There should be a certainty about tax liability but retrospective changes in tax laws are undesirable. They negate the basis of key investment decisions
Death and taxes are certain but when, how or why can be most uncertain. Experts find ways and means — sometimes genuine and sometimes sham — of minimising tax liability. This is to contextualise an arbitral panel under the Permanent Court of Arbitration rejecting India’s income tax claim of about Rs 22,100 crore from Vodafone.
The tax dispute goes back to 2007 when Vodafone International Holdings, a company registered in the Netherlands, acquired CGP Investments Limited, a company registered in Cayman Islands. Normally, acquisition of one foreign company by another foreign company should have nothing to do with Indian law and taxmen. A company’s shares are supposed to be situated in the country where it is registered. Legally, only Cayman Islands’ Government had the right to tax the capital gain made by the shareowner as the share sale took place there. However, Cayman Islands does not impose income tax or capital gains tax (and that is why so many companies are registered there.)
Through other offshore entities, the Cayman Island company controlled CK Hutchison Holdings Ltd’s 67 per cent stake in the Indian company, Hutchison Essar Ltd (HEL). So the end result of this share sale was that the ultimate “owner” of the Indian company got changed from the Hong Kong-based Hutchison to the UK-based Vodafone, both controlling the Indian company indirectly through a chain of intermediate companies. Since the share sale in Cayman Islands did not entail any income tax, it was a “tax-efficient” arrangement.
HEL was a joint venture company formed by the Hong Kong-based Hutchison and Essar Group. HEL held a telecom licence. The share sale transaction in Cayman Islands meant that the Hong Kong company Hutchison ceded control of HEL to British company Vodafone to the extent of 67 per cent of HEL shareholding. Had the shares of the Indian company been sold directly, Indian income tax would have been unquestionably payable on capital gains. But Vodafone indirectly acquired 67 per cent control in HEL from Hutchinson in a $11.2b deal.
Indian taxmen did not like what they saw as a tax-dodging arrangement. They argued that the Cayman Islands’ share sale was actually an indirect sale of shares of the Indian company. They raised a demand (2009) of $2.2 billion as capital gains tax. With interest and penalty, the total tax demand rose to Rs 22,100 crore. Vodafone contended that it was not liable to pay tax because the transaction did not involve transfer of any capital asset situated in India.
On January 20, 2012, the Supreme Court ruled that the Government had no jurisdiction to levy tax on overseas transactions between two foreign companies. A sale transaction between two foreigners was beyond Indian tax jurisdiction even if the subject matter of sale was controlling interest in an Indian company having valuable assets. No Indian company had directly sold anything.
The Government requested the Supreme Court to lift the corporate veil to see the true substance of the transaction, the true end-beneficiaries of the transaction and not go by mere form, or the corporate boundaries of shell companies through which ultimate owners operate. These arguments were not accepted. The top court said that the law as it then stood did not allow lifting the corporate veil based on such interpretations. Instead of “look through,” the court adopted a “look at” approach.
Unwilling to give up the tax claim, the Government amended the tax law retrospectively with effect from June 1, 1976, giving itself the power to re-open past mergers and acquisitions if the underlying asset was in India. Vodafone then contested the claim under the Bilateral Investment Treaties (BITs) between India and the Netherlands and between India and UK.
A PCA arbitral tribunal recently adjudicated the investment treaty arbitration dispute and rejected the Indian tax demand. The retrospective change in income tax Law in 2012 was held to vitiate the guarantee of Fair and Equitable Treatment (FET) given to Dutch/British investors under the BITs.
The Government can now appeal against the order in the High Court of Singapore. If not, it has to spend about Rs 85 crore (Rs 40 crore to PCA as 60 per cent of litigation cost and Rs 45 crore refund to Vodafone).
Another similar arbitration involving UK’s Cairn Energy Plc is expected to be concluded soon, where $1 billion of Cairn Energy’s shares have been confiscated.
India and similarly placed financial resource-starved countries face this dilemma. We want to welcome foreign capital to bring financial resources and technology to expand the earning capacity of the Indian economy, create jobs and raise income levels. The investors have a legitimate expectation of a fair and equitable non-discriminatory taxation and regulatory regime, ease of doing business but the Government also has a legitimate interest in collecting taxes. Last year, we reduced corporation tax for new manufacturing companies to a record low of 15 per cent.
There should certainly be a certainty about tax liability but retrospective changes in tax laws are undesirable. They change assessment of future profits and may negate the very basis of important investment decisions.
Discerning eyes can see that the primary driver of the Cayman Islands sale was acquiring controlling interest in the Indian telecom company and the deal was structured to make it an offshore transaction beyond the reach of Indian taxmen, an innovative tax avoidance measure. The world’s rich shift their incomes and wealth from their high-tax home countries to these “tax haven” countries like Cayman Islands having almost no income tax. How can “tax haven” countries defend giving shelter to people running away from their taxing home jurisdictions is a big international debate. It is an ideological battle between tax-free Governments of these countries and remaining “tax-and-spend” Governments who want to impose their ideology on nations following “minimalist Government” ideology.
One country’s “black money” (tax-evaded income) is a source of survival for another. That is how “tax havens” flourish. One would wish greater international cooperation in enforcement and “tax-and-share” being put in place but the interminable debate on limits of taxation, sovereignty and protection to criminals, acceptability of national laws on crime and taxation by outsiders, unfair/unjust/excessive taxation and fair end-use of tax proceeds block any such agreements from fructifying.
Taxation of foreigners and foreign companies presents special challenges. There is a clash between two principles. One is the US system based on “situs” of the assessee’s nationality and the other is the Organisation for Economic Cooperation and Development (OECD) system based on “source” of the assessee’s income.
The tax liability attaches to assessees based on their nationality. A Government may tax its citizens and the companies registered under its national laws. The 2012 Supreme Court judgment was based on the law then in force which limited extra-territorial application of tax laws.
The “situs” of the taxed entity is now pitted against the “source” of the entity’s income. The OECD project on Base Erosion and Profit Shifting (BEPS) is gaining traction.
More and more Governments are now coming to clash with the classical worldview on foreign taxation and asserting that a Government’s jurisdiction extends to foreigners and foreign companies who may be present on their soil or drawing sustenance from it. Big MNCs like Google, Apple, Facebook, Amazon and Netflix are inviting global attention for earning from different countries without contributing enough to the local public exchequer.
There is a global consensus regarding the need for a comprehensive mechanism to tax cross-border transactions in the digital economy. OECD, UN and EU are working on a resolution. We amended the Income Tax Act in 2018 to bring the concept of ‘Significant Economic Presence’ from April 1, 2019, and introduced equalisation levy (Google tax) in an attempt to tax incomes being collected by foreigners from Indian consumers. In an imbalanced world, the terms of trade and investments are not always favourable to emerging economies. They also don’t have the freedom to print money and spend. Balance has to be struck between fair taxation and honest tax compliance in form and substance.
(The author is an IAAS officer, superannuated as Special Secretary, Ministry of Commerce and Industry.)
The human rights watchdog may have looked at India through a Western prism but can we dispute its findings on Delhi riots?
The trouble with human rights watchdogs is that they have, by virtue of countering the establishment narrative, assigned themselves a certain kind of legitimacy and credibility without realising that some of their own investigations are compromised by subjective assessment rather than objective investigation. This has also been a problem with Amnesty International, which has many times been accused of looking at India through a Western prism. But as a robust democracy, we have it within ourselves to accept vilification and acknowledge cogent counterpoints. We shouldn’t need lobbyists to get the other side of the story; our media should be free to do that. Besides, by and large, the organisation has an international acceptability even if we take some of its reports with a pinch of salt. But by targetting Amnesty, which says it is now forced to shut shop in India because the Government has completely frozen its bank accounts here, we appear to be in the bracket of oppressor and authoritative regimes like China. And considering its activists have been particularly penalised for tracking dissent pan-India over the last two years, it gives them a moral upper hand and claim a witch-hunt. The reasons that the organisation lists behind the Government crackdown on it are the same as those cited by tormented civil society activists — namely “unequivocal calls for transparency in the Government, more recently for accountability of the Delhi police and the Government of India regarding the grave human rights violations in Delhi riots and Jammu & Kashmir.” Frankly, even without the Amnesty’s reports, there is far too much on-ground evidence of the charges it has made. And the way the disclosure statements and names in the chargesheet of the Delhi Police on the city riots have been circled out, targetting the liberal intelligentsia, protesters and activists while leaving out the inflammatory fringe Rightists, there is a move to freeze the right of democratic dissent. So the timing of its India exit suits Amnesty more than us at this point of time.
It would have made more sense had the Government zeroed in on Amnesty in 2016, when it was booked in a sedition case for allowing “anti-India” slogans on Kashmir at an event in Bengaluru. But to pursue it for violating foreign funding rules in 2019 obviously raises questions on intent. Amnesty though claims that its India operations have been funded domestically. The immediate context seems to be the report it released last month on the complicity of Delhi police in the riots. Yes we must defend our pluralism and challenge the official narrative. But by hounding out Amnesty, we have a public relations battle ahead. Nothing will happen to it. Nothing would have if it had been allowed to continue.
The benefits of filing taxes are many apart from the fact that we should be responsible citizens of the country
Given the havoc that the Coronavirus pandemic has played on the economy of the country and personal incomes of people, the Government has extended the Income Tax Return (ITR) filing deadline for the financial year (FY) 2019-20 to November 30. However, not many people are aware that they may be liable to file their ITR this time around even if their income was below the taxable limit in FY 2019-20. Though this may make people question the intention of the Government in the face of the hardships being faced by them due to salary cuts and lay-offs, but this has been done in a bid to catch tax evaders. In a bind because of the crumbling global and Indian economy even before the outbreak proved to be the last straw that broke the camel’s back, the Government last year introduced certain criteria from FY20 that make individuals liable to file ITR. The whole idea behind enhancing the return filing criteria is to catch unscrupulous taxpayers where there is a mismatch between the declared income and the expenses incurred by the assessee.
Even though most people tend to believe that filing an ITR is relevant for assessees with income above the tax slab, it has multi-layered importance, irrespective of whether the income is above or below the taxable limit or whether there’s a tax liability or not. Significantly, if the income is below the taxable limit or is “zero” the return is called “nil” return. But it acts as proof of funds accumulated in bank accounts or investments because, even if a person is earning an income below the taxable limit, over the years they create a corpus. In case there is any scrutiny after a few years, it becomes a tiring and lengthy process to prove the source of earnings, without an ITR, which is a legally-accepted proof of income.
Plus, under the seventh proviso to Section 139(1) of the Income-tax Act, 1961, even if the income is below the exempted limit, an assessee will have to file an ITR if they paid an electricity bill of Rs 1 lakh or above during the year; deposited Rs 1 crore or more in one or more current accounts and incurred an expenditure of Rs 2 lakh or more for travel to a foreign country. An individual travelling or planning to travel abroad requires a legal proof of earning. For salaried people, the employer certificate serves as proof. However, for individuals who are self-employed, the ITR can serve the purpose.
In cases where the assessee incurs capital losses during the financial year, the Income Tax Act allows him/her to carry it forward for eight consecutive years to set it off against any future gains. However, to keep track of the losses, it is mandatory to file the return before the due date even if the ITR is a loss return. Without this the losses of the year cannot be carried forward. So, even if there is no income to show, the Income-Tax Department lays it down that you declare the capital losses in your return before the due date.
In case a person has paid taxes over and above what stands payable, considering all the deductions and exemptions allowed, the assessee becomes entitled to a refund from the I-T Department. However, to get this refund, filing an ITR is mandatory. Salaried people usually believe that filing ITR isn’t required because the tax on their income has already been deducted. However, it is possible that the tax deducted and deposited as per Form 16 may be in excess of what should be cut. The employer might not have taken into consideration the actual tax-saving investments, insurances or actual house rent. In that case, filing the ITR helps to claim a refund.
Although, the Motor Vehicles Act does not make it compulsory to give the ITR while arriving at a compensation in case of disability or accidental death, the ITR is needed in case of self-employed people to establish the income of the person and arrive at the compensation amount.
Also, when a person is applying for loans, be it for a house, car or a personal loan, one of the mandatory documents required to be submitted to the loaning entity include the ITR for the last two-three years as proof of income. This is because ITR helps the lender determine the person’s income, payment obligations and loan repayment capacity. Plus when an individual intends to buy a high life cover, it is common for the insurance company to ask for proof of income. This is primarily done to assess the value of the cover amount that can be allowed to the person. The proof of income could be the salary slip, bank statement or the ITR of the past three-consecutive assessment years. So, for cases where the person doesn’t receive a salary slip or has monthly income disbursed from different groups, ITR serves as the only solid proof of income.
Then there are people who have very small incomes from sources like dividends, bank interest, family pension or tax-free earnings like agricultural income or interest on tax-free bonds. For these people, even though the proceeds are below the taxable limit, filing an ITR serves as proof of income that can be of multi-dimensional use subsequently. The benefits of filing taxes are many apart from the fact that we should be responsible citizens of the country.
(The writer is CEO, IndiaFilings)
The Government should accept the arbitration verdict and draw a line under the Vodafone issue
Pranab Mukherjee was a consummate politician and when the man, who was India’s 13th President, passed away recently, he was fondly remembered by all across the political spectrum. Yet, one of Mukherjee’s legacies as Finance Minister was the unfortunate retrospective tax legislation that he included in one of the Finance Bills he presented. This singular piece of legislation, for which the entire Cabinet of the time, including Dr Manmohan Singh, must share responsibility, ruined India’s reputation as an investment destination. It was in May 2012 that the Parliament passed the Finance Act under which various provisions of the Income Tax Act, 1961, were amended with retrospective effect to tax any gain on transfer of shares in a non-Indian company which derived substantial value from underlying Indian assets. And the exemplar of this legislation was the case the Government fought against British telecom giant Vodafone. Despite losing the case in the Supreme Court, tax authorities and the Government doubled down and the case went to arbitration in London, where even the member appointed by the Indian Government was found in Vodafone’s favour. The international arbitration tribunal ruled that India’s demand in past taxes was in fact a breach of fair treatment under the bilateral investment protection pact. Vodafone India was later on merged with Aditya Birla Group’s telecom company Idea.
Mukherjee had logic on his side when he wanted to tax deals where entities operating in the Indian market were bought and sold, even if they were not “based” in India. However, to make any act of legislation retrospective is not only unfair, it is also a confidence buster for investors, the thinking being that if it can be done once, it can be done again. When Narendra Modi said that he wanted to make doing business easier in India, he should have started by withdrawing the case against Vodafone and some other companies like Cairn. Maybe it wasn’t done lest he be accused of being friendly to industrialists or the tax authorities thought that they had a good case (as they always think) but now that the arbitration case has been lost, it is time to end this once and for all. This was a clear instance of tax terrorism and India’s reputation suffered as a result. At a time we need to roll out the red carpet for all investors, that is the least that can be done right now.
In these exceptional global conditions, coopetition — cooperation between competitors — will be vital as survival takes prominence over rivalry
The contagion has changed how business is conducted the world over. Firms which are unable to adapt are perishing as remote- working has become a norm. The post-pandemic world could throw up a lot of challenges and businesses need to revise their strategies in numerous ways to acclimatise themselves to the disruptions. An open organisational culture towards innovation, structured horizon planning and most importantly exceptional value proposition for customers and stakeholders will help businesses survive in these difficult times. Flexibility has also become crucial during these testing times. For example, a number of companies like Ford, Coca-Cola, 3M, Honeywell have augmented their traditional business models and their usual products to produce PPE (personal protective equipment) to fight the outbreak. In these exceptional global conditions, coopetition — cooperation between competitors — will be vital in times to come as survival takes prominence over rivalry. According to Bengttson and Kock, coopetition can be defined as a complex association between two business players, irrespective of their involvement, be it horizontal or vertical. A horizontal relationship would mean being business competitors or complementers in the same sector, producing similar products, whereas vertical business involves suppliers and customers. Research in this domain is unravelling tremendous benefits for competitors, who are forging mutually beneficial collaborations that are based on coopetition strategies where companies share resources such as equipment, funds and capabilities, like technical know-how, expertise and experience. These initiatives ensure mutually-beneficial outcomes by pursuing goals collaboratively that otherwise would be difficult to chase, which in turn improves their financial performance.
However, there is a catch here. Coopetition is not as easy as it seems, as rivals cannot suddenly collaborate, as this has to happen at all levels, top, middle and bottom. According to researchers, the degree of collaboration is inversely proportionate to the magnitude of rivalry or competition. In fact, it is a delicate balance between collaboration and rivalry. If businesses that complement each other work together, there is a potential for huge benefits. But if rivalry or competition is high, it could lead to adverse performance outcomes.
Several rival companies have taken advantage of collaboration and there are several motives to take this strategic route. First and foremost, the main motive is to effectively utilise scarce resources. Coopetition can effectively utilise scarce resources by integrating them to efficient production with lower risks. For example, in the electronics industry, Samsung Electronics and Sony worked together to develop the flat screen LED televisions by sharing R&D costs. This strategy is also used to increase the current market size or create a new market by introducing new products or services. Costs and risks are shared and companies can dominate their competitors. In the automobile industry, rivals Ford and Toyota teamed up to develop Atlas Ford F-150 hybrid pick-up truck, which went on to become the best-selling hybrid in this segment. The third motive is to augment the competitive position by increasing the market share. Protecting the current market share and increasing the same is one of the important strategies of firms. Giants like Google and Mozilla are working together with Google supporting and funding Firefox, Mozilla’s web browser, to beat the web browsers of its rivals Apple and Microsoft.
There are several other examples to show how companies benefit through coopetition. EDX is a non-profit organisation, which was founded by rivals Harvard University and MIT to provide free online education worldwide. Similar coopetition can also be seen between Amazon (Kindle) and Apple (iPad). They entered into an agreement in 2007 to deliver Amazon e-books through an iPad Kindle App which enabled Amazon to access a wider market and made iPad a complete content provider. This type of cooperation is also seen in the airline industry where competitor airlines use each other’s networks and ground staff for efficient services. One example is the Star Alliance network of competing airlines Thai Airways, Singapore Airlines, Lufthansa, Air India and many more. Its aim was to provide a seamless experience to travellers and also save on logistics, marketing and other costs. Fierce competitors in the beverage industry, Coca-Cola and Pepsi, along with Red Bull and Unilever have come together to set up a non-profit organisation to develop sustainable supply chain technologies, particularly in refrigeration, to fight global warming and ozone depletion. The phenomenon of coopetition gained popularity as a counter-intuitive strategy for a networked economy, leading to mutual benefits for both firms, like increasing their knowledge and expertise, sharing costs of new developments and R&D, improving market share and expanding into new markets. With the advent of technology, it is now easier for firms to reach out to competitors and other stakeholders. This strategy of cooperation among competitors and suppliers will be all the more useful in these exceptional times.
(The writer is Associate Professor, Amity University, Noida)
China has enjoyed showing its thumb to the world and in a brazen display of insensitivity, it recently allowed a mass beach party to take place in the city of Wuhan, the epicentre of the contagion that is ravaging the lungs of people across the world as well as the global economy. Stock markets worldwide are in a tumble once again as renewed curbs across Europe, following a resurgence of the pandemic, cast a shadow on economic activity that was picking up pace. The cascading impact hit D Street, too, as foreign portfolio investors and domestic institutions dumped shares, plunging graphs southwards. And although our market has recovered by about 50 per cent from the lows of March, it is still patchy and any decelerator sends it crashing too. Large countries like the UK as well as several cities and states across the US are being forced into another round of lockdown to prevent a devastating “second wave,” which means shuttering businesses that had opened. In India, while numbers have stabilised, albeit with lower testing numbers as well as evidence that district and city level officials are restricting testing deliberately, the pandemic appears to have become a fact of life with most cities whirring back. In Kerala, the State Government is allowing asymptomatic workers to return to their jobs in a secluded work zone. Yet, full steam ahead is quite a way off. While the impending festive season and the action in the Indian Premier League (IPL) will bring a spending boost, the levels will be nowhere close to those of past years. The problem is while businesses aren’t completely dysfunctional, allowed as they are to operate freely in non-restricted areas, they are inter-connected to supply and distribution chains across States. Stalling of operations in one hub in a badly-hit State is bound to affect others as the cascading effect slows down the sector a particular business is into, and thereby grunts the overall economy. With attendance and production capacity affected by restrictions, some sectors cannot even take off optimally. Bengaluru is a prime example. With most IT workers having left the city through a series of lockdowns, they returned in waves, thereby, slowing down the desired momentum for recovery. All such micro-blocks are threatening to disrupt the little gains made in reviving the economy. A slew of economic relief measures, too, has failed to inspire confidence among businesses as corporate finances remain squeezed, sales have not regained momentum and demand remains low. Even the amount allocated for bailing out MSMEs remains largely undistributed.
As some have described it, 2020 is a lost year, a year spent bleeding and that can only stop next year. Anyway the process of full recovery will not start before 2022. That said, others are still quite hopeful of a rebound economy and while expecting numbers to be lower than before, they feel they would be fairly decent. Many of these people are seen in the stock exchanges betting big. The rise in the price of many major stocks despite the lost first and insipid second quarters of the year was a sign that some would hold out long-term. As long as COVID-19 is around, there will be a continuing drop in demand and supply chain inconsistencies. Besides, there are sectoral spurts while the economy as a whole needs to stabilise. Given the Government’s long-range structural reforms, stimulus and relief by RBI, many investors are still using the volatility to their advantage by focussing on long-term prospects and asset allocation and choosing to build a solid portfolio. While many Indians do not have a choice but to live with the virus, some nations might prioritise differently. That said, it appears that the virus will keep on coming back. If we are to learn anything from the 1919-1920 Spanish flu epidemic, it is that it just took time to eliminate it. Vaccines did not exist then. But a price of asking for time will be that the economic bleeding might last longer and many worry that a body without any blood is not worth saving. So, will 2021 also be frightening year? It is a question worth asking now. Global ratings agency Fitch has already estimated that the Indian economy is expected to contract by 10.5 per cent in 2020-21. And while industry federations are hopeful that growth can be expedited through continued government support and hand-holding of businesses during this crisis, they are still cautiously optimistic about full capacity utilisation. This is going to be a long road to recovery.
(Courtesy: The Pioneer)
If borrowers get interest relief during the moratorium period, bank investors and depositors would stand to lose unless compensated by the Govt, like it happens in farm loan waivers
Responding to the pandemic, the Reserve Bank of India (RBI) had “permitted” banks to grant moratorium on payment of instalments of term loans due after March 1 up to August 31. A similar dispensation was “allowed” on recovery of interest on working capital. The moratorium was initially permitted up to the end of April and 55.1 per cent of customers of Scheduled Commercial Banks (SCBs), accounting for 50 per cent of outstanding credit, had availed this facility. In Public Sector Banks (PSBs), 80.3 per cent of all individual customers, accounting for 80 per cent of total outstanding individual loans, opted for the moratorium. A whopping 74 per cent of Micro, Small and Medium Enterprise (MSME) borrowers and 28.8 per cent of corporate borrowers, covering 81.5 per cent and 58 per cent (by outstanding amount in category loans), availed the facility.
For private banks, 41.8 per cent of individual customers, accounting for 80 per cent of outstanding individual loans, and 20.9 per cent of all MSME customers opted for moratoriums, comprising 42.5 per cent of outstanding loans to MSMEs. About 21.6 per cent of corporate borrowers, covering 19.6 per cent of total outstanding corporate loans, had availed the facility.
The Supreme Court has extended the moratorium and the Central Government has appointed an expert panel to look into the issue. Exactly how many loans accounts and what loan amount is under moratorium are not known. Some borrowers may have decided against seeking the moratorium facility due to uncertainty about relief on interest. Had the interest relief been announced upfront, almost all borrowers would have instantly opted for the moratorium, except possibly for borrowers too proud of their financial standing to seek any relief.
Since the verdict of the apex court was not available by August 31, it was the borrowers’ call to take a wager on the verdict and decide whether to opt for a moratorium or not. It is unclear if the relief, if and when granted, would be available only to those availing of the moratorium. Overall, the system lacks incentives for those remaining fully compliant while the non-compliant people may hope to get some relief. Had the interest relief been a matter of legal right under the Banking Regulation or Disaster Management Acts, it would have been through by now. The Disaster Management Act (DMA), empowering the Government to take immediate relief and rescue measures, cannot be over-read to give it unfettered powers to deal with the full economic fallout of the disaster. It certainly does not empower the Government to alter terms of private contracts on jobs, rentals, sales, lending and so on. That explains why the tone and tenor of parts of the “orders” issued under the DMA is not peremptory, prescriptive, definitive but indicative, persuasive and advisory in nature. Hence, legally binding orders regarding timely payment of full salaries, non-recovery of rent and school fees and so on could not be issued for this reason. Appeals to good conscience is a different matter.
Likewise, the Banking Regulation Act (BR Act) would by itself not confer any rights on the RBI to mandate any alteration in individual contracts entered into by the banks unless supplemented with legal remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act) or the Insolvency and Bankruptcy Code (IBC). Appropriately, the RBI has “permitted” grants of moratorium while extending regulatory forbearance on recognition of the non-performing asset (NPA). The BR Act does not empower the RBI to mandate changing loan terms already contracted. Loan contracts can be changed only on the orders of insolvency courts. Mandatory moratorium requires more than the BR Act.
There are no free lunches in economics except those paid for by others. If borrowers get interest relief during the moratorium period, bank investors and depositors would stand to lose unless compensated by the Government, like it happens in farm loan waivers. Charity at others’ expense is systemic. Relief to borrowers at the expense of depositors is akin to relief to consumers ending up suppressing remunerative market prices for farmers.The bank depositors are also adversely impacted by the pandemic-induced fall in interest rates that stand to benefit new borrowers as well as the borrowers who are able to refinance high-cost old loans. The post-outbreak rate cuts and liquidity infusion by the RBI, aided by rising foreign exchange reserves, has caused a precipitous fall in interest rates. Some are offering record-low home loan interest rates under seven per cent per annum with new products of repo-linked home loans on offer. Low interest rates bring cheer to borrowers but gloom to depositors.
There are no fiscal guarantees to depositors on minimum interest rates and the IBC haircuts have been too costly in some cases. When corporate borrowers get a tax reduction bonanza, they don’t share the booty with lenders as they are not obliged to. When farm loans are waived, Governments provide fiscal support to banks but at present the Centre does not seem able and willing to compensate the banks for interest relief.
In the absence of fully disaggregated data on different types of loans under moratorium, a back-of-the-envelope quantification of the impact of interest relief can be Rs 1 lakh crore per month, assuming interest relief to be about one per cent per month on total pre-pandemic outstanding credit of about Rs 100 lakh crore. Even direct fiscal relief to the general population is not of this magnitude.
Financial stakes on the Supreme Court’s verdict are very high. The interest relief has been sought from the highest court of justice precisely because it is not a legal right. The golden balance of justice is being watched by distressed borrowers and anxious depositors. All borrowers are not equally distressed by the pandemic. Some differentiating criterion based on quantum of liability outstanding on March 1 and purpose of loan (whether educational; for first home/car or second one, for the Economically Weaker Section or affordable housing, past credit history) and proven impact of the contagion on income can be evolved to give relief to a truly needy class of borrowers. The relief even to this subset should not be entirely a burden on bank depositors. Ideally such relief is best provided by governments under fiscal stimulus paid by taxpayers, current or future.
The need to maintain the health of banks can hardly be overemphasised. Deep-rooted socio-cultural beliefs stigmatising indebtedness (indebted person embarrassed and lenders reviled ) continue to change worldwide.
Post World War, the wheels of growth are lubricated by the continuous supply of credit. India joined the borrow/spend bandwagon in the 80s. Lending by Scheduled Commercial Banks rose from Rs 8,64,300 crore (30 per cent of the Gross Domestic Product [GDP]) at the end of March 2004 to Rs 67,35,200 crore at the end of March 2014 (60 per cent of the GDP). At present, bank lending is only about 50 per cent of the GDP.
As on July 31, the total deposits of SCBs were Rs 141,61,689 crore (Rs 127,44,583 crore a year ago); outstanding credit was Rs 102,65,888 crore (Rs 97,29,002 crore a year ago) and investments were Rs 42,78,294 crore (Rs 35,57,063 crore a year ago). The combined effect of risk aversion of banks to lend and predominantly domestic financing of fiscal deficit is that only about two-third of deposits get lent to non-Government entities.
We have made great strides in terms of expanding the reach of banking services and financialisation of savings but high-profile delinquencies by those who can afford to pay continue to eclipse these achievements.
The gross NPA of SCBs that had peaked to 11.2 per cent in 2017-18 has been brought down to 8.5 per cent by March. This achievement is at great cost to bank investors/depositors on account of hefty haircuts following not-so-competitive slump sales of distressed companies under the conventional, single round bidding system being followed under the IBC. The RBI has assessed that the gross NPA of all SCBs may increase from 8.5 per cent in March to 12.5 per cent by March 2021 and even to 14.7 per cent if the adverse economic impact of the pandemic is very severe. Seeing the plight of forecasting tools, the economic fallout of the contagion is hard to predict and measure.
Since bank lending is only about 50 per cent of the GDP and post-pandemic recovery would require a heavy dose of credit, it is imperative to maintain incentives for financial savings.
Erosion of bank profitability runs the risk of dire consequences of de-finacialisation or informalisation of savings, derailing the hard-won recovery. The banking system needs calibrated support to prevent relapse into transmitted sickness.
(The writer is a retired IAAS officer and former Special Secretary, Ministry of Commerce and Industry.)
The Govt should shed its current protectionism. Instead, it should go for an open trade policy by slashing import duties and eliminating non-tariff barriers
While presenting the Union Budget for 2020-21, Finance Minister Nirmala Sitharaman had renewed the commitment of the Modi Government to “Make in India.” She saw this as the most crucial component of the strategy to make India a $5 trillion economy by 2024-25. To achieve this, she targetted doubling of exports from the current over $500 billion to $1 trillion (that includes an increase in farm exports from $40 billion to $100 billion). Faced with a whopping contraction in the Gross Domestic Product (GDP) by close to 25 per cent during the first quarter, a continuing slide during the second quarter and projected decline for the whole of the current year by 10 per cent-14.5 per cent, the $5 trillion target may have lost much of its sheen for now. Nonetheless, the Government has other compelling reasons to pursue “Make in India” vigorously. First, the devastating impact of the Corona pandemic on economies worldwide in particular and the steep decline in the economy of China (which accounts for a big chunk of imports by India. For instance, of the technical material that is used for making end-use agrochemical products, 50 per cent comes from China) have led to the disruption of global supply chains. This has created pressure on India to go full blast for increasing its domestic production and achieve self-sufficiency.
Second, the frequent changes in rules by the Chinese Government, specifically targeting the US, Europe and Japan-based multinational companies (MNCs) and China’s deteriorating trade and investment relationship with those countries, have prompted hundreds of MNCs to exit. The Modi Government wants to seize the opportunity, make all-out efforts to lure them here and make India a manufacturing hub. How to make it happen?
A clue is available from this year’s Independence Day address by the Prime Minister, in which Aatmanirbhar Bharat reverberated all through. Modi exhorted “our policies, our processes, our products, everything should be the best.” Put simply, Indian industries should endeavour to manufacture products which can compete in terms of the price as well as quality, both in the domestic and international market. Broadly, two sets of factors are relevant here: (A) Those which are internal to a firm and (B) those which are external.
Factor A includes the ability of the firm to innovate products, which meet diverse demands of consumers in a manner that offers the latter quality, safety and convenience, putting in place manufacturing practices, which deliver best products on all these counts and optimising all factors of production viz. capital, labour, land and technology to ensure that the cost of supply is kept to the bare minimum. All these factors are within the control of the firm.
Factor B includes the availability of raw materials and other inputs at a competitive price, hassle-free logistics and transportation at low cost, availability of funds from credit institutions such as banks at low interest rate and a taxation structure that lowers the incidence of tax on products. Most of these factors are beyond the control of the firm. These depend on the macro-economic environment which, in turn, is influenced largely by Government policies. Look at petrol, diesel and Aviation Turbine Fuel (ATF) whose price impacts the cost of almost every product and service — cutting across all sectors of the economy. De jure, these petroleum products are deregulated. However, since the market for these is dominated by public sector oil companies, there is an upward bias in their prices which gets aggravated due to high taxes. At present, these items are out of GST (Goods and Services Tax) which means they continue to attract central excise duty (CED) and value added tax (VAT) at a high rate. No wonder, the tax component alone is nearly two-third of the retail price.
Power is another major input that impacts production cost. More than 90 per cent of the electricity is supplied by power distribution companies (discoms) at tariffs determined under cost plus mechanism. These rates subsume inflated cost allowed to power generators, pass-through of ever-increasing fuel cost, electricity tax and other levies, cost imposed on the system due to supplies to farmers and poor households at subsidised price (call it cross-subsidy), large-scale theft and so on. All of this result in exorbitant charges from industries.
The businesses also face a high cost of transportation and logistics thanks to high rail freight on movement of goods having to subsidise low fare on passenger traffic, high cost of movement by road due to escalating diesel price and high toll tax charged by concessionaires on highways (courtesy, inflated capital expenses on building roads and high cost of land acquisition). Wherever exports and imports are involved, high port handling charges add to the cost. Finally, they have to pay high interest rate on both long-term and short-term funds borrowed from banks, non-bank finance companies (NBFCs) and other financial institutions (FIs). Though interest rates are deregulated and the Reserve Bank of India (RBI) also keeps prodding banks/FIs to lower the lending rate (in the last 18 months or so, it has reduced the policy rate i.e. the interest rate it charges on money lent to banks, by 2.5 per cent to help them), borrowers have not got much relief thanks to the high non-performing assets (NPAs) of banks.
Most enterprises are hamstrung by these external factors, which many a time offset the inherent competitive advantage of firms by virtue of being strong on the internal front. Ideally, the Government should focus on removing these external bottlenecks. If the costs of fuel, transport, power, interest rate and so on are brought down from their present high to a reasonable level, this will automatically sharpen the competitive edge of Indian firms and move us closer to the goal of making India a manufacturing hub.
Instead, the Government is moving in a direction that does not augur well for its “Make in India” mission. It is increasing customs duties (during 2014-2019, it raised import duty on 3,500 items; electronic items, especially mobile phones and automobiles attract high levies), raising non-tariff barriers e.g. requiring dairy and poultry products to meet certain specifications, controls on the price of medical equipment viz. stents, knee implants and so on and now even implementing a licence regime for certain imports (import of TV sets).
In certain sectors, such as agrochemical, it is micro-managing things to a point of barring import of certain products for which indigenous facilities exist. Import of fertilisers such as urea is permitted only on residual basis i.e. only to the extent that domestic production fails to meet the demand. Moreover, only agencies authorised by the Centre such as the State Trading Corporation (STC), Minerals and Metals Trading Corporation (MMTC) can import it. With this overly-protectionist mindset, on November 4, 2019, Modi announced India’s decision not to join the Regional Comprehensive Economic Partnership (RCEP), a conglomeration of 10 members of the Association of South East Asian Nations (ASEAN) viz. Malaysia, Indonesia, Thailand, Vietnam, Singapore, the Philippines, Myanmar, Brunei, Laos and Cambodia plus six others like Australia, New Zealand, Japan, South Korea, China (besides India) covering 50 per cent of the global population and nearly 40 per cent of the world GDP.
From the same prism, it is reviewing existing Free Trade Agreements (FTAs) with ASEAN and its member countries. This approach has stymied chances of India signing a limited deal with the US (this is largely about goods and market access), forget concluding a comprehensive FTA, which also covers intellectual property rights (IPRs), investment and services, issues related to visas and manpower movement. For the same reason, talks for the FTA with European Union (EU) countries are not progressing at the desired pace.
The logic behind the Government’s current policy actions is an underlying belief that our domestic market should be reserved exclusively for “Made in India” products. Using the same argument, what if other countries also decide to reserve their local market for indigenously-made products? In that scenario, our exports are bound to take a hit; the goal of doubling Indian exports to $1 trillion will look like daydreaming. India can’t have the cake and eat it too. A scenario in which our products have uninhibited entry into the market of other countries (needed for scaling up exports) even as the products made in those countries face entry barriers on the Indian turf is neither practical nor sustainable. The Government should shed its current protectionist policy stance. Instead, it should go for an open trade policy by slashing import duties and eliminating non-tariff barriers. It should sign FTAs with groups such as RCEP, EU and so on as also with individual countries. As for perceived threats, there is ample scope for improving the competitiveness of India made products by addressing key bottlenecks under the “external factor” category — as brought out above.
(The writer is a New Delhi-based policy analyst)
Should the Competition Commission take a look at the comings and goings in the retail space?
First, Reliance Retail bought out the retail assets of Kishore Biyani’s Future Group. Now it emerges that the company is offering a 40 per cent stake in its operations to American e-commerce giant Amazon for $20 billion (an estimated Rs 30,000 crore), which will give the retail division of India’s one-time crude-to-chemicals giant a massive opportunity in that dedicated space. Reliance was already a big player, not just in the low-margin grocery retail with Reliance Fresh but in electronics with Reliance Digital apart from holding the India franchise for several major high-street brands such as Hamley’s for toys, Marks & Spencer and several other clothing outlets. With the Future Group purchase, Reliance would have acquired a huge space in most premium malls with Shoppers Stop and Pantaloons. If the Amazon tie-up does go through, it would not only give Amazon an automatic path to its mandatory sourcing requirements in India, it would also give Reliance Retail a leg-up in its weakest areas, warehousing and online sales. It has tried hard but found attempts at integrating its telecom and retail play between Reliance-Jio and Reliance Retail to be quite tepid.
That said, if a deal between Reliance Retail and Amazon happens, this should be a valid case for the Competition Commission of India (CCI) to explore. Nobody is saying that either party has done anything illegal. However, it is contingent upon the CCI to prevent any monopoly in any sector in India. And a monopoly does not only mean that there is one player, it means that there is one “dominant” player and domination can often come with only a one-third share in such a fragmented industry as retail. A dominant player can dictate terms to suppliers and can starve out supplies to rivals as well as prevent them from getting good space in malls and many other practices. This needs the constant supervision of the CCI for whom defending consumer choice should be the ultimate priority and not just defending affordability. Unfortunately, many regulators believe that the latter is more important than the former which has led to the disaster called television news in India as the race for eyeballs has meant targeting the lowest common denominator for news rather than high-quality paid services. In retail, telecom and aviation among other sectors, particularly in the aftermath of the Coronavirus lockdown, as many companies find themselves in a tough spot, the CCI should be a defender of competition, consumer choice and thus, the overall economy.
India, as an industrialising nation, cannot afford to have an engineer with bookish knowledge of an engine without the skill to design it
India went into lockdown mode in March and people in almost all sections of society have been facing socio-economic difficulties since then. The almost insurmountable challenge in front of policymakers has been to balance lives and livelihoods. The uncertainties of the lockdown entwined with health and safety concerns disrupted the market that faced a supply and demand shock. These issues resulted in a historically low Gross Domestic Product (GDP) growth rate of -23.9 per cent in the first quarter of the current financial year, with industrial growth shrinking by 40 per cent. However, it is expected to pick up in the subsequent quarters as stated by the Reserve Bank of India (RBI) and the World Bank. The economic consequences of the pandemic and local lockdowns have been well-discussed and are surfacing in the GDP and industrial production numbers.
However, there is another side of the issue which is quietly creeping up and that is the social consequences arising out of the lack of skill training. Certainly, this social and educational consequence will translate into economic adversity over a period. According to the All India Survey on Higher Education (AISHE), India’s gross enrolment ratio was 27.4 per cent for 2017-18. This is not a great figure as compared to the other developing countries. This is further battered by the possible decline in enrolment this year owing to constrained access to educational institutions and infrastructure for many unprivileged students, particularly in rural India. Given the contagion, the Indian education regime had to shift gear to the online mode. Thanks to the internet that, at least, served an option for continuing education. But the question is: Is this viable on the ground? Will our students contribute to the human capital and participate in the herculean task of reviving the Indian economy? The presence of internet and digital infrastructure along with their significant (about 50 per cent) penetration in the country have come today as a boon for education and for imparting training to aspirants. In this backdrop, the Pradhan Mantri e-Vidya Programme was launched, which unifies all efforts related to digital, online and on-air education. Furthermore, top 100 universities were permitted to start online courses from May 30 without any fresh approval from education regulators. States, such as Karnataka, too, announced policies for online education.
However, there exist certain unprecedented challenges for moving towards online education, which is the need of the hour. It has not only changed the way students from KG to post-graduation learn, but also has significantly altered the methods and materials of teaching for educators and parents. The fundamental constituent to enable online education is digital infrastructure, including high-speed internet and supporting devices (desktop, laptop, tablet or mobile phone). These prerequisites of online education have further expanded the gap between the upper and middle class and urban and rural populations of the country in terms of access to education even after promulgation of the Right to Education.
Education and skill training have always been a two-way communication and feedback process that may not be done in the online mode as effectively as it can be done in classrooms and laboratories. It is difficult to imagine students learning biology, physics and chemistry without actually experimenting in laboratories. It is quite important to differentiate knowledge and skill in this context. Knowledge can be delivered and learned from literature. However, skill-imparting needs experiment and experience that may not be feasible in the online mode of learning.
India, as an industrialising nation, cannot afford to have an engineer with bookish knowledge of a combustion engine without having the skill to design and operate it. Historically, the industry-academia gap has always existed in India. A McKinsey report had flagged the issue, a decade ago, that just a quarter of engineers in India were actually employable. Now, the online education model producing graduates with lack of skills may aggravate the employability issue further. This may lead to a deteriorated human capital and underemployment in the economy due to the fact that a large pool of the present unskilled human capital coming out of the online pedagogy will join the workforce in the future, face employability challenges and take a longer period to be skillful and join the productive workforce of the nation.
Given the necessity of the online education system, at present, we must acknowledge and address these issues, challenges and the consequences associated with it. The lack of digital infrastructure in rural and unprivileged sections has posed implementation challenges on the ground, leading to social inequalities. However, the major worry lies in the outcome of this new regime of online education system in terms of skill and lack of employability of the human capital that will have the great responsibility of putting the Indian economy back on its growth trajectory with equitable development.
It is high time we think about bridging the gap between rural and urban digital infrastructure for online education and imparting employable skills. The National Education Policy (NEP) aims to reform the education system by 2030 in a push towards an Atmanirbhar Bharat. One hopes that the NEP bridges the gap between the industry and the academia in terms of employable skills and gives an equal learning and growth opportunity to all.
(The writer is a Senior Research Scholar, Department of Management Studies, IIS, Bengaluru)
The Centre and States must try to fix all void in GST implementation to achieve buoyancy in tax revenue, thereby obviating the need for continuing with the compensation mechanism
Faced with a dwindling tax revenue since the last financial year of 2019-20, the issue of “full” and “timely” compensation for the shortfall in States’ tax revenue (their own collection plus the amount received as their share in indirect tax collected by the Centre as per the Finance Commission’s devolution formula) vis-à-vis a given benchmark, has been a bone of contention between the Centre and the States. It has acquired gargantuan dimensions during the current year with the Coronavirus pandemic forcing a collapse of businesses, cutting across almost all sectors (barring essential items) and in turn, leading to a steep fall in tax collection of both the Centre and States. During 2020-21, the gap between what can be arranged from a tax pool and compensation requirement of the States is estimated to be Rs 2,35,000 crore (during 2019-20, this was Rs 70,000 crore). The compensation to States is intertwined with the Goods and Services Tax (GST) in vogue since July 1, 2017. The GST Compensation Act, 2017 provides for compensation to the States for five years (2017-18 to 2021-22) for the loss of revenue to be calculated as the difference between their actual collection (including transfer of their share in indirect tax collected by the Centre) and the amount they would have got with annual growth at 14 per cent over the 2015-16 level under the erstwhile dispensation (Central Excise Duty (CED)/service tax/sales tax/Value Added Tax (VAT) plus other local taxes).
To ensure this, the Union Government had also passed an amendment to the GST Compensation Act (2018) to levy a cess on the supply of certain goods and services. The cess is levied on demerit goods (those which fall in the highest tax slab of 28 per cent — other slabs being five per cent, 12 per cent and 18 per cent besides the exempt category) such as automobiles, tobacco, drinks and so on with a proviso to use the proceeds for compensating States. The cess was to remain in force for five years in sync with the Centre’s obligation to compensate States for that period. The rationale behind keeping these arrangements in place for five years was that at the end of this transition i.e. 2021-22, the GST dispensation would have acquired the much-needed “vitality” and “resilience” to yield sufficient resources for the States to meet their budgetary requirements within a prudential limit set under the Fiscal Responsibility and Budget Management Act (FRBM) thereby obviating the need for any extra support beyond 2021-22.
During the first two years, viz. 2017-18/2018-19, collection from the cess was higher than the shortfall in tax revenue faced by States. As a result, there was surplus of about Rs 47,000 crore in the cess pool as on March 31, 2019. This helped the Centre meet the impending challenge during 2019-20 when cess proceeds were only Rs 95,000 crore against compensation requirement of Rs 1,65,000 crore. During the current year, against compensation requirement of Rs 3,00,000 crore, cess proceeds are estimated to be about Rs 65,000 crore leading to a shortfall of Rs 2,35,000 crore. In this backdrop and with the States unwilling to relent on their claim for compensation in full, the Centre is talking of what in legal jargon is termed as force majeure (unexpected circumstances). Put simply, the latter has expressed its inability to pay invoking an event beyond control or what the Finance Minister, Nirmala Sitharaman, has described as an “act of God” (the Coronavirus).
The issue was discussed during a marathon meeting of the GST Council on August 27, 2020. Ruling out a hike in tax rates or the Centre making good the shortfall from either the Consolidated Fund of India (CFI) or borrowing against its balance sheet, Sitharaman presented two options for consideration by the States. Under option one the Centre, in consultation with the Reserve Bank of India (RBI), will provide a special window to the States to borrow Rs 97,000 crore (this is the amount attributable to implementation of the GST, while the rest is apportioned to the pandemic — as informed by the Revenue Secretary, Ajay Bhushan Pandey) at a “reasonable” rate of interest. The loan won’t be treated as debt in the books of the State Governments and will be amortised (both principal and interest) from the cess collection. An additional FRBM limit of 0.5 per cent of State Gross Domestic Product (SGDP) will be allowed.
Under option two, the States will borrow the entire GST compensation gap of Rs 2,35,000 crore (including Covid-19 impact portion) from the market. The collection from the cess will only pay for the principal amount. As regards the borrowing treatment, only an amount up to Rs 97,000 crore won’t be treated as debt. No additional FRBM limit is allowed under this option. The GST Council also decided that the above borrowing arrangement would be for the current fiscal and a review would be done at the beginning of the next financial year. By putting the above options, the Union Government has made four things abundantly clear. One, it is not legally bound to pay the compensation when there is no money in the cess pool; second, it won’t borrow on its balance sheet but is willing to help States raise a loan; third it does not want the tax pool to fully cover the cost of servicing the loan and fourth, the cess on demerit products will continue beyond 2021-22. On option one, it can’t be faulted. The two provisions in law, namely one relating to compensation and the other levy of cess (and collection thereof) have to be viewed in conjunction with each other. In other words, the discharge of the constitutional obligation to compensate States for the loss of revenue would be possible only when there are enough funds available in the cess pool. Since the pool is denuded, the Centre is under no obligation to pay (this position is even confirmed by the Attorney-General). By the same logic, there is no case for it to borrow on its balance sheet and pay to the States.
Even so, going for it will have a catastrophic impact on its budgetary position. Already, the Centre has increased its borrowing programme from the budgeted level of around Rs 8,00,000 crore by 50 per cent to Rs 12,00,000 crore. This does not include Rs 90,000 crore towards additional allocation for MGNREGA and employment schemes for migrant labourers. Now, if it has to borrow Rs 2,35,000 crore to cover deficit in the cess pool, its total borrowings will gallop to Rs 15,25,000 crore or eight per cent of the GDP — more than twice the budgeted 3.5 per cent. Apart from casting a shadow on India’s ability to protect its macro-economic fundamentals and inviting the wrath of rating agencies by way of downgrade, borrowing by the Centre on such a mammoth scale will crowd the market, harden yield and increase the cost of borrowing by States even for their normal borrowing programme (apart from making things difficult for the private sector). In this backdrop, the proposal put forward by Sitharaman to help States raise loans at reasonable rates makes sense. However, disingenuous bureaucrats in the Finance Ministry have designed the borrowing options in a manner so as to make it unviable for the States. Under option one, the loan will be available at low interest rate and there won’t be any burden of servicing on them but this covers only 40 per cent of the shortfall. So, they will be forced to think of option two.
Under this option, States can raise a loan for the full amount of the deficit i.e. Rs 2,35,000 crore but the Centre won’t facilitate this. They will have to borrow from the market at a higher rate. No additional FRBM limits for these borrowings will make them less credible, thereby adding to the cost of raising them. Adding salt to injury, States will have to bear interest cost from their own resources as the cess pool will only pay for the principal amount. The Centre should stop this skullduggery. It makes no sense to make a distinction between a shortfall arising from the GST implementation or the pandemic. Whatever may be the cause, the fact remains, there will be deficit of Rs 2,35,000 crore in the cess pool and all of it needs to be addressed. The States should get to borrow this amount from the “special window” at a low interest rate and the cost of amortising it (principal plus interest) must be funded from the cess pool. The cess on demerit products will have to continue beyond 2021-22 till such time the loan-related liabilities are fully cleared. However, this will require that States refrain from pursuing their demand — made before the 15th Finance Commission — for continuing with compensation for three more years (beyond 2021-22) as that will jeopardise the chances of servicing this loan. Meanwhile, both the Centre and States should endeavour to remove all void in GST implementation to achieve the desired buoyancy in tax revenue, thereby obviating the need for continuing with the compensation mechanism.
(The writer is a New Delhi-based policy analyst)