Finance & Taxes

Sales taxes and other local levies collected by states also contribute to keeping fuel prices high in the country. Statelevel taxes account for about 17 per cent of the retail prices of petrol, 12 per cent for diesel and 4 per cent for cooking gas.  

While the fear of political fallout in an election year has prompted several state governments to cut these taxes, their claim that such reductions would result in losses to exchequer is not entirely true, analysts said.

As state taxes on petroleum products are mostly advalorem, which means that they depend on the monetary value of a commodity, there has been a substantial increase in the contribution by the petroleum sector to the state exchequer.

Each time petrol and diesel prices are increased, sales tax collection goes up "as these taxes are calculated on an advalorem basis," said a senior official in the central government.

The contribution of the petroleum sector to the state budgets has gone up from Rs 29,166 crore in 2002-03 to Rs 38,918 crore in 2004-05 to Rs 55,677 crore in 2007-08.

"State level taxes too have been responsible for the pressure on prices of petroleum products. Sales tax collection from oil sector have consistently been contributing to a third or more of the total sales tax collections of the states," the government-appointed Committee on Pricing and Taxation of Petroleum Products said in a recent report.

Industry chambers have also called for restructuring of the state tax regime on petroleum products.

"There is scope for restructuring sales tax regime on petroleum products at the state level," the Federation of Indian Chambers of Commerce and Industry said.

The Finance Bill, 2008, (the Budget) was passed by Lok Sabha after a walkout by members of the Left Front, which supports the ruling United Progressive Alliance government without being part of it, because Chidambaram's reply did not address their demands including a complete ban on all futures trading in commodities.

The tax holiday for software firms located in parks run by the autonomous Software Technology Parks of India, or STPI, was originally meant to expire in 2009 but has now been extended up to 2010. Chidambaram admitted that the right time to announce this would have been in Budget 2009, but added that he was doing so now because "...as things stand, the budget for 2009-10 may not be presented in February 2009, but only after the general elections..."

Chidambaram, who emphasized his opposition to extending tax sops, declined to make concessions on other Budget proposals such as introducing a transaction tax in commodities exchanges.

Software stocks rose in a strong Mumbai market, already buoyed by RBI's decision not to increase lending rates. Trade body Nasscom said Chidambaram's decision would benefit back-office firms and small and medium-sized software firms that have already been hit by the rupee's appreciation in 2007 and signs of slowdown in the US. Many larger firms have already secured permission to set up special economic zones which come with their own set of incentives, including a tax holiday.

"This benefit will also give us time to come up with other workable and acceptable options for the future, beyond 2010," Nasscom said in a statement.

"We have decided to encourage promoters giving a five-year tax holiday to multiplexes with at least three cinema halls, three year tax holiday to digital cinema halls and two year ta holiday for new entertainment complexes", Deputy Chief Minister-cum-Finance Minister Sushil Kumar modi said on Sunday.

Maintaining that the condition of film halls left a lot to be desired, Modi said the owners would get tax holiday and other incentives if they went in for renovation.

"The decision has been taken to give a much-needed boost to the entertainment sector in the state", he said.

Modi said the state would have a number of multiplexes in a year or two.

March 31 -- the all-important date in a financial year for tax payers -- has just passed by. You are now relaxed, having made your taxrelated investments. It has been a hectic month, thanks to the endless search for the right avenue and frantic calls to your tax consultant. You are glad that it's over and you won't be required to undertake the onerous task until March 2009.

And this is the very tendency you need to guard yourself against. Treating tax planning as a year-end exercise is a mistake that most people commit year after year, despite cartloads of advice calling for proper planning and systematic investments through the year. Thorough planning can yield rich dividends. As Franklin Templeton's senior portfolio manager, equity, Sivasubramanian KN says: "Investment success comes about through rigorous financial planning and then exercising discipline while implementing the investment strategy. When planning for taxes, retirement and children's education, one needs to have a carefully-developed plan in place, taking into consideration the objective, risk tolerance and time horizon." And devising a meticulous plan necessitates investing adequate time and efforts.

Instead of putting off the exercise until March next year, you could start utilising the time that you have on hand right now to identify the right opportunities. Apart from ensuring better decisions, it would do away with the stress involved in zeroing in on suitable tax-saving instruments at the last minute and help you steer clear of the pitfalls.

Why start early?
One of the most common mistakes that result from rushed decision-making is taking a life insurance cover in most cases Ulips (unit-linked insurance policies) that is not commensurate with the individual's requirements. People go in for insurance to avail of the tax breaks on premiums paid under section 80 C, without realising that they may not need an expensive cover and also that they would have to incur the cost at least for three subsequent years. "People fall prey to sales agents' tactics, who feed on their fear that time is running out. As a result, they direct their funds into instruments that might not help their cause," explains Kartik Varma of iTrust.in, a financial advisory firm. Lack of proper planning could result in non-availability of your own money when you need it the most.

* Systematic Investment is key

This applies to payments between banks, primary dealers, non-banking finance companies and payments in the money market, Government securities market and foreign exchange market, said the RBI note.

Earlier, the RBI's Working Group had issued the recommendations about migrating from paper-based systems to electronic systems and had recommended a phased approach of encouraging, monitoring and mandating.

According to the group's recommendations, moving such large payments from an unsecured paper-based system to a fully secure electronic credit push system would help to reduce credit and settlement risks, bring greater efficiency, increase customer convenience and reduce the transaction cost for the banks, which in turn can be passed on to customers

Chidambaram presented his seventh full budget - two when the United Front government was in power and the remaining five under the United Progressive Alliance government.

The Finance Minister presented the Budget against a backdrop of slowing expansion and creeping inflation which has hit the poor hardest.

Here are the major highlights:

• Personal income tax exemption hiked to Rs 1.5 lakh
  
• Senior citizens threshold tax limit increased from Rs 1,95,000 to Rs 2,25,000
  
• Tax exemption for women increased to Rs 1.8 lakh
  

• Excise on packaged softwares to be lower from 8% to 12%
  
• No excise duty on refrigerating equipments
  
• Anti-Aids drug exempted from excise duty
  
• Small cars to become cheaper
  
• Reduced excise duty on two, three wheelers
  
• Excise duty on hybrid cars cut from 24 pct to 14 pct
  
• Excise on small cars cut to 12 pct from 16 pct
  
• Rs 50 cr for tiger conservation
  
• Sixth Pay Commission report by March 2008
  
• Defence allocation up by 10% from Rs 96,000 cr to Rs 1,56,000 cr
  
• 22 Sainik schools get Rs 44 crore
  
• Rs 624 cr for Commonwealth Games
  
• PAN sole identification in securities market
  
• Debt waiver scheme and relief to small and marginal farmers
  
• Duty reduced on life saving drugs
  
• Rs 750 crore for upgradation of 300 ITIs in 25 districts.
  
• No change in peak customs duty
  
• Central sales tax cut from 3% to 2%
  
• Govt withdraws banking transaction tax
  
• Revenue implication of Indirect taxation to be 5900 cr
  
• Direct taxation changes to be revenue neutral
  
• Levy on STT only on option premiums
  
• Commodities transaction tax introduced like STT
  
• Short term capital gains to be taxed at 15%
  
• No change in surcharge of corporate tax
  
• Money changers and people running gains of chance and tour operators to be brought under service tax net
  
• Revenue Deficit is Rs 55,184 cr at 1% of GDP and fiscal deficit is Rs 1,33,287 cr at 3.1% of GDP
  
• Estimated planned expenditure at Rs 2,43,086 cr and non-panned expenditure Rs 57,409 cr
  
• Central Plans Scheme monitoring system under Plan Panel to be unveiled
  
• Non-agri peak rates for customs raises to 10% from 2% in 2004
  
• Tax to GDP ratio at 9.2% in 2004 up by 12.5% in 2007-08
  
• Custom duty on steel scrapped
  
• Set-top boxes to become cheaper
  
• Custom duty on vitamin pre-mixes to lower from 30% to 20%

WHO'S CUT, BY HOW MUCH

• SBI, Bank of India, Union Bank and Canara Bank have cut their prime lending rates by 0.25-0.5 per cent.
  
• The FM had asked banks to boost loans to consumers for home and consumer purchases at an "affordable cost".

"There is a feeling that adequate credit is not being provided to the housing sector and the consumer durables sector:" Chidambaram had told bank chiefs last week.

He asked banks to "pay attention" to provide adequate credit to these two sectors as they are "drivers of the economy".

"The coming year, we will expand our operations to cover most of the 37 districts in the state.  Bihar has over 1 core poor and low-income households across the state and we need to provide access to finance for these families.  By March 09, we plan to extend Rs.210 crore loans to 3 lac households impacting 15 lac lives," said Vikram Akula, CEO & Founder, SKS Microfinance.

SKS Microfinance currently serves 17 lac clients across 15 states and has disbursed nearly Rs. 2,000 crores in unsecured credit with a 99.8% repayment rate. SKS also provides life and health insurance products. It has 651 branches covering 20,000 villages and slums across the country and is adding 50 new branches and 1.5 lakh new clients per month.

The World Bank sanctioned a development policy on the basis of a loan-credit system to the tune of Rs 872 crore to support policy reforms being undertaken by the state.

The international bank, the Centre and the Bihar government signed an agreement to this effect on January 15.

Encouraged by the generous grant, chief minister Nitish Kumar, who had an hour-long meeting with the representatives of the Joint Development Partners' Group, said: "Moved by the group's response, we have agreed to take on more reform processes."

"We are setting up a committee under the chairmanship of the chief secretary to monitor the reform process and the utilisation of the bank-sponsored funds," he added.

The World Bank, said the chief minister, was also in the process of funding the Bihar Panchayat Strengthening project.

The project aims to improve autonomy, capacity and accountability of the panchayat raj institutions in rural pockets of the state.

The Asian Development Bank (ADB) has also agreed to finance construction of nine roads (820km) in Bihar.

Singh and Chidambaram have been labouring over the Budget and have been meeting frequently -- they spent a good two hours together on Thursday evening -- and the major points of emphasis are understood to have been thrashed out. The effort will be to keep tax rates stable, check inflation and incentivise manufacturing.

PC'S PROGRAM

• Tax exemption limit may be raised from Rs 1. 1 lakh to Rs 1.25 lakh.Tax slabs may not be tinkered with.
  
• The effort will be to check inflation and give incentives to manufacturing, particularly segments like textiles and leather, which have been hit by rise in interest rates and rupee's rise against dollar.
  
• Budget will roll out measures to ensure 8-9% GDP growth is not hit by global slowdown

The New Year is likely to bring some good news for borrowers as interest rates on home and consumer loans could decline from the second quarter onward, but high fuel and food prices could play spoilsport by putting pressure on inflation, feel bankers and economists.

Experts feel that interest rates have peaked and with deposit rates on the decline, consumers could see softening of interest rates in 2008 as the prudent stand of the Reserve Bank for almost the whole of 2007 managed to keep inflation low without disrupting economic growth.

"Our margins were a bit strained during the year but now banks have begun reducing deposit rates. With RBI's objective of keeping inflation close to 3 per cent in the medium term, interest rates are bound to come down," said M.V Nair, CMD, Union Bank . of India.

Yes Bank managing director & CEO Rana Kapoor said: "We see no decline in interest rates in the next three months. The RBI is unlikely to reduce rates in January but there could be a reduction of half a per cent in the next fiscal starting April."

Commercial real estate saw prices rising on the back of strong demand arising from a 9% economic growth. Ganesh Raj, partner at Ernst and Young, said over the past few years, real estate has grown at an unprecedented rate of about 30% and is expected to grow at 25% for the next three to four years. He said the sector is likely to rise from at present $48 billion to $140 billion by 2012, showing a compounded annual growth of 21%.

Despite rising interest rates, realty did not have any problem in raising funds for projects. With high return of over 20% per annum, private equity funds were lining up to invest. According to one estimate, around $3 billion foreign direct investments have already come in 2007.

Above that, foreign funds with around $30 billion corpus are waiting outside to invest, said a senior official of a global consultancy firm. But they are not yet able to put money because of unavailability of good projects. Biggies like Merrill Lynch, Morgan Stanley, George Soros Quantum fund and Blackstone, among others, have shown huge interests.

Booming stock market has helped the sector to raise funds from domestic market. A number of companies like Emaar-MGF are preparing to enter the market to raise funds. Raj said, market capitalisation of the real estate sector is only around 4.2% of the total m-cap of bourses, which is below the global standard of 15%, reflecting opportunity for growth.

With huge inflow of funds, activities in the sector are likely to rise. Experts said prices were expected to stabilise or to go downward with more supply coming in, which in turn will fuel demand. Commercial realty has been witnessing hectic activities, mainly because of higher growth in IT/ITes, retail and financial sectors.

The new regime is likely to usher in intense competition among the players leading to reduction in premiums.

However, any revision in rates will only be effective on renewal date of the insurance and insurers shall not be permitted to cancel existing insurances and replace them by new insurances at revised rates, it said.

This is the second round of detariffication in the general insurance sector as the regulator had earlier allowed limited price freedom to the players beginning this year.

"Except for Motor Third Party risks, for all other new insurances and renewals effective on or after January 1, 2008, insurers shall be free to quote rates of premium in accordance with the rate schedules and rating guidelines that have been filed with the Authority," IRDA said in a release.

The move by insurance regulator is expected to bring down the premium rates on motor own damage (insurance cover over the vehicle), fire and engineering.

According to sources, MRPTC has asked its investigative arm DGIR to look into GE Money's personal loan scheme `Loan lo vapas mat karo' scheme based on complaints of unfair trade practice. DGIR is trying to find out if GE Money allured customers through ads but did not fulfil its promise. It is also enquiring if the firm that "offered" full-loan waiver to a select few, among other possible attractions, has fulfiled its promise.

Officials alleged, the company was not fully cooperating with the probe and had questioned DGIR's authority before MRTPC after the agency sought details. An official alleged that details of interest rate charged before the offer period and after it were not disclosed and only a range of 18% to 32% was given.

In response to a questionnaire, GE Money said: "Since the matter is sub-judice we are unable to respond to your queries specifically. It is, however, stated that in its usual course of business and to provide its customers with more options, GE Money often comes out with various kinds of schemes. The loan scheme introduced last year between March-May 2006 did not overcharge our customers and did not work to the prejudice of any of our loan customers. GE Money product offers have always been competitive in the market and will continue to be so. In the instant case, GE Money is co-operating with DGIR by providing all relevant information as per the scope of the investigation provided under law."

Through the scheme GE Money disbursed Rs 287 crore.

The direction was passed after Additional Solicitor General Mohan Parasaran informed the Bench headed by Justice B N Agarwal that the Centre was issuing a notification today extending the time for filing returns till February 29, next year in relation to all categories of assessees.

The Bench also set aside the Allahabad High Court order that allowed business class and professionals having income below Rs 20 lakh to file tax returns under both SARAL-2D and new return forms for the assessment year.

"It is for the statutory authority to decide the type of forms."

Once the guidelines are in place, a due diligence of agents will be mandatory Banks will have to give borrowers enough notice for repayment, and supply them with the recovery agents' details. The agents won't call at odd hours, or send goons after borrowers. They won't abuse you verbally or physically, violate your privacy, or humiliate you publicly Banks will have a grievance-redressal system.

DEBT RECOVERY AGENTS WON'T

• Call borrowers at odd hours of day or night
  
• Employ goons to recover debts
  
• Violate borrowers' privacy
  
• Intimidate or abuse borrowers physically or verbally.
  
• Humiliate borrowors publicly

"Banks are responsible for their agents' actions. They must ensure that agents strictly adhere to the guidelines," RBI said.

The banking regulator asked the Indian Banks' Association and Indian Institute of Banking and Finance to formulate a certificate course for sales, marketing and recovery agents with a minimum 100 hours' training. "The certificate programme will ensure a better debt recovery process," said Kamleshwar Rao of Kotak Mahindra Bank.

"Interest rates are expected to remain stable to down," SBI chairman O.P. Bhatt told reporters before participating in a meeting of bankers and exporters with Finance Minister P. Chidambaram here.

Interest rates have already eased off a bit, he added.

Canara Bank CMD MBN Rao, who also heads Indian Banks' Association, said there is adequate liquidity in the system and with low inflation, interest rates are likely to remain soft and stable.

"Inflation being under control, I do not see any reason for interest rate to go up," he said.

However, high global oil prices are a cause for concern and should be watched carefully, Rao said.

He said lower interest rates internationally will increase the funds flowing into India, adding to the liquidity.

On credit offtake he said, credit has picked up in October and the offtake was likely to be of the order anticipated by the RBI in its credit policy.

Rao further said there has been brisk demand for credit from agriculture and other sectors of the economy.

The net interest rate margin (NIM) was also expected to improve as a result of increase in credit offtake, the Canara Bank CMD said, adding that NIM, which was above 3 per cent in 2006-07, came down to below that level in the initial months of the current fiscal. "It has now started improving."

Responding to a wide range of questions after his address, which summed up the government's economic policies, he said: "No one now advocates full convertibility of the rupee. The current fashionable phrase is `fuller convertibility', which means the process of liberalisation will continue, but some restrictions will stay."

The third significant announcement Chidambaram made was that the Sixth Pay Commission Report would be submitted by March-April, 2008. Clarifying on the recent SEBI measures to moderate `copius' capital flows, which had jolted the stock markets, he said: "At the moment we are not contemplating any more measures."

A reporter pointed to a `North-South divide' on the minimum support price for wheat, which is grown largely in the North and whose MSP has been increased to Rs 1,000 a quintal while paddy, grown mostly in the South, has its MSP at Rs 725 only.

The Finance Minister said the government had accepted the recommendations of the Commission on Agricultural Costs and Prices both for paddy and wheat and it announced a bonus of Rs 50 for paddy only.

Replying to a question on banks using muscle power to recover loan arrears from defaulters, Chidambaram said only one or two private banks had done so and the RBI had fined one of them heavily while the Supreme Court too had deprecated the practice. "I will take firm action if any public sector bank resorted to the use of muscle power."

• Sixth Pay Commission report by March-April, 2008
  
• Hardening fuel, food prices a source of worry
  
• Full convertibility of the rupee not yet
  
• No more steps at the moment to control capital
  
• Stern action if public sector banks use force to recover bad loans

RBI on Tuesday decided to continue with the high interest rate regime, despite inflation coming down to 3.1% by October 13, 2007 from over 6% in March this year, showing that the central back is not satisfied with the progress in the pricing front. In its mid-term review of credit policy, RBI left the statutory interest rates unchanged and increased the amount of cash that banks are required to keep with RBI (known as cash reserve ratio, CRR) by half a percentage points to 7.5%.

The CRR hike will suck out Rs 16,000 crore from the banking system. RBI governor YV Reddy said still enough liquidity will be left to support economic activities. Indicators like repo, reverse repo and bank rates are left unchanged.

RBI felt that the inflationary expectation is still high. This is mainly because high global prices of crude, metals, foods and commodities, which are not passed fully to consumers. Therefore, the present inflation (3.1%), based on WPI, indicates a suppressed figure, which can destabilises pricing scenario in the future.

While projecting growth at 8.5%, Reddy said it would be possible only if there is no escalation in global crude prices. However, FM Chidambaram said growth will be higher than 8.5%. RBI also expressed its concern over the liquidity created by foreign fund inflows, which can fuel inflation. Since June, RBI has added $48 billion forex in its reserve. In October so far, FIIs have invested $8 billion as against $17 billion so far in the year.

Investors across the country are using the law to fight the system. Here's how and why some of them did what they did, and how you too can  protect.

The good news is that fo