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Finance minister Nirmala Sitharaman, called for a "significant" reduction in the central bank's policy rates and said the government did not intend to review the budget proposal for overseas sovereign borrowings, the Economic Times (ET) reported on July 29.

India's benchmark 10-year bond yield was down 10 bps at 6.43% after falling to 6.42% immediately after market opened on the back of her comments.

The minister also said the increase in surcharge on foreign portfolio investments (FPI) was not intended to hurt investors, according to an interview published by the paper.

An influential Hindu nationalist group close to Prime Minister Narendra Modi's ruling Bharatiya Janata Party has demanded his government review its plan to raise money by selling foreign currency bonds, Reuters reported earlier this month.

"I am not doing any review. I have not been asked by anyone to do a review," Sitharaman told ET.

The minister also told the paper there was room for further interest rate cuts.

"I'll honestly wish rate cut and yes a significant rate cut, would do a lot of good for the country," Sitharaman told the paper in an interview.

"We will now have to look at that route with a lot more hope. And, the industry also feels that there is space for it."

Indian shares pared early gains and moved lower on Monday with the broader NSE Nifty falling 0.3%.

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US economic growth slowed less than expected in the second quarter as a surge in consumer spending blunted some of the drag from declining exports and a smaller inventory build, which could further allay concerns about the economy's health.

The fairly upbeat report from the Commerce Department will probably not deter the Federal Reserve from cutting interest rates next Wednesday for the first time in a decade, given rising risks to the economy's outlook, especially from a trade war between the United States and China.

Despite the better-than-expected GDP reading, business investment contracted for the first time since early 2016 and housing contracted for a sixth straight quarter. Fed Chairman Jerome Powell early this month flagged business investment and housing as areas of weakness in the economy.

But the signs of robust consumer spending, together with a strong labor market, further diminish expectations of a 50 basis point rate cut and could raise doubts about further monetary policy easing this year.

Gross domestic product increased at a 2.1% annualized rate in the second quarter, the government said. The economy grew at an unrevised 3.1% pace in the January-March quarter.

Economists polled by Reuters had forecast GDP increasing at a 1.8% rate in the second quarter.

The economy is slowing largely as the stimulus from the White House's $1.5 trillion tax cut package fades. The tax cuts together with more government spending and deregulation were part of measures adopted by the Trump administration to boost annual economic growth to 3.0% on a sustained basis.

The economy grew 2.9% in 2018 and growth this year is expected to be around 2.5%. Economists estimate the speed at which the economy can grow over a long period without igniting inflation at between 1.7% and 2.0%.

The GDP report showed a pickup in inflation last quarter. A gauge of inflation tracked by the Fed increased at a 1.8% rate last quarter, just below the US central bank's 2% target.

The government also published revisions to GDP data from 2014 through 2018. The updated data showed growth in the second and third quarters of last year was not as robust as previously estimated, and the economy grew much more slowly in the fourth quarter than had been reported in March. Revised price data showed moderate inflation last year.

STRONG CONSUMER SPENDING

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, surged at 4.3% rate in the second quarter, the fastest since the fourth quarter of 2017. Consumer spending grew at a 1.1% rate in the first quarter.

Some of the slowdown in consumer spending early in the year was blamed on a 35-day partial shutdown of the government. Spending is being supported by the lowest unemployment rate in nearly 50 years, which is lifting wages.

The jump in consumer spending helped to offset some of the weakness from exports, which fell at a 5.2% rate last quarter, in a reversal of the strong growth experienced in the first quarter.

The plunge in exports caused a deterioration of the trade deficit. As result, trade subtracted 0.65 percentage point from GDP growth last quarter after contributing 0.73 percentage point in the January-March period.

The acceleration in consumer spending also helped businesses to whittle down an inventory overhang, leading to a smaller inventory build.

Inventory investment increased at a $71.7 billion rate, slowing from the first quarter's $116.0 billion pace of increase. While inventories cut 0.86 percentage point from GDP growth in the second quarter, the smaller pace of stock accumulation is a potential boost to manufacturing.

Businesses have been placing fewer orders with factories while working through stockpiles of unsold goods, which contributed to undercutting manufacturing production. Inventories added 0.53 percentage point to GDP growth in the first quarter.

Business investment fell at 0.6% rate in the second quarter, the first contraction since the first quarter of 2016. It was pulled down by a 10.6% pace of decline in spending on structures, which includes oil and gas well drilling.

Spending on intellectual products, including research and development, increased. Business spending on equipment rebounded at a 0.7% rate in the second quarter. It is seen constrained by design problems at aerospace giant Boeing BA.N.

Boeing reported its biggest-ever quarterly loss on Wednesday due to the spiraling cost of resolving issues with its 737 MAX airplane and warned it might have to shut production of the grounded jet completely if it runs into new hurdles with global regulators to getting its best-selling aircraft back in the air.

The plane was grounded worldwide in March after two fatal crashes in Ethiopia and Indonesia. Production of the aircraft has been reduced and deliveries suspended.

Growth in government investment accelerated, but spending on homebuilding contracted for a sixth straight quarter.

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In the movie ‘3 Idiots’, the director of an engineering institute asks the students, “Who was the first person to step on the moon?” The students answered Neil Armstrong. He then asked “who was second?” Even before the students could answer, he said it does not matter as no one remembers who came second!

We can extend the analogy to the CEOs and MDs who are credited with success or blamed for the decline of organisations, but barely any attention is paid to their deputies.

Likewise, in the central banking world, it is the Governors who are remembered and not deputy governors. The crisis or success of monetary conditions is often attributed to the Governor with the name of the deputies never even mentioned.

Outgoing RBI deputy governor Viral Acharya did make efforts to change this hierarchy. He was not willing to play second fiddle to the Governor and built his own image.

His tenure started in January 2017 at a time when India was reeling under demonetisation. The early days were not that noticeable though he took up the important portfolio of monetary policy and economic research and also took up the cause of establishing public credit registry. Few had ideas that he was about to raise a storm in Indian economy.

The storm was raised in October 2018, when Acharya gave a speech which made most people -- including this author -- rub their eyes in disbelief. In his speech, Acharya openly criticised the Indian government for taking away the independence of the RBI. He cited the example of Argentina whose central bank has always been under pressure from the government only to invite ‘wrath from markets’. Comparison to the Argentinian central bank may have been far-fetched, but created the desired impact.

The speech opened a can of worms and led to a bitter squabble between the government and the RBI. Several issues such as the government eyeing a share of RBI’s reserves and using Section 10 of the RBI Act came to the fore. This was followed by the resignation of RBI Governor Urjit Patel in December 2018.  For central bank watchers, it was not a question of whether Acharya will resign but when. Thus it was not surprising when he chose to resign in June, six months before completion of his 3-year term.

Whether one liked the speech or not, it will go into the annals of the history of central banking as one of the most aggressive defences of central bank independence. That too from a deputy governor! Most Governors would think twice giving a speech on central bank independence and those who do, choose softer words and tone.

The October speech was not the lone one. He chose to leave the RBI with another hard-hitting speech where he questions the high government borrowing and how it is creating investment problems for the private sector. The speech was earlier given at IIM Ahmedabad -- in which the author was present -- and later as Hormis Memorial Lecture organised by Federal Bank in memory of its founder K P Hormis.

In the lecture, he asked the following question: Does government borrowing crowd out the private sector in India and what are its ramifications? To buttress his point, he shows how India’s fiscal deficit is second highest among G-20 countries.

This is obviously surprising to the common man who often learns from the financial press that India continues to meet its fiscal deficit target which is low and this augurs well for Indian economy. However, the catch is we mostly report the deficit number of the Centre ignoring that of the state governments. If we include the latter, we are placed just next to Brazil which suddenly makes the Indian economy look more vulnerable than it is made out to be.

Acharya went on to argue that if extra government spending was done to meet its capital expenditure, it is still fine and welcome. But that is not the case as the share of capital expenditure in total expenditure has consistently been around 15 percent. Further, as domestic savings are mostly used to finance the deficit, the private sector is crowded out and becomes reliant on capital flows from abroad. These capital flows are fickle and easily exit markets when there is a rise in global uncertainties as seen in 2013.  This makes private sector investment vulnerable to the global economy.

He spoke of three channels of crowding out. First is the real channel which says that when government borrowing increases, it leads to anticipation of higher taxes in future (called Ricardian equivalence). This leads the private sector to stop investing as they are likely to be taxed higher in future.

Second is bank lending channel where banks end up buying more government debt and do not lend to the private sector.

Third is corporate bond channel where financial companies such as mutual funds, insurance companies etc. begin to buy more government bonds compared to corporate bonds.

In the first channel, the private sector is not willing to invest and in the other two, it is not able to get funds for investment. In India, the bank credit channel is stronger than corporate bond channel. It also influences financial stability as corporates are forced to issue shorter-term bonds as the interest rates are high in the longer term.

Acharya also shows how crowding out is stronger when there are low foreign capital flows compared to the phase when it’s high. This also proves that when companies actually need more domestic savings as foreign inflows are weak, they are crowded out more.

The impact is even seen on interest rates. His research shows that when government debt rises by 1 percent, yields of AAA corporate debt rise by 2.3 percent, making it costlier for even the highest-rated firms. Monetary transmission is also stronger when share of government debt is below the median level.

His suggestion to the government is four-fold.

First, improve share of capital expenditure so that more spending is on public goods than meeting revenue expenditure of running the government.

Second, increase the share of disinvestment programme in the overall revenue, which will reduce borrowings and debt.

Third, establish an independent fiscal council that verifies the fiscal accounts and takes into account off-balance sheet borrowings which hide the true fiscal deficit.

Four, continue the emphasis on structural reforms on policy matters such as GST, the Bankruptcy code and on sectors such as labour and agriculture.

In the end analysis, the governments can bolster central banks by appointing capable deputies with an independent mind. This is evident from other geographies as well. Prominent examples include Guo Shuqing, deputy governor at the People’s Bank of China who gave a piece of his mind to the US government and Riksbank’s Cecilia Skingsley whose speeches have been useful in understanding digital currency. However, in today’s times, it is likely that governments want independent minded central bank officials as frictions have hit a new high or low, depending on which way you look at it.

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Former Reserve Bank of India governor Raghuram Rajan is among the front runners for the post of International Monetary Fund’s managing director, days after Britain’s Foreign Office was urged to back an Indian for the job, according to media reports in the United Kingdom.

The IMF role fell vacant after current MD Christine Lagarde announced her resignation last week after she was nominated by the European Council as president of the European Central Bank. Her resignation takes effect from September 12.

As demands grow for the next IMF MD pick to be from outside Europe and America — as British foreign affairs committee chairman Tim Tugendhat wrote in a letter to foreign secretary Jeremy Hunt – The Sunday Times mentioned 53-year-old Rajan among the likely candidates.

“This is an ideal time for the job to be opened up to an emerging-market candidate. Raghuram Rajan, the former governor of India’s central bank… has good IMF credentials as one of its former chief economists,” wrote The Sunday Times’ economics editor David Smith.

Besides Rajan, names mentioned for the IMF role include the outgoing governor of Bank of England Mark Carney, former chancellor in the David Cameron government George Osborne, and former Dutch finance minister Jeroen Dijsselbloem who headed the group of finance ministers during the eurozone crisis.

Rajan, currently a professor at the University of Chicago, was often mentioned by the British media as the probable next governor for the Bank of England (BoE) — whose selection process is currently underway.

He has, however, denied applying for the job.

In an interview to BBC HARDtalk to be telecast on July 22, Rajan continued denying the rumours about being the next BoE governor, “I am perfectly happy in my job and that is not a diplomatic statement. It’s actually the truth. I haven’t applied for any job.”

“I really believe that the central banker’s job has become much more political in recent times. For that, it’s best that a country have somebody who understands the political structure within that country and how to navigate that.”

“That is something that people have to take into account when they determine who they want as the central bank governor. It’s obvious that I am an outsider and I have very little understanding of the deep ebbs and flows of politics in this country,” he said during the interview.

The new Bank of England governor is scheduled to be appointed later this year.

Carney’s term has been extended until January 2020 to support a smooth exit of the United Kingdom from the European Union and an effective transition to the next person in the key role.

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After touching record highs, the foreign exchange reserves declined by $1.113 billion to $428.797 billion in the week to July 12 - the first fall after four consecutive weeks of gains - due to a fall in foreign currency assets, show the latest weekly RBI data. In the previous reporting week, the reserves had surged by $2.236 billion to scale a new life-time high of $429.911 billion.

In the reporting week, foreign currency assets, which are a major component of the overall reserves, slipped by $1.11 billion to $399.697 billion, the central bank said July 19.

Expressed in dollar terms, foreign currency assets include the effect of appreciation/depreciation of non-US units like the euro, pound and yen held in the reserves.

Despite ongoing massive rally in gold prices, the country's gold reserves remained unchanged at $24.304 billion, according to the central bank data.

Special drawing rights with the International Monetary Fund fell by $1.2 million to $1.450 billion. The country's reserve position with the fund also declined by $1.5 million to $3.345 billion.

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Sticking to his analysis that India's economic growth has been overestimated, Arvind Subramanian said he had raised doubts about the GDP numbers in 2015 when he was the chief economic adviser of the Modi government as he found inconsistency between projected growth and other macro indicators.

In a new paper 'Validating India's GDP Growth Estimates', the former CEA said he had indicated his doubts on the growth numbers in the Economic Survey in 2015 as well as mid-year Economic Analysis.

During 2011-2016, the period he deduced to have seen GDP growth being overestimated by 2.5 percentage points, the Indian economy was hit by a series of shocks - export collapse, twin balance sheet problem, drought, and demonetisation.

"Growth in real credit to industry collapsed, falling from 16 per cent to minus-1 per cent, mirrored in the official figures for real investment growth, which declined from 13 per cent to 3 per cent; Real exports fell from 15 per cent to 3 per cent; Overall real credit slowed from 13 per cent to 3 per cent; and real imports slowed from 17 per cent to minus 1 per cent," he wrote.

But the new GDP series, adopted in 2015, suggested that "despite all these large shocks, economic growth declined by very little, slipping from 7.7 per cent to 6.9 per cent. This situation invites a question: is it really possible that these five large adverse shocks had such little impact on GDP growth?" he asked.

India's gross domestic product (GDP) growth rate between 2011-12 and 2016-17 should have been about 4.5 per cent instead of the official estimate of close to 7 per cent.

"In January 2015, the CSO released new estimates using a new base year (2011-12 versus 2004-05), new data and new methodology. My team and I reviewed these estimates carefully - and immediately had questions about the new numbers. We consequently investigated the matter, but still could not find convincing answers, so we began to express our doubts internally and then externally," he said, pointing to a box he had put in the Economic Survey of 2015 raising doubts on the numbers.

Countering the government arguments that had rubbished his June research on GDP numbers, Subramanian said the NDA government did bring reforms such as GST and new insolvency and bankruptcy law but these would "deliver growth benefits in the medium term".

He rubbished productivity surge argument saying if that was so benefits accruing to firms in the form of higher profits would have been seen.

He also rubbished the consumption surge argument advanced by the government to counter his claim, saying if India had suddenly developed a unique model of sustained consumption-led growth it would have reflected in consumer confidence being high but the RBI's monthly Consumer Confidence Survey paints a different picture.

On the government argument that India's tax-GDP ratio rose post-2011 period, he said revenues are affected by more than just economic growth - "they are also affected by changes in tax policies and administration. Amongst the latter were the spate of measures to unearth black money, including demonetisation which led to a spike in collections in 2016," he said.

Stating that a variety of evidence suggests that it is likely that India's GDP growth is being overestimated by the new methodology, he said the country's sustained high measured GDP growth after 2011, despite large negative macro-economic shocks, is in contrast to the experience of other large emerging markets.

Also, India clocked significantly higher measured GDP growth than all other countries in the post-1980 period, with the same export and investment growth rates, he said.

"The evidence suggests that measurement changes likely caused India's GDP to be overestimated in the post-2011 period. Moreover, while it is not possible to say precisely what India's GDP would have been absent the measurement changes, the evidence suggests that the discrepancy in measured GDP growth post-2011 is likely to be significant," he added, suggesting the GDP methodology being re-visited.

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Customers may have to shell out more for petrol and diesel from April as fuel retailers are looking to pass on the higher cost of producing Bharat Stage VI-compliant fuel, said two senior officials at the companies.

This would help the state-run fuel retailers recoup their investments in upgrading their refineries to produce the cleaner fuel, the officials said, requesting anonymity. They said a final decision would be subject to government approval. The refiners are estimated to have spent more than Rs 30,000 crore to improve their facilities, with India set to implement BS VI emission norms, the equivalent of Euro VI, from 1 April.

“We have made large investments in upgrading to BS VI and we need to get a return on our investments. This is only logical. The thought process is to recover cost and not profit-making," one of the two officials cited earlier said on condition of anonymity.

“The price increase could be anywhere between a few paise to a maximum of Rs 2, which is likely to be charged in the form of a special cess or duty," said the second official. The Auto Fuel Vision and Policy 2025 in June 2014 had recommended a 75 paise cess to recoup additional investments projected for producing cleaner fuels.

“Pricing for petrol and diesel would be different and it will be averaged out according to what each company has invested,” the second official said. “The pricing would be decided closer to the launch and discussions are on to suggest to the government that we have made such huge investments and would like them to find a method for us to recover the same.”

Another increase in auto fuel prices would be a double whammy for consumers. Petrol and diesel prices rose by about Rs 2 each after the government imposed an additional special excise duty of Rs 1 per litre as well as a road and infrastructure cess of Rs 1 per litre on the fuels in the Union Budget for 2019-20.

“A fuel price increase is certainly required by the oil marketing companies given they have invested substantially to upgrade to BS VI. They need to recover at least their cost," said K Ravichandran, Group Head for Corporate Sector Ratings at ICRA. “Though it will be an additional burden on the consumers, it would be beneficial for the environment as the fuel will help reduce pollution. However, if the extent of fuel price increase is anything more than Rs 1 per litre, it would be a stretch for the consumer given the Rs 2 per litre hike in prices recently on account of additional cess/duties.”

Retail prices of petrol and diesel in India are linked to their prices in global markets and not that of crude oil. However, the price of crude, which makes up about 90 percent of the cost of these refinery products, is the biggest determinant in their retail prices.

Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) did not respond to queries emailed on July 12. A spokesperson for Indian Oil Corporation said in an emailed response that the “pricing of BS VI (is) to be decided in due course”.

India is shifting to the stringent BS VI emission norms as the government seeks to arrest rampant pollution in most of its major cities. BS VI fuel is said to significantly reduce greenhouse gas emissions, especially carbon dioxide, unburnt hydrocarbons or methane and oxides of nitrogen. It has sulphur content of 10 parts per million (ppm) against 50 ppm in BS IV.

Emissions from vehicles are one of the top contributors to air pollution, which led the government at the time to introduce the BS 2000 (Bharat Stage 1) vehicle emission norms from April 2000, followed by BS II in 2005.

BS III was implemented nationwide in 2010. However, in 2016, the government decided to meet the global best practices and leapfrog to BS VI norms by skipping BS V altogether.

To ensure a smooth transition to the proposed emission norms, the automotive industry, along with its representing body, Society of Indian Automobile Manufacturers, has requested the fuel retailers to provide BS VI grade fuel at least 30-45 days ahead of the April 2020 deadline.

Pawan Goenka, Managing Director of Mahindra & Mahindra (M&M), said prices of BS VI-compliant petrol vehicles are likely to rise by Rs 25,000-50,000 and diesel vehicles by about Rs 1 lakh over the existing BS-IV models.

With prices set to rise, some automakers are rejigging their portfolio by either discontinuing diesel-powered vehicles or those which have low sales volume.

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The Finance Ministry on July 12 said that it will look into the applicability of 20 percent tax proposed in Budget 2019 on the going share buybacks by listed companies.

Finance Secretary Subhash Chandra Garg, speaking at a CII event, said the proposed tax on listed companies is aimed at discouraging share buybacks and encouraging investments.

Asked if the government would consider grandfathering those share buybacks which are already underway from the proposed levy, Garg said, "I am not in a position to say whether that (grandfathering) can work or not, but we will discuss it with the revenue department."

In her Budget speech, Finance Minister Nirmala Sitharaman proposed that listed companies shall be liable to pay additional tax at 20 per cent in case of buyback of share, as is the case currently for unlisted companies.

The move was aimed at discouraging the practice of avoiding Dividend Distribution Tax (DDT) through buyback of shares by listed companies. DDT is paid by companies who distribute their profits to their shareholders in the form of dividends.

Garg said that buyback is mainly undertaken by those companies which have cash but see no investment opportunities.

"Our preference would be they invest so that there is no need to do a buyback. In this economy, how the buyback is being done in digital economy space, there also an enormous opportunity (for investment) to exist ... Our objective was to close the arbitrage ... the intent is to encourage investment," he said.

Share buybacks offer a route for companies to return some wealth to their shareholders, while potentially boosting their stock prices. In a share buyback, a company will absorb or retire the repurchased shares, and rename them as treasury stock.

Buying back stock is also a route to make a business look more attractive to investors. By reducing the number of outstanding shares, a company's earnings per share ratio are automatically increased.

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Oil marketing companies will save Rs 400-500 crore annually every year with the proposed removal of merchant discount rate (MDR), two company executives said.

MDR is a card transaction fee paid by the merchant — in this case, the fuel company—and shared by banks which put up the swipe machine and issue the card, and payment networks like Visa and Mastercard.

MDR is not passed on to customers.

In her maiden Budget speech, Finance Minister Nirmala Sitharaman said that no MDR shall be imposed on merchants who allow their customers to make payments through low-cost digital payment modes.

“There are low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain debit cards, NEFT, and RTGS," she said.

The Finance Minister said the Reserve Bank of India (RBI) and banks will absorb these costs from the savings that will accrue to them on the account of handling less cash as people move to these digital modes of payment.

Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation, have been bearing MDR on behalf of their dealers for more than a year now.

“Withdrawal of MDR is a welcome move. This will result in a yearly savings of up to Rs 500 crore for the oil marketing companies," said a senior official from an OMC, one of the two people cited earlier on the condition of anonymity.

Surcharging and high MDR charges are two of the reasons impeding growth and sustenance of digital payments despite measures being taken to promote it, according to a study by the Indian Institute of Technology, Bombay, released in March.

Unauthorised surcharging has burdened the payment system users with huge additional costs, according to the study by Ashish Das, a professor of statistics.

It is estimated that the merchants were burdened with nearly Rs 10,000 crore towards credit card MDR fee in 2018 alone as against the overall cost of Rs 3,500 crore towards debit card MDR, even as in value terms, credit and debit card transactions are almost similar at Rs 5.7 lakh crore each in 2018. “We had been in discussions with the banks to reduce this financial burden, but to no avail. It’s a good move," said the second official mentioned above on the condition of anonymity.

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Our Finance Minister, Nirmala Sitharaman is all set to present her first Budget. Though she has the benefit of unhindered support from the legislation due to a stable government, coming to power with a clear and substantial majority, there are a lot of expectations from her.

She has to ensure that the Union Budget not only fulfils the electoral promises made by the ruling party but also ensure a revenue-neutral budget so that there are no substantial losses incurred by the exchequer; and the long term economic objective of the government can be met.

Therefore, in consideration of these current contexts, the Indian corporate sector, with which the present finance minister has engaged on several occasions to discuss budgetary provisions, has the following expectations:

• Reduction in corporate tax rates:

India has one of the highest corporate tax rates, amongst competing economies, which clearly affects its score in the ‘Ease of Doing Business’ index. To address this issue, the erstwhile Government, in 2015, had proposed a reduction in corporate tax rates, along with the corresponding withdrawal of exemptions in the next four years.

Presently, the diminished tax rates are only applicable to a certain category of corporates which fulfil some specific criteria. Corporates expect that the government will implement a universal corporate tax rate of 25 percent.

They also expect the benefit to be extended to partnerships firms and Limited Liability Partnerships, as well thus allowing the benefits to flow into the Micro, Small and Medium Enterprises (MSME) sector.

• Road map to Direct Tax Code:

The stipulated date for the task force to submit its draft report on the Direct Tax Code has been extended till July 31, 2019. Since this is close to the Budget day, it is expected that the government may clarify the possible direction of the code so that the nation and general populace gets a preview of what may be the direct tax structure of the country in the near future.

• Angel Tax woes:

Start-ups have been a part of the political agenda since the erstwhile NDA-led government declared its flagship, Make in India programme.

Start-ups are seeking greater convenience of creating and doing business, which in turn allows them to focus more on innovation rather than compliance issues, thus fostering growth in the economy.

They expect single-window clearance to be available for compliance. Moreover, to boost employee retention and wealth creation of employees, they seek undemanding regulations on Employee Stock Option Schemes (ESOPs).

From a tax perspective, the present scenario with regard to the issuing of shares by closely held companies is fraught with unnecessary challenges.

If a closely held company issues its shares at a price more than its fair market value, then the amount received in excess of the fair market value is taxable as income from other sources, under section 56(2) (vii) (b) of the Income Tax Act (the Act).

To motivate and invigorate budding entrepreneurs, the government relaxed the interpretation attributed to the definition of start-ups and has made companies with sales of up to Rs 100 crore (previously, the exemption limit was Rs 25 crore) eligible for angel tax relief.

However, in this budget, the start-up community expects a complete exemption from tax under Section 56(2) (vii) (b) of the Act.

• Transition to Ind-AS:

One of the major developments in the accounting arena recently has been the migration of companies from I-GAAP accounting standards to Ind-AS. This entails a major shift from the principles of traditional accounting with which Indian corporates are still in the process of reconciliation.

In addition, the Indian tax laws are geared to handle items of adjustments under I-GAAP. However, there are no clear principles of treatment of typical adjustments arising from Ind-AS.

A majority of the Ind-AS adjustments are fair value adjustments and it would be desirable to have specific treatments being prescribed in the Act to account for such adjustments, to ensure uniformity of taxation and reduction in potential litigation.

• Thermal power sector:

The sector, which is the major contributor to India’s energy demands, faces gnawing concerns over the availability of fuel, the poor financial health of distribution companies and competition from the renewable energy sector.

The sector is expecting a re-institution of the deduction of an amount equal to 100 percent of the profits and gains derived from power generating business. The government may consider extending the sunset clause to provide relief to the power industries.

However, such expectations may be overly optimistic, considering the government’s clear intention to rationalise corporate tax rates and eliminate incentives gradually.

• Anti-avoidance and anti-abuse measures:

India has been the tip of the spear, in the battle against tax avoidance, with Indian policymakers constantly augmenting the legal framework counter mechanisms used for tax avoidance and treaty abuse.

A recapitulation of the Budget proposals made in the last decade is a clear indication of this intention and showcases several important measures adopted by India in consonance with the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) Action Plans.

The key anti-avoidance measures include General Anti-Avoidance Rules (GAAR), Place of Effective Management (POEM), indirect transfer taxation. The prominent BEPS related measures include equalization levy, Country by Country Reporting (CbCR) for transfer pricing, and Significant Economic Presence (SEP) based concept. One may expect further such adoptions, in the upcoming Budget.

India, in an attempt to tackle the problem of taxing the digital economy (Under BEPS Action Plan 1), introduced the concept of SEP in the Union Budget 2018. This was a gratifying step as far as taxation of the digital economy was concerned. However, the implementation of SEP provisions, especially in its current form, may create some concerns.

Previously, the government had invited comments and suggestions from stakeholders on the revenue and user thresholds, for the application of SEP provisions, but the final clarification/notification from the government is still awaited.

As these provisions are likely to impact key global digital economy players, the international tax community is watching with interest. The government is expected to introduce the clarifications/rules in the upcoming Budget.

• Issue of tax refunds:

Currently, there exists the practice of issuing a tax refund through cheques. This method should be completely substituted by direct online fund transfers. This change should be implemented on a war footing, as this would end many taxpayers’ grievances regarding refunds. This change in method will also reduce/eliminate manipulation and corrupt practices.

It remains to be seen if the government can meet all these expectations while ensuring sound economic growth.