GST dream one step closer to reality

Empowered panel of state FMs & Centre agree on 'place of supply' rules

The government's bid to implement the goods & services tax (GST) as early as possible got a significant boost with the empowered committee of state finance ministers endorsing the so-called 'place of supply' rules that form the backbone of the new regime that will replace a plethora of levies, create a common market and likely give GDP growth a lift of up to two percentage points.

The place of supply rules decide where goods or services will be taxed, fixing a crucial element of the levy that has gained in importance because of the surge in ecommerce and electronic delivery of services. The empowered committee has given in-principle clearance to place of supply rules

However, both the Centre and the states continue to differ on the threshold for the levy with the first wanting it to be raised to Rs 25 lakh while the latter prefers it at Rs 10 lakh.

The Centre has assured the states that they won't suffer any revenue loss on account of subsuming petroleum product and entry taxes within the ambit of GST, promising to meet an important concern of states that are opposed to these duties being included in the levy that was to have been rolled out in April 2010.

Place of supply rules are fundamental in determining the state where a service is provided and state GST or integrated GST is required to be paid. These are extremely crucial to the basic structure of GST. Place of supply and consumption will determine the

tax-recipient state and consuming state and have implications for their revenue.

This is more so in the context of services as determining the state of consumption would be challenging, particularly where the services are not provided from an identified fixed place, such as telecom and transportation. Most of the disputes on value added tax in the European Union centre around place of supply rules.

GST will require constitutional amendment Bill that will allow the Centre to tax goods at retail level and states to tax services.

GST will subsume central indirect taxes such as excise duty and service tax at the central level and value added tax at the state level besides other local levies such as octroi and entry tax. Though states are reluctant to include entry tax within GST, the Centre is now attempting to persuade them by offering a revenue compensation mechanism.

The GST Constitutional Amendment Bill, introduced in the Lok Sabha in 2011, has lapsed and the government has to come up with fresh legislation

NBFCs get new rules and four years to comply

The Reserve Bank of India (RBI) introduced a slew of changes in regulations for non-banking financial companies (NBFCs), tightening rules in a phased manner over the next four years “to create a level-playing field that does not unduly favour or disfavour any institution.” The central bank’s regulations on NBFCs have been long awaited given that the first recommendation to bring regulatory changes in the sector was suggested by a committee headed by former deputy governor Usha Thorat in 2011. RBI said the final recommendations draw from the Thorat committee and suggestions made by the committee on comprehensive financial services for small businesses and low-income households headed by former ICICI Bank Ltd executive Nachiket Mor.

NBFCs have been asked to increase their net-owned funds,

the core capital ratio of all NBFCs has been harmonized, the time frame for classification of non-performing assets (NPAs) has been brought on par with banks and provisions for standard assets has also been increased. NBFCs in operation before April 1999 have been asked to increase

their minimum net owned funds (NOF) to Rs.1 crore by March 2016 and further to Rs.2 crore by March 2017 from Rs.25 lakh currently or risk cancellation of their permits.

Significant changes include a decision to streamline the

core capital adequacy ratio for all non-deposit taking NBFCs with an asset size of Rs.500 crore. Such NBFCs will now be asked to maintain a core capital ratio of 10%, compared with a range of 7.5% to 12% currently. NBFCs have been given time till March 2017 to comply with the norms.

The criteria for directors NBFCs has also been on par with

banks. The new NBFC framework is aimed at addressing risks and regulatory gaps and arbitrage both within the sector as well as other financial institutions and harmonize regulations “to facilitate a smoother compliance culture among NBFCs”.

Classification of loan NPAs for NBFCs has also been

brought in line with banks. All NBFCs have to classify loans overdue for 90 days as NPAs. However, this new rule will be applied in a phased manner starting in March 2016 till March 2018. Provisions for standard assets has also been increased from 0.25% of the loans outstanding to 0.40% of loans in a phased manner starting from March 2016 and to be complied by March 2018.

For deposit-taking unrated NBFCs must get an investment

grade rating by March 2016 or stop accepting deposits. Between now and March 2016, unrated asset finance companies which are sub-investment grade can only renew deposits on maturity and not accept fresh deposits till they get an investment-grade rating.

All asset financing NBFCs will be allowed to accept

deposits upto 1.5 times their net owned funds, down from four times their net owned funds earlier. NBFCs above this threshold have been asked not to renew deposits.

Classification of non-deposit taking NBFCs has also been

tweaked. Earlier, such NBFCs which had assets over Rs.100 crore were considered systemically important. This cut-off has now been increased to Rs.500 crore “in light of the overall increase of growth of the NBFC sector.” Henceforth, NBFCs which are part of a single corporate group or have a common set of promoters will not been viewed on a stand-alone basis but the total assets including deposits taking NBFCs will be aggregated to determine whether its total assets are below or above Rs.500 crore.

These norms attracted mixed reactions from NBFCs. The norms are “pragmatic” and will not disrupt the business of NBFCs because there is enough time to comply with them. But stricter NPA classification norms and limiting the amount of deposits to 1.5 times of net owned funds will make it difficult for some companies to comply. Tighter provisions related to liquidity management which had been suggested by previous RBI committees have been avoided.

Really, RBI has recognized the importance of NBFCs and hence is tailor-making regulations around it.

HRM: TRAINING & DEVELOPMENTIs India ready to cash in on its demographic dividend?

{ ARTICLE FROM HINDU TODAY}A demographic dividend is a once-in-a-lifetime opportunity for a nation and can either make or mar its citizens’ present and future. When the share of the working-age population is on a rising curve while the share of dependents (those under the age of 15 and over 60) is falling, it enables workers to save (hence savings share in GDP rises) and invest. Thus, ceteris paribus, the growth rate rises. But for this dynamic to be in place, the working-age population should earn more than what their parents were earning. For that they must be in jobs more productive than agriculture, and agriculture itself must become more productive. These jobs require more skills and higher levels of education, both of which are demonstrably lacking in our population. This is

the most important reason for why India’s potential dividend risks becoming a nightmare.Also Read: Can India garner the demographic dividen?Providing vocational training

Just over half of our workforce of 470 million is either illiterate or has not completed primary education. National Sample Survey estimates that only 10 per cent of the workforce has any vocational training, formal or informal. But has public action and private initiative in these areas in the last decade reflected the extent of the problem and the urgency in tackling it? The demographic dividend will last only another 25 years or so.In his address to the nation on Independence Day in 2007, former Prime Minister Manmohan Singh stated, “The vast majority of our youth seek skilled employment after schooling. We will soon launch a Mission on Vocational Education and Skill Development through which we will open 1,600 new industrial training institutes (ITIs) and polytechnics, 10,000 new vocational schools and 50,000 new Skill Development Centres. We will ensure that annually over 100 lakh students get vocational training, which is a fourfold increase from today’s level.” The tragedy is that almost none of this has happened. The only good news is that the National Skill Development Corporation (NSDC), which was created as a private-public partnership in 2010, has trained a million people, as it incubated hundreds of private vocational training providers.The number of private ITIs did increase from 2,000 to about 10,000 in 2013, but in India when capacity expands at this pace, quality is the first casualty. The government has limited capacity to regulate private ITIs; hence industry continues to complain about the quality of its trainees. These were the only two major developments on the ground that happened during the 11th Five Year Plan (2007-12) (which recognised for the first time since Five Year Plans were introduced that a problem of skills existed), and since. In fact, the government grossly exaggerated that 500 million persons needed to be given vocational training by 2022; the total workforce itself is unlikely to exceed 550 million in that year. It then went about allocating that number to Ministries and the NSDC (100 million to the Labour Ministry, 50 million to the Ministry of Human Resource Development, 200 million to the rest of the Ministries and 150 million to the NSDC) to go and train. The 500 million target of the government implied that 50 million people would be trained every year, but even now the total capacity of all institutions, both private and public, to train does not exceed five million per annum. Even the more reasonable target of 200 million people to be given vocational training, that we have estimated, would be terribly ambitious, given that it means training 20 million each year till 2022. Achieving this requires a paradigm shift from a government-driven approach to a private sector-driven one and from relying mainly on discrete vocational training providers to a secondary school-based system. The most successful vocational education training systems in the world (Germany and China) rely on this approach.In late 2009, there were 1,66,000 schools with classes 9 and 10 (secondary level) and 57,000 with classes 11 and 12 (senior secondary level). Barely 3 per cent of the latter had any vocational education. Thanks to a task force of the MHRD, the government accepted the proposal to introduce vocational education for the first time in class 9 too. For four decades, vocational education was available only in classes 11 and 12. No industry participation, little practical training, and poorly qualified instructors ensured that only 3 per cent of students from the senior secondary level were in vocational education. In any case, those who graduated never got a job in their trade, and could not gain admission into polytechnics either. So, vocational education was a dead-end. It is no wonder that it has always been seen as a secondary option by parents and children. But the majority who pursued a general academic education were not very employable either. It is hardly surprising that demand for secondary education was low; even today, secondary level education enrolment is only 63 per cent and at the senior secondary level, it is 36 per cent (as of 2010) — way below Chinese levels.Besides, around one-third of the institutions with secondary sections are very small, having an enrolment of 80 or less in classes 9 and 10. In classes 11 and 12, 32.2 per cent of these institutions have an enrolment of 81-160. They are underutilised. The infrastructure of these institutions needs to be used for vocational education, with participation from local industry. But because of the struggles between the MHRD and the Labour Ministry between 2011 and 2013, the National Skills Qualification Framework, the basis of this reform, could barely be implemented. It is being rolled out slowly now. Recent government interventions have been too timid.The case of China: The reason why in China half of all children completing nine years of compulsory schooling enter vocational education at the senior secondary level is that they emerge highly employable after three years, of which one year is spent in practical training in industry (unheard of in India). China is a manufacturing superpower because it has human resources to staff semi-skilled and skilled tasks at the lower and middle levels. ‘Make in India’ cannot succeed without the base of the vocational education training system in the country being widened well beyond the limited number of private providers and ITIs who populate this space. But for this to happen, our new government has to use its goodwill with industry, that has backed it to the hilt so far, to expand the objective of ‘Make in India’ to ‘Skill India.’ Employers complain bitterly about the quality of vocational education training graduates in India — whether from secondary schools, ITIs, polytechnics or engineering colleges.But ironically only 16 per cent of Indian firms carry out any in-firm training themselves, as against 80 per cent of Chinese firms. Most of the 16 per cent are large firms (often foreign ones); the majority of firms are micro, small and medium size and do little training that is informal or no training. Our surveys have shown that these firms have even avoided participating in the government’s apprenticeship scheme since 1961.Industry, whether in services, manufacturing or construction, will have to offer its staff as instructors. It will have to offer internships, participate in curriculum redesign to suit its needs and participate in assessments of competencies based on national occupation standards. Some of this work has begun (with FICCI/CII and some firms taking the lead), but ‘Make in India’ risks remaining a slogan if we are not able to rapidly upscale the number of people who should acquire technical and soft skills, from about 5 million to 20 million a year, to make them industry-ready. Demographic dividend cannot be harnessed without faster non-agricultural job creation for skilled youth.

(Santosh Mehrotra is professor, Jawaharlal Nehru University, and the author/editor of India’s Skills Challenge.)