From the Economics Times - Times of India Publication * 29/01/2010

Let needs, not wants, decide your buy list

Your financial well-being depends a lot on your ability to draw the line between your needs and wants. Vidyalaxmi helps you with the process


AMEDIUM-SIZED departmental store in Mumbai has stacked a range of imported eatables such as Oreo Cookies, Kraft cheese slices, Pringles, and Tobleroneon in the front rows of its shelves. It seems like the store manager has smartly hidden desi products such as Parle G, Amul Cheese or 5-star behind the foreign goodies to earn on the differential pricing. But the store keeper has a different explanation for the display . He pins it down to customer preference for these products over their Indian peers. Whether his explanation seems convincing or not, the fact is that aspiring Indians are moving more towards a want-based spending pattern than a need-based one.

Needs vs wants


Its easy to differentiate between the two if you go by a textbook definition. But in reality, the distinction is difficult and has been getting narrower over the past few years.
Today, a car has become an emotional need despite the existence of an efficient public transport system. The need for a car has transformed from a status symbol to a luxury to a basic necessity now, says Amar Pandit, a Mumbai-based certified financial planner. The same logic applies to food. From home food to a fast food joint, today customers expect a fine dining experience and not just good food. This ambience comes at a premium and people just dont mind paying for it.
The fact is, wants are unlimited and often the lines between needs and wants get blurry. Hence, one needs to get into introspection before giving into the urge to splurge.
Lets assume a family of four spends Rs 8,000 on food, Rs 25,000 on shelter (Home loan EMI), Rs 20,000 on education and Rs 10,000 on transportation in a Metro. Now calculate the difference between your expenditure and the above example. All you have to do is to write the basic price list and the cost of living in your city and compare the areas to give you a realistic picture.
If you need a mobile because you have a field job, its a need. But if you insist on the latest gadget which you can really afford, its a want. That was an easy pick. But it gets difficult if you have to trade off a washing machine for a refrigerator or substitute a radio with a home theatre-cum-music system.
Additionally, enlist the recurring expenses such as utility bills, transportation and mortgage payments/rent and trim such expenses. They have a higher impact on your overall budget.

Are you saving enough


Its not wrong to give into wants or aspire for a certain lifestyle. It has to be backed by a sound bank balance after providing for future and other necessary expenses. The thumb rule is to save at least 25% of your take-home income. Otherwise, theres a serious problem with your lifestyle, Mr Pandit adds. At this stage, you have to critically evaluate every need and examine if its really a need or just an impulse buy.
Everyone aspires to own a huge house in a dream location. But you have to question if you need it and if you can afford such a big house at that prime location in the city, says Suresh Sadagopan, a certified financial planner at Ladder 7 Financial Advisors.

Why does it matter now


A few years ago, people were constrained by their salary levels. More often, the companies would save on their employees behalf by putting a substantial portion of their salary into PF, gratuity, etc. Now the employees are enjoying a higher disposable income without realising the downsizing in the PF and other saving components . Year 2009 was a particularly difficult one with job losses and paycuts . Hence, you should be financially equipped to handle such circumstances in future.

Retail therapy


Sneha Dharmarajan, a Mumbaibased psychologist, explains. This is a new term coined for people who treat shopping as a mood uplifting exercise . Often people say they feel euphoric after shopping even if they had a not-so good-day at home or work. But what they dont realise is that many do not feel so happy later as its just a temporary feel-good defence mechanism. At such times, you should just distract yourself with a favourite activity like listening to music or reading a book, which has longlasting distracting effect, she adds.

What implications does it have


It could be a root cause for personal finance disasters. By earmarking higher funds to tangible wants, people are unable to save or invest their money for future needs. Every rupee value has an opportunity cost, which is gained or lost, depending upon where you have deployed it. The opportunity cost is highest if invested, high if saved, lower if repaid and lowest if spent.

ENTER THE WORLD OF RETAIL THERAPY



Prepare a shopping list before you enter the supermarket and stick to it



Visit the supermarket only once a month for groceries and other utilities to reduce impulse buys



Check your neighbourhood grocer. He may offer the best deals in town



Keep switching to a low-cost tariff plan on your mobile phone and review your plan once in three months



Drop the high-cost channels on Cable TV. You can keep one educative channel for your children



Keep a back-up emergency fund



Chalk out your expenses and plug the leaks



If you are compelled to buy an item, come back to it the next week to reassess the need



If you are planning to upgrade your functional television, its a want



Dont swipe your credit card for recurring expenses such as groceries, vegetables or essentials

Missing state by Manas chakravarhty , Mint

India's GDP (gross domestic product) data do not add up. ndia's GDP (gross domestic product) data do not add up.
An entire state about the size of Uttar Pradesh (UP) appears to have gone missing. This Lost Pradesh, or Errors and Omissions Anchal or Discrepancy Nadu, call it what you will, fluctuates in size from year to year, but seems to be mysteriously growing larger and larger every year.

Why do I say there's a missing state? The answer is simple: if you add up the gross state domestic products at constant prices put out by the various directorates of economics and statistics in the states, the total is lower than the GDP of the country, as computed by the Central Statistical Organisation (CSO).

If you go to the CSO website and look at the state domestic product at constant prices, 1999-2000 series, you'll find a list of all states and Union territories (UTs) with their GDPs. At the bottom of the list they also have a line for all-India GDP 1999-2000 base, which seems to indicate that it's the sum of the GDP numbers of all the states and UTs. But it isn't so.

What is remarkable is that the totals of the states and UTs do not agree with the all-India number. No wonder CSO is at pains to point out, at the bottom of the table, that the state GDPs have been supplied by the states directly, which implies they aren't responsible for it. (This is GDP at constant prices, 1999-2000, at factor cost. The all-India figure for GDP at market prices, base 1999-2000, is even higher). At the very least, they should have had a row containing the states' totals and added a note about the discrepancies.

I would have expected that, left to themselves, the states would have been interested in showing a higher state domestic product. After all, West Bengal's growth in GDP in the 1990s had attracted plenty of scepticism, because there was little evidence on the ground to show that the growth was indeed taking place. The implication--the state was fudging its GDP data.

But if all the states inflated their GDPs, then their totals should have exceeded the all-India figure. But the reverse seems to be true. All-India GDP is much higher than the combined GDP of all the states and UTs. And not by a small amount either; in 2006-07, for instance, the total of the states' GDP was Rs26,17,531 crore, compared with Rs28,71,118 crore for the all-India figure. That's a difference of Rs2,53,587 crore, or more than the GDP of a large state like UP, whose GDP in that year was Rs2,37,420 crore. The discrepancy is as high as 8.8% of the all-India GDP for 2006-07.

But why should the states underestimate the size of their economies? That's why it looks like we have a very large well-hidden state that appears in the national GDP data, but doesn't figure in the states' list.

The first chart gives you a picture of the discrepancies.
Since the discrepancy is not constant, there's also a difference in the rates of growth of the economy if we take GDP according to the all-India figure computed by CSO, or if we go by the totals of the states. The second chart shows the difference between the growth rates. The difference in growth percentages is not much, except for 2005-06, when it was as much as one percentage point.

This is, of course, not the only discrepancy in the computation of GDP. When calculating GDP at market prices, for example, discrepancies add up to a substantial amount. For instance, CSO says that the sum of the various components of expenditure in the second quarter was lower than GDP at market prices by 2.1% in the second quarter of 2009-10. In the second quarter of 2008-09, this difference was as high as 7.6%.

Interestingly, the difference between the states' total and the CSO all-India figure has been increasing, as is seen from the chart. It was 8.2% of all-India GDP in 2001-02 and 9.4% in 2007-08. The 2008-09 states' total, however, should be larger, because GDP figures for Nagaland, Tripura and the Andamans are not available. Once these numbers are in, the discrepancy for the year should be slightly lower.

The data for 2008-09 haven't been taken into account as they are incomplete, with only 18 states having declared their GDP, according to the numbers made available by CSO.

Defending everyones whipping boy - THE PSB`s

Defending everyones whipping boy

MYTHILI BHUSNURMATH


IN TERMS of timing, I couldnt have picked a less opportune moment to stick my neck out on bank nationalisation; the public is still smarting at how nationalised bank employees held them to ransom with their strike earlier this month.
But come to think of it, given its connotations think bank nationalisation and Indira Gandhi and the Emergency immediately come to mind there is, probably, never a good time to defend bank nationalisation.
Earlier this year the Congress president and the FM were both ridiculed when they dared to speak in support of nationalisation. If the UPA chairpersons views were, somewhat charitably, put down to economic naivete, the FMs homage was seen as another instance of his anti-reform mindset.
Clearly 40 years after the event, bank nationalisation is still a bad word (never mind that both the US and the UK have only recently gone down the same path). So at the risk of being branded a revisionist, or, perhaps worse, clubbed with Mrs Sonia Gandhi and the FM, let me make my pitch in defence of public sector banks (PSBs).
Before you dismiss this as some sort of plug for PSBs, consider: in 1969, when banks were nationalised, the population per bank branch was 82,000 in the rural areas and 33,000 in urban areas. By 2007 that number had fallen to 17,000 in rural areas and 13,000 in the urban areas. In 1969, just 17% of the branch network was in rural areas; today that number is 32%, thanks almost entirely to PSBs.
Yes, there is a large section (41%) of the population that is still without access to modern banking. But what is indisputable is that but for PSBs, access to banking, especially in the rural areas, would have been far less (see table). As of March 2008, PSBs had 35% of their branch network in rural areas; the corresponding number for new private sector banks was just 6.3% while in metropolitan areas where business is more lucrative , private sector banks led the way with 36% of their branch network in metros as against 20% for PSBs.
Take another parameter: credit growth. It is widely accepted that the financial crisis in many western economies took a turn for the worse after credit markets froze. As banks took fright and shied away from lending, many borrowers were left high and dry, perpetuating a vicious downward spiral. Hence, part of the solution lay in persuading banks to continue lending, despite the slowdown. It is a different matter that few complied!
In India, too, industry chambers and the government have been shouting from the rooftops about the need for banks to continue lending. But once again it is PSBs that have ridden to the rescue; credit extended by PSBs, growing 20.4% in the year to March 2009 as against just 4% and 11% for foreign and private sector banks respectively. Yes, it is possible that when they expand their portfolios in a slowdown (in the larger interest of the economy at the diktat of the government), they might also see a rise in the level of NPAs. But that is the flip side of their delivering on their larger social responsibility and not necessarily a commentary on their efficiency.
Indeed, as the report of the Committee on Financial Sector Assessment points out, far from being slothful behemoths, PSBs have responded well to the challenge of competition . Not only is there an overall convergence in their financial results with the other banking groups but, surprise, surprise, their share in the overall profit of the banking sector has increased (emphasis added).
Moreover, thanks to their implicit government guarantee, PSBs are instrumental in promoting financial stability. Contrast the irrational fear that overtook depositors of ICICI Bank on rumours that the bank was in trouble with their rock-solid faith in Indian Bank back in the 1990s when despite public knowledge of its precarious financial position , there was no run on the bank.
This is not to say all is hunky-dory with PSBs. It is not! It is rather to point out that if we expect PSBs to heed a larger call promote financial inclusion, drop interest rates at governments behest (even when it does not make commercial sense to do so), lend to weaker sections, open branches in remote areas and so on and so forth, we must also be prepared to put up with the downside of their public ownership, of which strikes are just one manifestation. Poor work ethos, slow decision-making , bureaucratic interference , etc., being the others.
Does that mean we should cave in to the demands of PSB employees regardless, simply because they have more nuisance value than employees of say, a BHEL or SAIL Not at all! It merely means there is a case for public ownership of banks in a country like India in economic parlance, at our stage of development PSBs are a public good . So there is no point in berating them they are what they are because that is what we want them to be. It is far better, then, to give them greater professional and operational autonomy , even as we retain public ownership!


The recent strike by nationalised bank employees has made the public see red Everyone loves to hate public sector banks but they meet a larger social need and contribute greatly to financial stability Its far better to give them greater professional and operational autonomy, even as we retain public ownership

New tax code A paradigm shift - by NK Singh

New tax code A paradigm shift

It will be a test of perseverance and political will to ensure the early enactment of the new tax code and, more importantly, prevent any serious dilution of its basic features, says N K Singh


IN MORE ways than one the new direct tax code is a culmination of tax reforms initiated in the early 90s. Chidambarams dream budget with which I was associated had compressed income-tax rates to three slabs of 10, 20, 30 and corporate rate at 35. This was based on two well accepted paradigms. First that modest tax rates create virtuous circle of improved compliance and widen the tax net. Second, the so-called undocumented Laffer Curve effect in which lowering of tax rates in fact improve overall revenue realisation . The present tax code and the enabling legislation appended with the code bears the imprint of Chidambarams drafting skills and clarity of intent. Pranab Mukherjee must be complemented in having overcome multiple hurdles and in putting this document in public domain.
Taxation must subserve multiple objectives . Most importantly to finance government expenditure but in the process combine equity and efficiency. In doing so it needs to harmonise the objectives of maximising resources with a wider social purpose of fostering development, encouraging capital accumulation and investment as well as minimising the distortionary impact of exemptions designed to benefit a group of individuals or segments of society. Earlier attempts to eliminate this complex contradictory spagetti bowl of distortionary exemptions were stalled by powerful lobbies, a nexus between the law makers, beneficiaries and policy designers. The success of this code is therefore predicated on the ability to withstand these debilitating pressures to restore exemptions in one form or the other.
I am given to understand that the overall impact of the proposed legislation is revenue neutral. I expect this to be revenue positive if past is any guide to the future and the broad principle that lower tax rates will lead to tax widening and improved compliance continues to be valid. One broad criticism of the code could be to question whether it is progressive enough. Given our development compulsions and high incidence of poverty progressivity in tax regime is an important objective. That is why improved revenue buoyancy will be its cardinal test and in some ways it is raison detre . Of course, everyone realises the more heavily a man is supposed to be taxed the more power he has to escape being taxed.
The tax code introduces several features, which deserve attention:
First and foremost in fostering savings and investments by discouraging consumption . This is in line with what analysts have suggested that India unlike China must move away from a consumption-led growth to an investment-led growth. Their prescription for China is just the opposite. This explains the rationale of EET (Exempt Exempt Tax), namely, initial investment and interest are exempt but withdrawal would be subject to normal taxes. This will cause hardship for PF, senior citizens and others who towards the latter part of their life wish to enjoy better life quality through enhanced consumption. Similarly, for the corporate sector the exemption regime moves away from a profit-based to investment-based incentives for specific categories of investments in sectors like power, oil and gas, SEZs. However, it is often suggested that in times of recession consumption also needs a stimulus. The higher disposable incomes in the hands of consumers and corporates would hopefully achieve this purpose.
SECOND , the code by accepting the principle of grand-fathering and seeking prospective applications avoids multiple controversies and makes for easier transition.
Third, while retaining exemptions in religious institutions but subjecting other trusts and organisations to a modest 15% tax, it combines the virtue of pragmatism, while minimising multiple misuse.
Fourth, the simplification of capital gains tax by eliminating the distinction between short-term and long-term gains and encouraging more transactions by eliminating the security transactions tax and simplifying the dividend distribution tax are positive.
Fifth, the provision of a minimum alternative tax at 2% of the value of gross assets is based on the principle of incentivising efficiency . This deserves wider consultations. It could discourage long-term lumpy investments and more importantly not protect against business cycles with prolonged recession with negative cash flows if companies do not have the reserves to meet this onerous liability. At the same time the original intend of MAT needed to be restructured to subserve its original intent.
Sixth, while the provisions of general avoidance rule and double taxation is designed to prevent misuse, it is not clear if a code can override existing international treaties and obligations embedded in double taxation agreements. Given international experience and the need to discourage round tripping, this is a good time to renegotiate our multiple double taxation agreements by aligning them with the provisions of the tax code.
Finally, litigation and tax pendency has been an area of continuing concern. Alternative tax resolution methods and dispute settlement mechanism need further innovation . The constitution of the National Tax Tribunal to hear appeals from ITAT could minimise high court pendencies. Nonetheless , the existing appellate mechanisms which the code endorses need further consideration . The present regime leaves both revenue officials and assessees dissatisfied even making the allowances that their interest can never be symmetrical. The reports of the Comptroller and Auditor General and the working of the Public Accounts Committee that induce assessing officers to make large additions and exhaust all appellate processes result in serious distortions.
This needs a mindset change embedded in greater trust and accepting the bona fide judgements of tax officials. All over the world, tax officials are never high in popularity rating. While we must seek greater transparency and minimise scope for corruption , we need to invest more in training, technology infrastructure and resources. India has one of the lowest cost of compliance even compared to emerging markets. As we move to adopt a new code, we need to assign more talent and resources to the revenue department.
The new legislation is a paradigm shift in our approach to taxation. It will be a test of perseverance and political will to ensure its early enactment and more importantly prevent any serious dilution of its basic features . The code is a composite package. This is a case where the whole is bigger than mere sum of the parts.


(The author, a former revenue secretary,
is a Rajya Sabha member)

An idea whose time has come - courtesy economic times

The new direct taxes code is a great idea, many of the provisions are well intentioned and most importantly, time has come to embrace, adapt and run with the code as early as possible, says Sudhir Kapadia


THE freshly unveiled direct taxes code (DTC) is an idea which was overdue and whose time has perhaps never been more appropriate. There seem to be three key objectives behind the introduction of the DTC: simplification of language, resulting in lesser litigation; a law which promotes inclusive growth and yet retains the incentives for businesses to make profits; and allow businesses to function in the free market economy but with proper regulations. This article attempts to analyse some of the key provisions of the DTC in the light of the above objectives.
Taking a leaf out of the Chinese tax code, the DTC pegs the corporate tax rate to 25% which is clearly a very attractive rate compared to prevailing rate elsewhere. This, of course, comes with the removal of profitlinked incentives. We now have investment-linked incentives in specific sectors (infrastructure, power, exploration and production of mineral oil, etc) to incentivise capital formation and to remove the incentive to shift profits from “taxable units” to “exempt units”. We also now have capital assets deployed in the businesses (e.g., plant and machinery) to be treated as business assets and any profits arising on sale of these assets to be treated as normal business income and not as capital gains.
In practical terms, a company will now be subject to the same uniform rate of 25% tax on gains from transfer of such business capital assets as against the current rate of 20% for long-term capital gains on transfer of all capital assets. The downside in these provisions is the fact that a loss arising on such a business transfer will not be allowed to be written off in one year but will be amortised like depreciation over a period of time. This provision seems to be inconsistent with the treatment of gains as business income in the year when the gains arise.
However, there is a significant dampener to this feel-good story in the form of the new basis of levy of minimum alternate tax (MAT). The MAT will now be levied at 2% of the value of gross assets in the case of all companies except in the case of banking companies (tax at 0.25% for banking companies). This shift in the MAT base from book profits to gross assets is sought to be justified on the grounds of encouraging “optimal utilisation of the assets and thereby increased efficiency”. This measure, however, seems to run counter to the objective of encouraging capital investment for productive growth. For e.g., in the case of an infrastructure company where the pay back on the investments is longer, on the one hand we have the investment-linked capital allowance reducing taxable profits significantly, on the other hand is the imposition of MAT calculated at the same base of capital investments.
To make matters worse, there is no provision for reducing liabilities incurred for acquisition of assets, i.e., MAT is to be calculated on value of gross assets without corresponding reduction in borrowings incurred. This could result in a kind of “punitive tax” on capital-intensive companies including public sector companies as well as chronically sick companies making consistent losses.
A very significant shift is sought to be made in the area of capital gains taxation. Since 1991, capital gains on sale of shares and securities has always been accorded preferential tax treatment to encourage investment in equity market. The DTC now proposes to remove the distinction between short-term and long-term capital gains on all classes of assets, thereby taxing any gains on transfer of capital assets at normal rates of tax.
THUSindividuals in the higher tax bracket of 30% would be more adversely affected than companies, as companies would pay taxes at a uniform tax rate of 25% on similar gains. This also means that the abolition of the Securities Transaction Tax (STT) will be more than made up by a levy of normal tax on all stock market transactions, be they short term or long term. Further, gains on transfer of immovable property which at present is at 20% if property is held for more than three years will now be taxed at the normal rate of 30% for individuals in the higher tax bracket and 25% for companies.
Some very significant changes are proposed in the international tax area. A time-tested principle of characterising a foreign company as a resident Indian company on the basis of the foreign company being wholly controlled and managed from India is sought to be substituted by a more stringent and arguably a more subjective rule, i.e., a foreign company partly controlled and managed from India will also be regarded as an Indian resident company. In its present form, it would appear that overseas subsidiaries of Indian companies would be subjected to taxation in India on their worldwide income solely on the basis of them being “partly controlled and managed from India”. This seems to be an unintended onerous outcome which needs to be corrected.
An elaborate provision spelling out the general anti-avoidance rule is proposed. While it has features of comprehensiveness, it seems ripe for several different interpretations in respect of features like “commercial substance”, “round trip financing”, “accommodating party”, etc. It is further provided that the general anti-abuse rule will override the provisions of any tax treaty. Thus, for example, the current controversy on the use of Mauritius DTAT will get further ammunition as the Revenue will now seem to invoke the general antiabuse rule in specific cases to override the provisions of the Mauritius treaty. If the intent behind the code was to eliminate litigation and simplify provisions of law, this particular provision certainly does not stand anywhere close to achieving that objective.
In continuation of the introduction of the Alternate Dispute Mechanism in Budget 2009, the DTC seems to now extend this benefit to all taxpayers and not restrict it to foreign companies which is a welcome move and will help the entire tax community. Also, there is a proposal to introduce advance pricing mechanism on transfer pricing which has been a long standing request by multinational corporations. All in all, the idea of the DTC is great, many of the provisions are well intentioned and most importantly time has come to embrace, adapt and run with the DTC as early as possible.
(The author is Partner, Tax & Regulatory
Services, Ernst & Young Pvt Ltd)

Worth a read

It is August. In a small town on the South Coast of France, holiday season
is in full swing, but it is raining so there is not too much business
happening. Everyone is heavily in debt.

Luckily, a rich Russian tourist arrives in the foyer of the small local
hotel. He asks for a room and puts a Euro100 note on the reception counter,

takes a key and goes to inspect the room located up the stairs on the third
floor.

The hotel owner takes the banknote in hurry and rushes to his meat supplier
to whom he owes E100.

The butcher takes the money and races to his supplier to pay his debt.

The wholesaler rushes to the farmer to pay E100 for pigs he purchased some
time ago.

The farmer triumphantly gives the E100 note to a local prostitute who gave
him her services on credit.

The prostitute goes quickly to the hotel, as she owed the hotel for her
hourly room use to entertain clients.

At that moment, the rich Russian is coming down to reception and informs the
hotel owner that the proposed room is unsatisfactory and takes his E100 back
and departs.

There was no profit or income. But everyone no longer has any debt and the
small town people look optimistically towards their future.

COULD THIS BE THE SOLUTION TO THE Global Financial Crisis? Or, is
there a catch here?

Explanation .

Heidi is the proprietor of a bar somewhere in Europe. In order to increase
sales, she decides to allow her loyal customers - most of whom are
unemployed alcoholics - to drink now but pay later. She keeps track of the
drinks consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of customers flood into
Heidi's bar.

Taking advantage of her customers' freedom from immediate payment
constraints, Heidi increases her prices for wine and beer, the most-consumed
beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes
these customer debts as valuable future assets and increases Heidi's
borrowing limit.

He sees no reason for undue concern since he has the debts of the alcoholics
as collateral.

At the bank's corporate headquarters, expert bankers transform these
customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities
are then traded on markets worldwide. No one really understands what these
abbreviations mean and how the securities are guaranteed. Nevertheless, as
their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager
(subsequently of course fired due his negativity) of the bank decides that
slowly the time has come to demand payment of the debts incurred by the
drinkers at Heidi's bar.

However they cannot pay back the debts.

Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better,
stabilizing in price after dropping by 80 %.

The suppliers of Heidi's bar, having granted her generous payment due dates
and having invested in the securities are faced with a new situation. Her
wine supplier claims bankruptcy, her beer supplier is taken over by a
competitor.

The bank is saved by the Government following dramatic round-the-clock
consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the
non-drinkers.