Financing Independent Power Producers in India 1

In India, banks and financial institutions are conventional sources of infrastructure finance. Until recently, PSUs accounted for almost all of power sector exposures of banks and FIs. However, this trend is changing and with recent reforms paving way for greater private sector participation, banks are witnessing a sudden flurry of long term and working capital lending for Independent Power Producers (IPPs) in the last 3-4 years. Despite substantial revisions of internal exposure limits, by banks and FIs, to infrastructure and power, financing IPPs continues to be significantly constrained by limits both prudential and preferential. Moreover, PSU power companies, infused with fresh equity, are competing in the open market for already scarce financial resources.  In these circumstances, IPPs are facing teething issues in securing both long term and cash credit, from conventional sources.  

Indian Power Sector - Diaries 1

The Indian Power Industry is in an interesting phase of evolution. After the liberalization of the generation space in the Electricity Act 2003, there is a flurry of activity seen especially from Independent Power Producers (IPPs). It is projected that the share of capacity addition from IPPs would exceed that of the public sector (State, Central and Joint Sectors put together) in the next five years.

However, emerging players are confronted by several issues including shortage of long term funds, unproven operations track record, resource and supply logistics uncertainty, transmission and distribution bottlenecks etc. Many new IPPs emerging in the generation space are largely unprepared to face both upstream and downstream shocks widely expected in the industry.  

To mitigate the aforementioned setbacks and develop a strong economic, logistical, operational and managerial foundation, it is important for IPPs to design and implement an effective enterprise information and planning system. 

The ULIP Debate

Regulation is the most coveted item in India’s administrative circles. The ULIPs case has once again reiterated that Indian regulators love to vie for greater regulatory scope and power.  The unit linked insurance plan is a hybrid instrument which originated to circumvent the front loading restrictions in mutual fund industry.  Today ULIPs share a significant chunk of the markets and their architecture is similar to that of a mutual fund unit with underlying securities. The popularity of ULIPs owes to the specific deductions allowed in the Income Tax Act under chapter 6 deductions.

Basically, ULIPs are units of a fund which provide life insurance cover to the subscribers by investing the subscribed sums in market securities (in specific equities). Hence, it acts as a mutual fund under the cover of an insurance fund. This arrangement can be further judged by considering the facts that only a small sum out the periodical premium is diverted to insurance cover while the larger chunk is directly invested in markets. Moreover, IRDA permits a plethora of front end loads for insurance products which makes these ULIPs, all the more interesting to agents and markets brokers.

Now, the question is who should regulate this hybrid instrument? The CBDT, revising its stance on Chapter 6 deductions for ULIPs for the proposed Direct Tax Code, has suggested that it would allow deductions for instruments strictly classified as insurance products by IRDA, hence indicating a regulatory exclusivity on ULIPs to IRDA. However, the genesis of this regulatory debate began when SEBI has slapped, all the companies issuing ULIPs, with a show cause notice alleging that transactions in ULIPs is an unapproved/ illegal business. This provoked the Ulippers to approach IRDA which in-turn counter notified that SEBI’s notification is ultravires of its regulatory powers.  The government has intervened to mellow down this, almost melodramatic, regulatory war, and referred the regulatory issue to the Supreme Court.

However, in a sudden turn of events the Government of India has come out with an ordinance which delivered a clear victory to IRDA in this regulatory turf war. There has been no public discussion and no real assessment of the strengths and weaknesses of these regulators. Moreover, the very nature of the ULIPs instrument has not yet been strictly defined under any sphere. This ad hoc arrangement to protect select interests does not appear as a healthy reform signal from the Government.  

GST and Entry Taxes

One of the state level levies proposed to be subsumed under the Goods and Services Tax umbrella is the Entry Tax not in lieu of Octroi. Entry tax, not in lieu of Octroi, is levied by the State governments on goods entering into their respective territories for final consumption. It is levied under the powers available under Entry 52 of the State List. Entry tax is modeled as a compensatory tax. Compensatory Taxes are proportional to a measurable advantage conferred by the Government. Entry Tax, in its preamble, was stated as a measure for collection of tax to provide facilities to traders and improve infrastructure. Supreme Court has validated that Entry Taxes are in the nature of a Compensatory Tax as it confirms with the yardsticks imposed and has adjudged them to be an exception to Article 301 of the Constitution of India. Article 301, by providing that subject to provisions of Part-XIII, trade, commerce and intercourse throughout the territory of India shall be free, upholds the idea of India being a single economic unit with no restrictions for movement of goods, property and services. Citing this Article, it is often argued that the character of Entry Tax is, effectively, not in congruence with the principle prescribed under article 301 of the Constitution and hence can only be accommodated as an exception.

On one hand, Entry taxes, not in lieu of Octroi,  impose an unnecessary burden on the movement of goods, absorb administrative resources and could defeat the model of GST if not subsumed under it.  Entry Taxes are to be abolished by organizing adequate compensation for revenue losses suffered by states earning significant revenues for this source. On the other hand, Entry Tax, which is in the nature of Octroi, cannot be disturbed. It is imposed by municipalities and urban local bodies to meet their revenue requirements and the proposed Goods and Services Tax regime does not accommodate a compensation system for subsuming taxes levied by local bodies.

The Grasshoppers and the Ants - a Modern Fable

Source: Written by Martin Wolf, Published on the Financial Times: May 25 2010

Everybody in the west knows the fable of the grasshopper and the ant. The grasshopper is lazy and sings away the summer, while the ant piles up stores for the winter. When the cold weather comes, the grasshopper begs the ant for food. The ant refuses and the grasshopper starves. The moral of this story? Idleness brings want.

Yet life is more complex than in Aesop’s fable. Today, the ants are Germans, Chinese and Japanese, while the grasshoppers are American, British, Greek, Irish and Spanish. Ants produce enticing goods grasshoppers want to buy. The latter ask whether the former want something in return. “No,” reply the ants. “You do not have anything we want, except, maybe, a spot by the sea. We will lend you the money. That way, you enjoy our goods and we accumulate stores.”

Ants and grasshoppers are happy. Being frugal and cautious, the ants deposit their surplus earnings in supposedly safe banks, which relend to grasshoppers. The latter, in turn, no longer need to make goods, since ants supply them so cheaply. But ants do not sell them houses, shopping malls or offices. So grasshoppers make these, instead. They even ask ants to come and do the work. Grasshoppers find that with all the money flowing in, the price of land rises. So they borrow more, build more and spend more.

The ants look at the prosperity of grasshopper colonies and tell their bankers: “Lend even more to grasshoppers, since we ants do not want to borrow.” Ants are far better at making real products than at assessing financial ones. So grasshoppers discover clever ways of packaging their grasshopper loans into enticing assets for ant banks.

Now, the German ant nest is very close to some small colonies of grasshoppers. German ants say: “We want to be friends. So why do we not all use the same money? But, first, you must promise to behave like ants forever.” So grasshoppers have to pass a test: behave like ants for a few years. The grasshoppers do so and are then allowed to adopt the European money.

Everyone lives happily, for a while. The German ants look at their loans to grasshoppers and feel rich. Meanwhile, in grasshopper colonies, their governments look at their healthy accounts and say: “Look, we are better at sticking to the fiscal rules than ants.” Ants find this embarrassing. So they say nothing about the fact that wages and prices are rising fast in grasshopper colonies, making their goods more expensive, while lowering the real burden of interest, so encouraging yet more borrowing and building.

Wise German ants insist, gloomily, that “trees do not grow to the sky”. Land prices finally peak in the grasshopper colonies. Ant banks duly become nervous and ask for their money back. So grasshopper debtors are forced to sell. This creates a chain of bankruptcy. It also halts construction in the grasshopper colonies and grasshopper spending on ant goods. Jobs disappear in both grasshopper colonies and ant nests and fiscal deficits soar, especially in grasshopper colonies.

German ants realise that their stores of wealth are not worth much since grasshoppers cannot provide them with anything they want, except for cheap houses in the sun. Ant banks either have to write off bad loans or they must persuade ant governments to give even more ant money to the grasshopper colonies. Ant governments are afraid to admit that they have allowed their banks to lose the ants’ money. So they prefer the latter course, called a “bail-out”. Meanwhile, they order the governments of the grasshoppers to raise taxes and slash spending. Now, they say, you must really behave like ants. So the grasshopper colonies go into a deep recession. But grasshoppers still cannot make anything ants want to buy, because they do not know how to do so. Since grasshoppers can no longer borrow, to buy goods from ants, they starve. The German ants finally write off their loans to grasshoppers. But, having learnt little from this experience, they sell their goods, in return for yet more debt, elsewhere.

As it happens, in the wider world, there are other ant nests. Asia, in particular, is full of them. There is a rich nest, rather like Germany, called Japan. There is also a huge, but poorer, nest called China. These also want to become rich by selling goods to grasshoppers at low prices and building up claims on grasshopper colonies. The Chinese nest even fixes the foreign price of its currency at a level that guarantees the extreme cheapness of its goods. Fortunately, for the Asians, or so it seems, there happens to be a very big and exceptionally industrious grasshopper colony, called America. Indeed, the only way you would know it is a grasshopper colony is that its motto is: “In shopping we trust”. Asian nests develop a relationship with America similar to Germany’s with its neighbours. Asian ants build up piles of grasshopper debt and feel rich.

Yet there is a difference. When the crash comes to America and households stop borrowing and spending and the fiscal deficit explodes, the government does not say to itself: “This is dangerous; we must cut back spending.” Instead, it says: “We must spend even more, to keep the economy humming.” So the fiscal deficit becomes enormous.

This makes the Asians nervous. So the leader of China’s nest tells America: “We, your creditors, insist you stop borrowing, just as European grasshoppers are now doing.” The leader of the American colony laughs: “We did not ask you to lend us this money. In fact, we told you it was a folly. We are going to make sure American grasshoppers have jobs. If you do not want to lend us money, raise the price of your currency. Then we will make what we used to buy and you will no longer have to lend to us.” So America teaches creditors a lesson from a dead sage: “If you owe your bank $100, you have a problem; but if you owe $100m, it does.”

The Chinese leader does not want to admit that his nest’s huge pile of American debt is not going to be worth what it cost. Chinese people also want to go on making cheap goods for foreigners. So China decides to buy yet more American debt, after all. But, decades later, the Chinese finally say to the Americans: “Now we would like you to provide us with goods in return for your debt to us. Thereupon, the American grasshoppers laugh and promptly reduce the debt’s value. The ants lose the value off their savings and some of them then starve to death.

What is the moral of this fable? If you want to accumulate enduring wealth, do not lend to grasshoppers.

GST Diaries - Part 4

Some of the issues to be considered before implementing the new GST regime are:

(i)                   Fate of the existing concessions, exemptions and compounding benefits offered to the industry

            Concessions, Exemptions and Compounding benefits are offered to uphold equity in taxation. The existing indirect taxes regime offers idiosyncratic concessions to different assessees depending upon their turnover, geographical region, range of activity etc. These concessions, benefits and exemptions are obviously different for different levies. These benefits, in many cases, are proving to be distortionary and even regressive. Hence, there is strong case to do away with these multifarious concessions and instead establish a uniform product based exemption (both in SGST and CGST) at all levels of the supply chain. Now an immediate practical problem the committee will face in the implementation of the GST regime, is what will happen to the existing concessions, exemptions and compounding benefits offered by both the central government and the various state governments. The task force recommends allowing the existing assessee specific concessions to stay and henceforth not permit any additional such offers by the state or the centre.  Yet, it is unclear as to what kind of distortions the continuation of these concessions will impose on the new regime. 

(ii)                Should GST on stock transfers be abolished or be levied with credit given?

Stock Transfers are not a sale. Hence, the transferor (or consignor) will not be able to immediately pass the burden of tax on the customer. He needs to pay tax from his working capital. This will put an undue stress on the working capital of businesses. This will be very similar to payment of excise duty (under rules 7, 8 and 10A of the Central Excise (Determination of Value) Rules, 2000) for a transfer from the factory to a depot which is completely unnecessary and not business friendly. Since the additional cost borne for this additional burden on working capital will again be transmitted on to the consumer, this provision might prove to be regressive in its effect. Moreover, assuming the refund of tax is not automated, or in worst case if there is no provision for refund of tax but only a provision for set-off in perpetuity, the businesses will have to incur additional costs which will in turn hike up the price of their products. However, there is a case of tax evasion which may crop up if the transfer of goods, without payment of tax, is allowed. In order to prevent this tight inter-state border screening will be required which can again imply unwanted transaction delays. Hence, it is important to rightly assess and compare the probable economic cost of collecting GST on consignment or stock transfers with the costs implied from transaction delays caused by strict border policing.

(iii)               Degree of administrative standardization.

Administrative standardization means to offer a uniform/standard procedure for all interface related aspects of the Indirect Tax Regime.  Currently, the interface between the assessees and the motley of indirect tax administrations is variegated and in several instances duplicatory of one another.  For example, a common assessee is required to furnish turnover audit reports (where ever necessary) for Cenvat, VAT and Service Tax Assessment independently. This makes compliance burdensome and increases the transaction costs. Also, the number of forms to be filled for each levy (ranges from 7 Forms for Excise and 10 forms for Service Tax to more than 55 Different Forms for VAT) frustrates the businesses and incentivizes tax evasion. The all-in-one form suggested by the Task Force will help to simplify compliance to a reasonable degree.   

(iv)              Abolish all kinds of Declaration forms and Road Permits.

Road permits have been introduced in order to make good for revenue losses made by abolishing octroi. Road permits, also called as way bills, are issued by purchasing dealers to selling dealers to bring the material from one state to another. Example: VAT 65 in Jammu & Kashmir, ST-38 Haryana, ST -31 in Uttar Pradesh, VAT-47 in Rajasthan, FORM -50 in West Bengal, D IX in Bihar etc. One of India’s most troublesome issues which act as sand in wheels to businesses ranging across states is the permit raj. Any reform in this subject has got implications for administration standardization dealt above. This kind of a camouflaged octroi not only distorts prices for the same between states but also breeds in tax/compliance evasive tendencies in assessees.

(v)                The Case of Services

Services are by far the least understood and discusses subject under the GST. Given the fact that Services are India’s largest and most revenue potent industry, it becomes all the more important to understand their probable role and consequent response to the new regime.There are several questions being posed on their treatment in the tax model. Will they charged be at par with Goods? Will their identification be guided by a positive list or a negative list? What infrastructure will be put in place to track or monitor inter-state businesses? If the goods are to be taxed at different rates and services are to be taxed at one of the rates, won’t there be litigations cropping in? (This can potentially be solved by issuing a positive list of services which will be taxed at a stipulated rates and no litigation or bargaining shall be allowed)

GST Diaries - Part 3

Given the current administrative structure of energy industry in India, subsuming state electricity duties and petroleum taxes under the GST regime may not be feasible.

The following are some the factors which make it, close to, impossible to subsume electricity tax under the proposed GST levy:

 

-          Cost of power generation differs from mode to mode and in many cases from plant to plant. Moreover, Electricity tariffs are differently charged in different states and there is no uniform scientific model adopted in electricity pricing.

-          A potential administrative problem can arise from accounting the transmission and distribution losses between states.

-          Ad hoc demand management during times of power deficiencies becomes difficult.

-          Accounting credit transfers between states will be quite tedious owing to the inter-state or regional management of power generation and transmission.

-          An integration of the multifarious agencies and authorities in the power administration is pre-requisite for this reform.

-          Electricity consumption entails high volume transactions. Hence, an input tax credit burden will be an unnecessary impediment in working capital cycle.

-          Power sector is an investment intensive administration the melting time required to absorb input tax credit from capital goods will lock-in substantial sums of working capital.

-          Electricity does not form a significant chunk of input cost in many industries.

The following factors detail issues in subsuming taxes on petroleum products:

-          Demand and Supply management in the petroleum industry has strategic and security connotations attached. The current national level petroleum management structure may not accommodate a purely commercial form of levy designed on the destination principle. 

-          Accounting inter-state transfer of petroleum, especially in the transportation sector, will become an administrative nightmare. Consequently many rebating-related complications will arise.

-          Petroleum levies are major revenue earners in many states and are often taxed at rates higher than the average VAT rates. Hence, an inclusion of petroleum levies under the larger umbrella of GST will entail higher GST rates which will inturn be regressive on other goods.

-          Except in certain specified industries like Goods Transport Agencies, Power Generation (where no input tax credit can be passed on as power generation, as suggested by this study, will be kept outside the GST levied) and services specified under the service tax legislation etc, petroleum is not a major input and hence does not occupy a significant percentage of input costs.

The task force report suggests a bifurcation of petroleum levies based on the purpose of its consumption. It recommends that petroleum meant for industrial purposes must be taxed under the GST levy while allowing input tax credit and for all other purposes a levy similar to the ones currently imposed. Though this structure might ideally cater to the demands of political economy, it may impose an unnecessary administrative burden in form of strict vigilance to ensure classification on the basis of consumption is abided.    

China-Japan-India Trilateral Economic and Monetary Union

The idea of a greater Asian Monetary Union or even a China-Japan-India trilateral economic and monetary union, in today's world, remains a farfetched dream. While one cannot deny the benefits that go with a Monetary Union, such as a seamless intra-regional transfer of capital and investment, reduced exchange risk, regional market integration, financial deepening and diversification, the herculean task of fulfilling the preconditions required to achieve this ideal often tends to dampen the general enthusiasm.

A quick look at the available international models of economic and monetary unions will establish the grounds to further discuss this subject. Currently, there are three major models of monetary unions:

(i) EU Model:

The EU model, having a conventional single legal tender and a single central bank system at the regional level, subscribes to the traditional idea of a monetary union. The prerequisites for this model include establishing reliable responsibility/reporting system, relatively tighter political integration with strong political institutions like the European Parliament and the European Court of Justice and most importantly considerable congruence in per-capita incomes within the region.   

(ii) NAFTA Model:

North American Free Trade Agreement is a little more than just a FTA. Its managed floating backed inflation targeting objective makes it another form of a monetary union which is less physical than the EU one. NAFTA ushers its member states (US, Canada and Mexico) to maintain a common monetary policy objective commitment to ensure low and stable inflation in the region. Canada and Mexico are formal inflation targeters while the US is a de facto inflation targeter. Even for a NAFTA like model, there is some fundamental spade work to be done before implementing it. A loose political integration, a coordinated monetary policy action, independent central banks, absence of fiscal dominance and a well defined policy transmission channels are some of the pre-conditions required.

(iii) Latin American Currency Unions:

The third model of a monetary union is a one that demands a rigid currency union where one country absolutely submits its monetary policy autonomy to another umbrella nation by pegging the local currency with the super regional currency of the umbrella nation. This model requires a great deal of political and economic sacrifice beyond other equally painful submissions.

Finally, the preconditions for any sort of monetary union are as political as economic. Convergence of economic structure across member countries, strong and uniform investor rights to facilitate a uniform monetary transmission, prudential supervision and regulation, culture of policy transparency etc are some of the its essential ingredients ( Barry Eichengreen).

In the context of a China-Japan-India trilateral union, none of the above experimented models can be currently employed. Moreover, there is a controversial question of ‘who will submit to whom’ to be answered. Also, there are also wide rifts in the economic (both monetary and financial) structures between these countries. Hence as a potential union they have a far way to go before they meet any of the presuppositions listed in the aforementioned models.

In the hierarchy of Economic Integration (proposed as the second best and practical alternative), preferential trade agreements form the first step, chronologically followed by free trade agreements, customs union, single market, economic and monetary union and complete economic integration. The trilateral relationship between China, India and Japan hasn't even matured to that of a free trade zone forget about a unified regional market.

Thus, in the given state of affairs, to toy with the idea of an integrated Asian market, a single power Asian legal tender and a congruent Asian monetary policy is nothing more than romantic.

Thoughts on Thrift and Development

I don’t earn enough to remain thrifty. Well, it might not sound conventional, but, in my opinion to remain thrifty one needs to have a blanket of surplus money, left-over, after meeting ones essential and semi-essential needs. Hence, I need more money to remain thrifty. Now, what incentive do I have to be thrifty today? I am a little over a couple of decades old and I believe I possess a reasonable set of employment- friendly skills which should place me with a decent paying job in near future. So I reassure myself that I needn’t be as thrifty as I should otherwise be. This reassurance makes me go about running my life peacefully and without any anxiety about future and its fall outs.

However, I am currently being consumed by this disillusioning fear of tomorrow. Not because I can picture one but for the exact opposite of it. When I mean picture I understand I am being quite selfish in trying to concentrate my faculties to sketch a feel of my future, which I may or may not understand. To sound more precise, I am afraid whether I can sustain the style of living I have developed in the last few years. Not that I lead a flamboyant one but I wish to keep my dear and near in good company. Believe me, the goodness of one’s company has a (however, insignificant it may be) functional relationship with one’s earning.

It might be too early for someone like me to worry about a post superannuation or retirement life. But, being an inherent risk mitigator, I have enough reason to worry about my capacity to smoothen my consumption and thereby avoid unwarranted and unappealing jerks to my style of living. I have begun scouting for options available both inside and outside the finance world which will incentivize me to become thrifty when I start making some surplus. 

To my dismay, in my country I find very few such options. I wonder what may be the plight of my not-so-lucky fellow citizens, who can neither afford to be thrifty nor afford to be not thrifty.

The Indian financial markets might have broadened and deepened, might also boast of increasingly complex financial solutions to meet the needs of a select progressive class of citizenry. However, a large chunk of our populace is nowhere in the priority list. More than 70 % of this country’s citizens don’t have clue as to how their consumption power will remain (read life sustain) in this break neck speed economy. It is important to acknowledge the ills of super fast growth and try to rectify them to make sure the benefits of this growth percolates to all. Take an example of a small private business clerk (having 10 more years of service) who probably earns Rs 15,000 a month and saves Rs 2000 and having access to pension/provident funds offering 10% P.A interest rate on deposits. Also assuming an average Income growth rate of 10% P.A, if he begins to invest in these funds, he can aspire to earn around Rs 8 lacs. Assuming a steady inflation rate of 5%, the small business clerk would need approximately Rs 22,000, 10 years hence, to sustain his current consumption level of Rs 13,000. Is it feasible to earn Rs 22,000 per month with a corpus of Rs 7, 00,000 during retirement? In my opinion, it is feasible only to a financial genius who is capable of making the right bets in the financial market can and not to a regular small business retiree. Other option left to this then old man is to seek the generosity of his children or wards. Given the rate of disintegration of India’s traditional family set-up (also India’s most important old age social security system), this is not the best bridge insurance.

Compared to the problems of this small business clerk, mine are small and insignificant. But I am alert to make my hay while the sun shines. Not many are, not many are even aware of this impending plight. Not many can withstand it, I am not predicting an Armageddon but I am most definitely warning of an impending public finance crisis, if systems are not established to take care of the future of millions of have-nots and potential have-nots. PFRDA is a good initiative, but its role seems to remain dormant. I don’t see the kind of publicity I have expected (which it rightly deserves in order to attract savers). Government should also consider tying up with private superannuation fund managers to design micro or maybe even nano plans to suit the needs of our motley citizenry. The policy makers must realize that private thrift (by the common people and not only by businesses) is required to sustain our development momentum. Hence, they must focus their resources to make thrift accessible to our masses.

GST Diaries - Part 2

The famous Chanakya Nithi (in Arthashastra) elucidates that a government should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can sustain. Well, the indirect tax regime in India is more like a leech which parasitically efforts to suck as much blood as it can from its victim and in the process cause a lot of damage. Many assessing authorities take pride in being tax hounds than being persuasive civil servants. Moreover, the system of imposing minimum collection limits in order to meet revenue targets only adds to the tyrannies of the administration. It is high time that the proposed GST regime ushers in a new attitude of taxation amongst the taxing authorities.

Under the interest on delayed payment and the interest on delayed refund provisions of the Central Excise, one can visibly observe a clear arrogance on the part of the taxation authorities. U/S 11 AB of the Central Excise Act interest is to be paid by an assessee in case of a delayed payment of duty at a rate not below ten per cent and not exceeding thirty per cent per annum (currently 13%). However, U/S 11BB of the same act, the interest is to be paid by the department on a delayed refund of duty to the assessee shall not be less than 5 % and not exceed 30% (currently only 6%). Many such double standards in administration of excise duty and various other levies are quite visible. Such undue benefit to the department at the loss of assessees’ is not a sensible tax arrangement.

Under the current system, there is a great amount of discretion available to assessing officers in the assessment procedures. Such discretion not only accommodates red tape and graft but also encourages unwarranted submission of tax payers to the whims and fancies of the assessing officers. The proposed regime must attempt to automate the interface between the tax payer and department at most levels excepting the senior adjudication procedures. This will significantly lessen the compliance costs of most small and medium tax payers and also relieve the department of valuable administrative resources.

Other issues which the current reforms should seek to solve include the complexities involved in equity aimed compounding (of taxes and penalty) scheme, settlement commission, inadequate penal threats, high discretion in approving duty drawbacks, rebates and refunds etc .

GST Diaries - Part 1

The Goods and Service Tax is widely expected to lessen the overall burden of indirect taxes on the ultimate consumer. In public finance jargon, GST is expected to reduce the regressiveness of the existing indirect tax system and uphold the principle of equity in taxation. The advocates of GST argue that the GST levy will seamlessly transfer the Input Tax Credit through the Supply Chain and consequently reduce the effective impact of the tax. However, all this talk on seamless transfer and progressivity of taxes come while there is absolutely no consensus on the rate of levy.

There are several issues lying loose in the discourse on rates. There is a certain degree of ambiguity as to what kind of rate differentiation will GST adopt. Will the State and Central levy be uniform? Will there be a serious of rates for different goods? Will there be a rate differentiation between goods and services?

The following illustrate the consequences of the several propositions being made on rates.

(i) Different Rates for Services and Goods: In case of a works contract, the existing indirect tax regime values the consideration paid towards the service of works contract as the Gross Amount received by the service provider minus the value of the goods in property transferred by the service provider to the service receiver. This rule is introduced to help an assessee to clearly identify the value of service (and pay service tax on that value) as against the value of property transfer made while rendering the service. However, the degree of clarity achieved in the valuation of works contract has not been achieved with respect to other services like catering contracts, business auxiliary services etc. This led to several litigations and consequent administrative hassles. Now, by continuing a differentiated rate system, between services and goods, in the GST regime, one may end facing similar litigations and administrative hassles in the proposed regime.

(ii) Different Rates for Different Goods: By charging multiple tax rates, the GST regime may fall prey to the same problems that the erstwhile sales taxes faced. Some state governments, in order to uphold the principle of ‘equity’, have, at one point of time, courted as many as 10 different rates. I sincerely wish that the policy makers will take note of the fallouts from multiple rate structure and make GST a single or, maximum, a dual rate levy.

(iii) Effective Rate: The effective rate of indirect taxes in India (ignoring Customs and CST) is 12.56% (CENVAT + VAT). There are reports in the media which suggest that the finance ministry and the empowered committee is looking at a rate of around 16% (8%+8%). This steep levy, in spite of all the efficiency gains from administrative smoothening and seamless Input Tax Credit transfer, will dampen the growth of businesses.

There are several pressing issues confronting GST implementation, and that on Rate, mind me, have got far reaching consequences.

Public Accounting Gimmicks

It is common knowledge that accountancy is one of the most creative art forms that man had stumbled on. And, it becomes all the more artistic when you are dealing with someone else’s money. Now imagine what will be the case when a bunch of underpaid bureaucrats account for ‘social expenditure’ made by dishonest public representatives from the tax payer’s money. Indeed one will be bound to witness the ingenuity of human intellect and imagination displayed through a cleverly camouflaged maze of numbers. This is the primer that guides most of our public accounting processes.

In my current study I am attempting to understand the trends of Social Service expenditure made by certain states in India. To my amazement, I was able to make some headway in obtaining relevant accounts to study the patterns. However, the quagmire does not lie in the access to public documents (as in case of many superfluously ‘open-economies’ that I have had an opportunity to live in) but in what comes next – i.e. cracking them.

The beauty of public accounting is that you don’t know what you are accounting (public good or private good)? , why you are accounting (to record or to report)? , for whom are you accounting (for public or public officials)? , and for heaven’s sake, who is actually accounting?. This ambiguity inspires even the rather docile of public accountants to prove their mettle.

While I was trying to identify expenditure made by some state governments on Social Services, I was happy to locate a complete segment on the social services in the state expenditure statements. It has a very professional touch to it. Thanks to the efforts of RBI, I was also able to trace a uniform/standard expenditure statement published for different state governments. Now, one may wonder what I am complaining about. Let me give you a quick example which elucidates and highlights my plight.

The Government of Tamil Nadu rode to power on the promise of free color televisions for families living below the poverty line. Quite steadfastly, the government kept its promise of delivering the televisions (albeit the quality of the delivery is can be questionable). However, the real catch to this expenditure came when it was to be accounted. Thanks to the doctrines of public finance, there are some underlying principles which direct public expenditure accounting practice to describe the impact of ‘public expenditure’ on social wellbeing in a comprehensible manner. However, the principles are only persuasive or directive and not affirmative or confirmative. Hence this allows the government accountants and their political mentors have a field day. Encouraged by this haziness in the interpretation of the principles of public accounting, the Government of Tamil Nadu argued that the expenditure on Color TVs (which is essentially a consumption expenditure if not an economic decoy in the election manifesto) as a ‘Social Investment Expenditure’. It persuaded the C&AG to agree to this classification by further enlightening that the expenditure made on color televisions will contribute towards improving the access to public welfare information of BPL families. I wonder what the serials and cinema addicted beneficiaries of the scheme have to say. So what am I to believe and use for my study? This politically inspired idiosyncratic definition of social investment, offered by a state government, ruins the very composition of my study database. And to remain ‘academic’ enough and test my study empirically I have no other option but to disregard my faculties and believe the published reports. Well this is only one of the excesses caused by an inept public accounting system, which I may reasonably believe are beyond my comprehension.

I believe that the problem of public accounting is more applied than conceptual. One needs binding principles and not loose-ended ones to compel unscrupulous public officials to classify disbursements from the public coffers in a meaningful way. Moreover, a public sponsored body which prescribes and administers standards in public accounting (as in case of India) is an agency nightmare. It is high time that the government reinvents its public accounting system by actively collaborating with professional bodies. This will prove fruitful not only to the minuscule academia but also to the vast majority who are clueless as to how exactly their hard-earned tax money in being churned around for their own welfare.

Arise, Awake and Stop Not till the Goal is Reached

Many of us, young people, today, live in cities and towns. We live in crowded settlements, but seldom interact with our neighbors. We commute many kilometers everyday to reach schools, universities and work, but we rarely care to visit our neighborhood outreach centre. We have big ambitions but we remain cocooned in myopic visions. We have immense potential but no initiative. Many, young city dwellers, in the developing world, have been brought up in the bustle of city life without access to good education, health, civic amenities and quality of environment. We remain unperturbed by the bedlam surrounding us and are complacent to the inefficiency of our systems. Do we plan to bequeath the chaos, which plagues our lives, to our children and their children? No! We have an important responsibility and a great opportunity to effect enormous change to the defunct systems we live in.

There are very many factors which may undermine our participation in urban development. These include heavy politicization of local bodies, lack of organized non-political youth associations, economic difficulties, poor parental patronage and inept education system. However, our ability to face all odds comes from within. Our strengths lie in our dynamism, unwavering will and above all our potent age.

It is high time, for us, to put forward a legitimate claim, a claim for a better future. We have a fairer advantage in technology than our predecessors, and we must pledge to make use of it to effect the right change. I wish to put forward a few proposals to help young people actively participate in building sustainable and livable urban dwellings. I will make a modest attempt to prove that that money is not the only solution for development.

I believe that the primary agenda of urban development should be creation of a healthy education system. Healthy education implants thought and inspires action. To begin with, I propose that a course on ‘Urban Awareness’ should be introduced as a core subject in all Universities, Colleges and Schools. This course should facilitate a hands-on learning process wherein young stakeholders will discuss and debate on all existing systems and proposed plans. This course can encourage young students to come up with fresh and practical solutions to the idiosyncratic problems they face in their localities. This enterprise will go a long way in developing a sense of responsibility from a young age.

Also, young university students can take charge to introduce classes on ‘sustainable living’ in underdeveloped neighborhoods. The students can target to teach women living in these areas. By educating mothers and grandmothers we were able to motivate their children, brothers, husbands and extended families. I believe, in this process, the college students will have a first hand experience of a responsible and healthy education.

Exploding vehicular traffic and consequent environment pollution are chronic problems affecting many cities in the developing world. An important cause for this is an inefficient public transport system. This again can be attributed to the red tape. However, student and young people can effectively help correct this problem. Students can assist the understaffed civic bodies to survey major routes having highest vehicular density, collect feedback from different segments of the society and research on alternatives in public transportation. The universities and colleges can award project credits to students who participate in such initiatives. I am aware of a research team which voluntarily advised the Chennai Metropolitan Transportation Corporation on ways to optimize fuel consumption and improve bus frequency. Monies saved from this economization can be employed to upgrade the services.

In order to improve vehicular traffic management, the civic authorities can partner with a team of students and operators of photocopy shops, public telephone centers, internet cafés, tea stalls etc (who are mostly young people) in building a mobile phone based traffic management network. These young people working/living in vantage points can feed a central database (by text messaging) on traffic conditions. The central database can in turn transmit the information through FM channels, Traffic Police Cops and Road Signs to the commuters on road. This could effectively curb the traffic snarls that have now unfortunately become an integral part of urban life.

The progress of several public projects is hampered by bureaucratic quagmire. In order to prevent this, young people can volunteer to offer independent project vigilance. At this juncture, I would like to recall how a group of young cricket enthusiasts have voluntarily organized themselves to oversee the progress of a small community sports complex project. This made contractors, involved in the construction, answerable not only to the municipal authorities, but also to the ultimate beneficiaries. The outcome of this initiative is that the complex has been built within an unprecedented time of eight months and now efficiently offers services to more than 2300 members. This team which oversaw the project in its construction stage has now shouldered the responsibility to monitor its maintenance and upkeep.

If we don’t budge now, we have a crisis waiting to happen soon. It is estimated that more than a billion join the world’s urban population in the next fifteen years. Are our current cities and towns capable of sustaining that? Let us pledge to change this fate and transform our cities and towns to incubate the minds of today and inspire the minds of tomorrow.

I wish to conclude citing a famous message of Swami Vivekananda “Arise, Awake and Stop Not till the Goal is reached”.

I Failed My Driving License Test !

After a long time of contemplation, I finally decided to get a car driving license. For the last eight months (since I started driving) I was complacently comfortable with my provisional license. Succumbing to incessant warnings and cautions by people around, I applied for the test, traveled 40 kilometers from my hometown to reach the track test, spent two whole days waiting for the 'break inspector' and finally returned back empty handed. In spite of an unhappy ending, this episode gave me an interesting insight.

I wrote an amateur academic paper on corruption exactly one year ago. I submitted this for a national level essay competition, won it, and traveled to the United States for free. In that essay I took a very 'objective' stance and denounced passionate idealism that many people offer as solution to corruption . I argued 'Corruption is Social Deviance which has got no idiosyncratic solutions. Only structural or systemic reforms are required to mitigate the costs levied by corruption on social well being'. When I take a quick re-look at this sentence, I find it fancy and wordy. I wonder how the judges chose me to make a trip to the US. However, in crux, I still believe, sporadic anger and frustration led solutions to corruption are impractical.

Coming back to the driving license test, I cleared all formalities and produced all relevant documents. I did a good job on the test track and then approached the 'break inspector' for his decision on the outcome of my test. (FYI, Driving Test results are highly discretionary and are not subject to appeal under any circumstance). He expectantly stared at me for a couple of moments and, after grasping my unmasked persistence, failed me (of course, also, he didn't find the identification mark of a 'broker' or 'agent' who collects and passes on the emoluments to him). I was, for an instance, flabbergasted, not because of my the two day wait crashing into a failure, but because of his stoic response to a genuine 'ungreased' application.

I got 'Indian (Bharateeyudu)' movie inspired spurts to assassinate the license officer on the spot. (Not that I have the guts to actually do something like that).

After some inadvertent cold stares I was given an option to pay my way out (not a very steep sum). Given my 'objective' outlook on corruption, I should have 'objectively' bribed my way out. But I categorically refused. I didn't have control on my mind's processing and consequently my body's actions. However, I am still of the academic conviction that 'corruption' in many cases is a systemic failure and not an individual feature. I know I cant get my license unless I have a high profile recommendation/pay a few hundred bucks/reinvent the system. I, currently, find the first two closer to my capacity but I refuse to employ them !

Many a times there is a distance between your objective beliefs and subjective actions. I think this distance is heteroscedastically distributed at different instances. I only wish I develop a metaphysical power to reduce this gap. Until then, probably I will not hold a Driving License :).