Tuesday July 16, 2019
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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.

currency_83 by priyanka--621x414

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.

Next Story

India: Government Aims to Increase Present $2.7 Trillion Economy to $5 Trillion by 2025

The middle class literally wailed when the petrol prices shot up by Rs 2.50 per litre, diesel prices hiked up by Rs 2.30 per litre

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India, Government, Economy
Instead of making US dollar a bench mark of aspirational currency, why not work on making Indian Rupee stronger? PIxabay

The moment after the “bahikhaata” Union Budget was presented on Friday, people took to social media platforms that erupted with angry and perplexed reactions.

“Your folder is sanskaari, symbolising ‘departure from slavery of western thought’, but your aspirations are 3 trillion ‘US DOLLARS’ economy, huh hypocrite!” tweeted a user.

Finance Minister Nirmala Sitharaman announced that the government aims to increase the present $2.7 trillion economy to $5 trillion by 2025.

“Instead of making US dollar a bench mark of aspirational currency, why not work on making Indian Rupee stronger?” another user posted.

India, Government, Economy
The moment after the “bahikhaata” Union Budget was presented on Friday, people took to social media platforms. Pixabay

Another social media user shared the lines from an old song: “Achcha sila diya tune mere pyar ka”.

The middle class literally wailed when the petrol prices shot up by Rs 2.50 per litre, diesel prices hiked up by Rs 2.30 per litre just hours after the union budget was presented.

“This has been one of the poorest budgets for common honest tax payer and middle class. You are bound to lose many supporters,” a user wrote in reply to former finance minister Arun Jaitley’s tweet on the budget.

“Petrol prices, diesel prices higher. What are the benefits for honest tax payers? What is the tax benefit, pension benefit, gratuity amount holding by corporate companies?? You really care for honest people (Salaried)?” another person tweeted.

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The budget also announced that for I-T returns, PAN and Aadhaar cards would be made interchangeable to help tax payers file their returns.

“So ‘PAN and Aadhaar will become interchangeable’ is somehow a tax benefit to middle-class Indians? So, you first introduce a problem, and then increase the problem, make it more complicated, and then reduce it again (but still keep it confusing) – that somehow becomes a benefit?” a user questioned the decision.

“PAN and Aadhaar interchangeable will not help middle class,” another user tweeted.

People also criticised that the issue of unemployment was not addressed seriously.

India, Government, Economy
Finance Minister Nirmala Sitharaman announced that the government aims to increase the present $2.7 trillion economy to $5 trillion. Pixabay

“Hopeless budget 2019… no help or news for unemployment,” a tweet said.

The millennials, however, had some fun with the budget.

“So, the budget has been declared, still there is no announcement on subsidy for annual subscription of Netflix, Prime and Hotstar. Is this the India we want to live in?” posted a Twitter user.

The funny memes also kept circulating.

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Depicting the “before budget” and “after budget” feelings, a meme showed Prime Minister Narendra Modi first sitting on a rock, and then lying down flat on the rock.

The images and videos of former Congress President Rahul Gandhi looking blank and later dozing off went viral. (IANS)