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Budget 2019: Modi’s Legislative Agenda: Mere Packaging Or A Sincere Effort?

Bring back black money. Reduce non-performing assets in the banking sector. Adopt Goods and Services Tax. Remove red tape and ambiguity in rules to make way for prompt decisions. The Narendra-Modi led Bharatiya Janata Party government’s election manifesto had promised all this by way of its legislative agenda. Four-and-a-half years later, has it delivered?

BloombergQuint spoke with experts to understand if and how far the needle has moved on these promises through the Insolvency and Bankruptcy Code, GST, anti-black money and money laundering legislations, and ease of doing business efforts.

IBC: Disciplined Promoters, Bolder Lenders

As of September, 1,198 stressed companies have been admitted for insolvency. Of these, 52 have seen a resolution while 212 have been liquidated. The recovery for financial creditors has been between 20 and 100 percent.

Numbers aside, the significant shift has been in the creditor-borrower relationship, Nikhil Shah, managing director at Alvarez & Marsal, said. The promoters, Shah said, have visibility of their future cash flows and usually can see signs of stress 6-12 months in advance.

Rusty Power Plant Points to $38 Billion Wave of India Bad Debt (Photographer: Prashanth Vishwanathan/Bloomberg)
Due to IBC, the promoters now know that if they don’t generate sufficient cash flows to meet their obligations; they will lose control of their company, their equity value and their reputation. As a result, promoters are acting much quicker to try to refinance debt obligations, reschedule them, recapitalize the companies, sell assets to generate cash and work on improving operating cash flow. By recognizing the problem much earlier, they are able to preserve much more value.
Nikhil Shah, Managing Director, Alvarez & Marsal 

For lenders, the insolvency law has brought in a new culture of payments being made on time, MR Umarji, former legal adviser at Indian Banks’ Association, said. But creditors are using IBC in very extreme cases since it involves a lot of cost—a resolution professional needs to be appointed and the company has to be run as a going concern which again involves cost, he added.

There’s another reason why financial creditors are choosing to avoid IBC. It involves recovery of not only your own claim but settling all other claims as well. So if a creditor has a valuable security, the better course would be to take possession of that security, sell it and recover your loan.
MR Umarji, Former Legal Adviser, IBA 

Shah pointed out that IBC has also impacted the mindset of lenders. Instead of rescheduling, lenders have to either find a solution outside of IBC or they are directed by the RBI to resolve stressed assets through the insolvency process. Additionally, the insolvency law has provided creditors with significantly more negotiating power with promoters to say that if the capital structure isn’t restructured in a sustainable manner that they will lose control, he added.

War Against Black Money

Criminalising, confiscation, forfeiture and heavy taxation are four ways propagated by jurists to tackle economic wrongs, Amar Gahlot, former income tax officer and consultant at Lakshmikumaran & Sridharan, explained. In the last four years, he said, the government has made progress on all these fronts.

Starting 2014, the government has taken several legislative and policy measures to tackle the black money and money-laundering menace:

  • Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 which gave a compliance window for a limited period to persons who have undisclosed foreign assets. The tax department received 638 declarations with undisclosed foreign assets amounting to Rs 3,770 crore.
  • Again in 2015, the Foreign Exchange Management Act, 1999 (FEMA) was amended as well. This change said that if any person held foreign exchange, foreign security or any immovable property outside India in violation of FEMA, the equivalent value of property in India can be seized.
  • A year later came the Income Declaration Scheme through the Finance Act which offered a 45 percent tax rate on undisclosed income. Cash and other assets worth Rs 65,250 crore were declared under this scheme.
  • Soon after, to address black money menace in real estate, the Benami Transactions (Prohibition) Amendment Act, 2016 was notified. The scope of transactions which can qualify as benami was increased. Earlier, it only included transactions where a property is transferred to one person for a consideration paid or provided by another person. The expanded definition now also includes transactions made in a fictitious name, cases where the owner is not aware of or denies knowledge of the ownership of the property, and instances where the person providing the consideration for the property is not traceable or is fictitious.
  • The Prevention of Money Laundering Act, 2002 (PMLA) was amended as well to widen the definition of proceeds of crime. This has allowed enforcement agencies to attach properties—in India or abroad—equivalent to proceeds of crime. Additionally, corporate frauds under Companies Act, 2013 were included in PMLA.
  • And then came the Fugitive Economic Offenders Act, 2018 to deter economic offenders from evading the Indian law by remaining outside the jurisdiction of Indian courts.
  • Finally, the income tax law was amended last year to increase the rate of tax on unexplained cash credit, investment, expenditure from 30 percent to 60 percent, with an additional penalty of 10 percent.
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Among all these measures, the Black Money Act proved to be most unsuccessful. That’s because it provided immunity against certain laws like the Foreign Exchange Management Act, 1999 (FEMA), Income Tax Act but not from securities laws or the Indian Penal Code, Gahlot pointed out. But, for instance, the Enforcement Directorate has made full use of changes to FEMA by attaching properties in several high-profile case, he said.

In the last two years, the ED has attached properties worth Rs 42,000 crore. Of this, 75 percent has been confirmed by the adjudicating authority. Under the Benami law, provisional attachment worth Rs 3,500 crore has been made in 900 cases. The income tax department has also created 24 dedicated Benami Prohibition Units.

The steps which the government has taken to address black money menace will show their full effect only after a few years, Mohit Saraf, senior partner at L&L Partner said. To say that all these measures are a way of managing perception would be incorrect, he said.

When was the last time you saw high-profile businessmen giving up their passports and leaving the country?
Mohit Saraf, Senior Partner, L&L Partner

Ease Of Doing Business: Rankings Vs Reality

The most obvious claim to fame for the government on this parameter is the jump in India’s ranking from 100 to 77 on World Bank’s Doing Business Report. Not everyone is ecstatic. Some have attributed this jump to weakness in World Bank’s methodology.

But Saraf argued that significant steps have been taken by the government to ensure its ease-of-doing-business objective is met. To name a few, introduction of commercial courts, amendments to the Arbitration Act, changes to the Specific Relief Act are some of the legislative steps that will help businesses, he said.

To elaborate:

  • The Commercial Courts Ordinance came in 2015. It made way for creation of commercial divisions and commercial appellate divisions in high courts, and commercial courts at the district level. These court could entertain commercial disputes of at least over Rs 1 crore but last year, this was reduced to Rs 3 lakh.
  • Through the amendments to the arbitration law, high courts have been given exclusive jurisdiction over international commercial arbitration, arbitral tribunal have got powers to grant interim reliefs and measures.
  • Changes to the Specific Relief Act made specific performance the rule and not an exception, introduced the concept of substituted performance and took away the powers of court to grant injunctive relief in case of infrastructure projects.
  • Provision to curb cheque bouncing were passed last year through amendments to the Negotiable Instruments Act, 1881.

The judiciary too has taken a cue from the government’s efforts, Saraf pointed out.

It’s reflected in the enforcement of foreign arbitral awards in the Unitech case and even Tata-Docomo. This was the same judiciary which has been there for a long time but in the background of these legislative steps, courts have respected enforceability of contracts as well.
Mohit Saraf, Senior Partner, L&L Partner

Legislative efforts are all very well but unless the government works towards removing human interface—bureaucrats, red-tape will continue to bog down businesses, Sreejith Moolayil, co-founder of the health food startup True Elements, told BloombergQuint. Moolayil said that steps like integrating compliance websites, start-up registration for securing intellectual property, and allocation of Labour Identification Number—a one-stop-shop for labour law compliance—has surely helped. But getting licences continues to be a painful process since bureaucrats sitting in the department haven’t given up control to the online system, he said.

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Things can be initiated online, but you still have to visit departments and oil the people to get the final licence. I have personally experienced the same for licencees and approval under Provident Fund, Employees’ State Insurance, Factories Act, FSSAI, pollution control and Weights & Measures. The intention of the government is evident but babus, who continue to be part of the system, want to make sure they are relevant.
Sreejith Moolayil, Co-founder, True Elements

The process of online application and the documentation also needs to be simplified as it’s extremely difficult to get it done without the help of consultants, Moolayil said.

GST: Sincere Effort, Shoddy Implementation

32 meetings. 571 days. Numerous changes. The government spent considerable effort to bring in the Goods and Services Tax, build consensus among states before announcing changes to the law or rates, and be responsive to the industry’s pain points, Rohan Shah, an advocate specialising in indirect tax, said.

The fact that we have a GST law after years of debating is the most impactful thing. We are no longer in the academic phase of just discussing it. Secondly, till date, the means and methods of how the GST Council has worked as a consensual forum irrespective of political affiliations, is again outstanding because never before have we seen this kind of cooperative federalism. 
Rohan Shah, Advocate

But we should’ve been better prepared, both legislatively and administratively, he said. “Just because we’ve introduced a great law doesn’t mean we get the right to fumble our way through it,” Shah added.

The other issue, he explained, is that the government’s GST revenue target is falling short. As per the budget estimates, the monthly target was Rs 1.12 lakh crore but except for the month of October, the collections have been below the Rs 1 lakh crore mark. Shah said there could be primarily three reasons for it: the original estimates were wrong, tax evasion or not enough economic activity to support this nature of collection. “The biggest worry is that as a result of this shortfall, we will again go back to administering tax by revenue targets,” he said.

Police officers check commercial vehicles for customs purposes at the Bhopura checkpoint at the Delhi-Uttar Pradesh border in Ghaziabad, Uttar Pradesh, India. Photographer: Anindito Mukherjee/Bloomberg

The general impression in the industry is that harassment will be lower in the GST regime as the companies will need to deal with only one officer rather than different officers under different laws, Badri Narayanan, partner at Lakshmikumaran & Sridharan, said.

But there could be harassment in the form of audits and assessments in the future once that process starts. However, at the moment, the intervention of GST officers has not been significant expect in cases of tax fraud or evasion.
Badri Narayanan, Partner, Lakshmikumaran & Sridharan 

GST also came with a promise of one nation, one tax but experts say conflicting rulings by the Authority for Advance Rulings has become the biggest danger to that. While the framework is for one nation-one tax, the interpretative mechanism is marring it. “If I have business in three separate states, I could have completely different inputs on my tax liabilities. That is eroding the concept of one nation, one tax,” Shah said.

So, now businesses are looking at compliance and lability state-wise rather than at a national level, he said.