7th including the HRA effect of up to 35

7thPay Commission 7th Pay Commission report windfall for government employees ishaving an impact inflation and it is expected to go up in December.

Aside from7th Pay Commission, there are other reasons too, like rising oil prices and GSTpass-through effect too.  The immediate reason about role of 7th Pay Commission is thatthe housing rent allowance has been adjusted upward by the government. In theprevious monetary policy review held in October, RBI hadprojected 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% inthird quarter and fourth quarter of this year, including the HRA effect of upto 35 basis points (0.

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35%), with risks evenly balanced,” RBI had said.  The RBI had further said that HRA increases by various stategovernments may push up housing inflation further in 2018. “The staggeredimpact of HRA increases by various state governments may push up housinginflation further in 2018.  The recent rise in international crude oil prices may sustain,especially on account of the OPEC’s decision to maintain production cutsthrough next year,” RBI said.In November, inflation climbed up even breaching the ReserveBank of India (RBI) of 4% target, experts say that the central bank is going totake a long pause in 2018.

 Firming crude oil prices in the global market is likely to castits shadow on retail inflation, which has begun to move northwards afterhitting a low of 1.46% in June, and may prompt the RBI to hold interest ratesin 2018. Implementation of new pay scales recommended by the Seventh PayCommission is estimated to put an additional burden of Rs 1.02 lakh cr, or 0.7per cent of GDP, on the exchequer in 2016-17, government said today. The implementation of recommendations of the 7th Pay Commissionreport, however, would be after approval of the Cabinet on completion ofscreening of suggestions by a high-level panel of secretaries, the Rajya Sabhawas informed today. The implementation of the new 7th Pay Commission pay scales isestimated to put an additional burden of Rs 1.02 lakh crore (or 0.

7 per cent ofGDP at current market prices) on the exchequer in 2016-17. Subject toacceptance by the government, they will take effect from January 1, 2016. In a written reply, Minister of State for Finance Jayant Sinhaalso said that the announcement of Dearness Allowance has no impact on therecommendations 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 Rs2.83 lakh crore in the current fiscal.

Without the 7th Pay Commissionrecommendations, the outgo would have been Rs 2.44 lakh crore. If you are a central government official, your choice of pensionfunds (PFs) under the National Pension System (NPS) is set to more than doubleafter the Union Cabinet gave approval to the 7th Pay Commission report onWednesday. With a massive inflow of funds likely to come to the NPS fromcentral government officials by way of increased pay and arrears, the PensionFund Regulatory and Development Authority (PFRDA) is set to expand the choiceof pension fund (PFs) available for the government sector from three fundmanagers at present to seven. A proposal to this effect has already been sent to thegovernment by the pension regulator.

“At present, we have three pension fundoptions for the government sector NPS. Our proposal to the government is that it should be opened to theentire fund manager that are licenced by PFRDA including those who are managingfunds 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, thenon-government NPS has seven PFs including the three licenced for thegovernment sector.  Along with these three, HDFC Pension Management Co Ltd, ICICIPrudential Pension Fund Management Co Ltd, Kotak Mahindra PensionFund Ltd and Reliance Capital Pension Fund Ltd are the non-government PFs.

 Birla Sunlife Pension Management has been licensed for thenon-government sector but is yet to commence business. Pension fund is receiving contributions and are tasked withaccumulating the money and investing it to make payments to subscribers forpension as specified by the regulator. Contributing to NPS for building a pension corpus is mandatoryfor all employees who have joined the Central Government, including CentralAutonomous Bodies (except Armed Forces) on or after January 1, 2004.  Taking a cue from the centre, several State Governments haveadopted NPS for their employees.

 Under NPS, a government employee is required to contribute 10per cent of his salary plus DA into his Tier-I (pension) account on a mandatorybasis every month which is invested along with the matching contribution fromthe employer.The 7th Pay Commission has recommended a 23.55 per cent hike in pay andallowance. The impact the 7th Pay Commission recommendations on the governmentcoffers will be to the tune of Rs 1.

02 lakh crore. Nearly 47 lakh central government employees and 53 lakhpensioners would benefit from the 7th Pay Commission hike in salaries, whilearrears will be paid with effect from January 1, 2016. However, Hemant Contractor has said PFRDA has not been able tomake an exact assessment on the increased amount that would flow into NPS dueto the 7th Pay Commission recommendations since the full picture on paymentschedule of arrears and other compensations is yet to emerge. The7th Pay commission would definitely affect the private sector. 1.     Inflation: Forfinancing this raise, government will have to spend a whopping amount of money.

When such larges amounts are injected into the systems, inflation is bound toincrease a lot. There’s difference when governmentspends money on investment projects, like building infra, recruiting teachersetc and when government spends money on consumption purpose.This money is spendon consumption. And that is definitely going to cause inflation. Increasedliquidity, No increase in goods & services, increasing inflation. It’s theclassic “more money chasing the same goods”.2.     Salary hike in private sector likely: Thisis likely not a direct result but an indirect dynamics.

Many private sectorcompanies co-relate their salary with the one that is being currently paid bythe government. So, there should be some rise. But this change willbe both sporadic & spatially varied.

But for now, private sector employeesare left a little poor than their government counterparts.3.     Private sector boom: With increased salary, demand for consumer goodslikely going to get higher.So, overall this should show a positive trend toindustrial & service sector growth. Meaning, higher car sales, people wantto by new flats, etc. The Goods and Services Tax (GST), thebiggest tax reform since India’s independence, has announced the tax rates fordifferent goods and services.

We pay service tax on various services availedfrom banks, mutual fund and insurance companies.  Service tax is an indirect tax andthe Central Board of Excise and Customs (CBEC) is responsible for theformulation of policies related to levying and collecting indirect taxes. Whilethe government has finalised the rate of GST applicable on financial services, theCBEC is yet to come out with a clarification and exemptions list.  Service tax is currently levied atthe rate of 15 per cent (including 0.5 per cent Krishi Kalyan cess and 0.5 percent 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 thatyou will have to spend marginally higher to avail these services.MUTUAL FUNDSA mutual fund house offers portfoliomanagement services to investors. For this, it charges a management fee. On themanagement fee, which is a part of the total expense ratio (TER) of the fund, aservice tax at the rate of 15 per cent is levied currently; this will go up to18 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 theexpense ratio of an equity mutual fund scheme.

Therefore, if the assetmanagement company (AMC) charges a management fee of one per cent and remaining1.5 per cent goes towards other fees such as trustee fee, registrar fee,banking fee, custodian fee, marketing fee, commission, etc, then as per thecurrent 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.BANKING SERVICESA bank charges service tax on mosttransactions – online money transfers or withdrawals from ATMs beyond specifiedlimits.

With GST, these services will now attract a tax of 18 per cent insteadof 15 per cent service tax, charged currently.  For instance, if you withdraw fromanother bank’s ATM after exceeding the free transaction limit, you are chargedRs 20 plus service tax which comes to around Rs 23; post GST, this will go upto Rs 23.60.  However, experts are hopeful that theincrease in cost may not last in the long run as banks will pass on the benefitof input tax credit, under GST, to their customers. “Services such as FDsand bank account deposits that do not have an associated charge currently willcontinue to remain outside the GST net. The final list of exemptions from theflat 18 per cent tax rate is still awaited,” says Adhil Shetty, CEO andCo-founder, Bankbazaar.

com.INSURANCE When it comes to insurance, a service tax islevied on risk premium. In cases of term, motor and health insurance, theentire premium is considered as risk premium; therefore, service tax is leviedon the entire premium paid.In theory, this could mean anincrease 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 theindustry are allowed to betaken into account to decreaseinsurers’ tax paid. Vighnesh Shahane, CEO, IDBI FederalLife Insurance, explains this further: “If the premium of the terminsurance policy is Rs 20,000 (including taxes), you will have to pay Rs 600more (3 per cent more) after July 1. However, we may be entitled to anadditional 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 followingcharges are liable for service tax (including SBC & KKC) at the rate of 15per cent – surrender charges, fund management charges, policy administrationcharges, switching charges, mortality charges and allocation charges,”says Miranjit Mukerjee, CFO, Future Generali India Life Insurance. 2ndMany are calling it the biggest tax reform since India’s independence.

The Goods and Services Tax(GST), will change the current indirect tax structureand make it a single tax system throughout the nation.This one nation one tax system is expected to reduce tax evasion andgive rise to transparency. The amount of procedural compliance and paperwork will decreaseimmensely due to the subsuming of many consumption taxes and bringing it underone tax: the GST. Overall, consumers will benefit from the free movement of goods acrossthe country without the burden of multiple taxes.While the impact of the Goods and Services Tax rollout will touch everyindustry in India, the impact it has on the financial sector needs to be lookedat in detail.The financial sector which touches the life of every Indian, is one ofthe largest industries in the country, apart from being a major contributor tothe nation’s GDP it is also seen as a key driver for future growth.

There hasbeen a lot of discussion but very little clarity on how things will change forthe average Indian post GST implementation, hopefully this article should help.GST and BanksBanks charge a transaction fee for all the transactions that happenthrough 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 forbanking transactions.Most banks have now applied transaction charges on cash withdrawals fromdifferent bank ATMs or cash withdrawals from branch. So, banking transactionssuch as credit card payments, fund transfer, ATM transactions, processing feeson loans etc.

, where the banks are levying charges, increased tax rates wouldapply.GST and LoansLet’s a delve a little bit into the matter of GST and its impact onborrowing. The view is that there would be a marginal rise in cost at pointswhere the GST comes into play, for example say a personal loan, service tax inthe earlier tax regime was levied upon the processing fee and prepaymentcharges, 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 wouldrise to 18%. A marginal increase in the cost of borrowing is also applicablefor home loans, auto loans and personal loans.GST and Mutual fundsThe impact of GST on mutual funds will be minimal.

The levy of GST willbe on the Total Expense Ratio(TER) which is the measure of cost incurred by amutual fund house to operate its mutual funds. The TER rate is expected to riseby 3%.GST and InsuranceBe prepared to pay a little extra on your Insurance premiums. Insurancecompanies charge a service tax on term and health insurance products, delay inpayment 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 aspart of the GST roll-out.Registration of Bank BranchesBanks having branches in different states must register in each stateand 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 willincrease compliance, reduce the pressure on documentation and help in ensuringseamless integration of accounts in various states.

Service tax for inter-branch servicesBank continuously provide services to each other, which are also taxableunder GST. However, the Tax can be claimed as input credit for further set off.Input Tax Credit under GSTInput Tax in simple terms is when you are paying tax for your outputproduced you can reduce the tax that you have already paid on inputs. Input taxcredit is not allowed as per current tax structure. Under GST regime input taxcredit will be allowed to be set-off against the taxes payable by the bank onmaking outward supply. However, they must maintain separate books of account tohave a control for all input tax credit and utilized and unutilized credit.