‘R’ for ‘Recession’? “No way!” says India…

That the Great Indian Growth story is not just a flash-in-the-pan or a nine-day-wonder stands validated yet again and clearly there is no need for misplaced modesty! In fact, while many economies the world over hit serious roadblocks last September and continue to reel under debilitating recession, India has not only managed to insulate itself to a significant extent but, with an industrial output growth rate of 6.8% (July 09), it is actually springing back, sure and secure, in its growth trajectory!

Little wonder then that ‘R’ calls to the Indian mind, words like ‘Resilience’ ‘Recovery’ & ‘Revival’!

Even more heart-warming is the current accent on that much-needed and very laudable objective of ‘inclusive’ growth/development. Equitable sharing of economic gains – to embrace the deprived and disadvantaged – would, in fact, be the litmus test of enduring economic success. Albeit late by decades, we finally seem headed in that direction. Reasons for the overall resurgent mood include:

 July 2009 witnessed a 56% increase in FDI

 FDI equity inflows reached US$ 3,516 billion (Against US$ 2,247 billion during July’08 and US$ 705 billion in July’07).

Clearly the constant vigil/monitoring by the Government of India and the Reserve Bank have shown positive results. Efforts are on to reach the pre slowdown growth rate of +9% and beyond. Tax relief and increased expenditure on public projects are some other steps being taken towards maintaining this momentum

However the Finance Minister stated, in no uncertain terms, that there is absolutely no room for complacency and accordingly the Budget (2009-10) reflects this tone.

The need for revival and re-energising got further impetus at the recently concluded two-day Ministerial meeting of more than 30 Ministers of WTO Member countries, chaired by India. “Re-Energising Doha – A Commitment to Development” saw a unanimous affirmation, by all participants, of the need to expeditiously conclude the Doha Round.

Infrastructure gets the Go-Ahead in Budget 2009-10…

The ‘corner-stone’ comes centre-stage!

Recognizing that good Infrastructure is an absolute pre-requisite to a strong nation, the Budget 2009-10 has proposed giving more teeth to the Indian Infrastructure Finance Company Limited (IIFCL) which could support infrastructure projects and also refinance 60 % of commercial bank loans for Public Private Partnership (PPP) in critical sectors over the next fifteen to eighteen months.

Acknowledging the criticality of urban infrastructure development, the Government has increased allocation of funds by 87% over the previous year. Housing and provision of basic amenities to urban poor has been substantially enhanced, which includes new schemes intended to make the country slum-free in 5 years.

Allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) has been increased by 23 % over the previous year’s budget. There is also a very substantial increase in the allocation for Railways.

Further, the outlay under Accelerated Power Development and Reform Programme (APDRP) has been increased by 160% over the previous year’s budget.

The Government also proposes to develop a blueprint for long distance gas pipelines leading to a National Gas Grid to facilitate nationwide transportation of gas.

Clearly the paramount importance of good Infrastructure as a vital growth engine has moved beyond policy level platitudes.

Indian Exports Picking-up

Responding to the worldwide demand for smaller, fuel-efficient cars Motor Majors the world over (Suzuki, Hyundai, Nissan and others) are making India a hub for overseas sales of these ‘tiny-titans’. Helped by cheap labour and input costs, India this year has actually overtaken China in auto exports; and is well on its way to challenging Thailand and South Korea as an alternative production centre in Asia. Talk about legendary David and Goliath!

In other segments also, the export story is picking up. The diamond industry has bounced back, reemploying its retrenched employees. 50,000 additional job opportunities are expected in this industry.

However, sectors like textiles and IT/ITES continue to be affected due to slackness in demand from developed economies, still reeling under the downturn. To mitigate such hardships, the Indian Government has pledged support /incentives e.g. extension of Adjustment Assistance Scheme to provide enhanced Export Credit and Guarantee Corporation (ECGC) cover at 95% to badly hit sectors up to March 2010; enhancement of allocation for Market Development Assistance Scheme by 148% over the previous year’s Budget.

Foreign Direct Investment - Micro and Small Enterprises (MSEs)

Reaching down to hoist them up… MSEs get special attention.

The Finance Minister in the Budget has announced allocation of INR 40,000 million as special fund to Small Industries Development Bank of India (SIDBI) to facilitate flow of credit at reasonable rates to Micro and Small Enterprises (MSEs) by Banks and State Finance Corporations (SFCs) who in turn get refinanced up to 50 % of incremental lending to MSEs.

In the meanwhile, the Ministry of Commerce & Industry issued clarification to Press Note 18 of 1997, through press note 6 of 2009, wherein it has removed the current 24% ceiling on foreign holding in Medium and Small Enterprises (MSEs). MSEs will now be guided like other large enterprises as far as FDI is concerned, subject only to sectoral caps and other relevant sectoral regulations.

However, if non-medium and small enterprises manufacture any of the 21 items reserved for small scale sector, any FDI above 24% will require the Foreign Investment Promotion Board's approval.

Fair enough…we’d say.

Divestment

Divestment not a Dirty word... any more

Yet another indication of the growing maturity of Indian economy is the Government’s recognition of the feasibility of increased disinvestment in the Public Sector behemoths…while of course retaining 51% equity therein. Participation of private players is actually being encouraged as proposals are afoot to disinvest a small portion of equity in entities like RITES (Rail India Technical and Economic Services Ltd), Cochin Shipyard Ltd., Telecommunications Consultants India Ltd, Manganese Ore India Ltd, Rashtriya Ispat Nigam Ltd and Satluj Jal Vidyut Nigam Ltd.

Clearly the thinking behind the move is as progressive as it is professional…less State interference in the day to day functioning of these PSUs certainly bodes well for their financial health as well.

Stepping on the gas!

Accelerated impetus to PNG production…

Cairn India (domestic subsidiary of Edinburgh-based oil explorer Cairn Energy) and State-owned ONGC will jointly invest $4 billion to scale up the production capacity of their oil fields at Barmer in Rajasthan by 25,000 barrels of oil per day (bopd) to 200,000 bopd.

Reliance Petroleum has successfully started production of gas in G-6 Gas Block of Krishna Godavari Basin (KG Basin).

The country’s huge petroleum and natural gas deposits located in its land mass, territorial waters and continental shelf is like a dead asset unless exploited effectively and made accessible for productive purposes. Of course efforts have been on towards this but clearly the potential far exceeds the performance shown thus far.

To give a serious fillip to these efforts, certain concrete steps have been taken:

 The long standing demand for treating production of natural gas at par with mineral oil has been acceded to by the Finance Minister by extending tax holiday to profits from commercial production of natural gas from exploration blocks licensed under New Exploration Licensing Policy (NELP)-VIII.

 India's eighth round of New Exploration Licensing Policy (NELP-VIII) is offering the highest ever number of 70 exploration blocks covering an area of about 1,63,535 Sq. Km.

 Simultaneous offer of 10 blocks has been made under the fourth round of Coal Bed Methane Policy (CBM-IV) for exploration and production of Coal Bed Methane. The blocks offered under CBM-IV cover an area of about 5000 Sq.Km. and are spread over seven States.

However, enlargement of the service tax territorial extent by extending the applicability of Service Tax provisions to installations, structures and vessels in the entire Continental Shelf of India and Exclusive Economic Zones of India, may have an impact on Service Tax liability in case of oil & gas sector.

Housing sector - stimulation

The rude Reality of Realty…

To stimulate demand in the realty sector, the Union Cabinet has approved a Scheme of interest subvention on housing loans. Under this, support is being provided to individual borrowers by way of interest subvention of 1% on all housing loans up to INR 1 million, provided the cost of the house does not exceed INR 2 million. An allocation of a sum of INR 10,000 million has been made for the Scheme. The Scheme will be implemented through Scheduled Commercial Banks (SCBs) and Housing Finance Companies (HFCs) registered with the National Housing Bank (NHB).

Well let’s hope this puts pillars under the common man’s ‘castles in the air’.

Service Tax on legal services…

As per the new budget, legal service provided to a business entity, by a law firm, in relation to advice, consultancy or assistance in any branch of law, in any manner would attract service tax.

This will entail an addition of 10.3% in the fee.

However, Service Tax will not apply to individuals and for litigation.

Competition Commission of India

Put your best foot forward…but don’t tread on others’ toes!

To ensure a level playing field and obviate difficulties arising out of unfair competition, the Indian Government has established Competition Commission of India (CCI), an autonomous regulatory body ‘to prevent practices having an adverse effect on competition’. A Competition Appellate Tribunal headed by a retired judge of Supreme Court has also been constituted, to deal with appeals against the decisions of the CCI and also adjudicate on compensation claims.

Entry fee for Mutual Funds? “Exit” says Government!

Effective August 01, 2009, the Securities and Exchange Board of India (SEBI), abolished the ‘entry load’ viz. fee deductable, from the amount of money one invests in a mutual fund schemes. Till now, a fee of 2.25% was being charged by mutual funds (and asset management companies) under the pretext of expenses incurred in marketing and selling of the mutual funds. What remains permissible is an exit fee of up to 1% of the redemption amount which the funds can levy for paying commissions to distributors and for marketing and selling expenses.

Foreign Trade Policy 2009-2014

Blueprint for BIGGER footprints!

Giving further impetus to Foreign Trade is clearly a high priority. The newly announced Foreign Trade Policy for the next 5 years is a step in the direction of achieving an annual export growth of 15% by March 2011 and 25% by 2014 and also with a long term objective of doubling India’s share in global trade by 2020, the salient features include:

 Continuance of Duty Entitlement Pass Book Scheme up to December 2010

 IT benefits under Section 10(A) of the Income Tax Act for IT industry till 31st March 2011;

 IT under Section 10(B) of the Income Tax Act for 100% export oriented units for one additional year till 31st March 2011.

 Enhanced insurance coverage and exposure for exports through Export Credit Guarantee Corporation (ECGC) Schemes till 31st March 2010.

 Technology upgradation for Indian exporters through import of capital goods for certain sectors under EPCG made easier at 0 % duty.

 For Agriculture and Village Industry, capital goods imported under EPCG will be permitted to be installed anywhere in AEZ and import of inputs such as pesticides will be permitted under Advance Authorisation for agro exports etc.

 Indian exports insulated from decline in demand from developed countries through encouraging diversification to other markets e.g. Latin America, Africa, parts of Asia and Oceania.

 Towards making India a hub for production and export of green products and technologies, special initiatives planned to promote development and manufacture of items relating to transportation, solar and wind power generation.

 Improvement in infrastructure related to exports; bringing down transaction costs and providing full refund of all indirect taxes and levies envisaged as the three vital pillars to support Policy targets.

Exemption/refund of Stamp Duty to Special Economic Zones (SEZ)

The Stamp duty exemption to SEZs had become a contentious issue with States with the latter demanding for exemption to be restricted to processing area of the SEZ.

It may be recalled that an exemption was provided from Stamp duty on any instruments executed for purposes of SEZ in favour of an SEZ Developer or Unit by an amendment to the Indian Stamp Act, 1899 through Section 57 of the Special Economic Zones Act, 2005 (‘SEZ Act’). Consequent upon this amendment to the Stamp Act, States had sought clarification from the Ministry of Commerce and Industry (MoC) in relation to treatment of certain transactions related to SEZ for the purpose of application of Stamp duty. 

Taking into consideration the concerns raised by the States, MoC has issued clarifications that the exemption/ refund of Stamp duty in respect of purchase of land by the SEZ Developer will depend on the stage of the SEZ Approval at the time of such purchase.

In all cases, if the SEZ is not actually commissioned within the time indicated in the approval, or if the SEZ notification is cancelled, the State Governments will be entitled to withdraw the concession of Stamp duty and recover the same from the Developer. The facility of exemption from Stamp duty on purchase of land by the SEZ developer for activities like housing, hostel, recreation, entertainment, golf etc. would be available only with respect to the land which falls within the SEZ area. The concession of Stamp duty is available only on conveyance of land, buildings, premises, etc. by lease or otherwise (but not by sale) in an SEZ to the units/entities permitted to carry out operations therein. The facility of exemption of Stamp duty to a Developer will not be available for purchase or sale of any land or building at a place outside the notified SEZ. The clarification in the Instruction will clearly provide a much awaited breather to the SEZs!

Of course LPG is full of ‘power’!

In a recent case, the Supreme Court ruled that establishments using LPG by employer in the manufacturing process will be sufficient to attract the stipulation in the Employees State Insurance (ESI) Act for coverage. According to the Act, establishments using power for manufacturing process are included in the scope of the Act and must contribute to the ESI fund. It was argued that ‘power’ in the context of the Act meant electric power, and not LPG. Making a liberal interpretation, considering the social implication of the Act, the Supreme Court held that the use of LPG satisfied the definition of ‘power’.

Battle of the ‘Rings’-Consumer Courts don’t answer that doorbell!

Giving relief to telecom operators being dragged to consumer courts for deficiency in services, the Supreme Court has held that consumer courts cannot entertain disputes relating to telecom services. The Court stated that, when there is a special remedy of statutory Arbitration of disputes provided by the Indian Telegraph Act, 1885 in respect of telephone bills, and then other remedies are, by implication, barred. The arbitration shall be conclusive between the parties to the dispute and shall not be questioned in any court.

Tax credit on the Service Tax…

In a recent judgment, the Bombay High Court ruled that a beverages’ major could avail of tax credit on the service tax it pays for advertising and promotions. They can avail of the service tax rebate as Cenvat credit, against their excise duty liability on concentrates which they supply to their contract manufacturers. The ruling, passed by a division bench, stands to benefit companies in other sectors, too, like cosmetics and pharmaceuticals, since they too follow the contract manufacturing model and advertise and promote the end-products.

RTI Act given more teeth…

The National Consumer Disputes Redressal Commission (NCDRC) has held that when information is not made available to an applicant under the Right to Information Act, he can approach consumer court for a deficiency of service under the Consumer Protection Act (CPA).

Your Court or mine…the choice is yours!

The Supreme Court reiterated in a recent case that where there may be two or more courts of competent jurisdiction, if the parties to the contract agree to vest jurisdiction in one such court, to the exclusion of others, to try any dispute which might arise, such agreement would be valid and binding on the parties.

Foreign firms not taxable for carrying calls abroad…

In a recent ruling, the Authority for Advance Ruling (AAR) said that the foreign telecom firms operating without a permanent establishment in India are no more required to pay any tax on income from carrying international calls and data services in pacts with domestic operators. It was also made clear that since this income is not chargeable to tax under the (Income Tax) Act, there is no question of making any deduction at source.

The Arbitration and Conciliation Act 1996 - What is an Arbitration Agreement

It’s the intent that matters!

The Supreme Court in a recent case clarified that an arbitration agreement is not required to be in any particular form as per the Arbitration and Conciliation Act 1996. The intention of the parties is to be gathered from the correspondence exchanged between them and the surrounding circumstances. Such correspondence can be used to determine the existence, validity and enforceability of an arbitration agreement.

The Court further held that when an application is filed to refer disputes to arbitration, the court has to decide the following:

•  Its own jurisdiction, in the sense whether the party making the motion has approached the right Court. 
•  Whether there is an arbitration agreement, as defined in the Act and
•  Whether the person who has made the request before him, is a party to such an agreement.

The Court observed that it can further look into:

• whether the claim was a dead one; or a long-barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. 
• Whether the applicant has satisfied the conditions for appointing an arbitrator under the Act and can either proceed on the basis of affidavits and the documents produced or take such evidence or get such evidence recorded, as may be necessary.

However, the decision whether a live claim made, is one which comes within the purview of the arbitration clause has to be left to be decided by the Arbitral Tribunal.