CAG pulls up the taxmen for being selective and granting exemption to two Tata trusts
It is well known that innumerable cases of tax exemptions and deductions depend on the whims or generosity of the particular assessing officer. Most of this went unnoticed in the past, when the Comptroller & Auditor General (CAG) was largely seen as a bureaucratic bean counter, producing boring reports. All that has changed after Vinod Rai’s regime as CAG. India’s highest government auditing authority remains aggressive and its reports now attract plenty of media attention. CAG has recently been in the news for picking holes in the tax treatment of several of India’s holy cows—trusts, religious charities and cricket associations.
It has pulled up the income-tax (I-T) department for granting ‘irregular exemptions’ of over Rs1,000 crore to two Tata trusts. According to the CAG report tabled in parliament, Jamshetji Tata Trust and Navajbai Ratan Tata Trust invested Rs3,139 crore in ‘prohibited modes’ leading to accumulation of capital gains, which involved tax effect of Rs1,066.95 crore.
It has also identified 240 cases leading to irregular tax exemptions of Rs248.39 crore mainly because of the allowance or disallowance of depreciation. Among these is the high-profile Mata Amritanandamayi Math where a depreciation claim of Rs138 crore was considered ‘not in order’.
It has also questioned the I-T department’s generosity in granting exemptions to four cricket associations which deprived the exchequer of Rs37 crore tax on the income raked in through sale of television rights. It has also flagged 30 cases where voluntary donations to trusts were treated as corpus even when there was no specific direction to this effect.
Meanwhile, a whole new chapter of collusive deals may open up with the many ‘electoral trusts’ that are being set up by large business houses for political funding. Under the new framework, these ‘Electoral Trusts’ are not-for-profit entities and will enjoy tax benefits. The question is: Will they also continue to extract corporate benefits from the political parties they fund? Then, there is the issue of political funding by companies, such as Vedanta Plc, through their Indian subsidiaries, which is barred under Indian law but has gone unchecked. A public interest litigation seeking a court-monitored investigation into this funding has been filed by Association for Democratic Reforms (ADR) and retired civil servant EAS Sarma. This may lead to another round of clean-up of our political system.
Mr Sarma has also drawn attention to the fact that the new Companies Act allows private companies to spend on political donations as much as 3.5 times the sum they are mandated to spend on corporate social responsibility schemes. This is clearly in preparation for the 2014 general elections. Political observers say that big business is likely to play safe and spread their donations among multiple parties, given the uncertainly about the outcome of these elections.
After the surprise return of the Congress-led UPA coalition in 2009, nobody is willing to write off even the Congress. However, Indian businesses—cutting across religious and ideological spectrum or past affiliations—are rooting for Narendra Modi as the prime minister.
How long will banks get away with funnelling public money into hands of dubious industrialists through CDRs?
An Rs8,000-crore CDR package to a politically powerful industrialist on the eve of general elections calls into question RBI’s exhortations to banks to stop ever-greening of bad loans. That it happened even after the AIBEA’s unprecedented action of naming bad loan accounts and demanding that banks ‘stop the loot’ of public funds, only underlines that senior public sector bankers either do not recognise the change in public sentiment or believe that they cannot be touched. How long will banks get away with funnelling public money into the hands of unscrupulous industrialists?
EAS Sarma, former Union government secretary, in a harshly worded letter to the finance ministry, says, “CDR has become a euphemism for regularising banking fraud.” He also says that, since most CDR packages involve huge write-offs by public sector banks, often under pressure from politicians, there must be a CBI or CVC investigation into each case. Mr Sarma cites the example of how a syndicated loan of Rs4,500 crore to a power project was entirely credited to the account of an overseas company and ‘round-tripped’ later as foreign direct investment through the Foreign Investment Promotion Board (FIPB). This could never have happened without the knowledge and active connivance of the consortium of bankers who made the loan.
Now consider LANCO, a construction, power, and real estate company founded by L Rajagopal, a member of parliament with access to the Congress high command. While it thrived in the 1990s mainly because of its ability to bag and restructure government contracts, the company has ratcheted up losses and applied for debt restructuring in July 2013. Despite opposition and reluctance by several banks in the 27-member consortium, the group’s CDR was cleared in mid-December 2013 with the lenders not only granting it a two-year moratorium on interest payments, but also lowering of interest rate, fresh loans of Rs2,500 crore and restructuring of its bank guarantees and letters of credit. In other words, the group is fully funded and geared during election time. Against this backdrop, RBI’s earnestness in getting banks to take serious action against defaulters sounds naïve.
Promoters like Pramod Mittal exemplify how banks and RBI allow Indian industrialists to get away easily
The Reserve Bank of India (RBI) frowns on bad loans; the All-India Bank Employees Union (AIBEA) says deliberate defaults are weakening banks. But, we, the ordinary people, find it hard to believe that banks are serious about recovery because of the lavish display of wealth by habitual defaulters. Consider the 60 million Euros that Pramod Mittal spent on his daughter’s lavish wedding in Barcelona.
Why is it a problem if Pramod Mittal decides give his daughter one of the most expensive weddings ever? For nearly 15 years now, Mr Mittal has made news mainly because of his perpetually high debts, loan restructuring and, eventually, selling out his steel plant supposedly for a pittance. This, too, happened only after a two-time corporate debt restructuring (CDR) involving massive write-offs. Although the Mittals have been defaulters even in the 1990s, Pramod Mittal’s Ispat group was bank-rolled for a series of global adventures after 2003 that have all run into trouble. These include contracts and major acquisitions in Bulgaria (including a football club), Nigeria and the Philippines, which are all mired in controversy. Employees of Ispat’s Nigerian business have reportedly remained unpaid shortly after 2006 and have been left high and dry.
The group also owes over Rs630 crore to the State Trading Corporation (STC) which STC is now trying to recover from JSW Steel of the Sajjan Jindal group (which acquired the beleaguered Ispat Industries in 2010). A Central Bureau of Investigation (CBI) probe into this has also gone nowhere. Pramod Mittal paid off some of his Indian debts with the sale of Ispat Industries; but, even today, the Nigerians threaten to agitate should he return. In India, Ispat Profiles, which owes more than Rs1,000 crore, is facing liquidation.
Everywhere, allegations against the Mittals are similar—building huge debt, often through collusive deals, diverting funds to other ventures leading to defaults. Yet, the Mittals’ personal wealth, and the lavishness of their lifestyle and spending, has only grown due to the benevolence of our banks.