Saturday, September 22, 2012

Vodafone Again

With a new dispensation in North Block’s  all important revenue department, the Finance Ministry has in flurry started a long overdue  move to try and get in more Moolah by closing old high value cases like the Vodafone one.

After a five-year slugfest in courts that produced an adverse verdict for the revenue department, the government tried to undermine the effect of the verdict through a 50-year retrospective amendment of the Income tax Act. The move rattled foreign investors and raised serious questions about the notions of fair play and India's respect for court verdicts.

The case arose over the revenue department's move to gouge out $2 billion in taxes from a $11.2 billion deal between two overseas entities - Vodafone International Holdings, a Dutch subsidiary of Vodafone Plc, and Hong Kong-based Hutchison Whampoa and its associate firms.

On Friday, Vodafone India chairman Analjit Singh met finance minister P. Chidambaram, fuelling speculation that a rapprochement was imminent.

The latest initiative from North Block suggests that an old truce offer, which was made about a year ago, has been revived. Under the terms of this offer, Vodafone will have to pay the original tax without any penalties or interest, which the government had threatened to invoke by treating it as an assessee in default. The tax payout could work out to Rs 8,000 crore instead of the Rs 11,000 crore initially demanded, or the Rs 20,000 crore which the government had at one stage threatened to seek.

Chidambaram has asked expenditure secretary Sumit Bose to take over the crucial revenue department to tone down the fulsome rhetoric of its previous secretary who was insisting on the implementation of the general anti-avoidance rule (GAAR). This is a new-age tax measure that developed countries in the west have started to experiment with to stop foreign investors from using elaborate corporate structures and a fund trail passing through a number of tax havens to minimise tax payouts in the country where the income originates. The move to introduce GAAR from April next year had spooked foreign investors who were considering opening ventures in India.

Sources say revenue officials made a strong case that letting Vodafone off the hook would affect a number of other cases. These include the Idea Cellular-ATandT deal, SABMiller's buyout of a 100 per cent stake in Foster's India, and General Electric's sale of its majority stake in Genpact in a $500 million deal.
They argued the total notional loss  to the exchequer may well be in tens of thousands of crores of rupees, something which could well roll into another major controversy, especially if an activist Comptroller and Auditor General took up issues with the government on this.
The government needs to mop up Rs 10.75 trillion in direct and indirect taxes and with the economy going through a slowdown, it’s not yet certain whether tax targets will be met.

The other problem was that the Government had passed a law amending Section 119 of the Income
Tax Act and to repeal it, the move would have to come up before Parliament where the government could well be pilloried for first asking for this all important change and then for seeking to repeal it in a move which could be interpreted to help one single company.

Vodafone which obviously is a long term player in the Indian market which has proved extremely lucrative for it, now seems to favour coming to some kind of a peace deal with the government and has recently said it would consider making a provision against the legal risks of its Indian tax liabilities. The British telecom giant has plans to invest upto $ 4 billion in new telephone licences which are to be auctioned.


Saturday, September 15, 2012

Manmohanics is Back

Manmohan Singh is back as `Salman Khan' aka `Tiger' !*
Manmohanics is finally back. On Friday night, a cabinet headed by prime minister Manmohan Singh, the original reforms man, decided to allow foreign direct investment into India's $ 600 billion retail market, albeit with riders and limited to willing states,.

It also agreed to let power exchanges sell stake to foreign owners, allow foreign airlines to buy into Indian carriers, hike FDI levels in non-news broadcast services and disinvest in 4 blue-chip public sector firms which could rake in about $ 2.5 billion.

Hit by charges of sleeping on the job and of ushering in an era of policy paralysis, Singh’s cabinet, which earlier this week cut subsidy on diesel, by hiking price of the auto-fuel and reduced supply of subsidised coking gas, decided to gamble that a wave of reforms would be too many for recalcitrant allies to take on.

The prime minster, who is credited with having introduced the first big burst of economic reforms in the early 1990s ( an early burst of import-export reforms in the early 1980s by then finance minister Pranab Mukherjee is believed to have helped build the stage for his big leap), is believed to have been keen these decisions should be passed and passed in one shot to dispel notions that his government did not have the belly to take hard-nosed decisions and to kick-in an economic climate where Indian and foreign investors would be enticed to invest.

Especially as India’s GDP growth had slowed down from over 9 per cent a few years ago to just over 5 per cent in the last quarter and a threat from global rating agencies of marking India out by giving it the dubious distinction of having its credit rating downgraded to that of junk bonds.

While the Trinamool Congress which boycotted the reform agenda cabinet meet, was busy sending a 72 hour ultimatum for a roll back of diesel prices, the Congress led coalition decided to risk her and another key ally Samajwadi party’s ire by going ahead with FDI in retail.

The idea seems to be that the government will bow down later to Mamata and roll back diesel price hike by 20-25 per cent or increase the number of subsidised cooking gas cylinders allowed per family, letting her claim victory, while going ahead with the bouquet of reforms. ** 

Friday, September 14’s decision will allow foreign retailers like Walmart, Carrefour and Tesco to take up to 51 per cent stake in large format departmental stores, which Indian officials have dubbed multi-brand retail, but will be limited to states which have agreed to allow them. As yet some 11 states and union territories including Delhi, Maharashtra, Assam, Haryana, Andhra Pradesh, Uttarakhand, Rajasthan, Manipur and Jammu and Kashmir.

"The series of policy decisions announced by the Government today signal that India is on the move (and) they send out a clear message to the global investor community that the Government is committed to taking forward next generation economic reforms,”  said an exuberant Sunil Bharti Mittal, who has a tie-up with US giant retailer Wal-Mart.

However, the reform burst did not come just because of a desire to attract investments and check a slowdown in the economy. Many analysts saw this as an attempt to cash in on a period when elections were not on the anvil. The next round of state elections are in Gujarat in November-December. Nearer to that date, the Congress led government will have to go back to being populist and not reformist.

Earlier suggested rules of limiting foreign owned retailers to cities with 1 million plus population have been junked, allowing state governments to decide which cities to allow retailers entry into. However, new terms which ask retailers to invest 50 per cent of funds in back-end infrastructure such as cold chains and processing plants in rural areas have been brought in, making the retail proposition attractive to any state with large agricultural production.

West Bengal does happen to be the largest producer of rice, vegetables, fish and pineapples and second largest producer of potatoes in the country and accounts for about 10 per cent of edible oil produced in the country. However, potatoes often sell at as low as Rs 2 a kg at farm market in the state, while they retail at over Rs 20 a kg in most metropolitan cities and at Rs 10 a kg in Calcutta.

Farmers in West Bengal as in other parts of the country rarely benefit from their huge surpluses the way they would have if middlemen could be eliminated from the supply chain and retailers buy directly from farmers. Commerce Ministry officials hope that big states like West Bengal, Tamil Nadu and Uttar Pradesh will be forced to change tack on foreign retailers once they see the direct benefit to their large farmer communities. 

The reforms burst, is expected to be followed by a cut in interest policy rates or a cut in the cash reserve ratio, the amount banks have to keep with the Reserve Bank, despite inflation still ranging at over 7.5 per cent. The RBI it is believed will be told that the government is making sincere efforts to cut subsidies and hence borrowings and this should give the central banker room to manoeuvre on interest rates. ^

But in all this flurry of grand reforms – one little economic logic does not seem to be working out. New jobs and thence fresh demand needs to be generated to make the old economy to jump to new rates of growth.

* The picture taken from The Telegraph newspaper, is a spoof based on the Bollywood Movie `Ek tha Tiger' (Once there was a tiger) where actor Salman Khan plays the role of a Bond-style super-agent, nicknamed `Tiger'. Here Dr Singh is shown as the new `Tiger'.
** At the end of a week after this was written, a `deal' on partial roll-back did not happen after both sides hardened stands and Mamata hit out accusing the Congress of trying to cover up scams such as Coalgate and of tapping her cell-phone. This seemed to be proverbial Rubicon and the Congress decided to call her bluff and let go of her and her party from the coalition in favour of more pliable allies such as Mayawati's BSP.
^ Three days after the article was written - The RBI stuck to its stand on not lowering interest rates, but it did cut the CRR, pumping in some Rs 170 billion or $ 320 billion into the marketplace, thereby encouraging banks to lower lending rates.