Suddenly, it is raining reforms in India. The government has shoveled upon the economy a heap of reforms – from scrapping the retrospective taxation act, to the bouquet of measures to help the ailing telecom industry, to strengthening the bad bank system and extending the PLI scheme to more industries.
It all began on 5 August, when the government brought in the Taxation Laws (Amendment) Bill, 2021, effectively meant to scrap the ‘retrospective taxation’ that had become a sore point in India’s relationship with investor countries. The Bill made it clear that any tax demand raised for an overseas transaction that substantially involved Indian assets, made before 28 May 2012, would stand nullified. The Bill became Law on 13 August 2021, after the President of India gave his ascent.
Former Finance Minister, late Pranab Mukherjee’s stand that a major transaction involving billions of dollars not being taxed anywhere is a travesty of justice but impractical. For the government to draw upon it the right to amend tax laws retrospectively and introduce a tax that took effect many years back, made India look like a country that would change the rules in mid-game, at its whim. Litigation prolonged, passing through appellate courts, the Supreme Court and international arbitration.
NATIONAL EMBARRASSMENT
What ensued was a national embarrassment. After India was held by the International Court of Justice to be in violation of investment treaties, Cairn Energy, a company stung by the retrospective taxation, got the Tribunal Judiciaire de Paris to freeze 20 residential real estate assets owned by the Indian government in France. Cairn also moved for enforcement of the ICJ award in several countries, identifying Indian assets worth about $70 billion, attached for its arbitral award of $1.2 billion.
A similar case was that of Vodafone’s, where the government applied a tax retrospectively for a transaction that took place abroad with the underlying assets being in India.
Clearly, the Modi government was waiting for this to happen, because all this provided the perfect context and justification to do something that was morally and practically correct. Two predecessors of Finance Minister Nirmala Sitharaman, Arun Jaitley and P Chidambaram, could not do this. It is just as well the government did it. “It was important to do away with the tarnished image of the Indian tax regime at a juncture where post-pandemic recovery was the need of the hour,” observes Vasanth Rajasekaran, an international law expert with law firm Phoenix Legal. If this zephyr of reform happened in August, there were more to come in the following month.
LOUDER WILL RING TELECOM BILLS
At last the government came to the aid of the moribund telecom sector! Among the measures announced was a correction of another silliness—counting non-telecom income as ‘adjusted gross revenue’ (AGR). This was illogical, because the concept of revenue-sharing came in the wake of spectrum auctions. Now, if a company was to share revenue with the government in lieu of upfront spectrum fee, obviously, only the telecom-related income ought to be counted. The government wanted to include all income, including non-telecom-related ones. This was again a sore point with the telecom companies, which lost the game at the Supreme Court. Many experts have commented that the apex court ought to have been more pragmatic than being narrowly technical by looking into only the covenants of the agreement. (How the telecom companies signed an agreement with such an iniquitous clause is a mystery—though their stand is that they could not negotiate hard while dealing with the government).
In doing away with the sticky issue of AGR dues, the government has been pragmatic, because with the overhang of dues of Rs 1.47 lakh crore, the success of the upcoming 5G spectrum auctions had come under a cloud. Now that bad air has been cleared.
The government has also given a moratorium of four years to telecom companies to pay their spectrum dues, though the companies would have to pay it all with interest after four years, with a possibility of a part of the dues to be converted to equity. The conversion to equity is good because it rides in tandem with another measure—allowing 100 per cent foreign direct investment in Indian telecom companies.
Vodafone, which is on the edge of bankruptcy, will get a lease of life, though these measures may not assure its survival. According to a report of Goldman Sachs, Vodafone could save Rs 16,200 crore, but this also means that the company would have to pay around Rs 65,000 crore plus interest from 2025. Since telecom companies are estimated to need Rs 30,000 crore to buy 5G spectrum and invest in infrastructure, the moratorium does little beyond offering a breather.
GOOD NEWS ON BAD BANK
After the gift hamper to telecom, the government came up with another reform, which did not catch as much public attention, but one that is indeed a big one – sovereign guarantee to the ‘bad bank.’
In India, asset reconstruction companies—entities that buy bad loans from banks and make a profit by pursuing the recoveries—have consistently failed. Simple reason: why would the ARC succeed where a bank could not? ARCs, typically, have very little money of their own, so they pay for the bad loans in terms of ‘security receipts,’ which are sort of IOUs. Ultimately, if the ARC cannot effect recovery, it cannot pay.
But now, under the IBC regime, recoveries are faster, though in recent times, the hair-cut the lenders have had to take has been unconscionably high.
The government has announced a Rs 30,600-crore sovereign guarantee to the bad bank, the National Asset Reconstruction Company Ltd (NARCL), for five years. This will enable NARCL to take away Rs 2 lakh crore of large NPAs from the banking system, leaving the banks with more room to lend to an economy that is on an upswing and needs financial lubrication.
With the Rs 30,600 crore, the government guarantees 15 per cent of the bad loans that NARCL will buy; the company will give IOUs for the rest. Since most banks have already provided for over 80-85 per cent of the loans, they can pocket the 15 per cent and clean up their books. NARCL will have to rely on the IBC regime to make recoveries; as and when recoveries happen, it will share the proceeds with the banks.
This is again a for-now kind of measure. The real answer to the bad loans problem lies in a robust debt recovery system. The IBC started off well, with the lenders recovering around 90 per cent (in some cases 100 per cent) of loans, but has since slipped, presumably because the borrowers have learned to game the system. (There are instances when the Committee of Creditors prefers to settle for a lesser amount, under the pretext of some technicality, for reasons that are left to one’s imagination.)
Anyway, the sovereign guarantee has put some wind into the sails of banks, for now.
PLI FOR AUTO AND COMPONENTS
And then came the production-linked incentive scheme (PLI) for the automotive sector. While the incentive outlay of Rs 25,900 crore is lower than the earlier proposed Rs 57,000 crore, it is still expected to engender fresh investments of Rs 42,500 crore and incremental revenues of Rs 2.3 lakh crore over the five-year period from 2022-23, the year the scheme becomes effective. The scheme covers both vehicles and components and there are prescribed eligibility conditions. For example, OEMs should have global group revenue of Rs 10,000 crore and net worth of Rs 3000 crore and must make a minimum investment of Rs 2000 crore over the 5-year period. Component manufacturers should have global group revenue of Rs 500 crore, net worth of Rs 1500 crore and must invest at least Rs 250 crore over the 5-year period.
The recently-announced PLI scheme, along with the earlier ones, should support electric vehicle penetration and indigenization of components.
Clearly, the government has opted for supply-side economics to push growth and resisted the temptation to key-up demand, which would have required a bigger outlay and perhaps called for the inflationary measure of printing currency notes. This is a sensible approach. Attracting manufacturing into India at a time when China is a bit weak is more important than putting a little cash into the hands of people. The PLI for mobile phones has yielded heartening results and has made India a major manufacturer of phones. – Kautilya
