GAAR: A Grey Bargain

It is by nature that people try to tinker with tax laws to the best of their creative ability so that their tax liabilities can be avoided. Seemingly Indian policy makers have no problem if their tax laws are trampled which is why honorable Finance Minister P. Chidambaram has finally deferred the execution of General Anti Avoidance Rules (GAAR) by two years. In this era of complex capital flows, every mature economy strives to fight better with the prospect of tax avoidance by enterprises and investors in the guise of tax mitigation. Many countries such as China, Canada, and Australia have GAAR rules enshrined in their tax statute. UK and USA have recently tightened GAAR. It is unfortunate that India couldn’t muster courage to go for such stern and essential tax laws.

GAAR is the set of rules which empowers tax authorities to clampdown on transactions primarily driven towards tax-evasion. If implemented, instead of routing through courts, income tax officers can directly reach out to tax fraudulent by invoking GAAR provisions. It was earlier introduced in March 2012 by the then Finance Minister Pranab Mukherjee but giving in to intense outcry from domestic and foreign investors, PM Manmohan Singh while holding finance portfolio in July, appointed an expert committee headed by Parthasarathi Shome, a former advisor in the finance ministry, to review the GAAR recommendations and suggest a suitable way forward. It is by accepting Shome committee recommendations that Chidambaram has postponed the implementation of GAAR till FY 2015-16.

Lately, Mauritius has emerged as India’s favourite destination for overseas investment replacing Singapore. It is also a major source of capital inflows in India accounting for about 40% of total flows. India’s Double Tax Avoidance Treaty with Mauritius and Singapore is exceedingly manipulated by domestic and foreign investors to minimize their tax-liabilities. Voluminous investment is made via so called Mauritius and Singapore entities of multi-national-business targeting Indian market. This is popularly known as treaty shopping. Few Indian or foreign companies inflate volumes of transactions via continuous and frequent purchase and sale of particular security, commodity or asset, thus indulge in round-tripping trade to avoid capital gains taxes. This round tripping and treaty shopping swallows a good portion of revenues in India who is relentlessly reeling under huge deficits.

There is a school of thought who believes that autonomous power given to tax authorities will result into unnecessary harassment of entrepreneurs and industrialists. Investor sentiment will also be badly affected leading to less FII and FDI inflows. However, leveling these criticisms against GAAR is nothing but an attempt to secure undue interests of investors. The truth of black money converting into white by entering Indian markets through tax havens, as discussed above, is clearly opaque. Accountability of Income Tax Dept. can be maintained. It is not a big deal.  Removing shortcomings of tax laws to outwit its misuse is what is more important.

Global economic environment is quite insecure and uncertain. Seeing this, it is imperative to maintain decent level of law and order in the country. GAAR experience of other countries has rendered positive results to them. Foreign investment in those countries hasn’t come down as it is being feared in India. Govt must motivate fresh FII and FDI as core of its policy initiatives. But it is also paramount to have modern tax laws to avoid misuse. A judiciously tough tax regime makes a nation more credible in the long run.

Fare affair

Central Govt. has finally mustered courage to go for a bold and long-awaited treatment of Indian Railways through fare hikes. The nasty politics of Railways has already taken a heavy toll from this most important economic infrastructure. It took over a decade to Govt. to revise passenger tariff but this is certainly something which should ideally be done on yearly basis. It appears that political leadership has lastly realized that railways can not survive with populist policies and it is imperative to keep revising tariffs in order to keep this mass public transport healthy and moving. For that, Govt. must follow up this decision of fare-hikes with expeditiously establishing a mechanism which keeps regulating the rail fares as per market modalities.

Indian Railways is grappling with over-socialization and over-politicization of the sector. A good chunk of Indian population depends on railways to commute between far-off places. It was no doubt designed for the social benefit but gradually our politicians made it a source of offering political freebies to allure citizens. Political motives of various Govt. didn’t let the railways flourish with the changing times. Railways Ministry failed to understand that it is an economic infrastructure not a Govt. hospital or MNREGA scheme which can be run on subsidized rates. Railways lies in one of the few most important and basic infrastructures of any country. It is unfortunate that on one hand Indian Railways is in dilapidated condition, on the other it is the most expensive railways among other countries.

Monopolization of the Govt. in Railways led it to the crisis it is facing now. It kept on increasing freight fares and didn't touch passenger fares at all, just opposite of what profit-making railways in other countries do. Govt. irrationally increased its fares which resulted into squeezed cargo business of Railways. People relies more on roads to carry their heavy goods and freight trains are used to only carry perishable goods like coal, iron, grain, cereals and fertilizers. Consequently, they don’t make much profit. Instead of freight fare hikes Govt. must think of increasing freight carrying capacity so that the cargo business of railways can flourish.

Railways is reeling under huge losses due to all round loss making operations in goods and passenger segments which results in general level of low productivity. Neither does it make profit nor provide safety and decent amenities to public. Modern travelers are repelled from it and general public flooded it. Modernization of the railways is a must. It is desirable that Ministry goes for network expansion across the country and increase number of trains deployed. Well facilitated platforms and coaches, dedicated corridors, double-decker trains are also needed.

Tariff hikes for passenger trains is welcome but it is high time for Ministry of Railways to realize the dire need of setting up Railway Tariff Regulatory Authority. After all the decision of fixing freight and passenger fare must be kept aloof from political meddling and be regulated by independent and pragmatic authority. Political monopolization of the sector must also come to an end and Public Private Partnership must be encouraged. All going on PPPs projects must be expedited and scaled up. All this would only be possible if Indian Railways falls in the ambit of someone who is genuinely concerned with the economics of railways, not politics of the same.

A Glittering Risk

Gold must not glisten so much so that it makes Indian economy lose its already fading shine. Rising inclination towards gold investment among Indian populace is a cause of serious trouble for the country. It is one of the potential factors behind ballooning current account deficit, which has widened to an all time high of $22.3 billion, or 5.4% of gross domestic product, in the July-September quarter. Current account deficit (CAD) is measured by the difference between a country's exports of goods, services and transfers and total imports within a time period.

Reserve Bank of India, in its recent Financial Stability Report, showed concern over increasing gold imports. As per its draft report “Gold imports have continued to be high and have accounted for, on an average, over two-thirds of the CAD during the last three years. While India’s share in international trade is less than 2 per cent and that in world GDP is less than 6 per cent in Purchasing Power Parity terms, it accounts for a quarter of world demand for gold.”

The investment sentiment in the economy is at its all time low. High inflation is robbing returns on bank savings while mutual funds and equity are not offering attractive returns either. Gold seems to be the safest option for people to invest their hard-earned money. It is a global phenomenon as people tend to go for gold because it provides them a sure hedge against growing inflation and in an insecure economic environment. Only difference is that their gold trading is paper-based unlike ours. Recently SBI proposed an idea of virtual trading of gold instead that of physical. Gold-linked financial instruments, gold bonds etc must be introduced which yield similar returns as this yellow metal does in physical form. Such paper based gold trading might reduce the problem of physical possession of gold which leads to higher import of gold.

According to the most recent available data from the World Gold Council, India's gold demand during the January-September period of 2012 was 607.6 metric tons, down 24% from a year earlier. It could happen because Govt. had doubled the customs duty on standard gold bars to 4%, and non-standard gold bars was doubled to 10%. But a closer data study reveals that gold imports did fall to 131 tons in the April-June quarter but again rose 9% to 223.1 tons in the July-September quarter. A sharp recovery in Q3 is also likely due to peak festival and wedding season buying. Hence Govt. effort of increasing import duties on gold in the current fiscal year, eventually, bore no fruits.  Yet Finance Minister P. Chidambaram again intends to resort to making gold imports costlier. He must also keep in mind that expensive retail price of gold might lead to smuggling of the same. Govt has also asked gold import agencies such as MMTC and STC to lower the volume and value of gold imports.

Gold loans disbursed by banks and other Non Banking Financial Companies (NBFCs) pose a threat to financial stability of banks in India. They lend borrowed cash from banks to people in exchange of gold. RBI says that the bank-debt of these gold-loans companies have increased by 200% over the period of one year. Indian banks will be in trouble if ever NBFCs falter in the wake of volatility in gold price. As per RBI guidelines, these companies can only provide 60% of loan against the value of collateral gold.

Predictions are against any betterment of economic condition in year 2013. This negative sentiment will buttress the trend of gold investment further because real profit through any other savings policies is meager given lower interest rates and inflation. Govt. must understand that bumping up import duties on gold import is not a solution. He would do well if he tries to drift people’s attention away from this yellow metal by offering equally valuable financial products and inflation-indexed policies. Higher gold import is actually not the only problem. Recycling of gold scrap, huge stock of idle gold which is highest in the country and gold-smuggling are few other challenges needing immediate concern. It’s high time that Govt. pursues a viable gold policy. 

Hasty Cash Transfer: Appealing or appalling?

Finally the Govt. has failed to meet the deadline of Direct Cash Transfer( DCT) of subsidy in the wake of haphazard and unfinished preparation. They have now postponed it by four days.

The key purpose of DCT is to provide entitlements in cash to the poor via biometric identification under Aadhar. Any rational Govt. would have first assembled the data of beneficiaries before introducing schemes, intrinsically aiming at poor-benefit. But it is staggering that India still doesn't possess any authentic data of poverty when the entire system of social-welfare schemes rests on poverty-estimation. What is more surprising is that Govt. effort of identifying needy via Socio Economic Caste Census (SECC), which was supposed to be completed by 2006 is yet on play and Govt. is moving forward to live with the faulty list of beneficiaries. Hence many deserving needy will remain out of the ambit since beginning.

Govt. put its all energy into making people Aadhar enabled which doesn’t even estimate income data. Govt. would have done better to either associate it with specifying income data or simply expedited the process of SECC before distributing Aadhar in remote villages.

The selection of states and welfare programs also shows the poor insight of Govt. States like UP, Bihar, Orissa, and West Bengal, considered to be densely destitute, are not part of this first trial of DCT. Apart from this, Govt. has chosen mainly scholarship and pension schemes which are less or not at all tainted with leakage. Pilot projects are meant to be testified in challenging situations, if not entirely then at least on smaller scale. It is pertinent to mention that one of the testing trials in Kotkasim (Rajashthan) has comprehensively failed to deliver the desired results of DCT of Kerosene subsidy.  

Only 40% of India's 1.2 billion people have bank accounts, and only 36,000 of India's 600,000 villages even have a bank branch. There were plans to open 73,000 new "ultra small" bank branches of about 100 to 200 square feet apiece and hire one million banking employees in rural areas (according to minutes from a government committee overseeing cash transfers) but when the target seemed unattainable before deadline, there came a wild card entry i.e. Business Correspondents known as BC model. This model seems tricky. Representatives from companies, financial institutions, panchayat and even kirana shoppers etc can become a BC in far-off villages. These BCs will be deployed in villages with a micro-ATM. Villagers wanting to withdraw their entitlement will approach a BC, get his/her fingerprints verified on machine and will be paid by BC. Micro-ATM devices will be operated through wireless connectivity which is by and large intermittent and creaky. In case of any technological failure, beneficiaries might be deprived of their benefits. 

This Friday Union Agriculture Minister and Nationalist Congress Party ( NCP) Supremo Sharad Pawar cautioned the Govt. against hasty implementation of cash transfer schemes. Many Chief Ministers had also opposed the move in the recently held National Development Council (NDC) meeting. The implementation of DCT, without the consent of state governments, is certainly a tough call in the federal setup of the country. No single target pertaining to DCT has been achieved so far. The problem is that there was no visionary agenda for the same and many institutions were roped in without coordination. Govt. must understand that too many systems lead to no systematic system at all. Mr. Chidambaram, DCT is definitely a game changer (directing towards failure) and a pure magic (a black one).

Corporate for Community

Corporate philanthropy is all set to become a practice thanks to recent amendments in   Companies Act. The amended bill has included a unique proviso of mandatory Corporate Social Responsibility (CSR) in companies operation.  It is now by a statute of law that they are supposed to engage with CSR which was till then a voluntary practice. The Govt. might provide further incentives to motivate the companies to work for social betterment. With the inclusion of CSR in companies act, corporate can safely counter balance the political demand of reservation in private sector through their community development initiatives.

The Bill mandates that companies having net worth of Rs.500 crore or more, or turnover of Rs.1,000 crore or more, or a net profit of Rs.5 crore or more in a fiscal will have to spend a minimum of 2% of the average net profit of the past three fiscals on CSR. If companies are unable to meet CSR norms, they will have to give explanations and disclose reasons in their books for the same. Otherwise, they would face action, including penalty. It is left to companies’ discretion to choose the nature of their CSR programs.

Endeavors carried out by companies for the betterment of community and society are termed as Corporate Social Responsibility. It is considered that they are ethically liable to spend a part of their profit for community development. It is not a new concept for India Inc. Many renowned companies like Tata Group, Aptech, Infosys, Mahindra & Mahindra etc are already enthusiastically engaged in CSR activities. They voluntary provide services in the area of healthcare, education, employment, and environment etc under their CSR projects. This trend of engaging in CSR without a motive of profit emerged twenty years back and is highly popular at global stage as well. In 2011 companies like Statoil, Nestle, Edison, Walt Disney Company, Grupo Ferrovial etc have been listed by Fortune Magazine among top 10 companies involved in CSR.

Though a philanthropic intent involved, CSR has become more of a business strategy. Many global companies undertake ethical business actions, such as maintaining environment sustainability, providing labor etc in order to raise their reputation in market. British American Tobacco (BAT), the petroleum giant BP (well known for its high-profile advertising campaigns on environmental aspects of its operations), and McDonald's are believed to undertake CSR programs in order to avoid ethical questions based on their core operations. However this is not the case in India.

The CSR performance of India Inc has been pathetic. They could neither link CSR with business sustainability nor business strategy. A study carried out by ET intelligence group says that while most companies discuss CSR initiatives at great length only a handful have mentioned the amount spent, either in absolute terms or as a percentage of their sales or profit. Thirty eight companies of the Nifty companies mentioned CSR initiatives in their annual reports or exclusive sustainability reports, but there was no information on the amount spent.

Incorporating CSR as a statutory provision in companies bill is a commendable step. It would make corporate more sensitive and proactive towards their social responsibility. Companies must come forward to complement Govt. efforts for social development. CSR is an ideal measure for complementing government efforts of social development and a win-win preposition for both i.e. companies and society.

Affordable Sickness

How unfortunate it is that India who is called the ‘Pharmacy of the Developing World’ is not equipped-well at home to procure decent health facilities for its vast majority of population. Good number of people in this country becomes the victim of death knell simply because they are not provided with adequate medical attention. Only handful of the people has access to those top-class medical services which India likes to boast of. Poor can’t take advantage of these expensive medical amenities and end up in Govt. hospitals, mostly devoid of doctor and dose. How shameful it is that a good chunk of India can’t even afford to get sick!

In the backdrop of this sorry state of the nation, it is surely a commendable step taken by Gov. to allow reducing the prices of essential medicines. Recently Govt. has passed a long-pending bill named “National Pharmaceutical Pricing Policy (NPPP 12), concerned with the price control of 348 drugs enlisted in National List of Essential Medicine (NLEM). Once implemented, the prices of these medicines will go down by 50-70%. For the first time the cost of imported drugs, like insulin imported by Eli Lilly and Novo Nordik, has also been kept in its purview. Only new drug discoveries, new drug delivery systems (NDDS) and those which get their first patent in India will be exempted from price control for five years. Hence the new drug policy secures the sanctity of patent drugs and new inventions and at the same time protects the interests of those many people who can’t avail costly medicines.

Indian Pharma Industry is one of the fastest growing pharmaceutical markets in the world. It is world's fourth-largest in terms of volume and stands 14th in terms of value. The profitability of pharmaceutical industry will be reduced to some extent due to new drug policy but it won’t be as serious as being projected.  A preliminary working shows that prices of many leading brands will be slashed by 50 per cent to 80 per cent. This will reduce industry's profit by Rs 4,000 crore on domestic sale of Rs 67,500 crore per annum. Indian Pharma sector is growing at over 16% because of the strong growth in chronic segment in the domestic market. It is definitely a booming sector. India has the highest number of pharmaceutical manufacturers in the world: over 20,000. It must also be noted that price reduction will result into volume expansion and it can very well balance possible profit erosion due to price reduction of medicines.

Another criticism of NPPP 12 is that if profitability of pharma companies will spiral down, there would be less money to put in Research & Development. “In the past decade, the pharma sector has been spending more and more on R&D activities, while the returns have been minimal,” said D.G. Shah, secretary general of Indian Pharmaceutical Alliance (IPA) in an interview. However, It is a convenient and safest argument on the part of pharma companies sitting on high reserves.

A public health group AIDAN has filed a PIL in Supreme Court to bring down the prices of essential medicines. Hearing of the case is likely to happen in the second week of Jan 2013. By then Govt. might come up with new prices for all 348 drugs enlisted in NLEM. It is mandatory to not let pharma companies reign over this sector. Medicine is the ONLY commodity, purchasing of which is not decided by purchaser but by prescriber. One can imagine the grave scenario in the event of cartelization between producer and prescriber or for that matter among the companies themselves. Truly justified it is on the part of Govt. to intervene as 'health for all' is the fundamental duty of a welfare state.

The Male muddle : Politics vs corporate

How unfortunate it is to see that political establishments are hitting hard at the business of corporate-giants. You get a contract sponsored by sovereign Govt. of the country and later the apex court concerned simply terminates it regardless of the huge loss the private enterprises involved go through with.

It seems that not only in India but globally internal politics of respective nation is encroaching upon the territory of its global economic relations which are supposed to be dealt with independently. Economic relations must never get tainted by the petty interests of politics, opposite of which just happened in Maldives.

The earlier Govt in Maldives in the president-ship of Naseed enters into a concession agreement with GMR-MAHB to develop the Male International Airport. After a coup d’état, the new Govt. formed in the stewardship of Waheed annuls the same contract calling it illegal and this $500 million airport-deal simply goes into vain. The similar incident has happened in India as well when 2G-spectrum allocations had been negated by Supreme Court jeopardizing the interests of corporate including foreign companies such as Telenor , Sistema, Etislat etc.

In June 2010, the Maldives government, the Maldives Airports Company Limited (MACL) and GMR-MAHB Consortium signed a tripartite concession agreement to develop and run the Ibrahim Nasir International Airport at Malé, the capital of the island nation. According to this agreement GMR group levied Airport Development Charge on departing passengers, the revenues earned through this process went to the Maldives Govt. Later this practice was found illegal by a local court. Seeing that, the then president Nasheed allowed the GMR to deduct the amount of ADC from the overall revenues it used to share with the Govt. Bone of contention appeared when the changed Govt. of Waheed found out that it owed GMR about $3.5 million.

 In the guise of xenophobia he contended to expropriate the tender from GMR and won the case in Singapore Court.  It is notable that GMR-MAHB consortium has made the largest-ever FDI investment in Maldives and Male airport is a top growing airport in the region. Given these facts and that IFC, a financial body of World Bank was involved in the bidding process through which GMR had won the tender; it is wondrous how the new Govt. in Maldives called it an unfair agreement. The whole incident clearly manifests the anti-Indian sentiment spread in the neighboring island.

On one hand, GMR-Maldives spat is technically a win-win situation for the Maldives and on the other; it brings complex repercussions for India. Strategically Maldives is an important neighbor archipelago for the country. Given the geographical position of Maldives and its recent brew with India, China with all its might would try to make a footing in this region to counter balance India. Hence it is a challenge for Indian Govt. to keep Maldives in good humor while achieving justice for its company. Highly likely it is that GMR will appeal in International Trade Court against the Singapore court verdict which would further stress diplomatic  machinery’s new mission to handle Male. The test is not actually for GMR but for Indian Govt. as to how it would help this b’lore based enterprise to incur its losses at the same time keeping the strategic relationship with the island intact.