Citizens' Issues
Trusts, Maths and Taxes

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.

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Money for Lanco: When banks’ action differ from their rhetoric

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.

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COMMENTS

S.S.A.Zaidi

3 years ago

A wonderful article---evergreening has been there ,it is not a new phenamenon--it is high time fetters are put on banks -to thwart any political attempt to influence their decision making

REPLY

nagesh kini

In Reply to S.S.A.Zaidi 3 years ago

At long last the RBI has come to accept the CDR regreening is a NO-GO. They are all NPAs, back door write-offs.This 'phenomenon' has be given a decent burial asap

nagesh kini

3 years ago

"Evergreening" is indeed a new term to bail out wilfull defaulters via CDR and this has to be put an end to. It should not used as a pre-election free be to the money bags to fund parties.

The banking system and Pramod Mittal’s lavish wedding bash

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.

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COMMENTS

Bharat Thakkar

3 years ago

Not only banks, but Accounting Standard Regulators, Auditors, CDR Empowered Group, Independent Directors, Stock Exchanges and SEBI etc all work for these looters (called businessmen. They advice on how to make loss and also to make profit out of entries made in the book of account from thin air. Look at the inefficiency and the inability of the stock exchanges and SEBI that they have asked companies to fill in a form while filing their balance sheet and profit and loss account. The form must say whether the auditor has qualified the accounts or not. What a joke. Why can’t stock exchange and SEBI read for themselves to find out audit qualification? The companies and auditors have also now tied up as to how to not qualify the accounts. Don’t qualify accounts but write everything under the heading “Emphasis of Matter”. So, the company can say that there is no qualification and thus no need to recast the accounts. My experience that all those points for which the auditors would have qualified their opinion about five years back, are now done through this dubious “Emphasis of Matter”. The ICAI, SEBI and all other regulators including Stock Exchanges should consider “Emphasis of Matter” as good as qualification by auditors and the authorities must mandate companies to recast the accounts as per law made applicable in case of audit qualification.

Pantulu

3 years ago

This is what is happening in this country.Wealthy people acquired their riches at the cost of common people who deposit their hard earned money in banks.People like Mittal swallow that money and there is no mechanism in this country to rcover.people lost money because of exploiters specially in the last decade since we did not have any leader worth the name at the top.Let us hope we will get better leadership which has concern for common people who have no saviour at any level.

Veeresh Malik

3 years ago

And in case you wanted to read up more on Global, inputs from another source are here:-

http://reyadel.wordpress.com/2009/07/27/...

Veeresh Malik

3 years ago

Typically, the way most of such companies fiddle is they report losses. (And then use the skim/loot/scoot for weddings?)

This is how they do it:-

Under report sales: Companies show less production than actual production and as such show lower sales. The actual production is sold without accounting for it in the number one books. In this manner they additionally avoid paying excise duty on the production / sales which is not accounted for in the books. However, full cost of raw materials and other costs of production is taken and the company reports losses.

One way to check for this is things they cannot hide. For example, in electric arc furnace there is a clear ratio of electricity consumption and steel production.

The relevant questions to ask here is, what has been the electricity consumption (month wise) and steel production over last 10 years and see if there is consistency. It should also be compared with other companies operating in the same industry.

Similarly, if they were producing speciality alloy steels, they would be mixing fixed amounts of tungsten / titanium / molybdenum / magnesium etc. If these records are compared (monthly consumption of any of these inputs with production and sales of steel) one can get an idea if they have been cooking on production / sales figures.

Since these are high value speciality metals / minerals with limited suppliers proper records of their purchase / consumption has to be maintained. And if a certain consumption of these inputs is accounted for, there would be a certain amount of steel actually produced. If the actual steel produced is less, they have major reasons to answer.


Under invoice sales:- Companies sometimes under invoice sales to shell companies, who then onward sell to end users. In this manner the actual producer shows losses and so can declare themselves sick and get all kinds of reliefs and concessions.

H____Co & B____r C______c followed this route. B___r C_____c was a group company of the A____a Bxxxa Group and captive producer of caustic soda for H_____co.

They sold their production to H_____co at much lower prices as compared to market prices and reported large losses and went to BIFR and took all eligible reliefs and concessions. M.....i companies in general and Bxxxa group in particular had mastered the art of legally milking GOI and the Indian public at large in this manner. That is why they can afford to have so many temples built!

The relevant questions to ask here are:

(i) Did the banks and other authorities compare selling prices - actual charged by the company with what similar products have been sold during the same period?

(ii) Did they check if sales are directly to customers or through selling agents (generally owned by close relatives or promoters). What price sold to the intermediary and at what price the intermediary sold to end user.

+++

Another one:- Over invoice capital costs: The cost of plant and machinery can be over invoiced. Say the actual cost is Rs.60/-. First they get quotation from sellers for Rs.100/-, then apply for Term Loan from banks for Rs. 80/- and claim that they would meet their commitment (margin) of Rs.40/- evidencing their financial stake in the business. Since the actual cost is Rs. 60, once the seller has been paid Rs.80 (direct disbursement by the bank / FI), the difference in cost of Rs.20/- is shared between the seller and the promoters (also the middleman). Second, such over capitalised businesses typically would find it difficult to service their interest costs / repay principal dues since profitability and cash flow projections are massively optimistic. And the promoter had no intention of serving his debts to start with!

The relevant questions to ask is check for project cost of similar projects. Technical experts from consultancies like MECON / Engineers India Ltd. / Dasturco used to give pretty good estimates.

And then:-

Over invoice operating costs: Purchases are made through middle men at higher than market prices, and from whom promoters get a cut. Personal expenses are charged to company. Fictitious expenses are charged to P&L like market development expenses etc. Careful sieving through audited financials over a number of years often give out clues.

But then, should we be doing it, or the authorities at BIFR, CLB and others?

Time will tell as technology starts making it easier to find out - and track stolen money.

REPLY

Ram

In Reply to Veeresh Malik 3 years ago

Thank You Veereshji, u gave valuable information.

Hemant K Chitale

3 years ago

How could his daughter be happy being married off with such money ? Doesn't it hurt her conscience to have that much money spent away ?

mm sundram

3 years ago

the bankers who financed to this beleagured company should be blamed. this is very very horrible that public monies has been looted by the defaulters/companies whereas the small amounts of personal loan given to small and ordinary citizens pressurized vehemently by the bankers.

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