CSE-2011/GENERAL STUDIES(PRELIMS)/HAND OUT #10

Pension Reforms in India:
On August 23, 2003, Government decided to introduce a new restructured defined contribution pension system for new entrants to Central Government service, except to Armed Forces, in the first stage, replacing the existing defined benefit system. Subsequently, the New Pension System (NPS) was operationalised from January 1, 2004 through a notification dated December 22, 2003. The main features of the NPS are:
 It is based on defined contribution. New entrants to Central Government service contribute 10 per cent of their salary and dearness allowance (DA), which is matched by the Central Government (Tier-I).
 Once the NPS architecture is fully in place, employees will have the option of a voluntary (Tier-II) withdrawable account in the absence of the facility of General Provident Fund (GPF). Government will make no contribution to this account.
 Employees will normally exit the system at or after the age of 60 years. At the time of exit, it is mandatory for them to invest 40 per cent of the pension wealth to purchase an annuity to provide for lifetime pension of the employee and his dependent parents and spouse. Remaining 60 per cent of pension wealth will be paid to the employee in lump sum at the time of exit. Individuals would have the flexibility to leave the pension system prior to age 60. However, in this case, mandatory annuitisation would be 80 per cent of the pension wealth.
 The new system will have a central record keeping and accounting infrastructure and several fund managers to offer investment options with varying proportions of investment in fixed-income instruments and equity.
 The new system will also have a market mechanism (without any contingent liability) through which certain investment protection guarantees would be offered for the different schemes.
 An interim regulator, the Pension Fund Regulatory and Development Authority (PFRDA) was constituted through a Government resolution dated October 10, 2003 as a precursor to a statutory regulator and became operational from January 1, 2004.



Empowered Committee of State Finance Ministers on Value Added Tax (VAT):
Introduction of State Level VAT is the most significant tax reform measure at State level. The State level VAT implemented has replaced the existing State Sales Tax. The decision to implement State level VAT was
taken in the meeting of the Empowered Committee (EC) of State Finance Ministers held on June 18, 2004, where a broad consensus was arrived at to introduce VAT from April 1, 2005. Accordingly, VAT has been introduced by 30 States/UTs so far. Tamil Nadu has implemented VAT from January 1, 2007. The union territory of Puducherry has communicated its decision to implement VAT from April 1, 2007. Uttar Pradesh has not yet taken any decision in this regard. Since Sales Tax/VAT is a State subject, the Central Government has played the role of a facilitator. A compensation formula has also been finalised in consultation with the States, for providing compensation, during 2005-06, 2006-07 and 2007-08, for any losses on account of introduction of VAT and compensation is being released according to this formula. Technical and financial support has also been provided to the States for VAT computerization, publicity and awareness and other related aspects.
The Empowered Committee, through its deliberations over the years, finalized a design of VAT to be adopted by the States, which seeks to retain the essential features of VAT, while at the same time, providing a measure of flexibility to the States, to enable them to meet their local requirements. Some salient features of the VAT design finalized by the Empowered Committee are as follows:
(a) The rates of VAT on various commodities shall be uniform for all the States/UTs. There are 2 basic rates of 4 per cent and 12.5 per cent, besides an exempt category and a special rate of 1 per cent for a few selected items. The items of basic necessities have been put in the zero rate bracket or the exempted schedule. Gold, silver and precious stones have been put in the 1 per cent schedule. There is also a category with 20 per cent floor rate of tax, but the commodities listed in this schedule are not eligible for input tax rebate/set off. This category covers items like motor spirit (petrol), diesel, aviation turbine fuel, and liquor.
(b) There is provision for eliminating the multiplicity of taxes. In fact, all the State taxes on purchase or sale of goods (excluding Entry Tax in lieu of Octroi) are required to be subsumed in VAT or made VATable.
(c) Provision has been made for allowing “Input Tax Credit (ITC)”, which is the basic feature of VAT. However, since the VAT being implemented is intra-State VAT only and does not cover inter-State sale transactions, ITC will not be available on inter-State purchases.
(d) Exports will be zero-rated, with credit given for all taxes on inputs/purchases related to such exports.
(e) There are provisions to make the system more business-friendly. For instance, there is provision for self-assessment by the dealers. Similarly, there is provision of a threshold limit for registration of dealers in terms of annual turnover of Rs. 5 lakh. Dealers with turnover lower than this threshold limit are not required to obtain registration under VAT and are exempt from payment of VAT. There is also provision for composition of tax liability up to annual turnover limit of Rs. 50 lakh.
(f) Regarding the industrial incentives, the States have been allowed to continue with the existing incentives, without breaking the VAT chain. However, no fresh sales tax/VAT based incentives are permitted.
VAT implementation–experience so far:
The experience of implementing VAT has been very encouraging. The new system has been received well by all the stakeholders, and the transition has been quite smooth with the Empowered Committee constantly reviewing the progress of implementation. The revenue performance of VAT-implementing States/UTs has been
very encouraging. During 2005-06, the tax revenue of the 25 VAT implementing States/ UTs registered year-on-year increase in VAT revenues of 13.8 per cent, higher than the average annual rate of growth in the last five years. In the first seven months of 2006-07 (April-October), the 30 VAT State/UTs have collectively registered revenue growth rate of 26.1 per cent over the corresponding period of the previous year. The Central Government had announced a compensation package under which the States are compensated for any revenue loss on account of VAT introduction at the rate of 100 per cent of revenue loss during 2005-06; 75 per cent during 2006-07, and 50 per cent during 2007-08. The initial Budget provision for the year 2005-06 was Rs. 5,000 crore, which was reduced to Rs. 2,500 crore at the RE stage. For the year 2006-07, a provision of Rs. 2,990 crore (BE) was initially made, and an additional provision of Rs. 1,000 crore has been made through First Supplementary. In all, 8 States requested for VAT compensation for a total amount of Rs 6,765.6 crore in 2005-06. In 2006-07 so far, claims for a total of Rs. 514.3 crore have been received from 5 States.
Recommendations of Committee on Fuller Capital Account Convertibility (Tarapore Committee II) — Development of Indian debt market
Government Bond Market:
(i) Over time, it would be preferable to progressively increase the share of mark-to-market category.
(ii) Promoting a two-way market movement would require permitting participants to freely undertake shortselling. Currently, only intra-day short-selling is permitted. This would need to be extended to shortselling across settlement cycles; this would, however, require adequate regulatory/supervisory safeguards.
(iii) To stimulate retail investments in gilts, either directly or through gilt mutual funds, the gilt funds should be exempted from the dividend distribution tax, and income up to a limit from direct investment in gilts could be exempted from tax.
(iv) In line with advanced financial markets, the introduction of Separate Trading of Registered Interest and Principal of Securities (STRIPS) in G-secs should be expedited.
(v) Expanding investor base would be strengthened by allowing, inter alia, entry to non-resident investors, especially longer term investors like foreign central banks, endowment funds, retirement funds, etc.
(vi) To impart liquidity to government stocks, the class of holders of G-secs needs to be widened and repo facility allowed to all market players without any restrictions on the minimum duration of the repo; this would, however, necessitate adequate regulatory/supervisory safeguards. This will improve the incentive for a wide range of economic agents to hold G-secs for managing their liquidity needs through repos.
(vii) A rapid debt consolidation process that is tax neutral, by exempting the gains arising from exchange of securities from all taxes, may be taken up. If necessary, a condition may be stipulated that gains arising from such an operation cannot be distributed to the shareholders.
(viii) The limit for FII investment in G-secs could be fixed at 6 per cent of total gross issuances by the Centre and States during 2006-07 and gradually raised to 8 per cent of gross issuance between 2007-08 and 2008-09, and to 10 per cent between 2009-10 and 2010-11. The limits could be linked to the gross issuance in the previous year to which the limit relates. The allocation by SEBI of the limits between 100 per cent debt funds and other FIIs should be discontinued.


Corporate Bond and Securitised Debt Market:
(i) GOI, RBI and SEBI should be able to evolve a concerted approach to deal with the complex issues identified by the High Level Committee on Corporate Bond Market.
(ii) Institutional trading and settlement arrangements need to be put in place and investors should have the freedom to join any of the trading and settlement platforms they find to be convenient.
(iii) The issuance guidelines have to be changed so as to recognize the institutional character of the market.
Since issuers may like to tap the bond market more frequently than the equity market and since subscribers are mainly institutional investors, issuance and listing mechanisms in respect of instruments being placed with institutional investors should be simplified by relying more on the assessment of a recognized rating agency rather than on voluminous and tedious disclosures as required by the public issues of equities.
(iv) Until transparent trading platforms become more popular, reliable trade reporting systems should be made mandatory. Clearing and settlement arrangements like those offered by CCIL in the case of Gsecs should be in place to ensure guaranteed settlement.
(v) Stamp duty at the time of bond issues as also on securitised debt should be abolished by all the state governments.
(vi) The FII ceiling for investments in corporate bonds of US$1.50 billion should in future be linked to fresh discontinued.
(vii) Corporate bonds may be permitted as eligible securities for repo transactions subject to strengthening of regulatory and supervisory policies.
(viii) In the case of the securitised debt market, the tax treatment of special vehicles that float the securitized debt has to be materially different. Government should provide an explicit tax pass-through treatment to securitisation Special Purpose Vehicles (SPVs) on par with tax pass-through treatment granted to SEBI registered
venture capital funds.
(ix) Securitised debt should be recognised under the Securities Contract and Regulation Act (SCRA), 1956 as tradable debt. The limitations on FIIs to invest in securities issued by Asset Reconstruction Companies should be on par with their investments in listed debt securities.


WTO negotiations and India
After the suspension in negotiations during July 2006 due to the wide gaps in the positions of WTO Members, especially on agricultural domestic support and market access, there was a soft resumption of negotiations on November 16, 2006. Subsequently there was full-scale resumption of negotiations on February 7, 2007, on the principles that it preserves the architecture of the negotiations, inclusiveness, and the progress made so far, and leads to an outcome that is balanced, ambitious and pro-development.
While safeguarding the interests of India’s low income and resource poor agricultural producers (which cannot be traded off against any gains elsewhere in the negotiations) remains paramount for India, making real gains in services negotiations where it is a demander is no less important. In the case of industrial tariffs, India’s growth and development concerns need to be addressed where India has taken a stand along with NAMA-11 coalition. These concerns are reflected in India’s position on different WTO issues for negotiations.