Mid Night News for 18th Jan 2017

Midnight News Update – Jan 18th 2017

The forthcoming Budget may see the service tax rate being hiked to 15% from the current level of 14%. Currently, service tax is charged at 14% but on top of that there is a 0.5% Swach Bharat Cess and another 0.5% Krishi Kalyan Cess, which anyways adds up to 15%. The proposed increase in service tax will bring it closer to the GST rate of 18%. This will take the effective rate of service tax to 16% including the two cesses. Service tax accounts for over 14% of the total tax revenues of the centre and accounts for 1/3rd of the indirect tax revenues. The final rates of tax under GST are yet to be worked but the current demand is that critical services like insurance and telecom be taxed at 12% while the remaining services can be taxed at 18%.

The government may be seeking up to $2.2 billion in dividends from Hindustan Zinc. The government of India currently holds 29.5% stake in Hindustan Zinc. Vedanta Group, owned by Anil Agarwal, is the majority shareholder of Hindustan Zinc and the company is currently sitting on huge cash reserves. In fact, the government has been coaxing many of the profitable PSUs to pay out heavier dividends this year to help the government meet its revenue shortfall.

The RBI governor, Dr. Urjit Patel, will brief the parliamentary panel on the impact of demonetization on Wednesday. He will also outline the steps taken by the RBI to deal with the cash crunch to ensure that the levers of the economy do not get interrupted. Apart from senior officials of the Finance Ministry, senior officials from PSU banks will also be present at the briefing. The RBI governor will also appear before the Public Accounts Committee (PAC) over the weekend. While the liquidity crisis at the end of banks seems to have been resolved, the impact on industry and trade is yet to be gauged.

Former RBI governor, Dr. Raghuram Rajan, has warned of a serious trade war between the US and China if Trump continued to hold his hostile attitude towards China. Trump had promised to impose 45% duties on all products imported from China once he assumed the US presidency. China and the US are 2 of the world’s largest trading partners and hence a trade war between the two will spill over and have larger repercussions across the global markets. The trade war could assume a few additional dimensions. Firstly, Britain will be walking out of the EU and that will trigger a fresh trade war. Secondly, China could resort to devaluing the Yuan and that could have spill over effects across emerging markets, most of who export commodities to China.

It is final and official that the GST will be rolled out effective from July 01st 2017. Apparently, the centre has allowed states control over most of the disputed items. The states will get to administer 90% of the assessees with turnover below Rs.1.50 crore, which is what the states had been demanding. Regarding assessees above the turnover of Rs.1.50 crore, the ownership of the assessees will be shared equally between the centre and the states. Additionally, coastal states also the get the power to tax activities up to 12 nautical miles, an area that will hitherto the preserve of the centre.

In what could be a major relief for the FPIs, the tax department has decided to keep in abeyance its proposed circular on indirect transfers. Most FPIs and VCs / PE funds were sceptical that this circular could lead to double taxation. The origin of this circular was back in 2012 which provided for taxation of gains arising out of the transfer of an asset even if it is registered or incorporated outside India if it derived its value directly or indirectly from an asset located in India. The decision to put the circular in abeyance lays these fears of FPIs to rest for the time being.

For those who are wondering why Indian markets are rising despite FIIs selling, the answer lies in the enthusiasm of the retail investors. Indian equity mutual funds folios have already touched an all-time record and inflows into mutual funds are already at an all-time high. Retail flows into equity funds are at a high of Rs.4000 crore per month and this is making up for the FII outflows. With other asset classes like real estate, gold and bonds continuing to underperform, retail investors are increasingly shifting their focus to systematic investment in equities.

A week after Chandra was appointed the chairman of Tata Sons he was also appointed the chairman of Tata Motors. The flagship company has been doing extremely well in its global JLR business but has been languishing behind competition in its domestic passenger cars business. In the last couple of years, the Tata auto business has ceded space to Mahindras, Honda and Renault who have all emerged stronger at the expense of Tata Motors. Then Chandra also has the overhang of the Tata Nano and that was the bone of contention between Mistry and Tata. But the big challenge for Chandra will be to bring back Tata Motors to its erstwhile leadership position in the Indian passenger cars segment.

The US dollar weakened after Donald Trump called the USD too strong even as the UK£ got a boost from Theresa May insisting on an early exit from the EU. Trump has blamed the strength of the dollar on China, which has traditionally tried to hold down its own currency to boost its exports. But Trump may not find the going so easy for the dollar. With a hawkish Fed and Trump planning to get back growth to the US, a strong dollar is a logical corollary. That may be the real dilemma for Trump.

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