit Patel took over as the central bank’s chief in September 2016.

Shortly after Patel took over, the government announced demonetisation.

Initially it was believed that the RBI was in favour of the disruptive move. But the minutes of an RBI meeting eventually revealed that the central bank had warned of demonetisation's short-term effects and said it would not have material impact on curbing black money.

In August 2018, an RBI report said almost 99.3 percent of the banned notes came back into the system.

The trouble began again when the government asked for capital from the central bank’s excess reserves. The government had even threatened to use Section 7 of the RBI Act, which would give it more power to instruct the RBI.

Acharya had in October 2018 highlighted the importance of the independence of central banks, and said government interference negates its functional autonomy.

After Patel's unexpected resignation, there was speculation that Acharya’s exit would follow. Though Patel had cited “personal reasons” for his stepdown, the backdrop made it appear as a sign of protest.

Though this was not the first time the RBI and the government have clashed over independence, this was a rare occasion when the rift was made public.

You can buy a standalone ‘own damage’ motor insurance from September 1

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In less than three months from now, motor vehicle owners would be able to buy a standalone annual “own damage” cover. This will be applicable for cars and two-wheelers, both old and new. This means that buying a package policy of motor third-party and own-damage insurance will no longer be compulsory.

However, details of the third party policy taken will have to be provided to the insurance company. The own damage cover will protect against vehicle repairs, theft and fire.

Insurance Regulatory and Development Authority of India (IRDAI) said that insurers would have the option to offer package policies, in addition to stand-alone OD and TP policies. However, it clarified that long term stand-alone own damage policy would not be permitted for the present.

Onkar Kothari, Company Secretary and Compliance Officer – Bajaj Allianz General Insurance, said that the This circular from IRDAI had provided much-needed clarity in terms of insurer's approach for standalone motor OD policy, its pricing and duration.

“It is going to be an annual policy. It has also made it mandatory for insurers to ensure that no vehicle should be insured only for OD cover and the insurer needs to mention start and end date of TP policy and name of its issuer while giving standalone OD policy,” he added.

IRDAI said that policyholders would have the option to renew the own damage component of a bundled cover falling due on or after September 1 with the same insurer or a different insurer. This can be done on an annual basis.

Here, the pricing of a stand-alone OD policy will be the same as that being offered for the OD component of a package policy.

Motor “own damage” policies are optional while the third party cover is mandatory for all vehicles running on Indian roads.

Jagan Mohan Reddy, Devendra Fadnavis by his side, K Chandrasekhar Rao inaugurates Rs 80,000 crore mega irrigation project

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The Kaleshwaram project, touted as the world's largest multi-stage lift irrigation scheme and boon to Telangana, was inaugurated by Chief Minister K Chandrasekhar Rao at Medigadda in Jayashankar-Bhupalpally district on Friday.

Telangana and Andhra Pradesh Governor E S L Narasimhan, Maharashtra Chief Minister Devendra Fadnavis and Y S Jagan Mohan Reddy of Andhra Pradesh were present on the occasion when the Medigadda barrage was opened.

The estimated Rs 80,000 crore project was built on Godavari river, which originates in Maharashtra, flows through Telangana before merging with the sea in Andhra Pradesh.

Rao and his wife participated in 'Jala Sankalpa Mahotsava Yagam' at the Medigadda barrage earlier.

The scheme would provide irrigation facility to 45 lakh acres for two crops, according to the state government, which said that it would also provide water to the ambitious Mission Bhagiratha drinking water supply project.

The project would also help in supplying drinking water to one crore population in Greater Hyderabad on a daily basis, as also 16 TMC of water to thousands of industries in the state, it said.

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