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As
the recent high-powered committee on making Mumbai an
international financial centre emphasised, we have indeed
dismantled an “autarkic license-permit raj” in
industry and trade; but we need to do it again in finance.
It would step up efficiency and productivity across the
board, and lead to better allocation of resources.
The way ahead is to have a
tax regime in finance that does away with cascading rates,
including stamp duty, registration duty and the securities
transaction tax. Instead, what’s required is sound tax
design for a goods and services tax (GST) in finance.
Given
the practical difficulties in having in place a
comprehensive GST for financial services, a staggered,
multi-year approach needs to be followed through. And
once such a tax regime is in place, it would be
simultaneously possible to remove turnover taxes,
including stamp duty and STT. Perhaps the finance
minister needs to announce that a technical committee
would be set up to workout the mechanics and logistics
of going about it.
There’s a case for tax reform when it comes to the
consolidation of accounts. As per Indian GAAP norms, a
listed holding company has to present stand-alone and
consolidated accounts. But for income-tax purposes,
such consolidation of accounts is not permissible.
However, at a conceptual level, it cannot be said that
it is desirable to tax a group on the basis of its
‘overall financial performance.’
The idea is to incorporate the performance of all
subsidiaries taken together. In jurisdictions abroad,
including in the UK and the US, the standard practice
is to levy tax on a corporate group ‘as a single
unit.’
There are other anomalies in the tax treatment in
finance. For example, when a subsidiary company pays
dividend to its holding company, it pays a dividend
tax of 14.025%. But a dividend payout by the holding
company to shareholders means a ‘second dividend tax
of 14.025%.’
So the tax code thoroughly disincentivises the
‘holding company structure.’ Now, the aim of a
holding company route is to support listing and
operations of a set of finance companies that may span
the entire gamut of financial services.
But the fact remains that Section 297 of the Companies
Act ‘constrains the utilisation of the services of
any group company by another.’ And even when group
companies have a common management structure, ‘prior
approval’ of the centre is necessarily warranted to
unlock synergy.
It suggests excessive and quite needless oversight.
Instead, what’s needed is adequate provisions for
transparency in corporate governance procedures. There
are still other aberrations in Indian finance.
The most important ‘deficiencies’ pertain to the
absence of efficient and liquid bond, currency and
derivative markets. The latter would include credit,
interest rate and currency futures and options. All
three markets need to develop rapidly with domestic
and overseas participation. It would mean vigorous
trading in the spot and futures markets, with much
possibility for arbitrage opportunities to guarantee
transactional liquidity in the marketplace.
The objective ought to be to chalk out a more
realistic yield curve that shows the term structure of
the going interest rates. A vibrant yield curve is a
key signalling device in the mature markets. So the
continuing absence of sufficient depth in the
corporate bond and government securities market,
together with shortcomings in the trading of currency
and derivative instruments, does stultify
informational and everyday operational efficiency in
finance.
The lack of modern financial markets is actually
counterproductive when it comes to public debt. For,
in financing the fiscal deficit, a credible system
requires that sovereign and sub-sovereign bonds be
bought ‘voluntarily by any kind of buyer,’ sans
coercion, direction and restriction. And this is far
from the case at present.
It needs to change. After all, a sophisticated
financial system requires an active sovereign bond
market as a ‘credit bellwether.’ As the
high-powered committee report concluded, the asset
portfolios of banks, insurance companies and pension
funds are much ‘repressed’ by fiat at present.
With clear-cut financial sector reforms and opening
up, the three sectors are likely to ‘grow
dramatically.’ In tandem, it will imply new sources
of demand for government securities.
However, if greater demand for the bonds is not
matched by increased supply, the prices of such gilts
should rise with the coupon rates suitably reduced. It
would mean more efficient financial markets. The
Budget needs to set the ball rolling for the much
needed financial sector reforms.
Source
: Economic Times - Gurgaon, Haryana, India, dated
27/02/2008
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