📰 PMLA will need more changes
•India will have to make money laundering an explicitly standalone offence to upgrade its compliance ahead of the on-site mutual evaluation by the Financial Action Task Force (FATF), which is due in November-December 2020.
•Among the key recommendations of the FATF, an international body that sets global standards for fighting illicit finance, is that money laundering be made a standalone offence.
•Despite several amendments, the Prevention of Money Laundering Act (PMLA) remains a predicate-offence-oriented law. This means a case under the Act depends on the fate of cases pursued by primary agencies such as the CBI, the Income Tax Department or the police. The latest instances are the verdicts in the 2G spectrum and Aircel-Maxis cases by the CBI courts, in which the money laundering angle probed by the Enforcement Directorate fell apart.
Karnataka case
•On the issue of attachment of assets, however, the Karnataka High Court, in a 2016 judgment, appreciated the agency’s stand that money laundering was a standalone offence in view of Sections 5 and 8 amended in 2013, read with the definition of ‘property’ in Section 2(1)(v) of the Act.
•The Enforcement Directorate is empowered to investigate the financial aspects of those crimes, as defined under the other penal laws, which are listed in the PMLA schedule.
•The first FATF mutual evaluation of India was done in 2010 when the body expressed satisfaction with the measures taken by the country. However, in the same breath, the FATF highlighted, in its 256-page report, a number of lacunae in the then extant legislation, for which it suggested changes. Since then, a range of laws have been amended.
•After analysing PMLA provisions, the FATF recommended that “legal measures are taken to allow for confiscation of the money laundered as subject of the ML [money laundering] offence and which is not contingent on conviction for the predicate offence [stand-alone ML offence].”
•The report said: “The predicate offence conviction condition creates fundamental difficulties when trying to confiscate the proceeds of crime in the absence of a conviction of a predicate offence, particularly in a standalone ML case, where the laundered assets become corpus delicti [concrete evidence of a crime] and should be forfeitable as such.”
📰 Mandate and allocations
The terms of reference of the 15th Finance Commission raise questions about constitutional propriety
•It is not without reason that the presidential terms of reference (ToR) of the Fifteenth Finance Commission have raised questions, and the recent conclave of Finance Ministers of the southern States to discuss contentious issues in the ToR is only the beginning. In the months ahead more debate on this is likely. But the line by the media that this conclave was about concerns over the directive to use population data in the ToR from the 2011 Census, and not the 1971 Census that was used earlier, is an exaggeration.
•To be fair, the meeting was called to discuss all contentious issues. Of course, for the southern States the issue of population was a point of concern and provided a common meeting point for the Ministers. But this was not the only area.
Using population data
•Conceptually, general purpose transfers to States by way of tax devolution and grants are meant to enable them to provide comparable levels of public services at comparable tax effort. Public services have to be provided to the current population and not just the population of either the 1971 Census or the 2011 Census. The earlier Finance Commissions were issued the directive to use population data of 1971 based on a parliamentary resolution.
•In fact, the Thirteenth Finance Commission expressed its frustration when it said: “We are bound by our ToR to take into account population figures for the States based on the 1971 Census” and assigned 25% weight to the factor. The Fourteenth Commission, after examining various factors to represent demographic changes, chose population figures of 2011 and assigned 10% weightage in addition to the 17.5% weightage given to the 1971 population data. The ToR for the present Commission could have been silent on which population figures should be used and avoided a controversy. In any case, from the perspective of economic objectives, there is no justification in using 1971 population data as a factor in the horizontal distribution of funds. From a political perspective, the use of 1971 population data will result in losers and gainers.
Fiscal federalism
•States need to debate a number of contentious issues in the ToR which affect the very structure of fiscal federalism. These include: asking the Commission “to examine whether revenue deficit grants be provided at all”; considering “the impact of [the] fiscal situation of the Union government of substantially enhanced devolution by the Fourteenth Finance Commission, coupled with continuing imperative of the national development programme including New India 2022”; looking at the conditions that may be imposed by the Central government while providing consent to States when they borrow under Article 293(3); asking the Commission to propose measurable performance-based incentives to States in respect of a number of areas such as the implementation of flagship schemes, progress towards replacement rate of population growth, a control or lack of it in incurring expenditure on populist measures; and finally, promoting ease of doing business.
•It must be noted that issuing directives and guidelines to the Finance Commissions has been done even in the past and there are cases of States taking serious objection to such directives. Although the basic ToRs of the Commission are laid down in Article 280 of the Constitution, guidelines and directives are given by the Union government under clause: “any other matter referred to the Commission by the President in the interests of sound finance”. However, the ToR of the Fifteenth Commission raise questions about constitutional propriety and has implications for the federal fabric of the nation itself.
•Take, for example, the suggestion that the Commission may examine whether the revenue deficit grants should be given at all. The very objective of Article 275 is to enable the Commission to give grants to offset post-devolution gaps between normatively assessed revenues and expenditures. If the Commission takes this suggestion seriously, it will have serious ramifications for States with genuinely large resource gaps.
National plans
•Never before in the history of the country has a Finance Commission been asked to review the recommendations of the previous Commission on the grounds that it gave “substantially enhanced devolution”. It has been clarified several times that the Commission had to include the grants for State Plan Schemes in its devolution. Furthermore, it desisted from giving discretionary and sector-specific grants including those for the environment.
•Analysis shows that the increase was just about 2-3% of the divisible pool. Nudging the Commission to leave larger fiscal space for implementing national development programmes under New India 2022 is to ask it to leave more funds for making further intrusions into State subjects. The ToR seek to reduce the role of Article 275, which is a legitimate channel for grants, and asks the Commission to leave it more fiscal space to expand grants under Article 282, which is questionable.
•Asking the Commission to take into account the performances in implementation of various Central schemes is equally contentious. The Seventh Schedule of the Constitution assigns the respective functions in terms of Union, State and Concurrent subjects. It is ironical that the Union government has been intruding into State subjects through Central schemes by forcibly using fiscal space. Performances must be built into the implementation of schemes and not into the tax devolution formula. It must be noted that devolution of taxes to States is not a charity; it is their right. As pointed out by the Sixth Finance Commission, “It is misleading to speak in terms of redistribution of resources between the Centre and States. It will be more appropriate to view the problem as one of distribution of resources as between the subjects coming constitutionally within the competence of the Centre and those coming within the purview of States. The resources belong to the nation and they should be applied at points where they are needed most.”
•Although it has by now become customary to issue guidelines, those issued this time raise questions of constitutional propriety. The ToR of the Ninth Finance Commission had raised considerable disquiet among States when it was asked to adopt a normative approach. The Chairman of the Commission had to allay their apprehensions in his letter to all the Chief Ministers saying: “It is the Commission’s prerogative to adopt such approach and method as it considered fit and appropriate on subjects covered by (a) and (b) of Article 280(3) of the Constitution. In view of the Presidential notification, however, the Commission would consider, inter alia, adopting a ‘normative approach’ wherever appropriate in the interest of sound finance. But by doing so, the Commission would apply a uniform, just and equitable yardstick both to the Centre and States.”
•The ToR of the present Commission raise even more serious issues of constitutional propriety and, hopefully, States will safeguard their turf to preserve the federal fabric of the country.
📰 What demonetisation did to tax collections
It has sharply lifted tax buoyancy and ushered in many new return filers into the income tax net
•The argument about whether demonetisation was good or bad for the economy refuses to die down even a year after the event. Former RBI Governor Raghuram Rajan took potshots at it in a recent speech.
•While one can endlessly debate, with very little data, on whether the ban on high-value currency notes dealt a body blow to terrorism, corruption and counterfeiting, one area in which its impact can be quantified with data is tax compliance.
•In the last sixteen months, there has been a lot of premature analysis on India’s tax compliance metrics based on sporadic data points cited by the Finance Minister and tax officials. But with the deadline for FY17 return filings ending on March 31, official data on direct tax collections for FY17 and FY18 is available. This makes an objective analysis possible on what demonetisation did to India’s tax base. The news is mostly good.
Better collections
•India managed a second consecutive year of strong growth in its direct tax collections in FY18. Net collections (gross mop ups minus refunds) increased by 17.1% in the just concluded fiscal year, to Rs. 9.95 lakh crore.
•This was after a 14.6% increase in the mop ups in FY17. It should be noted that income tax rates have largely stayed put in the last couple of years, with only minor increases in the surcharge and cess components.
•Now, compared with the first two years of the NDA rule, the last two years’ numbers are very healthy. In FY15 and FY16, India’s direct tax kitty witnessed growth of just 8.9% and 6.9%.
•But seen from a historical perspective, a 14% or even 17% annual increase in direct taxes isn’t extraordinary for the Indian economy.
•For instance, in fiscal year FY14 (under the UPA government), direct tax collections rose 14.3%. In FY11, they had expanded 18%. Clearly, these numbers were achieved without any tinkering with high-value currency notes.
•So how would we know if direct tax collections have really revved up post-demonetisation?
Higher buoyancy
•Well, a good way to gauge this is to evaluate direct tax buoyancy. Given that direct taxes both for individuals and businesses are levied as a percentage of their annual income, it is reasonable to expect taxes collected to march in step with GDP growth. This is what tax buoyancy measures, by dividing the growth in tax collections for each year by the nominal GDP growth. Higher the number, the better the compliance. Applying this measure to India shows that tax buoyancy has indeed picked up post-demonetisation. In the seven years from FY08 to FY14, direct tax buoyancy hovered between 0.5 and 1.1 times, averaging out at 1 for the period.
•Put simply, every additional rupee of nominal GDP growth for India yielded an equivalent new rupee of direct taxes for the Centre. After hovering at 1.0 until then, in FY15 and FY16, direct tax buoyancy unaccountably slumped to 0.8 times and 0.6 times.
•But since the note ban, buoyancy numbers have perked up quite a bit. Direct tax buoyancy doubled from 0.6 times in FY16 to 1.3 times in FY17 and accelerated further to 1.7 times in FY18.
•(For these computations, we used the latest available nominal GDP estimates from the CSO, using the new series from FY12).
•This is good news indeed, because India’s nominal GDP growth has been below historical levels in the last two years, due to low inflation. If nominal growth revs up, and the new-found tax buoyancy holds up, the Centre’s direct tax coffers could fill up even faster in the coming years.
More filers
•Not all of the direct taxes flowing into the Centre’s kitty come from citizens willingly paying up their tax. The direct tax collection numbers put out by the Central Board of Direct Taxes (CBDT) include mandatory deductions by way of the much-hated tax deducted at source (TDS).
•It typically accounts for a third of the collections each year. A good way to measure voluntary tax compliance, and to strip out the impact of TDS, is to look at the number of Income Tax (IT) returns being filed by individuals and businesses each year.
•In FY14, just before the NDA swept into power, 3.79 crore IT returns were filed by taxpaying entities (this includes individuals, small businesses and companies). Over the next two years to FY16, this number crept up to 4.36 crore. That’s a 15% addition over two years.
•But the latest CBDT data (provisional) tells us that the number of filings zoomed to 6.84 crore by the end of FY18. That’s a 57% increase in the last two years (2.48 crore new filings).
•As IT returns are typically filed for the previous financial year, the filings at the end of FY18 would fully capture the demonetisation impact. Yes, one can still debate if it was the act of demonetisation that sparked this sudden good behaviour.
•The NDA government has made anti-evasion a top policy priority and has been systematically plugging loopholes in tax laws in its last few Budgets. In the post-note ban period, the CBDT has also been on an overdrive to show good collection numbers, unleashing a flurry of notices, warnings and raids on non-filers.
•But without looking the gift horse on tax filings too closely in the mouth, one can still cheer this new found improvement in tax compliance. After all, getting non-filers to step into the parlour is the first step to expanding the income tax net. Once a citizen begins to file returns, a contribution to direct tax collections must inevitably follow. Better compliance would eventually provide headroom for the Centre to prune down income tax rates.
The outdated 3%
•Income tax payers in India have always felt a sense of victimhood because they make up such a small sliver of the population, with dozens of memes and jokes dedicated to this ‘unfortunate’ 3%.
•But recent numbers on India’s tax base suggest that this figure is now quite outdated. In the latest Budget, the Finance Minister pegged India’s current direct tax base at 8.27 crore taxpaying entities. The official definition of ‘tax base’ sweeps in all assessees who have filed their IT returns in the last three years, and adds in those who paid TDS.
•Now, the Indian population featured 25 crore households as per the last Census. If one assumes agricultural households to make up about 40% of that number, (given that agricultural income is exempt from tax) potential tax-paying households (or entities) can be guesstimated at about 15 crore. A tax base of 8.27 crore makes up well over half of this number.
Tax base estimate
•A ballpark estimate of the individual taxpayer base is equally reassuring. Of the estimated population of 132 crore, the working population is estimated at about 40% (52.8 crore). If half of the workforce is assumed to be engaged in agriculture, that’s a potential tax base of 26 crore individuals. With individual income tax payers already topping 6 crore, it is clear that a fourth of those who owe income tax are already paying tax.
•Detractors will point out that, though India’s tax base has grown at a furious pace in the last couple of years, the CBDT has mostly netted small fish, as its tax collections haven’t kept pace with the number of newbies joining the tax system. That is true. CBDT data does show that newbie return filers have mostly joined the bottom of the pyramid where tax rates are nominal or nil.
•But hopefully, as India’s income levels improve over the next few years and it transitions into a middle-income economy, these new return filers will graduate into the higher tax slabs and cough up their due share of taxes.
•This should pave the way for the government to loosen up on its anti-evasion measures and prune its sky-high income tax rates.
📰 ‘Robust exports can help India grow at 8%’
India can benefit as China’s shipments are becoming expensive: ADB’s Sen Gupta
•India can achieve more than 8% growth rate in a sustained manner if it takes steps to revive investments and make exports competitive, said Asian Development Bank Economist Abhijit Sen Gupta.
•Efforts will also have to be made to streamline agriculture marketing and improve supply chain. This is the area where there is scope for more reforms. “Right now, the investment and exports drivers are really not firing... Once those two engines fire up India can sustainably grow at 8%,” he said.
•In its Asian Development Outlook, 2018, the ADB said it expects India’s growth to pick up to 7.3% in current fiscal and accelerate to 7.6% in the next financial year.
‘Marginal player’
•Referring to exports, he said India was still a “marginal player” in global trade and there was a lot of potential to increase exports. As Chinese exports are becoming expensive because of rising wages, India can reap benefits by improving competitiveness. “We need to improve our Ease of Doing Business and state of infra to benefit from trade and be better integrated into the value chain,” Mr. Sen Gupta, economist at the ADB India Mission, said.
•On whether India can achieve double digit growth, he said: “it is not unfeasible. But, I don’t know if you can do that over a longer term period given the state of infrastructure and regulatory policies. Lot more reforms would probably be needed for that.” On investments, he said credit to infrastructure and industry is picking up, which is a positive sign.
📰 Modi’s visit could see pacts on migrants, Ayurveda centre
The Prime Minister is to hold two bilateral meets with May, prior to participating in the CHOGM forum this week
•Efforts to give new impetus to the Commonwealth and U.K.-India bilateral relations will get under way on Monday, as a Commonwealth business forum kicks off ahead of the Commonwealth Heads of Government Meeting (CHOGM) that Prime Minister Narendra Modi will attend in London.
•The Commonwealth Business Forum, which will bring together business leaders and political figures from across the Commonwealth, would explore ways of raising intra-Commonwealth trade from around $525 billion in 2015 to around $700 billion by 2020, alongside looking at some of the contemporary challenges and opportunities around technology, skills, and protectionism.
•The CHOGM meet is to take place alongside Mr. Modi’s bilateral visit to the U.K., in which a range of issues — including immigration, technology cooperation and education — will be in the frame.
Diaspora event
•Ahead of the CHOGM meeting — on Thursday and Friday — Mr. Modi will arrive in the U.K. for the bilateral visit, during which he will hold meetings with Prime Minister Theresa May, Prince Charles and the Queen, alongside a diaspora event in central London. The latter will be on a smaller scale compared to the massive event during his last bilateral visit and will involve a speech followed by a question and answer session, with questions taken both from the audience gathered and via live link-ups from across the world.
•The two meetings with Mr. Modi held by Ms. May will be seen as part of efforts by Britain to emphasise its eagerness to forge closer ties with India, amid growing scepticism and concern about Britain’s ability to secure lucrative post-Brexit trade deals.
•A memorandum of understanding on the return of illegal migrants to India, previously agreed and relating to an issue that Britain has repeatedly raised, will be formally signed. Other agreements set to be reached include one on the setting up of an Ayurveda research centre in the U.K. However, it remains to be seen whether any moves will be made to respond to Indian concerns about Britain’s immigration regime — which India has repeatedly stressed is key to a future relationship.
Johal’s detention
•Also to be seen is in what format Britain raises issues around the treatment of religious minorities in India and the detention of Jagtar Singh Johal, a British citizen who remains in custody in India after being arrested last year. British Ministers have said both these issues would be raised during Mr. Modi’s visit, though insisting that these would be made privately rather than through “megaphone diplomacy”.
•With an Indian diaspora of around 1.4 million, Mr. Modi’s visit will attract much attention. A number of rallies — both to protest and support Mr. Modi — are being planned during and ahead of the visit. They include one by the South Asia Solidarity group, which will be holding a protest outside Downing Street over attacks on religious minorities, Dalits and the media. The U.K. Sikh Federation will also hold a protest which is likely to revolve around Mr. Johal’s detention, while another one is to be organised by Nazir Ahmed, a Member at the House of Lords. Mr. Ahmed on Monday is likely to raise a question on the “peaceful resolution” to conflicts in Kashmir, Punjab and other northeastern States.
•Another protest will take place by the group ‘Action for Elephants’, calling on the Indian government to enforce laws on protecting temple elephants. A rally in support of Mr. Modi is also due to take place outside the diaspora event venue on Wednesday.
📰 ‘NPAs, high debt level to ebb in 6-9 months’
‘Resolutions under IBC to quicken’
•It may take at least three quarters before the twin balance sheet problem — of banks saddled with bad loans and highly leveraged corporates — gets resolved, industry body Assocham said on Sunday.
•It also said the process of resolution of the companies under Insolvency and Bankruptcy Code (IBC) reference would gather pace in the coming months.
•Twin balance sheet problem refers to the stress on balance sheets of banks due to non-performing assets (NPAs) or bad loans on the one hand, and heavily indebted corporates on the other. “Our own assessment is that it would take another six to nine months before the banks see revival of confidence to lend afresh as they would then see reasonable amount of their NPAs get unlocked through a resolution.
‘Sales growth expected’
•“Besides, with sales growth expected to witness a revival, the ability to service debt would improve considerably,” Assocham said in a statement.
•Assocham Secretary General D.S. Rawat urged regulator RBI to relax norms proposed in its February circular on the revised framework for resolution of stressed assets, claiming these were harsh both on the banks as also borrowers.
•“These norms would aggravate rather than solve the problem of NPAs,” he said.
📰 Reimagining governance
Getting the Centre, States and district administrations to work in tandem is crucial
•The 115 Aspirational Districts Programme (ADP) conceived by Prime Minister Narendra Modi is radical not because this is the first time that a government in India has focussed on India’s most backward districts but because the exercise envisages a serious re-imagination of government and governance, and deepens cooperative federalism. The programme is informed by the failures of the past and therefore has a more contemporary vision of how public services are best delivered to those who need them most.
Aspirational districts
•The 115 districts were chosen by senior officials of the Union government in consultation with State officials on the basis of a composite index of the following: deprivation enumerated under the Socio-Economic Caste Census, key health and education performance indicators and the state of basic infrastructure. A minimum of one district was chosen from every State. Unsurprisingly, the largest concentration of districts is in the States which have historically under-performed such as Uttar Pradesh and Bihar, or which are afflicted by left-wing extremism such as Jharkhand and Chhattisgarh. Moving forward, the areas that have been targeted for transformation are: education, health and nutrition, agriculture and water resources, financial inclusion, basic infrastructure and skills. Deliberately, the districts have been described as aspirational rather than backward so that they are viewed as islands of opportunity and hope rather than areas of distress and hopelessness. Attitudes and narrative matter for outcomes.
•There is no financial package or large allocation of funds to this programme. The intent is to leverage the resources of the several government programmes that already exist but are not always used efficiently. The government doesn’t always need to spend more to achieve outcomes but instead to spend better. Many schemes of the Centre have flexible spending components which permit autonomy at the level of local governments but these are seldom used in practice due to controlling Central and State machineries.
•Achieving success in this programme requires three tiers of government, the Centre, States and district administrations, to work in tandem. There is a structure in place. Each district is assigned a prabhari (in-charge) officer from the Centre (of additional secretary or joint secretary rank) and a prabhari officer from the State (of the rank of Secretary to State government) who will work in cooperation with the district administration. It is necessary for the Centre and States to be involved because not all decisions can be taken at the level of district. For example, if there is a shortage of teachers in a local school or a shortage of health personnel in a primary health centre, it needs the State capital to act, possibly through transfers of personnel from over staffed areas. On financial inclusion, the full cooperation of banks is necessary and only the Central government has leverage over them. But most crucial is the District Magistrate or Collector who is familiar with the challenges of his or her geography and has considerable power to implement government schemes. Partnership is not something which comes easily to the upper tiers of government, which are used to dictating terms to lower tiers.
•The spirit of cooperation needs to be supplemented by a culture of competition. This programme takes the principle of competitive federalism down to district administrations. Each district will be ranked on the focus areas which are disaggregated into easily quantifiable target areas. So as not to bias the rankings on historical achievements or lack of them, the rankings will be based on deltas or improvements. The rankings will be publicly available.
•India’s long history of a dominant state apparatus has led to an entrenched perception that government is the sole actor capable of and responsible for the transformation of India. The ADP has opened its door to civil society and leveraged the tool of corporate social responsibility to form partnerships which will bring new ideas and fresh energy with boots on the ground from non-government institutions to join the “official” efforts. The force multiplier on outcomes from such participation is potentially massive.
Smart data
•One area which is being given serious attention is the collection of quality data on a real-time basis. Too often in India, data collection is delayed or lacking in quality which ends up leading to policymakers shooting in the dark. With continuously updated data dashboards, those running the programme on the ground can alter strategies after accurate feedback.
•In a way, the ADP is a big pilot programme from reorienting how government does its business of delivering development. A decisive shift in the paradigm of governance is likely to finally fulfil the many broken promises of the past.
