Tag: Arun Jaitley | Page 6

22 March, 2016

Vijay Mallya Is Just A Small Part Of The Big Banking Problem

If media coverage were to be a reflection of the scale of any problem, then it can safely be said that Vijay Mallya has all alone been responsible for the crisis in the Indian banking sector.

But that is clearly not the case.

Mallya owes Indian banks around Rs 9,000 crore. This is a very small amount when we look at the total amount of money owed by various corporates to Indian banks. The minister of state for finance Jayant Sinha shared some interesting data in a written reply to a question in the Lok Sabha, on March 11, 2016.

The accompanying table shows us how big the problem of banks’ lending to corporates actually is.

Rs. in Crore
Corporate Lending
Year	Gross Advances	Gross NPAs	GNPA Ratio
2012-13	31,11,761	1,00,118	3.22
2013-14	34,06,025	1,54,955	4.55
2014-15	36,15,133	1,93,123	5.34
2015-16 (till Dec. 15)	38,41,836	2,60,653	6.78

The gross non-performing ratio has more than doubled between 2012-2013 and December 15, 2015. It has jumped from 3.22% to 6.78%. The gross non-performing ratio is essentially obtained by dividing gross non-performing assets by gross advances or total loans given by the banks, in this case to corporates.

And how do we define gross non-performing assets? As the per the Reserve Bank of India: “An asset…becomes non performing when it ceases to generate income for the bank.” When the corporate borrower stops paying interest and repaying the principal on a loan(a loan is an asset for a bank), the bank typically allows for a grace period of 90 days. After this grace period is over, the bank categorises the loans as a non-performing asset and starts setting aside money (or making provisions) for it. The total sum of such loans forms the gross-non-performing assets.

It is worth remembering here that a loan being categorised as a gross non-performing asset does not mean that all is lost for the bank when it comes to that particular loan. The bank can recover money from the asset that has been offered as a collateral against the loan. Of course this is not as straightforward as it sounds.

In Mallya’s case, he has also given personal guarantees to banks while taking loans for Kingfisher Airlines. Mallya owes around Rs 9000 crore to banks. This is a very small amount if one compares it to the gross-non-performing assets of corporate lending carried out by banks.

As on December 15, 2015, it was at Rs 2,60,653 crore. Mallya’s Rs 9,000 crore works out to around 3.5% of the total corporate gross non-performing assets. The percentage would be even more lower if we compare it to the total gross non-performing assets.

Also, Credit Suisse in a report released in October 2015 identifies some of the biggest corporates who are having a tough time repaying the money they have borrowed from banks. The Credit Suisse analysts (Ashish Gupta, Kush Shah and Prashant Kumar): “Going through the annual reports available for ‘House of Debt’ companies, we find instances where auditors have highlighted that the company has been in default for a period of up to 360 days. According to their auditors report, eight of the ten ‘House of Debt’ groups were in default last year. Total debt with these companies in default was at US$53 billion (~48% of total debt with the groups) of which US$37 billion were reported to be in default for 0-90 days by the auditors.”

The corporates which form the House of Debt group are as follows—Adani Group, Essar Group, GVK group, GMR group, Jaypee Group, JSW Group, Lanco Group, Reliance ADAG, Vedanta Group and Videocon Group.

Hence, the point is that the mess in the Indian banking sector is substantially bigger than just Vijay Mallya. It’s just that Mallya with his flashy lifestyle has become the poster boy for these corporates who have borrowed from banks and are now not in a position to repay.

The finance minister Arun Jaitley has been very vociferous about Mallya and has said: “The facts are very clear: Every government agency will take strong action against him. Banks will go all out to recover every single penny.”

Indeed, that is great. Nevertheless, the question is why just Mallya? What about the other corporates who have borrowed from banks and are now not repaying their loans? They owe the banks close to Rs 2,51,000 crore. Mallya owes just Rs 9,000 crore.

Why is the same aggression missing when it comes to the other borrowers?

The nation wants to know.

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

The column originally appeared on Swarajya Mag on March 22, 2016

15 March, 2016

Mr Jaitley, the New Black Money Scheme is Nothing but an Amnesty Scheme

In the budget speech finance minister Arun Jaitley made on February 29, 2016, he proposed: “a limited period Compliance Window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income.”

So, if you have black money, and are willing to pay 15% extra to the government, over and above the top tax rate, the laws of the land won’t apply to you. As Jaitley further said in his speech: “There will be no scrutiny or enquiry regarding income declared in these declarations under the Income Tax Act or the Wealth Tax Act and the declarants will have immunity from prosecution. Immunity from Benami Transaction (Prohibition) Act, 1988 is also proposed subject to certain conditions.”

In an interview to the national broadcaster Doordarshan, Jailtey later said: “It’s not a VDIS (Voluntary Disclosure of Income Scheme) and it is not an amnesty.” Like a good lawyer, he did not specify what the scheme really is.

So what does the word amnesty mean? I looked for and managed to find my fifteen-year-old The Compact Oxford Reference Dictionary. The dictionary lists out two meanings for the word amnesty. Here are the two meanings: a) an official pardon for people convicted of political offences. b) a period during which people admitting to particular offences are not prosecuted (the italics are mine).

As Jaitley said during his budget speech: “We plan to open the window under this Income Disclosure Scheme from 1st June to 30th September, 2016 with an option to pay amount due within two months of declaration.”

Hence, anyone admitting to having black money during this period and paying the tax, the surcharge and penalty on it, will not be prosecuted under the laws of the land and will have immunity. This is precisely the Oxford Reference Dictionary’s meaning for amnesty – a period during which people admitting to particular offences are not prosecuted.

So, even if Mr Jaitley does not want to call the government’s black money amnesty scheme, an amnesty scheme, it is nothing but an amnesty scheme. If you are willing to declare your black money, pay 30% tax and 15% extra on it, the law of the land will not apply on you.

Now compare this to advance tax which needs to be paid by the non-salaried income tax payers several times during the course of a year. As per Section 234C of the Income Tax Act, if advance tax is not paid on time, a fine of 1% per month needs to be paid on the total amount of tax outstanding. Hence, the government is basically treating everyone who has black money and has not paid tax on it, a little worse than someone who has not paid advance tax for a year.

Also, it is interesting that this time around the government wants those who have black money to pay only 15% extra and get immunity. In May 2015, the Parliament had passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Act. After the passage of this Act, the government offered a compliance window.

This window allowed those with undisclosed foreign assets and income(or foreign black money) to declare them, pay a tax of 30% and a penalty of 30%. The window was closed on September 30, 2015.

Taking advantage of the compliance window 638 declarants declared assets and income of Rs 4,147 crore in total. This meant that the government was able to collect around Rs 2,488 crore (60% of Rs 4,147 crore) as tax revenues.

For all the hype and hoopla that happened, the actual collection was basically very small. Did this failure lead to the government just asking for 15% extra this time around, instead of 30%, as was the case last year?

Further, is there a distinction being made between foreign black money and domestic black money? The domestic black money stays within the country and has some utility. It is spent on consumer goods and real estate. Hence, the money enters the domestic financial system and is income for many individuals.

So, even though tax is not paid on this money, it does have its utility. The same cannot be said about black money that has left the country. And is that why the government is handling those declaring black money in the next financial year, with kids gloves?

The one good thing that Jaitley has done is that he has not assumed the total amount of money he expects the government to earn through the black money amnesty scheme, as a part of the government income for the next financial year.

Guess there is no way to possibly estimate this. The last time the government launched such a scheme was in 1997. The scheme ran between July 1, 1997 and December 31, 1997. The scheme allowed individuals with black money to come out in the open and pay a tax of 30% on their black money. In case of others i.e. corporates and firms, a tax of 35% had to paid.

The government ended up collecting Rs 9,584 crore from around 4.75 lakh declarants. Nevertheless, the scheme was different from the one that will be launched in June this year, given that back then the black money wallahs did not have to pay any fine. This time around there is a 15% fine. Also, the response to the amnesty scheme on foreign black money launched last year, had had a thanda response.

Given these ifs and buts, it’s a good thing that the government has not made any assumptions about the total amount of money they expect to earn through this route. But this hasn’t stopped the stock market wallahs from trying to come up with a number.

Akash Prakash of Amansa Capital expects the government to earn Rs 50,000 crore through this route. He doesn’t explain how he came up with the number. The thing is that the government hasn’t gotten around to putting a number to the money it expects to earn is primarily because there is no way a reasonable estimate can be made.

In that scenario how did Mr Prakash come up with a Rs 50,000 crore number? Or like other fund managers was he just being optimistic for the sake of being optimistic? That as we know is a favourite pastime of the fund managers.

The column originally appeared on Vivek Kaul’s Diary on March 15, 2016

8 March, 2016

#EPFnotax: Six reasons why taxing EPF was a stupid idea in the first place

The Narendra Modi government has decided to withdraw their plan to tax the corpus accumulated by investing in the Employees’ Provident Fund(EPF). As the finance minister Arun Jaitley said in the Lok Sabha today: “In view of representations received, the government would like to do a comprehensive review of this proposal and therefore I withdraw the proposal.”

This is a sensible decision to withdraw what was basically a very stupid idea at multiple levels.

a) The finance minister Arun Jaitley in his budget speech had said that only 40% of the corpus accumulated by investing in EPF would be tax free. This would apply on investments made after April 1, 2016.

The entire 100% accumulated corpus could be made tax free by investing 60% of the corpus in annuities. Annuities are essentially policies sold by insurance companies which can be used to generate a regular income.

The trouble is that most annuities in India give a return of around 5-7%. Given this, they remain a bad way to invest a large corpus. Even investing in a long term fixed deposit can give you a better return.

Some savings bank accounts also pay more than the returns that can be generated by investing in annuities. The annuities in their current are essentially nothing but a rip-off and anyone in their right mind would stay away from investing in them.

Then there is the Senior Citizens Savings Scheme, which allows a senior citizen to invest up to Rs 15 lakh. The scheme pays an interest of 9.3%per year. Given that better returns are available elsewhere, why force people to invest 60% of their provident fund corpus into annuities paying 5-7% per year.

b) Also, the change applied only to private sector employees with a salary of greater than Rs 15,000. This meant that the government employees investing in the General Provident Fund (GPF) or employees of public sector companies investing in other recognised provident funds, could withdraw 100% of their accumulated corpus and need not have paid any income tax on it.

Why was the change proposed only for private sector employees? Why was this distinction made on the basis of the employer? If the idea was to tax, the tax should have applied to everyone and not just the private sector employees.

In the way things had been proposed, a private sector employee making Rs 16,000 per month would have had to pay a tax on the accumulated corpus. A government employee need not have done anything like that. How is that fair and equitable?

c) The government has defended this move on the logic of moving towards a “pensioned society”. As the clarification issued by the ministry of finance a few days back pointed out: “The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.”

Why was only the private sector encouraged to move towards a pensioned society? Also, what about those people who are earning less than Rs 15,000 per month. Their need for a regular income after retirement is even greater than those making more money.

d) Also, why make only EPF and other recognised provident funds taxable at maturity. Why leave out the Public Provident Fund? Shouldn’t self-employed professionals who invest in PPF to possibly accumulate a retirement corpus, also be encouraged to become a part of the pensioned society?

e) The government also planned to tax the principal amount invested in the EPF. How fair is this? While calculating capital gains for investments made in stocks or real estate, the principal amount is not included. Also, investments made in real estate and debt mutual funds get indexation benefits, where the impact of inflation is taken into account while calculating the cost of purchasing the asset. This brings down the capital gains on which income tax is paid.

Further, there is no tax on long-term capital gains made on stocks and equity mutual funds. Taking all this into account, how fair was it to decide to tax EPF? Why leave out the investing modes of the rich and decide to tax the middle class EPF?

f) Further, it needs to be realised that different people have different needs. As Jaitley said in the Lok Sabha today: “”Employees should have the choice of where to invest. Theoretically such freedom is desirable, but it is important the government to achieve policy objective by instrumentality of taxation. In the present form, the policy objective is not to get more revenue but to encourage people to join the pension scheme.”

For that to happen there are so many other things that need to be set right. People use their retirement corpus for various things. They use the money to get their children married, educated and so on. While the government may look at this as something that shouldn’t be done but at times there is no option.

Sometimes emergency medical costs are also met out of withdrawing out of the corpus accumulated by investing in the EPF. In a country where there is almost no insurance for the old, how fair is to deny them access to the EPF corpus by deciding to tax it?

What all these points clearly tell us is that the Modi government clearly introduced the idea of taxing the EPF corpus in a hurry. There is clearly more thinking needed on it. Also, several things need to change before such a tax is introduced. And these changes are not going to happen any time soon.

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

The column originally appeared on Firstpost on March 8, 2016

8 March, 2016

Why EPF Tax is a Bad Idea

The finance minister Arun Jaitley wants to tax the corpus accumulated through investments made in the Employees’ Provident Fund(EPF).

As per what he proposed in his third budget speech last week, only 40% of the corpus accumulated by contributions made into the EPF after April 1, 2016, will be tax free. The remaining 60%, if withdrawn, will be taxable. If the remaining 60% is invested in annuities, the entire accumulate corpus will be tax free. The income from annuities will be taxable.

This is a bad idea at multiple levels.

a) The change applies only to those in the private sector earning more than Rs 15,000 per month. As the ministry of finance clarified on this: “The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement.” So this doesn’t apply to those earning less than Rs 15,000 per month. Why are these people not being encouraged to invest in annuities and not squander away what they have saved for their years in retirement?

Also, if you are working for the government, the entire corpus you accumulate through the General Provident Fund (GPF) or any other recognised provident fund, remains tax free. If you are working for a government owned company like Coal India and investing in the Coal Mines Provident Fund, the entire corpus on maturity remains tax free.

The question is why is a distinction being made on the basis of the employer and not the total amount of corpus that has been accumulated? This is basically an inequitable decision, where those in government are simply trying to protect their retirement savings from being taxed.

b) 100% of the accumulated corpus can be tax free, if the private sector employee uses 60% of the accumulated corpus to buy annuities. This is nothing but a conspiracy to benefit insurance companies. Annuities remain one of the worst forms of investing in India. The returns typically are in the range of 5-7% before tax. Savings accounts, of a few banks pay as well, if not more than that.

As Debashis Basu writes in the Business Standard: “Annuities are a simple information and access arbitrage enjoyed by insurance companies to rip off senior citizens. Insurers buy long-dated governments securities at eight plus per cent and hand down five-seven per cent pretax return to the annuity buyers, keeping the profits.”

So why are we forcing people to buy annuities, if there are better forms of investment available? As I said earlier, it’s nothing but a conspiracy to benefit insurance companies. At the same time all the money going into annuities will ultimately end up in government bonds, which will benefit the government.

c) The idea is to move EPF and other recognised provident funds from EEE (Exempt, Exempt, Exempt) to EET (Exempt, Exempt, Tax). Up until now, many tax saving investments like EPF have come under the EEE regime. The investment made can be deducted from taxable income and hence is exempt from tax, the interest earned on the investment is exempt from tax and the final corpus is also exempt from tax.

Under EET (Exempt, Exempt, Tax), the investment made can be deducted from taxable income and hence is exempt from tax, the interest earned on the investment is exempt from tax, but the final corpus is taxed. Hence, under EET, the payment of tax is only postponed.

The idea to move from EEE to EET was a part of the Direct Taxes Code(DTC) when it was first introduced in August 2009. The DTC was supposed to replace the current Income Tax Act (1961). The DTC came with other changes as well. Take the case of the tax slabs. The tax slabs were as follows:

The current tax slabs are nowhere these slabs that had been proposed. The tax rate of 10% applies for taxable income between Rs 2.5 lakh and Rs 5 lakh. The tax rate of 20% applies for taxable income between Rs 5 lakh and Rs 10 lakh. And a tax rate of 30% applies for taxable income greater than that.

Given the fact that the entire idea behind the DTC was to simplify the income tax system, it was never implemented. It would have hit people who make a living out of complicated tax laws, very hard.

d) The other big problem with the proposal to tax EPF is that it will tax the entire corpus including the principal. Further, it will not take into inflation into account. Let’s understand this in a little more detail.

Let’s say you invested in real estate in 2005 and you sold it ten years later in 2015. You need to pay a tax on the capital gains at the rate of 20%. While calculating the gains inflation is taken into account. This means that if you had bought real estate, for let’s say Rs 20 lakh, while calculating the gains this amount of Rs 20 lakh will be adjusted for inflation.

If the inflation during the period was 7% per year, then the inflation indexed amount will be Rs 39.34 lakh (Rs 20 lakh x (1.07)^10). This will be the inflation indexed purchase price. If the real estate was sold for Rs 80 lakh, then the capital gains on which tax will have to be paid will amount to Rs 40.56 lakh (Rs 80 lakh minus Rs 39.34 lakh, the inflation indexed amount). On this a 20% tax, which amounts to Rs 8.13 lakh will have to be paid. This is referred to as indexation benefit.
Other deductions which take into account the cost of maintenance of the real estate are also allowed. Further, as mentioned earlier, the principal amount is also not taxed.

As Dhirendra Kumar writes on valueresearchonline.com: “EPF returns are barely above inflation rates. To disallow indexation for inflation is a grave injustice. This is morally and principally wrong. Moreover, because this tax will be on bulk withdrawals, it will push even low-income savers into the 30 per cent tax bracket for that year. This is unconscionable.”

Also, it needs to be pointed out that long-term capital gain on stocks (i.e. stocks sold after one year of purchase) continues to remain zero. So is true for long term capital gains on equity mutual funds. The corpus accumulated through insurance policies also continues to remain tax free.

But the government in its wisdom has decided to tax the total amount of money accumulated through investing in EPF. This proposal is wrong at multiple levels and its time, the government got rid of it.

The column originally appeared on Vivek Kaul’s Diary on March 8, 2016

7 March, 2016

In The Public Sector Bank Crisis, Govt Needs To Do A Lot More Than Just Blame Bankers

The Times of India reported on Saturday that Jayant Sinha, the minister of state for finance, had indicated to public sector bank chiefs that they were wasting public funds. Sinha said this at an offsite for public sector bankers organised at Gurgaon.

The Economic Survey for 2015-2016 points out that between 2009 and September 30, 2015, the government had infused Rs 1.02 lakh crore of capital. It is this money that Sinha was perhaps referring to.

The government is the main owner of 27 public sector banks. If it has chosen to invest more than Rs 1 lakh crore in these banks over the last seven years, then as the owner of these banks, it has chosen to waste public money.

There is no point in trying to pass on the buck to the chiefs of public sector banks. Of course, it needs to be pointed out here that, the government in this case means both the Manmohan Singh government that governed until May 2014 and the Narendra Modi government which has been in power since then.

The current budget has made an allocation of Rs 25,000 crore for further capital infusion into these banks. As the finance minister Arun Jaitley said in the budget speech: “If additional capital is required by these Banks, we will find the resources for doing so. We stand solidly behind these Banks.” This was Jaitley’s way of saying that the government will do whatever it takes to keep these banks going.

This builds in a tremendous amount of moral hazard into the entire system. Economist Alan Blinder writing in After the Music Stopped says that the “central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it.”

Hence, if the government keeps infusing capital into public sector banks and keeps rescuing them when they are in trouble, there is no real incentive on part of public sector banks to run a responsible, viable and a profitable business. This is moral hazard at play. It is not surprising that as of the end of December 2015, the gross non-performing assets of listed public sector banks stood at Rs 3.9 lakh crore.

The government is keen to hold on to these banks. As the Economic Survey pointed out: “The return on assets for most banks is currently less than one third of the norm of 1 per cent that is considered reasonable. Many, though not all, of the less profitable banks are those with smaller levels of employment.” Despite this, the government remains obsessed with the idea of owning 27 public sector banks.

There has been no effort made to sell out of these banks or even shut them down. The total employment in public sector banks currently stands at around 87,000 employees. Given this, shutting down some of the smaller banks which are in trouble, is not going to much of a difference, at least on the employment as well as the lending front. Further, no effort has been made to privatise them either.

The state that some of these banks are in right now, there is no way the government is going to get a decent valuation while selling them. Nevertheless, the chances of these banks being turned around by private management are higher than if they are continued to run as they currently are. In such a scenario the minority stake that the government will continue to hold in these banks will be worth much more than the current majority stake is. The point being that the government needs to stop looking at these banks as “family silver”.

Also, by trying to run 27 public sector banks, the government has spread itself too thin. As Kaushik Basu, current chief economist of World Bank and former chief economic adviser to the ministry of finance, writes in An Economist in the Real World: “One mistake early Indian policymakers made was to try to micromanage the economy. While it is true that the government needs to attend to a range of policies, from shipping to the quality of education in villages to managing the nation’s international economic relations, it is imperative to realize that it is not feasible for the government to attend all the varied and layered needs of society with equal diligence.”

As Basu further adds: “An intelligent government recognizes that no matter what kind of society it aims to build, it is hopeless to try to deliver it all by itself.” The point being it is a hopeless idea continuing to own and run 27 public sector banks. There are more important things that the government needs to be concentrating on.

The government’s big plan to solve the mess in public sector banks is to get banks to merge. As the finance minister Jaitley said over the weekend: “The bankers’ themselves have supported the proposal of consolidation of banks in order to have strong banks rather than having numerically large number of banks.”

In the past mergers have happened when a bank has been in trouble. In this scenario, a weak bank has been merged with a strong bank. The New Bank of India was merged with the Punjab National Bank. The Global Trust Bank was merged with Oriental Bank of Commerce. The strong banks had to go through several years of pain to accommodate the weak banks.

The trouble now is that almost all public sector banks are in trouble, though of varying degrees. Hence, any merger would be effective if excess employees are fired, unviable branches shutdown and assets sold. Is the government willing to do this?

The way the Modi government has gone up until now, the answer is no. In this scenario the government will essentially end up merging two banks with small problems and end up creating one bank with a bigger problem. And that will mean basically postponing the problem, not solving it.

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

The column was originally published on Huffington Post India on March 7, 2016