Disinvest, but with right interest : Economic Times: 18th July 2024

 

Employment rises, but productivity dips: Businessline 12th July 2024

 

Adam Smith's invisible hand is a star cricket player : Mint 12th July 2024

 

Time To Ease The Process Of Paying Taxes: Free Press Journal: July 6th 2024

 

There are some rationalisations that are called for to make the tax system more elegant as some of the levies need to be reassessed

The core content of the Union budget is not likely to be different from what was presented in the interim budget. There would be certain specific additions in budgetary outlays to align the same with what was promised at the time of elections. But this would not materially change the look of the final numbers. This has been the case in all past budgets presented by the new government.

One area which merits a closer look is on the administrative side which can make the process of making tax payments simpler for individuals. These reforms would be neutral in terms of impact on budgetary numbers but can improve the ease of paying taxes. Also there are some rationalisations that are called for to make the tax system more elegant as some of the levies need to be reassessed.

Let us look at the ways to make tax filing simpler considering that filing returns involves a plethora of pages. The first pertains to the reconciliation of the form 26AS and AIS. One of them captures all transactions on which tax is deducted while the other tries to cover all sources of income under the PAN. However, the two need to match and ideally there should be only one of them as the tax payer is often trying to match the entries on both the forms. Further, when it comes to the purchases and sale of securities, the present system tends to club both the buyer and the joint owner together which has to be contested by the tax payer. This has been on for over two years now and needs to be corrected.

Second, the concept of TDS does leave the doors open to inconvenience for the tax payer. For certain earnings, there are exemptions while for others there are limits beyond a certain amount that merits a deduction. There are distinctions made for interest earned on fixed deposits of banks and others. Further, if one does not have to pay taxes, there is a form that has to be submitted, which has to be done every year. Finally, once the TDS is done, the individual has to pay the balance on time depending on the income slab.

A way out is to take an instruction from the customer on the amount of tax that has to be deducted which can be zero, or the relevant tax slab of the old or new tax scheme. This way the full tax can be deducted at one stroke. It benefits the individual who does not have to keep a track of all such earnings as very often the amounts could be small and appear in the AIS statement and not 26AS. The government would be better off as the entire tax amount would be received at one point of time. The individual often cannot track these payments and ends up paying the same once the AIS is updated which often involves a penal interest charge once the financial year ends.

Third, the AIS and 26AS need to be the final one when the tax payer views the same. With May 31 normally being the date allowed for companies to pass on the tax collected to the government, there is less time available as these forms keep getting updated on a daily basis. As these forms keep getting updated periodically it gets hard for one to figure out which is the final version.

Fourth, once the AIS is taken to be the final income statement of an individual, insisting on Form 16 and other documents should be done away with so that an individual is dealing with only one official document.

Fifth, while the tax laws says that super senior citizens do not have to submit form 15H to avoid TDS, the instructions have not filtered down to the banks. This needs to be done to make life easier to this class of people.

An alternative model which is suggested here is the following. The income tax department already links all income associated with a PAN. An algorithm can work out the tax to be paid which can be conveyed to the assessee periodically. This would be the ultimate level of sophistication where the government tells the individual what has to be paid. This was not possible earlier, but with all transactions now being linked with the PAN card, it should be easily accomplished.

On the tax rationalisation front there are a couple of anomalies that need to be addressed. The first relates to the education cess. This is levied on all tax payers and is on the total tax that has to be paid. This cannot be a permanent levy and logically should be done away with. There is no separate statement in the budget which talks of how this money is spent.

On similar lines, the surcharge being paid by higher income individuals needs a review as the logic applied is incorrect. To begin with a surcharge cannot be a permanent one. If the idea is to tax the rich at higher rates, the income slabs for taxation can be altered upwards. The major anomaly here is that there are different grades for this surcharge. It begins once the taxable income crosses Rs 50 lakh and there are different rates for higher incomes. However, the surcharge is on the entire tax payable on total income and not for just the incremental income beyond the threshold. This can be corrected because if an individual earns Rs 49.99 lakh there is a certain level of tax paid. But once it is Rs 50.01 lakh, a levy of 10% is put on the entire tax paid and not just the incremental part. Today a person whose income crosses the threshold pays higher tax than one who is marginally below these thresholds.

As a lot of progress has been made on getting the PAN linked to all financial transactions, logically citizens should have access to ease of paying taxes. With widespread digitisation, all the suggestions made can be implemented and will save a lot of time and do away with ambiguity.

Why economists rely on GST data: Indian Express 4th July 2024

 

It is one of the more appropriate and timely indicators to gauge the state of the economy.

Post Covid, economic indicators have tended to be heavily influenced by the base-year effects. Often, one tends to get contrary signals. For example, the Indian economy has averaged a growth of over 8 per cent in the last three years. However, consider the absolute increase in real GDP – for the five-year period ending in 2023-24, GDP increased by around Rs 34 lakh crore compared to Rs 42 lakh crore in the preceding five-year period. In this scenario, how does one gauge the state of the economy?

One of the more appropriate indicators to gauge the state of the economy is data on GST collections. This data has so far been published on a monthly basis. This is based on actual collections and hence does not require making any assumptions or the use of algorithms, which is the case with most macroeconomic indicators where some imputation is required. This data is critical for several reasons.

First, GST collections tell us whether consumption is increasing because it is a consumption based tax. GST collections, as a proportion of private consumption expenditure, work out to 10.5 per cent in 2018-19, rising to 11.3 per cent in 2023-24. This was after a decline during the two Covid years when consumption growth slowed down. Currently, GST collections are clocking a steady growth rate, indicating that the economy is on the right path.

Second, as this data is available for states too, it also throws light on the consumption patterns across regions. This is critical especially for companies, which can make plans based on this information as they can tailor their strategies for different markets.

Third, as indirect taxes are a major source of revenue for the government, this data also gives an idea to what extent the budgetary targets are being met. This holds for both the Centre and the states. Thus, getting this information is a useful indicator not just for the government, but also the markets which use it to project government revenues, possible fiscal deficit deviations and market borrowings. The monthly flows also give important signals on the distance covered in relation to previous years.

Fourth, as a part of the increase in GST revenues has been due to the formalisation of the economy, it also serves as an indicator on how much progress is made on that front. If macro numbers pertaining to consumption as per GDP estimates are not increasing at a quick pace, but GST collections are, then it perhaps says something about the state of the formal and informal economy.

Last, as the data also includes information on the compensation cess, it gives an idea of how states are faring.

From an economist’s perspective, the GST data is probably one of the most credible high frequency indicators to gauge how the economy is performing. While the Purchasing Managers Index are also published on a monthly basis, they are based on sample surveys and often diverge from the direction seen in the actual industrial production data which comes with a lag. Bank credit, which is also based on actual borrowing and is indicative of economic activity, tends to be affected by seasonal factors. Thus, the practice of releasing the detailed, disaggregated GST data should be continued.

What's driving rural spending? Business Line 3rd July 2024

 

A new era for bond market: Financial Express 1st July 2024

 The Markets will be entering a new phase from July onwards with the inclusion of Indian bonds in the JP Morgan Index. In fact, after the announcement of inclusion of these bonds in September, there was a gradual build-up of holdings in government securities (G-Secs) by foreign portfolio investors (FPIs). The assets under custody of sovereign bonds held by FPIs climbed from around $19 billion in September-end to $28 billion in mid-June. Clearly some of the players wanted to build their positions in advance to take advantage of the indices, once included. This phase was also associated with considerable activity in the G-Sec and forex market though there were several other factors at play. What can be expected going forward?

The basics can be put together to begin with. The JP Morgan index of bonds involving government paper would assign a weight of 10% to India at the rate of 1% per month. Hence even passive investment in the index would mean some allocation for Indian bonds. Twenty-three securities would qualify for investment where there are norms on the residual maturity as well as amount outstanding. Both are necessary for rebalancing the index. Unlike equity which is perpetual, debt matures at some point of time and would require replacement of appropriate securities. The Reserve Bank of India (RBI) has also included several securities under the FAR banner which denotes fully accessible route, where no limits are placed on FPI holdings. If one were to 

 between the market and the index, there could be additional inflows as one could take a call on the index and also a position in the particular security. All put together, there are estimates which point to an inflow of $20-25 billion on this score. This comes to around `1.8-2 trillion of potential purchases.

Now, the total borrowings for the year for the government is around `14 trillion. While only some securities would qualify to meet the index criteria, intuitively it can be seen that there would also be secondary market purchases of existing securities and hence it would free funding space of existing holders who could easily subscribe to the new securities issued this year. Hence, there will be easing of liquidity to a large extent as there is a new player in the market. Banks, in particular, will be less pressured to subscribe to these securities and can use them for lending purposes. Therefore, the advantage of liquidity will accrue over time.

Second, as there is more demand for paper, prices would tend to increase given that the supply is limited to existing stock or the announced fresh set of securities. Higher prices in the market would mean lower yields and hence this is something that will happen in the natural course. For banks holding on to paper, there will be mark-to-market gains to be made in such a situation. Also, lower yields across the spectrum of G-Secs without any rate action from the RBI would be indicative enough for other commercial rates to move down gradually. Therefore, the corporate bond market will also witness a decline in interest rates. This is so because corporate bond yields get benchmarked at a premium to the government bond of equivalent tenure.

Third, the fact that around $20-25 billion comes into the market every year would be good news for the forex market where the supply of dollars would increase. Presently our fundamentals look strong enough in terms of current account deficit and other capital flows. These additional FPI flows into debt will further strengthen the situation and make the rupee appreciate. This can counter, to an extent, the external factor of the dollar being strong in the market as long as the Fed holds on to the rates in the US. But this comfort is significant for the market.

Last, there could be collateral impact on equity market too, where foreign investors follow India more closely by virtue of this inclusion although, understandably, the two classes of investors are different. This could, however, be a possibility.

Hence, the immediate effects of these flows appear to be positive all the way. In fact, Bloomberg would be including Indian bonds in their indices from January 2025, which will further improve the situation. But such inflows would also be of concern to the RBI. First, a sudden jump in dollar inflows would also mean that there would be appreciation of currency, which may be tolerable only within limits. Hence, to control this volatility, the central bank would have to buy forex to ensure stability in the currency or else there is the threat of loss of export-competitive advantage.

On the other side, an increased source of funds in the market can cause the same kind of volatility as in the forex and bond markets. While lower yields would be desirable there must be limits here too, as this can come in the way of monetary policy. In FY24, there have been situations where the yield curve behaved differently when the shorter tenures were driven by liquidity while the longer term were tracking Fed actions. Here the securities covered in the index could move more decisively due to the concentration effects. Further, as these inflows will be concentrated in specific securities there could be skewed demand not just in terms of holdings but also trading. This needs to be watched more closely in the coming months.

On the whole, the “bond inclusion” in global indices is a reality and is something the government and the RBI have been working hard for. This does provide the global gravitas that was missing in a market which was largely domestic in nature. Along with this advantage there would also be closer scrutiny by players especially on the fiscal side, as most deficits finally get converted to G-Secs and enter the market which is now global in spirit.