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Two Pathbreaking Changes & How They are Faring

By Sugata Sircar, CFO & Country Finance Partner, Greater India, Schneider Electric

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Sugata Sircar, CFO & Country Finance Partner, Greater India, Schneider Electric

Schneider Electric (EPA: SU) is a 1836-founded French multinational corporation specializing in energy management, automation solutions, hardware, software and services.

This is a good time to talk about the status of a couple of pathbreaking changes which were brought-in by the Government in the recent past. The first is Goods and Services Tax (GST).

An ambitious and bold move, this has put millions of business transactions on a common digital platform under a common framework. The fact VAT, Excise Duty and other indirect taxes were subsumed, brought us among the most progressive nations. Indeed, I do not know of any other country in the world which has a platform of the size of GSTN.

As GST brought in rationalization of taxes, tax elements clogged at different stages of the value chain have been released, leading to reduction in prices to the end user in many cases. This has undoubtedly led to efficiencies in the value chain.

GST also forced traders and small businesses which operated outside the system to pay tax and process transactions on the common platform. This, I hear, may be pushing some small businesses to the brink. My view on this is that if a business model was operating on the basis of margins derived only from tax evasion, then there is a fundamental issue. Those models never worked. Therefore, it is a larger question as to how people in such businesses should find their livelihood. It is to be seen in the context of how the economy can support higher price levels and therefore provide a viable compensation to such small businesses.

"It is to be seen in the context of how the economy can support higher price levels and therefore provide a viable compensation to such small businesses"

For the organized sector, like our company, the structural positives are strong and much welcome. The efficiency due to the subsuming of several taxes, a clear input credit chain and harmonization of tax rates are leading to better efficiency, and business decisions are no longer required to be based on taxation.

Appreciably, the GST Council has been amending the provisions of GST to address issues being raised. Critics will say that these should have been thought of before, but I am prepared to make that concession to a Government which was bold enough to bring-in GST and remains responsive enough to make the amendments. In addition to rate rationalisation, input tax credit is now made available on items like canteen services received, life and health insurance premiums paid. For paying incentives or rebates on sales, the linking can be done to multiple invoices under one credit note. Separate GST registrations are allowed now in the same state, which businesses can use for separate divisions. These are positive changes.

Some pain points still exist. Issues are being put-up to Advance Ruling Authorities in different states. In some cases, the rulings from different states are conflicting. There is an immediate need for a national adjudicating authority to take decisions above the advance ruling authorities.

One such recent decision is that normal corporate services provided by a company to its branches across the country would be liable to GST. This is in spite of the fact that the company is serving itself, using its own resources of employed manpower. Another such ruling is that Liquidated Damages (LD) received on a project from a contractor is liable to GST  the explanation is that LD is in itself a compensation received for ‘pains’ of delays. In the absence of a strong national adjudicating body, all such disputes will clog the courts.

The other milestone was the introduction of IBC (Insolvency and Bankruptcy Code 2016). In principle, the IBC is to fast track actions on a company which has defaulted to its creditors; the action being by way of a buy out of the company by another party in a deal accepted by a Committee of Creditors and by the NCLT, or by liquidation of the defaulting company. The IBC proceedings can be triggered by creditors and goes through an Insolvency Professional.

The IBC has seen considerable action. Large financial creditors have triggered the Code on defaulting companies. While some companies have gone into liquidation, buy-out processes have been initiated for other defaulting companies.

The number of qualified Insolvency Professionals is increasing which will help to deal with the cases coming-up. However, the application of the Code has led to some issues which are before the NCLAT or the courts for resolution. The issue around the pre existence of a dispute, which under IBC leads to rejection of the petition of Creditors by the NCLT, was settled by the Hon’ble Supreme Court in a decision in 2017, clarifying a critical point.

Another issue currently under resolution relates to bids made by prospective buyers under the IBC process. In a particular case, the Committee of Creditors examined the bids and recommended the selection of the highest bidder to the NCLT. A higher bid was subsequently received and the question arose on whether such a bid can be accepted. The essence of the IBC is resolution in a time bound manner. This has been pointed out by the Hon’ble Supreme Court earlier. Therefore, the sanctity of the process timeline should be paramount.

Another area of contention has been around the fact that existing promoters of the defaulting company cannot bid for the company under this process. The haircut taken by Creditors is not to be misused by the same promoters who ran the company, to come back and control the company again, now devoid of debt. The contention is on beneficial ownership how far the concept of beneficial ownership can be stretched.

Overall, the IBC is changing the landscape; a recent survey on banks indicate that bad loan recovery has improved, not only through the IBC process, but since IBC has been implemented, defaulting companies are coming forward more readily to settle old debts.

Spokespersons have said that the Government remains open to consider sharpening of the Code to provide clarity and address ambiguities in the areas where disputes are arising. We remain positive that both the above will be positive for our economy.

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