Narrative on bank NPAs too loud on promoters; Concept of limited liability not understood

With almost 17 per cent of advances by the public sector banks coming under the toxic category of “stressed” assets, the banks and the government have not yet figured out how to handle such a huge crisis. The only person with a  clarity on the issue , that is RBI Governor Raghuram Rajan, has announced his decision not to seek second term, following a smear campaign against him by BJP leader Subramanian Swamy , supported by some powerful politicians and businessmen, who felt uneasy at the way Rajan was doggedly pursuing the clean-up operation of the state –owned banks.

It is not that people in the government and the banks do not know what can be done about the problem of Non-Peforming Assets which run into several lakhs of crores of rupees. The only solution lies in identifying the willful defaulters and those who found themselves in such a situation following turn of economic events after getting into the trap of exuberance of 2007-08 when corporates with low or no debts on their books were considered too conservative to grow. But the problem is,  who will bell the cat ? Nobody wants to take personal risks for the larger good of the society and the economy.

Under the given circumstances, the solution lies in what people call : cutting the losses or taking hair cuts by the banks. Put simply, banks must settle at waving some part of the loans and the interest even though bad assets are sought to be revived. The question is: Who will decide about these hair cuts and taking losses. What is the guarantee that five years from now, these people are not probed by CBI or any other wing of the enforcement machinery , if there is change of the government.  

Though the Bankruptcy law has come into force, its implementation would take at least a couple of years. Besides, even though the law is clear about the concept of  “limited liability or promters in a corporate entity” , the public discourse on the loud media , especially of television, sees promoter and the corporate as a single entity. The basic idea behind the corporate structure of ownership is that the promoters’ liability is limited to his investment in the entity. If the corporate promoted by him sinks, he loses his investment. Unless there is a malfeasance on his part, you cannot hang him for a company going bust because of his misconceived business ideas and errors in judgements.

That is the real challenge in restoring the banks and corporates under debt stress to health.  

   

Bad loans cannot be dismissed as legacy issue; better attend to it

Indian Finance Minister Arun Jaitley , reviewed, November 23, the level of non-performing assets or bad loans of the state-owned banks which account for over 70 per cent of the Indian banking business.

                                      North Block housing FM office  

After the meeting , he tweeted that the level of bad loans of the  Indian banks is “unacceptable”. At his press conference,  the Finance Ministry beat boys and girls were rather careful in crafting questions even when they wanted to ask some real tough ones. Having been a beat boy myself in different ministries, I know their problems. Simply put, if they act “too smart” either in asking questions or in writing story, they would not get one.  The editor is  not going to listen. He/she would like those on the beats to be “cultivating “ ministers and secretaries and not offending them. Anyways, let me not distract and return to the basic issue of bad loans.

This meeting of the FM with the banks was quite well publicized through the official tweets and agency reports.  Some market analysts and TV anchors were discussing whether any major announcement could be expected. Well, bankers had a review meeting with PM Modi some months ago following which “Indradhanush” (Rainbow) package was announced . That had . included recapitalization of Rs 70,000 crore in four years, giving autonomy to banks and political leaders keeping off. It is a different thing that given the gravity of the problem, much more capital infusion is required in the banks where majority stake is held by the government.  

So, in any case, you cannot expect packages every time the FM reviews functioning of the banks owned by the government. In a rather dismissive way, Jaitley talked about generalities like the Bankruptcy bill in the pipeline and how it would help the defaulters exit from the messy companies promoted by them. The sector specific problems in steel and power were also discussed and I am sure, bankers would or rather should have given their real take on the issue.

The FM is right when he says that some of the problems are legacies being attended to by this government.  This government of PM Modi is now about 18-month old and I am sure, the FM would not like to leave this legacy for the next government whoever forms it. So, the best way is to attend to the problem as it exists today and not always blame the legacy. After all, it is because of this legacy issue that Mr Modi swept the elections and the Congress punished. Sure, the country would  not like to be left with at least this kind of a legacy.    

Global firm CLSA has estimated that about 15 per cent of advances by the Indian banks are under stress. Now that is huge and surely, not sustainable and as Jaitley says “unacceptable”. Assuming that some such estimates would have exaggerated the figure, let us take the  RBI figures. It  had put this stressed assets (NPA plus restructured assets) at 11.05 per cent of gross advances as in  March,2015.

According to CLSA, the Indian government is not giving the kind of urgency which is required to address the issue. On the face of it, that may appear so and who knows CLSA may be right. But what gives me hope is a report in Business Standard how Vijay Mallaya , the poster boy of yester years, is trying to work out a deal with the banks to pay them back Rs 7,000 crore . The change of heart in Mallaya, who is believed to be ‘ willful defaulter’ ( legally or otherwise), has come about after Central Bureau of Investigation started  building  pressure on him and his firms including the grounded Kingfisher Airlines.

Maybe, what Finance Ministry and RBI cannot do, CBI can do it, at least with the willful defaulters and there are plenty of them. 

      

Pic courtesy: GOI

Concept Paper on GST

The Goods and Services Tax (GST) is billed as the game changer in India's taxation regime. But, the concept is yet to be understood; what is it is and how it is going work. Here is a pretty good concept paper prepared by the Finance Ministry. 

Concept Note on GST 

1.Introduction 
The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, seeks to amend the Constitution of India to facilitate the introduction of Goods and Services Tax (GST) in the country. The proposed amendments in the Constitution will confer powers both to the Parliament and the State legislatures to make laws for levying GST on the supply of goods and services on the same transaction.

2. Rationale behind moving towards GST:
2.1 Presently, the Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas./p>

2.2 This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry. Firstly, there is no uniformity of tax rates and structure across States. Secondly, there is cascading of taxes due to ‘tax on tax’. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’.

2.3 The introduction of GST would mark a clear departure from the scheme of distribution of fiscal powers envisaged in the Constitution. The proposed dual GST envisages taxation of the same taxable event, i.e., supply of goods and services, simultaneously by both the Centre and the States. Therefore, both Centre and States will be empowered to levy GST across the value chain from the stage of manufacture to consumption. The credit of GST paid on inputs at every stage of value addition would be available for the discharge of GST liability on the output, thereby ensuring GST is charged only on the component of value addition at each stage. This would ensure that there is no ‘tax on tax’ in the country.

2.4 GST will simplify and harmonise the indirect tax regime in the country. It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. It is also expected that introduction of GST will foster a common or seamless Indian market and contribute significantly to the growth of the economy.

2.5 Further, GST will broaden the tax base, and result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.

3. Salient features of proposed GST:

3.1 Dual GST: Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.

3.2 Inter-State Transactions and the IGST Mechanism: The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

3.3 Destination-Based Consumption Tax: GST will be a destination-based tax. This implies that all SGST collected will ordinarily accrue to the State where the consumer of the goods or services sold resides.

3.4 Central Taxes to be subsumed:

• i. Central Excise Duty
• ii. Additional Excise Duty
• iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
• iv. Service Tax
• v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
• vi. Special Additional Duty of Customs-4% (SAD)
• vii. Cesses and surcharges in so far as they relate to supply of goods and services.

3.5 State Taxes to be subsumed:

• i. VAT/Sales Tax
• ii. Central Sales Tax (levied by the Centre and collected by the States)
• iii. Entertainment Tax
• iv. Octroi and Entry Tax (all forms)
• v. Purchase Tax
• vi. Luxury Tax
• vii. Taxes on lottery, betting and gambling
• viii. State cesses and surcharges in so far as they relate to supply of goods and services.

3.6 All goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST.

• i. Petroleum and petroleum products have been constitutionally included as ‘goods’ under GST. However, it has also been provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Centre on petroleum and petroleum products, viz. Sales Tax/VAT and CST by the States, and excise duty the Centre, will continue to be levied in the interim period.
• ii. Taxes on tobacco and tobacco products imposed by the Centre shall continue to be levied over and above GST.
• iii. In case of alcoholic liquor for human consumption, States would continue to levy the taxes presently being levied, i.e., State Excise Duty and Sales Tax/VAT.

3.7 GST Council: In the GST regime, a Goods and Services Tax Council is being created under the Constitution. The GST Council will be a joint forum of the Centre and the States. This Council would function under the Chairmanship of the Union Finance Minister and will have Minister in charge of Finance/Taxation or Minister nominated by each of the States & UTs with Legislatures, as members. The Council will make recommendations to the Union and the States on important issues like tax rates, exemption list, threshold limits, etc. The recommendations made by this Council will act as benchmark or guidance to Union as well as State Governments. One-half of the total number of Members of the Council will constitute the quorum of GST council. Every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting in accordance with the following principles:-

• i. The vote of the Central Government shall have a weightage of one-third of the total votes cast, and
• ii. The votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting..

This is to protect the interests of each State and the Centre when the Council takes a decision and is in the spirit of co-operative federalism.

3.8 Floor rates of GST with band: GST rates will be uniform across the country. However, to give fiscal autonomy to the States and the Centre, there will a provision of a tax band over and above the rate of the floor rates of CGST, SGST and IGST. Initially, the rates of CGST, SGST and IGST are expected to be closely aligned to the Revenue Neutral Rates (RNR) of the Centre and the States.

3.9 Goods and Services Tax Network (GSTN): A not-for-profit, Non-Government Company called Goods and Services Tax Network (GSTN), jointly set up by the Central and State Governments will provide shared IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders.

3.10 GST Compensation: Due to a shift from origin based to destination based indirect tax structure, some States might face drop in revenue in the initial years. To help the States in this transition phase, the Centre has committed to compensate all their losses for a period of 5 years. Accordingly, clause 19 has been inserted in the Constitution (122nd) Amendment Bill, 2014 to provide for compensation to States by law, on the recommendation of the Goods and Services Tax Council, for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.

4. Salient features of the Constitution (122nd) Amendment Bill, 2014: The salient features of the GST Bill as introduced in the Lok Sabha are as follows:-

• i. subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services;
• ii. subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and State cesses and surcharges in so far as they relate to supply of goods and services;
• iii. dispensing with the concept of ‘declared goods of special importance’ under the Constitution;
• iv. levy of Integrated Goods and Services Tax on inter-State transactions of goods and services;
• v. levy of an additional tax on supply of goods, not exceeding one per cent. in the course of inter-State trade or commerce to be collected by the Government of India for a period of two years, and assigned to the States from where the supply originates;
• vi. conferring simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax;
• vii. coverage of all goods and services, except alcoholic liquor for human consumption, for the levy of goods and services tax. In case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of Goods and Services Tax till a date notified on the recommendation of the Goods and Services Tax Council.
• viii. compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period which may extend to five years;
• ix. creation of Goods and Services Tax Council to examine issues relating to goods and services tax and make recommendations to the Union and the States on parameters like rates, exemption list and threshold limits. The Council shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government. It is further provided that every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting in accordance with the following principles:—
• a. the vote of the Central Government shall have a weightage of one-third of the total votes cast, and
• b. the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.
• x. levy of an additional non-vatable tax on supply of goods of not more than 1% in the course of inter-State trade or commerce, for a period not exceeding 2 years, or such other period as the GST Council may recommend, to protect the interests of the producing/manufacturing States. This additional tax on supply of goods will be levied and collected by the Government of India, over and above the IGST levied under the proposed Article 269A (1). This tax shall be assigned to the States from where such supplies originate.

Paris terror attacks to create deep wounds for global economy; Indian tourism to get hit

The deadly terror attack in Paris will have a shattering impact on the global economy with major impact feared on the travel related sectors such as airlines, hotels, restaurants, city transport. It is also a very bad news for the oil and gas as the travel and tourism are the major triggers for the fuel demand, be it for cars, local transport or jet fuel.

Understandably, the maximum impact would be felt on major economies across Europe which are already  battling slowdown. The ripple effect would also be seen on major trading partners of the European Union- the US, China, India and Japan.

These attacks, the worst and the most brazen since the World War II on France have shaken the citizen confidence.  It is the citizen who is the core of the political and economic system and when the core is attacked and shaken, rest of the pieces of the block fall wide apart.

For the world leaders who are grouped into different nomenclature like G 20 and G 8 etc, it will be terrorism again that is going to be the top priority.  The fact that the terrorists could strike at Paris twice in a year shows how vulnerable a state can be even when the French intelligence  is considered to be among the best.  That means , these suicide squads are capable of breaking any barrier.

India gets bulk of its foreign tourist traffic  from western Europe for its winter season, which has just about begun.  States like Rajasthan, Delhi, Goa, Kerala attract a good number of tourists. These attacks in France will definitely have bruising  impact on the tourism sectors in these Indian states.

So, along with the commodities like metals, the tourism industry would come under pressure, ironically at a time when the aviation sector in India along with the rest of the world was showing a promise riding on the back of cheap jet fuel resulting in a sharp reduction in their operating costs. Several of the carriers in India like Spice, Jet have reported better results while the Initial Public Offering of the most profitable carrier Indigo has been a great hit on listing.  Hotels too would get a hit .  

How the world rallies around this terror attack would also make a difference. The key would be how countries in the Middle East respond.  France is wounded badly but the wounds are hurting all and would have a huge economic cost.  

Pic courtesy: GOI 

India to use London’s financial prowess for raising infra resources

Contrary to apprehensions that PM Narendra Modi would have lost sheen  after defeat of his party BJP in politically Bihar elections, he looked on top of the situation in UK. His important UK quotes from investors’ perspective are:

On Fast tracking FDI proposals:  India has decided to set up a Fast Track Mechanism for clearing investment proposals from UK since it is among the top FDI source nations.   

On Fund raising : India will make good use of London as a financial centre for raising funds for meeting its infrastructure requirements. India will raise Railway Rupee Bonds in London for funding Indian Railways.   

On commitment to open up : We will open new doors in the services sector. We will collaborate more – here and in India - in defence equipment and technology. We will work together on renewable and nuclear energy. 

For India, a target of 175 GW of additional capacity in renewable energy by 2022 and reduction in emission intensity of 33-35 % by 2030 are just two of the steps of a comprehensive strategy. 

Pic: PIB