The Hydra-Headed-Monster and the Trapeze Artist…

This monster just refuses to be tamed! With a devilish grin it seems to say “Heads I win; tails you lose”. Faced with such a formidable opponent called Inflation, the Union Finance Minister seems like a precariously perched trapeze artist gingerly trying to juggle multiple rings, even as the expectant public waits with bated breath… 

Well, as the Indian FM, Mr. Pranab Mukherjee presented the Union Budget for fiscal 2010- 11 on February 26, 2010, no applause was forthcoming…only groans of dismay.

The moot point is could it have been otherwise?

The Budget is the prime instrument through which any Government steers the economy, as it walks the tight-rope, between economic growth on one hand and social justice on the other. Even when the Indian economy looked rosy with GDP near-touching double digits (2007-08)  there was clamour decrying  lack of ‘inclusive growth’. In all fairness, there is no denying that the last budget and the current one have tried to correct this. Aiming at equitable and inclusive growth the current budget also provides impetus to rural and agricultural growth.

Presenting the Budget the FM said:

“The fiscal year 2009-10 was a challenging year for the Indian economy. The significant deceleration in the second half of 2008-09, brought the real GDP growth down to 6.7 per cent, from an average of over 9 per cent in the preceding three years. We were among the first few countries in the world to implement a broad-based counter-cyclic policy package to respond to the negative fallout of the global slowdown. It included a substantial fiscal expansion along with liberal monetary policy support.”

“The effectiveness of these policy measures became evident with fast paced recovery. The economy stabilised in the first quarter of 2009-10 itself, when it clocked a GDP growth of 6.1 per cent, as against 5.8 per cent in the fourth quarter of the preceding year. It registered a strong rebound in the second quarter, when the growth rate rose to 7.9 per cent. With the Advance Estimates placing the likely growth for 2009-10 at 7.2 per cent, we are indeed vindicated in our policy stand.”

The Finance Minister after referring to the global crisis and certain domestic problems further said:

 “…… I can say with confidence that we have weathered these crises well. Indian economy now is in a far better position than it was a year ago. That is not to say that the challenges today are any less than what they were nine months ago… ”

Clearly there are no easy answers. Even though the official figures and the economic logic cannot be faulted, it is equally evident and troublesome that the runaway inflation- particularly food inflation - has thrown even middle class kitchens into a tizzy. The plight of the poor can well be imagined.  

Mr Finance Minister – even a 10% growth is not good enough where a substantial portion of population is below poverty line !!!!

‘Destination India’ Made More Accessible… Easing the entry of BO/LO

In consonance with the avowed objectives of attracting Foreign Direct Investment (FDI), into the country, the Reserve Bank of India (RBI) has broadened the eligibility criteria/procedural guidelines for establishment of Branch/Liaison offices in India by foreign companies.

In terms of the new guidelines, such approvals would be based on certain parameters e.g. stipulated net worth and the profit-making track record in the home country. Eligibility criteria of a parent company can be availed by a subsidiary through filing of a ‘Letter of Comfort’ from the parent company.

In the same vein, where a proposal pertains to activities falling under the ambit of the automatic route (where 100% FDI is permissible under, as per the Policy) there such proposals will be dealt with by RBI itself. Where proposals fall outside the automatic route, there RBI will process it in consultation with the Government of India.

Recent RBI Circulars also provide:

Ø  Certain changes in the routing of applications for approval.

Ø  Allotment of a Unique Identification Number (UIN) both to the existing as well as new BO/LO.

Ø  Filing of the Annual Activity Certificate.

Ø  Permitted activities.

Ø  Applications for additional offices or undertaking additional activities.

Ø  Extension of validity of the approval of LO.

Ø  Winding up of BO/LO.

Well if good intentions (as evident from new policy guidelines) are backed by concrete action on the ground, by way of FDI friendly functioning of officialdom; it should certainly bring in a bevy of new investments into the country. Amen!

“Catch Me If You Can” They Say. “Of Course We Will!” Says the Government Plugging the tax loop holes…

Cognizant of the many devious shenanigans of some foreign entities to avoid tax in India, the Government has tightened the screws by making the provisions of the Income Tax Act more stringent, with retrospective effect.

In a landmark case of Ishikawajima, the Supreme Court had earlier held that only if the fees for technical services were rendered in India as well as utilized in India, it could be chargeable to tax in the hands of a non-resident entity. In actual practice this was being used as an escape route by foreign entities.

To plug this loophole an amendment, to the Income-Tax Act, has been proposed in the current Finance Bill, covering those non-resident foreign entities which earn fees for technical services delivered to an Indian entity.

As per the revised Section 9 of the Income Tax Act (to be operational with retrospective effect from 1976) such fees to a non-resident will be taxable, whether or not the non-resident has rendered services in India.

The retrospective application can lead to opening of assessments of projects completed years ago, causing   harassment and financial implications to assesses. 

“Welcome to My Parlour…But Don’t Overstay Please!” Tourist Visa on Arrival Scheme

The Government of India has announced a scheme for granting Tourist Visa-on-Arrival for citizens of Finland, Japan, Luxembourg, New Zealand and Singapore (subject to certain exceptions) planning to visit India on single entry, where such entry is strictly for the purpose of tourism, and for a short period viz. maximum of 30 days.

This Visa is non-extendable and non-convertible and will be issued at arrival only at the designated international airports of Delhi, Mumbai, Chennai and Kolkata. Only two visits on a Tourist Visa-on-Arrival shall be permissible in a calendar year and there shall be a gap of at least two months between each visit.

Indian hospitality lives up to its name!

Towards a Better ‘Win-Win’… Expats can breathe easier…

Something to cheer-up for those who are working in India and falling into the following categories, viz.,

Ø  a citizen of a foreign state, resident in India, who is an employee of a foreign company or

Ø  a citizen of India, employed by a foreign company outside India, either of who is on deputation to the office /branch/subsidiary/joint venture in India of such foreign company,

may now open, hold and maintain a foreign currency account with a bank outside India and receive the whole salary payable to him/her for the services rendered in such capacity in India, by credit to such account, provided that the income-tax chargeable under the Income-tax Act,1961 is paid on the entire salary as accrued in India.

Similarly, a citizen of a foreign state resident in India, who is in employment with a company incorporated in India may open, hold and maintain a foreign currency account with a bank outside India and remit the whole salary received in India in Indian Rupees, to such account, for the services rendered to the Indian company, provided that the income-tax chargeable under the Income-tax Act, 1961 is paid on the entire salary accrued in India.

This marks a major change from the earlier regulations restricting such remittances to 75% of the salary accrued to or received by such persons in India.

PAN or Pain? The Choice is Yours!

As per the new provision effective April 1, 2010 governing  tax deduction at source/withholding tax (TDS) under the Income Tax Act, 1961,  tax at higher of the prescribed rate or 20% will be deducted on all transactions liable to TDS, where the Permanent Account Number (PAN) of the deductee is not available.

It is also clarified that no certificate shall be given by the assessing officer under section 197, for deduction at lower rate or ‘no deduction’. Similarly, no declaration for non-deduction of TDS on payments, by an individual shall be valid, unless the application bears PAN of the applicant / deductee. 

Sense and Simplicity… Simplifying ECB procedure …

Supporting the ‘Pillars’ That Support the Economy…

A leg up to Infrastructure & IFCs…

Taking another progressive step forward, the RBI has widened the category of Non-Banking Finance Companies (NBFCs). In addition to the three categories viz., Asset Finance Companies, Loan companies and Investment Companies, a fourth category of "Infrastructure Finance Companies"(IFCs) has been added.

An IFC is defined as an NBFC which deploys at least 75 per cent of its total assets in infrastructure loans and which shall:

Ø  not accept deposits from the public;

Ø  have net owned funds of Rs. 300 crore or above;

Ø  have a minimum credit rating 'A' or equivalent of CRISIL/ FITCH/ CARE/ ICRA or equivalent rating by any other accredited rating agencies; and

Ø  have a CRAR of 15 percent (with a minimum Tier I capital of 10 percent).

A company which fulfils the said criteria can approach the Regional Office in the jurisdiction of which its Registered Office is located, along with the original Certificate of Registration (CoR) issued by the Bank for classification as IFC.

Definition of ‘Infrastructure’ & ECBs…

Pursuant to the announcement in the Union Budget for the Year 2010-11, the RBI has expanded the definition of infrastructure sector, for the purpose of availing of External Commercial Borrowings, to include “cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat”.

Accordingly, ECB can be availed by the players in new sector, subject to the other stipulations in the extant ECB Policy, such as limit per company per financial year under the automatic route; eligible borrower, recognised lender, end-use, average maturity period, prepayment etc.

Sense and Simplicity…

Simplifying ECB procedure for IFCs…

Going further down the lane of facilitating IFCs, new guidelines provide that their proposals for ECBs may now be considered under the approval route subject to their complying with certain conditions.

RBI is delegating powers to designated AD category-I banks to approve requests from ECB borrowers for:

Ø  Changes/modifications in the draw down/ repayment schedule of ECBs already availed; both under approval and automatic routes.

Ø  Changes in the currency of borrowing.

Ø  Change of AD bank by Borrower Company.

Ø  Changes in name of Borrower Company.   

No Drop Too Small… Relief for telecom Sector

Keeping in view the large outlay of funds required to be paid directly to the Government for the impending 3G spectrum allocation, within a limited period of time, the RBI has decided to make a one-time relaxation in the end-use conditions of the ECB policy.

This ‘ODI’ Gets Interesting Too! Online reporting…

RBI has decided to operationalise the on-line reporting system for Overseas Direct Investment (ODI) by Indian parties in a phased manner, with effect from March 2, 2010,

The new system would enable on-line generation of the Unique Identification Number (UIN); acknowledgment of remittances; filing of Annual Performance Reports (APRs) and easy accessibility to data at the AD level for reference purposes. Transactions in respect of Mutual Funds, Portfolio Investment Scheme (PIS) and Employees Stock Options Scheme (ESOPS) are also required to be reported on-line in the Overseas Investment Application.

However,

Ø  Application for overseas investment under the approval route would continue to be submitted to the RBI in physical form as before, in addition to the on-line reporting of Part I of form ODI, for approval purposes.

Ø  Transactions relating to closure / disinvestment/ winding up/ voluntary liquidation of overseas Joint Ventures/Wholly Owned Subsidiaries (JV/WOS) under the automatic and approval routes (Part IV of form ODI) would continue to be submitted to the Reserve Bank in physical form as before.

Few More Pennies for the Travel Wallet…

To facilitate resident Indians travelling abroad on a temporary visit, (other than to Nepal and Bhutan), the Government of India has enhanced the existing limits on the amount of currency that can be taken out/brought in during such travel  from INR 5000 to INR7,500 per person.