Tag: Jayant Sinha | Page 2

3 March, 2016

Employees’ Provident Fund: The Clarification of the Clarification of the Clarification…

There must be some way out of here” said the joker to the thief
“There’s too much confusion”, I can’t get no relief – Bob Dylan, All Along the Watchtower

Arun Jaitley presented his third budget on February 29, 2016. Since then, the only point from the budget that is being discussed is the income tax to be applicable on the Employees’ Provident Fund and other recognised provident funds.

In fact, the government’s communication on this left a lot to be desired. The finance minister Jaitley said during the course of the speech: “I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans. I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans. I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.”

Given that Jaitley gave a 100-minute-long speech, he could have taken a minute more and gone into the details of this change.

Barely had he finished saying this, all hell broke loose on the social media. As soon as he had finished his speech, the television channels caught on to this point. Jaitley should have ideally provided an annexure to his speech explaining the exact details of the plan. But an annexure wasn’t provided and neither did he go into the details. This created a lot of needless confusion.

What Jaitley basically said was that 40% of the accumulated corpus of the EPF and other recognised provident funds, on contributions made after April 1, 2016, would be tax free. As of now 100% of the accumulated corpus on the EPF is taxfree.

The first interpretation after Jaitley’s speech was completed was that now up to 60% of the EPF corpus will be taxable. On the social media people are quick to draw conclusions without waiting toget into details. A reading of the Finance Bill made it clear that wasn’t the case. If 60% of the corpus was used to buy annuities to generate a regular income, this amount would remain tax free as well.

The minister of state for finance Jayant Sinha clarified this on a television channel, late evening on February 29,2016. And then he made a mistake, which added to the confusion. He said income earned by buying an annuity would be tax free. Income earned from annuities is taxable.

Then he was asked if the corpus of the Public Provident Fund(PPF) would be taxed as well. He did not answer in the affirmative to this question, neither did he say no. The anchor asking the question essentially concluded that the accumulated corpus of the PPF would now be taxable.

After this, the revenue secretary Hasmuk Adhia, clarified that PPF would continue to be the way it was i.e. its corpus wouldn’t be taxable. He also made another remark which again introduced more confusion into the entire debate going on. He said a tax would be levied only on accrued interest on 60% of EPF contribution, after April 1, 2016.

This was contradictory to what Jaitley had said in his speech. He had said that 40% of the corpus will be tax free, which essentially means that 60% of the corpus will be taxed.

It is rather sad to see that the top policymakers of a ministry trying to bring in a very important change on a point that impacts so many people, were not clear about basic things. Either they hadn’t been briefed properly or they just didn’t realise how huge is the change they were trying to bring in.

After all this hungama the ministry of finance put out a clarification. The clarification started with these lines: “There seems to be some amount of lack of understanding [the emphasis is mine] about the changes made in the General Budget 2016-17 in the tax treatment for recognised Provident Fund & NPS.”

Rather ironically, the policy makers at the ministry of finance had contributed majorly to this lack of understanding. After this clarification (actually clarification of a clarification of a clarification if we were to start with Jaitley’s speech, go to Sinha’s comments and then Adhia’s clarification) this is how things stand as of now.

As the ministry of finance’s clarification points out: “The Government has announced that Forty Percent (40%) of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and National Pension Scheme.”

Does this mean what it means? Not really. There are certain nuances to it. For employees within the statutory wage limit of Rs 15,000 per month, things would stay as they currently are i.e. their corpus would continue to be 100% tax free.

Further, if you are a private sector employee and you want 100% of your EPF money to be tax free you need to buy annuities. As the finance ministry’s clarification points out: “It is expected that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% of the remaining Corpus is invested in Annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.”

What this means is that the private sector employees can make 100% of their EPF corpus accumulated on contributions made after April 1, 2016, tax free, by investing 60% of it in annuities. What about public sector employees? This is where things get interesting. The clarification is totally silent on this.

Hence, for public sector employees their provident fund continues to be 100% tax free at maturity. It means that public sector employees (or babulog) do not need to invest money in annuities at all. They can withdraw 100% of the money tax free. A private sector guy wanting to withdraw 100% money has to pay tax on 60% of the corpus he has accumulated on contributions made since April 1, 2016. Further, this is a clear attempt by the babus who drafted this change to ensure that their provident fund continues to remain 100% tax free.

Why is there this differentiation? Why is the private sector employee being treated in this unfair way? The press release further points out: “The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement.”

Doesn’t the government want public sector guys to do this? Shouldn’t babulog also be buying annuities to generate a regular income from their provident fund corpus after retirement? The government hasn’t offered an explanation for this but a possible explanation for this is that many retired government employees already get a pension from the government. Hence, their provident fund is 100% tax free.

This is bizarre. Many government employees get a fixed pension and on top of that get 100% tax free provident fund. A private sector employee on the other hand is forced to buy annuities. Why? The ministry of finance’s clarification points out: “There are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly – paid employees [italics are mine] of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this. What we are saying is that such employee can withdraw without tax liability provided he contributes 60% in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in Annuity product the tax would not be charged on 40%.”

The term highly-paid is not defined. I have a problem with this approach. It assumes all government employees earn a lower salary than private sector employees. And that is incorrect. If the idea is to tax, why not have a cut off on the basis of the total amount of the corpus that has been accumulated rather than try to differentiate between public sector and private sector employees? That would be a much more equitable way of going about it.

Also, the question is, is this government worried about an equitable way of doing things at all? I don’t really think so. The government plans to open a compliance window for those who have black money and are willing to declare it. Black money is income which has been earned but on which tax hasn’t been paid.

This would involve a tax of 30%, a surcharge of 7.5% and a penalty of 15%. By paying 15% extra, those who have black money can ensure that “there will be no scrutiny or enquiry regarding income declared in these declarations under the Income Tax Act or the Wealth Tax Act,” They will also have immunity from prosecution. What this means is that if you are willing to pay 15% extra, the law of the land will not apply to you.

Money can’t possibly buy love, but it definitely can buy everything else. The Modi government just showed us that.

The column originally appeared on the Vivek Kaul Diary on March 3, 2016

4 November, 2015

IDBI Bank’s privatisation will be a test case for Modi govt

Several news items in the last few days seem to suggest that the Narendra Modi government has plans of privatising IDBI Bank. A newsreport in The Economic Times talks about a “high-level committee headed by the cabinet secretary that will oversee strategic divestments”. The report also said that the “the first proposal likely to be examined by the panel will be the sale of the government’s stake in IDBI Bank to convert it to a private bank.”

The minister of state for finance Jayant Sinha had hinted at something similar last week when he told the media that “we’ll consider transforming IDBI Bank in a manner similar to the way Axis Bank was done.”

IDBI Bank is among the bigger public sector banks. It is the fifth biggest public sector bank in terms of market capitalisation. It is the seventh biggest in terms of total assets. But it’s the tenth biggest in terms of net profit.

The gross non-performing assets (bad loans) of the bank have been going up over the years. As of March 31, 2009, they stood at 1.38%. By March 31, 2015, they had jumped to 5.9% of total assets. Over and above this, the bank also had restructured assets (where the tenure of the loan or the interest on the loan has been changed in favour of the borrower) worth Rs 20,900 crore as on March 31, 2015. The number had stood at Rs 3,100 crore as on March 31, 2009.

The restructured assets as well as bad loans of the bank have grown at a fairly rapid rate. This clearly tells us is that the restructured assets are turning into bad loans in the time to come. The bank, like many others, has used the restructured assets route to kick the ‘bad loans can’ down the road.

The accumulation of bad loans has essentially led to a situation where the net profit of the bank has gone nowhere over the last six years. The net profit for the financial year ending March 31, 2009, was at Rs 859 crore. Six years later, the net profit for the financial year ending March 31, 2015, stood at a similar Rs 873 crore.

Flat profits due to an increase in bad loans essentially explains why the bank is seventh largest public sector bank when it comes to total assets but tenth largest when it comes to profit. In fact, flat profits have essentially led to a situation where the return on assets as well as return on equity of the bank have fallen dramatically over the years. The return on assets has halved from 0.6% as of March 2009 to 0.3% as of March 2015. The return on equity has totally collapsed from 12.1% to 3.9% during the same period.

Currently, the government owns 76.5% in IDBI Bank and any serious plan of privatisation would mean the government bringing down its stake in the bank majorly in the time to come. In fact, the government holding in the bank has gone up “from 65.14% in July 2010 to 76.5% in December 2013 by total equity infusion amounting to Rs 5,300 crore”.

There are several reasons why the government should privatise IDBI Bank. First and foremost as I have said in the past, there is no reason that a government should be running 27 public sector banks. There are other more important areas that need its attention.

Second, the return on equity on the government’s investment in the bank has fallen dramatically over the years. At 3.9%, it is lower than even the 4% interest that banks pay on their savings bank account. Hence, the government is not being adequately compensated for the investment risk.

How will privatisation help? As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “The last quarter century’s experience has shown that when the private sector is asked to provide telecom services, run airlines and airports, build and run ports, undertake banking, distribute electricity and even undertake water supply, the result is usually (though not always, for there is no shortage of private banks and airlines that have failed) a substantial improvement on what, the government was doing until then.”

This becomes clear from the fact that in the last financial year (April 1, 2014 to March 31, 2015) the private sector banks operating in India made a total profit of Rs 38,219.35 crore. In comparison, the public sector banks made a profit of Rs 37,820 crore.

This despite the fact that the total assets of private sector banks form only around 29.2% of the total assets of public sector banks. Assets owned by private sector banks in India form only 22.6% of the total assets owned by banks in India. Despite this, they are more profitable than public sector banks.

Interestingly, the total profit of public sector banks for the financial year ending March 31, 2013(April 1, 2012 to March 31, 2013), had stood at Rs 50,583 crore. Since then it has fallen by 25.2% to Rs 37,820 crore. The profit of private sector banks has jumped by 31.8% (from Rs 28,995.43 crore) to Rs 38,219.35 crore.

Between 2013 and 2015 as the economic scenario has gotten worse, the public sector banks have faltered big time. Meanwhile, the private banks have continued to increase their profits.

IDBI Bank as on March 31, 2015, had Rs 3,56,031 crore worth of total assets. As pointed out earlier it made a net profit of Rs 873 crore during the course of the financial year. Now compare this to Kotak Mahindra Bank which had total assets worth Rs 1,06,012 crore as on March 31, 2015. It made a net profit of Rs 1,866 crore, which was much more than that of IDBI Bank. Similar numbers can be put forward for other private sector banks like IndusInd Bank and Yes Bank as well, in comparison to those of IDBI Bank. These banks are significantly smaller than IDBI Bank but make much more money. [Data sourced from Indian Banks’ Association]

The government’s 76.5% stake in IDBI Bank is currently worth Rs 10,380.6 crore. If it privatises the bank, chances are whatever equity that it chooses to retain in the bank will end up being worth much more than it currently is, in the days to come.

The question is will the government get around to privatising IDBI Bank? The employees of IDBI Bank have called strike on November 27, later this month, to oppose the government’s move to privatise the bank. This shouldn’t stop the government from privatising the bank. The good part is that unlike a systematically important institution like Coal India, the employees of IDBI Bank have a limited nuisance value. Hence, a strike by IDBI Bank is not going to hurt many others. And this should help push through the decision.

Further, the government shouldn’t stop at IDBI Bank. This will be a test case for it on whether it will be able to continue privatising other public sector enterprises in the years to come.

There are many public sector enterprises which the government has no reason to own.

Like Mahangar Telephone Nigam Ltd.

Like Air India.

The column originally appeared on The Daily Reckoning on Nov 4, 2015

3 November, 2015

Disinvestment: The more things change, the more they remain the same

When finance minister Arun Jaitley presented the budget of the Narendra Modi government in February 2015, he set an aggressive disinvestment target of Rs 69,500 crore. Disinvestment refers to the government selling the shares it holds in public sector companies.

In late October, this aggressive disinvestment target was given a quiet burial.

A series of statements have been made in order to justify the slashing of the disinvestment target. “The target of Rs 30,000 crore seems more reasonable for current fiscal given that there is no big stock to sell,” a source told The Economic Times.

The minister of state for finance Jayant Sinha blamed it on the falling and low commodity prices. As he recently said: “One of the reasons why the divestment process is challenging right now is because many of the companies we are considering for divestment are in the commodity industries…Whether it is Coal India or OMCs (Oil Marketing Companies) and so on. They are impacted by global commodity prices.”

Sinha’s boss Jaitley more or less came up with the same reason when he said: “I don’t think it makes sense divesting at a time when [commodity] prices are low.”

How much sense does this argument make? Did commodity prices start to fall from March 1, 2015, a day after the budget was presented? On May 26, 2014, when Narendra Modi was sworn-in as the prime minister of India, the price of the Indian basket of crude was $108.05 per barrel. By February 27, 2015, a day before Jaitley presented the budget, the price of the Indian basket of crude oil had fallen by 44.6% to $59.85 per barrel. Hence, the price of oil had already been falling for a while at the time the budget was presented. The price of the Indian basket of crude oil is currently at $44.72 per barrel.

In fact, oil was not the only commodity falling. As an editorial in The Financial Express points out: “Similarly, in the case of copper, prices were $8,061/tonne in February 2013, $7,149 in February 2014 and $5,729 in February 2015—prices are down to $5,142.5 now. In the case of zinc, prices fell from $2,129/tonne in February 2013 to $ 2,034.5 in February 2014 and rose a bit to $2,098 in February 2015—prices are down to $1,687 now.”

So commodity prices were falling even in February when the government presented the budget. Why offer the reason now? Sinha offered another explanation as well: “Obviously, we have to ensure that we get best possible valuation for these valuable enterprises,” he said.

What does he mean here? On February 27, 2015, the BSE Sensex had closed at 29,220.12 points. Since then it has fallen by around 9.1% and closed yesterday (November 2, 2015) at 26,559.15 points. This is not such a big fall in the context of the stock market.

In fact, Jaitley had clearly pointed out in June earlier this year that a fall in the stock market would not lead to the government going slow on the disinvestment programme. As Jaitley had said: “I don’t read too much on daily movements as far as markets are concerned. By and large with the health of economy recovering, I see much greater stability as far as markets are concerned. And therefore, the disinvestment programme of the government will continue as it has been planned.”

So, if Jaitley was not reading too much into daily movements of the stock market in June, why is Sinha (and by that definition Jaitley as well) reading too much into the daily movements of the stock market, now?

Also, when an aggressive disinvestment target of Rs 69,500 crore was set, wasn’t the chance that the stock market will ‘fluctuate’ taken into account?

And why has all the optimism that was being projected on the disinvestment front by the government ‘suddenly’ evaporated now?

The stock market had touched a level of 26,500 points (as it is now) even in June earlier this year. So what has changed between then and now?

The broader point here is that the logic of commodity prices falling offered by the government to go slow on disinvestment now, was valid even at the time of presenting the budget. As The Financial Express edit quoted earlier points out: “If the government still went ahead and set an aggressive target for FY16[ 2015-2016], this implied it planned to be selling shares regularly, irrespective of the price—clearly that was an incorrect perception.”

Up until now the government has managed to disinvest shares worth only Rs 12,700 crore. Of this Rs 8,077 crore has come from the Life Insurance Corporation of India. So, there hasn’t been much disinvestment in the strictest sense of the term, nearly seven months into the financial year. What this tells us is that the government was not serious about disinvestment in the first place.

Given this, it is not surprising that the government has now decided to slash the disinvestment target. In fact, this has been a regular feature with almost all governments since disinvestment of public sector shares came to the fore in the early 1990s.

As AK Bhattacharya writes in a recent column in the Business Standard: “Since disinvestments of government equity in PSUs began in 1991-92, only on two occasions has a government met its target set at the start of the year. In the last year of the Narasimha Rao-led Congress government in 1994-95, total disinvestments of Rs 4,843 crore exceeded the target of Rs 4,000 crore set for that year and in the first year of the Atal Bihari Vajpayee-led government in 1998-99, total disinvestment proceeds were estimated at Rs 5,371 crore, compared with the target of Rs 5,000 crore.”
Of the total disinvestment target of Rs 69,500 crore, the government had budgeted Rs 28,500 crore to come in from the strategic sale of equity, which was basically a euphemism for privatisation. Nearly seven months into the financial year the government has given only given some indication of privatising IDBI Bank.

In this reluctance to privatise and continue holding on to companies, Narendra Modi is only following the Congress governments before him. In fact, TN Ninan makes an excellent summary of the way things stand as of now in his book The Hare and the Tortoise—The Challenge and Promise of India’s Future: “It is a matter of regret that Narendra Modi, who got elected on the promise of ‘minimum government, maximum governance’, has shown no taste for radical change or minimizing government…The government system continues to run loss-making airlines and hotels, three-wheeler units and Mahanagar Telephone Nigam, whose sales revenue is less than 40% of expenditure.”

Meanwhile, as I sit writing this column, its one am in the morning and one of the TV channels is replaying Modi’s election speech in Bihar.

As the old saying goes, the more things change, the more they remain the same.

(The column originally appeared on The Daily Reckoning on November 3, 2015)