Current Economic Statistics and Review For the Week 
Ended December 24, 2005 (52^nd Weekly Report of 2005)

I

Theme of the week:

Implementation of Value Added Tax (VAT) in India: An Overview*

Evolution of VAT in India

When the first spate of economic reforms began during the 1980s, there were concerns expressed about high industrial costs prevailing in the economy. A need emerged  for providing relief on inputs thereby mitigating the cascading effect on final products. With this objective, reforms were initiated in union excise duties by way of introduction of MODVAT, modified value added tax, on March 1, 1986. As a result, taxes paid on certain inputs were set off. The burden of excise taxation on inputs or countervailing duty of customs on inputs was substantially relieved through MODVAT in the manufacturing process. The pre-MODVAT level of duty on inputs under excise taxation was transferred on final products under MODVAT to maintain the tax revenue collection. Under MODVAT, manufacturer could take credit on excise duty paid on raw materials. Accordingly, every intermediate manufacturer could take credit on raw materials. As excise duty was levied on value additions by each manufacturer it was called (modified ) value added tax.  

Additional commodities were brought under MODVAT in 1987. In 1991, the central government adopted what may be called a full throated policy of economic liberalization and openness. With this, MODVAT became applicable to a large set of commodities in 1991. Gradually, more and more numbers of items were brought within the scope of  MODVAT.

MODVAT brought in transparency on the incidence of excise duties. It also provided relief from excise duty for the bulk inputs. MODVAT is said to have helped more efficient resource allocation on the basis of relative prices of inputs; it minimized production and allocative distortions.  As a  result of the saving on inventories, MODVAT also reduced the interest burden of industrial units. Since MODVAT was levied on the final product, it restrained rising goods prices in the country.

The MODVAT scheme was, however, limited in coverage. It had a few special provisions, namely notional credit and deemed credit. The notional credit was introduced in 1986-87. It provided a higher amount of credit not exceeding 10 per cent ad valorem on the purchases of inputs from small-scale industries. For instance, if the normal excise duty on an input is 20 per cent ad valorem, a small-scale unit was required to pay 10 per cent ad valorem but the user of that input would take credit of 20 per cent. This provision was expected to provide advantage particularly to small-scale units. Also, the large-scale sector could secure a MODVAT credit which was higher than the duty paid on the inputs.  However,  the MODVAT scheme also got misused and misdirected. As such, the extent of credit was reduced from 10 to 5 per cent ad valorem. This fragmented the manufacturing units for obtaining concessional duty benefits.  MODVAT was also considered discriminatory against tiny units. The provision of notional credit caused the government a revenue loss of Rs 100 crore in 1986-87 and about Rs 225 crore in 1987-88

Under the deemed credit facility, a manufacturer could take MODVAT credit at specified rates for certain inputs without submitting the documents of payments of duty. Overall, it was found that MODVAT was restricted in scope. But, it remained a major step towards adopting a full fledged VAT. The Tax Reforms Committee headed by Raja J Chelliah, in its Interim Report (1991),  emphasized adoption of VAT covering services and commodities. VAT was to replace central excise, state sales taxes and other indirect taxes.

In the central budget for 1999-00, ad valorem rates of basic excise duty were introduced, viz., 8 per cent, 16 per cent and 24 per cent. In the budget 2000-01,  the MODVAT scheme was renamed as CENVAT scheme. All statutory records in excise were to be dispensed with effect from 1^st July 2000 and excise department was to rely upon manufacturers’ records.

The Ground Laid in 1995

The first preliminary discussion on state-level VAT took place in a meeting of Chief Ministers convened by Shri  Manmohan Singh, the then Union Finance Minister, in 1995. Thereafter, in a meeting of all the Chief Ministers, convened on November 16, 1999 by Shri Yashwant Sinha, the then Union Finance Minister, three important decisions were taken. First, before the introduction of state-level VAT, the unhealthy sales tax rate “war” among the states would have to end. The sales tax rates would need to be harmonized by implementing uniform floor rates of sales tax for different categories of commodities with effect from January 1, 2000. Second, for harmonization of incidence of sales tax, the sales-tax-related industrial incentive schemes would have to be discontinued with effect from January 1, 2000. Third, on the basis of achievement of the first two objectives, steps should be taken by the states for introduction of state-level VAT after adequate preparation. For implementing these decisions, an Empowered Committee of State Finance Ministers was set up, under the chairmanship of Dr Asim Dasgupta, Finance Minister of West Bengal .

In the conference of state chief ministers, presided over by the then Prime Minister, Shri A Vajpai and held on October 18, 2002, it was confirmed that all states and Union territories would introduce VAT from April 1, 2003. The Empowered Committee of State Ministers, again endorsed, on February 8, 2003, the suggestion that all state legislations on VAT should contain a minimum set of common features. The Kelkar committee on tax reforms also recommended introduction of VAT in its report.

With apprehensions expressed by states about possible revenue losses, the central government agreed to compensate 100 per cent of the loss in the first year, 75 per cent of the loss in the second year and 50 per cent of the loss in the third year of the introduction of VAT. The government stated that transformation from erstwhile sales tax system to the VAT at the state level, being a historic reform of domestic tax system in India , the government thus decided to assist in transition to the modern domestic tax system.

The Union finance minister conceded that the process wasn’t an easy, one-step process. There was also the need to stabilize the new system. The VAT and central sales tax (CST) couldn’t  be applied together in tandem. The Central Sales Tax Act 1956 has been a Central Act while the state governments have been collecting and appropriating its  proceeds as per Article 269 of the Constitution. Thus, the first step towards state-level VAT was to reduce the ceiling rate of CST for inter-state sales between registered dealers to 2 per cent during 2003-04 

At the meeting of the Empowered Committee held on June 18, 2004, it is agreed to implement state-level VAT effective from April 1, 2005. The Empowered Committee of state finance ministers came up with  a white paper on state-level value added tax on January 17, 2005. The white paper discussed the issues concerning VAT and provided a settled set of conclusions as a result of which a majority of the states adopted VAT in 2005.

The White Paper On the State-Level VAT

VAT is to abolish multiplicity of taxes, such as turnover tax, surcharge on sales tax, additional surcharge, etc. In addition, central sales tax (CST) is also going to be phased out. Furthermore, VAT will replace the existing system of inspection by a system of built-in self-assessment by the dealers and auditing. As the tax structure will become simpler and transparent, it will improve tax compliance and also augment revenue growth. With the adoption of VAT, the overall tax burden will be rationalized. Prices, in general, will fall. The system of self-assessment by dealers  will also tend to eliminate the  fear factor. The VAT will, therefore, be favourable to all-common people, traders, industrialists and also the Governments involved. Indeed, VAT will bring in more efficiency, competition and fairness in the taxation system.

Design of State-Level VAT

According to the White Paper, the essence of VAT is in providing set-off for the tax paid earlier. This is through the concept of input tax credit/rebate. For all exports made out of the country, taxes paid within the state will be refunded in full. This refund will be made within three months. Units located in Special Economic Zones (SEZs) will be granted either exemption from payment of input tax or refund of the input tax paid within three months. The entire design of VAT with input-tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, shall issue to the purchaser serially numbered tax invoice with the prescribed particulars. The dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. Failure to comply with the above will attract penalty.

Registration of dealers with gross annual turnover above Rs 5 lakh will be compulsory. Small dealers with gross annual turnover not exceeding Rs 5 lakh will not be liable to pay VAT. States will have flexibility to fix threshold limit within Rs 5 lakh.

Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4 per cent and 12.5 per cent, plus a specific category of tax-exempted goods and a special VAT rate of 1 per cent only for gold and silver ornaments, etc. About 270 items including drugs and medicines, all agricultural and industrial inputs, capital goods and declared goods would attract 4 per cent VAT in India . Petrol, diesel, aviation turbine fuel, liquor and lottery tickets will not face VAT because their prices are not fully market determined. They will be continued to be taxed under the Sales Tax Act. In view of the tea industry facing a downfall, tea-producing states have been provided with the option to levy 4 per cent or 12.5 per cent subject to review in 2006. The states have been given an option to exempt foodgrains for a year after which it will be reviewed.

The remaining items would attract 12.5 per cent VAT. Under exempted category, there will be about 46 commodities comprising of natural and unprocessed products in the unorganized sector. Union excise duties are based on value addition principles in terms of the CENVAT system which allows input credit.

VAT is a uniform sales tax and is expected to replace the existing sales tax but other taxes like Octroi and Excise duties will remain out of its purview. VAT will be collected by the government of the state in which the final consumer is located.

Under the previous system, transactions involving the sale of goods were levied a sales tax at one-point, first or last. Unlike this, VAT would be collected in instalments at different stages of manufacture of a product.

Since Sales Tax/ VAT is a state subject, the central government is playing the role of a facilitator. Technical and financial support is also being provided to the states for VAT computerization, publicity and awareness and other related aspects. Introduction of state-level VAT is the most significant tax reform measure at the states level.

Measurement of VAT : Illustration

The measurement of VAT does involve a complex process. For instance, suppose the retailer buys goods from the wholesaler at Rs 250 and sold the goods to the final consumer at Rs 300, then, according to the subtraction method, the retailer will be required to pay VAT of Rs 5 (10% of Rs 50, which is the difference between sale price Rs 300 and purchase price Rs 250).  The consumer has to pay VAT of Rs 30 for the purchase  (See Annexure I).

Another way of levying VAT is ‘invoice-credit’ method.  This comprises of charging the tax on a dealer’s sale at the prescribed rate but with the rebate for the tax paid on his purchases. In this method, in the case of the retailer in the example given above the tax is calculated as the difference between Rs 30 (that is 10 per cent of Rs 300) and Rs 25 the tax paid on the retailer’s purchase. The retailer will be allowed credit for tax paid on his purchases as the evidence provided by his purchase invoice  (See Annexure II).

In both these methods, the aggregate tax revenue should be the same.

VAT Liability to Traders : Illustration

The VAT liability to traders can be approximated by the illustration presented in Annexure III. It is essentially measured by working out the fractions of total sale attracting four different sets of tax rates.

Corporate Sector Response to VAT Introduction

The Confederation of Indian Industry (CII) has welcomed the decision of state governments to implement VAT. The CII stated that there was an urgent need for a simple and predictable VAT regime with a moderate rate to promote efficiency, competition and the growth of a common market. The Indian corporate bodies strongly recommended the speedy implementation of VAT. The FICCI, the Assocham and the CII, have put across their suggestions for the Union Budget 2005-06.

Misgivings of the Trader Community

Traders initially displayed unwillingness to accept VAT but subsequently demanded modifications to make it trader-friendly. The demand was to make the taxation law benevolent to the traders. Confederation of All India Traders (CAIT) asserted that tax rate schedules of VAT differed from state to state. Traders went on a three-day strike from March 30 against VAT when it was implemented by 20 states from April 1, 2005. At Delhi , traders  sat on hunger strike at Chandni Chowk for a day and protested against the  implementation of VAT and tried to gherao Delhi Chief Minister on April 7, 2005.

The agitators were of the view that the government had ignored the plea to withdraw harsh provisions in the draft. They also contended that lack of uniformity in implementation would increase the burden of taxation. They stated that though the government had assured equal tax liability, in case of some rates the taxation rates were much higher in some states. They also felt that implementation of VAT would encourage Inspector Raj. Harsh penalties and measures would encourage corruption.

Some agitators were of the view that government showed undue haste in introducing the new tax system. They emphasized that keeping in mind the stiff opposition of the trading community, the government should have shown some respect to  the sentiment of traders and shopkeepers and the VAT should have been deferred till the time it could be introduced simultaneously all over the country. The objective of VAT to bring uniformity in tax rates and other provisions of taxation would only be achieved if a single ‘National VAT’  Act was formulated and implemented in all states at the same time. Traders and shopkeepers had expressed that prices of essential items would rise once VAT was implemented. Also, unlimited powers would be vested in the hands of the enforcement officials which would breed corruption. Traders were protesting against the extensive procedural formalities that will have to be followed by traders under the new regime, resulting in increased transaction costs. However, the main reason behind the protests by the traders  may have been less scope for evasion

An Integrated Goods and Services Tax (IGST)

In the present system, a tax on inter-state sale of goods has been imposed according to the Central Sales Tax 1956. In a system of dual VAT, the cascading effect of CenVAT on State-VAT and vice versa would continue to be there. The ultimate solution for reducing the cascading effect altogether lies in the adoption of an integrated  Goods and Services Tax (IGST)  covering all indirect taxes on goods and services levied by central and state governments. China has adopted such a system under which revenue is shared between the federal government and the provincial governments over there.

India has sought to adopt a more gradual and cautious approach in regard to IGST. In the short run, IGST is to be introduced at a sub-national level. That is, to first adopt a complete CenVAT covering all goods and services, and to introduce a state-VAT on similar lines. As part of the second-generation reforms, there will be  integration of both the sub-National VAT under a comprehensive National VAT.

The alignment of goods and services tax into a single rate will take about three years. The case for a uniform tax on good and services becomes more compelling in view of the country proposing to sign a spate of free trade agreements (FTAs) with its neighbours, the Asean countries and the Gulf nations, by the end of  2006. With so many FTAs in operation, there will be immense pressure on India to rationalise its local tax regime to ensure a level-playing field for domestic manufacturing. A report prepared by the National Manufacturing Competitiveness Council, under the chairmanship of Shri V Krishnamurthy, has also recommended a move towards GST as a means to make the domestic industry more competitive. Earlier, the Kelkar committee appointed by the finance ministry had recommended integration of excise and service tax legislations.

In the run up to the Budget for 2006-07, the industry chamber PHDCCI has asked the government to bring in stability in direct and indirect taxes to make India attractive for investors. The chamber has also wanted government to withdraw Fringe Benefit Tax (FBT) and three-slab customs duty structure of 5, 10 and 15 per cent for inputs, intermediaries and finished goods. It has suggested a time-bound roadmap for reducing excise and customs duties so as to enable corporates to plan their projects and factor in cost of operations. As the combined effects of taxes constitute around 40 per cent of the product price, lowering them will ensure better compliance. The chamber has called for merging CENVAT scheme with VAT and for abolition of CST for a positive impact on the business and investment climate.

Pros and Cons of VAT

The crucial issue for a nation’s economic competitiveness is its terms of trade, which VAT could improve. Unlike corporate or personal income tax, VAT exempts exports, that is, previous VAT payments are rebated when a product is exported.  Thus, an ideal VAT will have positive trade effects over the long run. However, a VAT that is less than ideal, notably, the one that exempts certain goods and services and applies multiple rates as do current VATs in Europe and Asia , could affect national competitiveness. Such VAT that exempts non-traded necessities like housing and medical care, or food, may result in tax preference channeling the investment demand away from the firms producing tradable goods and services and in effect contracting the country’s industries involved in external trade. 

VAT is most certainly a more transparent and accurate system of taxation. VAT recognizes and allows for progressivity by applying no or low rates of tax on essential items such as food, clothes and medicine. In addition, it allows for steep rates of tax on luxury items. However, this may result in problems associated with administration and open opportunities for evasion by way of deliberate misclassification. This problem is not peculiar to VAT and relates as much to excise or customs duties.

The benefits of VAT are that it includes almost all stages of production and distribution and tax evasion under VAT is difficult and should be minimal. With uniform application of rates, VAT would prevent unhealthy tax competition among the states. The provision of input tax credit would help in preventing cascading effect of taxation. The provision of self-assessment by dealers would reduce hurdles in the tax administrative system.

VAT requires computerized records and provides for greater transparency. VAT improves compliance.

The VAT system, if enforced properly, forms part of the fiscal consolidation strategy for the country.  The higher revenues estimated from VAT could contribute towards lowering  of the overall fiscal deficit in the country.

Further, the globally-accepted tax administrative system would help India integrate better in the World Trade Organisation (WTO) regime.

But, some assert that VAT is too difficult to operate from the position of both the administration and business. It has its own rate structure as well as a different tax base and separate administrative procedure. However, VAT also means reduction in the number of forms used, legislation to be applied and returns and accounts with which the business person has to contend. VAT also allows for the exemption of small businesses from the system.

Some also point out that VAT is inflationary. But, temporary price controls, a careful setting of the rate of VAT and the significance of the taxes they replace, would generally ensure that there is no increase in the cost of living.

 It has further been argued that VAT places a heavy direct impact of tax on a labour-intensive firm compared to the capital-intensive competitor, since the ratio of value added to selling price is greater for the former. Though this may be true in some cases, it is asserted that VAT would generate the impulse to increase states’ tax-GDP ratio without significantly disrupting economic activity.

Also, it must be affirmed that the older system of taxation suffered from various bottlenecks like under-billing, selling of goods without bills, tax evasion, under valuation of goods at the first stage etc,  and all such malpractices led to generation of parallel economy and thus to a large sum of black money.  Along with this, many states in the previous system had resorted to discriminatory taxation in their anxiety to stimulate trade or industry within the state. This had resulted in a rate war. The states also had too many structures or levels of sales tax – as many as 15 different rates in some states – distorting competition.  In comparison to this, the excellence of VAT is in its accountability of each and every transaction ensuring transparency, increase in government revenue, sharing of tax burden and reduction of tax evasion. The VAT system is non-cumulative and neutral in respect of competition. The system exempts sub-contracting from taxation. It is not levied on exports. It exempts goods which have already been taxed.

States Covered By VAT

The state of Haryana was the first to introduce VAT voluntarily implementing it on April 1, 2003.  As of now 21 states and all the seven Union territories have implemented VAT (Table 2). All have done with effect from April 1, 2005 except Uttaranchal which has adopted it effective October 1, 2005. Jharkhand has announced its intent to join from January 1, 2006. 

It is heartening to note that, on December 12, 2005 the BJP ruled states have decided “in principle” to adopt VAT in the remaining five party-ruled states of Gujarat, Rajasthan, Madhya Pradesh, Chattisgharh and Jharkhand; they will begin implementing it from April 1, 2006.

With the implementation of VAT, the central sales tax (CST) imposed on some commodities will be eventually abolished by the fiscal year 2007-08. The empowered committee has proposed that for the present CST be reduced to 2 per cent from 4 per cent effective from April 1, 2006 if the central government will fully compensate the states for the loss. 

VAT Rates Across States

It is also noticed that there are still some anomalies in the state’s VAT structure. For instance, there is some lack of uniformity in rates, levied on goods across regions. States such as Andhra Pradesh, Goa, Himachal Pradesh, Karnataka, Kerala, Punjab and West Bengal, have levied 12.5 per cent on imitation jewellery and synthethic gems, whereas states like Maharashtra, Jammu & Kashmir and Bihar, have levied only 4.0 per cent  on these items. Bihar is the only state to levy a tax of 12.5 per cent on goods like ‘Charkha, Amber Charkha, Handlooms and Gandhi Topi’, earthern pot, fishnet and fishnet fabrics. Sugar and Khadasari attracts 4 per cent levy in Punjab and Himachal Pradesh, whereas it has not been imposed any duty in other states except a higher 12.5 per cent in Karnataka. In Bihar , the levy on most of the goods is 12.5 per cent. Waste of wool, silk waste, asbestos, cereal grains, crude petroleum oils, hurricane lanterns, mica, natural graphite, natural honey, natural sands and  natural sponge, attract a 12.5 per cent duty uniformly in all states. Some other items also  attract 4 per cent duty amongst states.

However, while moving to a single rate of VAT under 2 or 3 different slabs, it should be reckoned that there is broad uniformity of rates across states. This would guard against unequal distribution of industries’ growth in future. For details of state-wise rates, see Annexures Table IV.

Initial Success of VAT so far

In the current financial year, the tax revenue generated through VAT during April-October 2005 in the states and Union territories that have implemented VAT depict increase as compared to the  sales tax in the corresponding period of the previous year (Table 4).

 As a result of the initial success story, the centre’s compensation to states for VAT is expected to be well below the budget estimate of Rs 5,000 crore, as most of the states have witnessed higher growth in revenue during the first half of the financial year. Amongst states,  Maharashtra has collected the highest amount of  Rs 8,364 crore from VAT during April-September 2005, followed by Andhra Pradesh Rs 5,431 crore, Karnataka Rs 3,972 crore, Kerala Rs 2,891 crore and Delhi Rs 2,529 crore. Three other states, West Bengal, Punjab and Haryana, have collected between Rs 2,000-Rs 2,300 crore.

            As VAT collection has been higher than the expectation during April-September 2005, the centre has received claims worth Rs 1,598 crore for VAT compensation  from states and has paid Rs 1,026 crore to various states that have witnessed lower than expected revenue collection (Table 5).

 Most of the states witnessed double-digit growth in revenue after VAT implementation. Only three states – Bihar, Kerala and Maharashtra – saw single-digit growth in revenue. Mizoram has witnessed the highest increase of 213 per cent in tax collection  as its tax revenue increased to Rs 21.58 crore during April-September 2005 from mere Rs 6.89 crore in the corresponding period of the previous year.      

 Apprehension was been expressed by Gujarat regarding VAT. Gujarat’s revenue from sales tax has of late been growing fast and amounted to Rs 7,169 crore in 2003-04, Rs 8,308 crore in 2004-05 and Rs 6,736 during this financial year until November 2005 against the target of Rs 9,000 crore for the year. The state of Gujarat had expressed that once VAT is implemented, Gujarat may not see such a drastic rise in tax revenue and has asked for a White Paper on States’ VAT performance so far.

 The continuance of the Central Sales Tax (CST) along with VAT has reportedly adversely affected the growth of many industries in Tamil Nadu, particularly in those units which use imported raw materials for production and processing in the state.

The Southern India Chamber of Commerce and Industry (SICCI) has said that the industry had to pay CST of four per cent for raw materials purchased from other states and thereafter an additional four per cent for customers in other states for sale of finished products made in Tamil Nadu. The continuance of the CST will affect the growth of industries, in particular, petrochemical industries, where most of the raw materials have to be purchased from other states. SICCI suggested that the Tamil Nadu Government should take up the matter immediately with the central government to ensure that the CST is abolished forthwith.

Conclusion

The implementation of VAT, begun in 2005 and to be completed in 2006 will be a matter of great satisfaction for the Indian fiscal system and for the federal structure. The initial success has doubly ensured the possibilities to derive immense and allround benefits from this tax reform. Due to its merit of avoiding the cascading effect as levied on value added at each stage of business transaction, VAT will bring about efficiency in the system. Also, with tax evasion under VAT being minimum, it will result in improved tax compliance and ultimately achieve a  rise in revenue collections. Transparency implied by VAT will provide a better organized tax system and would prevent  tax rate war between the states to attract more investment.

         The manufacturers have welcomed the move to shift to a simplified VAT tax regime though there had been opposition by the trading community who opined that VAT would increase corruption and bureaucratic hassles culminating in an Inspector Raj. However, by and large, these seem to be just nominal objections with arresting of the proclivities for tax evasion being the root cause of the anti-VAT stance. All in all, VAT promises higher government revenues, which will provide answer to many fiscal problems faced by the state governments today.

References:

Bagchi, Amaresh (2005): State VATs in Operation, Promises and Problems, Money and Finance, Volume 2, Numbers 20-21, January-June 2005, pp 30.

Chelliah, Raja; Rao.R, Kavita: (January 2002): “Rational Ways of Increasing Tax Revenues in India. ”. National Institute of Public Finance and Policy.

Das-Gupta, Arindam (July 2004), “The VAT versus The Turnover Tax With Non-Competitive Firms,” Working Paper No.21

Economic Surveys (2001 to 2003, 1985 to 1991)

Ebrill,L;M.Keen,J-P.Bodin and V.Summers (June 2002): “The Allure of the Value Added Tax,’’ Finance and Development, June, Vol  39, No.2 A quarterly magazine of IMF.

Handbook of Statistics on Indian Economy (2005): Reserve Bank of India publication.

Indian Tax Institute (2000): “Value Added Tax, With Reference to India ,” VAT Conference.

Jinjarak,Yothin; Aizenman Joshua(July 2005); “The collection efficiency of the value added tax: Theory and International Evidence.” National Bureau of Economic Research, Working Paper w11539.

Matis Alexandre (April 2004): “VAT indicators”, Working Paper No 2. http://europa.eu.int/comm/taxation_customs/taxation/taxation.htm.

Purohit Mahesh (February 2005): “VAT for a common Market – Where do we stand?”Assocham-PHDCCI National Conference.----- (March 2002), “Structure and administration of VAT in Canada-Lessons  for India ,” (Reprint Paper No.1) National Institute of Public  Finance and Policy.

--------------- (July 2002): “Harmonizing Taxation of Inter-State Trade under a Sub-National VAT: Lessons from International Experience,”Discussion Paper No 8.) National Institute of Public Finance  and Policy.

------------------- (May 2001): Road Map for National and Sub-National VATs in India   No.3) National Institute of Public Finance and Policy.

Raboy David; Hammond Jeff; Shapiro Robert (July 1995): “ Enterprise Economics IV: The case for and against Value Added Taxation,”. PPI Policy Institute, Policy Report.

The Empowered Committee of State Finance Ministers, constituted by the Ministry of Finance, the Government of India) (January 2005); “ A White Paper On the State-Level Value Added Tax.”

The modern VAT (Washington, International Monetary Fund)

Union Budgets    (2001-02 to 2004-05)

www.stvat.com

www.bized.ac.uk

www.ifs.org.uk (Institute for fiscal Studies, UK )

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* This note is prepared by Archana  Kathe

Highlights of  Current Economic Scene

AGRICULTURE     

In the WTO Hong Kong ministerial round, member countries have agreed to set April 30, 2006 as a deadline for reaching a draft pact for the wider Doha trade round and to phase out export subsidies by 2013. Developed countries have settled to eliminate all forms of export subsidies for cotton by 2006 and extend duty- and quota-free access for 97% of exports produced by the world’s poorest nations, from the commencement of the implementation period. However, there are no definite commitments on reducing domestic subsidies and the exact formula for tariff reduction is yet to be agreed.

According to the Food Corporation of India (FCI), the country has adequate stocks of wheat until May and hence there is no need for any imports. As per FCI records, the country would have about 6.6 million tonne of wheat on January 1, 2006, which is enough to meet requirements under various welfare schemes and that of needy states.

The Finance Ministry has agreed to extend Rs 1000 crore towards the enhanced subsidy requirements for the fertiliser industry, against the demand of an additional Rs 5,510 crore for 2005-06 made by the department of fertilisers. Revised subsidy bill for the year 2005-06 has been estimated at Rs 21,768 crore, 34 per cent higher against the estimated Rs 16, 253 crore from the central fiscal. The rapid increase in subsidy is driven by high cost of feedstock, especially naphtha and fuel oil and other input and services provided by monopolistic public sector oil companies over which the industry has no control.

The sugar industry has demanded decontrol of sugar, which enables the industry to make profit by taking advantage of global shortfall scenario and facilitates government to regulate the division of cane stringently. Decontrol involves removal of marketing restrictions such as levy and free-sale quota, that is elimination of the requirement for the mills to deliver 10 per cent of their production to the government as ‘levy’ under the public distribution system.

The government has approved an interest subsidy of Rs 567 crore for loss making cooperative sugar mills via the National Bank of Agriculture and Rural Development (Nabard) to enable them to clear dues. Nabard is going to introduce financial package for providing loans to these mills.

The Indian Agricultural Research Institute (ICAI) has developed a variety of rice, which can be sown late and still it will be ready for the harvest at the usual time, with the normal yield. Normally winter rice crop in the country is sown from October to December and the harvest takes place in March-April. This new variety of rice can be sown in January and will be ready for harvest by March. The farmers who could not complete sowing due to adverse weather or financial conditions can pick up another month to cover up.

Japan has approved to import chicken from India , as the country is so far free from bird flu epidemic. Japan is looking for new sources for poultry meat after it has banned imports from more than a dozen nations where bird flu has struck; including Thailand and China . Japan is looking to import over two lakh tonne of processed chicken meat from India a year.

INDUSTRY

Automobiles

The global consumption of auto components is expected to grow from $1.2 trillion in 2004 to $1.6 trillion in 2015. India has the potential to capture a major chunk of this business, provided it works on critical factors like creation of world-class infrastructure, development of talent pool and enhancement of service capability.

Pharmaceuticals

A study by ASSOCHAM has forecast growth of 11 per cent for the pharmaceutical industry from the current level of Rs 39000 crore in 2004-05 to Rs 60000 crore in 2007-08. The exports would clock a growth rate of 18 per cent to touch volume figures of Rs 30000 crore by 2007-08 up from Rs 16000 crore during 2004-05. The main drivers of growth would be generic drugs markets in both US and Europe in which $65 billion worth of drugs are set to go off patent. The Indian companies are expected to grab a share of around 30 per cent of the increasing generics market in the pharma sector world over.

INFRASTRUCTURE

Power

The Electricity Regulatory Commissions have now been empowered to fix tariff of electricity generated from licensed atomic power stations, following an amendment of the Atomic Energy Act, 1962, which till date was determined directly by the government due to security/strategic concerns. Currently, the tariff per unit charged by Nuclear Power Corporation (NPC) to various states is around Rs 2.70.

Petroleum, Petroleum Products and Natural Gas

The petroleum minister has strongly advocated an increase in the retail prices of LPG and kerosene for the public distribution system (PDS). Though it has left the final decision to the energy coordination committee, it has suggested a roadmap for pricing of the two fuels as outlined in the table.

Railway

The Indian Railways have relaxed various norms relating to overloading and imposition of penalties for delays in loading and unloading wagons, giving in to a long-standing demand of the industry. These relaxations come just a few months after the Indian Railways drastically reduced the free time available for loading and unloading of wagons. Realising that a majority of its customers were not able to meet the new norms, the ministry decided to relax them.

Aviation

The modernisation plan of Delhi and Mumbai airports will miss its 31^st December deadline since the empowered group of ministers, which was to finalise the list of qualifiers of the technical round of bidding, have decided to set up yet another committee to oversee the modernisation process. This is the fourth such committee being set up so far – the original deadline of October 2005 was first revised to November 2005, later to December 2005 and now it is set at January 15, 2006.

INFLATION

The annual point-to-point inflation rate based on wholesale price index has gone down marginally to 4.50 per cent during the week ended December 10, 2005 from 4.55 per cent registered during the previous week. The inflation rate was at 6.84 per cent in the corresponding week last year.

The WPI in the week under review has declined by 0.2 per cent to 197.4 from the previous week’s level of 197.8 (Base: 1993-94=100). The index of primary articles’ group (weight 22.02 per cent) has declined considerably by 0.8 per cent to 195.8 from the previous week’s level of 197.3, due to a considerable decline in the price indices of both, food and non-food group. The index of food articles declined by 0.5 per cent to 199.1 from 200.2 in the last week, mainly due to lower prices of fish-marine, fish-inland and moong. Similarly, the index of non-food articles declined substantially by 1.4 per cent to 174.9 from 177.4 in the previous week. The lower price indices in this group are mainly attributed to a lower prices of raw skins, groundnut seeds, soyabean and raw hides. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has remained constant at the previous weeks level of 310.7. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has also remained unchanged at the previous week’s level of 172.7.

The latest final index of WPI for the week ended October 15, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 197.8 and 4.77 per cent instead of the provisional levels of 197.7 and 4.71 per cent, respectively.

Overall, the rate of inflation has remained reasonably contained in the range of 4 to 4.5 per cent in the month of November and up to mid-December. Moreover, the Finance Minister has also assured over price stability by emphasising on fiscal measures, if necessary. He added that the current rate of inflation, which is below 5 per cent is not a cause of concern.

BANKING

The RBI has decided that the general provisioning requirement for ‘standard advances’ shall be 0.40 per cent from the present level of 0.25 per cent with effect from the financial year beginning April 1, 2007, for all state and district central co-operative banks. However, direct advances to agricultural and SME sectors which are standard assets, would attract a uniform provisioning requirement of 0.25 per cent of the funded outstanding on a portfolio basis.

ICICI Bank UK Ltd. has opened its fifth branch in UK , in the London suburb of Wembley. In addition, ICICI Bank Ltd. has set up a wealth management branch in the Dubai International financial centre, UAE.

The RBI has clarified that all small denomination coins including those of 50 paise and 25 paise coins are legal tender and non-acceptance of any such coins is an offence.

Thrissur-based Catholic Syrian Bank has launched a new personal accident insurance policy, ‘CBS Travel Support’ for pilgrims, domestic tourists, business travellers or those on professional and education tours. The policy validity for 21 days would have a premium of just Rs.50.

The India Millennium Deposits (IMDs) were mobilised by State Bank of India (SBI) in November 2000 to boost the country’s foreign exchange reserves. The IMDs were issued in three currencies, namely, US$, GB£ and Euro. The total outgo of foreign exchange on December 29, 2005 will be about $7.3 billion, including the cumulative interest of Libor plus 175 basis points. As per the arrangement, SBI will repay the central bank, the equivalent amount of the $7.3 billion in Indian rupees, at the exchange value prevailing on the date of redemption i.e. December 29, 2005. This amount – including the principal and interest is likely to be around Rs.33,000 crore. The entire foreign exchange outgo will be met by the RBI through the sale of its foreign exchange reserves to SBI, which will buy foreign currency using rupee resources. SBI has already introduced at least 4 deposit products for NRIs and is expecting to retain at least 10-15 per cent of the entire outgo. In other words, it needs close to Rs.27,000 crore to pay IMD holders. The SBI has taken adequate steps to mobilise rupee resources to purchase the foreign exchange from RBI. The SBI and its 7 associates are raising one-year money at 7 per cent through on-tap certificate of deposits (CDs) to counter the redemption pressure of IMDs. Six of the 7 associate banks of SBI have already raised CDs worth about Rs.2,500 crore to meet their cash requirements. SBI is likely to report an exchange gain with the rupee trading around Rs 46.10 per dollar, much cheaper  than Rs 46.65 per dollar at which it sold the IMD proceeds to the RBI in November 2000.

PUBLIC FINANCE

An ET survey of 200 large companies reveals that during the past five years – between 2000-01 and 2004-05 their aggregate tax payments, both direct and indirect, have increased by 87.1 per cent though their aggregate sales turnover has increased by 65.8 per cent.

The Lok Sabha passed a bill to amend the Central Sales Tax Act, 1956, to make appeals to CST disputes easier and enable smooth functioning of an appellate authority. The CST would be eventually phased out and that discussion was underway with the states on compensating them for losses that would arise from the phase out of the tax. The amendment will enable the government  to appoint the chairman and the member (legal) of the Authority for Advance  Rulings  (AAR) on income tax as the chairman and member (legal) of the CST Appellate Authority (AA).

In the first nine months of financial year 2005-06 from April to December 2005, the directorate general of income tax (Investigation) Pune, has seized assets worth Rs 73.1 crore. During the first six months of the year 2005-06, the authorities conducted searches on 17 groups, as opposed to nine in the corresponding period last year. This included educational institutions in Pune, Kolhapur , Vasai, Latur and Nagpur , a Pune based marble dealer, a builder of commercial godowns and industrial complexes  at Bhiwandi and manufacturers and traders of steel items at Nashik and Nagpur , among others. The total value of assets seized in Pune in the first six months of financial year 2005-06 rose to Rs 34.7 crore as compared to Rs 3.98 crore in the corresponding period of the previous year.

Gujarat Sales Tax (GST) department has decided to cancel the registration of around 40,000 traders, from Central Gujarat region, who have not yet submitted papers for TIN (Tax Index Number) which is required for the soon-to-be implemented  Value Added Tax (VAT) regime which is expected to come into force in the state from April 2006. The last date for submission of papers for TIN was November 30. Sales Tax department, Vadodara division, has already issued show-cause notices to around 7,000 traders.

The finance ministry is considering to review the tax holiday extended to the developers of housing projects following internal reports about large scale misuse. The ministry may tighten norms regarding claims for concession.

The centre and the states may explore the possibility of a slight increase in certain VAT rates to offset the losses arising from Central sales tax (CST) phase out. This was one of the proposals that came up for discussion during the meeting between the VAT panel and the Union Finance Minister. However, no final decision has been taken in this regard.

The finance ministry expects to raise an additional Rs 1,00,000 crore this year by way of income tax arrears that have piled up over the years. This is besides the projected direct tax collection  of Rs 1,76,000 crore for the current financial year. To recover the arrears a plan has been put in place by the Central Board of Direct Taxes.  The ministry believes that around Rs 85,000 crore are recoverable. An estimate at the beginning of the current fiscal year has put the arrears  at Rs 98,606 crore. Of this the revenue authorities hopes to collect alteast 85 per cent. They estimate that about 10 per cent of the arrears are locked in litigations before the settlement commission and another 10 per cent is pending because of the pay orders. At least 5 per cent of arrears, the department admits, cannot be recovered due to many reasons. Another 2 per cent also falls into non-recoverable.

The finance ministry is unlikely to apply large scale changes to the Income-Tax Act, 1961 through the Union Budget. Rather, only the urgent changes to the direct tax law may be routed through the finance bill 2006 and all other changes to the provisions of the Act would be brought through  the overhauled  I-T Bill later in the year.

The finance ministry has asked the Maharashtra government to roll back the stamp duty imposed by the state on all NSE and BSE deals, even where the brokers and investors are located outside the state.

The Centre has proposed a 2 per cent health cess to collect Rs 6,000 crore to fund insurance schemes for families living below the poverty line.

The Bombay Chamber of Commerce and Industry (BCCI) has made recommendations to amend current taxation system in its pre-budget memorandum. The recommendations include reduction in the central sales tax from 4 per cent to 2 per cent, exemption of intellectual property from service tax, amendment in the securities transaction tax (STT) to include off market transactions and buy-back of securities and merger of fringe benefit tax (FBT), surcharge and cess with the basic rate of tax.

The chamber also suggested that the Income-Tax (I-T) Act should provide for enhanced rate of interest payable on refunds due beyond a certain period. The Income Tax Act does not explicitly provide for interest on any refunds arising out of tax paid on self assessment.

To encourage small and medium industries, provision should be incorporated in the credit rules to permit a company to avail Cenvat credit on the service tax paid on services.

To reduce transaction cost and make Indian goods truly competitive in the international market, BCCI has recommended that all taxable services availed and received by the merchant exporters should be exempted.

This apart, BCCI has suggested that necessary provisions be incorporated in the Income Tax Act to introduce guidelines on taxation of e-commerce transactions.

Also, the Indian tax regime should set up advance pricing mechanism with respect to the transfer pricing regulations. Moreover, the Indian transfer pricing  law should be amended to provide for advance pricing  agreements between the assessee and the income tax department. 

Air India may have to succumb a withholding  tax of Rs 3,000-3,600 crore on interest payable on foreign exchange loans, raised to finance its $ 8 billion fleet expansion, over a 12 year period. In the case of Indian Airlines, this could be around Rs 1,000 crore, and for other private carriers, in expansion mode, the cost of funding may rise sharply on similar lines. This would make the aircraft more expensive and raise the cost of operation. Since A-I is close to signing up for the aircraft this month it has approached the government for exemption of withholding tax on the forex interest to be paid on the loans.

The Pune Municipal Corporation (PMC) has become the first municipal body in the country offering property tax sops to information technology (IT) sector if they plan to invest on road development. Under the IT policy adopted by the state government in 2003, local municipal bodies have been given freedom to provide rebate in property tax to the IT sector provided they invest in city’s infrastructure.

FINANCIAL  MARKET

Capital Markets

Primary Market

The QIB portion of Educomp Solutions Ltd.’s IPO, which closed on December 22, has been oversubscribed by more than 11 times with bids received for 2.2 crore shares, as against 20 lakh shares on offer in the price band of Rs. 110 to Rs. 125.

The retail portion of the initial public offering of Ginni Filaments Ltd., which closed on December 23, has been oversubscribed by 6 times as on December 23, while the QIB portion of the IPO has been oversubscribed by 1.5 times.

The QIB portion of the IPO of Bartonics Ltd, which opened on December 20, has been oversubscribed by 8.5 times; while the portion reserved for retail investors and non-institutional investors has been oversubscribed by 8.6 and 4.33 times, respectively.

Secondary Market

During the week, the stock market remained volatile; the BSE sensex to closed at an all-time high level of 9,394.27 points, 1.18 per cent gain against its previous day close; the S & P Nifty also settled at 32.45 pointy higher at 2,810.15 points on December 19. the buoyancy in the market has been due to huge FII investments as well as the news of demerger of Reliance group. However, across the board profit booking saw the indices registering a marginal loss of 0.30 per cent for BSE sensex and 1.07 per cent for NSE nifty.

Among the sectoral indices of BSE, the consumer durables index BSE CD witnessed the highest decline of 2.77 per cent, followed by BSE HC at 1.49 per cent. The BSE small cap index rose by 0.06 per cent, while BSE sensex and BSE mid-cap registered losses of 0.30 per cent and 0.22 per cent, respectively.

During the week, the FIIs have been net buyers to the extent of Rs. 4,778 crore with purchases of Rs. 1,0768 crore and sales worth Rs. 5,990 crore. Calendar year until December 23, FIIs have net investment has crossed $ 10 billion. However, mutual funds have been net sellers to the extent of Rs 330 crore with sales of Rs 2201 crore and purchases of Rs 1871 crore.

As per Emerging Portfolio.com Fund Research, 2005 was a record-setting year for investor contributions to emerging market equity and bond funds and global bond funds. With a little more than a week remaining Emerging Portfolio Fund Research, Inc. forecasts that net flows into the global, international and emerging markets equity funds that it tracks will surpass $60 billion for the year, the second best year for flows into such funds since 1995. Last year these funds received $75.3 billion from global investors.

Derivatives

The total turnover on the NSE’s F & O segment during the week has been Rs. 117,113 crore with the daily average turnover ranging between Rs. 20,047 crore to Rs. 27,107 crore. The stock futures turnover stood at Rs. 61,858 crore, around 52.81 per cent of the total turnover, while the index future contributed around 35.90 per cent.                          

Government Securities Market

Primary Market

The prevailing tightness in the market liquidity as well as the higher short-term rates, the cut-off yield on 91 day treasury bill auction rose to 6.03 per cent against 5.78 per cent in the previous week, similarly the cut-off yield on 364 day treasury bill also firmed up to 6.17 per cent.

Secondary Market

During the week under review the liquidity further tightened due to expectations of outflow of about Rs. 33,000 crore on account of redemption of SBI’s India Millennium Bonds amid an already existing strain on liquidity due to the advance tax outflows. The average amount received under RBI’s daily reverse repo action was just around Rs. 400 crore as against the average size of Rs. 3,900 crore in repo auction. The call rates remained firm above 6 per cent throughout the week and traded in the range of 5.75 per cent to 6.50 per cent. irrespective of the fall in the inflation rate, the yield on 8.07 per cent 2017 rose from 7.20 per cent on December 16 to 7.23 per cent on December 23 due to the pressure on liquidity.

Bond Market

The high-level committee on corporate bonds and securitisation formed by the finance minister in the last budget is slated to submit its report to the finance minister by month end. The committee is likely to propose a institutionalised platform for corporate bond trading, uniform rate of stamp duty for the debt market as in the equity market.

Indian Overseas Bank is planning to raise tier-II capital through unsecured, subordinated and redeemable bond, in nature of promissory notes tot he tune of Rs. 250 crore.

Foreign Exchange Market

The forex market continued to be volatile as the rupee breached the level of 45 per dollar on Monday and traded in the range of 44.92 to 45.40 during the week and closed at 45.20 per dollar. Meanwhile, the dollar recovered a bit against other major foreign currencies. The six-month annualised forward premia rose from 1.04 per cent on December 16 to 1.14 per cent on December 23.

Commodities Futures Derivatives

Forward Market Commission (FMC) has decided that in case the maturity date of a running raw jute contract falls during the suspension period of the trade, the contract should be deemed settled at the settlement price of December 15. Futures trading in all on-going raw jute contracts was suspended effective from December 15, following the Jute Commissioner’s order of fixing prices for various grades of raw jute, under the Jute Textiles Control Order, 2000, in line with the industry’s long-term demand.

Despite fresh demand and tight demand-supply scenario, the wheat spot prices continue to rule high owing to a dip in supplies and depleting government stock. While, the demand continues to remain strong and mandi arrivals are decreasing. Currently, the spot price is now trading Rs. 100 per 100 kg higher than the futures rate.

CREDIT RATING

Crisil has assigned  ‘ GVC Level 2’ rating to Foseco India Limited. This governance and value creation (GVC) rating indicates that the company’s capability for creating wealth for all its stakeholders, while adopting sound corporate governance practices is high. The rating reflects Foseco India 's highly capable and well-diversified board comprising eminent professionals; the board participates effectively in taking key decisions and provides adequate oversight on the functioning of the executive management.

Crisil has reaffirmed the ‘P1+’ rating assigned to Munjal Showa Limited’s Rs. 60 million commercial paper programme. The rating continues to reflect the company’s strong business and financial risk profile.

Icra has assigned an ‘A1+’ rating to the Rs. 9.25 billion (enhanced from Rs. 6.85 billion) certificate of deposits programme of Indian branches of American Express Bank Limited. (AMEX)

Icra has assigned a positive outlook to the ‘LAA+’ rating assigned tot he outstanding subordinated bond programme of UTI Bank Limited (UTI Bank). The agency has also reaffirmed the ‘A1+’ rating assigned tot he Rs.25 billion certificate of deposit programme of UTI Bank.

Icra has retained the ‘LA+’ (SO) ratings assigned earlier to the bond programmes cumulatively worth Rs. 16 billion of Karnataka Neeravari Nigam limited (KNNL). The ratings are based on structured payment mechanisms incorporating unconditional and irrevocable guarantees from the government of Karnataka.

Icra has reaffirmed the ‘LAAA’ rating assigned to the Rs. 6 billion long-term debt programme of Hindustan Aeronautics Limited (HAL). The agency has also reaffirmed the ‘A1+’ rating assigned to HAL’s Rs. 3 billion short-term debt programme. The ratings take into consideration HAL’s strong market position as the major domestic agency for the manufacture and overhaul of the defence aircraft fleet, the company’s growing order book for manufacture of fighter and trainer aircraft, and its favourable financial risk profile.

Care has assigned a ‘PR1+’ rating to the certificate of deposit programme upto Rs.4000 crore (increased from Rs.2000 crore) of Allahabad Bank (AB) for a maturity upto one year. It has also assigned a ‘AA +’ rating to the proposed Tier II Bond (Series V) issue of the bank of Rs.500 crore, to be issued on a private placement basis. The bonds would have a bullet repayment at the end of seven-ten years from the date of allotment. Meanwhile, the agency has also retained the ‘AA+’ rating assigned to the outstanding Tier II Bonds of Rs.200 crore.

Care has assigned ‘PR+’ rating to the short- term non-convertible debentures of Rs. 10 crore of Bhushan Steel and Strips Limited (BSSL). The rating factors in BSSL’s dominant position in the domestic cold rolled (CR), galvanized plain (GP)/ Galvanised corrugated (GC) segments, diversified customer base in the auto and white goods sector, strong export presence in GP/ GC segments and track record of profitable operations.

Care has assigned ‘PR1’ rating to the Rs. 9.6 crore commercial paper programme of Gati Limited, the rating takes into consideration Gati’s established position in express cargo industry, rich experience of its promoters, multi- modal transportation network, profitability of its mainstay cargo business, improved IT infrastructure and cash inflows from the rights issue.

Fitch Rating has assigned a National bond fund credit rating of AAA (Ind) tot he units of LICMF Floating Rate Fund (short- term plan) managed by Jeeva Bima Sahayog Asset Management Company Limited. The assigned rating reflects the weighted average credit quality of the funds portfolio, investment practices and management controls.

CORPORATE SECTOR

Warburg Pincus has sold its nearly 5.85 per cent shares in Gujarat Ambuja Cements for Rs 648 crore.

Capsugel, the capsule manufacturing division of the world’s largest pharmaceutical company Pfizer has acquired Bharati Enterprises healthcare business for $ 19.5 million (approximately Rs 88 crore).

Rajasthan Spinning and Weaving Mills has decided to invest Rs 300 crore for expansion, which includes diversifying into denim fabrics and a new plant to produce trousers. This includes Rs 150 crore investment in setting up captive power plant and also it is investing Rs 250 crore to set up a denim fabric-producing unit in Rajasthan with capacity of 20 million metres per year.

German industrial gases group Linde AG has won an order worth around   $ 175 million from Reliance Industries Limited to supply five hydrogen units for a refinery site at Jamnagar .

Bajaj Auto has recently launched the new version of the Discover bike – Discover 112 cc.

Larsen & Toubro has received Rs 1300 crore turnkey order from Oil and Natural Gas Corporation (ONGC) for a major offshore project. The company will execute the entire ‘bcp-B2 booster-compressor platform’ and deliver it within two years.

Orchid Chemicals and Pharmaceuticals Limited has received a formal approval from USFDA for its new drug Cefprozil tablets USP, 250mg and 500 mg.

ONGC and China National Petroleum Corporation (CNPC) have entered into Memorandum of Understanding (MoU) to form a 50:50 joint venture with Himalaya Energy Syria Limited.

Dubai Financial, a subsidiary of Dubai Investment Group (DIG), has acquired Thomas Cook India Limited from its German promoters Deutsche Lufthansa and retail company Karstadt Quelle. DIG has paid approximately $ 92 million to acquire 60 per cent shares in Thomas Cook India Limited.

JB chemical and Pharmaceutical has decided to set up a subsidiary in Moscow with total initial investment of $ 3 million.

Usha Martin has acquired an industrial property to set up a wire rope plant to cater to the US market. The plant will get fully commissioned in three years. Its initial capacity will be about 7200 tonne, which will be eventually increased up to 24000-30000 tonne.

Recently, TVS Motor Company has launched Apache, a 150 cc motorcycle, priced Rs 52,490 at its ex-showroom in Chennai.

Tata Motors has entered into an agreement with Karachi-Based Afzal Motors to assemble and sell its Daewoo range of trucks. The agreement has been signed between Tata Daewoo Commercial Vehicles and Afzal Motors.

LABOUR

The government is considering enacting a law to extend job quotas for backward classes in the private sector. It has, so far, left the decision regarding private sector job reservations to the private sector, but now is considering both, an amendment to the Constitution as well as enacting a law for the purpose. The Ministry of Law has already made it clear that there is a room in the constitution for getting the private sector to implement quotas, but believes that the purpose can be achieved by an ordinary law under the 9^th schedule of the Constitution.

SOCIAL SECTOR

Health

 According to United Nations Children’s Fund (UNICEF) latest report titled ‘The State of World’s Children 2006’, India ranks low at 131 out of 193 countries in the under-five mortality rankings (U5MR), a critical indicator of well-being of children.  

     India ’s Asian counterparts like Sri Lanka , Nepal , Bhutan and Bangladesh fare better in U5MR, while Pakistan is slightly worse off. The report also finds that countries worldwide are lagging behind in achieving the millennium development goals (MDG) set in 2002. One of the MDGs was to reduce the mortality rate by two-thirds among children under five by 2015. At the current rate of progress, 3.8 million children are projected to die in 2015 alone. The report also highlights that India scores low in most basic indicators with 30 per cent of infants born with a low weight and 18 per cent of under-fives severely underweight. Primary school enrolment is only 77 per cent and only 61 per cent of primary school entrants reach grade 5. The percentage of central government expenditure allocated to education is a mere 2 per cent in India as compared to 18 per cent in Bangladesh .

The centre, under the new drug policy for 2006-10, plans to impose 2 per cent health cess to mobilise Rs 6000 crore for a health insurance scheme for families below poverty line. The scheme proposes to provide medicine almost free of cost to BPL families at their doorsteps. According to the Joint Secretary of the Ministry of Chemicals and Petrochemicals, one such scheme called the ‘Universal Insurance Scheme’ is already operational, but it has not yielded expected results as it required the families to contribute Rs1 each per day amounting to Rs 365 a year. Therefore, the new proposed health insurance scheme is now expected to bring positive results.          

EXTERNAL SECTOR

The government has simplified customs procedures for registration of export-oriented units, electric hardware technology parks and software technology parks for clearance of imported goods.

The National Bureau of Statistics has raised the estimates of GDP in 2004 for China to 15987 billion Yuan ($1.930 billion), which is 16.8 per cent higher than the previous calculation of 3688 billion yuan. The rise came from the services sector which had been underestimated and now make up 40.7 per cent of the GDP.

Export of plantations from India in the last few years has witnessed a downslide. As against a total export of $1.1 billion in 1999-2000, the exports have come down sharply to $910 million in 2004-05. According to a recent study done by Dun & Bradstreet, the share of the plantations sector in India’s total exports has reduced considerably, from 2.9 per cent in fiscal 2000 to just 1.1 per cent in fiscal 2005. Except tea, where India considered to be the largest producer in the world, plantation crops such as coffee, spices have witnessed a declined exports over the years. Of the $910 million plantations export in fiscal 2005, tea garners sizeable chunk with 42 per cent, followed by spices and coffee with 28.2 per cent and 24.7 per cent respectively, the study pointed out. Though India’s rich topography allows it to be one of the largest producers of plantation crops in the world, except tea, India is only the fourth largest producer of rubber and sixth largest producer of coffee, the study said. After witnessing a steady decline since fiscal 2001, tea exports witnessed a recovery in fiscal 2004 and the exports rose by 13% in fiscal 2005 to touch $382 million. Top export destinations such as the UAE, Russia , the UK , Iraq and Kazakhastan account for 15.2 per cent, 13.9, 11.1, 8.3 and 7.4 per cent respectively. Similarly, in the last six years, coffee exports have mostly witnessed a downward trend, declining from $332 million in fiscal 2000 to $225 million in fiscal 2005 due to increased competition from Italy and Brazil , said the study further

Poor performance of the textiles, engineering products and gems and jewellery sector pulled down exports in the month of November. Exports have registered a low growth of 11.3 per cent in November to value at $6163.9 million as against $6995.6 million registered in November 2004. Engineering exports, particularly primary products which account for 20 per cent of the category shrank by $150 million with falling international prices, officials said. Similarly, exports of man-made fibres declined by $150 million on high raw material costs. Gems and jewellery exports declined by $300 million after the revenue department clamped down on the use of export incentives by exporters for minimal value addition, officials added. They, however, refused to give out detailed numbers. The last time exports declined was in March 2002. Exports have been growing in the double digits since September 2003 except in January 2004 (8.7 per cent growth) and September 2005 (7.5 per cent increase).

The drop in November brought the export growth during April-November 2005-06 to $57.05 billion, which was 16 per cent higher than the $ 49.15 billion registered during the corresponding period last year, according to provisional data. During November 2005, imports rose 8.68 per cent to $9.9, while imports during April-November were estimated 29.3 per cent higher at $84.7 billion.

During the eight month period-ended November 2005, oil imports rose 43.46 per cent to $27.76 billion from $19.35 billion during April-November 2004. Non-oil imports went up 23 per cent to $56.93 billion during April-November 2005.

India 's trade deficit increased to $3.74 billion in November 2005, compared with $2.15 billion last year. The trade deficit during April-November 2005-06 was estimated at $27.64 billion, compared with $16.34 billion during the corresponding period last year

Fall in exports was a matter of concern since November, December and January typically fed Christmas shipments to the United States and Europe .

INFORMATION  TECHNOLOGY

Software firm Mastek Ltd. has launched its insurance product suite, Elixir, in India with Birla Sun Life and Max New York Life as its first customers. The product already has customers overseas.

The $1.8 billion global IT services company, Perot Systems has launched a new facility in Noida with $8 million investment.

Global IT services arm of Wipro Ltd., Wipro Technologies, has acquired 100 per cent stake in privately-held Australian semi conductor design company NewLogic in an all cash deal of $56 million.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

LIST OF WEEKLY THEMES

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