Tax Payers' Charter: Will it Deliver

Here is the full text of the Taxpayers’ charter released by the Hon Prime Minister on 12 August 2020. Does it make things better for the Taxpayer? For Tax Administration in the country?

 

Through the charter, the department is now committed to treating taxpayers as honest; providing complete and accurate information; giving a fair and just system; and, among other things, reducing compliance cost. The objectives are laudable and like most policy averments are idealistic. It would, however, be important for the department to ensure that these commitments don’t remain only on paper.

 

There are opinions that the new charter is less specific and more like a statement of good intentions. People hope that this would be followed up with concrete timelines to be followed by officials in delivering services. Even though the charter is to form part of the Income Tax Act, it does not give scope for justiciabillity as all the provisions are statements of intention.

 

The potential of the charter to beneficially influence Tax administration would depend on the success of similar reforms taken up by the Government. For example, the I-T Department had rolled out the faceless e-assessment scheme in October last year. The Department selects accounts for assessment based on criteria selected to ensure that only complicated cases, where potential for evasion is high, are selected. Communication to the taxpayer goes from the National e-Assessment Centre (NeAC) in New Delhi. The NeAC randomly allots cases to different assessment units. These assessment units do not correspond to the taxpayer directly, which eliminates physical interface between an assessing officer and a taxpayer. Faceless e-assessment has eliminated territorial jurisdiction and substituted individual discretion, thereby increasing transparency.

 

While faceless assessment is good, there would be challenges in terms of the appropriate explanation that were needed to be understood by the person assessing the tax liability. The system would need some time to stabilize and would be very useful in the long run to enhance a transparent system. However, a large number of tax officials are reported to have already started pushing back against the new faceless programme because they see problems in the lack of consultation and inadequate resources.

 

If teething troubles are left unaddressed, it might erode confidence in the new system. Hence, ownership at the highest level is very important for the system to fulfill its promise of transparence and ease of living, which the Finance Ministers hopes for by all such measures. Tax consultants and practitioners hope that government walks the talk on implementation and does not burden assessees with arbitrary assessment and harassment. Bureaucracy is likely to err on the side of caution and levy higher taxes in all such cases. The experiment should hopefully not remain just a pilot.

New Education Policy 2020: Rationalization of schools

 

The Business standard has a discussion here on the New Education Policy, 2020 (NEP20). They point out that:

 

The NEP 2020 promotes “rationalization” of schools, citing facts like these: 15 per cent of upper primary schools in India have less than 30 children attending. But students, especially after Class 8, need to travel long distances to attend school/college even now (chart 2). Reducing the number of schools may put children further apart.

 

The National Statistical Office’s 2017-18 report on education shows that less than 50 per cent students get education for free after Class 8 (chart 3). The NEP 2020 talks about curbing commercialization of education. While more than two-thirds of primary schoolchildren have access to government-funded education, the proportion reduces to half at higher levels (chart 4). Physical distance and financial problems are key reasons cited by students for discontinuing education.

 

I believe that this would need to be addressed differently. As in the US, government can provide free transportation to students when they travel, say more than 2 km for high school education. Cost benefit analysis of the two options: Having a school for less than 30 students or transporting the students to the nearest High school. I don’t believe that any state government has had a look at the option of transporting students to larger schools, which have many inherent advantages. Larger schools tend to be located in larger villages/ small towns and hence can attract teachers better. Monitoring of such schools also tends to be much better and peer learning of Teachers is also possible. A brief mention has been made about higher cost of private sector education without providing economic costs of the process.

 

Not that private education has inherent faults, but its cost variance with government-funded education is disproportionately skewed. Medical education is, on average, three times costlier in a private college than in a government-funded college. At lower levels, the fee difference is starker (chart 5).

 

Is the education really free? It might be free in the sense that the students don’t pay anything out of pocket. But the resources spent by Governments are public funds and should be evaluated for effectiveness of spending/service delivery. Is the free education of good quality? Is there demand for the same or do the poor send their children to these Government schools due to lack of options? This tendency to treat all government services as free prevents comparison of services provided by the Government and the Private sector. It takes the comparison process into emotional and political rhetoric. The rhetoric buries the need for effective service delivery to the poor and we see groups warring to take ownership of providing services and showing the private sector in a bad light. The emotional arguments that flow conveniently forget that the private sector in 99% of cases is an Indian national/Company and are all under the regulatory control of the government and follow the law of the land. People are willing to cynically say that the law is in the ‘hands’ of the rich, but are unwilling to do anything to remedy the situation.

 

 

 

 

Corporate Debt Restructuring

 

1. The Reserve Bank of India (RBI) has constituted a committee headed by Sri K.V.Kamath to suggest guidelines on one-time loan restructuring. Other members of the committee will be former State Bank of India managing director Diwakar Gupta, T N Manoharan, former chairman, Canara Bank; banking expert Ashvin Parekh; and Sunil Mehta, chief executive officer of the Indian Banks’ Association (IBA) as the member-secretary.

 

2. In view of the covid-19 pandemic it is expected that a huge number of firms are likely to seek relief under the proposed guidelines.

 

A Business Standard analysis of the companies that have announced their results for the April-June quarter indicates that companies which either reported operating losses or a poor interest coverage ratio (ICR) accounted for nearly 45 per cent of corporate borrowing. 

 

3. Mrutyunjay Mahapatra, MD and CEO of the erstwhile Syndicate Bank has felt that “A loan account shows signs of stress two quarters prior to becoming ‘default’. This is typically when ‘ever-greening’ happen. Evergreening is a practice whereby banks extend even more loans to debt-laden companies to help them repay previous loans and hopefully earn enough revenue along the way to get out of trouble. It has been a pretty common practice in India, contributing to the banking sector's mushrooming bad debt pile and this mainly comes out of reluctance of the officer/team dealing with the loan to bite the bullet and call the loan ‘bad’.

 

“It’s important to distinguish between a legacy problem and a problem that is Covid-related. Many units in India were having problems even prior to Covid, and so, March 1 is a good date from that angle,” said a former deputy governor of the RBI.

 

4. Banks also need to look at intra-group leverage of the companies at the time of restructuring debt. Intra-Group Debt means any money or liabilities, owing or incurred to one Group Company by another Group Company together with all accruing interest and costs. Companies lending to group companies for unproductive usage would have to service the debt of the lending and borrowing entity in the group leading to failure of the restructuring exercise. Hence the extend of leveraging in intra-group debt is important.

 

5. Bank officers are unwilling to allow any restructuring out of fear of failure of the restructuring process.

 

In a note to the Parliamentary Estimates Committee on bank non-performing assets in September 2018, former RBI governor Raghuram Rajan had said that the “risk-averse bankers, seeing the arrests of some of their colleagues, are simply not willing to take the write-downs and push a restructuring to conclusion, without the process being blessed by the courts or eminent individuals”, leading to an “endless” delay in the process. 

 

The restructuring might not actually take place in the case of companies who are otherwise eligible as per guidelines.

 

6. Many companies are so cash strapped that they might not have the money to service the initial requirements for the restructuring to kick-in. If they are unable to do so, they would be declared defaulters and bankruptcy proceedings could kick in. Experts feel that this might be the case for many companies.

 

7. It is said that a problem with the previous restructuring schemes was that the banks didn’t have a structure in place to do a thorough review of the proposals. Risk management and economic planning needed to be incorporated in the bank’s workflow and institutional as well as individual capacities need to be built up.

 

8.  The path that a company would take after the restructuring exercise is difficult to predict, for the promoters and much more so for Bankers. 

 

“The biggest problem with any restructuring plan is how I predict what my top line and bottom line are going to be,” said the former deputy governor. Banks engaged in the erstwhile mechanism of corporate debt restructuring (CDR) had no clue, so they used to “cook up things. They used to put their own revenue assessments and a discounting rate of their own discretion to calculate the net present value of their sacrifice”, said the former RBI official.

 

“There is no way even now banks will be able to calculate that and that is where the Kamath panel can set up the entry points and draw a benchmark based on sectors.” The panel doesn't need to look at individual accounts to give their approval of a resolution, but can set rules for sectors that were hit the hardest due to the pandemic and need restructuring, such as aviation, tourism, hospitality.”

 

9. It is also important to ensure that companies that do not need restructuring do not jump onto the Bandwagon. Companies and promoters would have to be more tightly bound by way of personal guarantees, increased collaterals, bringing in additional equity etc.

 

10. Finally, Banks would need to decide if it is better to take a company to the insolvency court today or at a later date after giving them one more chance.

Repo Rate Cuts and Bank Capitalisation

 

Here is a good explanation in the "Live Mint about why Government of India would love a repo rate cut, which is the rate at which the RBI lends to Banks. The article extracts from Viral Acharya’s latest book “Quest for Restoring Financial Stability in India”.

 

The Reserve Bank of India (RBI) on Thursday decided to keep the repo rate or the interest rate at which it lends to banks, at 4%. In his new book, former RBI deputy governor Viral Acharya explains why the government loves the cycle of repo rate cuts.

 

What does Acharya say in his book?

Viral Acharya writes in Quest for Restoring Financial Stability in India: “Rate cuts are preferred … whereas rate hikes are particularly disliked." Now, this is primarily because the government is a major owner of the public sector banks (PSBs).

 

What is the problem with repo rate cuts?

The government is trying “to keep the budgetary allocation for public sector banks’ capital needs low". Repo rate cuts help in doing that. When the repo rate is cut, the value of the government bonds held by the state-owned banks goes up. This is because when interest rates go down, bond prices go up and vice versa. When bond prices go up, the PSBs end up making profits. This profit is recognized almost immediately, and helps shore up the capital base of these state-led lenders. Also, the government does not have to dip into its budgetary revenues to shore up the capital of public sector lenders.

 

This might at best be a temporary fix and cannot substitute the need for prudential lending practices and for better recovery by Banks.

Consumer Protection Act, 2019: Practical issues

 

Here is a good write up in Business standard of 10 August 2020 about how the new Consumer Protection Act, 2019 would mitigate against quick disposal of cases at District Forums.

 

To get a perspective, let us consider the scenario under the old Act. The District Consumer Forums, with a pecuniary limit of INR 20 lakh, are located mostly in premises that are too small, especially in urban areas where more cases are filed and there is a scarcity of space. So, files spill over into the corridors and there is hardly any place for movement. The Forum is manned by just one or two clerks, who find it difficult to cope with the workload of accepting complaints, scrutinising them, preparing and dispatching notices, accepting deposits and investing the money during the pendency of appeals, issuing certified copies of orders, etc. Similarly, there is just one stenographer who has to take dictation of judgements get the judgment even after the case has been argued. Besides, when the clerk or steno proceeds on leave, there is no substitute to attend district level.

 

Even though the Act stipulates that cases must be decided within three months, or within five months if laboratory testing is required, the reality is that it takes between four and 10 years, and sometimes even longer, for a consumer complaint to be decided, especially in cities.

 

With a five-fold increase in pecuniary jurisdiction under the new Act, it is likely that a case may now take 15 to 25 years to get decided. A consumer whose fridge or television is defective cannot wait so long for his grievance to be redressed. He will prefer to abandon his rights rather than fight for them for so long.

 

The article also describes the difficulty in getting judgements enforced under the new dispensation.

 

Under the old Act, initially the procedure for enforcing orders was the same as that applicable to decrees of civil courts. It required the filing of a separate application before the Civil Court for attachment of property by the bailiff, publishing of newspaper advertisement for auction of property, etc. making it a tedious as well as costly procedure, and often not worthwhile for realising a paltry sum. The Act was amended in 2003 to make recovery proceedings simpler by adopting the procedure laid down for recovery of arrears of land revenue by the collector or other competent authority. Even though this procedure was working well, the new Act surprisingly reverts to the civil court procedure for execution.

 

The effectives of mediation, it has been felt, would be very little due to the fact of not allowing cases like medical negligence for mediation.

 

The new Act provides for mediation. There will hardly be any scope to mediate in a dispute pertaining to defective goods or services, which would have been filed only after attempts to redress the grievance failed. Mediation could be helpful in resolving cases where there are high claims for compensation, such as those dealing with medical negligence. Yet matters relating to medical negligence resulting in grievous injury or death are prohibited from being referred to mediation.

 

These changes in the law would, it appears, make it more tedious for the consumer to approach the forum. If cases were to take so long to dispose, only habitual litigants might use the provisions and the common man would not be able to get justice.

 

Consumer Rights

The consumer protection act 2019 gives a more important place to the interests of consumers in the world of commerce. It brings online commerce under the purview of the act. It also provides for establishment of a central consumer protection authority whose job is to prevent violation of consumer rights, unfair trade practices and false or misleading advertisements.

 

The new act also introduces a generic product liability clause under which compensation claims may be raised for harm caused by a defective product or defective service. It has provisions to help avoid frivolous claims and vexatious litigation.

 

When an individual or a celebrity endorses a product or a service, they would be advertising it. If such advertisement is false or misleading and is prejudicial to the interest of any consumer, such advertisements maybe directed to be discontinued or modified. Over and above this, penalty by way of fine up to INR 10 lakhs can be levied. The celebrity endorser could also be barred from advertising the product for a period of one year. The safeguard for the endorser is that there would be no penalty if he she has exercised due diligence to verify the veracity of the claims being made.

 

In a related development the Ministry of Health and Family Welfare has finalized an amendment that will ban advertisements promoting fairness creams, health drinks claiming improvement to the height of children and products promoting anti-ageing remedies – with potential jail time as well as stiff fines for or offenders. The country has a long-standing obsession with fair skin and according to a Market Research report, the fairness cream industry is likely to have revenues of more than INR 5,000 crores by 2023.

 

It appear that consumer rights are being brought into focus and better social values are also being promoted.

 

Why is everyone unhappy with Crop Insurance

Agricultural crop insurance schemes in India suffer from various infirmities and as a result farmers do not willingly opt for it. Farmers find the claims process to be cumbersome and time consuming. They also do not like the fact that decisions on allowing a claim and quantum of compensation take place too far from where they can approach and make out a case for themselves as well as exert pressure. After getting used to liberal payouts in state government schemes they are also unhappy with the low payouts of Crop Insurance schemes. As a result only loanee farmers are participants in the program due to compulsion by banks. This, in spite of the fact that, the premium payable by the farmer is nominal – 1.5% of the sum assured for Rabi crops, 2% for kharif crops and 5% for commercial and horticultural crops.

 

Previously, the balance of the premium was shared equally by the state and central governments. Recently the government of India has reduced its own share in the premium subsidy to 30% for rain fed crops and 25% for irrigated crops. The entire premium subsidy would now have to be paid by the state governments from their budgets. States are already groaning under a heavy budgetary out go with limited capacity to enhance revenues. Due to lack of public demand for the insurance scheme, many states have opted out of the scheme.

 

Insurance companies find it very difficult to estimate the crop yield for each farmer. They use secondary data collected by the state governments. The crop cutting experiments conducted by the state government are inadequate to meet insurance requirements. They are performed for estimating the crop yield in the entire country and hence suffice for that purpose. They however do not provide the granular information for an insurance company to act upon.

 

The microclimate and circumstances even in a reasonable sized district are huge in number and hence there is need to conduct more crop cutting experiments to be closer to truth. In the absence of the same, the insurance companies do not trust the government data fully. They apply much greater rigour in a evaluating claims and spend time collecting secondary data which not only delays the process but also leaves the farmers highly dissatisfied. They also tend to increase the premium over years due to large number of claims they need to service.

 

It appears that none of the stakeholders are happy with the way the scheme is administered, but all of them are going through the motions to keep up appearances.

 

The difficulty with this scheme also lies in the fact that the exceptions for which a payout is required is often equal to the entire population resulting in losses. This naturally leads to steep increases in premia in the following years.

Economic recovery

This is a good article by Rajesh Kumar in business standard dated July 31, 2020. He speaks of three issues that would need to be addressed to ensure sustained economic recovery.

 

The first is the poor state of government finances. Budget deficits of all Governments will increase more than a normal progression would allow for. The poor state of the economy as the result of the covid pandemic shows no fixed progression making assessments less reliable. The State bank of India has released a note which showed that public debt increased from 67.4% of GDP in 20 1112 to 72.2% in 2000 1920.

 

The projected debt of governments is only part of the story and all governments have taken to the practice of shifting liabilities to the books of state owned enterprises, some with government guarantee and some without government guarantee. In all such cases PSUs borrow money for a specific purpose and governments take over the amount to use for other purposes, clearly a diversion of funds with an intention to make books look better.

 

In the current year over 43% of the union government’s budgeted net tax collection was set aside for interest payments. This is only a debt trap which governments are getting into, with fresh borrowing going to service old debt. In some states the annual borrowings just about equal the debt servicing obligations and in worse managed states the annual borrowings are not enough to meet debt obligations. Governments are therefore forced to cut back developmental and welfare expenditure.

 

The second weakness pointed out is the fragility of the financial system with increase in non-performing assets in the banking system is already affecting their ability to lend and also affecting their willingness to lend. Bankers seem to be getting into the trap of wanting to lend only to governments as such action would prevent civil and criminal action against them. The banking regulator is just not able to provide the leadership or the oversight required to keep banks running on sound lines.

 

They need to improve ease of doing business further cannot be understated. Even though governments have taken conscious efforts, the spirit has not percolated to the last mile functionaries. In a large system, this would take more time and needs continued attention by governments over extended periods of time.

Informal relationships

Ajay Shah writes about the value of informal traditional business relationships (landlord and tenant, lender and borrower, large firm and suppliers etc) in times of crises like the Covid 19. He says that enforceable legal contracts are central and essential to creating the complex edifice of advanced capitalism and prosperity. This would help firms to not have to limit their search for partners/suppliers to friends and family. The limited point he makes is that contracts-based capitalism handles a novel shock-like Covid-19 poorly. In contrast, there is greater room for negotiation and accommodation in the Indian arrangements of contracting with friends and family.

 

I am reminded of one’s informal relationships that once existed between landowners and landless poor class in Indian villages. Informal relationships also existed between the tenants and landlords of agricultural land. Government of Andhra Pradesh had, as a reform measure, brought in the Andhra Pradesh (Andhra Area) Tenancy Act, 1956 to formalize the tenancy arrangements and protect tenants from eviction. The Act shifts the balance towards the tenants and made it near impossible for landlords to repossess land. The act had a feature that presumed tenancy to be permanent and the entire burden of proof was totally on the landowner to prove his need for possession of land.

 

The question that arises is, whether the legislation was able to meet the objectives that it set forth to achieve. The present crop of tenancy acts does not provide any protection to the rights of the landowner.

 

As a result, landowners are on willing to register the name of the tenant either in a bank document or on any revenue records. All tenancy is informal and it has been continuing so for several years based on informal relations. The very same situation that was prevailing even before the tenancy act came into force. They act only sensitized the landowners into preventing any kind of recording of tenancies. This has worked against the interests of the cultivators, as they are unable to access credit from banks as well as any kind of subsidized inputs provided by the government. It has also failed to protect the tenure of tenancy or from their eviction at the desire of the landlord. I feel that on one hand it has failed to meet its objectives, while on the other hand, has created mistrust between the landowner and the tenant.

 

The Government of AP has tried to bring in greater balance between the rights of the landowner and the tenant. The Andhra Pradesh Legislative Assembly passed a Bill to aid tenant farmers and to recognize their rights as cultivators. Tenant farmers are those who own little or no land and take up agricultural land on lease. The Andhra Pradesh Corp Cultivator Rights Bill, 2019, which was passed by a voice vote, seeks to provide all amenities, including banking and insurance benefits, to the tenant farmer without affecting the rights of the landowner. Tenant farmers will be issued Crop Cultivator Rights Card, which will ensure they receive all benefits prescribed in the Bill.

 

The Act balances the rights of the cultivators and landowners. Section 4 of the act provides that the land shall be reverted back to the landowner on expiry of the agreement period without any encumbrances. Section 5D of the act provides that the cultivator shall vacate the agricultural land immediately at the end of the term of the agreement without any encumbrances. These provisions override the provisions of the AP Tenancy Act 1956 and remove any presumption about permanency of tenancy. Tenancy is limited to the period of the agreement entered between the landowner and tenant which is in the form of crop cultivator rights card.

 

Section 4(b) of the act requires the landowner to put the cultivator in possession of the agricultural land on the first day of the agreement and he shall not interfere with his possession as long as the cultivator complies with the agreement. The cultivator is entitled for undisturbed possession irrespective of change in ownership during period of agreement. Tenant shall also be entitled to crop loans, crop insurance, crop damage compensation or any other facilities provided to cultivators by the government. These new facilities were not available in the previous Act as landowners worked actively against the same. The new Act creates a situation where such facilities can be availed by the tenant without the landowner being uncooperative or working against it.

 

 

Support to Covid hit companies by way of Equity infusion

International Monetary Fund Chief Economist Gita Gopinath urged governments to shift to "equity-like" support from one focused on loans as the coronavirus pandemic inflicts prolonged damage on companies. She said that the massive scale of the shock meant more firms would become insolvent as they suffer lower revenues for many months. Government support in the form of loans would saddle such companies with huge debt which would make it difficult for them to recover post the pandemic. She says that if the lending takes form more like equity, it will make it easier for firms to recover from the crisis.

 

A similar effort at equity infusion is the Fannie Mae and Freddie Mac bailout that occurred September 6, 2008. The U.S. Treasury Department was authorized to purchase up to $100 billion in preferred stock of the organizations and buy mortgage-backed securities. As a result, the Federal Housing Finance Agency (FHFA) put Fannie and Freddie into conservatorship. Keeping the two agencies afloat cost taxpayers US$187 billion over time as the Treasury paid $116 billion for Fannie and $71 billion for Freddie. The Treasury decided to send all Fannie and Freddie profits into the general fund. Since then, the bailout has been paid back with an additional $58 billion in profit. Fannie remitted $147 billion, and Freddie paid $98 billion.

 

The bailout kept Fannie, Freddie, and the American housing market functioning. It was supposed to be a temporary situation, but the government did not get around to selling the shares it owned and return Fannie and Freddie to private ownership.