Category : UPSC
Stock Market in India
Stock Market (Specially in India Context)
A stock exchange is an organization which provides a platform for trading shares- either physical or virtual. The origin of the stock, market dates back to the year 1494, when the Amsterdam Stock Exchange was first set up. In a stock exchange, investors through stock brokers buy and sell shares in a wide range of listed companies. A given company may list in one or more exchanges by meeting and maintaining the listing requirements of the stock exchange.
In financial terminology, stock is the capital raised by a corporation, through the issuance and sale of shares. In common parlance, however, stocks and shares are used interchangeably. A shareholder is any person or organization which owns one or more shares issued by a corporation. The aggregate value of a corporation's issued shares, at current market prices, is its market capitalization. Stock broker buys and sells for an investor and does the work of arranging the transfer of stock from a seller to a buyer.
Importance of Stock Exchanges
· For efficient working of the economy and for the smooth functioning of the corporate form of organization, the stock exchange is an essential institution.
· an efficient medium for raising long term resources for business
· Help raise savings from the general public by the way of issue of equity debt capital
· attract foreign currency
· exercise discipline on companies and make them profitable
· investment in backward regions for job generation
· another vehicle for investors? savings
Stock Exchanges in India
The first company that issued shares was the VOC or Dutch East India Company in. the early 17th century (1602). Since then we have come a long way. With over 25m shareholders today, India has the third largest investor base in the world after the USA and Japan. Over 9,000 companies are listed on the stock exchanges, which are serviced by approximately 7,500 stockbrokers. The Indian capital market is significant in terms of the degree of development, volume of trading and its tremendous growth potential.
Stock exchanges provide an organized market for transactions m securities and other securities. There are 24 stock exchanges in the country, 21 of them being regional ones with allocated areas. Three other are set up in the reforms era, viz. National Stock Exchange (NSE), the Over the Counter Exchange India Limited (OTCEI) and Inter-connected Stock Exchange of India Limited (ISE) Important Stock Exchanges m India are Bombay Stock Exchange, popularly known as BSE and National Stock Exchange located m Bombay.
Stock Exchanges m India ?
2. New Delhi
The Bombay Stock Exchange, or (BSE) is the oldest stock exchange in Asia located at Dalal Street in Mumbai/ India. Established in the year 1875, it is the largest securities exchange in India with more than 6,000 listed Indian companies. BSE is also the fifth largest exchange in the world with market capitalization of US $1.6 trillion (2011). About 5000 companies are listed on the BSE.
Overall performance of BSE is measured using the BSE SENSEX or the BSE 30 index. This index is composed of 30 BSE stocks. These stocks are selected from specified group shares on the basis of market cap, liquidity, depth, trading frequency and industry representation. BSE 3D was introduced in 1986. Apart from BSE 30, there are various other indices used in the BSE: Some of these include BSE 100, BSE 200, BSE 500, BSE PSU, BSE MIDCAP. BSE SMLCAP etc.
One of the unique features inside the BSE includes the automatic online trading system known as
BOLT that ensures an efficient and transparent market for trading in equity, debt instruments and derivatives. BSE contributes phenomenally to the .overall economic development and capital markets in India.
In 2005, the status of the exchange changed from an Association of Persons (AoP) to a full-fledged corporation under the BSE (Corporatization and Demutualization) Scheme, 2005 and its name was changed to The Bombay Stock Exchange Limited.
Classification of companies listed in BSE
Companies with large capital base, large shareholder base, and good growth record with regular dividends & greater volumes in secondary market.
Relatively liquid scrips with good management & satisfactory growth prospects & volumes
Segment for Non-convertible debentures .
Central and State Government Securities
It comprises ofcompanies not complying with clauses ofthe listing agreement and are not redressing the grievances ofthe investor.
Sensex or Sensitive Index is a value- weighted index composed of 30 companies with the base 1978- 1979 = 100. It consists of the 30 largest and most actively traded blue chip stocks, representative of various sectors, on the Bombay Stock Exchange. Inclusion of the company is basically on the basis of market capitalization. The 30 companies in the index are revised periodically- some are replaced by others and new sectors may find representation as the economy evolves. The Sensex is generally regarded a mirror or barometer of the Indian stock markets and economy.
Demutualization is when management and ownership are separated. Ownership is divested from the brokers and the company becomes a public company. All stock exchanges are to be demutualised according to the Government law made in 2004. Demutualization, thus means that ownership, management and trading rights are separated in a stock exchange.
National Stock Exchange of India
The National Stock Exchange of India (NSE), is one of the largest and most advanced stock exchanges in India. In the year 1991 Pherwani Committee recommended to establish National Stock Exchange (NSE) in India. In 1992 the Government of India authorized IDBI for establishing this exchange. The National Stock Exchange of India was promoted by leading Financial Institutions and was incorporated m 1992. In 1993, it was recognized as a stock exchange. NSE commenced operations in 1994. It is located in Mumbai, the financial capital of India.
Following financial institutions were the promoters of National Stock Exchange:
· Industrial Development Bank of India (IDBI).
· Industrial Finance Corporation of India (IFCI).
· Industrial credit and Investment Corporation of India (ICICI).
· Life Insurance Corporation of India (LIC).
· General Insurance Corporation of India (GIC).
· SBI Capital Markets Limited.
· Stock Holding Corporation of India Limited.
· Infrastructure Leasing and Financial services Limited.
The Standard & Poor's CRISIL NSE Index 50 or S&P CNX Nifty - Nifty 50 or simply Nifty is the leading index for large companies on the National Stock Exchange of India. The Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy.
The CNX Nifty Junior is an index for companies on the National Stock Exchange of India. It consists of 50 companies on the National Stock Exchange of India. It has the second tier of stocks in terms of market cap and don?t make it into Nifty.
The Inter-Connected Stock Exchange of India Limited (ISE)
The Inter-Connected Stock Exchange of India Limited (ISE) is being promoted by regional stock exchanges to set up a new national level stock exchange. The ISE would provide a national market in addition to the trading facility at the regional stock exchanges.
BSE, Federation of Indian Stock Exchanges and regional stock exchanges have promoted Indonext. The regional stock exchanges that are part of Indonext include Madras Stock Exchange, Bangalore Stock Exchange, Interconnected Stock Exchanges of India, Ludhiana Stock Exchange and Vadodara Stock Exchange. Indonext is envisaged to bring liquidity and attention to stocks that are listed on RSEs.
Over the Counter Exchange of India (OTCEI)
The OTC Exchange of India (OTCEI) incorporated under the provisions of the Companies Act 1956, is a public limited company. It allows listing of small and medium sized companies. OTCEI is promoted by the Unit Trust of India, Industrial Development Bank of India, the Industrial Finance Corporation of India and others and is a recognised stock exchange.
The capital markets in India are regulated by the Securities and Exchange Board of India. (SEBI) It was established in 1988 and given a statutory basis in 1992 on the basis of the Parliamentary Act-SEBI Act 1992 .to regulate and develop capital market SEBI regulates the working of stock exchanges and intermediaries such as stock brokers and merchant bankers, accords approval for mutual funds, and registers Foreign Institutional Investors who wish to trade m Indian scrips. Section 11(1) of the SEBI Act says that it shall be the duty of the Board to protect the interests of investors in securities.
SEBI promotes investor's education and training of intermediaries of securities markets. It prohibits fraudulent and unfair trade practices relating to securities markets, and inter trading in securities, with the imposition of rnonetary penalties, on erring market intermediaries. It also regulates substantial acquisition of shares and takeover of companies and calling for information from, carrying out inspection, conducting inquiries and audits of the stock exchanges and intermediaries and self-regulatory organizations m the securities market.
SEBI has its head office in Mumbai and its three regional offices in New Delhi, Calcutta and Chennai.
SEBI?s powers were enhanced in 2002 - strengthen the SEBS board, enlarge it to nine from six and appoint three full-time directors; given enhanced powers to conduct search and seizure etc.
SEBI and the Reforms
The Stock Exchange Seam of 1992 (Harshad Mehta) and the scam in 2000 (Ketan Parekh) led to various measures by the Government to protect the interests of the small investors. SEBI introduced reforms like improved transparency, computerization, enactment against insider trading, restrictions on forward trading, introduction of T + 2 system of settlement etc. The restriction and elimination of forward or Contango trading, referred to in India as 'Badla' is a bold step to check speculation and manipulation of the market. Some more steps taken by SEBI to strengthen markets are:
· SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms for brokers, and makes rules for making client/ broker relationship more transparent
· SEBI enforces corporate disclosures.
· Enforces ban on insider trading
· Protects retail investors
· SEBI is empowered to register and regulate mutual funds.
· Introducing a code of conduct for all credit rating agencies operating in India.
· Clause 49 of the listing agreement that SEBI introduced mandates that all listed companies should have half the Directors on the Board as Independent Directors.
Sebi makes new rules 2009
The Securities and Exchange Board of India (SEBI) approved the "anchor investor" concept under which an investor can subscribe to up to 30 percent of the quota for institutional investors in an initial public offering. Under the new rules, an anchor investor would pay 25 percent of the total investment at the time of applying for the initial public offering, and the balance within two days of the closure of the issue. Such anchor investors would have to adhere to a g lock-in period of one month from the date of the share allotment.
Capital Market Reforms
Since 1991 when the Government launched economic reforms, the following measures were taken.
· SEBI given statutory status- that is Act of Parliament
· Electronic trade
· Rolling settlement to reduce speculation
· FIIs are permitted since 1992
· setting up of clearing houses
· Settlement guarantee funds at all stock exchanges
· compulsory dematerialization of share certificates so as to remove problems associated with paper trading; and speed up the transfer
· Clause 49 of the listing agreement for corporate governance
· Restrictions on PNs
The primary market is that part of the capital markets that deals with the issuance of new securities directly by the company to the investors. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue.
In the case of a new stock issue, this sale is called an initial public offering (IPO).
FPO (Follow on Public offer)
If the company already issued shares and is going to the market again with a new issue, it is called Follow on Public Offer (FPQ).
The secondary market is the financial market for trading of securities that have already been issued in an initial public offering. Once a newly issued stock is listed on a stock exchange, investors and speculators can trade on the exchange as there are buyers and sellers.
Types of shares
There are essentially two types of shares: common stock and preferred stock.
Preferred stock is generally issued to banks by the companies though retail investors are also eligible for them. They are preferred for the following reasons.
· In terms of dividend payment, generally, they are given dividends even if the common stock holders are not.
· When the company is to be closed, preference stock holders are given money first from the proceeds of the sale of the assets of the companies.
· They may have enhanced voting rights such as the ability to veto mergers or acquisitions or the right of first refusal when new shares are issued (i.e. the holder of the preferred stock can buy as much as they want before the stock is offered to others).
Derivative is a financial instrument. It derives from an underlying asset- securities, debt instruments, commodities etc. The price of the derivative is directly dependent upon the value of the underlying asset in the present and the projected future trends. Futures and options are the two classes of derivates.
Buyback of Shares
Buy back of shares is the process of a corporation?s repurchase of stock it has issued. In the case of stocks, this reduces the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company. This is usually considered a sign that the company's management is optimistic about the future and believes that the current share price is undervalued. The company also should have reserves to do so.
Reasons for buybacks include
· putting unused cash to use
· raising earnings per share
· Reducing the number of shareholders to reduce the cost for servicing them, etc.
Shares bought back need to be cancelled and thus the total equity shrinks and the shareholders benefit. Buyback price is more than the market prices. Companies can buy back with the reserves but cannot borrow to buyback. It is allowed in India since 1998.
A Rolling Settlements is a mechanism of settling trades. In Rolling Settlements, trades done on a single day are settled separately from the trades of another day on the basis of Trade day + 2 days (T+2). Such petting of trades is done only for the day. As such, in Rolling Settlement, settlement is carried out on a daily basis. Since trades done on a given day cannot be bunched with those of another day. Thus, speculation is drastically reduced.
Commodity exchanges are institutions which provide a platform for trading in 'commodity futures? just as how stock markets provide space-for trading in equities and their derivatives. They thus play a critical role in price discovery where several buyers and sellers interact and determine the most efficient price for the product. Indian commodity exchanges offer trading in 'commodity futures' in a number of commodities. Presently, the regulator, Forward Markets Commission allows futures trading m over 120 commodities. There are two types of commodity exchanges in the country: national level and regional. There are five national exchanges:
· National Commodity & Derivatives Exchange Limited (NCDEX) Multi Commodity Exchange of India Limited (MCX)
· National Multi-Commodity Exchange of India Limited (NMCEIL)
· ACE Derivatives and Commodity Exchange
· Indian Commodity Exchange (ICEX) The unique features of national level commodity exchanges are:
· They are demutualized,
· They provide- online platforms or screen based trading
· They allow trading in a number of commodities and are hence multi- commodity exchanges.
They are national level exchanges which facilitate trading from anywhere in the country.
FMC (Forward Market Commission)
Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority, which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up m 1953 under the Forward Contracts Regulation) Act, 1952. The Commission consists of 2-4 members.
It monitors and disciplines the working of the exchanges. It recognizes an exchange or can withdraw such recognition. It collects and whenever the Commission thinks it necessary publishes information regarding the trading conditions in respect of goods.
It makes inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.
Forward Contracts (Regulation) Amendment Bill, 2010 was introduced in the Parliament. It seeks to make FMC into a Sebi- like regulator that is independent.
Forward Markets Commission is at present is part of the department of consumer affairs. FMC will' given more teeth to regulate exchanges and all market participants.
In addition, the bill proposes to increase the monetary penalty for contravention of the legal provision to up to Rs 25 lakh from a meagre Rs 1,000 at present.
Mutual fund ? a financial intermediary that mops up money, from a group of investors, to invest in capital market so as to generate returns for the investors. Mutual fund does it for a fees, there are two types of MFs.
Open-ended or open mutual funds issue shares (units) to the investors directly at any time. The price of share is based on the fund's net asset value. Open funds have no time duration, and can be purchased or redeemed at any time on demand, but not on the stock market.
An open fund issues and redeems shares on demand, whenever investors put money' into the fund or take it out.
It is a collective investment scheme issued by a fund. Only a fixed number of shares are issued in an initial public offering which may be called New Fund offering (NFO). They trade on an exchange/ Share prices are determined not by the total net asset-Value (NAV), but by investor demand.
Once the offering closes, new shares are rarely issued. They can be traded only on the secondary market (stock exchanges). Shares are not normally redeemable until the fund liquidates. On the other hand, an open-end fund where the fund company creates new shares and can redeem existing shares.
The total value of all the securities in the fund divided by the number of shares in the fund is called the net asset value.
Foreign Institutional investors (FIIs)
Foreign institutional investors are organizations which invest huge sums of money in financial assets - debt and shares- of companies and in other countries- a country different from the one where they are incorporated. They include banks, insurance companies? retirement or pension funds hedge funds and mutual funds.
Foreign individuals are not allowed to participate on their own but go through FIIs.
FIIs are allowed to 1veSt in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). The ceiling for overall investment for His varies from company to company.
His called hot money invested in Indian equities and debt about $30 billion in 2010.The number of registered FIIs is 1,660 and that of registered sub-accounts is above the 5,000 mark. Besides buying equities from the market, have participated in Qualified Institutional Placements (QIPS), directly from the promoters requiring, huge capital.
SEBI prescribes norms to register FIIs and also to regulate FIT investments.
The FII?s total investments in domestic markets amount to $60 billion since India allowed them to invest here m 1992.
Reasons for FIIs having India as a favorite destination
· growing economy
· corporate profits are high
· government policies are encouraging
· compared to other countries, India has brighter prospects
FII investment is referred to as hot, money for the reason that it can leave the country at the same speed at which it comes in.
Global Depository Receipts (GDR)
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs) GDRs are designated in dollars euro.
The proceeds of the GDRS can be used for financing capital goods imports, capital expenditure including domestic purchase/ installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JVs in India.
GDRs are listed on London SE or Luxembourg or elsewhere. They are also called euro issues.
American depository receipts are like shares. They are issued to US retail and institutional investors. They are entitled like the shares to bonus, stock split and dividend. They are listed either on Nasdaq or NYSE.
Like GDRS, they help raise equity capital in forex for various benefits like expansion, acquisition etc.
ADR route is taken as non-USA companies are not allowed to list on the US stock exchanges by issuing shares.
Similarly with Indian Depository Receipts (IDRS) as and when they are allowed.
Participatory notes are instruments used for making investments in the stock markets. In India, foreign institutional investors (FIIs) use these instruments for facilitating the participation of overseas funds like hedge funds and others who are not registered with the SEBI and thus are not directly eligible for investing in Indian stocks.
Any entity investing in participatory notes is not required to register with SEBI (Securities arid - Exchange Board of India), whereas all FIIs have to compulsorily get registered. Participatory notes are popular because they provide a high degree of anonymity, which enables large hedge funds to carry out their operations without disclosing their identity and the source of funds. KYC (know your customer norms are not applied here).
Since the source of funds is not revealed, the PNs are potentially unsafe. Therefore, SEBI m 2007 October imposed certain conditions like limits on the PNs that a single FII can issue etc. SEBI wants the PN holders to register with the SEBI and invest directly as India is a long term growth story. Sebi policy paid off with the number of FIIs registering with the regulator going up to over about 1750 (2011).
The SEBI action aims at ensuring that the quality of flows into stock markets and Indian forex market is clean.
A hedge fund is an investment fund open to only a limited range of investors. They are mostly unregulated. The term-hedge funds, is used to distinguish them from regulated investment funds such as mutual funds and pension funds, and insurance companies. Hedge funds are not allowed into India as they do not disclose data required by the SEBI.
An organisation which registers, monitors, matches and guarantees the trades of its members and carries out the final settlement of all futures transactions. The National Securities Clearing Corporation is the clearing house for the NSE.
Common stock and preferred stock that is, shares issued by the company. Also, funds provided to a business by the sale of stock.
is a certificate representing ownership of the company that issued it. Shares can yield dividends and entitle the holder to vote at general meetings. The company may be listed on a stock exchange. Shares are also known as stock or equity.
A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing.
Debt not secured by a specific asset of the corporation, but issued against the issuer's general credit- that is, it is unsecured debt. Investment earns an interest for the debenture holder, the following are various types of debentures
· convertible debentures can be converted into equity at a future date
· Non-convertible debentures will not be converted
· Partly convertible debentures will have some part converted into shares.
Bear & Bull
Bear is an investor who believes that market will go down.
Bull is an investor who believes that the market will go up- optimistic
A sustained period of falling stock prices usually preceding or accompanied by a period of poor economic performance known as a recession.
A stock market that is characterized by rising prices over a long period of time. The time span is n6t precise, but it represents a period of investor optimism, lower interest rates and economic growth. The opposite of a bear market.
Gilt is a bond issued by the government. It is issued by the Central Bank of a country on behalf of the government. In India, Reserve Bank of India issues the treasury bills or guts. Gilt Edged Market is the market for government securities.
Blue Chip Share
Blue chip shares are the shares of the companies that are the most valuable. Companies that are profit making; usually dividend ?paying and are liquid in the market- that is there is almost always in demand on the market.
Generally, companies with a market capitalization that is very high are called large caps and the next one below is.mid cap and the bottom one is small cap companies. Limits are not statutorily laid down and vary from institution to institution.
Ans. Market regulator SEBI set the investment limit for retail investors in an initial share sale offer to Rs 2 lakh. This will cut the numerous applications investors sometimes make in the name of relatives to get more shares.
The Reserve Bank of India introduced a system of Primary Dealers (PDs) in government securities market in 1995 with the objective to strengthen the infrastructure in the government securities market in order to make it vibrant, liquid and broad-based. The following can be the PD: subsidiaries of scheduled commercial banks and all India financial institutions and engaged predominantly in securities business and in particular the government securities market; or companies incorporated under the Companies Act, 1956 and engaged predominantly m securities business and in particular the government securities market; The company should have net owned funds of Rs.50 crore.
It is a dimension of market liquidity and it refers to the ability of a market to handle large trade volumes without a significant impact on prices.
Liquidity is the ease to find a trading partner for a given order.
Market depth means the following: The fraction of the overall market that is participating in the market?s up or down move. The greater the depth, the more the companies that are participating.
Trading volumes means the number of shares traded.
Negotiated Dealing System
Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments.
The sale of a security made by an investor who does not own the security; The short sale is made in expectation of a decline in the price of a security, which would allow the investor to then purchase the shares at a lower price in order to deliver the securities earlier sold short. In short sale, shares are borrowed at a -fees/price and returned when the sell-buy operation is completed. Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. It is banned.
Price per share multiplied by the total number of shares outstanding; also the markets total valuation of a public company.
Also known as the P/E multiple, this is the latest closing price divided by earnings per share EPS. P/E is perhaps the single most widely used factor in assessing whether a stock is overvalued or cheap. A company?s P/E should be looked at against those of similar companies, and against that of the stock market as a whole, since different industries and even different company are characterized by markedly different P/Es. In general, fast-growing technology companies have high P/ Es, since the stock price is taking account of anticipated growth as well as current earnings. A high P/E is often a reflection of high expectations for a stock.
The portion of a company's profit allocated to each outstanding share of common stock. The amount is computed by dividing net earnings by the number of outstanding shares of common stock. For example, a corporation that earned Rs 10 million last year and has 10 million shares outstanding would report earnings per share of Rs.1.
trading occurs when anyone with information related to strategic and price- influencing information purchases or sells stocks so as to make speculative profits.
A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors m electronic form. Besides holding securities, a depository also provides services related to transactions m securities. Benefits of a depository are reduction in paperwork involved m transfer of securities; reduction in transaction cost.
National Securities Depository Limited (NSDL)
In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. The enactment of Depositories Act in; 1996 paved the way for establishment of NDL, the first - depository in India.
NSDL offers facilities like dematerialization i.e., converting physical share certificates to electronic form, dematerialization i.e., conversion of securities in demat form into physical certificates etc.
Nasdaq stands for the National Association of Securities Dealers Automated Quotation System. Unlike the New York Stock Exchange where trades take place on an exchange, Nasdaq is an electronic stock market that uses a computerized system to provide brokers and dealers with price quotes. It is an electronic stock market- first in the world- run by the National Association of Securities Dealers. Many of the stocks traded through Nasdaq are in the technology sector.
Dow Jones Index
The New York Stock Exchange (NYSE) index, which reflects the movement of the world's first stock market, it is composed of the 32 most traded stocks of the NYSE. Currently there are three Dow Jones Indices: The Dow Jones Industrial Average (DJIA). The Dow Jones Transport Average (DJTA) and finally DJUA (Dow Jones Utility Average).
Important indices in the world
Market index is a number to indicate the average movement of prices of a securities market. It usually tracks select stocks.
? American Dow Jones Industrial Average and S&P 500 Index
? British FTSE 100: It is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. The index began in 1984 with a base level of 1000.The index is maintained by the FTSE Group, an independent company which originated as a joint venture between the Financial Times and the London Stock Exchange.
- French CAC 40
- German DAX
- Japanese Nikkei 225
- Indian Sensex and Nifty
- Australian All Ordinaries
- Hong Kong Hang Seng Index
- South Korea's Kospi.
- Straits Times Index (STI) of Singapore
- Bovespa index
- RTS Index (RTSI) is an index of 50 Russian stocks that trade on the RTS Stock Exchange in Moscow.
- SSE (Shenzhen Stock Exchange) Composite Index-China
- SSE (Shanghai Stock Exchange) composite index-China
A notable specialized index type is those for ethical investing indexes that include only those companies satisfying ecological or social criteria, e.g. those of Dow Jones Sustainability Index.
Ponzi scheme of Pyramid Scheme
A Ponzi scheme is a fraudulent investment operation that pays high returns to investors and promises higher returns to those who join the scheme later. The payments are done from investors own money or money paid by subsequent investors rather than from any actual profit earned because it is not possible to earn such high returns on any investment. The system is destined to collapse because the earnings, if any, are less than the payments. The scheme is named after Charles Ponzi, who
became notorious for using the technique after emigrating from Italy to the United States in 1903.
It means that a nation's economy may have an autonomous logic and need not be entirely dependent on the global economy. For example, if the world goes into a recession, all counties need not. India, for example grew at 6.7% (2008-09) while the USA and the west were contracting. Reflecting the economic realities, equity markets also perform autonomously after a point, it is called decoupling- that is, isolation from the rest.
China is more integrated with the world as its economy is driven by exports. However, even China is decoupled as it has a lot of domestic consumption driving its growth.
Clause 49 of the Listing Agreement to the Indian stock exchange came into effect in 2005.
It has been formulated for the improvement of corporate governance in all listed companies as it mandates that there should be certain independent directors on the Board of a Company.
Indian Depository Receipts are issued by a non-Indian company to Indian investors for its listing on Indian stock exchanges. It is like ADR.
Recommendation of Bimal Jalan Committee constituted by SEBI in Jan. 2010.
SEBI, in January 2010, had .appointed a committee under Dr. Bimal Jalan (former Governor of the Reserve Bank of India) to study and recommend changes on the ownership and governance of the Market Infrastructure Institutions ('MIIs') like stock exchanges, depositaries and clearing corporations.
The committee, on November 22, 2010, ha submitted its report. The report makes some particularly strong recommendations including not allowing such entities to get listed on stock exchanges.
The Report examines the nature of these institutions and emphasizes on the systemic importance of these MIIs for the economy. The report views these MIIs as producers of public good for society, which are essentially the price signals produced by a transparent and efficient market mechanism'.
The Report says that it is not possible to sever the regulatory role of the Mils from their more obvious role of Serving as providers of infrastructure of the market and goes on to describe the characteristics and functions of these Mils emphasizing the following characteristics' of such institutions:
1. In general MIIs are in the nature of public utilities.
2. All of them are vested with regulatory responsibilities, in varying degrees.
3. They have systemic importance to the economy.
In the above background, the Report highlights the conflict in the regulatory role? of these MIIs with their 'economic interests'.
The Committee suggests the raising of entry level barriers for the new exchanges. Only financial institutions and banks with a net worth of Rs. 1,000 crore could become anchor investors.
There will be a cap on the profits that the MFI shareholders can enjoy and on the remuneration of top executives of the exchange. Trading and clearing members will be ineligible to serve on the boards and the number of public interest directors should be at least equal-to those representing the shareholders. No stock exchange will be allowed to list, a recommendation that should put an end to a long-standing controversy over conflict of interest. Stock exchanges and other Mils will have to fulfil the disclosures and corporate governance requirements of the listing agreement applicable to public companies. Clearly, The Jalan Committee has taken note of the fact that stock exchanges will continue to have regulatory functions. The bar has to be kept. high to admit only genuine players.
Shariah, the religious law of the followers of Islam, has strictures regarding finance and commercial activities permitted for believers. Arab investors only invest in a portfolio of 'clean' stocks. They do not invest in stocks of companies dealing in alcohol, conventional financial services (banking and insurance), entertainment (cinemas and hotels), tobacco, pork meat, defence and weapons.
The index will be rebalanced every quarter though stocks that do not comply (at some point of time) with Shariah statutes will be excluded immediately. National Stock Exchange S&P CNX Shariah Index and Dow Jones Islamic India Index are other Shariah benchmarks that are tracked by investors, Shariah-based equity investments do not .allow investors to invest in heavily indebted.
Asia-s oldest stock exchange, the Bombay Stock Exchange (BSE); launched its Shariah index in December 2010.-The index, structured in partnership with Taqwaa Advisory Shariah Investment Solutions has 50 stocks selected from the BSE-500 bracket
Infrastructure, capital goods, IT, tetecom and pharmaceuticals shares will form a large chunk of the 'BSE Tasis Shariah-50 Index', as the new index is 'known. But no stock will have more than an 8% weightage. The stock Screening has been done by Taqwaa Advisory (Tasis) scholar board, and the index construction, by BSE.
The new index will attract investments from Arab and European countries where Shariah funds are already popular.
Takeover Code 2011
Securities Exchange Board of India - India's capital markets regulator announced changes to revamp takeover code. While the formal takeover code has been in place since 1997, SEBI constituted a Takeover Regulation Advisory Committee (Achutan Committee) in 2009 to review the existing norms and make them more relevant for the present day scenario.
To start with, the trigger point for open offer is increased from is per cent level to 25 per cent and the open offer size, after the 25 per cent trigger is reached, is enhanced from the current 20 per cent to 26 per cent.
If an acquirer acquires at least 25 per -cent stake in a company, then he has to come out with minimum 26 per cent open offer. This will result in making an acquirer ending up with "controlling" 51 per cent stake in the target company. Thus, the cost of acquisitions goes up substantially.
A Non-compete fee to be paid to the promoter is removed. It helps the smaller investors as all shares are equally priced and the promoter is not treated unequally. The reason for removal is that there is no need for additional price be given to a promoter by an acquirer over and above the fixed price paid to the ordinary shareholder arrived at after the valuation.
With the new takeover code, only serious buyers can bid for a take over as 51% stake is required.
Sebi's new takeover code may put corporate groups with promoter holdings below 30 per cent at risk of losing majority. In Infosys Technologies, promoters hold just about 16 per cent, but then it can attempt a fight back drawing strength from its phenomenal reserves of over $3 billion. As per the new takeover code, an acquirer can buildup 25 per cent stake in Infy from the market, then make an open offer for 26 per cent to take a majority 51 per cent control,
VIX (Volatility index)
Market Volatility Index. An index designed to track market volatility as an independent entity. The Market Volatility Index is calculated based on option activity and is used as an indicator of investor sentiment, with high values implying pessimism and low values implying optimism.
India VIX is India's volatility Index which is a key measure of market expectations of near-term V volatility conveyed by NIFTY stock index option prices. This volatility index is computed by NSE based on the order book of NIFTY Options. For this, the best bid-ask quotes of near and next-month NIFTY options, contracts which are traded on the F&O segment of NSE are used. India VIX indicates the investor's perception of the market's volatility in the near term i.e. it depicts the expected market
Volatility over the next 30 calendar days. Higher the India VIX values, higher the expected volatility and vice-versa.
Volatility Index (VIX) is a key measure of market expectations of near term volatility. As we understand, volatility implies instability. Thus when the markets are highly volatile, market tends to move steeply up or down and during this time volatility index tends to rise. Volatility index declines when the markets become less volatile. VIX is sometimes also referred to as the Fear Index because as the volatility index (VIX) rises, one should become fearful or careful as the markets can move steeply into any direction. Worldwide, VIX has become an indicator of how market practitioners think about volatility. Investors use it to gauge the market volatility and make their investment decisions.
VIX was first introduced by the Chicago Board of Options Exchange (CBOE) as the volatility index for the US markets in 1993 and it was based on S&P 100 Index option prices.
The Stock Exchange, Mumbai launched 'DOLLEX-30' to track the performance of SENSEX shares b Dollar terms.
Like SENSEX, the base-year forDOLLEX-30 has been fixed as 1978-79 and base value at 100 points. While SENSEX reflects the growth from market value of constituent stocks over the base period in rupee terms, a need was felt to design a yardstick by which these growth values are measured in dollar terms. Such an index would reflect, in one value, the changes in both the stock prices and the foreign exchange variation.
Foreign investors would find this index to be very useful as it would help them measure their 'real returns after providing for exchange rate fluctuations. The dollex is calculated daily at the end of the trading session taking into consideration that day's Re/$ rate.
Futures are financial instruments based on physical underlying (commodity, equities etc.). A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price.
Future are part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying investment. Futures are different from forwards as the former are traded on exchange while the later may be merely a signed contract between two parties.
Options are a class of futures where the buyer or seller has the option whether to buy or not ? put option is the right but not the obligation to sell. Call option is right but not the obligation to buy.
Taxation System in India: Concepts & Policies
Tax is a payment compulsorily collected from individuals or firms by government. A direct tax is levied on the income or profits of an individual or a company. The word ?direct? is used to denote the fact that the burden of tax falls on the individual or the company paying the tax and cannot be passed on to anybody else, For example/ income tax, corporate tax, wealth tax etc. An 'indirect tax is levied on manufacturing and sale of goods or services. It is called 'indirect because the real burden of such a tax is not borne by the individual or firm paying it but is passed on to the consumer. Excise duty, customs duty, sales tax etc.
Funds provided by taxation are used by governments to carry out the functions such as:
· military defense
· enforcement of law and order
· redistribution of wealth
· economic infrastructure ? roads, ports etc
· social welfare
· social infrastructure like education, health etc
· social security measures like pensions for the elderly, unemployment benefits
Taxation System in India
India has a well-developed tux structure. Being a federal country, the authority to levy taxes is divided between 'the central government and the state governments. The central government levies direct taxes such as personal income tax and corporate tax, and indirect taxes like customs duties, excise duties and central sales tax (CST). CST is assigned to the States in which it is collected. (Art.269). The states have the constitutional power to levy sales tax apart from various other local taxes like entry tax, octroi, etc.
Taxation has always played an important role in the formulation of the government?s economic policy. Taxation policy in a developing country like India can play an important part to raise resources for growth, to bring in reduction in inequalities, to direct growth in backward regions, to reduce consumption of luxury goods, to direct investment into small scale sector, to promote savings etc. In the wake of the economic reforms, the tax structure and procedures have been rationalised and simplified. Since 1991, the tax system in India has undergone substantial rationalization reduced rates and slabs and better administration.
Some of the changes are:
· Broadening the tax base to include services, fringe benefits, stock market transactions etc.
· Reduction in customs and ?excise duties. Peak customs rate is today 10%.
· Lowering of corporate tax rates to 30%.
· Rationalizing the personal income tax rates and slabs starting- from 1997 'dream budget'
· Sales tax reforms at the State level as a preliminary step towards their integration into CST.
· Introduction of VAT from 2005 at the state level; GST is expected to be introduced in 2013.
· Simplifying income-tax return filing procedures. For example, Saral, towards better taxpayer services, in 2011-12, the JT department has introduced simple and user friendly SAHAJ (Form) for individual salary tax-payers; SUGAM for small tax-payers availing presumptive tax scheme. (For presumptive tax, see ahead).
Tax revenue as a percentage of GDP decreased initially, after reforms began in 1991 as rates came down and growth of economy was not very robust. Compliance also did not increase proportionate to rate reduction. Since the Tenth Plan period, there has been a consistent rise in tax collections but it dipped due to global financial crisis of post-2008 period. The share of direct taxes in the Centre's gross tax receipts is estimated at 56.3% in 2011-12. Centre's gross tax-GDP ratio is being projected at 10.5% in 2011-12. Further, by widening the service tax net, the revenue collections from service tax for 2011- 12 have been pegged at Rs 82,000 crore with no increase in rates, up from Rs 71,309 crore in 2010-11.
Measures for Broadening Tax Base, Strengthening Compliance and Simplification
· Rates and slabs are rationalized
· service tax on more than 100 items at 12%
· adoption of VAT by almost all the states
· GST introduction
· Tax to be deducted at source on various items like interest on bank deposits; dividend distribution etc
· Quoting of permanent account number made compulsory for many transactions so more people can be brought into tax net.
· fringe benefit tax
· securities transactions tax
Other measures suggested are: minimizing exemptions and concessions; drastic simplification of laws and procedures; building a proper information system and computerization of tax returns, and a thorough revamping and modernization of the administrative and enforcement machinery.
Tax Collections 2011-12
As can be seen from the table above, Governmen.t of India's tax receipts were about Rs.932440 crores of which direct taxes make up 56.3%. It helps government spend more on social projects.
The reasons for the tax collections being so healthy are:
· economy is growing at a robust pace- expected to grow at about 8.5% in the current fiscal
· incomes of individuals have gone up
· lower tax rates help compliance
· Procedures are simple and citizen- friendly base has been widened a drive has been mounted to bring more people to pay income tax with proper investigation.
As a proportion of gross tax revenue, direct taxes have been accounting for over a half of the total since 2007-08. Given the composition earlier in the decade, which had a large share of indirect taxes, this indicated robust levels of growth in direct taxes, particularly corporation tax. However, growth in corporation tax was moderate in 2008-09 and 2009-10 owing to demand slowdown on account of the impact of global crisis. At 22.4 per cent, growth in corporation tax rebounded in 2010-11. Growth in personal income tax fell appreciably m 2008-09 to 3.3 per cent and rebounded in 2009-10 to reach 15.4 per cent. With growth in 2010-11 marginally lower at 13.7 per cent, overall growth in direct taxes in 2010-11 was at 19.5 per cent. It was budgeted at about the same level in BE 2011-12 with a growth of 20.2 per cent envisaged in corporation tax and 18.2 per cent in personal income tax. The Budget for 2011-12 underscored the governance, initiatives taken through information technology including online preparation and e-filing of income-tax returns, Electronic Clearing Services (ECS) facility for crediting of refunds directly in taxpayers' bank accounts; and electronic filing of tax deduction at source (TDS) documents. Also a category of taxpayers was notified who need not file a return of income as their income tax liability has been discharged at source.
Reduction in excise duties was a key component of the fiscal stimulus package announced in the wake of the global financial and economic crisis and its impact on the economy. With the economy rebounding in 2009-10 and 2010-11 and healthy growth in indirect taxes in 2010-11 the budget for 2011- 12 had the option of rollback of the excise duty cuts. But this was eschewed for two reasons: to see improved business margins, incentivize higher investment rates and to facilitate introduction of the goods and services tax (GST). While holding the peak non-agricultural custom duty rates at 10 per cent, the Budge for.2011-12 sought to rationalize three rates of 2 per cent, 2.5 per cent, and 3 per cent a the middle level of 2.5 per cent.
Cost of Direct Tax Collection
Buoyant economic growth along with higher tax compliance have led to a desirable decline in the cost of direct tax collections as a proportion of total direct tax collections: all- time low of 0.54 per cent in 2007-08.That is, the income-tax department spends 54 paise for every Rs 100 direct tax collected by it, which is among the lowest in the world. The income tax department has a tax base of 3.5 crore assesses.
Income-tax slabs and rates
10 per cent rate on a slab extending up to Rs 5 lakh. Likewise, the 20 per cent rate will now apply on income slabs beyond Rs 5 lakh and up to Rs. 10 lakh. The maximum marginal rate of 30 per cent on an income slab of above Rs 10 lakh.
Service tax was first imposed in 1994. Today the rate is 12% and a 3% education cess is additionally imposed. More than 100 services are being taxed. Tax analysts said that widening the service tax net is the first step before rolling' out a comprehensive GST. India's service tax collection for the Financial Year 2010-11 was estimated at Rs 69,400 crore and for 201 1-12, it is expected to increase to Rs 82,000 crore as per the Union Budget projections.
Major services that are currently taxed include telephone, insurance, brokerage, banking and financial services, courier, port services, etc. Some of the minor activities on which service tax has been recently imposed include beauty parlours, paridals or tent house services, dry cleaning, cable operators, etc.
Telephone services yield the maximum amount.
The service sector has emerged as an important area of economic activity. Reasons for taxing services
· Its share in the country's Gross Domestic Product (GDP) has increased from about 28% m 1951, to 55% (2011).
· Taxing services is important to raise resources and increasing the tax-GDP ratio
· service providers should share the tax burden with others-industry
· As the share of industry m GDP decreases while that of services expands, the tax base shrinks unless services are taxed.
· Failure to tax services distorts consumer choices, encouraging spending on services at the expense of goods and savings.
· As most of the services that are likely to become taxable are positively correlated with expenditure of high income households, subjecting them to taxation will improve equity.
Service Tax and Indian Constitution
In the Seventh Schedule to the Constitution, under Article 246, the item relating to ?taxes on services? was not specifically mentioned in any entry either in the Union List or in the State List.
However, Entry 97 of the Union List empowers Parliament to make laws in respect of any other matter not enumerated in List II (State List) or List III (Concurrent List), including any tax not mentioned in either of those lists. Since "taxes on services" is not there in any of the lists, service tax was levied by the Central Government in exercise of the powers under Entry 97 of the Union List.
The 88th amendment to the Constitution (2004)' amended Article 270 (made it divisible) and inserted in the Union List (List I) entry No. 92C ? 'taxes on services'.
The amendment to the Constitution places services tax formally under the Union List, This will pave the way for the Centre to levy and collect the tax.
The amendment becomes redundant with the introduction of GST in 2011 where the services will be jointly taxed by Centre and States.
GST - Evaluate its pros & cons?
Goods and Services Tax is a multi-point sales tax with set off for tax paid on purchases of inputs. There is no cascading (tax on tax) effect as there is deduction or credit mechanism for taxes paid for the inputs. The tax is levied on the value added and on consumption only. Total burden of the tax is exclusively borne by the domestic consumer. Exports are not subject to GST.
In the Union Budget for the year 2006- 2007, Finance Minister proposed that India should move towards national level Goods and Services Tax that should be shared between the Centre and the States. World over, goods and services are integrated and taxed as a comprehensive domestic indirect taxation system based on value addition. They attract the same rate of tax. That is the foundation of a GST. The basis of GST is value addition.
The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture and sale of goods as well as services at a national level. Integration of goods and services taxation would give India a world class tax system and improve tax collections. It would end the long standing distortions of differential treatments of manufacturing and service sector. The introduction of goods and services tax will lead to the abolition of taxes such as octroi, Central sales tax, State level sales tax, entry tax, etc and eliminate the cascading effects tax on tax.
It is aimed at forging a common domestic market, removing multiplicity of taxes, eliminating the cascading effect of tax on tax, making the prices of the Indian products competitive and, above all, benefiting the end consumers
The central and state governments moved closer to ushering in a nationwide goods and services tax on April 1, 2011, a reform intended to cut business costs and boost government revenue. The reform would eliminate multiple indirect taxes levied by states and the central government, leading to a reduction in the average tax burden on companies and a rise in the country's tax-to- GDP ratio.
The GST is an indirect tax that would replace existing levies such as excise duty, service tax, and value-added tax (VAT).Both the states and the central government would impose the tax on almost all goods and services produced in India or imported. Exports would not be subject to GST. For the first two years of operation, the proposal is for two rates both at the federal and state levels, converging to a single rate in the third year. Producers would receive credits for tax paid earlier, which would eliminate multiple taxation on the same product or service.
Direct taxes, such as income tax, corporate tax and capital gains tax would not be affected.
Eliminating a multiplicity of existing indirect taxes would simplify the tax structure, broaden the tax base, and create a common market across states and centrally administered districts.
Increased compliance and fewer exemptions to GST would lift India's federal tax-to GDP ratio from the 11.8 percent it currently estimates for the financial year 2012/13. At the same time GST would lower the average tax burden for companies that now pay cascading taxes on top of taxes through the production process.
By lowering business costs it would boost economic growth and increase exports, proponents argue, and bring India in line - with practices in many developed economies.
Reducing production costs would make exporters more competitive.
The GST may usher in the possibility of a collective gain for industry, trade, agriculture and common consumers as well as for the central government and the state governments for reasons cited above.
For the first year: 10 percent of CGST of Centre and 10% of SGST of states for goods and 6 percent each for essential items 8% each for services. Thus, it is dual rate. Also, goods and services are taxed separately initially.
The higher rate would come down to 9 percent in the second year, and the two rates would converge at 8 percent in the third year.
Yes. Goods deemed necessary or of basic importance would be taxed at a lower rate. The, government will review the various lists of exempted goods to align them at the federal and state levels.
Alcohol, petroleum and electricity would not come under GST.
GOI will compensate states for potential lost revenue and central government has assured states that if needed, it would increase a 50,000 crore -rupee ($10.6 billion) fund that the 13th Finance
Commission recommended as an incentive for the states to buy into GST.
The legislation to make constitutional amendments needs to be finalised and the mechanism for administering the tax needs to be created. The government also needs to set up the technology infrastructure to manage the tax-TAGUP.
The GST is initially intended to be revenue-neutral but is eventually expected to increase the lax collections due to more efficient collection, expanded base, transparency and increased compliance.
Implementation of a comprehensive GST would lift India's economy of over $1 trillion by between 0.9 percent and 1.7 percent, according to a report by the New
Delhi-based economic think tank the National Council of Applied Economic Research. Exports would rise by between 3.2 percent and 6.3 percent, while imports would
increase 2.4 percent to 4.7 percent, the study found.
Constitutional Amendment for GST
Constitution (One Hundred and Fifteenth
Amendment), Bill, 2011 (GST Bill)
Constitution (One Hundred and Fifteenth Amendment), Bill, 2011 (OST Bill) was introduced in the Parliament in the budget session in March 2011, deals with GST. The Bill seeks to introduce Goods and Services Tax (GST) and the GST Council. As per the existing structure of indirect taxation, the Parliament has the power to make laws on the manufacture of goods and the provision of services (Union List) while the State Legislatures have the power to make laws on the sale and purchase of goods within their respective states (State List). The Parliament has retained the exclusivity to make laws pertaining to sale of goods in the course of inter-state trade or commerce.
Definition of Goods and Services Article 366
The above Article which defines 'Goods and Services Tax7 to mean, any tax on supply of goods or services of both except taxes on the supply of:
· Petroleum Crude;
· High Speed Diesel
· Natural Gas
· Aviation - Turbine Fuel; ? and
· Alcoholic Liquor for human consumption.
The Union Government has the exclusive power to levy excise duty on the manufacture or production of the following
· Petroleum Crude
· High Speed diesel
· Natural Gas
· Aviation Turbine Fuel
· Tobacco and Tobacco Products
The State Governments shall have the power to levy tax on the sale (other than in the course of inter-state trade or commerce) of petroleum crude, high speed diesel, petrol, natural gas/ aviation turbine fuel and alcoholic liquor for human consumption. In Article 249 the Parliament has been vested with the power to make laws pertaining to GST on behalf of the state Legislature in circumstances of national interest. The power to make such laws would be pursuant to a resolution passed by the Council of States supported by not less than a two-thirds majority of the members present and voting. Power of Parliament to make laws on subjects in State List in the case of Emergency ? Article 250.
The Parliament has been vested with the power to makes laws pertaining to GST on behalf of the State Legislature when there is a proclamation of Emergency.
GST Council - Article 279A
The President shall constitute a GST Council within sixty days from the Commencement of the GST Act.
Membership of the GST Council
The Union Finance Minister would be the Chairperson, the Union Minister of State for Revenue shall be one of the members, the Finance Minister or any other minister nominated by each State Government shall be the members of the GST Council. The Members of the GST Council shall decide on the Vice-Chairperson of the GST
Council for such period as decided by the members.
Functions of the GST Council
The GST Council while being guided by the need for a harmonized structure goods and services tax and for the development of a harmonised national market for goods and services shall make recommendations to the Union and the States on:
· Taxes, cesses and surcharges levied by the Union and the States and local bodies which may be subsumed with in the GST
· Exemptions from GST for such goods and services
· Threshold limit of turnover below which GST may be exempted
· The GST rates
· Any other matter relating to GST
Every decision of the GST Council taken at a meeting shall be with the consensus of all the members present at the meeting.
GST Dispute Settlement Authority - Article 279B
The Parliament, by law, will provide for the creation of a Goods and Services Tax Dispute Settlement Authority (DSA) which shall adjudicate any dispute or complaint referred to the DSA by the State Government or the Union Government arising out of deviation from any recommendation of the GST Council which results in the loss of revenue to the State Government of the Union Government or affects the harmonized structure of the GST.
The DSA shall consist of three members namely, the Chairperson, who has been a Supreme Court Judge or the Chief Justice of a High Court, appointed by the President recommended by the Chief Justice of India; the remaining members shall be persons who shall have expertise in the field of law, economics or public affairs appointed by the President recommended by the GST Council.
The DSA shall pass suitable orders including interim orders
Only the Supreme Court shall exercise jurisdiction over such adjudication or dispute or complaint.
Fiscal Autonomy Issues
Constitutional amendments are required to enable the Centre and the states to impose tax on the same base of goods and services. Currently, the states cannot impose tax on services. They also cannot impose tax on manufacturing of goods. Centre cannot levy tax sales tax.
States feel that their fiscal autonomy is being eroded for the following reasons:
·they are surrendering the power to sales tax
·they cannot change rates according to their fiscal needs
·all states cannot have the same rates
·centre may not compensate the states fully
·The position of states is rejected on the other points for the following reasons.
·centre is all surrendering and sharing its powers regarding service tax
·and union excise duties
·states are free to tax sin goods like liquor and also the petroleum products
It is said that like VAT, GST would also increase the revenue of the states as they will have powers to impose tax on services, which are growing at a rapid pace. However, in case of Contentious federal issues on GST.
GST rates, the division of taxing powers between the Centre and the states, compensation amount; exemptions and on certain design elements of the GST.
Goods and Services Tax (GST): Challenges for implementation.
The GST is a necessary condition for a common market to exists, this permits free and unimpeded movement of goods and services across a federation, thus encouraging efficient regional specialization.
Such harmonization will significantly reduce the vertical imbalance between the Centre and the states by enhancing the tax base of the states. It is going to be the biggest ever tax reform in India.
Challenges to address:
? Integration of a large number of Central & State Taxes
? Multiplicity of taxes and tax rates to be unified
? Federal distribution of powers to levy and collect taxes
? Necessary constitutional amendments.
? Rationalization of thresholds and exemption limits.
? Standardization of systems and procedures.
? Broad based computerizations across the Nation.
? Dispute settlement procedure and machinery.
? Training of tax administrators and assesse.
? Protecting and balancing the present and future revenues of the Centre and the States.
? Safeguarding the interests of less developed States with lower revenue potential.
? Taxing of Alcohol, tobacco, petroleum products which are out of the GST regime.
GST and Fiscal Federalism
Being the largest indirect tax reform requiring the centre and the states to adjust their constitutional taxing powers, GST has opened up fiscal federal challenges like never before. There is mutual surrender of powers to a uniform national taxation system where both gain. But there are apprehensions of loss of fiscal autonomy by states and central dominance as mentioned above.
The Constitutional changes proposed and being debated by the Empowered Committee of State Finance Ministers are likely to bring the federal units together for a new and innovative system of fiscal federal sharing and cooperation
Technology Advisory Group for Unique Projects (TAGUP)
An effective tax administration and financial governance system calls for creation of IT projects which are reliable, secure and efficient. IT projects like Tax Information Network, New Pension Scheme, National Treasury Management Agency, Expenditure Information Network, Goods and Service Tax, are in different stages of roll out. To look into various technological and systemic Issues, Finance Minister announced in the Union Budget 2010-11 to set up a Technology Advisory Group for Unique Projects under the Chairmanship of Shri Nandan Nilekani. [t has been set up in mid-2010.
Tax Reforms in India
Since the beginning of the last decade as a part of the economic reforms programme, the taxation system in the country has been subjected to consistent and comprehensive reform. The need for the tax reforms arises from the fact that
· tax resources must maximised
· international competitiveness must be imparted to the Indian economy
· transaction costs must be reduced -
· the high-cost nature of Indian economy needs to be corrected so that
· compliance increases
· equity improves
· investment flows
On the direct tax front, the reforms are the following:
· Reduction and rationalization of rates- there are only three rates of income tax today with the highest rate at 30%
· Simplification of procedures
· Strengthening of administration
· Widening of the tax base to include more tax payers in the tax net
· Exemptions are gradually being withdrawn'
· MAT was introduced for the 'zero tax? companies
· The Direct Tax Code of 2010 is meant to replace the outdated Income Tax Code of 1961.
· Reduction in the peak tariff rates- 10% is the peak customs duty today which was more than a 90% reduction since 1991.
· The number of slabs has come down drastically
· There is a progressive change from specific duty to advalorem tax
· VAT is introduced
· GST is being rolled out by 2011
· Extension of service tax to more than 1.00 items at 10% rate
Tax expenditure refers to revenue forgone as a result of exemptions and concessions (personal, corporate, indirect tax). It was introduced for the first time in 2006-07 Union Budget. The revenue foregone due to tax incentives in 2010-11 is estimated at Rs 5, 60,276 crore. Such exemptions have been justified for promoting balanced regional growth, dispersal of industries, neutralisation of disadvantages on account of location, and incentives to priority sectors, including infrastructure. These should be subject to a sunset clause, as tax exemptions often create pressure groups for their perpetuation.
While some may be justified as they enhance investment and generate more taxes for the government, others are not.
Such exemptions and concessions can distort resource allocation and stunt productivity. They also result m a multiplicity of rates, legal complexities, classification disputes, litigation etc.
If these exemptions are ratiohatized, they can help the government spend moreon social and infrastructure and help reduce the fiscal deficit
G-20 and Bank Tax
Group of 20 saw the European countries like Germany and France propose a ban tax on their transactions so that fund could be mobilised in order to bail out future bank failures. The idea is to avoid taxing ordinary people. India along with Brazil and other countries opposed it on the following grounds
· Regulation is the remedy
· Banks can pay the tax and not shed their reckless behavior
· It may in fact induce them to be more reckless as there is a ready fund available and bailout is guaranteed.
· India has a well regulated banking system and so did not suffer the same fate as the banks in developed economies. The problems of the advanced countries should not be imposed on others
· Banks, as private entities, would simply push the added costs onto consumers.
A tax haven is a country or territory where certain taxes are levied at a low rate or not at all. Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. For example, income tax, wealth tax or corporate tax etc.
The important features of a tax haven arte:
? nil or nominal taxes;
? lack of effective exchange of tax information with foreign tax authorities, that is, personal finance information is not shared with other countries
? no requirement for a substantive local presence; and
? Self-promotion as an offshore financial center.
Switzerland, Singapore, the Cayman Islands, Monaco, Luxembourg and Hong Kong are among 45 territories blacklisted by the Organisation for Economic Co-operation and Development and threatened with punitive financial retaliation for their banking secrecy.
It shows the entity on whom tax us imposed. It is different from the tax burden as shown below, if government increases tax on petrol, oil companies may absorb it, if competition is intense or they may pass it on to private motorists. Tax incidence here refers is on companies and the burden may be on the consumer.
It means those who actually pay taxes from whom tax is collected. Depending on the market forces involved, a tax can be absorbed by the seller or by the buyer (in the form of higher prices), or by a third party like sellers' employees in the form of lower wages.
The value of goods, services and incomes on which tax is imposed. When economists speak of the tax base being broadened, they mean a wider range of goods, services, income, etc. has been made subject to a tax. In the case of income tax, the tax base is taxable income. Some kinds of income are excluded from the definition of taxable income, such as savings. For sales tax, the tax base is the value/volume of items that are subject to tax; essential goods, for example, are not part of the tax base.
It indicates how much tax is due from each source. Some tax systems have high rates but have a narrow base allowing generous deduction of business expenses Other tax systems have a wide base with few exemptions and lower rates.
Any technique which allows one to legally reduce or avoid tax liabilities. It is a way in which the taxpayer can invest his income in a particular kind of investment that gives tax concessions.
Difference between tax avoidance and tax evasion: There are provisions in the law that allow one to save and invest in a manner that leads to reduction in taxable income, if these provisions are used for the benefit is called tax avoidance. It is lawful to take all available tax deductions.
Tax evasion, on' the other hand, is a punishable offence. Tax evasion typically involves failing to report income, or improperly claiming deductions that are not authorized.
Hidden taxes are taxes that are concealed in the price of articles that one buys. Hidden taxes are also referred to as implicit taxes. The most well-known form of the hidden tax is the indirect tax. Examples of hidden taxes are import duties.
Differentiate between Proportional, Progressive and regressive tax?
An important feature of tax systems is whether they are proportional tax (the tax as a percentage of income is constant over all income levels), progressive tax (the tax as a percentage of income rises as income rises), or regressive tax (the tax as a percentage of income falls as income rises). Progressive taxes reduce the tax incidence on people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes.
A Latin term meaning "according to Worth,? referring to taxes levied on the basis of value. Taxes on real estate and personal property are ad valorem. Luxury goods are taxed higher even if they weigh the same or number the same as ordinary goods.
Compound duties are a combination of value and other factors based on which tax is imposed.
Excise duty is a tax on manufacture and e levied on the manufacture of goods within the country.
When goods are imported or exported, customs duty is imposed and collected by the Union Government. Peak customs duty today is 10%.
Negative Income Tax
Subsidy is a negative income tax. It is a taxation system where income subsidies are given to persons or families that are below the poverty line. The government will send financial aid to a person who files an income tax return reporting an income below a certain level.
Entry 52 of the State List, VH Schedule, which specifies tax on the entry of goods into a local area is the octroi. Octroi has been a main source of revenue for most of the urban local bodies in India. It is criticized for the fact
that it is an obsolete method of tax collection and involves stoppage of vehicles at the check posts outside the city limits, thereby obstructing a free flow of vehicular traffic; waste of business hours; loss of fuel etc.
It refers to the percentage change in tax revenue with the growth of national income. That is growth based increase in tax collections.
Tax elasticity is defined as the percentage change in tax revenue in response to the change in tax rate and the extension of coverage. Buoyancy, on the other hand is the response to economic growth when the base increases but there is no change in the rate.
It means no frequent changes and continuity of policy in a predictable and transparent manner. Although revenue from different taxes varies from year to year, revenue stability is desirable because it makes it easier for a government to build a credible spending and borrowing plan for the year ahead. Taxes whose revenue is relatively stable contribute to overall revenue stability. Market players also can plan better.
The Pigovian tax is imposed on bodies that have a negative externality. For example, pollution. Externality means impact of one person's actions on the well being of an outsider (bystander or third party). For example, the seller and consumer of cigarettes together will harm the third person with pollution. Example of negative externality is exhaust fumes from automobiles. Positive externality refers to a good effect on the third party. For example, restoration of historic buildings, research into new technologies. Carbon tax is one example in the context of the need to discourage fossil fuels and encourage renewable sources due to climate change threat.
James Tobin, economist, proposed a worldwide tax on all foreign exchange transactions- when foreign capital enters a country and when it leaves. The aim is to check speculative flows. Long term investment? generally FDI, will not suffer as it does not invest for speculative (short term) reasons like FIIs.
Tobin justified the tax on two Grounds
First, it would reduce exchange rate volatility and improve macroeconomic performance.
Second, the tax could bring in revenue to support for 'development efforts or exchange rate stabilization.
The defining characteristic of a Tobin tax is that the tax is levied twice- once when one acquires foreign exchange, and again when one sells the foreign exchange.
The south East Asian currency crisis (1997) is attributed to the 'dynamics of hot money' (portfolio investments or FII flows).
Tobin tax can be imposed only if all the countries accept the proposition. Otherwise FIIs can go to countries where the tax is not imposed.
Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the Income Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who show book profits as per their profit and loss account (according to the Companies Act) but do not pay any tax by showing no taxable income as per provisions of the Income Tax act. Although the companies show book profits and may even declare dividends to the shareholders, they do not pay any income tax.
These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, MAT was introduced in 1996. They are required to pay MAT at 18.5% (2011-12).
Book profit is Profit which is notions made but 'not yet realized through a transaction, such a stock which has risen in value but is still being held. It is also called unrealized gain or unrealized profit or paper gain or paper profit.
Presumptive Tax the Estimated Income Method of assessment for certain categories of businesses is prevalent in several countries. Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on the taxpayer's accounts. The term presumptive is used to indicate that there is a legal presumption that the taxpayer's income is no less than the amount resulting from application of the indirect method.
The reason for the presumptive tax is that in a number of businesses the assesses do not maintain books of accounts or the books of accounts maintained are irregular and incomplete.
It was introduced m India in the early nineties for traders but was withdrawn as the success rate was low.
Developed by Arthur Laffer, this curve shows the relationship between tax rates and tax revenue collected by governments.
The Laffer curve has been debated in the country since 1997-1998 Budget reduced rates and slabs in the income tax regime in the country.
Inverted Duty Structure
Higher import duty on the raw materials than on the finished product are called inverted duty structure .It puts the domestic manufacturers at, a disadvantage making them uncompetitive. For instance, compact fluorescent lamps (CFLs), where the import duty on raw materials for manufacturing CFLs is 9.7 per cent more than on finished bulbs. This skewed duty structure makes Domestic CFL manufacturers uncompetitive.
Dividend Distribution Tax
Companies giving dividend have to pay tax on the amount distributed as dividend.
It means withholding of tax from certain payments including interest, salaries paid to employee?s professional fee, payment to contractors etc. It is the same as TDS.
Capital Gains Tax
It is the tax on the gains made from buying and selling assets like land, shares etc. - If the gain is made in the assets held for over three year (one year for shares), it is called long term capital gain and taxed. For shares, there is no long term capital gams tax. For short term capital gains (less than one year)/it is 15% for shares.
When income accumulates into wealth, it gets taxed after a point. Wealth tax is levied only in respect of specified non-productive assets such as residential houses, urban land, jewellery, bullion, motor cars etc.
Securities Transaction Tax
Introduced in the Union Budget 2004- 2005, it is a tax on the value of all the transactions of purchase of securities that take place in a recognised stock exchange of India. It is meant to make up revenue loss from the abolition of long term capital gains .tax.
Transfer pricing involves charging for goods supplied to the subsidiary. The international norm in this regard is the 'arms length principle? which means that when two related parties deal m goods and services, pricing must be done objectively and commercially. If the principle is not followed/ it means losses for the government. For example, an MNC has a subsidiary in India and elsewhere. The corporate tax rates are high in India. Therefore, the price of goods sold by the MNC to the two subsidiaries in the two countries is shown differently higher in India and less in the other country. In that case, Indian subsidiary shows less profit or more losses and tax liability (corporate tax) is less.
Thus, transfer pricing is generally done in a way as to show high profit in countries where the corporate tax rate is low and low profits/losses where the rate is high. Therefore, transfer pricing norms existing today need to be rationalise the tax revenues that are due to the government are not eroded. Tax evasion and money laundering has to be checked by tightening the transfer pricing regime.
Rupee Comes Like This
The major pan of the government's revenue comes from borrowings. Consequently, the biggest chunk of expenditure is on interest payments.
Out of every rupee that enters the government's coffers, 29 paise is from borrowings and other debt, with corporation tax contributing 22 paise and income tax another 12 paise.
Of the remaining, customs and excise duties account for 10 paise each, with another 10 paise coming from non-tax revenue. Service taxes amount to six paise, while non- debt capital receipts contribute one paise.
The term cess is generally used to mean a tax. It is an additional levy on a tax. It is different from surcharge as the latter is general while the former is specific. Collections from the latter can be used for any purpose while cess collections can be used for designated ends only- education cess etc.
Direct Taxes Code Bill, 2010
The direct taxation of the income of individuals companies and other entities is governed by the Income Tax Act, 1961. The Direct Taxes Code- seeks to consolidate the law relating to direct taxes. The Bill ?will replace the Income Tax Act, 1961, and the Wealth Tax Act, 1957. The Bill widens tax slabs, and lowers corporate tax rates. It removes a number of exemptions and grandfathers some others.
The Bill replaces the Income Tax A 1961 and the Wealth Tax Act, 1957.
The Bill widens income tax slabs for individuals' income between Rs 2 lakh to Rs. 5 lakh will be taxed at 10%, between Rs 5 lakh and Rs 10 lakh at 20%, and that over Rs10 lakh at 30%.
Companies will be taxed at 30% of business income. Foreign companies shall pay an additional branch profits tax of 15%, Nonprofit organisations are taxed at 15%.
The Bill removes several tax deductions currently allowed for companies, but retains most deductions current available to individuals.
The Bill removes the distinction between short term and long term capital gains for all assets except securities listed on stock exchanges.
The wealth tax exemption Limit increased from Rs 15 lakh to Rs 1 crore.
The Bill introduces General Anti Avoidance Rules to allow tax authorities to classify any arrangement as one entered into for evading taxes.
MAT is at 20% of book profits
Key Issues and Analysis
A Draft Direct Taxes Code, 2009 that was published for public feedback had the intent of simplifying tax legislation and widening the tax base. The Bill reverses some of the provisions of that Draft Code.
Tax exemptions for individuals have been retained while most exemptions for corporates removed. The tax rates for individuals have been lowered. The taxes paid by corporates will form a greater part of the government?s revenue than earlier.
The Bill may increase the burden of compliance in two ways. There are no guidelines to indicate in what situations the General Anti Avoidance Rules will be implemented. Additionally, the Bill requires income from different units of the same business to compute their tax liability separately.
The Bill retains the Dividend Distribution Tax and the Security Transaction Tax. These taxes are levied at a uniform rate irrespective of the amount of income or profit, and go against the principle of progressive taxation of individuals.
The Bill seeks to tax foreign companies if their place of effective management is in India at any time of the year. It is unclear-as to what would constitute effective Management of a foreign company in India.
Bill makes a number of broad changes to the way income is taxed under the Income Tax Act, 1961, these include:
? Personal income ? Widening of income tax slabs and the removal of some exemptions;
? Business and corporate income ? Removal or grandfathering (phasing out) of most exemptions.
? Tax administration ? Wider powers to prevent tax evasion, and an increase in certain penalties.
? Tax Administration and Appellate Authorities
? Under the Act, the apex authority for tax administration is the Central Board of Direct Taxes (CBDT).
? The Bill introduces a general anti- avoidance rule. (GAAR), which aims to plug loopholes in the law which
· Help tax payers reduce their tax liability. The Commissioner of Income Tax can declare any arrangement by a tax payer as 'impermissible', if in his judgment, its main purpose was to have obtained a tax benefit.
India-Mauritius Tax Treaty
India and Mauritius have a double taxation avoidance treaty (DTAA) under which companies of one country investing in the other country are not taxed. It is well- intentioned but is being abused. India has been seeking to tax capital gains on companies making profit in India. Mauritius has agreed to negotiate and revise the existing Double Taxation Avoidance Agreement (DTAA) with India.
More than 40% of total foreign investments to India originate from Mauritius. Authorities here suspect most these investments are nothing but treaty shopping to avoid paying tax. Capital gains is exempted from tax in Mauritius, and under the DTAA, a Mauritian company cannot be taxed in India. The government has en under pressure to act against tax havens, especially after the civil society slammed it for its failure to tackle the issue of black money and tax evasion. India has been insisting on taxing all gains made by a Mauritian company here.
India has DTAAs with 79 countries and is in the process of negotiating more such agreements to broaden the information sharing mechanism. To give more teeth to its tax laws and bring tax evaders to book, the Government has devised -a Tax Information Exchange Agreement (TIEA) which is being negotiated with 22 identified tax havens. The finance ministry has been negotiating fresh tax treaties with countries with which has no such arrangement and revising existing treaties where liberal clauses are replaced with more stringent reporting mechanism to avoid any round tripping.
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