Rahul Jindal – Kailasha Foundation

Portfolio Management: An Alternative to Insurance

Rahul Jindal — Wed, 16 Jan 2019 05:30:07 +0000

There was a very cautious man

Who never laughed or played

He never risked, he never tried,

He never sang or prayed.

And when he one day passed away,

His insurance was denied,

For since he never really lived,

They claimed he never really died.

Okay, to begin with, I have to say the poem is nothing to do with what we will be talking about, this was just enough to break the ice.

Robert Shiller stated, Portfolio Management is an alternative to Insurance.

The basic idea about insurance or getting insured to minimize the losses incurred in case of happening of an uncertain event.

A portfolio is pretty much the same idea, it is the diversification of ownership. It’s an idea of managing risk not through purchasing of insurance policy, but through diversification (owning a variety of asset).

A risk is inherent in investing, thus we diversify the investment by buying different assets and not putting “all our eggs in one basket”. I guess you have heard a lot of times about that phrase, but I like the history of thought, so I tried to find out when was this phrase used at the earliest, the best I could find that it itself was used by Alexander Crump in 1874, in his book on how to invest, where he wrote, “It is an old saying that is unwise to put all your eggs in one basket”.

A later insight –

If all people are like me, thinking the same thing and trying to hold the same kind of portfolio, then still why is it different from one person to another? The core insight of the theory is, you know what, even if I calculate the optimal portfolio, the best-diversified portfolio, then how is it different from others?

Well, you could be different from others because you might be more risk-averse than others. You might have a greater or lesser risk tolerance. But that tolerance to risk could be adjusted by leveraging your portfolio up and down.

I have a rather interesting explanation for leverage though! So a lever is something used to move things, and leverage is how you move people. Imagine, if I was in need of money, and then I go to a bank for a loan, then the bank will have leverage over me and the will charge me with high-interest rates. Similarly, before 2010 when there was no Obamacare policy in the US, only people who were sick or who knew they were going to be sick, bought health insurance and thus the insurers had leverage over them and they charged high rates. Same is with your portfolio, you get leverage over the risk. If you are a rational economic person, you will have portfolio management so that you don’t have to worry about a stock going down, it’s the total that matters to you.

Conclusively, if we compare portfolio management and insurance it’s basically the same idea to minimize the risk. Investors do it by diversification, and insurance companies do it with what they call as risk-pooling, where insurance companies come together to form a pool, which can provide protection to insurance companies against catastrophic risks such as floods or earthquakes.

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DECIPHERING THE “LETTER STOCK” CONUNDRUM

Rahul Jindal — Sun, 09 Dec 2018 05:54:22 +0000

FOR IT IS NOT ONLY THE TYRO WHO NEEDS TO BE WARNED THAT WHILE ENTHUSIASM MAY BE NECESSARY FOR GREAT ACCOMPLISHMENTS ELSEWHERE, ON WALL STREET IT ALMOST INVARIABLY LEADS TO DISASTER.

~BENJAMIN GRAHAM~

New development such as the rapid development of conglomerate companies, franchise operations, and other relative novelties in business and finance, which include a number of tricky devices such as the letter stock, proliferation of stock-option warrants, misleading names, use of foreign banks, and others have been there since the 1960s.

Our recent reading what brought this upon was the enigma of why the US Securities and Exchange Commission (SEC) brought down a private transaction and is now no longer of concern to the investors. Quite engrossing isn’t it?

“Letter Stock” is a stock not registered for sale with the Securities and Exchange Commission for which the buyer supplies a letter stating the purchase was for investment. But this isn’t the same now. As said earlier it is now no longer of concern to investors. So as of now “Letter Stock” is known as ‘Restricted Stock’ or ‘Section 1244 Stock’. Restricted stock is used as a form of employee compensation, in which case it typically becomes transferrable (“vests”) upon the satisfaction of certain conditions, such as continued employment for a period of time or the achievement of particular product-development milestones, earning per share goals or other financial targets. It typically becomes available for sale under a graded vesting schedule that lasts several years.

These are unregistered shares of ownership in a corporation that are issued to corporate affiliates, such as executives and directors. Restricted stock is non-transferable and must be traded in compliance with special Securities and Exchange Commission (SEC) regulations.

Restricted stock became more popular in the mid-2000s as companies were required to expense stock option grants. Insiders are given restricted stock after merger and acquisition activity, underwriting activity, and affiliate ownership in order to prevent premature selling that might adversely affect the company. An executive may have to forfeit restricted stock if he leaves the company, fails to meet corporate or personal performance goals, or runs afoul of SEC trading restrictions. The SEC regulations that govern the trading of restricted stock are outlined under SEC Rule 144, which describes the registration and public trading of restricted stock and the limits on holding periods and volume.

But this information can be availed from anywhere, why are we reading this?

During the mid- 1960s, the mutual funds bought the “Letter Stock” in a private transaction, then immediately revalued these shares at a higher price. This enabled these “go-go” funds to report unsustainably high returns in the mid-1960s. The U.S. Securities and Exchange Commission cracked down on this abuse in 1969 and brought upon some regulations and restrictions making it no longer a concern for fund investors.

Let us understand the enigma how these privately placed shares were giving such unsustainably higher returns.

Earlier, In case of letter stocks, the companies had the sole discretion in the method adopted for valuing the shares. Therefore, in order to inflate return the companies used to value their shares at a price substantially lower than the market value of the share. For e.g. a company declares dividend of INR100,000 and the market price of share is 1,000 then Return on Investment will be 100% , However in case of letter stock where the valuation is done by the company, and the shares are valued at INR500, then Return on Investment takes a stride to reach 200%, indicating erroneously high return by the company. The agenda behind this false defalcation has been only lure investors to infuse capital, for their future ventures.

Following is the one of the prominent cases arose during that period:

In June 1969, the Commission established an administrative proceeding against Frederic S. Mates (“Mates”), Mates Financial Services, Among other matters, it was alleged that, contrary to representations to Fund shareholders, Mates caused the Fund (a) to possess a considerable amounts of restricted securities, (b) to impede its shareholders’ right to redemption, and (c) to obtain from banks loans of more than $7 million secured by a lien on the Fund’s entire portfolio.

It was further alleged that Mates inflated the restricted securities and defalcated Fund of shareholders and clients, as well as prospective clients of Mates Financial Services subsequently, leads to an increase in the net asset value per share.

Security Exchange Commission came into notice of this fact and in order to curb this scenario of false returns, the Commission made a conscious effort of studying the valuation of restricted securities by investment companies, giving attention also to the correlated problems of liquidity and restraint of investment judgment which may arise when open-end companies acquire restricted securities. Consequent to the end of the fiscal year, the Commission issued a statement setting onward its views regarding the issues integral in the acquisition of restricted securities by investment companies.

Henceforth, we can settle with the fact that even in the financial history of the world there have been instances to deceive investors, but in one or other way, whether it is SEBI/RBI/NCLAT in India or the SEC in the US, find its way to fill up the breaks, in order to strengthen the pillar and at times, warrant the financial security of the depositors.

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Source:

https://www.sec.gov/about/annual_report/1969.pdf

Investopedia

The Intelligent Investor – Benjamin Graham

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What Is 107% Rule?

Rahul Jindal — Mon, 26 Feb 2018 05:30:21 +0000

“Any driver whose best qualifying lap exceeds 107% of the pole position time will not be allowed to start, save for exceptional circumstances accepted as such by the stewards of the Event. Should there be more than one driver accepted in this manner, their order will be read more

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Recapitalisation – Why do Banks need to Recapitalise?

Rahul Jindal — Wed, 15 Nov 2017 05:30:24 +0000

The Centre on October 24, announced a re-capitalisation plan of ₹2.1 lakh crore, unveiling a two-year roadmap to strengthen NPA-hit public sector banks, which includes re-capitalisation bonds, budgetary support, and equity dilution.

Why do banks need to recapitalise?

It’s like this. Banks create money. They can create money at will really. If I lend you money, and you put it back in a deposit in my own bank, I have created money.

Now, what constraints banks have, is their capital. For every loan I make, I need to have 10% of it as my capital. So if I have Rs 100, I can give out Rs 1000 in loans.

Now if I lose Rs 50 on those loans because some fellow defaulted (5% NPA) then my loss hits my capital. My capital falls to Rs 50.

Now I have only Rs. 50 on Rs. 950. So at this point, I have to raise capital to come back to 10% capital ratio. Or, I have to somehow call in loans. Calling on loans isn’t possible so I stop lending more.This is what has happened.

Public sector banks have frozen up on lending because they can’t lend more, as their capital ratios will not allow any more.

Banks have Rs 100 capital and have lent Rs 1500 (6% capital ratios) They have losses of Rs 50 they know about and are unwilling to take (net NPAs). So the government gives them Rs 50. Their capital increases to Rs. 150. Then they take the Rs. 50 loss.

So now they have Rs 100 capital on Rs. 1450 lent which is a better capital ratio than before.

Because of better capital ratios, banks can now raise more capital – say another Rs 50 is raised. Now they have the ability to lend another 500 rupees, to maintain say an 8% capital ratio.

Effectively, what the government wants to do is force banks to take losses by pushing NPAs to real losses, as the government replenishes the capital that is lost.

The recapitalisation programme for public sector banks is likely to boost equity market sentiment as it fuels growth recovery hopes, though the recapitalisation amount may create a supportive environment for growth, it may not drive growth by itself.

Given that over the last five years, the Centre has infused about ₹89,000 crore (2012-2017) into PSBs, the bounty is sure to please the markets. But given that the capital the Centre has infused over the past several years has not aided growth and only helped banks fund losses on account of huge loan defaults, there is an urgent need to also start structural reforms within the sector.

While the main aim of the Centre’s step is to boost lending activity, going by past data, capital infusion alone cannot ensure credit growth, structural changes at SOE banks (State – Owned – Enterprise) in terms of HR practices, incentive structures and independent boards need to be followed up.

The current love of capital infusion in PSBs entails mobilisation of capital, with maximum allocation in the current year, to the tune of about Rs 2,11,000 crore over the next two years, through budgetary provisions of Rs 18,139 crore, and recapitalisation bonds to the tune of Rs 1.35 lakh crore. The overall loan growth for all PSBs put together was an only 2 percent in 2015-16, even as the Centre infused around ₹20,000 crore during the year. The trend has been no different in 2016-17, with loan growth for PSBs still a meagre 1.9 percent.

The recent CRISIL report stated that banks need to keep aside 3.3 lakh crores as NPA provisioning in FY18, which is 50 percent more than that of last fiscal (2.2 lakh crore). This reveals that the Centre’s funds have gone mostly to fund banks’ losses on account of huge loan defaults.

Having said that Centre’s capital infusion, even this time around will continue to fund these banks’ losses rather than growth for some time. As a fire-fighting measure, the Centre’s recap plan can help banks clean up their balance sheets and prepare themselves for the next period of lending.

As a matter of fact, the Centre’s recap plan did have a great short-term impact on the stock markets. After the announcement on 24^th October, markets reap dividends on 25^th of October. The recap news lifted the spirits of share markets, where the BSE SENSEX closed over the 33,000 mark for the first time and Nifty scales new high as stocks of PSBs record gain.

However, The Centre’s decision to recapitalise banks with government bonds worth Rs 1.35 lakh crore is nothing but the taxpayer bailing out India’s public sector banks whose capital base stands eroded because of mounting loan defaults by 50 large corporate groups.

Though the government says this won’t increase the fiscal deficit as no cash outflow is involved, it does have other effects of a higher fiscal deficit such as increased interest payment by the government on the bonds issued to banks. Let us now hope that the higher fiscal deficit would not add to the demand-side pressure, and there will be a negligible impact on CPI inflation.

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SENSEX vs NIFTY

Rahul Jindal — Mon, 13 Nov 2017 05:30:15 +0000

In the previous article of this series, we have learned about the Market Index, Stock Market, NSE and BSE.

Now that we have the basic idea, let us understand how Sensex and Nifty work !!

METHOD ADOPTED FOR SENSEX CALCULATION –

The method adopted for calculating Sensex is the market capitalisation weighted method in which weights are assigned according to the size of the company. Larger the size, higher the weightage.

The base year of Sensex is 1978-79 and the base index value is set to 100 for that period.

WHY IS THE BASE VALUE SET TO 100 POINTS?

The total value of shares in the market at the time of index construction is assumed to be ’100′ in terms of ‘points’. This is for the purpose of ease of calculation and to logically represent the change in terms of percentage. (So, next day, if the market capitalization moves up 10%, the index also moves 10% to 110.)

HOW ARE THE STOCKS SELECTED?

The stocks are selected based on a lot of qualitative and quantitative criteria, as well as the financial soundness and performance.

HOW IS THE INDEX CONSTRUCTED?

The construction technique of index is quite easy to understand if we assume that there is only one stock in the market.

In that case, the base value is set to 100 and let’s assume that the stock is currently trading at 200. Tomorrow the price hits 260 (30% increase in price) so, the index will move from 100 to 130 to indicate that 30% growth.

Now let’s assume that on day 3, the stock finishes at 208. That’s a 20% fall from 260. So, to indicate that fall, the Sensex will be corrected from 130 to 104(20%fall).

As our second step to understand the index calculation, let us try to extend the same logic to two stocks – A and B.

A is trading at 200 and let’s assume that the second stock ‘B’ is trading at 150. Since the Sensex follows the market capitalization weighted method, we have to find the market capitalization (or size of the company- in terms of price) of the two companies and proportionate weightage will have to be given in the calculation.

How do we compute the size of the company- in terms of price?

That’s simple. Just multiply the total number of shares of the company by the market price. This figure is technically called ‘market capitalization’.

Back to our example –

We assume that company A has 100,000 shares outstanding and B has 200,000 shares outstanding. Hence, the total market capitalization is (200 x 100000 + 150 x 200000) = Rs 500 lakhs. This will be equivalent to 100 points.

Let’s assume that tomorrow, the price of A hits 260 (30% increase in price) and the price of B hit 135. (10% drop in price).

The market capitalization will have to be reworked. It would be – (260 x 100,000 + 135 x 200,000) = 530 lakhs.

That means, due to the changes in price, the market capitalization has moved from 500 lakhs to 530 indicating a 6% increase. Hence, the index would move from 100 to 106 to indicate the net effect.

This logic is extended to many selected stocks and this calculation process is done every minute and that’s how the index moves!

CALCULATION OF SENSEX –

What we said was the general method to construct indices. Since the Sensex consists of 30 large companies and since their shares may be held by the government or promoters etc., for the purpose of calculating market capitalization only the free float market value is considered, instead of the total number of shares.

What is free float?

That’s the total number of shares available for the public to trade in the market. It excludes shares held by promoters, governments or trusts, FDIs etc.

To find the free float market value, the total value of the company (total shares x market price) is further multiplied by a free float market value factor, which is nothing but the percentage of free float shares of a particular company.

So logically, the company which has more public holding will have the highest free float factor in the Sensex. This equalizes everything.

Example- Let’s assume that the market value of a company is Rs 100,000 Crore and it has 100 Crore shares having a value of Rs 1,000 each but only 20% of it are available to the public for trade. The free float factor would be 20/100 or 0.20 and the free float market value would be .20 x 100,000 = 20,000 Crores.

You need not calculate the free float market capitalization since its available straight on the BSE website.

NOW, LET’S SE HOW THE SENSEX MOVES.

Sensex value = Current free– Float market value of constituents stocks/Index Divisor

So, the numerator is available straight from the BSE site. It’s the total of free float factors of 30 stocks x market capitalization.

Now, THE DENOMINATOR – Index Divisor

The Index divisor nothing but the present level of the index.

So, now, we have all the figures.

Let us assume that the free-float market capitalisation is Rs 10,00,000 Crore. At that point, the Sensex is at 12500. What would be the value of Sensex if the free-float market capitalization is Rs 11,50,000 Crore?

(Those who can’t find the answer may go back to the ratios and proportions chapter )

The answer is 14,375. (12,500/10,00,000 X 11,50,000)

CALCULATION OF NIFTY –

Nifty is calculated using the same methodology adopted by the BSE in calculating the Sensex – but with three differences. They are:

The base year is taken as 1995.
The base value is set to 1000.
Nifty is calculated on 50 stocks actively traded in the NSE.

50 top stocks are selected from 24 sectors.

The selection criteria for the 50 stocks are also similar to the methodology adopted by the Bombay stock exchange.

Here is the mathematical formula to arrive at the value of NIFTY –

Market Capitalization = Equity Capital x Price

Free Float Market Capitalization = Equity Capital x Price x IWF

Index Value = Current Market Value / Base Market Capital x Base Index Value (1000)

*IWF = Investible Weight Factor – It is a factor to determine the number of shares available for trading.

The index is calculated in real-time daily whenever the value of any share changes.

Difference Between Sensex and Nifty

As such, there is no difference between Sensex and Nifty since both target large-cap stocks. There’s no difference in the performance – you can see that in 20 years chart.

NIFTY and Sensex are stock market indices that indicate the strength of the market. The NIFTY reflects the value of NSE and Sensex is the stock market index for BSE.

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Stock Exchange – What is NSE and BSE?

Rahul Jindal — Sun, 12 Nov 2017 05:30:40 +0000

Have you ever heard of the stock exchange, Nifty, Sensex? Have you ever heard of the Dalal street or the D Street? Let us understand these terms.

DALAL STREET

Dalal Street, in Mumbai, India is the address of the Bombay Stock Exchange, the biggest stock exchange in India and several related financial firms and institutions. When Bombay Stock Exchange was moved to this new location at the intersection of Bombay Samachar Marg and Hammam Street, the street next to the building was renamed as Dalal Street.

The Hindi word Dalal means “a broker”. The term “Dalal Street” is used in the same way as “Wall Street” in the U.S., referring to the country’s major stock exchanges and overall financial system.

In order to understand what is nifty and sensex, we need to understand the Indian stock exchanges first.

Now, let’s discuss the two major stock exchanges in India i.e. the ‘Bombay stock exchange’ and the ‘National stock exchange’

Bombay Stock Exchange (BSE)

Bombay stock exchange is an Indian stock exchange located at Dalal Street, Mumbai, Maharashtra.

It was established in 1875 and is Asia’s oldest stock exchange.

It is the world’s fastest stock exchange, with a median trade speed of 6 microseconds.

The BSE is the world’s 11th largest stock exchange with an overall market capitalization of $1.43 Trillion as of March, 2017.

More than 5500 companies are publicly listed on the BSE.

Image Source – Internet

National Stock Exchange (NSE)

The National Stock Exchange (NSE) is the leading stock exchange of India, located in Mumbai, Maharashtra, India. It was started to end the monopoly of the Bombay stock exchange in the Indian market.

NSE was established in 1992 as the first de-mutualized electronic exchange in the country.

It was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered an easy trading facility to the investors spread across the length and breadth of the country.

NSE has a total market capitalization of more than US$1.41 trillion, making it the world’s 12th-largest stock exchange as of March 2017.

Image Source – Nifty Historical Data

What is ‘Market Index’ ?

A market index is an aggregate value produced by combining several stocks or other investment vehicles together and expressing their total values against a base value from a specific date. Market indexes are intended to represent an entire stock market and thus track the market’s changes over time.

Index values help investors track changes in market values over long periods of time. Investors can track changes in the index’s value over time and use it as a benchmark against which to compare their own portfolio returns.

Importance of Market Index :

The market indexes are the barometer for the market behaviour. It gives a general idea about whether most of the stocks have gone up or gone down.

Often, Market Index is used as a benchmark portfolio performance.

It is used as a reflector of investor’s sentiments.

Market indexes are used for sorting and comparison of the various companies.

They are used in passive fund management by Index funds.

Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) also have their respective market index, i.e., SENSEX (BSE) and NIFTY (NSE).

SENSEX

The SENSEX-(or SENSitve indEX) was introduced by the Bombay stock exchange on January 1, 1986. It is one of the prominent stock market indexes in India. The Sensex is designed to reflect the overall market sentiments. It comprises of 30 stocks. These are large, well-established and financially sound companies from main sectors.

As of March 15, 2017, the Full Market capitalization of Sensex is 4,986,299 crores and the free float market capitalization is Rs. 2,687,777 crores.

NIFTY

Nifty is a major stock index in India introduced by the National stock exchange. NIFTY was coined from the two words ‘National’ and ‘FIFTY’. The word fifty is used because; the index consists of 50 actively traded stocks from various sectors.

Image Source – Internet

The Sensex and Nifty are both indicators of market movement. If the Sensex or Nifty go up, it means that most of the stocks in India went up during the given period.

With respect to NIFTY and NSE, we can say that:

If Nifty goes up, this means that the stock price of most of the major stocks on NSE has gone up.

If Nifty goes down, this tells you that the stock price of most of the major stocks on NSE has gone down.

When Sensex/Nifty increases, it shows economic growth of the country.

Now, we have the basic idea that what is Sensex, Nifty and market index. In the upcoming next article of this series, we will understand, how Sensex and Nifty works.

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Bharat Ke Veer

Rahul Jindal — Tue, 15 Aug 2017 14:30:13 +0000

bharatkeveer.gov.in or Bharat Ke Veer is an initiative taken by central government by launching a new web Portal for the general public to make donations to the families of martyrs and soldiers of Indian Armed forces. Using the bharatkeveer.gov.in portal, anyone who wishes to support the families of martyrs can donate online.

The web portal and app has been launched by the Ministry of Home Affairs in order to pay homage to the brave hearts who have laid down their lives in order to protect their country and citizens.

How to Donate Online on Bharat Ke Veer Portal

To make online donation/contribution, one has to visit the Bharat Ke Veer Portal at bharatkeveer.gov.in
Then you need to click the “Enter” button from the homepage.
If you want to make the contribution to the individual account, then you need to click the “Bravehearts” link in the menu or if you want to contribute to Bharat Ke Veer corpus fund then click “Bharat ke Veer” link in the menu.

Upon clicking the “Bravehearts” link, you can select the individual soldier from the displayed list or search one and make the desired contribution.

If you want to donate to “Bharat Ke Veer Corpus”, then simply fill the details and amount to be contributed in the form which is displayed there.

After contribution, one can also download the certificate of their contribution by entering their e-mail ID and phone number.

Let’s pay homage to the brave-hearts who are the reason for this free land, who sacrifice their lives to protect us.

#JaiHind

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GST (Goods and Service Tax) – Know All About It

Rahul Jindal — Wed, 26 Jul 2017 14:30:38 +0000

~Introduction~

The govt of India rolled out the much-awaited GST on 1st July 2017. It is by far the most significant tax reform in the history of independent India.

The hitherto tax structure in India has been complex. There are two types of taxes in India :

Direct taxes – directly paid by the individual to the government (e.g. income tax, corporate tax, wealth tax).
Indirect taxes – paid to the government via third person (e.g. VAT, service tax, etc. paid to restaurants which, in turn, pay it to the government).

The GST is an indirect tax reform and hence, it does not affect the existing rules or mechanism related to direct taxes in any way. The concept of GST is to have a single indirect tax throughout the country instead of complicated multiple indirect taxes which vary in different states.

Read about

GST Confusions and Restaurant’s Billing

~Advantages of GST~

The new tax will require firms to upload their invoices every month to a portal that will match them with those of their suppliers or vendors. Because a tax number is needed for a firm to claim a credit on the cost of its inputs, many companies are refusing to buy from unregistered businesses. Those who don’t sign up risk losing any customer who has. Hence, a large number of unregistered businesses are expected to come under the tax net.

It will capture nearly all commercial transaction. Hence, it is expected to result in an increase in tax compliance
It will subsume a number of indirect taxes.
It will eliminate the cascading of the tax burden.
It will create a common market.

~GST timeline~

2000
- Vajpayee government started discussion on GST by setting up an expert panel headed by Asim Dasgupta, former West Bengal finance minister
2003
- The Kelkar Task Force suggested the need to have a comprehensive indirect tax reform through GST
2006
- UPA finance minister P Chidambaram proposes GST in his Union budget. The Empowered Committee (EC) of state finance ministers was assigned the responsibility to chalk out a road map for its implementation
2008
- Empowered Committee submits a report ‘A Model and Roadmap for GST in India’
2009
- The Empowers Committee after holding discussions with the Centre and the states submits the first discussion paper
2011
- Constitution Amendment Bill introduced in Lok Sabha and referred to the Standing Committee on Finance for scrutiny
2013
- Standing Committee submits its report to Parliament. But UPA government fails to take the legislation forward. The bill lapses with the dissolution of the Lok Sabha
2014
- Finance minister Arun Jaitley introduces the Constitution (122nd Amendment) Bill, 2014 in Lok Sabha on December 19
2015
- Jaitley in his budget speech sets GST rollout deadline on April 1, 2016. Lok Sabha approves the bill on May 6. The Congress demands to cap GST rate at 18%. The NDA government fails to get it passed in Rajya Sabha
2016
- Centre and states agree on Constitution Amendment Bill without a cap on the rates. The bill is approved by the RS in August 2016. The amended bill is passed in the LS on August 8
- The GST Council headed by the Union finance minister is formed. The council decided on a four-slab rate GST structure of 5%, 12%, 18% and 28%. The ‘sin’ or “demerit” products such as tobacco items, aerated drinks, and luxury cars, would come under the highest tax slab and may attract a cess, which could raise the tax burden to 40%
2017
- The date for the implementation of the new tax structure is shifted to July 1, 2017, as the Centre and states took time to finalize the draft bills— CGST, IGST, SGST and UT-GST
- May: GST Council during its meet in Srinagar fixes rates of goods and services

-> Unlike the present GST structure in India which has multiple tax slabs, an ideal GST has a standard rate with a plus and minus rate. However, as per the Union Finance Minister, the slabs have been created keeping the interests of the poor in mind. Otherwise, it would mean “taxing Hawai chappal (slippers) and Mercedes car at the same rate.” the Union Finance Minister said.

-> Some experts have criticized so many tax slabs as it makes the GST complicated and perplexed for some, contrary to the objective of having a simpler indirect tax system.

-> Arvind Subramanian panel, which was set up by the Central government to determine the optimal GST rate for India, recommended that the maximum GST must not exceed 18 per cent. However, the GST Council went ahead with a 28 per cent slab, 10 points higher than the government’s own Chief Economic Advisor.

-> Because of its vagueness, the anti-profiteering provisions may potentially result in harassment and extortion of small and medium businesses, resulting in inspector raj.

-> Some experts believe that the GST rates are quite high which may lead to tax evasion, defeating the very purpose of GST; lower rates could have provided better results.

-> Some specific GST rates have been widely criticized :

Sanitary pads: despite various appeals by activists, sanitary napkins are put under non-essential goods and 12 per cent tax is levied on them. According to a survey, around 80% women in India are unable to afford menstrual hygiene leading to various health complications.
Stationery: most of the stationery items—notebooks, boards, papers, etc. have been put in the 18 per cent tax bracket. Only books are exempted from any taxes.
Toothpaste and soap: used by the majority of the population have been put under 18 per cent tax slab.
Shampoo and detergents: commonly used in almost, if not all, every house in the country have been put under 28 per cent tax slab!
Fertilizer was earlier kept under the 12 per cent bracket, but thankfully, it has been shifted to 5 per cent slab.

Despite some minor concerns and criticisms, there a consensus among the experts that GST is indeed a game changer, and will benefit us in the long run. The GST, in its present form, has several imperfections which can, and hopefully will be addressed by the government and the GST council. So far, the response of the government has been positive and responsive towards criticism and suggestions. With more steps in the right direction and efficient implementation of GST, we can hope for a better future of India.

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The GST Confusion and Restaurants’ Billing

Rahul Jindal — Sun, 16 Jul 2017 16:20:29 +0000

Many customers complained about restaurants charging GST along with VAT and Service tax. In the hearsay of several consumers calling for their confusion on social media regarding GST rates for restaurants and the relation of the same to VAT and service tax, the government has come out with a clarification about GST rules for restaurants.

The food ordered at restaurants captivates two kind of tax structures depending on whether if it is an AC restaurant or a non-AC restaurant, and whether the restaurant has the license to serve alcohol or not.

These are 12% and 18% GST rates which include both CGST (Central GST) and SGST (State GST).

For the GST tax rate of 12%, 6% is CGST and the other 6% is SGST.

Similarly, for the GST tax rate of 18%, 9% is CGST and the other 9% is SGST.

The 12% GST rate is for :

non-AC restaurants,
roadside eateries that don’t serve alcohol,
local delivery restaurants.

The 18% GST rate is for :

the restaurants with full air-conditioning (both with or without alcohol),
non-AC eateries that serve alcohol.

The Central Board of Excise and Custom has also clarified that the actual GST incidence will be lesser.

The tax department has also launched the GST Rate Finder App. This App is available on Google Play platform for Android handsets, the app enables users to find the applicable GST rates on goods and services.

In order to download the GST RATES FINDER App, you can follow the steps mentioned below:

Open Google Play Store on your smartphone.
Go to the search tab and search for “GST Rate Finder”.
Select the app and press “Install” to download the app on your phone.

And then you are good to go in a few minutes.

Here is how you can use the GST Rates Finder App –

Open the GST Rates Finder app on your phone.
To find out the details about a product, write its name in the search box and click enter.
This will provide you with the all the details related to the product.

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The post The GST Confusion and Restaurants’ Billing appeared first on Kailasha Foundation.

WELFARE ECONOMICS

Rahul Jindal — Thu, 08 Jun 2017 05:30:51 +0000

THE OBJECT OF GOVERNMENT IS THE WELFARE OF THE PEOPLE. THE MATERIAL PROGRESS AND PROSPERITY OF A NATION ARE DESIRABLE CHIEFLY SO FAR AS THEY LEAD TO THE MORAL AND MATERIAL WELFARE OF ALL GOOD CITIZENS.

~THEODORE ROOSEVELT

Pick up a newspaper any day and you are sure to find a story about a debate concerning the government’s role in the economy.

Should income taxes be cut?
Do we need to subsidize the purchase of medicine for the elderly?
Is it advisable to use public land for oil exploration?

The list is, virtually endless.

The above discussion must have given you a taste of welfare! Yes, today we will be exchanging our views on Welfare Economics.

Welfare Economics, the framework used by most public finance specialists, the branch of economic theory concerned with the social desirability of alternative economic states.

We begin by considering a very simple economy. It consists of two people who consume two commodities with fixed supplies. The economic problem discussed here in welfare economics is to allocate resources such that the amount of two goods between the two people maximizes the welfare of both.

Let the two consumers be A and B and the two goods to be consumed be Food and Clothing. An analytical device known as the Edgeworth Box depicts the distribution of Food and Clothing between A and B.

The welfare of a society, in the broadest sense, depends upon the satisfaction levels of all its consumers. But almost every change in the economic state of the society will have favorable effects on some members and unfavorable effects on others.

The Italian economist Vilfredo Pareto (1848-1923) said that if a change in the economic state makes at least one individual better off without making anyone worse off, then the change is for the betterment of social welfare, i.e., the change is desirable.

Or, it can be said as a situation where one individual can’t be made better off without making some other individual worse off.

Suppose a situation where the total resource of the economy is Rs. 100, where A has Rs. 99 of the total resource and B has Rs. 1.

Now, the above situation is said to be Pareto Optimal because in any condition if we make better off B, we will have to worse off A by the same amount. Thus here it brings a condition where one individual (B) can’t be better off, without worsening off of another individual (A).

Another case where everyone gets Rs. 0.99 and the whole Rs. 99.01 gets wasted, this is not Pareto optimal allocation as we could have allocated the total resource to better off the society. A better case of optimality would be to give a Rs.1 and not giving anything to anyone else. This would make A better off and no one else is worse off.

Let us now link the above, example with Edgeworth box.

In the Edgeworth Box above, each point in the box is an allocation of endowments of both X and Y to A and B.

Let us suppose Q is the endowment point. Now we can draw ICs of A and B, to show how much of X and Y does A and B prefer at endowment point Q.

Moving to the next figure, IC (A & B) shows A’s preferences, and IC (D & E) shows B’s preferences, for different endowment points. In this figure, we see that ICs of A and B intersect each other. This condition is not Pareto Optimal for the reason being that we can still improve any of the party’s allocation and worse off another. That improvement can be found in the eye-shaped region formed by the intersection of the two ICs.

Now, to translate the definition of Pareto efficient condition we must know a point where both ICs are tangent to each other and give the efficient outcome.

The point A and E are the best allocation points or the Pareto optimal points because, at any other point say D or C, we are either going to make A better off and B worse off or vice versa, which violates the Pareto-optimal efficient conditions.

Thus we can draw a diagonal curve in the box which shows that any point on the line is Pareto-optimal as the ICs of A & B are tangent to each other.

In mathematical terms, the indifference curves are tangent where the slopes of ICs are equal. And in economic terms, the absolute value of the slope of the IC curve indicates the rate at which an individual is willing to substitute one endowment for an additional endowment of another; called the Marginal Rate of Substitution.

Hence, Pareto Efficiency requires the MRS be equal for all the consumers: MRS_{A =} MRS_B.

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