Latest Economic News of India - August 2011

PMEAC suggests 49% FDI for all sectors
Charting the boldest reform ever, the Economic Advisory Council to the Prime Minister (PMEAC) has suggested uniform 49 per cent direct foreign direct investment in all sectors, except the negative ones (defence, nuclear energy, etc) in its Economic Outlook for the financial year 2011-12. At present, key financial sectors, such as banking, have a 33 per cent cap on FDI while for insurance, the ceiling is 26 per cent. Nothing has been decided about the pension sector but it is believed that the FDI cap will be on the same lines as insurance. 
  • Favouring a more conducive environment for portfolio foreign investment, the Council wants the Government to move on the recommendations of the U.K. Sinha Committee on financial flows. In 2010, the Committee recommended single-window for the registration of Qualified Foreign Investors, doing away with the distinction between FIIs, foreign venture capitalists and NRIs.
  • The Council expects much lower FII investment during 2011-12, less than half of what the country received during the last fiscal due to adverse economic developments in the US and Euro Zone.Dr C. Rangarajan, Chairman, PMEAC, said, “World economic situation is not good. Many developed countries have revised their GDP. It will have an impact on us in two ways. First, export growth may come down and second, international commodity prices could face a dampening effect.”
Sebi amends rule to check black money, tax evasion in market 
The regulator recently came across a loophole in its existing regulations, which was being abused by stock brokers for facilitating tax evasion and flow of black money through fictitious trades in lieu of hefty commissions.
To remove this anomaly, Sebi has asked stock exchanges to penalise the brokers transferring trades from one trading account to another after terming them as 'punching' errors.
  • In a widely-prevalent, but secretly operated practice, the people looking to evade taxes approach certain brokers to show losses in their stock trading accounts, so that their earnings from other sources are not taxed (loss shopping!!).These brokers are also approached by people looking to show their black money as earnings made through stock market (profit shopping!!). While profit is purchased to show black money as earnings from the market, the losses are purchased to avoid tax on earnings from other sources.
  • To check any abuse of this rule, Sebi has asked the bourses to put in place a robust mechanism to identify whether the errors are genuine or not. At the same time, the bourses have been asked to levy penalty on the brokers transferring their non-institutional trades from one account to the other.
Govt must use diplomatic pressure to get info on black money 
A Parliamentary panel today asked the government to step up the diplomatic pressure on smaller nations to elicit information about black money stashed in those countries. "Legislative framework alone is not enough because tax evaders keep shifting their operations. The government must use diplomatic pressure, particularly on smaller nations, for the eliciting the requisite information," the Parliamentary Standing Committee on Finance said in its report tabled here.
  • The committee has also suggested that DTAAs should also be constantly reviewed in the light of inputs received from Income Tax Overseas Units as well as from other enforcement agencies. India has started re-negotiations the Double Tax Avoidance Agreements (DTAAs) with 75 countries and Tax Information Exchange Agreements (TIEAs) with 22 nations. Of this, as on date, India has completed negotiations with 53 countries and sovereign jurisdictions. The government so far has inked 16 such treaties (11 DTAAs and 5 TIEAs).
  • It also pointed out that lack of coordination between the Commerce and Industry Ministry, and Finance Ministry has resulted in a delay in bringing out a review of present tax and duty exemptions to Special Economic Zones (SEZs). The committee also pointed out a non-realisation of tax revenue worth Rs 51,296 crore and recommended the ministry to immediately set up a special cell to recover the said amount in six months.
Deven Sharma - The Jharkhand boy who downgraded US 
On August 5, Standard & Poor's, led by Jharkhand-born Deven Sharma, struck off the 'AAA' rating of the US, considered the Gold standard in the world of finance, for the first time since 1914

Cognizant overtakes Wipro Technologies
Cognizant has rearranged the Indian IT sector's pecking order of years, with its quarterly revenues racing past No. 3 software exporter Wipro Technologies. And its growth clip is such that it could dislodge the one-time growth monster, Infosys Technologies, before the year-end. 

Govt permits QFIs to invest up to $13 bn in MFs
The government allowed foreign investors, in its newly-created Qualified Foreign Investors (QFIs) category, to invest up to $13 billion in equity and debt schemes of mutual funds, a move aimed at enhancing depth in the capital market.It has been decided that the aggregate investments by QFIs in equity schemes of the mutual funds under direct and indirect routes shall be subject to a ceiling of $10 billion," a finance ministry statement said.
Similarly, QFIs can invest up to an additional amount of $3 billion in the units of mutual fund scheme, which invest in infrastructure debt of minimal residual maturity of five years in corporate bonds issued by infrastructure companies, it said.

Probable Question Areas

1. Negative Sectors
Sectors that do not contribute to economic growth. eg : defence, healthcare

2. U.K. Sinha Committee on financial flows.
The UK Sinha Committee was set up to review the policy of foreign investment in India. It proposes restructuring and rationalization of administration of capital flows. In a sea change from the existing structure the committee has recommended a single window for registering Qualified Foreign Investors or QFI's and it has done away with distinctions between investor classes like Foreign Institutional Investors, Foreign Venture Capital Investors and non-resident Indians.

3. Profit shopping and Loss shopping in stock market
Profit shopping is to show one's black money as earnings made through stock market and loss shopping is to show losses in one's stock trading accounts, so that their earnings from other sources are not taxed.

4. Tax Information Exchange Agreements
Tax information exchange agreements (TIEAs) provide for exchange of information on request relating to a specific criminal or civil tax investigation or civil tax matters under investigation

5. Double Tax Avoidance Agreements
Double taxation is the imposition of two or more taxes on the same income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country. The double liability is often mitigated by tax treaties between countries.
  • Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kind of taxpayers.
  • A large number of foreign institutional investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty between India and Mauritius/Cyprus, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in Mauritius/Cyprus selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius/Cyprus, the gain will escape tax altogether.It must be noted that India has and is making attempts to revise both the Mauritius and Cyprus tax treaties to eliminate this favourable treatment of capital gains tax. 
6. Qualified Financial Investors
A qualified foreign investor (QFI) is a person residing in a country (other than India) which is a signatory to IOSCO's multilateral MoU and is compliant with FATF standards. He should not be registered with Sebi as a foreign institutional investor or a sub-account.
  • Sebi allows QFIs in Indian MFs.
  • Aggregate investment can be up to $10 billion in equity schemes; $3 billion in debt schemes.
  • QFIs can’'t avail facilities such as SIPs, withdrawals, transfer of units and switching between schemes.
  • A QFI can invest in Indian mutual funds in two ways either by opening a demat account with SEBI-registered depositories who will execute their orders and also hold units on their behalf or eligible investors will place orders with a foreign depository for buying units on their behalf. 
Sources : wikipedia, Economic Times, Business Standards, Ibnlive,BusinessLine