Visionary Budget but devil lies in the implementation

The government has provided a long-term vision, avoiding any "big-bang" reforms but the devil will be in the details of the implementation, say Business Standard experts while assessing the Budget for.

Creating soft infrastructure: Shardul Shroff 

The imprint of the lawyer in the finance minister in the Budget 2015-16 is writ large. 

The proposals for bankruptcy law reform, extension of the definition of financial institutions to non-banking financial companies (NBFCs) registered with the Reserve Bank of India (RBI) and having an asset size of Rs 500 crore and above for the summary debt recovery, merging of the forward markets commission with SEBI, and amending the Government Securities Act and the RBI Act, creation of the resolution corporation pursuant to the Indian Financial Code, the creation of a public procurement law consistent with the UNCITRAL model, the introduction of Public Contracts (resolution of disputes) Bill to streamline the institutional arrangements for resolution of such disputes, the regulatory reform law that will bring cogency of approach across various sectors of infrastructure and the setting up of exclusive commercial divisions in various courts in India, are all welcome steps for creating the soft infrastructure that a country like India needs for moving forward, and easing "doing business in India". 

The establishment of commercial divisions in courts needs careful structuring as most high courts do not have original side jurisdiction. 

The establishment of such divisions in civil courts may not engender the confidence required for speedy resolution of disputes. The simultaneous introduction of amendments to the Arbitration and Conciliation Act ,1986, is a vital cog for speedy resolution of commercial disputes. 

Expertise and knowledge of commercial law is a sine qua non for resolution of commercial disputes and the selection of members of arbitral tribunals should be from a younger pool, and not just retired judges or bureaucrats. 

A robust bankruptcy law reform will require corporate licensed liquidators. The receivership of a bankrupt asset or the appointment of a liquidator needs a far greater dynamic approach requiring a confluence of skills of management, secured creditors, merchant bankers, solicitors and advocates, bankers and warehouse keepers and security agencies for preservation of assets etc. 

The institution of Official Liquidator attached to the Company Court has failed spectacularly as there is no incentive to expedite disposal in bankruptcy proceedings, or to turn around the assets and find new promoters with the requisite financial and managerial abilities. 

The law must secure that "wrong doers are not in control" to avoid the siphoning of assets and funds which takes place when the writing is on the wall. 

Principles of malfeasance, misfeasance, fraud and nonfeasance must be well defined, and the pursuit of wrong doers must be as strictly dealt with as the finance minister has proposed for black money. 

Early warning signals and tracing of assets should be the norm and not the exception. 

Financial institutions and auditors must be obligated and bound by their inspection and audit reports of stocks and machinery, and must be held responsible if they are not vigilant. 

The sophistication required for comprehensive bankruptcy resolution must be worked simultaneously with international "vulture funds" who are adept at disposing the carcasses of bankrupt companies. 

The Public Contracts (resolution of disputes) Bill must carefully define public contracts, and should not destroy the freedom and autonomy of the parties to select their arbitrators, nor introduce mandatorily the governing law of India in all public contracts where the counter party is foreign-owned and controlled or a foreigner. 

The ability to resort to international commercial arbitration is paramount, and should not be interfered with as it would dis-incentivise foreign investments into India. 

The opinion rendered by the Supreme Court of India in Presidential Reference No 1 of 2012 has a significant bearing on the contours of the proposed public procurement law. 

The consistency of regulators entrusted with tariff decisions having an impact on public services such as utilities like ports, airports, electricity generation, distribution etc needs to be addressed to create confidence among foreign investors and domestic entrepreneurs when PPP is the order of the day. Clearly, expert drafting is required to implement the vision expressed in the Budget. 

TAKEAWAY
Amendments to the Arbitration and Conciliation Act, 1986, is a vital cog for speedy resolution of commercial disputes

Budget 2015: Complete Coverage

Shardul Shroff
Managing Partner, Amarchand Mangaldas

 

A challenge for corporate India to be GST-ready: Satya Poddar 

Resistance to change and any major transformation is in the DNA of the Indian polity as reflected in the poetic mood of the Finance Minister (FM) during his Budget speech, when he refers to 'Mushkil yeh hai ki bagh mein ab tak, kaante kai purane hain'.

It aptly sums up the challenges he faces in 'enabling ease of business and movement towards GST'. 

The last few months have witnessed an intense debate on whether GST can be implemented in India, given the nature of our federation. 

The Centre, on its part, has taken the first step by tabling the Constitutional Amendment Bill (CAB) for GST on December 19, 2014. The FM has now reaffirmed that GST would be rolled out by April 1, 2016. 

He has proposed abolition of education cesses while rationalising the basic excise duty and service tax rates at 12.5 per cent and 14 per cent, respectively. This is in contradiction to the goal of a common tax rate for goods and services. 

A minor pruning of the negative list of services has been done, (e.g. access to amusement facilities and certain entertainment events), but a large number of services still remain outside the service tax net. 

The current indications are that the proposed dual GST system may be subject to multiple rates, with the standard rate being in the range of 18-20 per cent. 

The intentions are there, but there are miles to go before GST sees the light of day. At a minimum, the CAB needs to be approved by Parliament, a task made difficult by controversies such as the Land Acquisition Bill. It also needs ratification by legislatures in at least 50 per cent of the states. 

Following ratification of the CAB, the GST Council has to be created, laws and procedures to be drafted and approved, administrative structures put in place and issues such as taxable base, GST rates and exemptions ironed out between the Centre and states.

The Budget, while reaffirming the Government's plan to implement GST on April 1, 2016 does not provide any road map. While it is recognised that the design of the GST can only be decided by the GST Council, the FM would have done well to outline the steps being taken for its timely implementation. 

Given the opacity of timelines and rules and procedures, it would be a challenge for corporate India to be GST-ready. GST is an opportunity of migrating to a world-class indirect tax compliance system, one that is fully automated, allows proper assessment of business impacts and determination of tax liabilities, and is flexible to accommodate changes in the tax base, rates and rules and procedures. 

In the absence of clear laws and procedures, businesses would need to anticipate and develop alternate scenarios for the GST design and assess its impact on their accounting and compliance frameworks, cash flows, organisational structure and IT systems. 

Retrograde proposals such as continuation of the Central Sales Tax (CST) in the form of the additional 1 per cent tax in the state of origin will add to the challenges of becoming GST-ready. 

The governments are planning to extend the 1 per cent tax on stock transfers (also referred to as consignment transfers), which will compound the challenges. Under this provision, the tax would apply to all inter-state movement of goods, e.g. raw materials and parts from the source states to the state where the production plant is located, and of the finished goods from the plant to the mother depot and onward to distribution centres. 

Even service providers would suffer this tax when they transfer parts and supplies to their central warehouse and remove them for repairs and maintenance work at the client site. 

Exclusion of real-estate and petroleum sectors from GST purview will also lead to denial of input credit in these sectors and lead to cascading. Compliance under GST would require full automation of the accounting and tax reporting procedures. 

All interaction with the Goods and Services Tax Network (GSTN) would be electronic. The transition needs to be managed with teams for coordinating activities of different workstreams, anticipating risks and potential roadblocks, and ensuring timely completion of all tasks. 

Given the manner in which the GST implementation is progressing, the FM faces the daunting task of 'aur bahut phool khilane hain'. 

TAKEAWAYS

Businesses would need to develop alternative scenarios for GST design

Assess its impact on accounting and compliance framework

Satya Poddar
Tax Partner, Policy Advisory Group, EY 

 

A road map for five years: Koushik Chatterjee

The run-up to the Budget every year is dramatic, with markets predictions, policymakers and economists debating what's best for the finance minister to follow. This year was no exception. 

To be fair, this government has been working on a few key themes since they assumed office - the Jan-Dhan Yogna for the poor, Skill Building to develop long-term capability and human capital, the 'Make in India' programme for manufacturing competitiveness, 'Digital India' to leverage technology and a taxation regime that is non-adversarial. 

The Economic Survey had cautioned against big-bang reforms and emphasised on the need for a steady turn in the economy. The setting for the Budget was perfect - the first full Budget of the new government, low international energy prices providing the tailwinds for an energy importing country like India, consumer inflation levels trending down and a largely stable rupee. 

The FM took the opportunity to lay the blueprint of the long-term vision of the government and also mentioned that the reforms and policy changes would be introduced through the year. 

The Budget speech had two clear elements - first, it has given specific targets to where this government would like to take India in the next five to seven years. Second, the government has started giving shape to the plan towards building India for the future. 

In the given context, I would like to pick five announcements in the Budget that deserves attention and analysis. First, the idea of monetising the gold inventory that Indians have. 

This is certainly a very innovative way to provide a revenue flow in the hands of those having gold through a transparent mechanism. If implemented properly, this can potentially reduce volatility in gold prices. 

Second, the FM has provided the concept and framework for a social security system in India - if implemented thoughtfully, it will ensure that a significant size of the population will be able to plan for a dignified old age. 

Third, the announcement regarding the intention to revamp the Bankruptcy Code and replace the SICA and the BIFR. A more progressive and speedy bankruptcy management process would enhance India's capital productivity of already invested assets and eventually lead to a better and more accountable credit standards in the banking sector. 

Fourth, the government's determination regarding black money was evident when the FM laid out the framework for the new law. I believe, an effective law with a strong deterrent in the regulatory set-up has the potential to plug the proliferation of black money in the country and increase the tax to Gross Domestic Product ratio significantly. 

Finally, the government has now clearly demonstrated its principle for a predictive and stable tax regime by announcing the plan for reduction of the corporate income tax over the next four years and making GAAR a prospective legislation. 

India has an opportunity to position itself not only as an attractive economy for capital investments, but also as a tax-friendly and tax competitive destination for domestic and overseas investors. 

On the specific provisions of the Act, as one goes through the fine print, there are some elements that will add to the tax burden, for example, the corporate surcharge and the service tax amendments. 

That's the difficult balancing act that the FM had to carefully tread between long-term strategic directions versus short-term optimisation. The government's focus and resolve on developing the social and physical infrastructure in urban and rural India will be critical for the country's long-term growth and development. 

Efficiency of the economy and long-term competitiveness of India would depend on the availability of world class infrastructure and trained human capital. While there is a lot to do in the coming years, this Budget provides a realistic direction to the path forward. Over the next year, the country and the world will wait to see the implementation of the plan. 

TAKEAWAYS

A speedy bankruptcy process would enhance India's capital productivity of already invested assets

An opportunity to make India tax-friendly and tax competitive destination

Koushik Chatterjee
Group Executive Director (Fin & Corp) Tata Steel
 

Extend provisions to onshore black money: Somasekhar Sundaresan 

The finance minister has outlined specific agenda for legislative clean-up. These are areas that need focussed and nuanced attention. 

That he even dealt with them is heartening - pointing as it does to policy attention. One specific area of legislative clean-up is the law governing public sector banks, which have the largest market share in banking in India. 

A Bank Boards' Bureau, only as a step towards the investment and holding company for public sector banks is a crying need. 

The recommendations of the PJ Nayak Committee that reviewed corporate governance in banks were among the very first policy recommendations received by the FM when he took charge. 

The report even has draft legislation for the Bureau and amendments to banking regulation law, in an environment after the bank investment and holding company takes over government stakes in public sector banks. 

This sector has been repeatedly capitalised with taxpayer money and deserves urgent attention of Parliament. 

Legislative amendments to treat non-banking financial companies of a material size as "financial institutions" under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is also long overdue. 

When multiple players in a financial system are in the same business of lending, treating them differently when it comes to recovery of amounts lent, merely on the basis of the licence under which they lent is unfair and inexplicable. 

A bank that loses money in a loan can enforce and recover under this law but NBFCs who lent to the same lender have to rely on general law. 

To clean this up, is logical. More is needed. A comprehensive bankruptcy code has yet again been referred to. Particularly since it was mentioned in the context of "sick companies", it is hoped that such law would cover all sectors. The FM has revealed the contours of the new proposed law seeking to tackle black money. 

A reading of these features warrants pause and deeper contemplation. First, there is an absolute focus on "foreign assets" even when it is well known that there is more black money onshore India than offshore. 

The same provisions could well apply to onshore too. Second, it is not the lack of law that is a problem, but the lack of effective administration and enforcement. 

For example, the apparently fictitious investors in Sahara have not been investigated for ages by authorities whose job it is. 

Instead of authorities under the Prevention of Money Laundering Act, 2002, officials of the Securities and Exchange Board of India, which is meant to protect investors, have been in action. Third, stringency of law alone cannot deliver virtue. 

One must remember that a great part of Indian unaccounted assets held abroad comprises monies sent out right under the nose of the draconian Foreign Exchange Regulation Act, 1973, which even "presumed culpable mental state".

 Cleaning up legislation is potentially tougher than cleaning the Ganges. It is time to move on from focusing just on land acquisition, insurance and retail. 

TAKEAWAYS

New black money law focuses on foreign assets
Bankruptcy code proposed may cover all sectors

Somasekhar Sundaresan
Partner, JSA, Advocates & Solicitors 

Little recognition for the needs of fund-starved judiciary: M J Antony 

The good news for the legal sector is that allocations for the Law and Justice Ministry appear to have gone up significantly. 

The total revenue capital in the new budget is Rs 3,523.65 crore (Rs 35.23 billion), while it was Rs 1,931.53 crore (Rs 19.31 billion) last year and Rs 1,859.45 crore (Rs 18.59 billion) the year before. These include both Plan and non-Plan expenditure. 

The total expenditure on the ministry is envisaged as Rs 2,960 crore (rs 29.60 billion), up from Rs 1,086.13 crore (Rs 10.86 billion) last year, and Rs 1,854.48 crore (Rs 18.54 billion) earlier. 

However, a large chunk of this will go towards election expenses, which come under the ministry. 

While in 2013-14, the provision under this head was Rs 203 crore (Rs 2.03 billion), and Rs 381 crore the next year, the present budget puts the figure at Rs 1,555.40 crore (Rs 15.55 billion). Thus, there is not much recognition of the needs of the fund-starved judiciary. 

A serious problem facing the judiciary is lack of infrastructure. On this count, the Budget seems to have taken a step backward. Computerisation of district and subordinate courts gets a mere Rs 2 crore (Rs 20 million), whereas in the previous year, it received Rs 29.87 crore (Rs 298.7 million) and the year before, Rs 38.89 crore (Rs 388.9 million). 

It is not explained why computerisation got such low attention, when it is vital to speed up case disposals and reduce corruption at the lowest level. Another negative aspect of the proposal is the lowering of funds under the head 'Development of Infrastructure Facilities for Judiciary in the states'. 

While the last Budget provided Rs 845.40 crore (Rs 8.45 billion) for this essential segment, it has been cropped to Rs 500 crore (Rs 5 billion) for some inexplicable reason. There is a separate head under 'Administration Services' for infrastructure for the judiciary. 

However, this has been left blank for the moment. The National Mission for Judicial Reforms received a boost from Rs 5.69 crore (Rs 56.9 million) to Rs 212.29 crore (Rs 2.12 billion). 

Tribunals dealing with tax get extra attention. The fund for the Income Tax Appellate Tribunal has gone up steeply from Rs 56.16 crore (Rs 561.6 billion) last year to Rs 146.05 crore (Rs 1.46 billion) in the new Budget. 

The Appellate Tribunal for Foreign Exchange gets a marginal rise in fund to Rs 9.32 crore (Rs 93.2 million). The International Centre for Alternative Dispute Resolution has received a boost from Rs 5.69 crore (Rs 56.9 million) to Rs 212.29 crore (Rs 2.12 million). 

Since arbitration is recommended as the way to cheap and speedy settlement of commercial disputes, this could encourage corporates to take this surrogate route to end disputes. Meanwhile, Supreme Court gets Rs 155 crore (Rs 1.55 billion), Rs 5 crore (Rs 50 million) more than last year. 

Finance Minister Arun Jaitley has recognised that disputes arising from public contracts took long to resolve, and the process is very costly. So he has proposed to introduce a Public Contracts (Resolution of Disputes) Bill to streamline the institutional arrangements for resolution of such disputes. 

He has also acknowledged the failure of the Sick Industrial Companies Act and Bureau for Industrial and Financial Reconstruction which have failed in achieving speedy relief in bankruptcy. 

His promise to bring in a comprehensive bankruptcy code, a relook at regulatory arrangements and regulation of non-banking financial companies will be keenly watched. 

TAKEAWAYS

Allocation for Law and Justice Ministry up
Computerisation has got low attention

Budget 2015: Complete Coverage