Long Term Capital Gains Tax – Robbing Peter to pay Paul all over again

As most of you know, the finance minister in his recent budget has proposed to re-introduce the long term capital gains (LTCG) tax  at a rate of 10% on equity shares and mutual funds. In addition, there is now a dividend distribution tax on equity mutual funds.

So, the stage is set to rob Peter – Thank you! The premise is that “almost” all the people who are benefiting from the current zero LTCG are large industrialists and fund houses, who keep putting their money into the capital markets. Some people say that the industrialists are getting away by earning money in the markets instead of spending it on industry – fair enough. But, even for a moment did people sitting in the higher echelons of the Government – the ministers, bureaucrats etc. give a thought to the salaried “aam aadmi” – common man – who puts his/her hard earned salary in the form of SIP every month in a disciplined way into the mutual funds, hoping to secure their future?

Why should the salaried common man be bucketed in along with the industrialists? Can’t they be exempted from the LTCG as a goodwill? After all, it is this salaried common man who contributes the bulk of the income tax collected – by force or by choice, they even contribute to a bulk of the GST that comes through every transaction made by them. So, the effective tax rate on the salaried common man is probably 60-70% for those in the 30% tax bracket.

And what about Paul? Why should Peter’s hard earned mutual fund income be used to pay the health insurance bills for Paul? Why can’t Paul do something worthwhile to earn that insurance? Will the insurance really reach the needy Pauls out there? Think for a moment about the UPA Government’s grandiose “Food Security Act” – has it in any way reduced the number of hungry people on the streets in India? What about all those people in the slums and begging at the traffic signals – why aren’t they being given food for free every day, as it was promised? What happened to all the taxes you collected from Peter to fund this? What gives me the confidence that the hard saved monthly SIPs of the salaried common man which are now being diverted to fund health insurance for Paul would really reach the Pauls out there?

Flawed economics, even more flawed politics Mr. Finance Minister! This country will never learn that robbing Peter to pay Paul never makes Peter or Paul any better. Surely, you heard that adage about how to teach a man to fish? Thank you once again for robbing me and so many salaried common people out there to fund an abyss which never gets filled.

P.S1: Let’s not even talk about what happens to the additional 1% education cess that you will start collecting – we already know where the 3% you have collected for over 10 years resides – deep inside a drain in the middle of the earth or the fat pockets of your esteemed colleagues across India – I don’t think education in Government schools is any better for it. And yes, Thanks for the sham 40,000 standard deduction, while slyly taking away the medical and transport allowance – who said the salaried common man is intelligent? We are blind, Thank you – just can’t see what you did as 40,000 is a big amount for us!

P.S2: Please note that there is a huge difference between the salaried common man and the common man – it’s deliberately emphasized through this article. It irks me when this distinction is never made and common man is always supposed to be the man on the street.

Cutting off the very hand that feeds us

Yet another farmer’s death – but this time in full view of the public at a rally where some of the most important politicians of the land were.

Shocking.

The rally continued following the person being moved to hospital.

Disrespectful.

Now, there is a lot of mudslinging and debate among all the political parties with the media and all hounding them.

Temporal.

That’s where the problem lies – this will die down a few days later when the media glare stops. This time around it was in the full view of everyone, so it garners more attention. But, how many farmers have been dying silently across the country for years? Who even cares about their plight? Certainly doesn’t seem like the Government (or any politician outside the Government) does – if anything it is like crocodile tears, in an effort to gain votes in the next round of the circus called an election.

For years, we have known of farmer suicides in Telangana and Andhra Pradesh and they have continued unabated – despite the Government’s tall claims to prioritize agriculture.

We can gain all the money we want in the world, but we can’t do anything with it if we do not have the food to eat – that’s the stark truth. Also, none of us want to pay much for the food – a large part of us want it subsidized and the poor farmers grow it for free for these subsidies to be doled out. The farmers are caught in a spiral of more poverty, arising out of these subsidies. If anything, there should be a subsidy to produce, not to consume! Even in some of the most prosperous nations in the world, farming is an unsustainable profession with the advent of other more lucrative professions. No country can afford food to be expensive, so even the powerful economies like the US subsidize farming in a big way. They also have effective controls and restrictions to prevent their farming from being hijacked. In India, we just don’t seem to care about the farmer, as long as the free food is being doled out at every meal.

Another big, big obstacle for farmers earning a livelihood is the notorious middleman, who pockets all the big gains, while the farmer struggles to make a penny. Who is this notorious middleman, a good friend of our dear politician – no wonder! By now, we all know that there will be a month or two in the year when onions and tomatoes will touch Rs 80-100 a kilo and then there will be a few days when it will drop below Rs 10. What explains this huge disparity? The farmer still gets the meagre Rs 1 or Rs 5 a kilo, irrespective of the price in the retail market. It’s the middleman who pockets it, of course, and goes around in the expensive Audi or Mercedes or BMW SUV with the local goons to meet the politician who has just got off the chartered plane and has reached the uber luxurious state palace or 5 star hotel.

So, where is the case for the farmer to survive? There seem to be only 2 choices – either give up their profession or their life.

Shameful.

Not to the farmers, but everyone who exploits their innocence and hard work.

Period.

Why all the fuss about the 1 paisa per second plan?

I don’t understand why the whole mobile phone industry and the stock market is reacting so much to the 1 paisa per second plan…

To the layman, no great statistics are needed to prove that this is not probably such a great loss to telecom revenues.

Prior to the introduction of this plan, the telecom rates were mostly around 40 paisa (or in some cases 30 paisa) per second – all you needed to do was to add an additional Top up to reduce the call rate from Rs 1 per second to this rate

(In the case of Airtel, even this top up rate has been coming down steadily – in Jan 2009, I paid Rs 84 per month for this, in April this was Rs 64 per month, in August I paid Rs 160 for 3 months and I’ve seen messages later which were offering this rate for almost nothing).

Let us consider someone just making a lot of local or within the state calls:

Current rate: Either 40 paisa or 30 paisa per minute
New plan: 1 paisa per second

Here are a few examples:

Call Duration: 10 seconds
Current Rate: Either 40 or 30 paisa
New Plan: 10 paisa

Call duration: 30 seconds
Current Rate: Either 40 or 30 paisa
New Plan: 30 paisa

Call duration : 60 seconds
Current Rate: Either 40 or 30 paisa
New Plan: 60 paisa

Any call over 60 seconds ….say 3 min, 5 min, 10 min
Current Rate: Either 1.2, 2 or 4 Rs – or 0.9, 1.5 or 3 Rs
New Plan: 1.8, 3 or 6 Rs

So, anyone can clearly say that the telecom providers are going to make a significantly higher exponential revenue than they were making with the older plans by introducing this per second plan – only if the call duration is less than 40 (or 30) seconds, does the revenue actually go down compared to what it was earlier.
So, how many short calls of 1 minute or lesser do people actually make? We are a nation of people who can’t have enough of the mobile phone, are we not? And that too…for local calls…where a whole network of family and friends is always on call 🙂

I’m referring to local or within the state calls only above.

It could possibly lead to a dent in revenue in the long distance calling (out of state) though.

In the case of the STD calls the lean in the new plan is towards 1.2 paisa per minute.

STD calls were mostly in the range of Rs 1.5 per minute (or sometimes Rs 1 based on the top up) – so it could possibly lead to a 50% decline in revenues (or lesser) from this segment. Won’t some of that be compensated by bigger volumes?

I see that most Indians still stick to their home states (atleast I hardly call anyone outside my state and I see the same amongst most of my friends), I would like to see some statistics on how much revenue local calls bring in versus STD calls before passing a verdict on this plan.

However, I can’t see why the so-called famous and well acclaimed analysts are beating down the stocks of some of these valuable companies on the grounds of a tariff war – a great money making tactic for the investors isn’t it – bring down the stock value, invest at the low level and reap the profits by pushing up the stock value again…..what say?

Hypercity – Hyderabad’s first WalMart-like store is here!

7 years ago I remember asking a Marketing Professor from Wharton over lunch whether he could ever visualize a Wal Mart in India – he said he was doubtful if it would happen in the next 20 years.

Move over to 2009 – we seem to be making our own Wal Marts – welcome Hypercity http://www.hypercityindia.com (I remember that Bharti Wal Mart started off with a store in Amritsar a couple of months ago amidst controversy, so technically Wal Mart is in India, but I would like to highlight the case of our home grown Wal Mart in this article). Hypercity is owned by the same group (K. Raheja) that owns the Shoppers Stop chain of retail stores and the MindSpace IT parks, among other ventures.

The moment I stepped into Hypercity (located at the Inorbit Mall near the Durgam Cheruvu in the Hitec city area of Hyderabad) last evening, it brought a sense of Deja Vu of entering a Wal Mart somewhere in the US (or rather I would say Target, because Target always seemed to be the better organized store to me).

The first thing that hits you is the gigantic single floor layout – a little uncommon in Indian cities (and in most places in Asia) where malls tend to go up vertically instead of spreading out horizontally for obvious space constraints. (I remember the very first time I entered a Wal Mart Super Store and I was really left gaping in awe – I couldn’t see the other end of any of the sides from where I stood at the check out counters that day).

You can’t miss the number of turnstiles (check out counters) lined one after the other and then the maze of sections (Electronics, Food, Clothes, Sports, Appliances, a Cafe Coffee Day, a Dadu’s snack counter, Furniture, an exclusive section for Meat products and the list just goes on…)…

When I first went to the US, I used to feel lost for choice at the Super Markets, as I just did not know which one to pick when there were so many brands, sizes etc of the same product – HyperCity kind of brings that conundrum into our shopping in India as well :). Some people might say it’s good to have many choices, while others like me usually stick to the brand of their choice.

I thought that the layout of the store was pretty fine, the parking should be sufficient for a while – you never know with the exploding cities, the interiors were pretty well done for a store of this kind, the presentation is certainly catchy and overall, the store gives you a welcome feeling. There are still several areas that are yet to open up though (the Inorbit Mall itself hasn’t opened!) and we can expect to see more additions over the next couple of months.

So, what’s different when compared to a Wal Mart or a Target?

For one, most of the products are not yet “Made in China”, though this might happen very soon.
Then, the inevitable Indian customizations – you see Cricket gear instead of say, baseball gear.
Of course, there are the Indian eat-out places (Thank Goodness!). And of course, the check out counters – I guess the employees are not yet there in terms of the check out efficiency, but that’s perfectly acceptable.
And…sadly I have to point out that some Indian customers never change – we saw a customer almost man handling an employee and shouting so many profanities at him so loudly the entire store could hear – I can’t understand why people have to do that – if there’s been some kind of a mistake, it can still be handled calmly and with the manager – wonder when that change and a semblance of civility will hit some of our fellow citizens.

There are a few things that I can’t see happening so soon in India – at least not yet -and one of them is the “Self Check Out” option you see at some of the Wal Mart Stores – I believe even in the US, this option is restricted to the largely trouble-free areas. I noticed that when this was first introduced, it was actually a pain – people took too long to scan their items or find what the item code/name was and then finally pay up -so, this particular feature is not something I would yearn for – especially given all the constraints we have out here.

I’m not getting into the advantages and disadvantages of the Wal Mart model and whether India should go that way – it’s a topic that can be debated forever. Personally, I’m neutral to this topic.

So, if you have the time, go check out HyperCity – I suggest you go on a week day if you work near the Hitec city area – to avoid the rush over the weekends (especially given people’s curiousity to check out something new) – well, first impressions often last and it’s better that impression is created in a better setting!

Education cess of 3% – Where is it being utilized?

I am one of those left wondering what’s happening to the 3% surcharge (called “Education cess”) on my income tax.

To give some background on how this Education cess originated:

To give a boost to primary education in the country and in conformity with the Common Minimum Programme of the UPA government, former Finance Minister P Chidambaram on July 2004 proposed to levy a Educationcess of two per cent on income tax, corporation tax, excise and customs duties and service tax. The new cess was expected to yield about Rs 4,000-5,000 crore (Rs 40-50 billion) per annum and the entire amount will be earmarked for education including provision of nutritious cooked mid-day meal. The education cess will be a 2 per cent surcharge on the total payable tax, and not 2 per cent of total income.

An additional 1% Secondary and Higher Education cess was imposed in 2007 to help fund new seats in higher education that are required to implement the 27% reservation of seats for other backward classes. “It has been introduced to fund secondary and higher education as well as for the expansion of capacity by 54% for reservation for socially and educationally backward classes.”
The increase in cess will fund secondary and higher education, particularly the shortfall in the recommendations of the Moily Committee report. The committee said this implies a 54% rise in student admissions at an estimated expenditure of Rs16,563 crore spread over five years.

I’ve borrowed some of the text above from an informative article on the net – here is the link:
http://aserf.org.in/analysis/Education%20Cess.pdf.
It’s really worth a read. This is really the best source I could find – as you can imagine, information on this is not so easy to gather and it exists in spurts here and there – but there is no comprehensive source and the Government web sites aren’t that helpful either.

It’s a worrying factor that we do not have transparency from the Government on what’s happening to this money – a bigger cause for concern is that budgetary allocations for education are actually reducing every year, though the kitty collected under the education cess is increasing.

(I’ve always been a bit skeptical about levying taxes through the back door and not directing them towards the intended destination – just to give an example, the Indian Railways collects a “safety surcharge” on your ticket price – do we have any solid proof to say that the Railways have utilized this security surcharge effectively and that this will result in a safer journey? Do we have data to prove that the number of train accidents have been reduced after levying this surcharge?)

Education is one thing for which I do not mind paying an additional amount in the form of tax from my pocket – however, I really would want to know what’s happening to the money and I think we all have a right to know as well – invoke the Right to Information Act!

“Resale” of apartments – a dangerous nexus between builders, investors/owners and Banks/lending agencies… leaving the Government in the cold

I’ve been following the major boom and the current downswing in the Indian realty sector, I have heard about several factors being mentioned in the media for the same, however there is one important aspect that no one ever seems to talk about and it is the nexus between the builders, investors (who pretend to be owners) and financial institutions (banks, lenders), perhaps with the covert support of the Government authorities (specifically the Register office which controls the property deals).

I’m a live witness to this, I realized that something like this existed after committing to buy our apartment. The builder told us it is a “resale” as it has already been bought by someone and the builder has been authorized by the “owner” to sell it on his behalf. We were in a hurry to buy (or rather I should say “I was in a hurry to buy”) and I didn’t really bother about digging the facts behind this – in hindsight I realized I should have asked a number of questions.
The first one: Who is the current “owner”? I think I asked this and all I got is some vague reply.
We never got to see or talk to the real “owner”, so we aren’t even sure if this flat was ever owned at all!
I heard then that many people “invest” this way, they take a loan from a bank to partly/fully buy the apartment and do not get it registered with the Government authorities (if they register, they need to pay the hefty registration charges, the service tax, VAT and other charges imposed by the Government) – the banks are perfectly ok with this arrangement, maybe because they get a hefty cut out of the profit that the owner/investor makes when he sells the investment. The builder cleverly hides the name of the true owner and perhaps levies all the charges that he already collected from the original owner. Examples: The higher amenities, car parking, facilities and other charges.
The registration authorities turn a blind eye towards this whole arrangement, as they are well “fed” by the builder.

This is one of the primary reasons for the unreasonable boom in the real estate sector and the astronomical prices. There are no “true” owners – how many occupied flats do you see in all those huge apartment towers around your city? (If at all any are occupied, they would be occupied by a bunch of poor bachelors who come together and pay the ridiculous rents – many single people and families anyway cannot afford the rents). The true owner doesn’t exist at all! Due to this nexus, people invested crazily and “owned” 3-4 apartments or more at a time and sold them out later to the “bakras” – the true buyer who is genuinely looking to buy a home at super-inflated prices. Everyone colluded in creating this.

So, do these builders/banks/investors deserve help from the Government at all? No. If anyone needs to be helped, it is the down trodden first-time home buyer, who is really in need. Two hoots to the claims of all these big builders that they are in trouble (and need a ‘stimulus’ from the Government) – if they really are, they deserve to be. Another two hoots to the bankers – I would be happy to see you go down and crash – you’ve been irresponsible. Investors – all I can say is that you’ve been smart and lucky to ride the boom.

To the ordinary person who cobbled up a huge loan together to buy that home for the first time which is way beyond his/her reach to live there happily ever after – my sympathies are with you and I hope you earn enough, soon enough to get out of this nexus.

The sub-prime crisis is supposed to be one of the key factors that pulled down the US economy, I am no financial expert and do not really understand the finer aspects of this “sub-prime” thing, but I can certainly say that this whole nexus above is probably something similar.

Our Prime Minister, Dr. Manmohan Singh, claimed yesterday that there are enough regulations in place now to ensure that some disaster like Satyam wouldn’t happen again – I hope he is keeping a close watch on all these parties above (the real estate players, banks, investors) to see where they are going – somehow it doesn’t inspire confidence in me that we wouldn’t see another Satyam. It’s great to state that we have the regulations in place, weren’t many of them in place when Satyam went down as well? I can see several dark horses lurking in the corner, waiting to be discovered.

A few quick remedies I can think of:
(1) Sanction a bank loan only if a flat is registered in the owner’s name
(2) Let only the true owner come and sign the papers for a re-sale and disallow the builder to act on his behalf
(3) Last, but not the least – please stop calling this business a “resale”
(4) Do a comprehensive audit of all these companies, ASAP. Satyam came out in the open, others will not come out by themselves. It’s hard to believe that all these real estate companies are “pristine”

Biometric PAN cards are coming…and it’s time to adapt biometric technology to make a national identity card

I read this in the news today:
http://business.rediff.com/report/2009/apr/13/tcs-infy-hcl-vie-for-biometric-pan-cards.htm
Finally, it looks we are moving towards resolving the headache of people possessing multiple PAN cards, with the biometric PAN card.

I still suspect that there’s a lot of fraud in reporting income, savings, stock holdings etc in India and hopefully this card will be a major breakthrough in preventing such fraud. The Government has already made it mandatory for the PAN number to be quoted in most transactions and I believe the purview of these is being expanded every year, it’s really a step in the right direction and needs to be lauded.

I have seen biometric driving licenses in some states in the US and thought that they are cool. We have to adopt this technology for all identification cards eventually – the biggest project would be I guess for the Voter Identity card, if we can do that, it would certainly reduce the rigging that’s taking place rampantly today.

On that note, is it necessary to have so many indentity cards at all, one for each department? I think we should simply have 1 identity card (call it a National Identity Card, if you need to give it a name) which works everywhere and make it biometric. It should atleast be useful in most places – of course, you would need separate cards for say, a driving license or a vehicle registration as these are dependant on other factors.

I understand that such a project would involve huge expenses, as you would need biometric readers everywhere as well (what good would all the fancy cards be without a mechanism to read them? :)), but it is certainly worth the effort.

Given our huge population (and the number of illegal immigrants that creep into India from all sides along our porous borders every day), it is really needed to have this biometric national identity card to identify each citizen. Yes, it would probably be amongst the most ambitious invididual projects ever, trying to roll this out to around 1.2 billion people, but if we do it, we would break new barriers and showcase it to the rest of the world!

So, here’s looking forward to this first of several small steps that need to occur to cleanse the system and praying that it would be put in good hands for the implementation (both the technology and process)!

PS: I hate having to be finger printed, especially at the immigration counters and when I attend visa interviews, but realize that it is for our own good at the end of the day.:)

“Recession”, “Recession”, “Recession” – In India?

Everywhere I go these days, the topic of discussion is the “recession”.
I open the newspaper and there are articles about recession. I watch the TV news and see things about recession.

Let me get this straight – we in India are NOT in recession! The generally accepted designation of the word “recession” is 2 or more succesive quarters of negative GDP growth. We are far from that – even the most pessimistic estimates put the Indian growth this year at at least 4.5-5%.

Yes, half the developed world is in a recession. However, a recession would be catastrophic for a developing economy like ours – we do not even want to hear that word uttered! It’s true that a number of industries in India are heavily dependent on the export market to developed countries like the US and they would be hit, but it’s not the end of the road! We have a vibrant domestic market to help us wade through these tough economic conditions.

We are definitely experiencing an economic “slow down” from the hey days of 9-10% growth over the last year or so, but certainly we are not and do not want to be, in recession.

So, let’s cheer up and take this “slow down” on our chin and work through it and get back to a 10% plus growth rate and discard the word “recession” forever!

Here are some facts:
THE three decades since 1980-81 have been easily the best in India’s economic performance in the last century.
After averaging about 3.6 per cent a year in GDP (gross domestic product) growth rate during the 30 years between 1950-51 and 1980-81 and less than 1 per cent a year in the half century before that, GDP growth accelerated to 5.6 per cent in the 1980s (5.3 if 1991-92 is included) and averaged even higher at 6 per cent in the decade up to 2000-01.
(Source: http://www.hinduonnet.com/fline/fl1902/19020610.htm)
I believe the average since 2001 would be closer to 7- 7.5 % or more.