Mr Jaitley, One Thing Direct Tax Collections Show is That Acche Din are Here for CAs

A little over a week back, the numbers for the direct tax collections for 2017-2018, were released. The net direct tax collections have improved by around 17.1% to Rs 9.95 lakh crore. The direct tax collections consist of corporate tax, personal income tax and other direct taxes. This is the gross direct tax collection. After, refunds are deducted from it, what remains are the net direct tax collections.

The finance minister attributed this increase in net direct tax collections to demonetisation and Goods and Services Tax, which had resulted in a higher formalisation of the economy. The interpretation being that with increased formalisation people paid more tax.

The trouble with looking at just the absolute direct tax collections is that they do not take into account the fact that the size of the economy has also grown. Hence, any tax collection, should always be looked at as a proportion of the gross domestic product. How do things look when we look at the direct tax to the GDP ratio?

Take a look at Figure 1, which plots that.

Figure 1: 

Source: https://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdf.
For 2017-2018, the figure has been arrived at using data from http://pib.nic.in/PressReleseDetail.aspx?PRID=1527290
and http://pib.nic.in/PressReleseDetail.aspx?PRID=1522059.

What does Figure 1 tell us? It tells us that the direct tax to GDP ratio in 2017-2018 is likely to be at 5.94%. We use the word likely because right now what we have is a GDP estimate for 2017-2018, which will change when the actual numbers come out, later this year.

The direct tax to GDP ratio in 2016-2017 was at 5.6%. Hence, there is an improvement of 34 basis points (one basis point is one hundredth of a percentage), year on year. If we look at historical data, such a jump happened almost every year between 2001-2002 and 2007-2008. And no demonetisation or GST happened back then.

In 2007-2008, the direct taxes to GDP ratio peaked to 6.3%. The stock market was rallying big time back then. Once it crashed, the direct taxes to GDP ratio fell over the next few years. What this basically means is that when the stock market is doing well, the investors pay a lot more short-term capital gains tax than they do otherwise. And this improves the direct taxes to the GDP ratio of the government.

This is a factor that needs to be taken into account for the jump in direct tax collections as 2017-2018 as well. The stock market has been rallying over the last few years, and there is bound to have been some jump in the short-term capital gains tax collections. Given that an exact breakdown of different kinds of taxes is not available in the public domain as of now, we cannot adjust for it. These gains need to be adjusted for simply because they are temporary in nature.

But, we are sure, the mandarins at the finance ministry have this data, they can very well adjust for it and then tell us, what has been the real growth in direct tax collections.

There is another factor which makes the data look a lot better than it perhaps actually is. The net direct tax collections as mentioned earlier are arrived at by subtracting refunds from gross direct collections. Let’s take a look at Figure 2.

Figure 2: 

Source: Author calculations on data from https://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdfhttp://pib.nic.in/PressReleseDetail.aspx?PRID=1527290
and http://pib.nic.in/PressReleseDetail.aspx?PRID=1522059.

The refunds have fallen from 1.07% of the GDP in 2016-2017, to 0.89% of the GDP in 2017-2018. This is the second biggest fall in refunds between 2000-2001 and 2017-2018. It will be interesting to see what portion of the returns filed still remain to be processed. The larger point being that the direct tax collections data does not pass this basic smell test.

Further, if we look at GDP growth, 2017-2018 has seen slowest GDP growth (in nominal terms without adjusting for inflation) since 2011-2012. The government collecting higher taxes while the overall economy is slowing down, is not something to be proud of.

Let’s look at another data point that the Modi government keeps tom-tomming about at any given opportunity. That the number of tax returns being filed has been going up at a rapid pace. As the press release accompanying the announcement of direct tax numbers pointed out: “During FY 2017-18, 6.84 crore Income Tax Returns (ITRs) were filed with the Income Tax Department as compared to 5.43 crore ITRs filed during FY 2016-17, showing a growth of 26%. There has been a sustained increase in the number of ITRs filed in the last four financial years. As compared to 3.79 crore ITRs filed in F.Y. 2013-14, the number of ITRs filed during F.Y. 2017-18 (6.84 crore) has increased by 80.5%.”

Between 2013-2014 and 2017-2018, the number of income tax returns being filed has gone up 80.5%. During the same period the direct taxes to GDP ratio has gone up from 5.62% to 5.94%, by around 32 basis points.

What does this tell us? It tells us that more and more income tax returns are being filed, without any tax being paid. Why? Simply because the taxable income is not enough to be taxed.

The Economic Survey of 2017-2018 acknowledges this: “Analysis suggests that new filers reported an average income, in many cases, close to the income tax threshold of Rs. 2.5 lakhs.”

The Survey believes that “as income growth over time pushes many of the new tax filers over the threshold, the revenue dividends should increase robustly.”

Basically, what the Economic Survey is saying that a bulk of new tax filers are close to the income threshold of Rs 2.5 lakh. Income tax needs to be paid by individuals only if taxable income is more than Rs 2.5 lakh. The Economic Survey believes that as these people earn more, cross the Rs 2.5 lakh limit and pay tax. But the assumption here is that the Rs 2.5 lakh limit will continue to be the same.

Logically, it will have to go up in the years to come, simply because inflation needs to be taken into account. Hence, this argument doesn’t quite hold.

To conclude, the chartered accountants (CAs) in the business of filing returns are basically having the last laugh. The good thing at least someone is seeing the promised acche din.

The column originally appeared on Equitymaster on April 10th, 2018.

89% of Bad Loans Written Off by Public Sector Banks are Not Recovered

rupee
“You don’t get bored writing about bad loans of public sector banks?” asked a friend, a few days back.

We honestly told them, we don’t, simply because new details keep coming out, and we keep writing about them. And most of these new details show how messy the situation has become.

Yesterday, while digging through the questions raised by MPs in the Rajya Sabha, we came across another interesting data point, which again shows how messy the bad loans problem of public sector banks actually is and why it is not going to end anytime soon, irrespective of what analysts and politicians have to say about it.

Bad loans are essentially loans which have not been repaid for a period of 90 days or more.

After a point banks need to write-off bad loans. These are loans which banks are having a difficult time to recover.

When banks write-off bad loans, the total bad loans of the banks come down. At the same time, these bad loans are written-off against the operating profits of banks.

In an answer to a question raised in the Rajya Sabha, the government gave out the details of the total amount of bad loans which have been written off by public sector banks, over the last few years.

Take a look at Table 1:
Table 1:

YearLoans written off (in Rs Crore)
2014-201549,018.00
2015-201657,585.00
2016-201781,683.00
2017-2018*84,272.00
Total2,72,558.00
* Up to December 31, 2017

 

Source: RAJYA SABHA

UNSTARRED QUESTION NO: 3600

TO BE ANSWERED ON THE 27th MARCH, 2018

Table 1 tells us that between April 1, 2014 and December 31, 2017, the public sector banks wrote off loans worth Rs 2,72,558 crore. Hence, the profits of the bank have been impacted to that extent and so have the dividends that these banks give to the government every year.

Nevertheless, this is a point that we have made in the past. In this column, we hope to make a new point. While the loans that are written off are those that are deemed to be difficult to recover, there is still a certain chance that these loans may be recovered by the bank (given that loans are made against a collateral). How do the numbers stack up on this front? Take a look at Table 2.

Table 2:

YearLoans recovered(in Rs Crore)
2014-20155,461.00
2015-20168,096.00
2016-20178,680.00
2017-2018*7,106.00
Total29,343.00
* Up to December 31, 2017
 

Source: RAJYA SABHA

UNSTARRED QUESTION NO: 3600

TO BE ANSWERED ON THE 27th MARCH, 2018

 

From Table 1 and Table 2 we can conclude that over the last four years, Rs 29,343 crore of the bad loans that have been written off (Rs 2,72,558 crore) have been recovered by public sector banks. This basically means that the rate of recovery is 10.8%. Or 89.2% of the bad loans which are written off are not recovered.

Hence, technically there might be a difference between a write off and a waive off, but in real life, there isn’t. A write off is as good as a waive off with the banks failing to recover a bulk of the bad loans. Also, in case of a waive off, the government compensates banks to that extent.

As we have mentioned in the past
, loans to industry amount to 73% of the overall bad loans of public sector banks, whereas loans to the services sector amounts to another 13%. This basically means that corporates are responsible for more than 80% of bad loans of banks. And this explains why public sector banks have a tough time trying to recovering the bad loans they have written off.

A bulk of these bad loans are because of corporates who have access to the best lawyers as well as politicians and banks find it difficult to recover these bad loans by selling the collateral against which these loans have been made.

While, public sector banks have written off loans worth Rs 2,72,558 crore over the last four years, the total bad loans outstanding of public sector banks stood at Rs Rs. 7,77,280 crore, as of December 31, 2017. So, public sector banks aren’t done writing off bad loans as yet. There is more to come.

Stay tuned!

The column was originally published on Equitymaster on April 3, 2018.

India’s Banking is Getting Privatised Without the Govt

Indian_ten_rupee_coin_(2008_Reverse)
“Should public sector banks be privatised?” is a question that is being thoroughly debated these days. Arguments have been offered from both sides.

Those against the idea of public sector banks being privatised like to say that private sector banks also make bad lending decisions and end up with bad loans. Of course, that is true. In the business of banking, some loans are bound to go bad. A bad loan is essentially a loan on which  the repayment has not been made for 90 days or more.

Nevertheless, the more important point is what proportion of the loans have gone bad. As of March 31, 2017, the total bad loans of public sector banks stood at Rs 6,41,057 crore. In comparison, the total bad loans of private sector banks stood at Rs 73,842 crore.
Hence, the bad loans of private sector banks amounted to around 11.5% of bad loans of public sector banks. But just looking at bad loans in isolation isn’t really the correct way.
We also need to look at the total advances or loans of these banks.

As of March 31, 2017, the total advances of public sector banks stood at Rs 55,57,232 crore. The total advances of private sector banks stood at Rs 22,19,563 crore, or around 40% of advances of public sector banks.

If the private sector banks were doing as badly as public sector banks on the bad loans front, there bad loans should also have been around 40% of the total bad loans of public sector banks. But that as we saw is clearly not the case. The bad loans of private sector banks are at 11.5% of the bad loans of public sector banks.

This basically means that the private sector banks operate much more efficiently than public sector banks. Hence, the argument that public sector banks should not be privatised because private sector banks also accumulate bad loans, doesn’t really hold.

But that isn’t the major point that I wanted to make in this column. What people who suggest that public sector banks should not be privatised do not realise is that the banking sector in India is getting privatised on its own, even though the government continues to own 21 public sector banks. Take a look at Table 1.

Table 1:

Total advances As on March 31Public Sector BanksPrivate Sector BanksRatio (Total advances by private sector banks to total advances by public sector banks) (in %)
201238,77,307.319,66,402.9524.92%
201344,72,844.6511,43,248.5825.56%
201451,01,053.9513,42,934.6126.33%
201554,76,249.5415,84,311.8628.93%
201655,93,576.7819,39,339.4334.67%
201755,57,231.6322,19,563.0139.94%

Source: Author calculations based on data from Indian Banks’ Association

 

Now what does Table 1 tell us? As on March 31, 2012, the total advances of private sector banks were around a fourth of the total advances of public sector banks. By March 31, 2017, this ratio had increased to 40%.

This basically means that as public sector banks go slow on lending because of their bad loans, the total loans given out by private sector banks are growing at a much faster pace. Hence, as far as the overall banking sector is concerned, it is getting privatised, irrespective of what the experts and the government think about privatising public sector banks.

In fact, the situation is not very different from other sectors which the government has opened up for private companies over the years. Take a look at what happened to the airlines sector. Air India and Indian Airlines (before they were merged) had 100% of the market (along with Vayudoot, another government owned entity). Now Air India (in which the erstwhile Indian Airlines has been merged) has 13.8% of the market share. This has benefitted the consumers tremendously.

Similar stories of privatisation, without  the government privatising public sector enterprises, have played out in the telecom and pharmaceutical sectors, respectively, and even in education, to some extent.

The telecom sector had two players BSNL and MTNL. Over the years, the market share of these two government owned companies, has come down dramatically, while the government continues to own them.

Over the years, various ministers have referred to public sector enterprises as family jewels. The trouble is that in sector after sector, these family jewels have lost their lustre and a tremendous amount of value has been destroyed.

Along similar lines, public sector banks have reached a stage where it will be difficult to find buyers for many of these banks, even if the government makes a decision to privatize them (which in the first place seems very difficult).

The 1997 Committee on Banking Sector Reforms (better known as the second Narasimham Committee) had recommended that the government reduce its holdings in PSBs to 33 per cent and, in the process, give increased autonomy to these banks. The Committee had also recommended no further recapitalisation of public sector banks by the government. But that is not how things have eventually turned out.

And more than two decades later, now we have reached a stage where most of the public sector banks are as dead as a dodo.

 

The column was originally published on Firstpost on April 2, 2018.
 

GST — 9 Months Later

The Goods and Services Tax (GST) has been in existence for close to nine months now. By now, we have sufficient data and other evidence to figure out, how well the nation has taken to this new tax.

Let’s first start with how the GST collections have been between July 2017 and February 2018. Take a look at Table 1.

 

Table 1: GST collections

(Amount in Rs Crores) MonthCollection
August, 201793,590
September, 201793,029
October, 201795,132
November, 201785,931
December, 201783,716
January, 201888,929
February, 2018*85,174

Source: Lok Sabha Unstarred Question Number 4809 and www.pib.nic.in
* Up to March 26, 2018.

As can be seen from Table 1, the GST collections have fallen over the months, after having peaked in October 2017. Let’s dig into the numbers in a little more detail. The total GST collections for the month of February 2018 stand at Rs 85,174 crore. Out of this the central GST amounts to Rs 14,945 crore. In the month of January 2018, the total central GST collected had amounted to Rs 14,233 crore.

If this trend of central GST collected continues in the months to come, the central government might get into some major trouble on the revenue front. The question is why? In 2018-2019, the central government expects to collect a total of Rs 6,03,900 crore, as central GST. This amounts to Rs 50,325 crore per month, on an average.

The current central GST collections are nowhere near this number.

In comparison, in February 2018, Rs 42,456 crore was collected as integrated GST, which is split between central and state governments. In January 2018, the total integrated GST collected had been at Rs 43,794 crore.

Further, Rs. 12,140 crores is being transferred from integrated GST to central GST account for February 2018. Thus, the total central GST collection for the month will be at Rs 27,085 crore (Rs 14,945 crore + Rs 12,140 crore). This is nowhere near the Rs 50,325 crore that the central government expects to collect every month through central GST.

If this trend continues in 2018-2019, the revenue expected to be earned from GST, will be way short of what has been projected, unless central GST collections improve significantly from their current level.

Clearly, there is a problem here.

Around 1.05 crore taxpayers have been registered under GST up until now. Out of this number 86.37 lakh taxpayers are required to file a monthly return, the rest come under the composition scheme and are required to file the GST return quarterly.

Of the 86.37 lakh taxpayers who need to file their returns monthly, 59.51 lakh filed their return for the month of February 2018, up until March 25, 2018. This basically means that only 69% of taxpayers who are required to file a monthly return, did so. So, nearly a third of the taxpayers who are supposed to be filing tax returns, aren’t doing that currently.

The question is why is this happening? The GST network carried out a survey in October and November 2017, and the answers it got are fairly interesting. Let’s take a look:

1) There were gaps in general understanding of the electronic processes for complying on GST Portal (Specific technical Issues like Digital signature related problems etc.)

2) Helpdesk is not able to respond to problems effectively.

3) Mistakes in return cannot be corrected.

4) Site performance being slow and has multiple problems.

5) Contextual help not available. Errors are generic and non-intuitive.

6) It is extremely difficult to reach helpdesk. It takes a long time to respond to issues escalated.

In fact, almost all the issues raised above could have been tackled if the government hadn’t launched GST in a hurry and come up with a simpler system design. Also, system design isn’t really a strong point with the Indian government. This clearly comes out in the answers to the survey. Anyone who has filed his income tax return would vouch for this.

Over and above what the survey found out, the World Bank in a recent report provided evidence regarding the complexity of the Indian GST system. As the World Bank said: “The Indian GST system currently has 4 non-zero GST rates (5, 12, 18, and 28 percent)… Most countries around the World have a single rate of GST: 49 countries use a single rate, 28 use two rates, and only 5 countries including India use four rates. The countries that use four or more rates of GST include Italy, Luxembourg, Pakistan and Ghana. Thus, India has among the highest number of different GST rates in the world.”

The Indian politicians may have their reasons for doing this, but multiple rates, do complicate things for those who need to follow the GST system (remember self-assessment is at the heart of this system).

Take a look at Figure 1.

Figure 1:Other than having too many rates of tax, India also has one of the highest GST rates in the world. As the World Bank pointed out: “Comparing the design of India’s GST system with those prevailing internationally, we note that the tax rates in the Indian GST system are among the highest in the world. The highest GST rate in India, while only applying to a subset of goods and services traded, is 28 percent, which is the second highest among a sample of 115 countries which have a GST (VAT) system and for which data is available.”

Take a look at Figure 2.

Figure 2:Basically, there are too many design issues with India’s GST, making the system essentially complicated for people to follow. To this criticism, people have pointed out that the earlier system of multiple tax rates with no input credit was even more complicated. This is true. But people making this criticism do not get two points.

First, their criticism is valid for the indirect tax system that prevailed on the sale and movement of goods. It is not valid for services. The service tax system was inherently simpler than the current GST, even though no input tax credit was available (but then the rate tax was also lower at 15%). And 50% of the Indian economy is services, is a point which is worth remembering. Also, the service tax had to be paid after it had been collected from the customer. Now, GST needs to be paid, after the invoice is raised, irrespective of whether the GST has been paid or not.

This has led to many a small entrepreneur facing working capital issues, and in the process financing big corporations, which take their own sweet time to make the payment. As a freelance writer, we have been facing this problem at our small level as well. And it’s not a great place to be in.

Second, the entire idea behind GST was to expand the tax base and get more people to pay tax. A complicated system of filing returns goes against this entire idea. In July 2017, the total number of taxpayers who were required to file tax returns stood at 59.57 lakhs. This has since then increased to 1.05 crore. Nevertheless, the total tax collected has fallen from Rs.92,283 crore to Rs 85,174 crore. What explains this increase in number of taxpayers and falling tax collections? The complicatedness of the GST system.

The GST council is handling this in a very piecemeal manner, where they keep coming up with new rules every month, and create a bigger headache for those who have to follow the system. Instead, what is needed is the simplification of the entire system of following and filing the GST. And that is easier said than done because among other things it would mean admitting to having screwed up, which politicians don’t like to do.

Of course, it is unfair to just blame the system design. Tax evasion, as always, continues. But that was always a given. A simpler system would have clearly helped in tackling this.

The column was originally published on April 2, 2018, on Equitymaster

 

 

Cash is Back: Ill-Effects of Demonetisation are Finally Going Away

We had written about this issue, earlier this month.

At that point of time, the currency in circulation was approaching its pre-demonetisation level.

As of March 9, 2018, the currency in circulation crossed its pre-demonetisation level, for the first time. This is a significant event, which has largely gone unreported in the mainstream media. We wonder why? Dear Reader, guess you know the answer to this one.

Take a look at Figure 1.

Figure 1:The currency in circulation as on November 4, 2016, four days before demonetisation was announced, had stood at Rs 17.98 lakh crore. After that the currency in circulation fell, as people deposited Rs 500 and Rs 1,000 notes in their bank accounts. It fell to low of Rs 8.98 lakh crore as on January 6, 2017, and has had largely had an upward trend since then.

Of course, it is not fair to look at currency in circulation, just in isolation. Then there would be no difference between what passes of as analysis on the social media and us.

The currency in circulation is also a function of the size of the economy. Between November 2016, when demonetisation happened and now, the economy has also increased in size. Hence, we need to adjust for this, and the right metric to look at is the currency in circulation to the Gross Domestic Product (GDP) ratio.

In order to come up with this ratio for the end of this financial year, we will have to project the currency in circulation. A projection for the GDP is available.

We basically look at the weekly growth rate of currency in circulation over the last one year (i.e. from March 10, 2017 to March 9, 2018). We ignore the rate of increase in currency in circulation from January 6, 2017 and March 2, 2017, because it was growing at a very fast rate at that point of time.

Using the weekly rate of increase of currency in circulation from January 6, 2017, onwards, is likely to lead to a higher currency in circulation at the end of this financial year and we like to be slightly conservative in our calculations.

Using the rate of weekly increase in currency in circulation between March 10, 2017 and March 9, 2018, the currency in circulation at the end of March 2018, is likely to be around 18.53 lakh crore. As of March 9, 2018, it was at 18.14 lakh crore.

The GDP at the end of the year is projected to be at Rs 167.51 lakh crore. This means a currency to GDP ratio of 11.1%. Take a look at Figure 2, which basically plots, the currency to GDP ratio of the Indian economy, over the years.

Figure 2:The currency in circulation as of March 31, 2017, had stood at 8.8% of the GDP. By March 31, 2018, it is expected to be at 11.1% of GDP, a jump of 230 basis points. One basis point is one hundredth of a percentage. While, this has still not crossed the pre-demonetisation level, it is a tremendous recovery from the March 2017 low.

There are multiple interpretations that can be made from this. Firstly, it tells us very clearly that Indians have gone back to cash as a medium of exchange. It also tells us very clearly that fundamental habits cannot be changed overnight, a point we have been hammering away at for a while now. An economy which used cash for close to 98% of its transactions (in volume terms), cannot be suddenly expected to use substantially less cash.

The increasing currency in circulation as a proportion of the GDP, is a sign of people carrying out more economic transactions with each other than they were in the past. Only when economic transactions happen do people need cash or currency to pay for stuff. If economic transactions are not happening, the currency can continue to stay in the bank account. Only, when transactions start to happen, money is withdrawn from banks and currency in circulation goes up.

Of course, many transactions are carried out in cash. Informal economy forms a huge part of India’s total economy. It also employs a major part of the workforce.

Depending on which estimate you want to believe the informal economy forms around 40-45% of India’s economy and employs anywhere between two-thirds to 92% of its workforce. The currency in circulation going up is clearly good news for the informal sector.

It shows that life seems to be gradually getting back to normal, for this sector, which was badly hit in the aftermath of demonetisation. This should gradually translate into good news for the formal sector as well. If the informal sector does well and people working in it earn money and spend it, the firms operating in the formal sector are bound to benefit, as well.

Of course, the propaganda these days is that everybody who operates in the informal sector is bad, because they don’t pay tax. But that is incorrect. As we have written in the past, a bulk of the individuals working in the sector do not come under the tax bracket and hence, they don’t pay tax. Hence, painting everyone with the same brush is neither fair nor required.

Having said that, there are people and firms operating in the informal sector not paying their fair share of taxes. This means the income tax department needs more efficient targeting, instead of painting everyone with the same brush, as the government has been doing since November 2016. But that is easier said than done.

Propaganda is way easier than doing the right things.

The column originally appeared on Equitymaster on March 22,2018.