Thursday, March 5, 2009
RBI cuts repo, reverse repo rates by 50 bps
RBI cuts repo, reverse repo rates by 50 bps
The Financial Express, March 5, 2009, Page 1
fe Bureau
The Reserve Bank of India reduced the repo and reverse repo rates by 50 basis points each on Wednesday, but industry said its effectiveness would depend on how well banks use the cheaper money to provide more credit to an economy rapidly losing steam. While Bank of India said it could take weeks to decide on lowering prime lending rates, UCO Bank announced a reduction in its benchmark by 50 basis points to 12.50%.
The money and stock markets had factored in the rate cuts for some time, but they are not expected to sustain a rally. A CII statement said another 50-bps cut would have been more appropriate. Nevertheless, industry captains are hopeful. Said Binani Cement MD Vinod Juneja, “The cut will boost demand for cement as housing loans are now expected to become cheaper and affordable. This will boost housing demand, in turn improving demand for steel and cement.”
General Motors India vice-president P Balendran echoed that sentiment. “Interest rates on auto loans will come down further. This will improve liquidity in the system and consequently volumes are expected to go up further,” he said. Sumit Bali, CEO of Kotak Mahindra Prime, which is major player in the auto lending business, said he expected interest rates for autos to be reduced by a minimum of 25 bps. “We will decide on the exact reduction in a day or two.”
This is the fifth time that RBI has slashed rates since October 2008, when the global economic crisis broke out. The repo rate—the rate at which banks buy cash from RBI—is now at 5%. To reduce the incentive for banks to park excess cash with RBI, the reverse repo rate has been cut to 3.5%, both with immediate effect.
Governor D Subbarao said, “It is expected that the reduction in the policy interest rates will further encourage banks to provide credit for productive purposes at viable interest rates. RBI, on its part, would continue to maintain ample liquidity in the system.”
An RBI statement took note of the huge dip in the economy’s Q3 growth rate to 5.3%—the lowest in five years: “Even as some public sector and private sector banks have cut lending rates in response to RBI’s monetary policy stance, concerns over rising credit risk, together with the slowing of economic activity, appear to have moderated credit growth.” In the meantime, the fiscal deficit has ballooned to over 6% of GDP and the rupee has slipped to less than 52 against the dollar.
All the economic indicators have taken a downturn, RBI acknowledged. Exports contracted for four consecutive months, October to January, while the latest figures show factory output has contracted by 2%. WPI-based inflation, though, has eased to 3.36% for the week ended February 14.
The Financial Express, March 5, 2009, Page 1
fe Bureau
The Reserve Bank of India reduced the repo and reverse repo rates by 50 basis points each on Wednesday, but industry said its effectiveness would depend on how well banks use the cheaper money to provide more credit to an economy rapidly losing steam. While Bank of India said it could take weeks to decide on lowering prime lending rates, UCO Bank announced a reduction in its benchmark by 50 basis points to 12.50%.
The money and stock markets had factored in the rate cuts for some time, but they are not expected to sustain a rally. A CII statement said another 50-bps cut would have been more appropriate. Nevertheless, industry captains are hopeful. Said Binani Cement MD Vinod Juneja, “The cut will boost demand for cement as housing loans are now expected to become cheaper and affordable. This will boost housing demand, in turn improving demand for steel and cement.”
General Motors India vice-president P Balendran echoed that sentiment. “Interest rates on auto loans will come down further. This will improve liquidity in the system and consequently volumes are expected to go up further,” he said. Sumit Bali, CEO of Kotak Mahindra Prime, which is major player in the auto lending business, said he expected interest rates for autos to be reduced by a minimum of 25 bps. “We will decide on the exact reduction in a day or two.”
This is the fifth time that RBI has slashed rates since October 2008, when the global economic crisis broke out. The repo rate—the rate at which banks buy cash from RBI—is now at 5%. To reduce the incentive for banks to park excess cash with RBI, the reverse repo rate has been cut to 3.5%, both with immediate effect.
Governor D Subbarao said, “It is expected that the reduction in the policy interest rates will further encourage banks to provide credit for productive purposes at viable interest rates. RBI, on its part, would continue to maintain ample liquidity in the system.”
An RBI statement took note of the huge dip in the economy’s Q3 growth rate to 5.3%—the lowest in five years: “Even as some public sector and private sector banks have cut lending rates in response to RBI’s monetary policy stance, concerns over rising credit risk, together with the slowing of economic activity, appear to have moderated credit growth.” In the meantime, the fiscal deficit has ballooned to over 6% of GDP and the rupee has slipped to less than 52 against the dollar.
All the economic indicators have taken a downturn, RBI acknowledged. Exports contracted for four consecutive months, October to January, while the latest figures show factory output has contracted by 2%. WPI-based inflation, though, has eased to 3.36% for the week ended February 14.
ECONOMY GETS ANOTHER RATE-CUT STIMULUS
ECONOMY GETS ANOTHER RATE-CUT STIMULUS
The Economic Times, March 5, 2009, Page 1
Repo, Reverse Repo Rates Cut 50 Bps Each
Motioning banks to cut rates further, RBI has clipped reverse repo & repo rates to 3.5% and 5%. But the immediate impact on demand remains to be seen
Our Bureau MUMBAI
AS THE longevity of the slowdown continues to gnaw the economy, Reserve Bank of India (RBI) governor Duvvuri Subbarao is firing on all policy cylinders. After nudging banks to cut rates, Mr Subbarao on Wednesday clipped two key interest rates by 50 basis points each—a move that is intended to signal more rate cuts.
The monetary authority has lowered the reverse repo rate—the rate at which it borrows from banks—as well as the repo rate—the rate at which it lends to banks—to 3.5% and 5%, respectively. The decision will make it less attractive for banks to park money with RBI, pushing them to lend more.
While the move’s impact on the overall demand in the economy could take a little longer, it’s good news for borrowers.
According to HDFC chairman Deepak Parekh, borrowing costs will fall across the board. “We may announce something at the end of the month, effective April 1,” he told ET.
The country’s second-largest lender, ICICI Bank, is also positive on the rate cuts. “RBI has sought to create conditions conducive to consumption and investments, taking into account the global developments and their impact on India—slowdown on growth on one hand and decline in inflation on the other,” said ICICI Bank joint MD and CFO Chanda Kochhar.
The market, however, had to grapple with a somewhat misleading statement during trading hours when Prime Minister’s Economic Advisory Council (PMEAC) chairman Suresh Tendulkar said the central bank may not tweak rates as banks are flush with funds. He felt that a rate cut may not help as banks are overcautious.
According to sections in the bond market, RBI’s decision, though well-intended, was perhaps mistimed. “I am surprised...A rate cut sometime in end-March would have been more helpful. By then, Rs 34,000 crore in borrowing would be over,” said STCI Primary Dealer (a bond house) MD Pradeep Madhav.
Indeed, high government borrowing has prevented interest rates from dropping quickly and caused a fall in bond prices, prompting RBI to announce a Rs 9,000-crore buyback of securities to support prices.
SPUR OF THE MOMENT
Does it matter?
If you are confident of retaining your job, plan for a loan. Interest rates are softening and will come down more in the days to come. However, lower interest on bank deposits could be a bit of a political issue.
Is it too little too late?
Not exactly. Any rate cut has to work its way through the system. Rates can't be lowered dramatically. Home, auto and other loan rates could have come down faster if government borrowing was lower.
What does this mean for banks?
A drop in yields will push up bond valuations a little. But unless it is sustained till March 31, it will not benefit banks and bond houses. Bank shares may move up in a knee-jerk reaction, but fears of bad loans and defaults could spoil the show.
How soon will rates fall?
Advance tax outflows may keep rates high till next week. The drop will be immediate for corporates as banks push loans to increase their loan books at the end of the year. The new financial will see loans for retail borrowers coming down as well.
WHAT'S COULD BE RBI'S
GAME PLAN?
Push banks to lend. Banks will now find that the return on money parked with RBI will not even cover the cost of savings deposits. Unlike the government, RBI is not covered by the pre-poll code of conduct. So, there could be another rate cut before the elections.
RBI surprises market with repo, reverse repo rate cuts
RBI surprises market with repo, reverse repo rate cuts
Business Standard, March 5, 2009, Page 1
Banks to consider lowering lending rates in a few days
BS REPORTER Mumbai
Less than a week after third-quarter GDP estimates showed a lowerthan-expected 5.3 per cent growth rate, the Reserve Bank of India today surprised the market and sent fresh signals to banks to lower lending and deposit rates by pruning the repo rate and the reverse repo rate by 50 basis points each.
The repo rate, or the rate at which RBI lends to banks, has been cut to 5 per cent, while the reverse repo rate, or the rate at which the central bank absorbs liquidity, has been pared to 3.5 per cent ( see table ). The market had given up hopes of an immediate reduction after the central bank prodded banks last week to lower rates.
Around the time the central bank announced its latest move to boost economic activity, Canara Bank said it would cut interest rates on housing and vehicle loans and domestic term deposits, effective March 11.
Others banks, however, said their asset-liability committees (alcos) would meet over the next few days to examine the cost of funds and then decide whether to reduce lending rates.
"Today’s move is prompted by the fact that inflation is coming down and there is a possibility that the numbers may go down to negative territory in June. We expect the cost of funds to drop in a fortnight. When the cost of funds comes down for us, we will pass on the benefit to borrowers," said HDFC Vice-Chairman and Managing Director, Keki Mistry.
An Axis Bank executive said that the bank would review its home loan rates soon but did not comment on the prime lending rate.
“This is a signal from RBI to review the rates. Our alco will meet in three or four days to take stock of costs and then decide the issue,” Bank of Maharashtra Chairman and Managing Director Allen C A Pereira said.
“RBI has sought to create conditions conducive to consumption and investment, taking into account global developments and their impact on India: a slowdown in growth on one hand and decline in inflation on other,” said ICICI Bank CEO-designate Chanda Kochhar.
The RBI move is largely a sentiment booster for banks rather than a technical one, as banks already have ample liquidity and hardly borrow from the repo window right now, she added.
A cut in reverse repo rates will discourage banks from parking surplus funds with RBI through the liquidity adjustment facility and encourage them to boost lending to the commercial sector. Over the past three months, RBI has slashed the rate 250 basis points.
With the latest repo rate reduction, the fifth since October 20, the overall cut since the global credit crisis intensified adds up to 400 basis points.
Since September, the central bank has also lowered the cash reserve ratio, or the proportion of deposits that banks set aside, by another 400 basis points to inject Rs 1,60,000 crore into the system. Through the series of measures, RBI has provided Rs 3,88,000 crore of primary liquidity to the system.
Banks have, however, refrained from passing on the entire benefits to borrowers and have reduced lending rates 50 to 200 basis points, with private and foreign banks being reluctant to cut rates.
As a result of banks’ risk aversion that prompted them to park larger sums of money in government securities, the flow of resources to the commercial sector from banks and non-banks fell to Rs 4,98,136 crore between April and February 13, against Rs 6,08,351 crore in the corresponding period of the last year. On a year-on-year basis, nonfood credit growth, which rose to 29.4 per cent on October 10, decelerated to 19.7 per cent on February 13.
RBI, while advising banks to “monitor their loan portfolio and take early action, to prevent asset impairment” also asked lenders to appropriately price the risk “and ensure that creditworthy enterprises continue to get funding”.
Overall economic activity has slowed, with the economy projected to grow 7.1 per cent this year, against over 9 per cent during the past three years. Industrial output contracted in December, exports have shrunk for four months in a row and growth in the services sector has slowed.
CHEAPER MONEY
REPO RATE (%)
Oct 20 ‘08 8.00
Nov 3 ‘08 7.50
Dec 8 ’08 6.50
Jan 2 ‘09 5.50
Mar 4 ‘09 5.00
REVERSE REPO RATE (%)
Jun 8 ‘06 5.75
Jul 25 ‘06 6.00
Dec 8 ‘08 5.00
Jan 2 ‘09 4.00
Mar 4 ‘09 3.50
India Inc looks at easier loans now
India Inc looks at easier loans now
The Financial Express, March 5, 2009, Page 2
fe Bureau, Mumbai, New Delhi
India Inc on Wednesday welcomed the Reserve Bank of India’s move on rate cuts as it believed that it will contribute to the positive sentiments in the current downturn scenario. After market hours, the Reserve Bank of India said it was lowering the repo rate, at which it lends to banks, to 5% from 5.5%, effective immediately. It also cut the reverse repo rate, at which absorbs excess cash from the banking system, to 3.5% from 4.0%, effective immediately, it said in statement.
Ganesh Natarajan-chairman, Nasscom & CEO, Zensar Technologies said, “The steps taken by Reserve Bank of India will boost the domestic IT market. It will improve the demand environment, and such a move will perk up the demand situation and people will be more likely to spend. This move will have a positive impact on the Indian industry as a whole.”
Meanwhile, the apex chambers have said that the repo rate cut will signal the Indian banking sector to cut their interest rates which will in turn help in bring back the consumer to the market.
Chandrajit Banerjee, director general, Confederation of Indian Industry said that the RBI’s decision to reduce the repo and reverse repo by 50 basis points is a welcome move and the industry has been expecting it. He further said that this would induce banks to look at their lending rates and also act as an enabler to lend rather than parking funds in government deposits. CII expects that this would help create credit availability for the industry and also lower the cost of credit.
Ficci, however, said it is waiting for a composite monetary stimulation package. It expects reverse repo rate at 3% and a further cut in repo rate.
Harsh Pati Singhania, president, Ficci said that by cutting the repo rate, the Reserve Bank has signaled to the Indian banking sector to cut their interest rate to consumers and producers alike. Ficci has urged the banks to take this cue and cut interest rates significantly in the weeks ahead. The small repo rate cut was to discourage banks from putting liquidity back into RBI. Ficci also hopes that RBI will help in bringing the consumer back to the market by offering interest subvention in housing, automobiles and white goods so that common consumer can afford these products.
According to Sajjan Jindal, president, Assocham, 50 basis point cut in repo rate and reverse repo rate is enough at this juncture and beyond that industry should not demand. India Inc has been asking for a rate cut of 50 basis point for some time now, a demand reiterated most vociferously when the rate cuts were not announced during the post Budget announcement of service tax cuts.
The Financial Express, March 5, 2009, Page 2
fe Bureau, Mumbai, New Delhi
India Inc on Wednesday welcomed the Reserve Bank of India’s move on rate cuts as it believed that it will contribute to the positive sentiments in the current downturn scenario. After market hours, the Reserve Bank of India said it was lowering the repo rate, at which it lends to banks, to 5% from 5.5%, effective immediately. It also cut the reverse repo rate, at which absorbs excess cash from the banking system, to 3.5% from 4.0%, effective immediately, it said in statement.
Ganesh Natarajan-chairman, Nasscom & CEO, Zensar Technologies said, “The steps taken by Reserve Bank of India will boost the domestic IT market. It will improve the demand environment, and such a move will perk up the demand situation and people will be more likely to spend. This move will have a positive impact on the Indian industry as a whole.”
Meanwhile, the apex chambers have said that the repo rate cut will signal the Indian banking sector to cut their interest rates which will in turn help in bring back the consumer to the market.
Chandrajit Banerjee, director general, Confederation of Indian Industry said that the RBI’s decision to reduce the repo and reverse repo by 50 basis points is a welcome move and the industry has been expecting it. He further said that this would induce banks to look at their lending rates and also act as an enabler to lend rather than parking funds in government deposits. CII expects that this would help create credit availability for the industry and also lower the cost of credit.
Ficci, however, said it is waiting for a composite monetary stimulation package. It expects reverse repo rate at 3% and a further cut in repo rate.
Harsh Pati Singhania, president, Ficci said that by cutting the repo rate, the Reserve Bank has signaled to the Indian banking sector to cut their interest rate to consumers and producers alike. Ficci has urged the banks to take this cue and cut interest rates significantly in the weeks ahead. The small repo rate cut was to discourage banks from putting liquidity back into RBI. Ficci also hopes that RBI will help in bringing the consumer back to the market by offering interest subvention in housing, automobiles and white goods so that common consumer can afford these products.
According to Sajjan Jindal, president, Assocham, 50 basis point cut in repo rate and reverse repo rate is enough at this juncture and beyond that industry should not demand. India Inc has been asking for a rate cut of 50 basis point for some time now, a demand reiterated most vociferously when the rate cuts were not announced during the post Budget announcement of service tax cuts.
Realty cos expect lower home loan rates
Realty cos expect lower home loan rates
The Financial Express, March 5, 2009, Page 2
fe Bureau
The real estate sector, which is facing a slump in demand, hail rate cuts by the Reserve Bank of India, saying the move would help in easing the credit flow for developers and benefit home buyers, as interest on home loans is expected to come down further.
Reacting to the rate cuts, Rajeev Talwar, executive director, DLF Group said, “It’s a very good decision. This will benefit not only real estate but also the entire industry. Liquidity will increase and interest on home loans is also expected to come down.”
Anuj Puri, country head, Jones Lang LaSalle Meghraj, said that all this is necessary to improve the sales volume in real estate.
Parsvnath Developers chairman Pradeep Jain said, “It’s a good move to cut rates. With this liquidity will increase. I expect that banks will reduce interest rates for borrowers, which will benefit both realty sector as well as home buyers.”
He said that the financial institutions should “lend money to borrowers instead of investing in government securities.”
Hailing the RBI decision, Unitech managing director Sanjay Chandra said, “It’s a welcome move and would help in easing the much required liquidity in the market. It also shows that the government is committed to stimulate the market through various possible measures.”
Chairman and managing director of global property consultant CB Richard Ellis (South Asia) Anshuman Magazine said, “This (rate cuts) was expected. We have to make money available at lower costs...this move is in the right direction.”
If interest rates on home loans fall, then it would be good for home buyers as housing prices have started to rationalise, he added.
Assotech managing director Sanjeev Srivastava said that the decision would result in lower borrowing cost for the industry as well as leave more money with the consumers to spend on housing, automobiles and other requirements.
Naveen Raheja, managing director, Raheja Developers said, “The banks are not passing the corresponding benefits to the industry. Unless the banks do it, this will not translate in real tangible benefit to the economy as well as the real estate sector.”
The Financial Express, March 5, 2009, Page 2
fe Bureau
The real estate sector, which is facing a slump in demand, hail rate cuts by the Reserve Bank of India, saying the move would help in easing the credit flow for developers and benefit home buyers, as interest on home loans is expected to come down further.
Reacting to the rate cuts, Rajeev Talwar, executive director, DLF Group said, “It’s a very good decision. This will benefit not only real estate but also the entire industry. Liquidity will increase and interest on home loans is also expected to come down.”
Anuj Puri, country head, Jones Lang LaSalle Meghraj, said that all this is necessary to improve the sales volume in real estate.
Parsvnath Developers chairman Pradeep Jain said, “It’s a good move to cut rates. With this liquidity will increase. I expect that banks will reduce interest rates for borrowers, which will benefit both realty sector as well as home buyers.”
He said that the financial institutions should “lend money to borrowers instead of investing in government securities.”
Hailing the RBI decision, Unitech managing director Sanjay Chandra said, “It’s a welcome move and would help in easing the much required liquidity in the market. It also shows that the government is committed to stimulate the market through various possible measures.”
Chairman and managing director of global property consultant CB Richard Ellis (South Asia) Anshuman Magazine said, “This (rate cuts) was expected. We have to make money available at lower costs...this move is in the right direction.”
If interest rates on home loans fall, then it would be good for home buyers as housing prices have started to rationalise, he added.
Assotech managing director Sanjeev Srivastava said that the decision would result in lower borrowing cost for the industry as well as leave more money with the consumers to spend on housing, automobiles and other requirements.
Naveen Raheja, managing director, Raheja Developers said, “The banks are not passing the corresponding benefits to the industry. Unless the banks do it, this will not translate in real tangible benefit to the economy as well as the real estate sector.”
Rate cut to boost cement demand
Rate cut to boost cement demand
The Financial Express, March 5, 2009, Page 2
fe Bureau
The 207-million tonne cement industry, which was concerned about the nearing oversupply situation and sinking demand of cement that is exerting pressure on earnings, sales realisation and margins of cement manufacturers, gave a thumps up to the much needed rate cut.
Vinod Juneja, MD of Binani Cement Ltd, said on Wednesday, “This is a welcome move by RBI. The 50 bps cut in repo rate cut will boost the demand for cement as housing loan is now expected to become cheaper and affordable. This will boost the housing demand in turn benefiting the demand for steel and cement.”
Meanwhile, housing which accounts for about 65% of the cement consumption in the country is also witnessing a slowdown resulting in the fall of cement consumption in real estate, as dearer home loans on account of high interest rates and high real estate prices are leading to a decline in housing affordability.
However, Anand Gupta, chairman, Builders Association of India was of the view that, “From October 2008 till March 2009 the government had almost five times made corrections in the repo rates and cash reserve ratio. By announcing such cuts RBI has injected Rs 3 lakh in the system but the realty sector is still deprived of this benefits. This is because of the red tapism in the system that banks do not adhere to the new norms. There should be a supervisory authority to keep a check on it.”
There is a visible slowdown in the real estate and infrastructure sector on account of the current liquidity crisis. This has resulted in a slackening of demand for cement. Similarly steel industry has also been hit by the global slowdown impacting the demand and prices for steel.
Industry hopes that this move will add as filler to industry which is reeling under a slowdown pressure.
Says Pujit Aggarwal, MD of Orbit Group of Companies, “There is some positivity coming in the real estate sector currently but just a 50 bps cut has come as a bit disappointment. What will truely boost the housing sector is the fixed interest rate (7% or 8%) charged for the entire period of loan from the customers and not keep changing for the first year and the next year.”
Similarly Sunil Khandelwal, CFO of Alok Industries Ltd, “This is a positive move and was expected by the industry. This is a clear indication to the banks to reduce their PLR and once the PLR is reduced the industry will get the benefit of the reduced interest cost.”
RBI on Wednesday cut its short-term lending and borrowing rates by 50 basis points each, saying the country’s growth trajectory had been hit more than expected by the global financial crisis and downturn.
The Financial Express, March 5, 2009, Page 2
fe Bureau
The 207-million tonne cement industry, which was concerned about the nearing oversupply situation and sinking demand of cement that is exerting pressure on earnings, sales realisation and margins of cement manufacturers, gave a thumps up to the much needed rate cut.
Vinod Juneja, MD of Binani Cement Ltd, said on Wednesday, “This is a welcome move by RBI. The 50 bps cut in repo rate cut will boost the demand for cement as housing loan is now expected to become cheaper and affordable. This will boost the housing demand in turn benefiting the demand for steel and cement.”
Meanwhile, housing which accounts for about 65% of the cement consumption in the country is also witnessing a slowdown resulting in the fall of cement consumption in real estate, as dearer home loans on account of high interest rates and high real estate prices are leading to a decline in housing affordability.
However, Anand Gupta, chairman, Builders Association of India was of the view that, “From October 2008 till March 2009 the government had almost five times made corrections in the repo rates and cash reserve ratio. By announcing such cuts RBI has injected Rs 3 lakh in the system but the realty sector is still deprived of this benefits. This is because of the red tapism in the system that banks do not adhere to the new norms. There should be a supervisory authority to keep a check on it.”
There is a visible slowdown in the real estate and infrastructure sector on account of the current liquidity crisis. This has resulted in a slackening of demand for cement. Similarly steel industry has also been hit by the global slowdown impacting the demand and prices for steel.
Industry hopes that this move will add as filler to industry which is reeling under a slowdown pressure.
Says Pujit Aggarwal, MD of Orbit Group of Companies, “There is some positivity coming in the real estate sector currently but just a 50 bps cut has come as a bit disappointment. What will truely boost the housing sector is the fixed interest rate (7% or 8%) charged for the entire period of loan from the customers and not keep changing for the first year and the next year.”
Similarly Sunil Khandelwal, CFO of Alok Industries Ltd, “This is a positive move and was expected by the industry. This is a clear indication to the banks to reduce their PLR and once the PLR is reduced the industry will get the benefit of the reduced interest cost.”
RBI on Wednesday cut its short-term lending and borrowing rates by 50 basis points each, saying the country’s growth trajectory had been hit more than expected by the global financial crisis and downturn.
Tax relief for services done outside SEZs too
Tax relief for services done outside SEZs too
Hindu Business Line, March 5, 2009, Page 1
Exemption window replaced by refund mechanism.
--------------------------------------------------------------------------------
Norm change
Refund mechanism will add to transaction costs as it would impact cash flows besides increasing paper work for the SEZ developers/units.
--------------------------------------------------------------------------------
K.R. Srivats
Services rendered from outside special economic zones (SEZs) to developers/units in such zones will now be entitled for service tax relief. The benefit would flow in the form of “refund of service tax” and not through an exemption.
Until now, only services rendered within the SEZ were eligible for the service tax relief – they were “exempted” from service tax, implying that they did not attract service tax.
The Finance Ministry on Tuesday also put in place a new mechanism whereby SEZ developers and SEZ units would have to initially pay the tax on the services rendered to them (from inside and outside the zone) and then claim refund of the taxes paid.
Thus while the scope of the relief has been expanded, the procedure has been changed to provide for only refund of service tax rather than an exemption, say tax and trade experts.
Welcoming the Finance Ministry move, Dr L.B. Singhal, Director-General of Export Promotion Council for EOUs and SEZs (EPCES), however, said that the introduction of refund mechanism would add to transaction costs as it would impact cash flows besides increasing paper work for the SEZ developers/units.
How it works
Explaining the new regime, a tax expert said that if a chartered accountant was rendering auditing/accounting service to a SEZ developer/SEZ unit from outside the zone, the developer/unit was hitherto not getting any exemption or relief on the service tax component of the billing of the auditor. With the latest changes, the developer/unit could claim refund of the service tax.
The Finance Ministry has now implemented the Empowered Group of Ministers on SEZs’ decisions of August and October 2008 on the issues of service tax on taxable services rendered to SEZ developers/units.
Some tax experts, however, contend that the refund mechanism overrides the SEZ Act that only provides for service tax exemption.
“The Finance Ministry move has effectively moved the regime from exemption into refund mechanism. There appears to be an apparent conflict (with the SEZ Act). The Act provides for exemption. What the Finance Ministry has done is good for service providers, but the refund mechanism will impact cash flow of SEZ developers/units,” Mr Rajeev Dimri, Leader, Indirect Tax Practice, BMR Advisors, told Business Line.
Service tax exemption to retain developers in SEZs
Service tax exemption to retain developers in SEZs
The Financial Express, March 5, 2009, Page 3
While many special economic zones’ (SEZs) developers are looking to exit the business due to a dip in demand coupled with lack of easy credit for SEZ construction, the government has brought relief for them by providing exemption from paying service tax for authorised operations within the zones. The only hitch — exemption will come in the form of a refund, so they will still have to pay service tax first.
“The developers of SEZ units shall claim the exemption by filing a claim for refund of service tax paid on specified services,” said a finance ministry notification. Now, not only services provided within the SEZ will be exempted but also a range of services provided outside these zones such as transport of raw materials and banking services will go out of the tax net.
While senior commerce ministry officials said the exemption was evaluated by the empowered group of ministers (EGoM) on SEZs headed by external affairs minister Pranab Mukherjee, tax experts and developers say the timing of the move is far from right as availing exemption through a refund will increase transaction costs.
“SEZ developers and units will now have to make provision of extra cash for payment of service tax. This will certainly increase their working capital requirement. The notification also comes in conflict with the SEZ Act, 2005 that provides for a blanket-tax exemption,” Rajeev Dimri, partner BMR Advisors said.
“The SEZ Act provides for ab initio exemption from service tax but the notification provides it through a refund. It would result into unnecessary blockage of funds, paper work and transaction cost. These refunds should be with retrospective effect from February 10, 2006 when the SEZ Act became operational,” said LB Singhal, director general Export Promotion Council for EOUs and SEZs.
The complicated refund procedure has posed as a big problem for domestic tariff areas. Since it was announced in October 2007, hardly any refund claims have been processed till now, the Federation of Indian Export Organisations (FIEO) pointed out.
“While this is a welcome move, all services whether inside or outside the SEZ should be exempted. The government should also simplify the refund procedure to ensure that it is faster,” Ajay Sahai, director general FIEO said.
Interestingly, the notification by the revenue department also jeopardises the single-window clearance mechanism, the SEZs were purported to have. Developers have to claim their refund from the assistant commissioner of central excise or deputy commissioner of central excise, rather than the SEZ development commissioner or the customs officer posted in the zone.
“SEZ units or developers must not be asked to go outside the SEZ for taking this refund. With this mechanism, single-window facility intended in the SEZ has been dealt a severe blow,” said Singhal.
Singhal also points to another problem: “The notification gives no timeframe for refund of service tax claims. In case, there is a delay in refunds, then a provision of payment of interest should be incorporated in the notification as has been done in the case of refund of duty drawback and central sales tax.”
SEZs to get tax refunds on input services
The Economic Times, March 5, 2009, Page 7
While Developers & Units Will Now Have To Claim Refund After Paying Tax, They Are Demanding Ab-Initio Exemption
Our Bureau NEW DELHI
DEVELOPERS of special economic zones (SEZ) and units inside such zones can from now on claim refunds of taxes paid on all input services, regardless of whether the services are used inside or outside the tax-free zones, according to a change in rules notified by the government.
The new rules means that developers and units inside SEZs will now have to first pay a tax on the services consumed and then claim a refund from the tax authorities. The refund can be claimed within six months from the date of payment of taxes.
Until now, the government had exempted developers from paying a tax on services used inside the zones while services used outside them attracted taxes, notably a 10% service tax on items such as courier and transport services. The move could help the finances of SEZ developers and companies operating inside SEZs, although exporters said it could increase paperwork and been lobbying for a blanket exemption from paying taxes.
Exporters said while the SEZ Act provided for an exemption from service tax, the changed rules still wanted taxes to be paid first and reclaimed later. They said the government had complicated matters by bringing services used inside the zones under the ambit of the taxand-refund scheme. Until now, services consumed inside zones did not attract service taxes.
“It will result in unnecessary blockage of funds, paperwork and transaction cost. Hence, it would be appropriate if ab-initio exemption could be provided,” Export Promotion Council For Export-Oriented Units & SEZs director general LB Singhal said.
Tax experts concur. “By allowing the exemption by way of a refund, the government has not only increased the transaction cost, but also increased the cash outflow of SEZ units,” Ernst & Young associate director Bipin Sapra said.
The move on refunds comes in the wake of a decision by the empowered group of ministers on SEZs headed by finance and external affairs minister Pranab Mukherjee. SEZ developers and unit owners have long argued that they should not have to pay tax on services consumed outside the export zone if the services were related to production within the zones.
The finance ministry’s notification clears the ambiguity on the tax exemptions, particularly since the industry’s views on the issue had been contested by the tax authorities.
The notification, which will over-ride the tax exemption provided in the SEZ Act, will come into effect on or after the date of publication of the notification in the Official Gazette.
TWEAKING NORMS
Move could help finances of SEZ developers and companies operating inside SEZs.
It could, however, result in unnecessary blockage of funds, paperwork and transaction cost.
The move on refunds comes in the wake of a decision by the EGoM on SEZs headed by finance and external affairs minister Pranab Mukherjee.
Singapore co to invest in Formulae 1 hotels in India
Singapore co to invest in Formulae 1 hotels in India
Hindu Business Line, March 5, 2009, Page 1
Our Bureau
The Government has allowed AAPC Singapore Pte Ltd to invest Rs 365.78 crore in an Indian company to construct, develop, own and manage low-budget Formulae 1 hotels here. AAPC is a hotel management company and Formulae 1 is an Accor brand.
Globally, Formulae 1 hotels are recognised as the international benchmark for budget hotels and offer modern functional rooms with basic comforts at affordable prices.
The Foreign Investment Promotion Board on Wednesday allowed AAPC Singapore to invest up to 100 per cent in an Indian company by subscribing to equity and fully convertible debentures to construct, develop, own and manage Formulae 1 hotels.
EARLIER MOU
While no details were available of the project cleared on Wednesday, in 2006, Emaar MGF and Accor announced the formation of a joint venture, Budget Hotels India Pvt Ltd, to bring Formulae 1 brand to the country.
In 2006, the new venture planned to invest $300 million over the next decade. Starting with the major metros, the joint venture company had planned to develop 50 hotels during the first five years of operations, with the remaining 50 to be developed in the second phase. The total development will add 10,000 hotel rooms, officials said. Emaar MGF is a partnership between global property developer Emaar Properties, the Dubai-based public joint venture stock company, and MGF Developments.
Realty cos to come under sebi scanner after Maytas: Hudco chief
Realty cos to come under sebi scanner after Maytas: Hudco chief
The Financial Express, March 5, 2009, Page 2
fe Bureau, Kolkata
After the Maytas episode, books of listed real estate companies might come under the scanner of the Securities & Exchange Board of India (Sebi), said D Subrahmanyam, executive director, Housing & Urban Development Corp of India.
“Regulators have increased their activity. The next target would be the realty sector,” said D Subrahmanyam. He was speaking at an interactive session organised by the confederation of real estate developer’s association of India Bengal.
Talking to reporters after the seminar, he said that there are realty groups whose balance sheets are not very transparent.
“We receive proposals from companies whose balance sheets are not very transparent. Realty players need to maintain transparency,” Subrahmanyam said.
Apart from Sebi there are other regulatory bodies like the National Housing Bank and Competition Commission of India, he said. On a different note, Subrahmanyam said that realtors need to concentrate more on housing for the middle-income group. “That market has an untapped potential,” he said.
According to Harsh Neotia, managing director, Bengal Ambuja Housing Development Ltd, there had been an unusual spurt in real estate sector prices. “There had been astronomical increase in land price in the last few years… prices were spurred by investor interest. But now the prices will not go up. They might come down or stay flat,” he said.
“There is a sense of uncertainty leading to caution among the buyers. They are hope of further price correction and have deferred their decision to buy property,” Neotia said.
The Financial Express, March 5, 2009, Page 2
fe Bureau, Kolkata
After the Maytas episode, books of listed real estate companies might come under the scanner of the Securities & Exchange Board of India (Sebi), said D Subrahmanyam, executive director, Housing & Urban Development Corp of India.
“Regulators have increased their activity. The next target would be the realty sector,” said D Subrahmanyam. He was speaking at an interactive session organised by the confederation of real estate developer’s association of India Bengal.
Talking to reporters after the seminar, he said that there are realty groups whose balance sheets are not very transparent.
“We receive proposals from companies whose balance sheets are not very transparent. Realty players need to maintain transparency,” Subrahmanyam said.
Apart from Sebi there are other regulatory bodies like the National Housing Bank and Competition Commission of India, he said. On a different note, Subrahmanyam said that realtors need to concentrate more on housing for the middle-income group. “That market has an untapped potential,” he said.
According to Harsh Neotia, managing director, Bengal Ambuja Housing Development Ltd, there had been an unusual spurt in real estate sector prices. “There had been astronomical increase in land price in the last few years… prices were spurred by investor interest. But now the prices will not go up. They might come down or stay flat,” he said.
“There is a sense of uncertainty leading to caution among the buyers. They are hope of further price correction and have deferred their decision to buy property,” Neotia said.
Canara Bank rolls out fixed-floating home loan
Canara Bank rolls out fixed-floating home loan
The Economic Times, March 5, 2009, Page 7
Our Bureau MUMBAI
AFTER State Bank of India, it’s the turn of yet another public sector bank, Canara Bank, to offer a combination of fixed and floating rates for home loan borrowers. Canara Bank has however taken one step further than SBI — the bank that froze interest payments for the first year and subsequently linked payments to the then prevalent floating rate — by stepping up the fixed rate in the first five years and subsequently offering a floating rate of two percentage points below the benchmark prime lending rate. By this, the scheme aims to obviate uncertainties over interest rate movements.
Interestingly, the new scheme introduced by Canara Bank is set to compete not just with HDFC but also with SBI since it allows transfer of loans. This means a home loan customer of other bank can now switch over to Canara Bank. The bank has decided to fix loan rates for 20 years by applying different rates to varying slabs. For home loans up to Rs 30 lakh, the country’s second largest PSU bank proposes to charge a fixed rate of 8.25% in the first year and a fixed rate of 9.25% from the second to the fifth year. From the beginning of the sixth to the twentieth year the bank will charge borrowers 200 basis points below the then prevailing BPLR.
For loans above Rs 30 lakh, but below Rs 99 lakh, the bank will charge 50 basis points more. This will work out to a fixed rate of 8.75% for first year, 9.75% from the second to fifth year and 250 bps below the then prevailing BPLR subsequently. The bank has fixed a floor rate of 10% for the period from sixth to the twentieth year. This means that even if the bank’s PLR falls below 12% to, say, 11.5%, the interest rate charged to the customer will be 10% and not 9.5%. Further, to attract customers, Canara Bank has waived off the processing fees.
The bank has also lowered auto loan rates from 12% to 11%. The new rate will be fixed for a term of three years and subject to change, subsequently. The home loan scheme is open up to December 2009, substantially longer than the SBI scheme, which is open up to April. Industry observer opine that given the widespread expectation of a further softening in property prices, home loan borrowers will be better positioned to negotiate for favourable rates and avail of the Canara Bank scheme too.
AC Mahajan, chairman and managing director, Canara Bank, said that the purpose of keeping the scheme open for a longer period is aimed at giving the customer a better opportunity to buy a house at an affordable price. “After meeting with various authorities, we realised that they were uncomfortable with banks not disclosing the EMI for the entire loan tenure. They were of the view that the customer had the right to know the interest rate during the life of the loan, Mr Mahajan said. “We have not only addressed that problem but also taken measures to kickstart demand for the housing sector by offering the scheme up to December. Our purpose is to pass on the benefit to those sections of society which are least vocal, and not strong and capable of negotiating individually for better rates of interest.”
In a recent meeting with CEOs of large banks, RBI had asked SBI to ensure that home loan borrowers who have availed of its new 8% scheme are not jolted by rude shocks at a later stage. RBI had even asked SBI to indicate to their customers about the likely EMIs which they would have to pay after one year.
The Economic Times, March 5, 2009, Page 7
Our Bureau MUMBAI
AFTER State Bank of India, it’s the turn of yet another public sector bank, Canara Bank, to offer a combination of fixed and floating rates for home loan borrowers. Canara Bank has however taken one step further than SBI — the bank that froze interest payments for the first year and subsequently linked payments to the then prevalent floating rate — by stepping up the fixed rate in the first five years and subsequently offering a floating rate of two percentage points below the benchmark prime lending rate. By this, the scheme aims to obviate uncertainties over interest rate movements.
Interestingly, the new scheme introduced by Canara Bank is set to compete not just with HDFC but also with SBI since it allows transfer of loans. This means a home loan customer of other bank can now switch over to Canara Bank. The bank has decided to fix loan rates for 20 years by applying different rates to varying slabs. For home loans up to Rs 30 lakh, the country’s second largest PSU bank proposes to charge a fixed rate of 8.25% in the first year and a fixed rate of 9.25% from the second to the fifth year. From the beginning of the sixth to the twentieth year the bank will charge borrowers 200 basis points below the then prevailing BPLR.
For loans above Rs 30 lakh, but below Rs 99 lakh, the bank will charge 50 basis points more. This will work out to a fixed rate of 8.75% for first year, 9.75% from the second to fifth year and 250 bps below the then prevailing BPLR subsequently. The bank has fixed a floor rate of 10% for the period from sixth to the twentieth year. This means that even if the bank’s PLR falls below 12% to, say, 11.5%, the interest rate charged to the customer will be 10% and not 9.5%. Further, to attract customers, Canara Bank has waived off the processing fees.
The bank has also lowered auto loan rates from 12% to 11%. The new rate will be fixed for a term of three years and subject to change, subsequently. The home loan scheme is open up to December 2009, substantially longer than the SBI scheme, which is open up to April. Industry observer opine that given the widespread expectation of a further softening in property prices, home loan borrowers will be better positioned to negotiate for favourable rates and avail of the Canara Bank scheme too.
AC Mahajan, chairman and managing director, Canara Bank, said that the purpose of keeping the scheme open for a longer period is aimed at giving the customer a better opportunity to buy a house at an affordable price. “After meeting with various authorities, we realised that they were uncomfortable with banks not disclosing the EMI for the entire loan tenure. They were of the view that the customer had the right to know the interest rate during the life of the loan, Mr Mahajan said. “We have not only addressed that problem but also taken measures to kickstart demand for the housing sector by offering the scheme up to December. Our purpose is to pass on the benefit to those sections of society which are least vocal, and not strong and capable of negotiating individually for better rates of interest.”
In a recent meeting with CEOs of large banks, RBI had asked SBI to ensure that home loan borrowers who have availed of its new 8% scheme are not jolted by rude shocks at a later stage. RBI had even asked SBI to indicate to their customers about the likely EMIs which they would have to pay after one year.
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