MAY 02, 2019

By Naresh Minocha, Consulting Editor

MODI Government "has been able to take many decisions which are historic and has ushered in a comprehensive and fundamental transformation". Such decisions include Demonetisation and GST, according to BJP Manifesto for Lok Sabha polls.

Prime Minister Narendra Modi himself continues to defend twin disruptive decisions. He rubbishes reports of their negative impact in his speeches & interviews.

The Opposition, on the other hand continues to bemoan the problems resulting from these decisions. The Opposition stance is aptly reflected in a recent headline: "Rahul Gandhi says NYAY (minimum income guarantee scheme for poor) will revive the economy hit by demonetisation, GST".

Amidst these contrasting positions, how do citizens capture apolitical picture of impact of twin decisions on economy? Leave aside independent studies, reports of multilateral institutions & credit rating agencies and authoritative opinion of experts?

The answer lies in researching and analyzing what companies think about it quietly. The companies share their perceptions about economic outlook forthrightly before the international investors. They do so miserly before domestic investors, taking advantage of weak disclosure requirements in India.

A glance through corporate disclosures to foreign investors in 2019 show that companies are indeed worried about the negative impact of both demonetization and goods and service tax (GST).

They have also voiced concern over uncertainty about likely impact of income tax-related General Anti-Avoidance Rules (GAAR), retrospective taxation and other taxation risks.

Their respective disclosure of pending litigation with Government even under repealed laws such as Foreign Exchange Regulation Act (FERA) is shocking. All such ground realities don't figure in the ‘ease of doing business' (EoDB) rankings that the Government flaunts.

Consider what Vedanta Resources Finance II PLC (VRF), a subsidiary of UK-based Vedanta Resources Limited perceives about lingering disruption caused by demonetisation. Mind you, Vedanta group had generously funded BJP in 2014 Lok Sabha polls.

VRF says: Demonetization "reduced the liquidity in the Indian economy which has significant reliance on cash. These factors had resulted in reduction of purchasing power, and alteration in consumption patterns of the economy in general. While the comprehensive and long-term impact of this currency demonetisation measure cannot be ascertained at the moment, there has been a slowdown in the economic activities in India from which the Indian economy is recovering".

In its offering circular dated 11th April 2019 issued to foreign debt/bonds investors, VRF adds: "Given the demonetisation impacts a majority quantity of the cash currency in circulation, such a slowdown can adversely affect the Indian economy, in turn affecting the operations of Vedanta's business in India".

This concern is echoed by Singapore-based Ascendas Property Fund Trustee Pte. Ltd. It serves as Trustee-Manager for Ascendas India Trust (a-iTrust). It is engaged in owning income-producing real estate in India. Its main customers are companies that need office space. It forms a venture capital undertaking (VCU) for owning and operating each business park and other similar properties in India.

In its debt OC dated 16th April 2019, Ascendas says: "In November 2016, the Government of India carried out demonetisation, which had an immediate effect of decreasing the liquidity of cash in India. The impacts of the demonetisation on India's economic growth, credit demand, credit quality, liquidity and interest rates is uncertain. The long term effects of demonetisation on the relevant VCU's business are uncertain. The relevant VCU cannot accurately predict the effects thereof on its business, results of operations, financial condition and prospects".

Hear now GMR Hyderabad International Airport Limited. In its OC dated 3 rd April 2019 issued to global debt investors, GMR says: "India's GDP recently has contracted as a result of high inflation, political conditions and the demonetization and introduction of the goods and services tax regime. Though we are unable to determine if these recent conditions in India will adversely affect our results of operations in our current fiscal year, any sustained decrease in India's GDP or lack of improvement in domestic political conditions could have an adverse impact on our business and results of operations going forward".

JSW Steel Limited, has, however, sound relatively more optimistic. In its OC dated 11th April 2019, JSW observes: "As India recovers from the twin shocks of demonetisation and the goods and services tax (GST) implementation, India's steel demand is expected to move back to a higher growth track. Steel demand will be supported by improving investment and infrastructure programs. Stressed government finances and corporate debt weighs on the outlook".

Let us now focus on GST, a work in progress project that looks like rolling stone in perpetuity. Listen first to Cayman Island-registered ESR Cayman Limited, a logistics & realty company with business in India too.

As put by ESR: "The implementation of the new GST regime has increased the operational and compliance burden for Indian companies and has also led to various uncertainties. Any future increases and amendments to the GST regime may further affect the overall tax efficiency of companies operating in India and may result in significant additional taxes becoming payable".

In its multi currency debt OC issue dated 24th January 2019, ESR adds: "Our business and financial performance could be adversely affected by any unexpected or onerous requirements or regulations resulting from the introduction of GST or any changes in laws or interpretation of existing laws, or the promulgation of new laws, rules and regulations relating to GST,as it is implemented. Further, as GST is implemented, there can be no assurance that we will not be required to comply with additional procedures and/or obtain additional approvals and licenses from the government and other regulatory bodies or that they will not impose onerous requirements and conditions on our operations".

GMR has shared a similar apprehension. It says: "The introduction of a comprehensive Goods and Services Tax ("GST") in India may affect the competitiveness of MRO (Maintenance, Repair and Overhaul) services in general in India as compared to regional competitors".

IndusInd Bank, in its billion MTN OC dated 27th March2019, observes: "The GST is expected to increase administrative compliance for banks".

This perception is shared by other companies from the financial services sector.

Public sector enterprise (PSE)Housing and Urban Development Corporation Limited (HUDCO), for instance, has its own tale to tell on GST.

In its Rupee-denominated medium term notes (MTN) issue dated 19th March 2019 offered to foreign investors, HUDCO says: "GST has increased tax incidence and administrative compliance for financial and banking companies. The Issuer has had to make changes in its IT infrastructure and other internal process to adapt to the requirements of GST. To ensure compliance with the requirements of the GST laws, the Issuer has also had to allocate additional resources, which has increased its regulatory compliance costs and diverted management attention. Such increase in the Issuer's compliance requirements or in the Issuer's compliance costs may have an adverse effect on its business and results of operations."

Another PSE, NTPC Limited, has also suffered due to the manner in which GST has been implemented.

In its USD 6 billion MTN issue dated 20th December 2018, NTPC pointed out: "Since no GST is levied on the generation and supply of electricity, the GST paid on various goods and services procured by the Issuer for the generation and supply of electricity are not available to the Issuer as input tax credit and therefore it has become costs to the Issuer. Further, the Issuer's import of supplies for mega power projects was exempted from indirect taxes such as import duties, but now such import is subject to the GST, resulting in higher costs in business operations".

As for GAAR, the common refrain goes like this: If GAAR provisions are invoked, the tax authorities would have wide powers. With this, they can deny tax benefits or a benefit under a tax treaty. In the absence of any precedents on the subject, the impact of the application of these provisions is uncertain.

The GAAR provisions came into effect on 1 April 2017. They target tax arrangements declared as "impermissible avoidance arrangements". Their main purpose or one of the main purposes is to obtain a tax benefit. Such arrangement has to be detected through at least one of four tests.

The tests are 1) creates rights or obligations which are not ordinarily created between persons dealing at arm's length; 2) results, directly or indirectly, in misuse, or abuse, of the provisions of the IT Act; 3) lacks commercial substance or is deemed to lack commercial substance, in whole or in part; or 4) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

GST in flux, GAAR and many other tax reforms in the pipeline have all contributed to tax uncertainty. Political class should realise that tax stability is as much important as political stability, which is currently pitched before voters.

As noted by Bank of Baroda in its billion MTN OC dated 28th February 2019, "As the taxation system is going to undergo a significant overhaul, its long-term effects on the Bank and other banks are unclear as at the date of this Offering Circular and there can be no assurance that such effects would not adversely affect the Bank's business, its future financial performance and the trading price of the Notes".

If India's GDP has to grow at sustained 10% per annum, then it must strive for a stable, simple and credible tax regime.