Swacch Bharat Cess Is Not Like Education Cess, It’s A Proper Tax

The government of India (like other governments all over the world) has effectively outsourced a major part of tax collection. The corporates deduct income tax from the salary of their employees regularly and hand it over to the government. The government’s dealing with the employees is limited to the income tax return that needs to be filed at the end of the financial year.

The government has also outsourced the collection of service tax to people like me, who are self-employed professionals. We collect service tax on behalf of the government from our clients and hand it over to the government at regular intervals. We are also expected to file service tax returns, regularly.

Recently, during the course of billing a client for service tax as well as Swacch Bharat Cess I had a very interesting experience, which I will share in this column.

On November 6, 2015, the Narendra Modi government decided to implement a Swacch Bharat Cess. The cess amounts to 0.5% on all services, and has pushed up the effective rate of service tax to 14.5%, from the earlier 14%. As the press release announcing the cess pointed out: “the Government has decided to impose, with effect from 15th November 2015, a Swachh Brarat Cess at the rate of 0.5% on all services, which are presently liable to service tax. This will translate into a tax of 50 paisa only on every one hundred rupees worth of taxable services.”

This meant that when I was sending out bills for the month of November 2015, I had to take Swacch Bharat Cess into account as well. One particular client’s bill had amounted to around Rs 30,000. On this I added a service tax of Rs 4200 (14% of Rs 30,000) and a Swacch Bharat Cess of Rs 150 (0.5% of Rs 30,000).

I sent across this bill on December 1. The next day, the accountant called. He tried to explain to me that I had miscalculated the Swacch Bharat Cess. The Swacch Bharat Cess should be Rs 21 and not Rs 150, he said. It took me a while to realise what he was trying to say.

He had essentially considered the cess to be a tax on a tax, like is the case with the education cess that is levied on the income tax that we pay. Education cess is levied at the rate of 2%. There is a secondary and higher education cess of 1% as well. Hence, the total education cess essentially amounts to 3%.

This cess is a tax on a tax. If you happen to come in the 30% tax bracket, then the education cess effectively works out to a tax of 0.9% (3% of 30% income tax rate). If you happen to come in the 20% tax bracket, then the education cess effectively works out to a tax of 0.6% (3% of 20% income tax rate). If you happen to be in the 10% tax bracket, then the education cess effectively works out to a tax of 0.3% (3% of 10% income tax rate).

The accountant was effectively telling me that the Swacch Bharat Cess worked in a similar way, like the education cess. What he was saying is that Swacch Bharat Cess was effectively a 0.5% tax on 14% service tax. This amounts to an effective rate of 0.07% (0.5% multiplied by 14%). In my case the actual Swacch Bharat Cess worked out to Rs 21(0.07% of Rs 30,000, the amount I had billed or 0.5% of Rs 4,200, the service tax that needed to be paid).

Over the next 45 minutes I tried explaining to him that what he was saying was wrong. The Swacch Bharat Cess did not work like the education cess and was not a tax on a tax. He wouldn’t budge. Finally, I gave up and promised to send him a new invoice. The difference between Rs 21 and Rs 150 was Rs 129 per month, and that really wasn’t a very large amount. I could pay it out of my own pocket.

The Swacch Bharat Cess is effectively an additional tax of 0.5%, unlike the education cess which is a tax on a tax. So why has the government called it a cess? Tax collected by the central government needs to be shared with the state governments, a cess does not. That is why the Swacch Bharat Tax has been basically been called Swacch Bharat Cess.

Any additional tax essentially complicates the tax-filing and the tax-collection mechanism, as my dealing with the accountant brings out in a very simple way. While, the amount involved in my case is very small of around Rs 129 per month (or around Rs 1548 per year, if I continue to bill the client Rs 30,000 per month), this may clearly not be the case with others. Further, time and energy are wasted in trying to explain things to others, which clearly isn’t my job. Long story short—any additional tax, essentially ends up complicating the tax system further.

News-reports suggest that the government is now considering a 2% skill cess. This, as per news-reports, will function like the education cess and will be levied on corporate and income tax. Nevertheless, it raises multiple questions. If to develop something as basic as skills, the government needs to implement a cess, what is it doing with all the ‘real’ taxes that it is collecting? Further, the government has set up a committee to suggest simplification of the income tax laws. As explained earlier, every cess/extra tax introduced complicates the law. Hence, if the idea is to simplify the income tax laws, why introduce one more cess? How does the government explain this basic dichotomy?

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on Huffington Post India on Dec 7, 2015

Does The RBI Really Think Banks Are Cleaning Up Their Balance Sheets?

The fifth monetary policy statement for the current financial year (2015-2016) was released by the Reserve Bank of India (RBI) earlier this week. In this statement the RBI points out that since the beginning of this year, the repo rate has been cut by 125 basis points (one basis point is one hundredth of a percentage). Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

When the RBI cuts the repo rate it is expected that the banks will follow suit. As banks cut interest rates, the expectation is people will borrow more. But that doesn’t seem to have happened. Bank lending growth has continued to be in single digits. While the RBI has cut the repo rate by 125 basis points, the bank have cut their interest rates by only 60 basis points, which is less than half of RBI’s cut.

One of the reasons for this is that the bad loans have been piling up at banks, especially public sector banks. This hasn’t allowed banks to cut interest rates at the same pace as the RBI has cut the repo rate. Higher interest rates are being used to generate income which can compensate for losses on account of bad loans.

The RBI in the monetary policy statement is hopeful that “the on-going clean-up of bank balance sheets will help create room for fresh lending.” What this means is that once banks are able to clean up their balance sheets i.e. bring down their bad loans, they will be able to lower their interest rates and in the process greater lending will happen.

But how likely is this? The RBI declares the sectoral deployment of credit data every month. In this it gives out details of how much money was lent by banks to different sectors of the economy. Between October 2014 and October 2015, the banks have lent around Rs 1,15,800 crore to industry. This is an increase of 4.6%. Between October 2013 and October 2014, the lending to industry has gone up by 7.8%.

So far so good. Within industry, banks have lent Rs 73,500 crore to the infrastructure sector. Within the infrastructure sector, banks have lent Rs 55,600 crore to the power sector. Lending to iron and steel increased by Rs 22,200 crore between October 2014 and October 2015.

Hence, lending to the power sector and iron and steel sector was at Rs 77,800 crore. Given this, nearly two-thirds of all industrial lending by banks during the last one year has been to power and iron and steel companies. If we consider the entire infrastructure sector along with the lending to the iron and steel companies, then banks have carried out 82.6% of their industrial lending over last one year to companies operating in these sectors.

And why is that a problem? The RBI Financial Stability Report, which is released twice a year, with the last edition being released in June earlier this year, points out: “Five sub-sectors, namely, mining, iron & steel, textiles, infrastructure and aviation, which together constituted 24.8 per cent of the total advances of scheduled commercial banks, had a much larger share of 51.1 per cent in the total stressed advances. Among these five sectors, infrastructure and iron & steel had a significant contribution in total stressed advances accounting for nearly 40 per cent of the total.”

The power sector is a part of the infrastructure sector and a big defaulter of bank loans. Power sector loans form a little over 8% of total banks loans. Nevertheless they form 16.1% of the stressed advances.

Stressed advances are essentially gross non-performing assets (or bad loans) of banks plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan by increasing the tenure of the loan or lowering the interest rate.

What does this tell us? Basically 40% of the stressed advances of banks come from companies operating in the infrastructure and the iron and steel sectors. Ironically, banks have carried out more than 80% of their industrial lending to companies operating in these sectors, in the last one year.

Hence, banks are lending money precisely in those sectors where they have been losing money. Why are they doing that? A possible explanation is that new loans are being given so that the older loans that are falling due can be repaid. The companies operating in these sectors do not have the money to repay the loans they had taken on. In the process, the problem of recognising bad loans can be controlled, and the banks can kick the can down the road.

As the Financial Stability Report points out: “The debt servicing ability of power generation companies [which are a part of the infrastructure sector] in the near-term may continue to remain weak given the high leverage and weak cash flows. Banks, therefore, need to exercise adequate caution while dealing with the sector and need to continue monitoring the developments very closely.” What explains banks giving out more loans precisely to these companies?

With regard to the iron and steel sector the report had said that “the sector holds very good long term prospects, though it is currently under stress, necessitating a close watch by lenders.”

In fact, despite giving out fresh loans to the troubled sectors, the bad loans of banks have been on their way up. A recent newsreport in the Mint pointed out that bad loans of banks had risen to Rs 2,85,000 crore as on September 30, 2015. This was 22.9% higher than the total bad loans of banks as on September 30, 2014.
A report in The Indian Express puts the bad loans of banks at Rs 3,36,685 crore as of September 30, 2015. This is a rise of 27% from last year.

The RBI governor Raghuram Rajan recently said: “I want to put something like March 2017 on the table as when we hope that a full clean-up will have been done.” Is he being a little too optimistic here? That only time will tell.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on HuffPost India on Dec 3, 2015

Khada hai khada hai was a Sufi song: A dreamy conversation with Pahlaj Nihalani

It is 12.30AM at night and I am sleeping. In my sleep I am dreaming about Pahlaj Nihalani. I am actually talking to him. We are having a conversation.

“Sir if you could produce a film with a song khada hai khada hai khada hai, why don’t you like kissing anymore?” I asked him a simple question to start the proceedings.

“You are misquoting the song?”

“Misquoting the song?” I repeated, wondering how does one misquote a song.

“Well you are just singing a part of it,” explained Mr Nihalani, the censor board chief and started humming it himself: “Khada hai khada hai khada hai, dar pe tere aashiq khada hai.”

“This is the complete line?”



“This is a Sufi song. In fact, it was India’s first filmi Sufi song.”

“Sorry?” I asked, wondering what made one of India’s grossest double meaning songs, a Sufi song.

“Let me explain,” continued Nihalani. “The lover is calling out to his beloved and singing that he is standing on her doorstep waiting for her to open the door.”


“The beloved is essentially a representation of God, you see and the lover is her devotee,” he explained.

“Ah,” I said surprised at this masterful spin that Nihalani had come up with.

“Imagine a Sufi song in Hindi cinema of the 1990s. They used to be full of these double meaning songs. Choli ke peeche/andar kya hai and all that. This was a time when the world hadn’t discovered Nusrat Fateh Ali Khan sab. Or Abida Parveen for that matter. I was ‘so’ ahead of the times.”

“But Sir what about lal duppette waali tera naam to bata?” I asked, trying to get back into the game.

“What about it bacche?”

“Well there is a line in the song where the heroines sing, “har ajnabi ke liye khidki nahi khulti,” and in a very suggestive way slightly raise the hemline of their white mini-skirts. This clearly wasn’t a good projection of Indian culture that you now seem to be so passionate about?”

“Ah, the tragedy of my life,” shouted Nihalani.

“Nobody ever understood the real meaning behind my songs.”

“Real meaning?” I asked.

“Yes. That was a song against pollution. I was telling the people to keep their windows closed till the air gets a little cleaner. Again, I was ahead of the times. Now we at least have Modi Kaka’s Swacch Bharat.

“And what about main maal gaadi tu dhakka lagga? What was that all about?” I asked, hoping to catch the censor chief off-guard.

“Oh that was a song for the Indian Railways,” he replied.

“Indian Railways?”

“You know that the passenger service of Indian Railways is a loss making operation?”


“That was my way of indirectly telling the government that they should be running more freight turns, if they wanted the Railways to be profitable and sustainable.”


“And look at what happened?” he asked rhetorically.

“What happened?” I repeated.

“Lalu Prasad Yadav stole my idea when he became the Railway Minister in 2004. He gave immense importance to freight operations and revived the Railways,” explained Nihalani. “I never got the respect I deserved until Modi Kaka came along.”

“Hmmm. But what about angna main baba duare pe ma?

“What about it?”

“The song starts with the heroine Shilpa Shirodkar lifting her ghagra to reveal her thigh. It is followed by the heroine and a string of women extras gyrating their chests and doing other suggestive movements.”

“So?” Nihalani persisted.

“Well if you can produce that sort of a song, what is wrong with James Bond kissing?”

“Well, again you are seeing only what unfolds on the screen.”

“So what is the ‘deeper’ meaning?” I asked, trying to be sarcastic.

“This was a song against obesity.”

“Obesity?” I asked, with my head ready to spin.

“Yes. Look at the dance movements. I have just tried to Indianise aerobic movements. I had given special instructions to the choreographer to do that.”


“Yes. And this was a time when even Baba’s Yoga was not on the scene,” he explained.

“Yes that is pretty recent,” I said accepting defeat.

“And it was up to me that the country remained healthy until Modi Kaka came along.”

This was when a bucket full of water landed up on me and the girl-friend yelled at the top of her voice, “can you stop shouting Modi Modi even in your sleep.”

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek. On most days he writes on finance and economics).

This spoof originally appeared on Huffington Post India on Nov 26, 2015

Why the Swacch Bharat cess is a terrible idea

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
The government announced a new Swacch Bharat cess, yesterday. The cess will amount to 0.5% on all services, pushing up the rate of service tax to 14.5%, from the current 14%. The cess will come into effect from November 15, later this month.

As the press release announcing the decision said: “Swachh Bharat Cess is not another tax but a step towards involving each and every citizen in making contribution to Swachh Bharat…The proceeds from this cess will be exclusively used for Swachh Bharat initiatives.”

This decision is in continuation with something the finance minister Arun Jaitley had announced in the budget speech he made on February 28, earlier this year. As Jaitley had said on that occasion: “It is also proposed to have an enabling provision to levy Swachh Bharat Cess at a rate of 2% or less on all or certain services if need arises. This Cess will be effective from a date to be notified. Resources generated from this cess will be utilised for financing and promoting initiatives towards Swachh Bharat.”

Thankfully, the government has resisted the temptation to increase the rate of service tax by 2%, through the cess route and settled at 0.5%.

There are multiple reasons why this is a bad decision. As the press release said: “Swachh Bharat Cess is not another tax but a step towards involving each and every citizen in making contribution to Swachh Bharat.” What this clearly tells us is that the Swacch Bharat initiative is an important initiative for the government, as it should be.

And given that, it should be financed out through the primary revenues of the government and not through a cess. If the Swacch Bharat initiative is deemed to be important then it should have first claim on the revenues of the government and shouldn’t be financed through a cess.

Second, any cess essentially ends up taxing the same set of people again. Over the years, the government has made very little effort in trying to expand the tax base by simplifying the tax system as well as cracking down on a large set of Indians who do not pay any tax. The annual report of the ministry of finance for 2014-15 puts the total number of income tax assesses in 2013-2014 at 4.7 crore. These includes individuals, families, trusts and corporates. Given a population of close to 125 crore, what this clearly tells us is that not many Indians pay income tax. And this is something that government needs to improve on, instead of taxing the same base over and over again.

Third, any new tax (as a cess is) adds to the complication of the tax system and this keeps people away from paying tax. Further, in the Indian case, a cess tends to be more of a permanent nature than ad hoc as it should be.

Take the case of the education cess on income tax. It has been around for a while now raising the question that isn’t education important enough to be financed out of the primary revenues of the government.

Fourth, while the government has come up with a Swacch Bharat cess, it is wasting thousands of crore on keeping loss making public sector enterprises alive.

Let’s take the example of Mahanagar Telephone Nigam Ltd(MTNL) which offers internet and telephone services in Mumbai and Delhi.

During the course of 2014-2015(the period between April 1, 2014 and March 31, 2015) the company’s income was at Rs 3,400 crore. Its expenditure on the other hand stood at a much higher Rs 5,284 crore. The government(or rather the tax payer) bore the loss of around Rs 1,900 crore.

Or take the case of the government owned airline Air India. The company has accumulated losses of Rs 20,000 crore. The airline keeps making losses. The government keeps putting more and more money into it.

As this August 2015 news-report by PTI points out: “The Finance Ministry today sought Parliament’s nod for making an additional equity infusion into Air India worth Rs 800 crore, less than half the amount sought by the Civil Aviation Ministry for the national carrier.” Thousands of crore have already been infused into Air India. And with so much money going towards such lost causes, it is not surprising that the government has had to introduce a new Swacch Bharat cess.

Fifth, the government can easily finance Swacch Bharat by selling the shares it owns in Axis Bank, Larsen and Toubro and ITC, through the Specified Undertaking of Unit Trust of India (SUUTI). These shares as on November 6, 2015, were worth Rs 53,472 crore. Some portion of these shares can be sold every year to finance Swacch Bharat. At the end of the day what is strategic about the government holding shares in ITC, a company which earns a major part of its revenue through selling cigarettes? The SUUTI’s holding in ITC is worth Rs 30,210.7 crore.

Sixth, by levying a cess for Swacch Bharat, the government is taking the moral incentive out of the equation. As Nitin Pai of the Takshashila Institution puts it: “Levying a cess dilutes the moral incentive that a borderline conscientious citizen faces. Instead of a gnawing feeling when she sees garbage in public places, the marginal citizen is likely to feel the same-old, “I’ve done my part but the government is not doing its job properly.””

Once all these reasons are taken into account the Swacch Bharat cess is a stupid idea. The Narendra Modi government could have done better than this.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on Nov 7, 2015

Slash Prices: Arun Jaitley’s Advice To Real Estate Companies Is Spot-On

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

The Associated Chambers of Commerce and Industry of India (Assocham), a business lobby, recently released a study titled Real estate investment: State-level analysis.

In this study, it estimated that 75% of the 3,540 real estate projects in India remained non-starter as of the end of March 2015. The business lobby estimated that the projects had total outstanding investments worth over Rs 14 lakh crore. This means that the average size of a project is around Rs 395.5 crore.

Assocham further said that a total of 2,300 projects in the real estate sector remained non-starter. Further, 1000 projects are facing a significant delay in completion.

Why is this happening? Real estate companies have two major sources of finance: banks and investors. The monthly sectoral deployment of credit data released by the Reserve Bank of India (RBI) points out that the total bank lending to commercial real estate grew by a minuscule 2% between September 19, 2014 and September 18, 2015. This, when the overall lending by banks grew by 8.4%.

Now compare this to how things were in September 2014. Bank lending to commercial real estate between September 20, 2013 and September 19, 2014, had grown by a massive 20%. The overall bank lending by banks had grown by a similar 8.6%.

This clearly shows that the lending by banks to real estate companies has slowed down dramatically. Between September 2013 and September 2014 banks lent Rs 26,958 crore to real estate companies. This has crashed to Rs 3,157 crore between September 2014 and September 2015.
What this clearly shows is that banks are not interested in lending money to real estate companies anymore. And in this scenario real estate companies do not have enough money to start or complete projects. 

Other than banks a major source of finance for real estate companies are investors looking to deploy money in under-construction properties. It seems they are staying away from the sector as well.

The returns from the real estate sector have been very low over the last few years. Further, many projects are massively delayed. As the Assocham study points out: “On an average, real estate projects in India are facing a delay of 33 months in completion… Realty projects in Andhra Pradesh are facing maximum delay of about 45 months followed by Madhya Pradesh (41 months), Telangana (40 months) and Punjab (38 months).”

Given this, it is not surprising that the investor interest in real estate seems to have come down dramatically, leading to major fund crunch for real estate companies. This also becomes clear from the spate of goodies and discounts that real estate companies are willing to offer to anyone who is willing to invest in a fresh project.

Commenting on the real estate sector, the finance minister Arun Jaitley said on October 31: “The essence of your industry can’t be that I will only survive on subsidies. You will have to survive on the strength of the market economy itself [italics are mine] and you will have to survive on the strength of our banking system to finance you.”

The phrase to mark in the above paragraph is “You will have to survive on the strength of the market economy itself”. What did Jaitley mean by this? What this meant was that the real estate companies will have to allow the market economy to operate. Up until now, despite a major fall in demand for real estate, prices haven’t fallen at the same pace.

In this scenario, the real estate companies are stuck with a massive amount of unsold homes. Even a fall in interest rates hasn’t helped given that most of the real estate in India’s bigger cities, where the bulk of the market is, is way too expensive and beyond what most people can afford. This anomaly needs to be set right. Real estate companies need to cut prices at a much faster rate than they currently are. For once, Jaitley’s comment on real estate is spot-on.

The RBI governor Raghuram Rajan said something similar sometime back: “I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don’t want to create a situation where prices stay high at the level which means demand can’t pick up.”

It is important to understand here that real estate is a very important cog in the wheel of the Indian economy. It employs a large number of unskilled and semi-skilled labour. It has major backward linkages into sectors like cement and steel. The point being no home can be built without cement and steel. A revival of real estate sector will lead to a definite pick up in cement and steel sectors as well.

To conclude, if real estate demand has to pick up, prices need to fall much more than they have up until now. The question is how soon will the real estate companies come around to cutting prices at a much faster rate than they currently are? On that your guess is as good as mine.
Stay tuned!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on Nov 2, 2015