7th including the HRA effect of up to 35

Pay Commission 7th Pay Commission report windfall for government employees is
having an impact inflation and it is expected to go up in December. Aside from
7th Pay Commission, there are other reasons too, like rising oil prices and GST
pass-through effect too.  The immediate reason about role of 7th Pay Commission is that
the housing rent allowance has been adjusted upward by the government. In the
previous monetary policy review held in October, RBI had
projected inflation to be in range of 4.2%-4.6% for October-March (second half)
period of this fiscal.  “On the whole, inflation is estimated in the range 4.3%- 4.7% in
third quarter and fourth quarter of this year, including the HRA effect of up
to 35 basis points (0.35%), with risks evenly balanced,” RBI had said.  The RBI had further said that HRA increases by various state
governments may push up housing inflation further in 2018. “The staggered
impact of HRA increases by various state governments may push up housing
inflation further in 2018.  The recent rise in international crude oil prices may sustain,
especially on account of the OPEC’s decision to maintain production cuts
through next year,” RBI said.In November, inflation climbed up even breaching the Reserve
Bank of India (RBI) of 4% target, experts say that the central bank is going to
take a long pause in 2018.  Firming crude oil prices in the global market is likely to cast
its shadow on retail inflation, which has begun to move northwards after
hitting a low of 1.46% in June, and may prompt the RBI to hold interest rates
in 2018. Implementation of new pay scales recommended by the Seventh Pay
Commission is estimated to put an additional burden of Rs 1.02 lakh cr, or 0.7
per cent of GDP, on the exchequer in 2016-17, government said today. The implementation of recommendations of the 7th Pay Commission
report, however, would be after approval of the Cabinet on completion of
screening of suggestions by a high-level panel of secretaries, the Rajya Sabha
was informed today. The implementation of the new 7th Pay Commission pay scales is
estimated to put an additional burden of Rs 1.02 lakh crore (or 0.7 per cent of
GDP at current market prices) on the exchequer in 2016-17. Subject to
acceptance by the government, they will take effect from January 1, 2016. In a written reply, Minister of State for Finance Jayant Sinha
also said that the announcement of Dearness Allowance has no impact on the
recommendations of the Pay Commission. Giving details of financial implications of the recommendations,
Sinha said the burden on pay head would increase by Rs 39,100 crore to about Rs
2.83 lakh crore in the current fiscal. Without the 7th Pay Commission
recommendations, the outgo would have been Rs 2.44 lakh crore. If you are a central government official, your choice of pension
funds (PFs) under the National Pension System (NPS) is set to more than double
after the Union Cabinet gave approval to the 7th Pay Commission report on
Wednesday. With a massive inflow of funds likely to come to the NPS from
central government officials by way of increased pay and arrears, the Pension
Fund Regulatory and Development Authority (PFRDA) is set to expand the choice
of pension fund (PFs) available for the government sector from three fund
managers at present to seven. A proposal to this effect has already been sent to the
government by the pension regulator. “At present, we have three pension fund
options for the government sector NPS. Our proposal to the government is that it should be opened to the
entire fund manager that are licenced by PFRDA including those who are managing
funds of the non-government sector NPS,” Chairman, PFRDA, Hemant Contractor,
told FeMoney. The three PFs for Government Sector are LIC pension Fund, Ltd,
SBI Pension Funds Pvt Ltd and UTI Retirement Solutions Ltd. However, the
non-government NPS has seven PFs including the three licenced for the
government sector.  Along with these three, HDFC Pension Management Co Ltd, ICICI
Prudential Pension Fund Management Co Ltd, Kotak Mahindra Pension
Fund Ltd and Reliance Capital Pension Fund Ltd are the non-government PFs. Birla Sunlife Pension Management has been licensed for the
non-government sector but is yet to commence business. Pension fund is receiving contributions and are tasked with
accumulating the money and investing it to make payments to subscribers for
pension as specified by the regulator. Contributing to NPS for building a pension corpus is mandatory
for all employees who have joined the Central Government, including Central
Autonomous Bodies (except Armed Forces) on or after January 1, 2004.  Taking a cue from the centre, several State Governments have
adopted NPS for their employees. Under NPS, a government employee is required to contribute 10
per cent of his salary plus DA into his Tier-I (pension) account on a mandatory
basis every month which is invested along with the matching contribution from
the employer.
The 7th Pay Commission has recommended a 23.55 per cent hike in pay and
allowance. The impact the 7th Pay Commission recommendations on the government
coffers will be to the tune of Rs 1.02 lakh crore. Nearly 47 lakh central government employees and 53 lakh
pensioners would benefit from the 7th Pay Commission hike in salaries, while
arrears will be paid with effect from January 1, 2016. However, Hemant Contractor has said PFRDA has not been able to
make an exact assessment on the increased amount that would flow into NPS due
to the 7th Pay Commission recommendations since the full picture on payment
schedule of arrears and other compensations is yet to emerge. The
7th Pay commission would definitely affect the private sector. 1.     
Inflation: For
financing this raise, government will have to spend a whopping amount of money.
When such larges amounts are injected into the systems, inflation is bound to
increase a lot. There’s difference when government
spends money on investment projects, like building infra, recruiting teachers
etc and when government spends money on consumption purpose.This money is spend
on consumption. And that is definitely going to cause inflation. Increased
liquidity, No increase in goods & services, increasing inflation. It’s the
classic “more money chasing the same goods”.2.     
Salary hike in private sector likely: This
is likely not a direct result but an indirect dynamics. Many private sector
companies co-relate their salary with the one that is being currently paid by
the government. So, there should be some rise. But this change will
be both sporadic & spatially varied. But for now, private sector employees
are left a little poor than their government counterparts.3.     
Private sector boom: With increased salary, demand for consumer goods
likely going to get higher.So, overall this should show a positive trend to
industrial & service sector growth. Meaning, higher car sales, people want
to by new flats, etc.

 The Goods and Services Tax (GST), the
biggest tax reform since India’s independence, has announced the tax rates for
different goods and services. We pay service tax on various services availed
from banks, mutual fund and insurance companies. 

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Service tax is an indirect tax and
the Central Board of Excise and Customs (CBEC) is responsible for the
formulation of policies related to levying and collecting indirect taxes. While
the government has finalised the rate of GST applicable on financial services, the
CBEC is yet to come out with a clarification and exemptions list. 


Service tax is currently levied at
the rate of 15 per cent (including 0.5 per cent Krishi Kalyan cess and 0.5 per
cent Swachh Bharat Cess) on most financial services. Under the GST regime,
financial services will be the 18 per cent tax bracket. What this means is that
you will have to spend marginally higher to avail these services.


A mutual fund house offers portfolio
management services to investors. For this, it charges a management fee. On the
management fee, which is a part of the total expense ratio (TER) of the fund, a
service tax at the rate of 15 per cent is levied currently; this will go up to
18 per cent after GST is implemented.


SEBI, the capital market regulator,
has allowed mutual funds to charge service tax over and above TER. 


There is a cap of 2.5 per cent on the
expense ratio of an equity mutual fund scheme. Therefore, if the asset
management company (AMC) charges a management fee of one per cent and remaining
1.5 per cent goes towards other fees such as trustee fee, registrar fee,
banking fee, custodian fee, marketing fee, commission, etc, then as per the
current scenario, the expense ratio of the scheme will be 2.65 per cent – 1.5%
+ 1 multiplied by (1+15%). After GST, it will go up to 2.68 per cent.


A bank charges service tax on most
transactions – online money transfers or withdrawals from ATMs beyond specified
limits. With GST, these services will now attract a tax of 18 per cent instead
of 15 per cent service tax, charged currently. 


For instance, if you withdraw from
another bank’s ATM after exceeding the free transaction limit, you are charged
Rs 20 plus service tax which comes to around Rs 23; post GST, this will go up
to Rs 23.60.


However, experts are hopeful that the
increase in cost may not last in the long run as banks will pass on the benefit
of input tax credit, under GST, to their customers. “Services such as FDs
and bank account deposits that do not have an associated charge currently will
continue to remain outside the GST net. The final list of exemptions from the
flat 18 per cent tax rate is still awaited,” says Adhil Shetty, CEO and
Co-founder, Bankbazaar.com.


When it comes to insurance, a service tax is
levied on risk premium. In cases of term, motor and health insurance, the
entire premium is considered as risk premium; therefore, service tax is levied
on the entire premium paid.

In theory, this could mean an
increase of 3 per cent in premium from the existing applicable premium,
effective from July 1, 2017, across life, health and general insurance.
However, some of this should be offset if tax on services availed by the
industry are allowed to be

taken into account to decrease
insurers’ tax paid. 

Vighnesh Shahane, CEO, IDBI Federal
Life Insurance, explains this further: “If the premium of the term
insurance policy is Rs 20,000 (including taxes), you will have to pay Rs 600
more (3 per cent more) after July 1. However, we may be entitled to an
additional credit against taxes that have been subsumed under GST. However,
whether premiums fall over time still remains to be seen.”

“In case of ULIPs, the following
charges are liable for service tax (including SBC & KKC) at the rate of 15
per cent – surrender charges, fund management charges, policy administration
charges, switching charges, mortality charges and allocation charges,”
says Miranjit Mukerjee, CFO, Future Generali India Life Insurance.



Many are calling it the biggest tax reform since India’s independence.
The Goods and Services Tax(GST), will change the current indirect tax structure
and make it a single tax system throughout the nation.

This one nation one tax system is expected to reduce tax evasion and
give rise to transparency.

The amount of procedural compliance and paperwork will decrease
immensely due to the subsuming of many consumption taxes and bringing it under
one tax: the GST.

Overall, consumers will benefit from the free movement of goods across
the country without the burden of multiple taxes.

While the impact of the Goods and Services Tax rollout will touch every
industry in India, the impact it has on the financial sector needs to be looked
at in detail.

The financial sector which touches the life of every Indian, is one of
the largest industries in the country, apart from being a major contributor to
the nation’s GDP it is also seen as a key driver for future growth. There has
been a lot of discussion but very little clarity on how things will change for
the average Indian post GST implementation, hopefully this article should help.

GST and Banks

Banks charge a transaction fee for all the transactions that happen
through them, this cost will rise from the 15% tax in the current regime to 18
% with GST. What this means is that a person must pay Rs.3 extra per Rs.100 for
banking transactions.

Most banks have now applied transaction charges on cash withdrawals from
different bank ATMs or cash withdrawals from branch. So, banking transactions
such as credit card payments, fund transfer, ATM transactions, processing fees
on loans etc., where the banks are levying charges, increased tax rates would

GST and Loans

Let’s a delve a little bit into the matter of GST and its impact on
borrowing. The view is that there would be a marginal rise in cost at points
where the GST comes into play, for example say a personal loan, service tax in
the earlier tax regime was levied upon the processing fee and prepayment
charges, these are expected to rise but not to levels that would cause worry.

For example, processing fee, depending on the lender was charged at 1-2%
of the loan and this fee would attract a service tax of 15%, now this would
rise to 18%. A marginal increase in the cost of borrowing is also applicable
for home loans, auto loans and personal loans.

GST and Mutual funds

The impact of GST on mutual funds will be minimal. The levy of GST will
be on the Total Expense Ratio(TER) which is the measure of cost incurred by a
mutual fund house to operate its mutual funds. The TER rate is expected to rise
by 3%.

GST and Insurance

Be prepared to pay a little extra on your Insurance premiums. Insurance
companies charge a service tax on term and health insurance products, delay in
payment of insurance premiums and these charges are predicted to go up from 15%
to 18%. However, some Insurance schemes such as the Aam Admi Bima Yojana,
Pradhan Mantri Jeevan Jyothi Bima Yojana are exempted.

Let us now look at the changes that banks themselves must undergo as
part of the GST roll-out.

Registration of Bank Branches

Banks having branches in different states must register in each state
and this will come under the service tax compliance of that respective state.
It is enough to register once for multiple branches in each state. This will
increase compliance, reduce the pressure on documentation and help in ensuring
seamless integration of accounts in various states.

Service tax for inter-branch services

Bank continuously provide services to each other, which are also taxable
under GST. However, the Tax can be claimed as input credit for further set off.

Input Tax Credit under GST

Input Tax in simple terms is when you are paying tax for your output
produced you can reduce the tax that you have already paid on inputs. Input tax
credit is not allowed as per current tax structure. Under GST regime input tax
credit will be allowed to be set-off against the taxes payable by the bank on
making outward supply. However, they must maintain separate books of account to
have a control for all input tax credit and utilized and unutilized credit.