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!
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.