Table of Content
ECONOMY
1. Is India set to lose its ‘Prized’ Investment Grade Status?
Investors questioned that whether after years of debt accumulation and irregular progress on reforms, India, once touted as a future economic superpower still deserves its 'investment grade' status.
S&P, Moody’s and Fitch had either downgraded or warned that: (i) they could downgrade India’s growth forecast (ii) that government debt as a share of GDP would jump to a record 90% this year!
The median debt level for countries Fitch has in the BBB investment grade bracket is currently around 55% and only 70% even for those languishing at the lowest depths of 'junk' grade. India becoming a ‘fallen angel’ (signifies demotion to ‘junk’ in rating agency parlance) would automatically exclude government or corporate bonds from certain high-profile investment indices, which meant that conservative funds - active managers as well as passive "trackers" - would sell out, aggravating the situation.
UBS analysts also estimated that India needed to grow at least 10% a year for public debt to stabilise and come down. It hasn't got anywhere near that since 1988, World Bank data shows. While it had built up a healthy stock of currency reserves, its huge population of 1.4 billion meant it still had the lowest prosperity level of any investment grade country when measured by GDP per capita of $2,164 as compared to China’s nearly $13000.
2. April Retail Inflation relaxed from 5.52% in March
On 12th May, official data showed that the Consumer Index-based inflation (CPI) was 4.29% for April,2021. This was well within the Monetary Policy Committee’s (MPC) medium term inflation target range of 4(+/-2)%. Moreover, this was the lowest in 3 months. April was the 5th consecutive month that CPI inflation was within MPC’s target range. This fall was primarily instigated by a sharp decline in food inflation from 4.87% in March to 2.02% in April. Analysts said that the drop in inflation was attributed to the lower demand of various items caused by regional lockdown in states.
The policy message was that the government needed to support demand without getting excessively concerned about the pressure on prices of petroleum products.
Meanwhile Aditi Nayar, Chief Economist with ICRA Ltd., said that she expected CPI inflation to bounce back to an average of 5% in the remainder of first half of the fiscal year, ruling out the possibility of further rate cuts to support economic activity and sentiment, as the lockdown base would extinguish gradually.
3. Crypto Roller Coaster
Cryptocurrency investors have experienced both euphoria and agony over the past few months. But, May 19, 2021 was a day to forget for crypto investors due to the free fall of all popular digital currencies. Bitcoin crashed 30% to $31000. The currency was down by more than 50% from its record level of $65000 posted in April. However, Bitcoin’s downstream was accompanied by Ethereum, the second-largest cryptocurrency in the world and Dogecoin, the meme crypto popularized by Elon Musk (CEO OF Tesla Inc.), which fell 40% and 45% respectively. The downfall was caused by Musk’s tweet announcing Tesla’s apprehensions towards Bitcoin. Further exasperation of the worsening sentiment was caused by an announcement from People's Bank of China on May 18, 2021 reiterating that digital currencies cannot be used for payments.
In India, during mid-May, many news articles suggested that Reserve Bank of India (RBI) was informally encouraging lenders to abandon cryptocurrency exchanges and traders. However, on May 31, 2021, the RBI clarified that banks cannot eschew crypto related transactions citing its 2018 circular, which became invalid since Supreme Court’s decision on March 4, 2020. Although, RBI advised banks to continue doing due diligence of customers on any crypto-related dealings along with ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA), 1999 for overseas remittances along with regulations governing standards for Know Your Customer (KYC), Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, (PMLA), 2002. Several financial institutions including ICICI Bank and Paytm Payments Bank had cut ties with crypto exchanges and blocked their ability to accept rupee deposits in the absence of a clear directive from RBI on the Supreme Court verdict. HDFC Bank and State Bank of India (SBI), even warned users of account suspension if trading continued. Industry experts believe that the clarification from none the regulator itself will enable lenders to engage with the crypto industry.
4. Plight of Fuel Demand
As per data compiled by the state refiners, domestic sales of gasoline and diesel fell by about 20% and jet fuel consumption slumped by nearly 38%, in the first half of May as compared to the same period in the month of April. The plunge in sales was due to the imposition of lockdown amongst various states in India. As a result, Indian refiners had started cutting crude processing and imports. Indian fuel demand had recovered to near pre-COVID levels in March but had been declining since April due to restrictions amid a staggering spike in infections to record highs.
Analysts opined that India’s demand for transportation fuels were expected to witness a sharper dip in May due to more impending restrictions. However, domestic fuel sales by state retailers over first half of May were higher versus a year earlier when there was a nation-wide lockdown.
5. India-Singapore trade unperturbed by the Covid pandemic
India’s High Commissioner to Singapore, P Kumaran said that trade between India and Singapore is likely to hit $21 billion in financial year 2020-21, after having already surpassed $19 billion. Such forecast signifies that trade deals between the 2 nations remained unfazed by the pandemic. Meanwhile, Singapore has topped the list of foreign investment generators, accounting for 29% of the record $81.72 billion foreign direct investment India received during the financial year 2020-21. USA finished second with 23% and Mauritius occupied 3rd place with 9%.
6. Cap on unemployment unfathomable as it scales up gradually
Based on estimates of hiring consultants, about 7.5 million jobs have been lost across various sectors over February to May 2021. Such worrisome figures are a result of the restrictions that have been initiated to control the impact of the second wave of Covid-19, which have crippled businesses. A recent report by Centre for Monitoring Indian Economy (CMIE) showed double-digit unemployment rate in April and May. Unemployment rate touched 14.5 percent in the week ended May 16, 2021 and rose further to 14.7 percent in the following week.
Direct Taxation
1. Digital Tax Threshold Notified
Non-Resident Tech giants like Google, Facebook, Netflix will have to pay taxes in India under new or revised tax pacts if their revenue exceeds ₹2 crore or their user base exceed 300,000 following new notifications made as a part of Significant Economic Presence (SEP) principle laid down in Finance Bill 2018-19. The notification will come to effect from April 1 ,2022.
The SEP had widened the scope of “business connection” by including provision of downloading data or software provided the revenue from such transactions exceed a prescribed limit or interactions exceed a prescribed number of users.
However, India will need to renegotiate the existing Tax Treaty with the USA in order to tax entities like Google, Netflix etc. as the current double taxation avoidance agreements are not covered by the above changes. Experts opined that a low threshold meant that many Non-Resident companies will come under the ambit of the new changes, however such companies can still take refuge under existing tax treaties since most of them follow the Permanent Establishment convention to determine taxability. As a result, the above changes can only take effect one new treaties are signed or existing ones are amended.
The SEP provision had been delayed till 2022-23 as India was waiting for the multilateral solution being deliberated by the Organization for Economic Co-operation and Development (OECD) under which all tax treaties would automatically be updated. Around 130 countries are striving to find a consensus solution to the problem of taxability of digital entities.
2. Reimbursement of welfare expenses by MNCs in India outside of tax net - Tribunal Ruling
In what could have a major implication for welfare expenses incurred by companies for their employees, the Income Tax Appellate Tribunal (ITAT) of Pune has laid down conditions for reimbursement of expenses by Indian arm of foreign companies.
The tribunal has put forward two conditions for Indian arms for claiming reimbursement of welfare expenses following which such reimbursement won’t have any tax implications. Firstly, there should be one to one direct correlation between the outflow of payment and inflow of receipt. Secondly, the receipt and payment should be of identical amount i.e. there should be no profit element.
The ruling was made in the case of BYK Germany which has a permanent establishment in Singapore and carries various testing technical support service across Asia Pacific. It also has operations in India. The Company incurred some training and welfare expenses for its employees in India including an event in Germany. The department was of the opinion that such payment should have been made by deducting TDS - a position that the tribunal shot down while putting the above-mentioned conditions.
3. Forex Gain arising out repayment of personal loan not taxable - Tax Tribunal
Forex gain arising out of repayment of interest free loan to a relative are not taxable as capital gains as per ruling made by Mumbai branch of Income Tax Appellate Tribunal (ITAT). The tribunal made the above ruling in a case where the plaintiff extended interest free loan of $200,000 to his Singapore based cousin in 2010 which amounted to Rs 90 lakh at an exchange rate of Rs 45.14. The loan was repaid two years later when the exchange rate was Rs 56.18 which resulted in a forex gain of Rs 22 lakh. The department wanted to tax the above surplus.
Earlier the commissioner of appeals had upheld the department’s view as it reasoned if that giving and taking of loans is not the business of the concerned person then such gain should be treated as interest on loan and therefore taxable as income from other sources.
This led to the plaintiff taking the matter to the ITAT which made the observation that such a surplus was arising as a result of foreign exchange fluctuations with respect to transaction which is capital in nature (i.e. a loan transaction). Therefore, it conclude that such gains were a non-taxable capital receipt.
4. New Slump Sale Rule Notified
The CBDT has notified new rules for computation of Fair Market Value of slump sale. The amendment made to IT rules have created the new rule 11UAE under section 50 which has given two methods for calculation stating that the higher value among these two will be used as Fair Market Value (FMV).
While under this rule all assets of an entity other than five specific categories of asset – immovable property, jewellery, shares, securities and artistic works, are valued at book value, the five assets themselves are valued at FMV, assuming these assets were transferred individually.
Experts believe that the new rule will make tax planning difficult for entities holding immovable properties and the other specified assets at low historical cost since now they will need to pay tax considering the FMV irrespective of actual transaction cost, if such transaction cost is lower than FMV.
Indirect Taxation
1. Key Highlights/Important recommendations of the 43rd GST Council Meeting
The much awaited 43rd GST Council Meeting was held on 28th May 2021. Some of the key highlights or important recommendations of the meeting were:
The GST Council decided to exempt from IGST Covid-related items like medical oxygen, concentrators, test kits, vaccines etc., which are imported on payment basis for donating to the government or on recommendation of state authority to any relief agency, till 31st August,2021. The earlier exemption of items through free donation route from IGST was also extended to 31st August. As regards individual items, it was decided to constitute a Group of Ministers (GOM) to go into the need for further relief to Covid-19 related individual items immediately. The GOM shall submit its report by 8th June,2021.
Certain clarifications/clarificatory amendments were recommended in relation to GST rates and in relation to services.
Amnesty Scheme to provide relief to taxpayers regarding late fee for pending returns had been announced.
To reduce burden of late fee on small taxpayers, the upper cap of late fee was being rationalized to align late fee with tax liability/turnover of the taxpayers which will be made applicable for prospective tax periods.
In addition to the relief measures already provided to the taxpayers vide the notifications issued on 1st May 2021 for March and April returns, further relief was provided.
Cumulative application of rule 36(4) for availing ITC for tax periods April, May and June 2021 in the return for the period June 2021.
Allowance of filing of returns by companies using Electronic Verification Code (EVC), instead of Digital Signature Certificate (DSC) till 31st August 2021.
Time limit for completion of various actions, by any authority or by any person, under the GST Act, which fell during the period from 15th April 2021 to 29th June 2021, to be extended upto 30th June 2021, subject to certain exceptions. Wherever the timelines for actions have been extended by the Honourable Supreme Court, the same would apply.
Simplification of Annual Return for Financial Year 2020-21.
Amendments in certain provisions of the Act so as to make the present system of GSTR-1/3B return filing as the default return filing system in GST.
2. Rationalization in GST refund provisions
Earlier GST refund applications were returned citing deficiency, seeking companies to file a fresh application. The filing of a rectified refund application was treated as a new refund application. As a result, even though the application was filed within the time limit of 2 years, the department had been considering the date of rectified refund application as the relevant date resulting in rejections on the ground of breach of time limits.
Central Board of Indirect Taxes & Customs (CBIC) has ended this controversy by amending GST rules and has excluded the time period from the date of filing of refund application to date of issuance of deficiency memo by the officer from the overall time limit to file refund application. Hence, from now onwards, refund application can be withdrawn at any time prior to issuance of provisional/ final refund order or refund payment/ withhold/ rejection order.
3. Application for Revocation of Cancellation
According to Notification No. 14/2021 dated 01.05.2021, the timeline for filing the ‘Application for Revocation of Cancellation’ had been extended to 180 days from 90 days which will be valid up to 15th June 2021.
4. GST Officers to become effective vigilantes
The integration of e-way bill, RFID and Fast Tag will enable tax officers to undertake live vigilance in respect of e-way bill compliances by businesses and will aid in preventing revenue leakage by real-time identification of cases of recycling of EWBs, non-generation of EWBs. Additional features have also been added to the e-way bill mobile application of tax officers, which will provide them real-time tracking details of e-way bill and vehicle to help them to apprehend tax evaders who are misusing the e-way bill system. The officers can now access reports on vehicles that have passed the selected tolls without e-way bills in the past few minutes, the vehicles carrying critical commodities specific to a state and have passed the selected toll, suspicious vehicles and vehicles of EWBs generated by suspicious taxpayer GSTINs.
What's Buzzing?
1. The Tussle Between Amazon and Future Group
The Future-Reliance deal will assist the oil-to-media conglomerate to control nearly 40% of India’s organized retail market. The success of this deal will lead to a contribution of 25% to RIL’s overall sales from retail business. This will help Reliance create a $26 billion retail empire which will earn them a 4% market share in India’s retail sector. Reliance Retail Ventures Ltd (RRVL), in its official statement had declared that the deal will help RRVL to accelerate providing support to millions of small merchants in increasing their competitiveness and enhance their income.
In August 2020, Kishore Biyani-led Future Group entered into an agreement with Reliance Retail, a subsidiary of the umbrella Reliance Industries Limited (RIL) group, to sell its retail, wholesale, logistics and warehousing businesses to the latter. As a part of the deal, Future Retail will sell its supermarket chain Big Bazaar, premium food supply unit Foodhall and fashion and clothes supermart Brand Factory’s retail as well as wholesale units to Reliance Retail.
Now, why is Amazon bothered by such a deal? The answer is simple. Amazon had acquired 49% stake in Future Coupons, the promoter firm of Future Retail. After Future-Reliance agreement, Amazon claimed that the deal was a violation of a non-compete clause and a right-of-first-refusal pact it had signed with the Future Group. Which simply put, means that Future Group was legally bound to inform and obtain consent of Amazon before entering into any sale agreement with third parties. In its defense, Future Group said that it was only selling its assets and had not indulged in any stake sale and therefore it was not guilty of violation of any terms of the Future-Amazon contract.
A right of first refusal (ROFR) is a contractual right giving its holder the option to transact with the other contracting party before others can. The ROFR assures the holder that they will not lose their rights to an asset if others express interest. Now, hypothetically, if SC provides its assent to the Future-Reliance deal, then Future Group’s justification that they had indulged in only asset sale and not in stake sale will hold significance. Therefore, this will act as a warning in case of future merger and acquisition deals (M&A) where the buyer will have to clearly mention that ROFR will apply both on asset and stake sale.
Amazon took a step further by sending a letter to the Securities and Exchange Board of India (SEBI), the Bombay Stock Exchange and the National Stock Exchange (NSE) asking them not to approve the Future-Reliance deal as there was an interim stay order passed by the Singapore International Arbitration Centre (SIAC) on 25th October 2020. The Future Retail Ltd. (FRL) had sought Delhi High Court’s (DHC) help for appropriate relief against Amazon to stop the latter from interfering with the deal. In its response, the DHC, on 21st December 2021, did not restrain Amazon from writing to SEBI, Competition Commission of India (CCI) and other authorities about SIAC’s order. It had also stated that the statutory authorities and regulators could view the Future-Reliance deal in accordance with the law, although it validated FRL’s transaction with Reliance Retail.
Interestingly, the Future-Reliance deal has already been approved by CCI and SEBI but is still awaiting nod from the National Company Law Tribunal (NCLT) and shareholders.
This build-up leads to the question: How did the Supreme Court of India (SC) get involved? Amazon had approached SC on 11th February 2021 against the DHC’s 8th February ruling to maintain the "status quo" on the Future-Reliance deal. The SC ruled that while proceedings before NCLT will continue, it will not culminate into any final order on the amalgamation of FRL with Reliance.
In the latest series of events, Amazon again moved the SC on 7th April 2021, against DHC’s March 22 ruling which removed the stay over the Future Group proceeding with the deal with Reliance Retail.
This order was a respite to the Future Group against DHC’s order passed on March 18, which restrained the selling of assets to Reliance Retail. Amazon appealed to SC that the March 22 order by DHC was "random", "illegal" and "inequitable and unfair". On 19th April, 2021, SC stayed all proceedings before the DHC. The matter will be further considered by SC on 28th June, 2021.
Even though, the last date of completion of Future-Reliance deal has been extended to 30th September 2021, the biggest battle in India’s corporate world is far from over.
2. Twitter and WhatsApp lock horns with the Central Government
The disputative IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 which came into effect on May 26, 2021, now covers a wide gamut of Indian internet ecosystem. The companies have begun to comply with the rules. However, both WhatsApp and Twitter have raised concerns regarding the rules. Hence, why are these two social media behemoths reluctant to comply with these rules?
As far as Twitter is concerned, it is concerned about the safety of its employees in India due to the recent raid by members of Delhi police’s special cell on two Twitter offices which is related to the tussle with the Central Government (CG) over ’manipulated media’ tags on some posts made by the ruling party. Additionally, it is suspicious that the Indian government may seek to suppress critical and dissenting opinions in India on its platform with these rules.
WhatsApp has taken a bold step by suing CG in Delhi High Court over the new rules, alleging that such rules will force the company to break its encryption, potentially revealing the identities of people that have sent messages through the platform. It claims that this is a violation of the fundamental right to privacy.
3. Reissue Relief for OCI Cardholders
According to the Home Ministry, the Overseas Citizen of India (OCI) card is required to be reissued every time a new foreign passport is issued up to the age of 20 and once after attaining the age of 50 due to biological changes in the face of the applicant. Additionally, foreign spouses registered as OCIs will be required to upload a copy of the new passport and a latest photo, along with a “declaration that their marriage is still subsisting, each time a new passport is issued”.
The details of the new passports can be uploaded within 3 months of receiving the passport. Thenceforth an auto acknowledgement through e-mail will be sent to the OCI cardholder, informing them about the updation of the record. Further, there will be no travel restrictions to/from India during the period from the date of issue of new passport and the date of final acknowledgement.
The Ministry of Home Affairs declared that OCI cardholders can lay claim to “only NRI quota seats” in educational institutions based on all-India entrance tests such as the National Eligibility cum Entrance Test (NEET), the Joint Entrance Examination (Mains), Joint Entrance Examination (Advanced) or other such all-India character tests.
Management Lesson
Lateral Thinking
Many years ago in a small Indian village, a farmer had the misfortune of owing a large sum of money to a village moneylender. The moneylender, who was old and ugly, fancied the farmer's beautiful daughter. So, he proposed a bargain. He said he would forgo the farmer's debt if he could marry his daughter.
Both the farmer and his daughter were horrified by the proposal. So, the cunning money-lender suggested that they let providence decide the matter. He told them that he would put a black pebble and a white pebble into an empty money bag.
Then the girl would have to pick one pebble from the bag. If she picked the black pebble, she would become his wife and her father's debt would be forgiven. If she picked the white pebble, she need not marry him, and her father's debt would still be forgiven. But if she refused to pick a pebble, her father would be thrown into jail.
All the villagers were standing on a pebble strewn path in the farmer's field. As they talked, the moneylender bent over to pick up two pebbles. As he picked them up, the sharp-eyed girl noticed that he had picked up two black pebbles and put them into the bag. He then asked the girl to pick a pebble from the bag.
Now, imagine you were standing in the field.
What would you have done if you were the girl? If you had to advise her, what would you have told her?
Careful analysis would produce three possibilities:
The girl should refuse to take a pebble.
The girl should show that there were two black pebbles in the bag and expose the money-lender as a cheat.
The girl should pick a black pebble and sacrifice herself in order to save her father from his debt and imprisonment.
Take a moment to ponder over the story. The above story is used with the hope that it will make us appreciate the difference between lateral and logical thinking.
The girl's dilemma cannot be solved with traditional logical thinking. Think of the consequences if she chooses the above logical answers.
What would you recommend to the Girl to do?
Well, what she did was:
The girl put her hand into the moneybag and drew out a pebble. Without looking at it, she fumbled and let it fall onto the pebble-strewn path where it immediately became lost among all the other pebbles.
"Oh, how clumsy of me," she said. "But never mind, if you look into the bag for the one that is left, you will be able to tell which pebble I picked."
Since the remaining pebble is black, it must be assumed that she had picked the white one. And since the money-lender dared not admit his dishonesty, the girl changed what seemed an impossible situation into an extremely advantageous one.
MORAL OF THE STORY: Most complex problems do have a solution. It is only that we don't attempt to think.
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