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Making sense of falling currencies, oil prices and effect of waving-off MAT in India

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By Gaurav Sharma

The world economy is at crossroads. Hit hard by the yuan depreciation and the slowdown of growth in China, the world currencies have pummeled under the fear of currency wars being waged to boost the domestic export market.

Vietnam and Kazakhstan have already loosened the grip on exchange rates. Russian rouble has declined between 4-7 per cent while the Indian rupee has fallen more than 3 per cent in the last two weeks.

Economists’ take on it:

However, economists have warned against such a move while pointing out that the Great Depression of 1930’s, a period during which economies raised import tariffs and cut currency rates through competitive devaluation of currencies further exacerbated the slowdown in growth.

multi-currencyExperts say that such tactics are a zero-sum game, which would lead to a race to the bottom. This is due to the fact that in any market situation, exports must be equal to imports, and therefore, cutting imports and boosting exports would be a futile gambit in the global scenario.

What does this mean in India?

In the Indian context, economists such as C Rangarajan, Prachi Mishra, Jehangir Aziz and Sajjid Chinoy have clarified the fact that the Indian export is not driven by exchange rate but is rather influenced by global growth.

Furthermore, the apparent devaluation of global currencies is more due to the strengthening of the dollar against other currencies rather than a deliberate devaluation by central banks.

Instead of succumbing to such a desperate measure, the country should smoothen out the kinks in its tax structure. But the failure to pass through the much-anticipated Goods and Service Tax (GST) Bill in the Parliament has prevented that eventuality from taking place.

The passage of the bill could have boosted the investor sentiment and would have given a fillip to growth in the country. Moreover, the development would have had the effect of erasing the haunting memory of retrospective tax levied on firms such as Vodafone, an image makeover which would have cemented Narendra Modi led BJP government’s commitment to a stable and fair tax regime.

If GST could not have been passed due to certain contentious clauses in the bill and the blockade by the opposition, another relief has been announced by the finance minister Arun Jaitley in the form of scrapping of the minimum alternate tax (MAT) retrospectively.

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Jaitley had earlier exempted capital gains made by FPI’s from the levy of 20 per cent MAT from the current year but not retrospectively.

Foreign companies had come under the MAT bracket when the Authority for Advance Ruling in 2012 stated that the Income Tax law did not make a distinction between Indian and foreign companies and therefore, MAT applied to them as well.

The ruling meant that the tax authorities started chasing foreign investors, demanding taxes on capital gains from the sale of securities.

Mauritius-based Castleton Investment Limited was subsequently asked to pay MAT, a decision whose validity will be tested in the Supreme Court in late September this year.

Is the government doing anything?

Now, with the government likely to accept the AP Shah panel’s recommendations,  the Foreign portfolio investors (FPI) will likely be saved from paying the tax even before April 1, 2015 and not just after the date mentioned in the next budget, by amending the tax law.

“The government should quickly issue a circular stating that MAT should not be applied to FPI’s from the period prior to April 1, 2015 as well”, said Suresh Swamy, partner, PwC while speaking to ET on the need for removing arbitrariness in the tax regime.

124119132Along with the clarity on tax structure which will reduce red-tapism in the country, the fall in global fuel prices will bring much cheer to the Indian economy. New shale gas discoveries in the US, record volume production of oil by OPEC and lifting of sanctions on Iran has meant that Indian oil imports (almost 75 percent of the domestic demand) would be lower in dollar value.

The current account deficit (difference between imports and exports) would fall and therefore, fuel (transport) and other prices would also decline, cooling down rising inflation which has brought much tears to the aam aadmi.

A $1 fall in global crude prices means India’s import bill falls by Rs 6,700 crores. This, coupled with the shift to direct benefit transfer (DBT) of LPG subsidy and deregulation of diesel price would rekindle the fortunes of oil marketing companies (OMC) such as OIL, ONGC, Reliance and Essar by overturning their under-recoveries.

It has been reported that the under-recoveries of OMC’s have been slashed by Rs 139,869 crores in 2013-14 to Rs 72,314 crores last financial year due to the above measures.

So, the big picture is that the Indian economy is on the right track. The hidden problem of burgeoning import dependence can be further ameliorated by removing bottlenecks such as bureaucratic sloth and complex regulatory processes.

Obliterating MAT for foreign portfolio investors is a step in that direction.

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Sri Lanka On The Brink of ‘Economic Anarchy’

Sri Lanka will have issues on accessing government money if the stalemate is not resolved by the end of the year.

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Sri Lanka
Members of a civil society group attend a silent protest to demand democracy, after Sri Lankan opposition leader Mahinda Rajapaksa was appointed prime minister when President Maithripala Sirisena dismissed Ranil Wickremesinghe, in Colombo, Sri Lanka. VOA

Two men each claim to be the prime minister. Lawmakers are exchanging blows in Parliament. A former finance minister says Sri Lanka is on the brink of an “economic anarchy.”

Welcome to Sri Lanka, where the political crisis is getting worse by the week.

The trouble started when President Maithripala Sirisena, fed up with disagreements with his prime minister over money, an alleged conspiracy plot and unresolved issues of wartime crimes against civilians, fired Ranil Wickremesinghe and his Cabinet and replaced them with a government headed by a popular former strongman, Mahinda Rajapaksa.

But lawmakers balked and twice passed a no-confidence motion. Sirisena, however, refuses to accept that his choice of prime minister has been defeated.

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Sri Lankan President Maithripala Sirisena waves to supporters during a rally outside the parliamentary complex in Colombo, Sri Lanka. VOA

Sirisena government can’t be legal

Jehan Perera, head of the local analyst group National Peace Council, said that the government appointed by the president can’t be called legal because Sirisena had not sought a parliamentary vote when he dismissed Wickremesinghe.

“It can be called illegitimate because provisions for a confidence vote in Parliament are being blocked by the president’s own party through their riotous behavior,” Perera said, referring to a brawl last week that was followed by another pandemonium in the chamber when Rajapaksa loyalists refused to let the speaker conduct proceedings.

Wickremesinghe says his dismissal is invalid because he still holds a majority in the 225-member Parliament. The dismissal is also disputed because of the latest constitutional change, which lawyers say has taken away presidential powers to dismiss the prime minister.

sri lanka, parliament
Sri Lankan former President Mahinda Rajapakse addresses journalists at his residence in Colombo, Sept. 22, 2018. Rajapakse has been appointed the Sri Lanka’s new prime minister. VOA

Life goes on

Despite all the drama and two rival prime ministers, life hasn’t collapsed, thanks to the efficient bureaucracy that keeps the wheels of administration turning.

Even though there is no Cabinet recognized by Parliament, and despite warnings by Wickremesinghe supporters that state officials should not take orders from an “illegal government” of Rajapaksa, bureaucrats continue to work with the president who is the chief executive and the ministers appointed by him, officials said on condition of anonymity because they are not authorized to speak to the media.

Budget dilemma looms

However, decisions regarding new projects or purchases involving large sums of money are on hold.

The absence of a recognized government has delayed the budget for 2019. Mangala Samaraweera, who was finance minister in Wickremesinghe’s Cabinet, said that there will be no legal way of spending money in the coming year without a parliament-approved budget.

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Sri Lanka’s ousted Prime Minister Ranil Wickremesinghe reacts during a news conference in Colombo, Sri Lanka, VOA

Sri Lanka’s Constitution says that control over public finances lies with Parliament and no funds can be released without a warrant signed by the finance minister and approved by the legislature. That means all government payments starting from January can be deemed illegal, Samaraweera says.

Sri Lanka is on the brink of an “economic anarchy and chaos as never experienced before.”

“The cavalier and irresponsible actions of the president … based on personal animosities and precipitating a series of illegal acts, places at risk Sri Lanka’s ability to meet its immediate debt obligations,” he said.

Sri Lanka has to repay $1 billion of its foreign loans in early January, which is also in the prerogative of Parliament to approve.

Sri lanka
Sri Lanka’s former President Mahinda Rajapaksa, front left, is sworn in as prime minister before President Maithripala Sirisena in Colombo, Sri Lanka. VOA

Wickremesinghe’s lawmakers have presented a motion to the speaker seeking to block funding to the prime minister’s office, which if passed, would curtail Rajapaksa’s functions.

“As far as the people are concerned, they are witnessing the normal functioning of the country,” insisted government spokesman Keheliya Rambukwella.

Also Read: Regional Political Turmoil Reflects India-China Rivalry

However, he conceded that Sri Lanka will have issues on accessing government money if the stalemate is not resolved by the end of the year. Sirisena called snap elections for Jan. 5, but the opposition challenged the decision, and the dispute is in court. (VOA)