My First Political Rally

This post was originally published on CRI on October 3 2013

http://centreright.in/2013/10/my-first-political-rally-2/#.U5bdjfmSz_g

Standing in the midst of a massive crowd and listening to the chant ‘Modi, Modi, Modi’, I had to pinch myself to believe that I was really attending a political rally and not a rock concert. Frenzied support that Modi evokes has to be seen to be believed. But then this was my first political rally and I was simply overwhelmed. Everything I experienced may be because of my anxiety and excitement to see what it feels like to take my virtual world of social media activism to the real world. Attending a political rally was certainly a tentative first step towards advancing my political activism and crystallising a commitment towards a political ideology.

I come from a conservative middle class family and the only time we were politically engaged was during the elections. My parents regularly exercised their franchise but active association with a political party was something unthinkable. My mother would not have approved such association/participation. Yes #MyMotherToldMe to stay away from the politicians and the people associated with the political parties. The Indian middle class view politics and politicians as outlaws. The lack of political involvement of middle class is largely due to the perceived criminalisation of politics over the last few decades.

I will not focus on what was said in the rally and who said it rather I would like to share what I had expected and what I eventually experienced.

We reached venue well before time and felt the sense of excitement in the air. There were many youngsters walking in groups, walking with one or two friends to the venue. One could notice palpable excitement on the faces of those who came to attend. Security at the venue and on the roads to the venue seemed adequate. There were announcements about the number of entry/exit gates, medical facility, and water/sanitation facility available at the venue. Post 11:00 am; there was real surge in the number of people around us. We had to squeeze in to accommodate further people.

We walked from Rohini West Metro station to Japani Park and on the way learned that Congress had played put up some posters with their pet ‘Feku’ remark. There were many passionate NaMo supporters with me on the way to venue and I learned that one particular supporter spent whole night making sure all posters are back in its place -Dustbin.

I must admit there was a little apprehension in my mind whether crowd will turn up. Whatever sting operation media might have carried out, I saw the crowd building up from 9:00 am till 11:30 am. We were supposed to sit in the VIP area, but the whole group decided to take seats with the general crowd as the view was better and it was also near to the main stage.

We as a society need to learn to understand the safety standards. Climbing on pole might make good photo ops and serve well for the smart word play like “Pole-rising”, but certainly this is not safe and it should not be allowed in any rallies like these.

If anyone has not been to a public rally of NaMo, he/she have to believe what others express about the kind of support he gets across different sections of society, age group and genders. I have seen grand-son and his grandfather walking out of rally passionately discussing NaMo’s speech. There were females/ house wife listening to NaMo passionately, father with his son and young couple all could be seen enjoying atmosphere of optimism. People from all walks of life were there to be a part of NaMo’s magic and wanted to make their presence felt in the history.

Considering number of people attending the rally I understand why my parents would never approve to go such rally.  Even if they permit me, I am sure they will never approve my sisters or my wife or my son joining me. I personally think political rallies in general are not Women/Children/Senior citizen friendly. Expecting females to be cramped along with other males to listen political rally is too much to expect, but I was proven wrong in Delhi.

There were many passionate females there to prove me wrong. NaMo highlighted importance of women power and importance of their participation in decision making his recent speech. I am sure women participation will increase manifold, if they are assured of a safe environment. Timing of the rally was very crucial, since rally was in morning, many women felt safe to come down at rally even alone.

There is absolutely no intention of being preachy, but I am just sharing the apprehension of middle class voters (I am one of them), who don’t participate in the political process of our country and attending political rally is just part of the process. People came to the rally, next BJP have to make sure that people also come to voting booth and cast votes in its favour. If this objective needs to be achieved, engagement with people has to go to the next level. I hope BJP accommodates following in its future political rallies.

• Clear announcement with respect to number of entry and exit gates (these announcements were made at Delhi.)
• A basic facility such as fans, sanitation facility, drinking water, appropriate security and friendly volunteers to make sure public order is maintained. I have seen everything there at Delhi; I hope same standard will be maintained for all future rallies.
• Different sections for women, Senior citizen, Citizen with special needs. I hope this will increase women participation.
• With such large number of people turning up to listen NaMo, it gives tremendous opportunity to get feedback/expectation from new government. BJP IT cell has been doing great job. This new initiative would give them range of issues and expectation from people would like them to address.

#Agenda2014 No more license raj in upstream oil and gas sector

 This post was originally published on CRI on 2nd December 2013
http://centreright.in/2013/12/agenda2014-no-more-license-raj-in-oil-and-gas-sector/#.U5bdC_mSz_g

“The Licence Raj was a result of India’s decision to have a planned economy where all aspects of the economy are controlled by the state and licenses are given to a select few. Up to 80 government agencies had to be satisfied before private companies could produce something and, if granted, the government would regulate production” Source Wiki

Though Licence raj is a rarity now, it has assumed various forms in certain industries. Oil and Gas, both upstream and downstream, is an example of an industry which has continued to be at mercy of government.

“If you are an entrepreneur, would you like to get in to a business where Government(Worst it is not even government it is the regulator) appoints two nominees to a management committee (highest decision making body) where one member will be chairman of the committee and other will be deputy chairman?”

Yes! Above business condition is the norm of the day. Oil and Gas sector is yet to see light which can free them from government intervention in day to day business affairs. For the benefit of other readers who don’t know intricacies of Oil and Gas Upstream sector, here is the snapshot of how this business operates all over the world.

Oil and Gas Upstream business background

Exploration of Oil and Gas is considered to be the high risk and high return business; traditionally there has always been a scarcity of the resources and the investments due to the risk involved. Joint Ventures between different corporates are formed to share risks, resources and investments.

Sometimes one of the partners takes the responsibility for the day-to-day running of the joint venture. This partner is referred to as the “Operator”. The operator is responsible not only for the efficient running of the joint venture but also for the accounting for the venture and reporting the profit or loss to the other partners.Partners who do not operate the venture are sometimes referred to as “Non-Operating” partners. Although most Oil and Gas upstream players carry out their business operations using joint ventures, only in early 1990s Joint Ventures came in to use in Indian Upstream industry. Let’s quickly look into the brief history of Oil and Gas Upstream industry.

Indian Upstream Industry history

Indian Oil and Gas was dominated by Government corporations who are often called as ‘National Oil Company’ (NOC). ONGC and Oil India Ltd (OIL) had dominated Indian Upstream sector till 1991. ONGC started as a commission linked to Ministry of Petroleum and Natural Gas and became a Public Sector Corporation in 1994. In 1959 Oil India Pvt Ltd was formed with an equal partnership with Burmah Oil Company (UK) and Government of India. For two decades OIL remained as a Joint Venture company and in 1981 OIL India was nationalised. Till 1990 there was no bidding for exploration of blocks, government of India nominated exploration blocks to ONGC or OIL.

Post 1990 Government of India auctioned off some of the blocks under production sharing agreement. Directorate General of Hydrocarbon (DGH) was set up in 1993. Most of the employees of DGH were/are from ONGC or OIL. DGH was/is supposed to be an upstream regulator, but it has never become a truly independent regulator.

In 1997 New Exploration Licencing policy or NELP was announced. Intention of NELP was to invite international players in domestic market and bring best practice in Indian Oil and Gas sector. NELP regime is based on production sharing contract. India adopted PSC model in order to invite both foreign and Indian companies and to attract investment and latest technology in upstream sector.

Adopting PSC model Government of India thought “PSC model was more progressive than nomination regime as Management committee constituted under it offered suitable forum for regular interaction between government and contractors” Whatever may be good intention behind policy/law, till the time India is not free from cowboy capitalism and phony socialism, all those good policy remains on paper only.

Production sharing Contract existing model and issues associated with it

Existing PSC model has a number of issues associated with it, one being fiscal model that it has adopted to share the profit with the government. Contractor (Operator) was supposed to share the profit with the government once it recovers all the cost from the revenue earned from the sales of Oil and Gas. Ratio of sharing profit was based on an investment multiple. An investment multiple was the ratio of the net cash income earned over the cost incurred. Even though Profit petroleum was the profit share of the government, the essence of this ‘profit sharing’ is the tax on profit.

It is important to draw attention of the reader that it took more than 30 to 40 years with annual revision (tweaking) of Income tax law to come to this stage, where litigation between assessor (Tax department) and assesse has reduced to a large extent. Since Profit Petroleum to be received from operator was in the form of income tax, it was natural to have a disagreement about the cost incurred by the operators/contractors. Operator/Contractors have more reasons to inflate cost to show less profit than to pay profit petroleum share with government.

Policy makers were too optimistic or disconnected with the ground realities thinking that contractors/operators will share profit with government without resorting to gold plated cost to reduce profit.

Role of Regulator

Directorate of hydrocarbon is clearly unequipped and an inefficient regulator to deal with the accounting issues coming out of the calculations of government profit share. Two critical components of profit share were a) Calculation of the ‘Profit Petroleum’ and b) The ‘Cost Petroleum’. Cost recoveries, inherent for the calculation of profit petroleum, makes it necessary for the DGH to actively monitor the expenditure on a regular basis.

A wise man has said “The only thing that saves us from the bureaucracy is its inefficiency”. In order to have a wider say in the decision making, control cost and increase profits, in addition to the role of a regulator, DGH also assumed the role of managing Oil and Gas Upstream Business in India. All production sharing contract signed under NELP regime had more or less following provisions with respect to constituents of the management committee.

• Annual work programme and budget for the exploration phase
• Annual work progress and cost for the same, “offshoot cost monitoring has resulted lot of disagreement between the operating committee and the management committee over procurement procedures.”
• Proposal to surrender or relinquishment of any part of contract area
• Proposal to declare discovery as the commercial discovery.

Last two points has been major point of contention between DGH and Operators/contractors. This is where allegation of cowboy capitalism is often raised against the Operators/Contractors.

Constraints and challenges faced by Regulator

DGH has been staffed with personnel on deputation basis from PSU such as ONGC and OIL India. It has never been able to strengthen its capacity or expertise. This has resulted in administrative burden on the sector as a whole. Considering babu culture in government department in general and DGH in particular, manual system of managing cost approval (Authorization for expenditure, commonly known as AFE), scheduling management of committee meetings, and preparing minute of meetings manually caused delays and it has become increasingly difficult to manage.

To the defense of ‘Management Committee’ headed by DGH, Operator along with the other partner forms ‘Operating Committee’. ‘Management committee’ can only take up subjects and decision points which have been put before it by ‘Operating Committee’. ‘Operating Committee’ cannot take decisions which fall within jurisdiction of management committee. Isn’t it exciting? If not exciting, it certainly creates a lot of deadlock situations. Most of the delays in the projects of the upstream industry are the result of bureaucratic tussles between the operating committee and the management committee.

Relinquishment and Surrender of allotted area

Commercial discovery declaration is within the jurisdiction of the Management committee. No Contractor can delicate their discovery as a commercial discovery and go ahead with the development plan till the time management committee approves. As per PSC terms, the contractors are required to surrender or relinquish contract area allocated to the contractors which are not identified as the part of discovery area.

Surrender or relinquishment of the allocated contract area has been the major source of controversy, it has been alleged that a few contractors (read Reliance) don’t surrender the contract area which are not part of the development plan or the part of discovery area.

Allotment of land for exploration and provision PSC are entangled with complications due to the nature of role DGH plays seating the Management committee. There is no doubt that many of the contractors/Operators didn’t surrender their contract areas which are not part of the discovery, but at the same time, it is important to note that bureaucratic hurdle started long back with the PSC.

Management committee didn’t provide consideration for the deep water exploration and delay caused by lack of technical knowledge with domestic explorer. KG basin has been our (India) first real deep water exploration. Reliance and GSPC both have struggled due to lack of technical know how to complete exploration in deep water.

E and P Industry players has been complaining about long delays in starting of actual work due to approval from different ministries such as Defense, Environment and forest and other state government ministries. Needless to say, delay in getting approval from various government agencies has downstream impact on meeting timeline committed by E and P companies to the management committee. It has been no surprise when some of the foreign players, who relinquished their blocks without going ahead with exploration, found difficult to get around Indian licence raj.

Coming back to the controversy on relinquishment and surrender of allotted blocks, blame cannot be placed solely on the contractors/operators but on various factors such as delay in adoption of Open Acreage Licencing policy (OLAP), resolution of gas pricing issue, removing ministerial level and bureaucratic hurdle posed by different ministries and government agencies.

Gas pricing mechanism and Controversy

Oil/Gas/Mining industry has been governed, since independence with assumption that government is the owner of hydrocarbon/mining products extracted out of mother earth. (This has been challenged recently in the Supreme Court). But in case of RIL vs. RNRL, Supreme Court held that Gas is the property of the nation. We will see the litigation due to these conflicting Supreme Court judgement. Gas pricing mechanism is much linked with how ownership of the mineral rights is conferred. In RIL vs. RNRL supreme court felt “the EGOM decisions, regarding the utilization of the natural gas and the price formula/basis etc. do not suffer from any legal or constitutional infirmities”. This gave legal mandate to EGOM to decide over the Gas Pricing.

There has been a lot of scrutiny over Government of India’s decision to increase gas price from present $4.2 mmbtu to $ $8.4 mmbtu from April 2014. However till March 2014, gas price will be around $6.8. From Oil and Gas ‘Upstream’ companies’ perspective, this policy announcement has put them in the same basket as any other ‘NELP producing Operators’. It is a different matter that most of the opinion makers have concluded that this move by government of India will directly benefit RIL.

Before this policy announcement, there are broadly three pricing regimes for gas in India, One for gas priced under Administered pricing mechanism (APM) and other for the non APM or free market gas.

 Almost all upstream players operating in India prefer to have arm’s length based gas price, may be some decision makers in planning commission/petroleum ministry would be happy to oblige as well. However main hindrance for this policy adoption has been Gas Utilisation policy and objectives set by government of India. Gas consumption is primarily concentrated in Power, fertiliser and LPG sectors.

In principle, Indian Upstream sector incentivise investment so that production reaches optimum levels and all exploitable reserves put to production expeditiously.Well in real world,Reliance Industry is accused of not producing enough to meet India rising demand, because it is not getting right price for production.

For an Upstream company in India, if they are producing Oil/Crude, they can get market price. But if they produce Gas, they have to follow gas price discovery mechanism dictated by government of India.

Mr Anil Jain and Ms Anupama Sen in their paper “Natural Gas in India: An Analysis of Policy” highlighted following conflicting provisions regarding price determination of Natural Gas

Article 19 of production sharing contract prescribe how price of will be calculated. Contract applies to both Oil and Gas; however terms applicable to gas are less flexible than those of oil. The terms of Oil does not include administered allocation policy. NELP assures oil producer of international prices. The only restriction is that Oil must be sold in India. Article 21.3 states that contractor would have freedom to market the gas and sells its entitlement within India.

The government, however, appeared to want to retain some form of control through a gas utilisation policy, as gas continued to have competing demands on its use by state-owned enterprises in power and fertilisers. In order to reconcile these conflicting aims, the government included a general reference to a gas utilisation policy in the NELP Model Production Sharing Contract, but did not issue any formal statement on its right to prioritise allocation. In the absence of a formal clarification, there were differences in perception between the government and private companies on the extent of ‘freedom’ guaranteed under NELP. Eventually, in 2007, faced with calls for clarity, in the seventh round of NELP the government clarified its authority to prioritise the allocation of gas through an amendment to Article 21 in the Model Production Sharing Contract for NELP VII.

The NELP Production Sharing Contract from the seventh round onwards therefore has two conflicting objectives; (1) the assurance of marketing freedom to contractors for the exploration and production of domestic gas, and (2) the prioritised allocation of gas to be carried out through the government’s gas utilisation policy.

Key component of Gas pricing and related controversy is 1) price of the Gas 2) Gas allocation Policy

Report of the committee on production sharing contract mechanism in Petroleum industry has discussed various methods to arrive at the gas price and has also recommended combination two methods 1) Netback price of Indian LNG import at well head of exporting countries 2) Arriving competitive price in India based on prices prevailing at various hubs 3) Average price of this two methods should be adopted as Gas price which will be applicable for all sectors uniformly.

It is important to note that gas production quantity under NELP (Pvt Joint ventures) under 12th Plan is no more than one third of the total gas production, yet this very one third production quantity is driving Gas pricing policy of India.

To summarise, till the time our policy makers don’t bring parity between Oil and Gas price produced in the country, controversy on the Gas pricing will keep popping up every now and then.

Gas Utilisation Policy

Gas Utilisation Policy refers to the system of prioritised allocation which has long influence planning and operations in the main gas consuming sectors, particularly power and fertilisers. In the decade of 1990 the Gas allocation was under bureaucratic control of ‘Gas Linkage committee’. The sector wise allocation and to the region wise allocation was norm of the day. There was no clear allocation policy, decision made by ‘Gas Linkage committee’ were on an ad-hoc basis.

At this time most of the gas was produced by the Public sector undertaking, and sold to public sector undertaking producing fertiliser and power. In 1999 with NELP rounds, Gas Linkage committee lost its relevance to certain extent; they had little control over private producers under NELP.

Even though initial NELP contracts didn’t have restrictions on the administered allocation and price for gas products, NELP VII brought conflicting provisions from the marketing of gas products perspective (conflicting provisions are listed in section Gas price).

NELP D-6 (Operated by RIL) gave rebirth to Gas Linkage Committee in the form of ‘Empowered Group Ministers (EGoM). Difference is earlier it used to be bureaucrats who use to control ad-hoc allocation, now it is controlled by Ministers.

EGoM wants to keep control in their hand on allocation policy and Gas price, but every now and then we hear that marketing of Gas products will be given parity with Oil. Oil does not have administered allocation policy and selling price of Oil is directly linked with international crude price.

Fertiliser sector has been made as one of the most important priority sector however there was little done to make sure Gas actually reach these consumers within fertiliser industry.

Conclusion

Every five year plan had a mandatory section to put emphasis on energy security and how new policy statement will reform the sector. However there is no visible progress made in Oil and Gas Upstream industry. In fact Industry is marred with controversy specifically on Gas pricing issue/Gas allocation. Other ailments such as incompetent regulator and lack of technology available with the current Oil and Gas Upstream players are hardly discussion among policy wonks. I hope new government post 2014 will be able to provide the much needed independence to Oil and Gas Upstream industry and free industry from clutches of Licence raj.

References

1. BHP gives up India oil & gas blocks over delays
2. Ownership of mineral vests
3. Report of the committee on production sharing contract mechanism in Petroleum industry
4. Report of the committee on production sharing contract mechanism in Petroleum industry
5. Natural Gas in India: Analysis of Policy by Anil Jain and Anupama Sen

AAP’s CAG Audit Plan – Another damp squib ?

This Post was originally published on CRI on January 6 2014

http://centreright.in/2014/01/is-cag-audit-another-damp-squib-of-aap/#.U5bcq_mSz_g

“Having a Watchdog is ideal, but when it is barking up the wrong tree, theft cannot be stopped”

 Arvind Kejriwal has been quick to create an impression of delivering on AAP’s promises. Reduction of power tariff was one such move, though it was a partial step and only up to first 400 units. However the move to impose CAG audit on DISCOM is amusing if not surprising.

Why this move should not surprise us? Well, AAP had already hinted in their manifesto that something like this would be done. Let’s have a look as to what was promised:

Delhi’s consumers have been getting inflated bills due to malpractices by DISCOMS. AAP promises a reduction of consumers’ electricity expenditure by 50%. This will be done by ordering an audit of DISCOMS, rectifying inflated bills and getting electricity bills checked by independent agencies. Licences would be cancelled of any DISCOMS that refuse the audit.

DISCOMS would be brought under RTI and their accounts made more transparent. DISCOMS monopolies would be ended and consumers would be allowed to choose between two electricity providers. (Source: AAP Manifesto)

In addition, Arvind has often alleged DISCOM of cooking the books to show inflated cost of purchase.

But why do I find this move of CAG audit on DISCOM amusing?

To answer this question, many other questions automatically spring up. They are:

• Is he trying to ride on the credible name of CAG?
• Is he right to assume that CAG audit will unearth malpractices of DISCOMs which would result in the reduction power tariffs?
• Is he right in assuming that fault only lies with the DISCOM and not DERC? For that matter the greater responsibility lies with the one who rules and the one who regulates.

The entire attempt gives a feel that after scaring the hell out of you for a possible tumour in the brain, all your family doctor recommended was a chest X-ray. Similarly the purported CAG audit of DISCOMs may end up looking elsewhere instead of nailing out the main cause.

Now let’s see whether this can really remediate the illness which Kejriwal is trying to cure?

Tariff Fixations, who fixes them?

Dear readers, it is DERC which fixes the tariff and not DISCOMs. To understand the AAP charge that “DISCOMs are sending inflated bills and to investigate this malpractice inflated Bills will be checked by independent agencies.” (Source: AAP Manifesto), the definition of inflated bills need to be more clear.

Inflated bills can be either the price charged or number of units consumed or a combination of both is inflated.

As already mentioned, price charged to the consumer is not arbitrarily decided by DISCOMs, but it is fixed by DERC after taking into consideration various factors, such as past audited financial and costing results, upcoming demand and cost to meet the demand.

Allegation of AAP has hovered more on the inflated tariff and not on the inflated unit consumed which is shown on the power bill. Hence to focus only the DISCOMs and not on the DERC looks laughable.

In his rhetorical style, Arvind Kejriwal  asked if distribution loss has come down from 55% to 15% why has the benefit is not transferred to the consumers. But he doesn’t mention or he seems to be unaware that T and D loss target is fixed by DERC and any excess of T and D loss above target is borne by the DISCOMs.

AAP has alleged purchases from related party of DISCOMs has escalated Power purchase cost however DERC has not found any truth in this allegation.(Source Tariff order issued by DERC for FY 2013-14)

Is there any issue with the DISCOMs?

We don’t know whether DISCOMs alone are to be blamed and whether DISCOMs have really cooked up the books or short changed its consumers. But we do know that DISCOMs provide all the financial data to DERC which are indeed audited by the external financial auditors and cost auditors. DERC pass tariff orders based on this. As the part of Electricity Act, 2003 and rules made under this act, due notice for the tariff revision order information is given to public and their submission is taken in to consideration before passing the final order.

Following additional questions come up

• If DISCOMs are committing any malpractice, is DERC complicit in ignoring the same? And therefore leading to the main question – Why DERC, which is responsible for fixing the price, is not investigated?
  
• DISCOMs purchases most of the power from outside Delhi and most of the power is purchased from the government owned power Generation Companies.Tariff of power Generation Company is fixed by CERC. Does it mean that tariff fixed up by CERC is on the higher side and the power generation companies which are owned and operated by the government are also complicit as DERC is?
  
• Should CERC and other power generation companies also to be investigated?
  
• All purchases, including short term purchases (From group companies) by DISCOMs are subject to approvals from DERC. Why DERC is approving short term power purchase cost if it results in inflated tariff?
• Power purchase cost is 80% costs of DISCOMs, which happens to be classified as uncontrollable cost by law. Why the question is not raised to make Power purchase cost as controllable cost, when all tariffs, either by power generation, or transmission or distribution companies are either governed by CERC or DERC or any other state regulatory commissions.
• CAG audits are already being done yearly for DERC and CERC.Is that audit rendered toothless in views of AAP? If so, then can they rely on the same CAG to come out with solutions from DISCOM audit?
  
• Would terms of reference of this “new” CAG audit holistically include DISCOMs, DERC, CERC and government owned power generation companies and come out as ONE report?

While we seek answers to the above questions, it is also pertinent to note that in each DISCOM there are at least four Government Nominated IAS Officers on the Board of Directors.

Apart from having representation in the board of directors, these directors are/can be part of Audit committee. Audit Committee has power to investigate any matter which has been referred to it by board of directors.

Since Government of Delhi has sufficient representation in board of directors of DISCOMs they can very well ask for investigation of any purchase made by DISCOMs to audit committee. Audit committee can determine whether purchase made from related party was at arm’s length and provide report to board of directors.

Summary

• CAG audit of DISCOM is insufficient measures taken by Delhi Government run by AAP. This audit will more or less confirm audited books of accounts along with finding in tariff orders passed by DERC. However this finding is also dependent on term of reference given to CAG by lieutenant governor of Delhi.
• Investigating books of DISCOMs in isolation without including KEY players like DERC, CERC, power generation companies and power transmission companies is not going to help in overall objective of reducing power bill of end consumer.
• An audit is not an investigation but is a mere review of the facts presented to the auditors. Therefore if AAP was serious it would have constituted a Special investigation team which could have looked beyond mere ‘review’.

To keep a watch is good, but to have a watch dog for this purpose and make him bark at the wrong tree may not recover the stolen treasure or prevent future thefts.

Bank transaction tax – a revolutionary Idea or tax reform mirage

This post was originally published on CRI on 

http://centreright.in/2014/01/bank-transaction-tax-a-revolutionary-idea-or-tax-reform-mirage/#.U5bcKPmSz_g 

Is Bank transaction tax just an idea whose time may never come?

John Maynard Keynes once argued that

The master economist must possess a rare combination of gifts….He must be mathematician, historian, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thoughts. He must study the present in the light of the past for the purpose of the future. No part of man’s nature or his institutions must lie entirely outside his regard.

Baba Ramdev, who is a spiritual leader best known for his contribution in Yoga and Ayurveda, seems to have taken a leaf out of Keynes thoughts. Being one of the early Anti-Corruption Crusaders Baba Ramdev has now thrown his weight behind Bank transaction tax and is looking up to BJP to implement should come to power in Centre, Baba Ramdev tried selling bank transaction tax to BJP PM Candidate Shri Narendra Modi during one of the events last week. Whether Baba Ramdev followed decorum of the stage by insisting Shri NarendraModi to endorse or commit to bank transaction tax is to be judged by the political commentators

I respect Baba Ramdev’s efforts to support initiatives of public good and issues of national interest,but idea of single bank transaction tax has not given me much confidence. CRI commentator Rightwing Indian wrote two posts (Part 1 and Part 2). There is an event organised on January 19 2014 in Mumbai to discuss this proposal. I hope my concerns raised in this blog will also be taken in to the account by the Core committee of the event.

Constitutional Challenges and Encroachment on Federalism principle

Bank transaction code is posed as single tax which can replace all taxes imposed by the Central, State and other municipal corporations in India. Bank transaction tax revenue is proposed to be shared between Centre, State and the local government. While Income tax is a centre subject, seventh schedule list II to article 246 of the constitution provides state rights to raise taxes. Each state is responsible for managing its own finances.

As proposed, the finance ministry or RBI will be responsible for determination of Bank Transaction tax; states might or might not have any say in the determination of the bank transaction tax. Fiscal federalism is one of the reasons why GST (Goods and Service Tax) is not yet implemented in India. If Government of India is not able to implement GST due to state pressure, I wonder how BTT will be different. Each state in India is unique and each has its own financial requirements, pegging their finance requirement to the number of bank transactions, takes away the freedom of the state to manage its own financial affair.

States use taxes for a variety of reasons ranging from attracting investments, discouraging consumptions and use of cost effective environment friendly products etc. Now assuming that all other taxes are abolished, states will be dependent on their share of Bank transaction tax which are directly proportional to state’s volume in banking. This is a classic chicken and the egg situation i.e. whether the state GDP encourages usage of banking or increased usage of banking will stimulate the state GDP? If the states are not a part of decision making process on the bank transaction tax we are in a way allowing encroachment on principle of federalism.

Do we have sufficient banks? Is BTT appropriate for new age banking?

Bank transaction tax puts onus on banks to deduct BTT. Backbone of the proposed implementation is a bank. While the number of commercial bank branches per 100000 adults in India is almost same as the world average. But, in comparison with the other developing countries in Europe, Central Asia and Latin America, India has a long way to go.

Within India, bank penetration has not been even across states; Chandigarh has one branch per 3000 adults while Manipur has one branch per 33000 while overall India average stands at a branch per 14000 adults.

Many critics of the Bank transaction tax have highlighted cascading nature of the tax and it provides undue advantage to big corporations, specifically vertically integrated corporations.

In the new age banking, most of us hardly visit banks. Most transaction are done online, a person might be resident of Mumbai but can operate bank account in Pune or Bangalore or anywhere in India for that matter. Bank transaction at a particular branch may or may not have anything to do with the place of business. Hence a purchase made for a manufacturing facility in the remote town of Gujarat might be paid from a bank in Delhi or Mumbai or any other place in India. How would one determine the jurisdiction in such situation?

Isn’t Bank Transaction tax representing socialism?

Arthakranti which has propagated the current proposal of bank transaction tax in their proposal mention

The system can be brought into force without any major change in the constitution. It is truly benevolent and fair system, in line with the basic socialistic philosophy of nation.

If the current taxation systems are perils of socialist policy, why should we adopt one more system which is built on the socialist question – of whether bank transaction tax rates are progressive or flat? Although there is minor progressiveness is embedded in the proposed tax, yet in my opinion BTT remains primarily a flat tax. Under progressive tax regime there is a constant temptation to raise tax on rich to pay and whereas flat tax rate ‘BTT’ is applicable to everyone at the same rate.

Why is ‘Socialist’ mentioned in the proposal? Did Arthakranti refer ‘socialist philosophy’ to please incumbent centre government and state government in Maharashtra? I don’t know. I am not saying that everything associated with socialism is bad but to use it as one of the selling points to appease target audience is certainly not a good idea.

Bank transaction tax is essentially central imposed tax. Why should we view bank transaction tax different than five years central planning imposed on the nation?

Bank Transaction tax and Principles of ideal taxation

Arthakranti in its proposal has mentioned different principles of taxation which they have applied to current taxation system, I didn’t notice those being applied to their own Bank Transaction tax. Hence I take liberty to judge the BTT after applying those principles. Following principles of ideal taxation

Canon of Equity

Every person should have to pay the taxes to the government proportional to his ability.

Bank transaction tax is neither Income tax nor consumption tax. It assumes that person’s banking transactions determines his ability to pay. This might be true but not always. There are many exceptions; to name a few  - loans taken for non-productive usage for example marriage, social gathering, health, education etc.

Under Bank transaction tax loss making business entity has zero respite; Loss making business entity might become history feels Arthakranti. Profit and loss are inherent nature of business; even loss making entity will have to pay BTT. I am kind of bewildered to explain business can make real loss and not an accounting loss. Loss making entities do not have the ability to pay tax but they will not be exempted from payment of bank transaction tax.

Canon of Productivity

According to this principle tax should yield sufficient income to government.

Bank transaction tax is proposed to be distributed in predefined ratio between centre, state and local government. Whether BTT will increase revenue share for each state/local government is to be seen, but with bank transaction tax and abolition of all other taxes, we are certainly talking about limiting option of the states/local government. State government/Local government need flexibility to raise taxation based on need.

At this point, we also have to understand that tax is not only a tool for raising revenue for the government but also a tool to influence consumption, public health, economic conditions, or any such matter. For example government wants to decrease the consumption of tobacco and related products, hence it is charged with heavy indirect tax under the current regime. At the same time, taxes on certain products are either Nil or exempted. Whether these tax exempt products benefits the poor section of the society or saves foreign exchange or generates employment is the government’s prerogative.

Canon of Simplicity

According to this principle, tax should be simple so that tax payer can understand its purpose and implication of the same.

On the first look bank transaction tax looks simple tax without any complication but as people say, the devil lies in the details. What we have seen is the simple high level presentation on the bank transaction tax. What has been surprising is although Arthakranti proposal has been around for a while in the public forum, they have not put up details such as

• State wise/Local Municipal level tax revenue comparison, what we have seen is the high level proposed tax calculation and Mumbai Municipal Corporation. I wish they would have given state-wise and municipal wise tax calculation under proposed Bank transaction tax.
• BTT has been projected as single ‘Ram Baan – Panacea’ replacement to all taxes in the country, it would be good to still list out all taxes in one place to know which of taxes are going to get replaced.
• Model legislation which will bring in bank transaction tax.
• Which existing legislation need to be abolished and which need to be changed at Centre/State/Local Government level.
• Arthakranti has mentioned that there is no need to change constitution, but then why is the constitution proposed to be changed for the implementation of GST.
• If there is no constitution change is proposed, how will the Central government ensure that states and local government will not raise additional taxes?
• There are many businesses where security deposit is taken from customer as part of business practice, should those bank transaction also be subject to Bank transaction tax?
• What about the business houses which act as clearing houses, stock brokers, or any other business which receives money on behalf of their customer?
• What will happen to double taxation agreement with different countries – will BTT be considered as income tax or not? Dividend/Loan or IPO money received from ADR will also be subject to BTT.
• Whether intra bank lending will also attract bank transaction tax?
• How will law enforcement agencies be structured?
• How will law enforcement agencies enforce law? What if people find mechanism to evade this tax?
• Will there be any exemption from Bank transaction tax?

Canon of Elasticity

Elasticity means that tax rate should be capable of downward and upward revision. With BTT, when confronted with economic recession or boom, state and local governments do not have this flexibility to revise tax rates.

Canon of Economy

Canon of economy means Cost of collecting tax should be less than tax. We have not seen any cost estimate to implement and collect bank transaction tax. There will be one time cost to switch from current taxation to bank transaction cost and there will be business as usual cost which needs to be estimated. Without having any estimation it would not be appropriate to say BTT satisfies canon of economy.

Will it decrease circulation of black money or increase it?

Arthakranti fears if high denomination currencies are not withdrawn people might turn to cash transactions once BTT is introduced. Arthakranti has recommended withdrawal of high denomination currency (say above ₹ 50). They have also recommended restricting cash transaction up to limit (say ₹ 2000). Comparison has been made between INR and USD denomination. I guess somewhere during this comparison exercise, we didn’t look at the important point, which is purchasing power of ₹ 50 Note and USD 50 note. I understand that restricting Rs 2000 cash transaction is indicative, but it is important to note the purchasing power of ₹2000.

In the times of bit coin this measure doesn’t inspire much confidence.

In order to evade bank transaction tax, corporate houses may move their payment hub out of India, and might want to switch to offshore banks. I wonder how new tax enforcement authorities will be able to enforce payments to be made out of Indian banks and not from any of the foreign banks.

Conclusion

I don’t think I can conclude on this topic, I foresee many more discussions on this topic. But I hope concerns I have raised above will be taken in good spirit by the proponents of the bank transaction tax. I do believe in rationalisation of taxes. I think it can very well done leverage existing taxation system rather than the complete overhaul.

Bank Transaction Tax: Number Crunching on Top Companies in India

This post was published on CRI on January 29 2014

http://centreright.in/2014/01/bank-transaction-tax-number-crunching-on-top-companies-in-india/#.U5bbzPmSz_g

We have been discussing merits and demerits of the bank transaction tax for a while. What will be the impact of the bank transaction tax on our economy in general is a question most of us have on our minds. To start with I have tried calculating bank transaction tax on India’s leading companies. I have selected companies randomly; data used for the calculation is taken from MoneyControl.com.

Assumption for calculation above:

• This is a static model, I do understand that in dynamic model the calculation may vary a lot. Bank transaction tax is applied on the gross receipt in the bank. In the absence of this information I have derived the Gross bank Receipt highlighted in column F.
• It is assumed that working capital requirement for above operation is funded from internal accruals and there is no working capital loan is taken. Gross bank transaction includes capital receipts to fund expansion meeting working capital requirement etc. I have not included these transactions in model.
• Complexity of global supply chain cycle is not considered for above calculation, I would be happy to discuss impact on above calculations. Cash flow from investing or financing activity is not taken in to account for above calculations.
• Total Income includes Revenue, other income, stock adjustment and excise duty in some cases.
• Profit before tax does not include extra-ordinary items
• Table is sorted based on column G in ascending order.
• BTT rate is assumed at 2%
• All data is for Fiscal year ended 31st March 2013. Opening balance of Sundry Debtors is taken from 31st March 2012.

Inference from Simulation

You may observe that organisation with lowest profit margin ends up paying more tax than organisation with highest profit. Let’s compare tax payable by Cipla and Hindalco. Hindalco made 34.77 crore more profit than Cipla, but under the BTT regime Hindalco has to pay 364.042 crores more tax than Cipla. The difference is due to profit before tax to total revenue ratio, Higher the profit margin a company manages lesser the tax it contributes. Impact of Bank transaction tax on whole supply chain cycle and organisation behaviour is matter of debate.

Simulation at different profit level

For the benefit of simplification one more simulation is done, in this simulation BTT impact at various profit level is measured

You can simulate and change the figure in column C to see effect on column I.

Inference from Simulation

Higher the profit margin of the company the lesser the tax it contributes. An organisation earning Rs 500 at 5% profit margin has to pay Rs 200 in taxes and an organisation earning Rs. 10000 also contributes the same Rs 200.

Conclusion

I would like to draw you attention to a point I made in my last post

Canon of Equity

“Every person should have to pay the taxes to the government proportional to his ability.”

Bank transaction tax is neither Income tax nor consumption tax. It assumes that person’s banking transactions determines his ability to pay. This might be true but not always.

Dynamic model which better represents the subtleties of business cycle could make the above simulation more complex. I would be happy to take those discussion as well. I am presenting a most simplified static model to make my case. Even in simplest model BTT looks unfair to me. In my humble opinion BTT is not a fair taxation system. It simply does not meet the canon of equity. I would be happy to proven otherwise.

I would also like my fellow commentators to give their views on this simulation. Please find the simulation worksheet here

Gas pricing: Kejriwal’s hypocrisy?

This post is published originally on CRI on 22nd Feb 2014

http://centreright.in/2014/02/gas-pricing-kejriwals-hypocrisy/#.U5basfmSz_g

Dear Mr Arvind Kejriwal,

With reference to your letter to Shri Narendra Modi over Gas price issue, I would also like to bring to your notice that there is huge scam in Oil/Crude. I am really surprised. How come an anti-corruption activist like you has not spoken against it?

I hope after reading following details, you will take up this matter and take appropriate action against all Crude Oil Producers in India.

Crude/Oil Production			Figures in BBL & Amount in $ Mln
Year	2007-08	2008-09	2009-10	2010-11	2011-12	Total
India Prodn	245.736	241.272	241.272	271.368	273.744	1273.392
India PVT/JV Prodn	36.648	33.624	37.872	69.696	76.968	254.808
OIL/ONGC (A)	209.088	207.648	203.4	201.672	196.776	1018.584
Crude Oil Price /BBL in $ (B)	79.25	83.57	69.76	85.09	111.89
Cost of Prodn /BBL in $ (C)	33.76	33.76	33.76	33.76	33.76
Profit (D) = (B-C)*A	9511.413	10342.95	7322.4	10351.82	15374.11	52902.69

Note 1: Crude Price is picked up from statistics released by Petroleum Ministry

Note 2: Cost per BBL is cost of production in US based on 2007-09 Data

Sir, as you can observe there is scam of $52 Billion dollars. Both BJP and Congress are silent on this issue; well even you have been silent so far. But it should not be of great concern to you. You have chance of exposing this big scam. This scam is an injustice done to the Aam Aadmi. AAP should pick up this cause and expose the corrupt oil producers of India.

I have listened to your speech at CII. I am quite impressed by your thoughts on gas pricing. When I heard you speaking, “Why should we get gas at market price? From our wells, we should get it at basic cost, plus some profits”, I thought if there is an issue with reference to gas price not being Cost Plus, why there is no issue with crude oil? Crude oil has been sold at market prices for a long time and no one has bothered to comment on it. Hence I calculated $52 billion of scam.

Some of the facts I have noted below are also mentioned in article written by R Jagannathan, I am not sure whether you have read it or not? If not read, do you expect Narendra Modi to also take your letter seriously? But anyways let’s go to some detail:

• Article 21.6 of the PSC provides for sale of gas at competitive, arm’s length price, to the benefit of parties to the Contract and it also provides that the gas price formula/basis have approval of the Government prior to the sale of natural gas to consumers/buyers. I hope you being ex IRS officer understand what arm’s length price means?
• I wondered where you got figure of $2.35 in your article. A friend pointed out that you were referring to legal dispute going between RIL and NTPC. NTPC alleged that RIL has agreed to supply 12 MMSCMD at $ 2.35 for 17 years. This matter is sub judice, I would have appreciated if you would have questioned asp tp why even after close to 10 years there is no movement of the case.
• Supreme Court in another case but with respect to KG basin D6 ruled thatcontractor is free to market gas but it cannot finalise the gas price. Correct question to be asked to our policy makers is why there is a policy flip flop with respect to government’s position on Crude pricing vis-à-vis Oil Price. As you can see yourself there is scam of more than $52 Billion with respect to crude sales. Why are you not demanding Cost Plus price for crude also?
• Planning commission has estimated that in 12th plan more than half of India’s Gas demand is fulfilled by imported gas. I hope you are aware that imported gas is priced on an avg $ 12-$ 15. Why not demand imported gas to be price at cost plus? If they don’t agree, you can always do dharna in front of the respective embassy! 1/4th of production will be produced by PVT/JV. And 1/4thwill be produced by OIL/ONGC. If government wants to decide Gas price keeping in mind interest of RIL, shouldn’t you demand same price for OIL and ONGC? But Sir, I am sorry to disappoint you; new price is also applicable to OIL and ONGC. I know you don’t care for details and references but I do. The following is a quick look at demand vs production estimate under 12th Plan.
  
• R Jagannathan in his article addressed to you has highlighted that higher sales price means higher profit for contactors. As per PSC terms profit earned by contractors needs to be shared with Government of India. So with high price government is going to get a benefit as well, so where is the issue Mr Arvind Kejriwal?
• Do you remember last December you made scam allegation against Gujarat Government and Narendra Modi in particular, did you take the matter to court? If not why have you not cared so far, after all you had all the proof with you! By the way I wrote some details on the same account at that time, I am not sure whether you will be interested to know but in this link you will find my point by point counter to your allegation.

To summarise, will you care to expose Crude Oil producers in India? They get market price for their production. Gas Producers are still getting price fixed by government. You have been consistently making wild allegations against your political adversary without proving anything!

I am not surprised R Jagannathan said “Mr Kejriwal, grow up. Your open letter to Modi is all gas, no economics.”