Archive for June 20th, 2016

Indian Mutual Funds among cheapest globally…

June 20, 2016

These are the kind of news developments which are barely discussed in India’s financial media.

The shaping of Indian mutual funds has been a story which has few parallels in stories of India’s financial sector. All of this has been happening pretty silently as multiple actors along with the regulator have coordinated to make things more transparent and less costly for small investors. Our banks keep doing poorly despite layers of supervision but mutual fund industry just keeps moving along. I know there is scope for improvement which should be the case, but we have come a long long way from how mutual funds were bought and sold.

Apparently, the regulator wants to lower the expenses of managing these funds. The question is how costly are India’s mutual funds at the first place?

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A case of two loans – Tractors at 15.9% and Mercedez Benz at 7%…

June 20, 2016

P. Sainath the perennial critique of lopsided Indian growth story has another hard hitting article in EPW.

He points to two kinds of loans in Aurangabad:

Tractor loans at 15.9 per cent trapped Aurangabad farmers like Hirabai in debt. But Mercedes Benz loans in Aurangabad were going for 7 per cent at the same time. Yet, sales of both were seen as rural progress…

He narrates the tale of how these loans were disbursed and asks about this illusion of rural progress:

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Finance finance everywhere but not a drop to drink

June 20, 2016

Barry Eichengreen has just rephrased Samuel Taylor Coleridge’s poem on water:

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‘Buy 1 get 1 free’ deals to come under GST…

June 20, 2016

This blog has always wondered what is a more useful deal on a good- Buy one, get one free or 50% off . For a producer looking to get his goods off the shelf buy one get one is a better offering. However, for a consumer 50% off is a better deal as it given the flexibility over how much to consume given it comes at half the original price.

However, it seems with GST things are going to get complicated. The one plus one deal could invite taxes under GST:

Free samples and gifts offered with purchases as well as popular ‘buy-one-get-one-free’ deals may attract the proposed Goods and Services Tax (GST) levy which government plans to roll out from April next year.

The model GST law, unveiled by the government last week for stakeholder comments, says that any supply sans any consideration will attract tax. This would cover free gifts and samples as well as buy-one-get-one-free deals, tax experts said.  

Section 3 of the model GST law defines a supply of goods and services to include ones “made or agreed to be made without a consideration.” Under the Schedule-1 for ‘Matters to be Treated as Supply Without Consideration’, the law further goes on to define them as “Supply of goods and / or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business.”

Simply put, buyers will have to pay GST on articles they receive free. “GST will be entirely based on the concept of a ‘supply’, which now includes even goods and/ or services supplied without consideration by a taxable person in the course of or furtherance of business,” said Rohit Jain, Partner, Economic Laws Practice.

KPMG India National Head (Indirect Tax) Sachin Menon said, “This will impact the sales and marketing cost of companies which follow the system of free samples or free supply strategy such as “buy one get one free.”

Presently, for a free sample of goods, excise duty is payable but VAT/ CST is not payable. However, proportionate input tax credit under VAT is reversible in some states. “The net impact for businesses will therefore be the difference between the existing Excise and VAT cost, and the GST which will become payable,” Jain said. “Similarly, complimentary services (for which no charges/ fees are payable) which do not currently attract Service tax, will suffer GST.”

Tough times for consumers. They will be taxed for everything under the sun in GST and on freebies too.

Will this lead companies to just offer 50% off deals? Why will consumers pick a free item and yet pay taxes?

What would Brexit mean for London as a financial centre?

June 20, 2016

Patrick Jenkins has a superb article wondering role of London as a financial centre post Brexit (HT: MR blog).

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Saving democracies from central bankers and finocracies…

June 20, 2016

Adam Smith in his Wealth of Nations tome said this on monopolies (pg 450):

This monopoly has so much increased the number of some particular tribes of them that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.

In today’s world, Prof Smith could just be replacing monopoly with central bank and monopolist with central bankers. He would be shocked to see what has been going on in the world of central banking. He could not write on this organisation as it had hardly come into the kind of form we know today. Otherwise he would have warned about it earlier  as well.

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