Saturday, 25 July 2015

Goods and Services Tax in India

Goods and Services Tax

As you all know the Central government is likely to introduce the Goods and Services tax in the monsoon session of the parliament. What do you need to know about this tax and its effect on you?
The Goods and services tax ( Herein referred to as the GST)

The GST does not apply to Alcohol, Petroleum products and electricity (or that is what is said)
            Initially there was Central excise ( Cenvat), Sales tax – Later known as Sales Value added tax and service tax. Now it is proposed to replace all these taxes with a single uniform tax namely GST.

           All Indirect taxes both at the centre and the state level are going to be replaced by one tax - the GST.

What are the advantages of having the GST

a     There was widespread tax evasion when there were lots of taxes. This resulted in the government realizing less money than when there was simple tax regime.
       Total cost will reduce in a single tax regime
       Time taken when goods move between borders of states will be reduced drastically.
       The unnecessary loss of fuel while waiting at the border will be reduced
       Demand will increase when the Cost is reduced.
       The GDP will be benefited by about 0.9 to 1.5% if GST is introduced


Kelkar Task Force – A task force was set up in 2005 for Fiscal Responsibility Budget management. 

And it recommended a uniform tax known as GST.

Kelkar Committee recommended  that all indirect taxes be replaced by one tax known as GST

What will not be affected by GST?
Direct taxes - Income tax, Corporate Tax and Capital gains tax

GST will replace all indirect taxes if the Parliament approves both in Lok Sabha and the Rajya Sabha (two thirds majority) and must be ratified by 50% of the states.

There are 3 types of GST namely
State GST – Collected by the state governments (SGST)
Central GST – Collected by the Central government (CGST)
Integrated GST – Collected by the Central government (IGST) (the exact names may change in the law but this is for understanding)

New System
Old system
Sale within the state
VAT and Excise/ ST
Under the new system transaction will have SGST – goes to the state and CGST – Goes to the centre
The levying of excise or sales tax was not dependent on the levy of VAT
Sale outside the state
CST and Excise/ST
Under the new system the transaction between states has one type of tax – Integrated GST to the centre
Levying of CST was not dependent on Excise or sales tax

The GST is implemented in countries like Australia and Malaysia. It has resulted in better tax collection and fewer Tax evasion. Hence it is in everybody’s interest that the GST is passed in the Parliament.

Saturday, 18 July 2015

Greek Crisis and its Solution

Greek Crisis - My understanding

History behind Greek Crisis

2010 - May

Euro 110 Billion was injected by the Troika of European Commission, European Central Bank and IMF(Troika). An agreement of austerity was reached and for the Structural reforms and Privatisation of Goverment assets between Greece and the Troika.

A year later the recession worsened.And the Greek government (with the EU) agreed to the extension of the Loan repayment period from 7 years to 15 years.
A new aid of 109 billion euros and a 50% write off of Greek debt was agreed with the Troika of Euro leaders and IMF

Austerity measures brought down the deficit from 7.5% to 2.4% in 2011. But unemployment grew from 7.5% to 19.9% in Nov 2011

In 2013 the Hellenic Financial stability fund (HFSF) injected 48.2 billion euros in Greek banks for recapitalization efforts.This efforts increased the Debt GDP ratio by 24.8 points.In return the Greek government got shares of these banks which is now trading much lesser than the original value in the Market and hence it is a failure.

May 2014

Another round of Bank recapitalization was done with 8.3 billion euros by private share holders. HFSF is going to receive Euro 27.3 billions for the 48.2 billion it invested in 2013.

Solutions for this problem as suggested by many economists

1) Return to Drachma and devalue it for the exports to climb.The current national debt for Greece is around 300 Billion dollars.

2) Circulate a digital currency card (as Bank deposits far exceeds paper Euros in Greece).

3) Negotiate another Bailout ( agree for sale of government assets)

4) Convene an european debt conference and negotiate the debt for all European nations ( not Just Greece)

Current Debt to GDP ratio of Greece is 180% and will rise to 200% as forecast by IMF.

What could be a possible solution to the above crisis. My proposed solution is as follows

As we know Greece is dominating the headlines in the International scene. Greece itself came out with a sensible suggestion - they proposed a GDP linked bonds.

On the look of it it was a sensible suggestion. And it would work thus -

When the economy grows debt would grow and Greece would pay it easily. When the Economy shrinks it would keep the debt GDP ratio to be the same.

Why was it not acceptable to the Politicians.

There is a lingering disbelief that Tsipras( or the Greek Govt) would not allow the Greek economy to grow as it would mean Greece would have to pay more than they are indebted. On the other hand it would mean there is an incentive for the Greek economy to be in permanent recession. Meaning you repay much less than what you owe to your debtors.

A via media would be to have a cap and a floor on the GDP bonds. The cap would be for the Greeks to grow without having to repay more than what they owe the European union. The floor is for the lenders to recover a minimum of what they lent.

The EU and Greece need to agree to this if there is a solution which is feasible else it is gloomy days for all involved.