VT PODDAR COLLEGE OF MANAGEMENT &

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TOPIC

A
PROJECT ON
MONETARY & FISCAL POLICY OF INDIA LAST THREE YEARS

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SIDDIQUI ISHTEYAQ (44)
SINGH SONU (47)
BHATT HARDIK (05)
PATEL SAURANG (28)

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MAHAJAN YOGESH(20)

RBI Monetary Policy Statement 2010-2011

The Reserve Bank of India has hiked short term lending and borrowing rates and the
portion of money banks deposit with it by 25 basis points each.

Cash reserve ratio has been raised by 25 basis points to 6%.

Repo Rate has been raised by 25 basis points to 5.25 %.

Reverse Repo rate has been hiked by 25 basis points to 3.75%.

As a result of the increase in the CRR, about Rs. 12,500 crore of excess liquidity will
be absorbed from the system.

Bank rate has been retained at 6%.

Economic growth projection is seen at 8% for 2010-11

FY'10 GDP growth is seen at 7.2-7.5%.

Inflation is pegged at 5.5% for 2010-11

After a continuous decline for eleven months, imports expanded by 2.6 per cent in
November 2009, 32.4 per cent in December 2009, 35.5 per cent in January 2010 and
66.4 per cent in February 2010.

RBI targets inflation at 3 pc in medium term.

Lower policy rates can impair inflationary expectations.

RBI to closely monitor price situation.

Demand side pressures building up in economy

RBI sees baseline whole price index (WPI) at 5.5 pct at end March 2011.

Policy to be aligned with evolving state of economy.

The Interest Rate Futures contract on 10-year notional coupon bearing Government of

India security was introduced on August 31, 2009.

It is proposed to undertake a study of the implications of the IFRSs convergence

process and also to issue operational guidelines as appropriate.

RBI proposes to introduce some Interest Rate futures.

To prepare discussion paper on foreign banks by September.

It is proposed to permit banks to engage any individual, including those operating

Common Service Centres (CSCs), as BC, subject to banks' comfort level and their
carrying out suitable due diligence.

It is proposed to put in place an appropriate monitoring mechanism of the working of

the SLBCs / DCCs.

Securitization Companies/Reconstruction Companies set up under the SARFAESI

Act: It is proposed to: SCs/RCs can acquire the assets either in their own books or
directly in the books of the trusts set up by them.

The period for realization of assets acquired by SCs/RCs can be extended from five
years to eight years by their Boards of Directors, subject to certain conditions.
Asset/Security Receipts (SRs), which remain unresolved/not redeemed as at the end
of five years or eight years, as the case may be, will henceforth be treated as loss
assets (Securitization Companies/Reconstruction Companies set up under the
SARFAESI)

It is proposed to issue the final guidelines on Change in or Takeover of the

Management of the Business of the Borrower by the SCs/RCs by April 30, 2010.

The scope of the 'Vision Document' has been enhanced to ensure that all the payment
and settlement systems operating in the country are safe, secure, sound, efficient,
accessible and authorized.

RBI Monetary Policy Statement 2009-2010

* Bank rate retained at 6 percent
* Repo rate unchanged at 4.75 percent
* Reverse repo rate unchanged at 3.25 percent
* Cash reserve ratio unchanged at 5 percent
* Statutory liquidity ratio unchanged at 24 percent

* Inflation forecast hiked to 5 percent from 4 percent

* Negative inflation only a statistical phenomenon
* Balance between liquidity and inflation main concern
* India's growth now forecast at 6 percent with upward bias
* More scope for cutting rates by commercial banks
* Money supply may grow 18 percent this fiscal
* Policy will ensure enough commercial

Monetary Policy Statement for (2011-12) by Reserve Bank of India

(RBI) governor D Subbarao

*Short term lending rate (repo) hiked by 50 bps to 7.25%.

*Repo rate to be only effective policy rate to better signal monetary policy stance from now
on.

*Reverse repo to be fixed 100 bps lower than the repo rate.
*Short-term borrowing rate (reverse repo) up by 50 bps to 6.25%.
*Cash reserve ratio (CRR) and bank rate left unchanged at 6 pc each.
*Interest rates on savings bank deposits hiked to 4% from 3.5%.
*Interest rates on savings bank deposits hiked to 4% from 3.5%.
*Economic growth projected lower at 8% for FY'12.
*WPI inflation projection lowered to 6%.
*Objective is to contain inflation by curbing demand-side pressures.
*Favours aligning of fuel prices with international crude prices to avert widening of
fiscal deficit.
*Banks to get a new overnight borrowing window under Marginal Standing Facility at
8.25%.
*Likelihood of oil prices moderating significantly is low.
*Malegam committee recommendations on MFI sector broadly accepted.
*Bank loan to MFIs on or after April 1, 2011, will be treated as priority sector loans

Fiscal policy 2008

External Affiars and Finance Minister Pranab Mukherjee

The following is the government's fiscal policy strategy statement that the finance minister
announced in Parliament.
A. Fiscal Policy Overview
1. The Union Budget 2008-09 was presented in the backdrop of impressive growth in the
Indian economy which clocked about 9 per cent of average growth in the last four years.

This striking performance coupled with significant improvement in fiscal indicators, during
the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 regime definitely put
the country on a higher growth trajectory inspiring confidence in the medium to long term
prospects of the economy. The process of fiscal consolidation during these years has resulted
in improvement in fiscal deficit from 5.9 per cent of GDP in 2002-03 to 2.7 per cent of GDP
in 2007-08. During the same period, revenue deficit has declined from 4.4 per cent to 1.1 per
cent of GDP.
This improvement in the state of public finances was achieved through higher revenue
buoyancy, driven by efficient tax administration and improved compliance which is evident
from increase in the tax to GDP ratio from 8.8 per cent in 2002-03 to 12.5 per cent in 200708.
2. Riding on the path of fiscal consolidation, the Union Budget 2008-09 was presented with
fiscal deficit estimated at 2.5 per cent of GDP and revenue deficit at 1 per cent of GDP.
However after the presentation of the Union Budget in February 2008, the world economy
was hit by three unprecedented crises -- first, the petroleum price rise; second, rise in prices
of other commodities; and third, the breakdown of the financial system.
The combined effect of these crises of these orders are bound to affect emerging market
economies and India was no exception. The first two crises resulted in serious inflationary
pressure in the first half of 2008-09. The focus of the monetary as well as fiscal policy shifted
from fuelling growth to containing inflation, which had reached 12.9 per cent in August,
2008.
Series of fiscal measures both on tax revenue and expenditure side were undertaken with the
objective of easing supply side constraints. These measures were supplemented by monetary
initiatives through policy rate changes by the Reserve Bank of India and contributed to the
softening of domestic prices.
Headline inflation fell to 4.39 per cent in January, 2009. However, the fiscal measures
undertaken through tax concessions and increased expenditure on food, fertiliser and
petroleum subsidies along with increased wage bill for implementing the Sixth Central Pay
Commission recommendations significantly altered the deficit position of the Government.
3. The global financial crisis in the second half of the financial year which heralded
recessionary trends the world over, also impacted the Indian economy causing the focus of
fiscal policy to be shifted to providing growth stimulus.
The moderation in growth of the economy and the impact of the fiscal measures taken to
stimulate growth can be seen reflected in the estimates for gross tax revenue which stand
reduced from Rs 6,87,715 crore in B.E.2008-09 to Rs 6,27,949 crore in R.E.2008-09.
Additional budgetary resources of Rs.1,50,320 crore provided as part of stimulus package
and various committed liabilities of Government including rising subsidy requirement,
provision under NREGS, implementation of Central Sixth Pay Commission
recommendations and Agriculture Debt Waiver and Debt Relief Scheme for Farmers
contributed to the higher fiscal deficit of 6 per cent of GDP in RE 2008-09 as compared to 2.5
per cent of GDP in B.E.2008-09.

4. The Country is facing difficult economic situation, the cause of which is not emanating
from within its boundaries. However, left unattended, the impact of this crisis is going to
affect us in medium to long term.
The Government had two policy options before it. In view of falling buoyancy in tax receipts,
the Government could have taken a decision to cut expenditure and thereby live within the
estimated deficit for the year.
The second option was to increase public expenditure, even with reduced receipts, to
stimulate economy by creating demand and maintain the growth trajectory which the country
was witnessing in the recent past.
The Government took the second option of adopting fiscal measures to increase public
expenditure to boost demand and increase investment in infrastructure sector.
Ensuring revival of the higher growth of the economy will restore revenue buoyancy in
medium term and afford the required fiscal space to revert to the path of fiscal consolidation.
B. Fiscal Policy for the ensuing financial year 5. The Interim Budget 2009-2010 is being
presented in the backdrop of uncertainties prevailing in the world economy. The impact of
this is seen in the moderation of the recent trend in growth of the Indian economy in 2008-09
which at 7.1 per cent still however makes India the second fastest growing economy in the
World.
The measures taken by Government to counter the effects of the global meltdown on the
Indian economy, have resulted in a short fall in revenues and substantial increases in
government expenditures, leading to a temporary deviation from the fiscal consolidation path
mandated under the FRBM Act during 2008-09 and 2009-2010.
The revenue deficit and fiscal deficit for R.E.2008-09 and B.E.2009-2010 are, as a result,
higher than the targets set under the FRBM Act and Rules.
The grounds due to which this temporary deviation has taken place, are detailed in the Fiscal
Policy Overview above and also in the Macro-economic Framework Statement being
presented in the Parliament. The fiscal policy for the year 2009-2010 will continue to be
guided by the objectives of keeping the economy on the higher growth trajectory amidst
global slowdown by creating demand through increased public expenditure in identified
sectors.
However, the medium term objective will be to revert to the path of fiscal consolidation at the
earliest, with improvement in the economic situation.
Tax Policy
Indirect Taxes
6. During the first half of the fiscal year, the global spurt in commodity prices (crude
petroleum, food items and metals) led to increases in domestic prices of essential items and
industrial inputs, putting a severe inflationary pressure on the economy.

Hence, the Government took several measures after the presentation of the Union Budget
2008-09, particularly on the Customs side, to contain the rising inflation, as detailed below:Customs
On 21.3.2008, to curb the inflationary trends in the economy arising out of a rise in prices
of food items, a sharp reduction was effected in the import duty rates on various food items
such as semi-milled or wholly milled rice (70% to nil) and crude and refined edible oils (from
40%-75% to 20%-27.5%). On 01.04.2008, a further reduction was effected in the import duty
rate- on all crude edible oils duty was reduced to nil, and on refined edible oils duty was
reduced to 7.5%.
Export duty of Rs 8,000 PMT was imposed on exports of Basmati rice with effect from
10.5.2008.
With effect from 10.5.2008, import duties on crude petroleum was reduced to nil and on
petrol and diesel to 2.5% (earlier 7.5%). Customs duty on other petroleum products was
reduced from 10% to 5% on 04.06.2008.
Import duties were reduced to nil on many iron and steel items as well as on specified
inputs for this sector (zinc, ferro-alloys, metcoke) on 29.4.2008. Further, in order to increase
the domestic availability and bring about moderation in prices, export duties were imposed on
many items in the iron and steel sector @ 15% ad valorem on pig iron, sponge iron, iron and
steel scrap, iron or steel pencil ingots, semi finished products and HR coils/sheets, etc.
On 08.07.2008, raw cotton was also fully exempted from customs duties so as to contain
the prices of raw cotton and augment the domestic supply.
Excise
With effect from 04.06.2008, excise duty on unbranded motor spirit (MS) was reduced
from Rs 6.35 per litre to Rs 5.35 per litre and on unbranded high speed diesel (HSD), excise
duty was reduced from Rs 2.6 per litre to Rs 1.6 per litre. In the post-October stage, while the
inflationary pressures on the economy were subdued, the global meltdown and resultant
slowdown of the Indian economy required review of the existing policy in favour of
maintaining the growth momentum and retaining export markets. As such, the following
policy changes were effected which would be reviewed in the ensuing financial year in the
light of the macroeconomic situation particularly the growth of the manufacturing sector:
Customs
Export duties on iron and steel items were withdrawn w.e.f. 31.10.2008.
Aviation turbine fuel was fully exempted from basic customs duty for the benefit of the
aviation industry w.e.f. 31.10.2008.
In addition, to provide a level playing field to the domestic industry, some customs duty
exemptions provided earlier to combat inflation, on iron and steel items, zinc and ferroalloys, were withdrawn w.e.f. 18.11.2008.
As an incentive to the infrastructure sector, the CVD and Special CVD exemption granted
to imports of cement has been withdrawn w.e.f. 2nd January, 2009 to provide a cushion to
domestic cement industry and boost demand.
In the power sector, customs duty on naphtha used for generation of electricity by
electrical generating stations has been fully exempted w.e.f. 2nd January, 2009 till the end of
this financial year.

Service Tax
The refund of service tax paid by exporters on various taxable services attributable to
export of goods has been further extended to include clearing and forwarding agents services.
The upper limit of refund of service tax paid by exporters on foreign commission agent
services has been enhanced from 2% of FOB value to 10% of FOB value of export goods.
Drawback benefit can now be availed of simultaneously with refund of service tax paid in
respect of exports.
In order to mitigate the genuine hardships of goods transport agencies, eight specified
services which are provided to goods transport agency have also been fully exempted from
service tax.
Direct Taxes
7. Over the last five years, widespread reforms have been ushered in the area of direct taxes.
The reform strategy comprises the following elements: Minimizing distortions within the tax structure by expanding the tax base and
rationalizing the tax rates.
Enabling the tax administration to provide quality taxpayer services and also enhance
deterrence levels. Both these objectives reinforce each other and have promoted voluntary
compliance.
Re-engineering business processes in the Income-tax Department through extensive use
of information technology, viz., e-filing of returns; issue of refunds through ECS and refund
bankers; selection of returns for scrutiny through computers; e-payment of taxes; establishing
a Centralized Processing Centre and an effective taxpayer information system. These
measures have substantially enhanced the direct tax revenue productivity from 3.81 per cent
of GDP in 2003-04 to an estimated 6.35 per cent of GDP in 2008-09. Further, the share of
direct taxes in the Central tax revenues is now significantly higher than the share of indirect
taxes resulting in a substantial improvement in the equity of the tax system. Therefore, the
reform strategy in the medium term is to consolidate the achievements of the past.
8. Since there is no change in the tax base and rates, the prospects of growth in direct tax
collection in the ensuing financial year will remain unchanged vis-a-vis the revised estimate
for the financial year 2008-09.
Contingent and other Liabilities 9. The FRBM Act mandates the Central Government to
specify the annual target for assuming contingent liabilities in the form of guarantees.
Accordingly the FRBM Rules prescribe a cap of 0.5 per cent of GDP in any financial year on
the quantum of guarantees that the Central Government can assume in the particular financial
year.
The Central Government extends guarantees primarily on loans from multilateral/bilateral
agencies, bond issues and other loans raised by various Public Sector Undertakings/Public
Sector Financial Institutions.
The stock of contingent liabilities in the form of guarantees given by the government has
reduced from Rs 1,07,957 crore at the beginning of the FRBM Act regime i.e. 2004-05 to Rs
1,04,872 crore at the end of 2007-08. As a percentage of GDP, it has reduced from 3.4 per

cent in 2004-05 to 2.3 per cent in year 2006-07 and further to 2.2 per cent for the year 200708.
The disclosure statement on outstanding Guarantees as prescribed in the FRBM Rules, 2004
is appended in the Receipts Budget as Annex 3 (iii).
10. Assumption of contingent liability in the form of guarantee by the sovereign helps to
leverage private sector participation in areas of national priorities. In the current situation,
wherein a large number of infrastructure projects are being cleared for implementation under
the Public Private Partnership (PPP) mode, difficulties are being faced in reaching financial
closure due to the current uncertainties in the global financial market.
Within the given fiscal constraints and with a view to supporting financing of above
mentioned PPP projects, the India Infrastructure Financing Company Limited (IIFCL) has
been authorized to raise Rs 10,000 crore through Government guaranteed tax free bonds, by
the end of 2008-09 and additional Rs 30,000 crore on the same basis as per requirement in the
next financial year.
The capital so raised will be used by IIFCL to refinance bank lending of longer maturity to
eligible infrastructure projects. This initiative of the government is expected to result in
leveraging of bank financing to PPP programmes of about Rs one lakh crore.

The likely assumption of contingent liability in the form of guarantee for 2008-09, including
the above mentioned Rs 10,000 crore for IIFCL, will amount to Rs 36,606 crore which will
be 0.67 percentage of GDP during 2008-09, higher than the target of 0.5 per cent of GDP set
under the FRBM Rules.
This deviation has been necessiated in the larger interest of re-invigorating the economy in
the background of the current economic scenario, to stimulate demand and increase
investment in infrastructure sector projects. In the medium term while this may not have a
potential budgetary impact, the additional demand thus created will help restore the economy
to its higher growth path and contribute to higher revenue buoyancy which has shown a
slump in the current financial year due to moderation in the growth in economy.
Government Borrowings, Lending and Investments
11. The Government policy towards borrowings to finance its deficit continues to remain
anchored on the following principles namely (i) greater reliance on domestic borrowings over
external debt, (ii) preference for market borrowings over instruments carrying administered
interest rates, (iii) elongation of the maturity profile and consolidation of the debt portfolio
and (iv) development of a deep and wide market for Government securities to improve
liquidity in secondary market.
12. In the first half of the current financial year, the government borrowing was in line with
the indicated auction calendar decided upon in consultation with the Reserve Bank of India.

However, due to the need to provide the fiscal stimulus to counter the situation created by the
effects of the global financial crisis, the borrowing calendar of the government had to be
revised in the second half of the current financial year.
The gross and net market borrowings (dated securities and 364- day Treasury Bills) of the
Central Government during 2008-09 (up to February 9, 2009) amounted to Rs 2,40,167 crore
and Rs 1,68,710 crore, respectively. As part of policy to elongate maturity profile, Central
Government has been issuing securities with maximum 30--year maturity.
The weighted average maturity of dated securities issued during 2008-09 (up to February 9,
2009) was 14.45 years which was marginally lower than 14.90 years during the
corresponding period of the previous year. The weighted average yield of dated securities
issued during 2008-09 (up to February 9, 2009) was 7.91 per cent and was lower than 8.12
per cent during the corresponding period of last year.
13. Consequent to the transition to the FRBM Act mandated environment, recourse to
borrowing from RBI under normal circumstances is prohibited. During the year 2008-09 (up
to February 7, 2009) the Central Government resorted to ways and means advance to meet
the temporary mismatch in receipts and expenditure for 77 days as compared with 91 days a
year ago.
The daily average utilization of ways and means advance by the Central Government was Rs
7,383 crore as compared with Rs 14,498 crore a year ago. The Central Government also
availed of Overdraft (OD) for 24 days up to February 7, 2009. The daily average of OD was
Rs.11,233 crore as compared with Rs 6,381 crore a year ago.
14. The outstanding balance under Market Stabilization Scheme (MSS) on 1st April, 2008
was Rs 1,70,554 crore. Notwithstanding fresh issuance of Rs 43,500 crore during 2008-09,
the outstanding balance under the MSS declined to Rs 1,05,773 crore mainly reflecting the
change in policy and unwinding MSS through buyback of Rs 47,544 crores. This was done in
order to ease liquidity in the system in the backgrounds of the additional borrowing plan
during the second half of 2008-09 to finance the increased deficit.

17. Government has set up National Investment Fund (NIF) to which the disinvestment
proceeds from Central PSUs are being transferred. This fund is being managed by
professional fund managers. The receipts in the Fund are not reckoned as resources for the
purpose of financing the fiscal deficit. The income from investments under NIF is used to
finance social infrastructure and provide capital to viable public sector enterprises without
depleting the corpus of NIF.
Initiatives in Public Expenditure Management
18. The focus has shifted from financial outlays to outcomes for ensuring that the budgetary
provisions are not merely spent within the financial year but have resulted in intended
outcomes. Initiatives have been taken to evenly pace plan expenditure during the year and
also to avoid rush of expenditure at the year end which results in poor quality of expenditure.
The practice of restricting the expenditure in the month of March to 15 per cent of budget
allocation within the fourth quarter ceiling of 33 per cent is being enforced religiously.

.
19. Delays in receipts of utilization certificate are broadly indicative of poor implementation
strategy, diversion of funds or delay in utilization of funds for intended purposes. Monitoring
of utilization certificates and unspent balances with the implementing authorities is reviewed
at the highest level in the Ministry of Finance. Necessary control mechanisms have been put
in place with the help of the office of the Controller General of Accounts (CGA) to avoid
parking of funds and to track expenditure.
20. A central monitoring, evaluation and accounting system for the 1258 centrally sponsored
schemes and central sector schemes of the Government has been instituted under the Central
Plan Schemes Monitoring System. All sanctions issued by the Central Ministries under these
schemes are now identified with a unique sanction ID that enables the tracking of release as
per their accounting and budget heads across the different implementing agencies. This
central system is hosted on the e-lekha portal of the CGA.
.
C. Policy evaluation
23. The process of fiscal consolidation during the FRBM Act regime has created necessary
fiscal space to undertake much needed social sector expenditure and provide for higher
infrastructure outlays.
The performance up to 2007-08 was heartening. Fiscal deficit was brought down from 4.5 per
cent of GDP in 2003-04 to 2.7 per cent in 2007-08. Similarly, revenue deficit was reduced
from 3.6 per cent of GDP in 2003-04 to 1.1 per cent in 2007-08. The government was
steadfast in following the fiscal consolidation path which is reflected in the deficit estimates
of B.E.2008-09.
However, subsequent to the global meltdown, there was a compelling need to adjust the fiscal
policy to take care of exceptional circumstances through which the economy has been
passing. The result of the fiscal measures taken by the Government for containing inflation
has been positive as is evident from headline inflation dropping from high of 12.9 per cent in
August 2008 to 4.39 per cent in January 2009.
Similarly the intervention of the Government has ensured that the economy grows at a
healthy rate of 7.1 per cent in a difficult year when most of the developed economies are
facing recession. The fiscal consolidation process has to be put on hold temporarily.
The process of fiscal consolidation will be back on track once there is an improvement in
economic conditions.

India Tax Structure 2011-2012

This guide provides an overview of the tax structure and current tax rates in India. The tax
regime in India has undergone elaborate reforms over the last couple of decades in order to
enhance rationality, ensure simplicity and improve compliance. The tax authorities constantly
review the system in order to remain relevant. India has a federal system of Government with
clear demarcation of powers between the Central Government and the State Governments.
Like governance, the tax administration is also based on principle of separation therefore well
defined and demarcated between Central and State Governments and local bodies.
The tax on incomes, customs duties, central excise and service tax are levied by the Central
Government. The state Government levies agricultural income tax (income from plantations
only), Value Added Tax (VAT)/ Sales Tax, Stamp Duty, State Excise, Land Revenue, Luxury
Tax and Tax On Professions. The local bodies have the authority to levy tax on properties,
octroi/entry tax and tax for utilities like water supply, drainage etc.

DIRECT TAXES
Individual Income Tax & Corporate Tax
The provisions relating to income tax are contained in the Income Tax Act 1961 and the
Income Tax Rules 1962. The Income Tax Department is governed by the Central Board for
Direct Taxes (CBDT) which is part of the Department of Revenue under the Ministry of
Finance. In terms of the Income Tax Act, 1961, a tax on income is levied on individuals,
corporations and body of persons. Tax rates are prescribed by the government in the Finance
Act, popularly known as Budget, every year.
The Government of India has recently taken initiatives to reform and simplify the language
and structure of the direct tax laws into a single legislation the Direct Taxes Code (DTC).
After public consultation the Direct Taxes Code 2010 was placed before the Indian
Parliament on 30 August 2010, when passed DTC will replace the Income Tax Act of 1961.
The DTC consolidates the provisions for Direct Tax namely the income tax and wealth tax.
When it comes into effect, probably April 2012, it is likely to have significant impact on the
tax payers especially the business community.
In the case of Individuals, incomes from salary, house and property, business & profession,
capital gains and other sources are subject to tax. Women and Senior citizens are extended
some special privileges. Individuals incomes are subjected to a progressive rate system. Tax
treatment differs depending on the residence status.
Income of the company is computed and assessed separately in the hands of the company.
Income of company is subjected to a flat rate plus a surcharge. In addition to these, an
education cess is also charged on the tax amount. Dividends distributed are subjected to
special tax and the distributed income is not treated as expenditure but as appropriation of
profits by the company. Tax treatment differs depending on the residence status.
A company is liable to pay tax on the income computed in accordance with the provisions of
the Income Tax Act. Although many companies have huge profits, and declare substantial
dividends, they are relieved from tax liabilities because their income when computed as per
provisions of the Income Tax Act is either nil or negative or insignificant. Therefore a
provision called Minimum Alternative Tax (MAT) was introduced by an amendment in 1997.
As per the MAT provision such companies are required to pay a fixed percentage (presently
18% for 2011-2012) of book profit as minimum alternate tax.
Additionally, by an amendment in 2005 companies are required to pay Fringe Benefit Tax
(FBT) on value of fringe benefits provided or deemed to have been provided to the
employees.
In addition to income tax chargeable in respect of total income, any amount declared,
distributed or paid by a domestic company by way of dividend shall be subjected to dividend
tax. Only a domestic company is liable for the tax.
Wealth Tax
Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits
derived from property ownership. The tax is to be paid year after year on the same property

on its market value, whether or not such property yields any income. Similar to income tax
the liability to pay wealth tax also depends upon the residential status of the assessee. The
assets chargeable to wealth tax are Guest house, residential house, commercial building,
Motor car, Jewelry, bullion, utensils of gold, silver, Yachts, boats and aircrafts, urban land,
cash in hand (in excess of INR 50,000 for Individual & HUF only),etc. But in reality majority
of the potential tax payers do not pay this tax as most of the movable items such as jewelry,
bullion etc are stashed away from accounting. Invariably they just pay tax for the immovable
wealth such as real estate.
Capital Gains Tax
The central government also charges tax on the capital gains that is derived from the sale of
the assets. The capital gain is the difference between the money received from selling the
asset and the price paid for it. To restrict the misuse of this provision, the definition of capital
asset is being widened to include personal effects such as archaeological collections,
drawings, paintings, sculptures or any work of art.
Capital gain also includes gain that arises on transfer (includes sale, exchange) of a capital
asset and is categorized into short-term gains and long-term gains. The Long-term Capital
Gains Tax is charged if the capital assets are kept for more than three years or 12 months in
the case of securities and shares that are listed under any recognized Indian stock exchange or
mutual fund. Short-term Capital Gains Tax is applicable if the assets are held for less than the
aforesaid period.
In case of the long term capital gains, they are taxed at a concession rate. Normal corporate
income tax rates are applicable for short term capital gains. In case of the short term and long
term capital losses, they are allowed to be carried forward for 8 consecutive years.

INDIRECT TAXES
Excise Duty
The central government levies excise duty under the Central Excise act of 1944 and the
Central Excise Tariff Act of 1985. Central Excise duty is an indirect tax levied on goods
manufactured in India and meant for domestic consumption. The Central Board of Excise and
Customs under the Ministry of Finance, administers the excise duty. Central Excise Duty
arises as soon as the goods are manufactured. It is paid by a manufacturer, who passes on its
incidence to the customers. Excisable goods have been defined as those, which have been
specified in the Central Excise Tariff Act as being subjected to the duty of excise.
There are three main types of excise duty

Basic Excise Duty is charged on all excisable goods other than salt at the rates
mentioned in the said schedule

Additional Duties of Excise is charged on goods of special importance, in lieu of

sales Tax and shared between Central and State Governments

Special Excise Duty is charged on all excisable goods on which there is a levy of
Basic excise Duty. Every year the annual Budget specifies if Special Excise Duty
shall be or shall not be levied and collected during the relevant financial year.

Note: Under the Cenvat (Central Value Added Tax) Scheme, introduced under The Cenvat
Credit Rules, 2004, a manufacturer of product or provider of taxable service shall be allowed
to take credit of duty of excise as well as of service tax paid on any input received in the
factory or any input service received by manufacturer of final product. Such credits can be
used to setoff any excise duty tax payable.
In the recent budget, a number of tax exemptions have been initiated. Specific goods enjoy
concessional duty rates. Exemptions are allowed to tax payers engaged in the manufacture of
certain goods such as, water treatment, bio-diesel, processed food etc and certain types of
establishments such as small scale industries, cottage industries that create jobs are also
exempted.
Customs Duty
Customs duty in India falls under the Customs Act 1962 and Customs Tariff Act of 1975.
Customs duty is the tax levied on goods imported into India as well as on goods exported
from India. Taxable event is import into or export from India. Additionally educational cess is
also charged. The customs duty is evaluated on the value of the transaction of the goods. The
Central Board of Excise and Customs under the Ministry of Finance manages the customs
duty process in the country. The rate at which customs duty is applicable on the goods
depends on the classification of the goods determined under the Customs Tariff. The Customs
Tariff is generally aligned with the Harmonized System of Nomenclature (HSL). It should be
noted that preferential/concessional rates of duty are also available under the various Trade
Agreements.
Service Tax
Service tax was introduced in India way back in 1994 and started with mere 3 basic services
viz. general insurance, stock broking and telephone. Subsequent Budgets have expanded the
scope of the service tax as well as the rate of service tax. More than 100 services are
subjected to tax under this provision. An education cess is also charged on the tax amount.
The Central Board of Excise and Customs under the Ministry of Finance manages the
administration of service tax.
Every service provider of a taxable service is required to register with the Central Excise
Office in the concerned jurisdiction. Exemptions are available for services that are exported,
small service providers whose revenue fall below the prescribed level, services provided to
UN and International Agencies and supplies to SEZ(Special Economic Zones). Subject to
conditions, service tax is not payable on value of goods and material supplied while
providing services.
Securities Transaction Tax (STT)

Transactions in equity shares, derivatives and units of equity-oriented funds entered in a

recognized stock exchange attract Securities Transaction Tax. Service Tax, Surcharge and
Education Cess are not applicable on STT. Taxation of profit or loss from securities
transactions depends on whether the activity of purchasing and selling of shares / derivatives
is classified as investment activity or business activity. Treatment of STT also depends upon
whether the income from these securities transactions are included under the head Income
from Capital Gains or under the head Profits and Gains of Business or Profession.
NOTE: The Indian Government is keen on merging all taxes like Service Tax, Excise and
VAT into a common Goods and Service Tax (GST). GST system has been proposed in order
to simplify current indirect tax system which is very tedious and complicated. All goods and
services will be brought into the GST base. There will be no distinction between goods and
services. Alcohol, tobacco, petroleum products are likely to be out of the GST regime. The
state and central combined tax rate is speculated to be between 16%-20% in line with the
global trend. Originally slated for implementation by the year 2010 it has been postponed
twice and now scheduled for the year 2012. The central and state tax authorities which had
locked horns earlier are seemingly nearing a consensus. If implemented this will be the most
outstanding reform ever to the Indian tax system.

STATE TAXES
Apart from the central taxes, the states also levy taxes on various good and services. Main
state taxes consist of:
Value Added Tax (VAT)
Sales tax charged on the sales of movable goods has been replaced with VAT in most of the
Indian states since 2005. This was introduced to counter the rampant double taxation issues
and resultant cascading tax burden that occurred due to the flaws inherent in the previous
sales tax system.
VAT, chargeable only on goods and does not include services, is a multi-stage system of
taxation, whereby tax is levied on value addition at each stage of transaction in the supply
chain. The term value addition implies the increase in value of goods and services at each
stage of production or transfer of goods and services. VAT is a tax on the final consumption
of goods or services and is ultimately borne by the consumer. VAT comes under the state list.
Tax payers can claim credit for the taxes paid at earlier stages and purchases known as Input
Tax Credit, by producing relevant tax invoices. The credit can be used to setoff any VAT tax
liability.
Different rates of VAT are charged depending on the category to which the goods belong.
Rates vary for essential commodities, bullion and valuable stones, industrial inputs and
capital goods of mass consumption, and others. Petroleum tobacco, liquor and so on are
subjected to higher rate and differ from state to state.
Notably, there is no VAT on imports and export sales are not subjected to VAT. Therefore VAT
charged on inputs purchased and used in the manufacture of export goods or goods purchased
for export, is available as a refund.

Note: The Central Sales Tax which is levied on inter-State sales would be eliminated
gradually.
Stamp Duty
It is a tax that is levied on the transaction performed by means of a document or instrument as
per the regulations of Indian Stamp Act, 1899. It is collected by the government of the state
where the transaction is carried out. Stamp duty rates vary between the states.
Stamp duty is paid on instruments, which are essentially a document to create, transfer, limit,
extend, extinguish or record a right or liability. Document acquires legality once it is
stamped properly after the payment of the requisite stamp duty charges. Stamp duty is
payable for transfer of shares, share certificate, partnership deed, bill of exchange, shares,
share transfer, leave and license agreement, debentures, gift deed, bank guarantee, bonds,
demat shares, development agreement, demerger, power of attorney, home loans, houses &
house purchase, lease deed, loan agreement and lease agreement.
State Excise
Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under
the Constitution and it is called State Excise. The Act, Rules and rates for excise on liquor
are different for each State.
In addition to the above taxes by the Central and State Governments the local bodies have the
authority to levy tax on properties, octroi/entry tax and tax onutilities

OTHER KEY NOTES

Filing of VAT, CENVAT, Service Tax returns
Periodic returns must be submitted by companies registered for CENVAT or VAT/CST or
Service Tax in India.

CENVAT filings are monthly, on the 10th day following the period end.

VAT reporting is either monthly or quarterly, depending on the particular States rules.

Service Tax filings are bi-annual.

Permanent Account Number (PAN)

PAN is an all India, unique ten-digit alphanumeric number, issued in the form of a laminated
card by the Income Tax Department.
Who Must Have a PAN
Every person,

if his total income or the total income of any other person in respect of which he is
assessable, during any previous year, exceeded the maximum amount which is not
chargeable to income-tax; or

carrying on any business or profession whose total sales, turnover or gross receipts are
or is likely to exceed INR 500,000 in any previous year; or

who is required to furnish a return of income or

being an employer, who is required to furnish a return of fringe benefits

PAN is increasingly being recognized as a valid Identity Proof across India and a mandatory
document for important transactions such as purchase of property, motor vehicles, share
transactions, opening of bank accounts, obtaining loans, maintaining deposits etc., therefore
any person not fulfilling the above conditions may also apply for allotment of PAN.
Tax Deduction at Source (TDS)
The Income-tax Act enjoins on the payer of specific types of income, to deduct a stipulated
percentage of such income by way of Income-tax and pay only the balance amount to the
recipient of such income. Some of such incomes subjected to T.D.S. are salary, interest,
dividend, interest on securities, winnings from lottery, horse races, commission and
brokerage, rent, fees for professional and technical services, payments to non-residents etc.
Tax Collection at Source (TCS)
Tax is collected at the point of sale. It is to be collected at source from the buyer, by the seller
at the point of sale. Such tax collection is to be made by the seller, at the time of debiting the
amount payable to the account of the buyer or at the time of receipt of such amount from the
buyer, whichever is earlier. The goods to be subjected to TCS are clearly specified and the
type of buyers, sellers and purpose are clearly defined in the Act. Tax rates vary depending on
the goods.
Note: All those persons who are required to deduct tax at source or collect tax at source on
behalf of Income Tax Department are required to apply for and obtain Tax Deduction and
Collection Account Number (TAN), a 10 digit alpha numeric number, which is required to be
quoted in all documents involving TDS/TCS transactions. Failure to apply for TAN or not
quoting the same in the specified documents attracts a penalty.
Double Taxation Relief

India has entered into Avoidance of Double Taxation Agreement (DTAA) with 65 countries
including countries like U.S.A., U.K., Japan, France, Germany, etc. The agreement provides
relief from the double taxation in respect of incomes by providing exemption and also by
providing credits for taxes paid in one of the countries. These treaties are based on the general
principles laid down in the model draft of the Organisation for Economic Cooperation and
Development (OECD) with suitable modifications as agreed to by the other contracting
countries. In case of countries with which India has double taxation avoidance agreements,
the tax rates are determined by such agreements and vary between countries.
Unilateral Relief
The Indian government provides relief from double taxation irrespective of whether there is a
DTAA between India and the other country concerned, if
1. The person or company has been a resident of India in the previous year.
2. The same income must be accrued to and received by the tax payer outside India in
the previous year.
3. The income should have been taxed in India and in another country with which there
is no tax treaty.
4. The person or company has paid tax under the laws of the foreign country concerned.

Income Tax Rates/Slabs for Assessment Year 2012-13 (FY 2011-12)

Income Tax Rates/Slabs

Upto

Rate (%)
1,80,000 NIL

Upto
1,90,000
(for
Upto 2,50,000 (senior citizens)

women)

1,80,001 5,00,000

10

5,00,001 8,00,000

20

8,00,001 and above

30

Tax amendments for the FY 2011-12 are mentioned below :

Increase in base income tax slab of men and senior

citizens.

Tax exemption limit remains the same i.e Rs. 20,000 on

investment in tax saving Infrastructure bonds.

A set of New Direct Tax Codes have been proposed,

which will be active from Financial Year 2011.

Senior citizen age reduced from 64 years to 60 years.

People above 80 years of age to be included in the

newly introduced 'Very Senior citizen' category

Income Tax Rates/Slabs for Assesment Year 2011-12 (F Y 2010-11)

Income Tax Rates/Slabs
Up
to
Up
to
1,90,000
Up to 2,40,000 (for resident individual of 65 years or above)

Rate (%)
(for

1,60,000 NIL
women)

1,60,001 5,00,000

10

5,00,001 8,00,000

20

8,00,001 upwards

30

Few amendments made to the taxation system for the FY 2010-11:

From now onwards there will be only 2 pages in the IT filing form for individuals.

More cases can now be appealed against.

Rs. 20,000 tax exemption will be provided for investments in certain investment bonds. This is in
addition to the already allowed exemption (Rs. 1,00,000) in certain savings instruments.

Tax Exemption will be given for contribution to the Central Government Health Scheme (CGHS).

New fields have been added to the e-TDS/TCS form. These new fields are Ministry name; PAO / DDO

Reviewing the
Framework

Reserve

Bank

of

India's

Microfinance

Date:
May 2011
Author(s):
Amarnath Samarapally, Scott Gaul

Last week, the Reserve Bank of India (RBI) issued new regulations for microfinance
providers, based on the conclusions of the Malegam Committee. Since the regulations contain
several provisions that can be analyzed using public data on the sector, we take the
opportunity to investigate two main components of the regulation:

that banks should ensure a margin cap of 12 per cent and an interest
rate cap of 26 per cent for their lending to be eligible to be classified as
priority sector loans. Fn1

Data from the past several years indicates that most MFIs are within these levels. However,
for larger MFIs, we can see evidence that interest rates and profits have increased over time.
Thus, it remains to be seen what effects the regulation will have on future levels.
When one examines the sector as a whole, the data suggests that MFIs have been well within
the prescribed 26 percent interest rate levels, although margins have crept 1 - 2 percent higher
than what RBI has mandated (as in the chart below).
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This isnt a bad picture overall. However, one has to segregate the data to see what it actually
says.
Practitioners have expressed concerns that smaller MFIs will not be able to meet the
regulations. In addition, the original Malegam committee report distinguished between large
and small MFIs based on a threshold of a 100 crore loan portfolio (roughly 22 million USD).
We segment the MFIs into small and large groups using this criterion for 2005 - 2009. The
table below shows the number of MFIs that comply with the interest rate and margin cap
provisions in each class over time.

In 2006, two-thirds of large MFIs met the RBI requirements for interest and
margin caps. By 2009, only one-third still met this requirement which
confirms some of the concerns raised that large MFIs have been charging
higher interest rates with higher profit margins.

Small MFIs initially charged higher interest rates to ensure profitability, but
by 2009, 46 percent were operating within the framework guidelines.
Though once the framework is implemented, they may face tough
competition from any larger MFIs that reduce rates.

These results cover the same period that led up to the present crisis and present regulation.
Updated results for the 2010 fiscal year (ending March 31) will be available soon, and
updates through December 2010 are available for 25 of the leading MFIs now.
It should come as no surprise that large MFIs generally have access to cheaper funds than
small MFIs, although there is little difference overall. Large and small MFIs have both
increased lending rates, although lending rates have been higher for larger MFIs.
Consequently, large MFIs have earned higher profit margins than smaller MFIs and will thus
be more affected by the new regulations. The following charts compare yield, cost of funds
and margin metrics for small and large MFIs using a few different statistics (displayed in
different tabs).
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The question remains if this regulation is the right way to respond to the crisis. Banks have
already begun to hike lending rates in the face of inflation, which will further squeeze
margins. If institutions cannot adjust their pricing, we may see declining profits and perhaps
the eventual the closure of some institutions. With restricted access to credit, potential
borrowers may choose to resort to more expensive sources of financing. Other research
indicates that, when there is an interest rate cap, lenders may see this as an opportunity to
raise prices, not lower them - caps can allow institutions to collude at a maximum allowable
price level.
While MFIs may currently be largely compliant with the guidelines, the proposed caps will
affect the evolution of the sector. Research indicates that the caps may lead to worse options
for borrowers overall, even if their impact is muted at the present.