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Volume 1, Issue 3

28 December, 2009

Finnomics.....
where learning peaks!!!

Also Contributed
by: All you need to know about Goods and
HariharaPrasath G. Services Tax (GST)
- PGDM 1st year

Abhinav Gupta
By Neha Harichandani, MMS - 1st year
- PGDM 1st year
The introduction of a countrywide GST will truly make our nation a com-
Manushi Paul mon economic area. This is a tax to be paid by the final consumer, and
- PGDM 1st year will eliminate all the existing indirect taxes – central excise tax, services
tax, central and state sales tax, and maybe even octroi. In the current
Amit Wadhwa
- PGDM 2nd year system, we often end up paying tax on tax (for instance, sales tax on ex-
cise), leading to a cascading of taxation and much inefficiency. The GST
will remove inefficiency and lead to a lowering of tax burden.

Background on GST:
GST
INSIDE THIS ISSUE: The goods and services tax (GST) is a comprehensive value-added tax
(VAT) on goods and services. France was the first country to introduce
GST this system in 1954. Today, it has spread to over 140 countries.
Wrap up — 2009 Through a tax credit mechanism, GST is collected on value-added goods
WPI and services at each stage of sale or purchase in the supply chain. GST
Sector SNAPSHOT paid on the procurement of goods and services can be set off against
Whizz Quiz that payable on the supply of goods or services. But being the last per-
son in the supply chain, the end consumer has to bear this tax and so, in
What is….?
many respects, GST is like a last-point retail tax.

Whizz Quiz!! Cont’d on page 3…..


1.) Which bond doesn’t
allow you to receive any
Interest? Wrap Up - 2009…..
By Sheriq Sumar, MMS - 1st Year
Answers to all Whizz
Quiz on Page 6. 2009.. a year of learning for the masses as well as the classes, from the
middle-class housewife to the jet-setting CEO, from the Satyam scandal to
the Dubai crisis, from stock market upheavals to uncontrolled price rises.
All these and more will be chronicled in history to describe the year that
was 2009.

Cont’d on page 2….


PAGE 2 FINNOMICS.....

Wrap up - 2009…..cont’d from page 1


But what might be missed out are the learning, the fall of vanity, the resilience and strength of good
policies, good governance, and a re-awakening world order, to the perils of free-wheeling capitalism.
The world has seen some good leadership in these difficult times, considering the humongous tides
which effectively knocked the world out of its self-induced stupor. Here, we bring you a summary of
some of the important events which called for our attention in the last 12 months, while we request
you to focus your thoughts on what came about as a consequence of these life-changing events.
• The books for 2009 opened with the cooked books of the erstwhile Satyam, which exposed a
mega-fraud to the tune of Rs. 7000 crore exposing the inadequacies of the governing bodies,
and besmirching India Inc.
• The exchange rates see-sawed from peaks to troughs in a matter of months, with high volatility
which resulted in the USD swinging to the tune of speculations, on the basis of the world mar-
ket sentiments. The lowest monthly average of Rs 46.56/$ in November and highest monthly
average in March with Rs. 51.20/$ were recorded.
• FDI inflow from April 2009 to Oct 2009 was Rs.85,273 crore from Rs. 80,395 crore last year
for the same period, which proves the strengthening risk-appetite of big ticket investors. Mauri-
tius is the highest contributor with 44% of total FDI coming from this country while USA contrib-
uting just 8% which again goes on to prove the changing world dynamics and the on-going
weakness of the US economy. Investment in Service sector was around 22%, while computer
hardware and software contributed around 9% re-affirming India as a strong Services, and IT/
ITES provider. Maharashtra still remains the favorite destination for FDI inflow with 36% of in-
vestment in this state.
• 2009 calendar year emerged as the best year for investors since 2009 with returns on invest-
ments more than 79%. The benchmark SENSEX closed on its 18-Month high on 26th Decem-
ber at 17360.
• India's industrial output rose 10.3 percent in October from a year earlier, matching market fore-
cast, helped by stimulus measures and robust domestic demand.
• The GDP recorded a growth of 7.9 per cent for the September quarter. This is much higher than
market expectations that were around 6.3 per cent. Almost all the components of the GDP put
up a better-than-expected performance during this period.
• Interest rate futures have clocked trading volumes of Rs 276 crore in their very first day of
trade. Trade in the newly-launched derivatives is expected to pick up with regulators and gov-
ernment officials stating that the exchange-traded instruments are superior to over-the-counter
overnight index swaps. Trading in interest rate futures began on the National Stock Exchange
(NSE) on 31st August.
• India’s inflation rate nosedived to negative territory for the first time in 32 years for the week
ended June 6 at minus 1.6 percent compared to the previous week's rise of 0.13 percent.
• On the heels of the negative inflation, it then accelerated to a ten-month high as food costs
soared, making it more likely the central bank will tighten monetary policy soon to contain
prices. The benchmark wholesale-price index climbed 4.78 percent in November from a year
earlier, following a 1.34 percent gain in October.
• The President of The United States of America, Mr. Barack Obama got elected on the 20th Janu-
ary 2009 with a landslide victory and a landmark victory speech. He instilled a sense of “Can
Do” spirit, not just in the US, but the world over, which was the necessity of the time, to fight
against the spreading recessionary phase and a losing battle of the psyche of a nation, and the
world as a whole.
• With the world being focused on the US sub-prime crisis, the Dubai debt crisis came unawares,
as Dubai on 26th November 2009, announced its inability to meet interest liabilities and re-
quested an extension. Although the scale of Dubai’s debts was comparatively modest at $80
billion, the uncertainty spooked the world markets. Abu Dhabi granting $10 billion has staved
off the collapse for now, allaying fears of a double-dip recession.

These were some of the events which will be remembered forever, some as sour pills and some as cher-
ished memories. With this, we at Finance Forum close the curtains on the year past, and welcome 2010
with open arms, with hopes of a brighter future....
VOLUME 1, ISSUE 3 PAGE 3

Goods and Service Tax


What is ….??
….cont’d from page 1
Winner’s curse:
In case of competitive
bidding, different peo- GST in India:
ple have different per- In India, a dual GST is being proposed wherein a central goods and ser-
ceptions about the vices tax (CGST) and a state goods and services tax (SGST) will be levied
value of an item. Some on the taxable value of a transaction.
may underestimate it The central and state governments are discussing the GST system pro-
while others may over- posed to be implemented in India from April 1, 2010. The combined GST
estimate it. The win- rate is currently being discussed by the Centre and the EC. The rate is
ner’s curse is invoked expected to be in the range of 14-16 %. Once the total GST rate is deter-
when the purchaser in mined, the states and the Centre have to agree on the CGST and SGST
an attempt to seal the rates. Today, services are taxed at 10% and the combined incidence of
bid overestimates the indirect taxes on most goods is around 20%.
offering the product The prices of commodities are expected to come down in the long run as
has to offer and dealers pass on the benefits of reduced tax incidence to consumers by
makes payments in slashing the prices of goods.
excess of the actual
intrinsic value. This
happens when there is Implications of GST on imports and exports:
asymmetric informa- Imports would be subject to GST. Exports, however, will be zero-rated,
tion or inaccurate meaning exporters of goods and services need not pay GST on their ex-
valuation. ports. GST paid by them on the procurement of goods and services will
In case of IPO’s unin- be refunded.
formed investors may
purchase a larger allot- Shifting to a dual GST system-
system- Beneficial:
ment of issues that Dual GST is expected to be a simple and transparent tax structure with
informed investors only one or two rates of taxes. The result would be a reduction in the
know are overpriced. number of taxes at the Central and state levels, cut in effective tax rate
This also applies in for many goods, removal of the current cascading effect of taxes, reduc-
case of real estate tion of transaction costs for taxpayers through simplified tax compliance,
firms where people and increased tax collections due to wider tax base and better compli-
sometimes push
ance.
prices beyond the true
Being a consumption-based tax, dual GST will result in better revenue
value of the assets.
Any person who may collection for states with higher consumption of goods and services.
has acquired such a The backward and less-developed states would see fall in collections.
property is said to The Centre is expected to put in place a mechanism to compensate
have invoked the win- states for any revenue loss due to GST.
ner’s curse ie , the
deal is won but finan-Challenges Ahead:
cial loss is accompa- The introduction of the GST system is by far the most important tax re-
nied with it. form in India. Consensus and coordination among states is required for it
to succeed. Before it can be introduced, the Centre and states have to
sort out issues like agreement on GST rates, constitutional amendments
empowering states to tax services, taxation on inter-state transactions of
Whizz Quiz!! goods and services, drafting of CGST and SGST laws, consultation with all
2.) What is common stakeholders including trade and industry associations before finaliza-
between Michael Doug- tion, administrative preparedness to implement the new tax regime and
las, Bluestar and Ed- resolution of all other issues under discussion.
ward Pressman? This is a formidable challenge given that we have only limited time left.
The Union Budget, which is to be presented on July 3, should lay down a
clear roadmap with defined timelines for GST to become a reality on April
1, 2010.
PAGE 4 NEWSLETTER TITLE

Changes in WPI and Implications….


What is ….??
By Pooja Shethia, MMS 1st Year
White Knight:
This is a term used in
Mergers and Acquisi- The Wholesale Price Index or WPI is the price of a representative basket of
tions. The white wholesale goods. Some countries use the changes in this index to measure
knights are seen as inflation in their economies, in particular India. The Wholesale Price Index
saviors or friendly bid- focuses on the price of goods traded between corporations, rather than
ders by the company goods bought by consumers, which is measured by the Consumer Price
that has filed for Index. The purpose of the WPI is to monitor price movements that reflect
bankruptcy. They gen- supply and demand in industry, manufacturing and construction. This helps
erally retain the em- in analyzing both macroeconomic and microeconomic conditions.
ployees of the ac-
quired company and
fuse capital into that Changes In WPI:
company to help it • A major change in WPI is in the form of change in the base year
operate profitably. of the wholesale price index (WPI) series from 1993-94 to 2004-
They are not entirely 05.
altruistic as they fore- • Also there is a monthly release of the wholesale price index (WPI)
see profitability in ac- instead of the previous weekly release.
quiring the company • As a compromise between those favoring and opposing monthly
in trouble. release of data, it has been decided to continue with weekly re-
porting for two components of the index: primary products and
The other knights are fuel. And, the price data for the manufacturing sector was to be
the grey knight and reported on a monthly basis.
black knight. The for- • The new 2004-05 base series will have 1,224 commodities
mer also takes over
(against the 435 items in the present WPI series).
the company but has
some concessions
• The weights have been kept unchanged at 22.02 percent for
like retaining employ- primary articles, 63.75 percent for manufactured products and
ees. However they are 14.23 percent for fuel, power, light and lubricants.
preferred to black • The annual rate of inflation for weekly basis is measured as a
knights who are hos- percentage change of the WPI of that week over the WPI of the
tile bidders. They re- corresponding week in the previous year. The monthly WPI is ex-
place staff and man- pected to be a simple arithmetic mean of weekly WPIs of the
agement with their month.
own people from its • Among manufactured products, cell phones, laptops and digital
corporation. The take- cameras are among items that will be added in the manufac-
over attempt is a bid tured segment category.
to kill competition.
One Of the major Reason:
The plan to shift to a monthly release of WPI is aimed at improving data
collection for the manufacturing sector. Weekly data is not adequately
available for the sector.

Whizz Quiz!! Implications of the change:


3.) What is common • The move is aimed at improving the accuracy of the inflation
between IMF, Re- data. The monthly release of WPI is a widely-followed interna-
serves and the num- tional practice. And, it is expected to improve the quality of data.
ber 44? Collection of price data of manufactured products will, accord-
ingly, have a monthly frequency consistent with the practice of
release of WPI.
• Rating agency Crisil’s Principal Economist DK Joshi said “The WPI
will now become more representative of today’s reality. I believe
it will come along with the revision in commodities and weights.”
VOLUME 1, ISSUE 1 PAGE 5

What is ….?? Implications… cont’d


Chinese wall: • The new WPI is aimed at tracking changes in price level accurately.
This is an ethical bar- Economists say India’s annual inflation figures, based on WPI, do
rier erected between not reflect the consumption pattern of the country’s household.
investment bankers • Since the rate of inflation is a key monetary policy input, a better
and traders to restrict WPI would help the Reserve Bank of India (RBI) take a timely re-
the flow of information sponse.
in order to prevent the • The change in the manufactured products is in keeping with the
flow of insider informa- changing nature of the consumption basket, which will make the
tion. This is done to index more relevant.
prevent the conflict of • A more recent base year, makes the WPI information more reliable,
interests generally in current and representative.
case of investment • The monthly release of inflation data should give the Office of the
banks between the Economic Adviser, attached to the Department of Industrial Policy
corporate-advisory and and Promotion, enough time to improve reporting to cover perhaps
brokering department 60 percent or more of manufactured products.
of the company. The
• This is a very good idea and from a government perspective , and
department offering
advice on takeovers aligns with global practices. There won't be frantic data revisions.
can influence the de- More importantly, it will give the policy environment some stability.
partment involved in
buying and selling of
shares in the absence
of the Chinese walls.
Sector SNAP-SHOT
Automobiles
Nano goes for a Rs 1 crore makeover
Whizz Quiz!! Auto Expo 2010 would unveil the
4.) What is com-
metamorphosed version of the 1 lakh
mon between Asia,
Bermuda Triangle
car at the price of a hundred Nanos
and Mount Ever- or Rs 1 crore. Automobile designer
est? Dilip Chhabria has waved his magic
wand yet again. Some of the features
of the metamorphosed Nano are:
1600 cc engine capacity. The top
speed that can be achieved would be 200 kmph. With wider and bigger
15’’ alloy wheels (Nano has 12’’ wheels) it will graduate into the
Whizz Quiz!!
world’s smallest sports car.
5.) Which multime-
dia communicating
device was previ-
ously known as
Geely acquires Volvo
Leapfrog? Geely Automobile Holdings Ltd, the
Chinese car maker announced its
acquisition of Volvo Car Corporation
on 23rd December this year. With this the Chinese auto industry has
won global acknowledgement. Ford has recognized this as the larg-
est acquisition of a Western auto brand by a Chinese company. The
deal would be closed by the first half of 2010.
PAGE 6 NEWSLETTER TITLE

Financial Services
RBI reviews the steps taken by ICICI Bank sells electronic pay-
commercial banks to reduce their ment terminals
MF exposure ICICI bank has hived off its network of over
Expressing its concerns over circular trading, 1.5 lakh electronic swipe machines, its
in which money parked by banks in mutual network of electronic point of sales (PoS)
funds comes back to banking system in the terminals that accept credit and debit card
form of borrowings from the overnight mar- payments to a separate company — ICICI
ket, RBI had asked banks to set an internal Merchant Services. First Data has bought
limit on their exposure to mutual funds. an 81% stake in the company which has
been valued at a little over $90 million.

Infrastructure Sector
Infrastructure output grows GTL Infra all set to buy Aircel Tower biz
5.3 pc y/y this November GTL Infra outbid Tata-Quippo earlier this month for
The growth in the infrastructure sector Aircel Cellular’s passive infrastructure valued at
has made the ambitious GDP growth around $1.8 billion. GTL Infra is now working on a
rate of 7-7.5% in 2009-2010 seem Rs 5000 crore debt financing with State Bank Of
closer to reality. The six industries India. The rest would be paid in cash by GTL. The
comprising this sector contributes company currently has 10000 towers , the acquisi-
26.7% to the overall Index for Indus- tion would take its portfolio to 22,000 towers bring-
trial Production (IIP). The growth has ing it close to Tata-Quippo combine. Besides, it will
been triggered by a robust increase in also get Aircel as a customer for its independent
production of steel and cement. tower business. The news has seen the GTL share
prices soar by 5% to Rs 38 per share.

Whizz Quiz - Answers!!!


1.) Islamic Bonds. 2.) Wall Street (Michael Douglas the lead actor in Wall Street (the movie)
played the role of Gekko. Gekko tried to acquire Bluestar and sell it piece by piece. Edward
Pressman is the producer of Wall Street. 3.) Special Drawing Rights (SDR). Dollar is the cur-
rent reserve currency, IMF has brought in new reserve currency SDR and in SDR dollar has
44% weight age. 4.) Asian, Bermuda and Everest/ Himalaya are all kinds of exotic options.
5.)Blackberry.
5.)

We are highly encouraged from the responses to the quizzes and articles of the
previous issue. We invite all SIMSRITES to sail with us on the boat of Finance Forum to
discover new shores in the ocean of the financial world. Keep writing to us at
financeforum@simsrites.com