Indian Acts, amendments and russian roulette!

 Whenever any change in the IT Act is contemplated it should be put through only one filter which is "simplification" of the tax. Revenue considerations, whether an increase or decrease, not to enter as a filter for any piecemeal or Adhoc changes during the course of the year.  Simplification, reduction of tax, widening of tax base may be used as multiple filters for once a year changes in the Budget. Many times an amendment is done in the name of maximizing tax revenues and plugging loopholes. This is a pure travesty of truth. Instead, Govt should move towards simplification and ease of compliance. This obsession with revenue maximization is a colonial hangover.

Very often IRS officers and CBDT also complain about CAG Damocles sword over their heads if they don't plug loopholes. Indirectly such a plethora of amendments and tinkering goads loophole industry to become more innovative.CAs, lawyers enjoy and thrive on this.More the loopholes and more the plugging.More they change,more they remain the same!!!

Probably many are trying to say if simplified ,more taxes thro voluntary compliance can be collected. They also suggest a remedy like new simple Direct Tax Code ( DTC),which is good but may throw more complications ,uncertainty ,unintended consequences into the moribund system if this new tax code is introduced all of a sudden (like that of GST).So at least in the short to medium term, Central govt should work towards only simplification in terms of return filing, assessments, presumptive tax , reducing litigation etc and keep revenue maximization in the back burner.

 One of the important points in this context needs some elaboration.AOs, CIT Appeals have a tendency to overrule a precedent Court judgment by taking a flimsy, perverted, convoluted argument or a trivial or a vexatious finding to make the court ruling inapplicable,just to maximize revenue collections and reach their targets for the year.Then deliberately they will make mistakes in calculations just to boost unpaid tax amount and threaten the assessees subtly showing it as arrears in demand.These are all euphemistically called "high pitched" assessments.!!

Few funny examples of unintended consequences or "Cobra effect" are given below:

1)Under IndAs, Redeemable Preference shares will have to be grouped under Borrowings and not to be included under Share Capital. This is in line with IFRS ,since Redeemable Pref.Shares with a fixed dividend payments have the substance similar to that of a borrowing even though by name they are called Shares.

However under our Cos. Act, 2013, the Redeemable Pref.Shares are continued to be classified as part of paidup Share capital.

This dichotomy, apart from skewing Debt:Equity ratios create other unintended consequences in the declaration of ShareCapital for the appointment of KMPs etc. and for presentation to the Lending institutions, Credit Rating Agencies etc.

An amendment in Cos. Act to align this with IndAs is long pending and would be a welcome step.

2)Similar is the case with depreciation calculation under Cos. Act and Indian Income Tax Act. Depreciation under IT Act can be charged at a higher rate (accelerated rate) allowable under the Act for claiming higher tax rebate whereas Cos. Act & IndAs prescribe lower rates for presenting the Financial Statements for declaration of dividend etc. Due to this anomaly every year Indian companies will have to work out Deferred Tax liability for deferring the tax by availing higher depreciation. Over the period the profits under Tax and IndAs will be smoothened out. This is pure legislative fiction. By aligning the tax rates under both the legislations this fiction can be easily removed. Is our Govt listening to simplification or trying to complicate things in the name of simplification.!!!

If anybody wagers on Russian roulette, most of the time winning it would depend on your luck and stars, and similar is the case of somebody wading through the muddy waters of Indian Income tax Act.

Ram temple and the Indian ethos

Ram temple has been the dream of millions of Indians who are Hindus, Sikhs,Buddhists, Jains and even some Muslims if not Christians,Jews etc. Why I said some Muslims, is because some of them regard and pay respect to Lord Ram as one of their ancestors. I learnt that some Muslim women of Varanasi have been performing "Shri Ram Aarti" for the past 14 years every day and sing Ram dhun.

Maryada Purushottam Ram has a special place in the ethos, culture, literature,traditions and whatnot of this country from Himalayas to Kanyakumari.He is a symbol of love and compassion and is celebrated that way in all Asian countries of Nepal, Sri Lanka, Thailand, Malaysia, Cambodia, Indonesia and Phillipines ,as I know of. Even Thailand's Royal Kings use the name of Ram in their titles.

Ram has been a symbol of Unity and Gandhiji in modern days extensively used Ram for uniting the people of India under the banner of Purna Swaraj for Bharat. Gandhi in his Autobiography says that Ramayana and Harichandra play left indelible marks in shaping his personality defining his principles of Sathya and Ahimsa. All through his struggle for Independence he stressed the need for Ram Rajya and what it symbolises for. In his own words,

"BY RAMARAJYA I do not mean Hindu Raj. I mean by Ramarajya Divine Raj, the Kingdom of God. For me Rama and Rahim are one and the same deity. I acknowledge no other God but the one God of truth and righteousness.

Whether Rama of my imagination ever lived or not on this earth, the ancient ideal of Ramarajya is undoubtedly one of true democracy in which the meanest citizen could be sure of swift justice without an elaborate and costly procedure. Even the dog is described by the poet to have received justice under Ramarajya. (YI, 19-9-1929, p. 305)

By political independence I do not mean an imitation to the British House of commons, or the soviet rule of Russia or the Fascist rule of Italy or the Nazi rule of Germany. They have systems suited to their genius. We must have ours suited to ours. What that can be is more than I can tell. I have described it as Ramarajya i.e., sovereignty of the people based on pure moral authority. (H, 2-1-1937, p. 374)

My Hinduism teaches me to respect all religions. In this lies the secret of Ramarajya. (H, 19-10-1947, p. 378)

If you want to see God in the form of Ramarajya, the first requisite is self-introspection. You have to magnify your own faults a thousand fold and shut your eyes to the faults of your neighbours. That is the only way to real progress. (H, 26-10-1947, p. 387)" (Link)

The above defined the course of Gandhiji's path in his life and in his independence movement mobilising the masses.

So Ram is deeply imbibed in Indian culture and Ayodhya is the holy point from where this has emanated and engrossed the whole country. Like Gandhiji , Lord Ram had covered the length and breadth of this country , of course mostly by foot meandering through the thickly infested forests- Dhandakaranya, Janasthan- and then to Sri Lanka.Like Gandhiji, he stood firm on his beliefs and promises come what may. Like Gandhiji, he led a life of renunciation and penance to keep up his promise.Like Gandhiji, he wanted to shun violence and pardon his opponent for his misdeeds by giving him an opportunity to return Sita back .

Gandhiji truly imbibed all the best moral characteristics Lord Ram stood for and that is why even when he was shot he died uttering "Hey Ram".

Gandhiji said Unto the Last and this inclusive concept started from Ram nam.In Vishnu Sahasranam , Parvati asks how a simpleton who does not know 1000 names of Vishnu will ever worship the Lord and Eswar obliges Her saying that Ram naam is equal to 1000 names of Vishnu .So the last man standing shall worship by chanting Ram naam so that nobody is left behind.

So constructing a Ram temple in Ayodhya in independent India has been the dreams of millions of indians for over 500 years and the foundation stone laying on 5th August has been the culmination of this dream.

VUCA 2.0 and Board evaluation of Strategy.

VUCA 1.0 talked about Volatility, Uncertainty, Complexity and Ambiguity in the countries around the world and how this VUCA gets multiplied over the years with a purposeful push towards chaos.

The laws of thermodynamics are called into play to describe what was chaos yesterday which has moved into the chaos of today and which will move into the chaos of tomorrow, with entropy increase.

But to tackle VUCA 1.0 , I prescribed the following:

 In a VUCA WORLD

    -Volatile environment requires Vision to look beyond the immediate and prioritise

    -Uncertainty  needs calm Understanding of the situation to be purpose driven

     -Complexity  demands Capability of mind to look at locks & keys

     -Ambiguity  calls  for  Agility in the workplace to innovate, grow and excel.

In VUCA 2.0 Bill George in his HBS article gives out a solution model instead of a fearful premise.

 He elaborates that Vision, Understanding, Courage and Adaptability are the main constructs over which the Strategy can be raised.

When it comes to Adaptability, I am reminded of Charles Darwin, who famously said

that  "it is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change."

If you want to swim against the tide and come out surviving, you will have to have the adaptability to change according to the demands of the circumstances.

A Board of Directors while looking at the Sustainability Goals of an Organisation will have to keep the above in mind while chalking out the Strategy. Whenever the Board faces a challenge in evaluating the goals vs the actual performance of the Co, they should remember the following as the compass for them to proceed.

“I can’t change the direction of the wind

but

I can adjust my sails to always reach my destination”

-Anonymous Sailor

EIA 2020 draft is good and what should we be careful about?

What do we know about EIA draft 2020? But even before we read it, we want to register our opposition to the draft. Does this attitude not reek of cynicism.

Former UPA minister Mr.jairam Ramesh shot out a letter to Minister for Environment in Central govt,Mr.Prakash Javadekar saying that draft EIA allows post facto approvals going against the principle of assessment before projects are put up.

There are some fundamental flaws in the assumptions behind the accusations against the draft.

1)Under the current EIA everything is hunky dory and the revised draft now is going to spell doom to the environment. For that, they are side by side quoting that LG Polymers gas leak disaster saying that this project has not obtained EIA clearances for the project still. These people, conveniently forgetting that this project has been put up as per current guidelines and not under the draft now presented, quote LG Polymer as an example of a violation of Environment Act. If the project had come up under the current guidelines it shows that the present system is far from perfect and not the draft EIA which is yet to be implemented.

2)The current regime encourages a lot of bureaucratic hurdles and "environment tax" on industry due to discretionary powers wielded by the govt agencies, NGOs and other vested interests. The influential private citizens hold the industry to ransom raising any number of objections and many a time it becomes a political battle using the corporate turf. The victims are corporate and the employed and finally the country.

3)Are we going by unbiased third party audits for EIA compliance before approving any mega projects. Whenever people's opinions are called for, most of the time the opposition parties jump in to settle their petty disputes and for scoring some political brownie points.Even after the matter is heard and resolved by NGT, and PCBs , local people are fed concocted news by urban naxals in the garb of NGOs through carefully planted stories in the gullible media inorder to arouse their passions and to rake up riots against the projects.In all this, the central point of Environment Impact assessment is the casualty. There are impartial National and International agencies who can give unbiased assessment reports and the country should make engaging them for assessment necessary, if not madatory.

4) Are we not unwittingly not believing any Govt agency even if the truth is told- immediately jumping to conclusion that the Corporates have bribed these Govt. agencies to talk in favour of them. We have become totally cynical of this system and we want to throw the baby with the bathwater.

5)Any development can happen only in the existing land.People must understand where they live today as their house and apartments all stand on land which was once thriving agricultural fields. Britishers pushed the development agenda by forcibly taking up the land and today our own Govt acquires these lands by paying up the agreed market price.Why are we then raising our hands against our own development. Is there any gain without pain?

6) People must understand, if they raise objections to any of these acquisitions, then where new roads, railroads etc can be laid?If our grandparents had raised such objections , whether today's existing Indian railways or National highways would have come up? or whether we could have enjoyed criss crossing the country happily riding on these infra facilities?

7) All those who raise these objections are still at liberty to approach the Courts seeking justice. Nothing or nobody is stopping them from reaching to the Courts.Instead if they want to do road roko or rail roko or cause obstruction to others in general, then their actions are anti social and anti national only. Such people are hell bent on scuttling India's development and prosperity and are playing into the hands of India's enemies.

My appeal to the common man is not to fall for the words of those who want to subvert India's growth using sophisticated wordplay and methods, as part of their selfish partisan and hidden agenda at the behest of our enemy nations.

RBI on Financial Stability of India and outlook on Govt finances

RBI has come out with its latest Financial Stability Report of the country last week.This is the first report after the outbreak of Covid 19 since this report is released once in six/seven months by RBI.The last report was released in Dec 2019.

Some of the macro financial indicators like CRAR(capital to risk-weighted assets ratio)at 14.8% ,, PCR (provision coverage Ratio) at 65.4% and GNPAs at 8.5% of all SCB improved all but marginally between Sep 2019 and March 2020.

But the bad news is GNPAs can worsen due to economic distress induced by  Covid pandemic and the Stress tests due to credit risk show a probability of this widening  to anywhere between 12.5% and 14.7% by March 2021.

Nomura India Business Resumption Index (NIBRI) which is published every week on Monday says in its latest published on July 27th that the Business Resumption shows signs of flatenning due to increase in Covid nos..According to  its short term outlook  the Indian Business which was set back by 30% from its pre pandemic Feb levels, will continue to languish at the same level. NIBRI index which hit 70.5 by end June after recovering from the slump , was at 69.2 by week ending July 5th, 68.7 by July 12th, 70 by  July 19th  and 70.1 by week ending July 26th .(link)(link) Pl. see these links to HT and ET reports.

Also in the Mint column of Dr.VAN (Bare Talk) on July 28th ,the real GDP contraction is projected to be at - 5% approx this year 20-21 with some other economists predicting it to be  direr than that i.e higher contraction of GDP.(link).Even a contraction in nominal terms is in their prediction as things stand.

The Govt. would have seen the writing on the wall. If the economic activity plunges its tax revenues will be hit and consequently its ability to finance its deficit and spend through its way. Already the impact of this is seen in dip in GST collections .In the previous fiscal itself there was a huge shortfall in GST collections vis-a-vis Budgeted nos.In FY 18-19,GST collections had fallen below 5% of GDP and in FY 19-20, it would have fallen still further. The shortfall in its Cess collections has impaired its ability to transfer the share of the States as promised by the Union Govt when GST was introduced.This lament by the Finance Secy about the need to invoke lower threshold for transfer invited sarcastic comments in the social media that this is the first case of GOI asking for moratorium and one time restructuring.

A timely disinvestment proceeds would have come in handy for the Govt. at this hour.But that is not to be as divestment of Air India and BPCL or other disinvestments are many months away, if not years.

So, the next two quarters will define the future course in terms of GDP growth,Tax revenues and the medium term plan of the Govt in finding new resources for funding.Since other macro factors like Current Account deficit, Foreign exchange reserves, Debt to GDP esp. outside Debt, Oil prices are all slightly better, if not favourable, Govt may bite the bullet and go for monetising of its fiscal deficit.When it decides on this, it should do that with a targeted loosening with a medium term clawing back to its fiscal glide path to 3% fiscal deficit in another 3/4 yrs.

Two days back RBI Governor has indicated where to target- five major dynamic shifts -infra, farm sector, renewables, leveraging ICT & start-ups, shifts in supply and value chains in domestic and global arena.

I would add my pet Auto sector to start with in terms of GST cut, which can be a game changer in terms of employment, investments and GDP growth with its ripple multiplier effects across the economy.!!!

Hammer and Dance strategy- both with Corona and China!!

Initially, when COVID 19 started spreading in India, PM Modi announced a war on Covid 19 and every single citizen abided by his exhortation.

Many newspapers and media personnel screamed Modi is going hammer and tongs at Covid 19 virus in order to scorch it totally.

But after a few lockdowns, both PM and the common man understood with humility that Covid demands hammer and dance strategy to deal with it.

So we are now reconciled to the fact that we must learn to live with Covid 19 at peace instead of waging a losing war. Adapting to its speed and spread, the common man is now equipped with mask, social distancing etc. to tackle it and dance with it.

Govt adopts the hammer and the common man adopts dancing with it.

Hopefully, this will become a considered foreign policy also with China, the birthplace of Covid19. Hammer at LAC and then dance with it in commercial and trade space!!Also, dance with China to wean it off Pakistan!!

Government's asset monetisation

Policy prescriptions are flying thick and fast and on my part, I am adding one more .

All Economists including me are prescribing deficit monetisation, pump priming etc. taking a leaf out of Modern Monetary Theory.

As against this,Central Govt. has an alternative which is called Asset monetisation, according to me.Govt calls it Disinvestment/Divestment of PSUs. When the whole world is reeling under Covid pandemic , will there be a suitor for Air India?

Even if there is a good buyer will he be willing to pay the right price for Air India.What will be the benchmark for its valuation when the whole industry is bogged down by this pandemic and its repercussions on the travel industry.

In such unprecedented situations , it is best advised not to go in for outright sale transactions of Government stake in PSUs including Air India, BPCL,etc.

Similarly, other intangible but real assets are Spectrum waves (link), Mining/Abiotic  ,Biotic Resources which are hidden inside the Earth, Ocean ,Space etc., Potential Renewable energy sources, which have future economic value and can add to GDP when suitably exploited without degrading the environment.

If these resources are valued properly, and India identifies these assets in terms of monetising its strengths, then India will have to look for its Enterprise value and raise suitable resources upfront for its current requirements in investing in its infra development.

In fact even lands owned by Indian Airports Authority can be used better by allowing usage of its land underground for commercial purposes.Even some of the defence lands can be wisely used under the ground for commecial purposes without in any way jeopardising defence security.