Dear Members,
The
countdown is over! The fireworks have lit up the sky, and 2017 is here! My
colleagues at the BCAS join me in Wishing You All a Very Happy and
Prosperous New Year. With each New Year, we get a fresh, clean page to
start over. Here’s hoping that life writes a beautiful new chapter for you this
year.
Hits & Misses – 2016 – The year has gone by
It
is said, don’t forget the past, learn from it! Seldom one witnesses such an
eventful year. Let’s begin with the Olympics at Rio where India sent its
largest contingent of 100 athletes. Pushing the limits many of them qualified
but failed in nail-biting finishes. In the end, it was Sindhu and Sakshi who
beat the odds to win two medals for India. Another dismal performance for India
but an apt demonstration that Indian women are winners!
Sixteen
years in the making and finally in the first week of August both houses clear
the Goods & Services Tax. A major tax reform and a game changer, GST which
is slated to be rolled out in April (may be July) next year, calls for a total
revamp of systems and will be a huge opportunity for the government, companies
and all of us.
Then
there was the Income Declaration Scheme which offered tax evaders an
opportunity to come clean after paying 45% of the undisclosed amount. It got
off to a slow start but at the end turned in some impressive figures that
enabled the government to toot its flute.
On
the international front, we have the BREXIT which made it abundantly clear that
nationalism is on the rise. Winning with a wafer-thin margin, the people of
Britain opted out of the European Union, highlighting the disadvantages of globalization.
Donald
Trump’s sweeping victory is another endorsement that is blindly embracing
globalization is not the best policy. Countries are looking at ways how they
can harness the ‘take’ of globalization without too much ‘give’ going out.
Inward looking and capitalizing on local is becoming the norm.
On
November 5, there was the 2016-17 Mid-Year Review of the Indian Economy by the
National Council of Applied Economic Research (India’s oldest and largest
independent think-tank). The figures were looking good; the economy was
buoyant, and there was distinct optimism in the air.
The
overall GDP growth was a healthy 7.6%. The agricultural sector fared well with
normal rainfall enhancing crop output 11% to touch 124 million tonnes. More
importantly, rural demand was strong too. The manufacturing sector displayed
growth with the Purchasing Managers’ Index and the Index of Industrial
Production inching north. The service index indicators continued to be muted
while urban demand was predicted to remain strong.
On
the global front, demand continued to be volatile. India’s merchandise exports
turned positive in June 2016, with exports rising in June to $ 22.57 billion.
India was on a good wicket with inflation too. After an upswing, it fell
sharply in September 2016 to 4.31%, as measured by the Consumer Price Index
(CPI). After declining for 17 months, the Wholesale Price Index (WPI) inflation
turned positive in April 2016, hovering at 3.5-3.7%. Tax collections were
better at 42.5% of the budget estimate with the escalation in both direct and
indirect taxes.
It
was amidst this relatively rosy scenario that the demonetization bomb dropped.
A second explosion hit India with the shock election of Donald Trump’s
widespread victory, sinking all benchmarks instantly. Targeting counterfeiting,
black money and terror funding, Notification No. 2652 nullified 86% of the
value of all cash in the market. It was a bold move that was hailed by many
within India and across the world. The secrecy and suddenness were calculated
to be effective in combating the shadow economy and corruption that was
plaguing India’s real growth.
But
the great expectations from the culling of the currency seem to have
evaporated. Out of the 15.4 trillion rupees that were voided, about 13 trillion
have already been deposited in the banks, reducing substantially the huge
windfall the government expected. The monumental mismanagement of replacing the
currency has severely impacted the economy and the image of the government.
Over 90 people have lost their lives, and the key indices of the economy have
all plummeted!
The
long-term gain from the short-term pain that the government is harping about
appears remote and of little consolation to the innocent common man and the
rural poor who have had to bear the brunt of the currency purge. The drought of
currency has caused immense losses to agriculture…crops rot unharvested and
wholesale markets have collapsed without cash.
The
unorganized sector which generates 30% of the national income is among the most
severely affected. This sector constitutes the majority of the economy in terms
of investments, savings and value addition. A whopping 90% of the Indian labour
force powers this sector. Largely rural, it lacks proper documentation as it is
unable to access banking or credit facilities. Its oxygen which is cash has been
thoroughly throttled.
Corporate
and consumer confidence have both slumped. The cash crunch has decelerated
sales to a trickle, disrupting manufacturing plans completely. The MSME sector
that feeds large companies is crippled with huge inventories and their
production is thrown out of gear.
The
only silver lining is the banking arena which has received a huge quantum of
deposits. Serpentine queues outside the banks have swelled the coffers and have
helped alleviate the bank’s NPA woes. Interest rates have dropped but credit
offtake however is down with both consumers and corporates staying away.
Cashless
payments have been given a huge impetus. E-wallets, net banking, debit/credit
cards, mobile banking, NEFT/RTGS…are all witnessing phenomenal growth trajectories.
The banks and payment companies are going all out to woo customers with high
decibel promotions reiterating the benefits of going cashless. Even the
government has joined the bandwagon by offering a spectrum of incentives for
cashless payments.
So,
is demonetization really working? Will it succeed in tackling the bane of black
money? Will there be sustained efforts to eradicate black money? Or was it all
just a ploy to choke funds to the opposition in the forthcoming elections? Will
the long-term gain actually translate into achhe din? Only time will tell!
Looking ahead
Now
all expectations are on the Budget 2017 which will be delivered for the very
first time on 1st February. The Government will surely look at
soothing the wounds of the common man either by reducing the tax rates or
increasing the basic taxation limits or may be both. The FM remarked, “What you
need is a broader base of the economy, for which you need a lower level of
taxation”. Only 3.3% of the population pays tax in India, which is very low
compared to 39% in Singapore, 46% in the US, and 75% in New Zealand – even if
the number here could be doubled to 7%, it will amount to a windfall of tax
collections. With GST around the corner, the stage is set to bring in all the
unorganized sector into the tax system by increasing compliance and vigilance.
The
government seems to be all ready for the GST rollout and has already trained
three-fourth of the targeted 60,000 field officers who would be instrumental in
implementing the new GST regime. But it seems that the industry is falling
behind. It will be a herculean task to train the unorganized sector in this new
law, many of whom probably may for the very first time pay any taxes. BCAS is
gearing up to take this challenge of training the industry and soon will
rollout a schedule in this regard.
With
the tax scrutiny season and the last date of depositing demonetized currency
into the bank coming to an end, we may be witness to a slew of notices being
issued inquiring about the source of the cash deposits. Though it is within the
power of the Income Tax department to ask questions, unless and until the
officers are made accountable for unnecessary harassment and without any proper
direction, this can be a new avenue of corruption. It is high time that there
is transparency and accountability of those governing the law and respect given
to the honest tax payers.
They are listening
The
Expert Group formed to consider issues related to Audit Firms appreciated the
representation made by BCAS and were receptive. I had an occasion to personally
interact with the committee and explain the issues faced by Indian Audit Firms.
We are hopeful that the interest of the profession is taken care of and our
suggestions are considered in the right spirit.
