Mounting NPAs: What Went Wrong?

In last 15 years, Indian Banks have tasted huge jump in non- performing assets. This has grown with the growth in advances which is quite convincing. Currently, NPA are more than Rs. 5.00 Lac Crs. or about 75 billion USD.  Actual figures of NPA and stressed accounts are estimated to cross Rs. 10 Lac Crores, almost 11% of total loan portfolio. 

What went wrong? Why it was not monitored properly? Is it matter of skill or something else? The answer to all these questions can be find out within the problem itself. A critical and unbiased analysis can not only help in understanding the facts but also help in controlling this for future.

A. Development in Banking system: In the beginning of this millennium, the competition was growing and private banks were just attending the age of adolescence. These banks were flushed with funds, aggressive team and to some extent knowledge. These banks were infact born out of frustration of the public sector banks who were dead slow and politically infected. We can’t deny this even today.  Also these banks were run by the cream of  bankers who were very sharp, intelligent and aggressive but

were frustrated in the PSU Banks. These banks with thin organization structure and fast decision making process soon overtake many PSU banks who were just surviving on government support and had become political shop. Thus the frustration of Bankers who could not perform in the dull atmosphere of PSU Banks and Exciting plans of the new banks joined hands together and exploded the market. Every Bank invented new products to lure the customers to borrow. Very soon private banks accumulated huge business from the market and this hit to the bottom of the PSU Banks. Now the turn was of just awakened PSU banks who not only lost the business but precious manpower too, to grab the market. The PSU Banks joined the rat race of increasing business without considering the GDP growth of the country. Every Bank was out to give Year-On- Year Growth of more than 20%, the pressure mounted at every level and thus the whole system of conservative appraisal, due diligence, Non-deviation from the set rules and strict adherence to end use principles got damaged.

Banks started rewarding Officers i) who could garner more and more business irrespective to the quality; ii)Who could register better recovery from the stressed accounts ignoring the fact that certain units could have been revived; iii) who could earn more and more fees for the organization even if it was through business executed under conflict of interest; and iv) who could expand the business left, right and centre without any focused approach.

B. Sudden Growth in the Economy: Beginning of the millennium also witnessed sudden jump in the economy. Existing set up was not well equipped to handle the sharp growth of the globalised Indian economy. All they could understand was to lend money in the proportion of 3:1 where Equity was only one third of the total loan and that too in many cases on paper only. No body was ready to listen and understand the hard fact that lending can not be influenced by emotional or political pressures. Systems and Procedures were not in place and by the time one could understand, there was a mountain of NPA before the banks.

C. Political Compulsions and Corruption: When NDA regained power in 1999, it was very hard earned by these non congress parties and hence they were aggressive to fuel the growth. Most of the parliament speeches were wrapped into GDP growth and hence the large funding was forced upon the bankers. This process further speed up post 2004 under UPA government. Rampant corruption in appointments and lending resulted into poor decisions. There was no hope for prudent decisions. In this situation, the mistakes of wrong funding was quite obvious and hence huge increase in NPA.

D. Over Ambitious Entrepreneurs: This is most crucial analysis, either the entrepreneurs were over ambitious and hence asked money or may be vice versa, but the result was same. Easy availability of funds or over confidence of lenders in entrepreneurs too fueled the fire. The cascading effect was in poor appraisal, fast decision making, poor monitoring and competition to surpass the other lenders.

Indian bankers were never equipped to handle the sharp growth as nothing was system driven. It was more people driven minus poor systems and procedures. Human Resource too responsible as there was not sufficient training to the lending employees. Personal habits like Ego, ignorance, over confidence too ignited the process of high NPA.

Detailed analysis of all the above major factors will be discussed soon.

VAT on Restaurant Bill

As per settled law VAT can be imposed on sale of goods only and not on service. Service can be taxed by Service Tax Laws. The authority competent to impose service tax has also assumed competence to declare what is service. If State has not challenged the same, it means state has accepted cum assumed 40% is service part on restaurant bill. Therefore, where element of service has been so declared and brought under the Service Tax vide Government of India notification dated 06.06.2012, (i.e. 40% of bill amount to the customers having food or beverage in the restaurant was made liable to service tax) no Value Added Tax can be imposed thereon.

It is well known and settled fact that restaurant bill includes both component Goods and Service. And since service component is there central government is levying service tax on discounted rate means on 40% value of entire bill considering 40% as a service. If restaurant owners are charging VAT on entire bill means they are charging, collecting and depositing the VAT on service part also then

charging, collecting and depositing the VAT on service part is unconstitutional and against the soul and objective of article 366(29A) of constitution.

Collecting unconstitutionally VAT on service components of restaurant bill is actually unjust enrichment of VAT department and also public of state is paying unnecessary tax from their pocket to make unjust enrich to VAT Department.

Also some restaurant in absence of clarity on law charging service tax on Packed Items having MRP which is incorrect.

It is unconstitutional practice which is against the soul and objective of constitution as well as against the Public Interest.

For better understanding I am reproducing and attaching herewith the constitutional, legal and judicial background on this case.

A. Constitutional Background

Before 46th Amendment of the Constitution, there was lack of clarity on taxation of bundle cases where material and service both involved in one transaction including works contract. In Landmark decision of State of Madras vs Gannan Dunkerley & Co (Madras ) Ltd. (1958)9 STC 353(SC), pertaining to sales tax , Honorable Supreme Court held that a building contract is one entire and indivisible contract ; there is no sale of goods as a separate contract. A series of the judgment of HC & SC followed this case taking the same view.

Thereafter due to effect of this decision and on recommendation of Law Commission and In order to levy tax on such contracts parliament amended the article of constitution.

And as introduced by the 46th Amendment of the Constitution, bundle cases where material and service both involved in one transaction including works contract were now made divisible into contract of supply of goods and supply of labour and services. In this sense due to this amendment and due to legal fiction indivisible contract become divisible.For Clear understanding I am reproducing here the full clause of Article 366 (29A) after amendment.

Article 366..

(29A) “tax on the sale or purchase of goods” includes—

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form)  involved in the execution of a works contract;

(c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration;

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;

Now by virtue of Article 366( 29A)(b) of the Constitution of India, the entire indivisible transaction is made divisible by legal fiction into one for sale of goods and other for supply of labour and service.

Also you please note that constitution is allowing taxability on the transfer of property in goods, means as referred “tax on the sale or purchase of goods”, it will be on goods and not other part of bill.

Constitution has specified only “tax on the sale or purchase of goods” is on transfer of property in goods. It means “tax on the sale or purchase of goods” on transfer of property of “non goods” is not subject to sales tax like on service price/ service tax.

This amendment exclusively defines that VAT will be only on Goods and not on other part. In case of bundle cases where material and service both involved in one transaction including works contract,  and on Non Goods Part, VAT can not be applied. Accordingly all the state VAT law has to follow provision of Article 366(29A) and any state law, rule, notification and circular should be according to this article. Any state law, rule, notification and circular if against the objective and provision of said article 366(29A), shall be void.

HIGH COURT 
IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL
Commercial Tax Revision No.02 of 2014RULLING

Valley Hotel & Resorts,
Through its partner Shri Arun Goyal),
Khasra No.1011/2,
Central Hope Town,
Selaqui, Chakrata Road,
Dehradun….. …..Revisionist/Applicant.

Versus

The Commissioner,Commercial Tax, Dehradun. .….Respondent
Mr. P.R. Mullick, Advocate for the revisionist.
Ms. Puja Banga, Brief Holder for the State of Uttarakhand/respondent.

Dated: April 10, 2014
Coram: Hon’ble Barin Ghosh, C.J.

Hon’ble V.K. Bist, J.
(Per: V.K. Bist, J.)

The revisionist is a partnership firm, engaged in the business of hotel. It provides boarding and lodging facilities to its customers. It also provides restaurant services. Upto 01.07.2012, the activities of the revisionist were covered under the Uttarakhand Vat Act, 2005 in respect to supply of cooked food in the restaurant. On 06.06.2012, the Government of India,Ministry of Finance (Department of Revenue) issued a notification amending the Service Tax (Determination of Value) Rules, 2006 by introducing Service Tax (Determination of Value) Rules, 2012, by which 40% of billed value to the customer, for supply of food or any other article of human consumption or any drink in restaurant, was made liable to Service Tax. Thereafter, the revisionist  moved an application under Section 57 of the VAT Act, 2005, requesting not to charge VAT on 40% billed amount to the customer, as same has already suffered Service Tax. The said application was rejected by the Commissioner, Commercial Tax, against which appeal was filed before Commercial Tax Tribunal. Same was also dismissed. Aggrieved thereby,the present revision has been filed.

2. We have considered the submission of learned counsel for the parties. Value Added Tax can be imposed on sale of goods and not on service. Service can be taxed by Service Tax Laws. The authority competent to impose service tax has also assumed competence to declare what is service. The State has not challenged the same. Therefore, where element of service has been so declared and brought under the Service Tax vide Government of India notification dated 06.06.2012, (i.e. 40% of bill amount to the customers having food or beverage in the restaurant was made liable to service tax) no Value Added Tax can be imposed thereon.

3. In our view, the Commissioner, Commercial Tax erred in rejecting the application of the revisionist. Thus, the revision is allowed. Judgments of Tribunal as well as of the Commissioner, Commercial Tax are set aside. The Commissioner, Commercial Tax is directed to pass order afresh in the light of above observations.

(V.K. Bist, J.) (Barin Ghosh, C.J.)
10.04.2014

SUPREME COURT RULING

The Supreme Court’s judgment in IMAGIC CREATIVE PVT LTD Vs COMMISSIONER OF COMMERCIAL TAXES, reported in 2008-TIOL-04-SC-VAT, has thrown up several interesting questions of the leviability of VAT on composite and indivisible contracts.

The question that arose before the Apex Court was, whether,sales tax could be levied, in terms of the provisions of the Karnataka Sales Tax Act 1957, on the entire value of a contract involving advertising services including the value of services, in respect of which, service tax is being paid. Here was the case of a service provider, who was using materials / goods in the course of providing the service as part of an indivisible contract and had been paying service tax. The Karnataka Commercial Taxes Department took the view that it was a composite contract of sale, wherein the taxable value of the goods sold being printed booklets got enhanced by the utilization of the soft skills involved in the process and that, sales tax was payable on the entire value of the contract. The Karnataka High Court, in a judgment (2006-TIOL-431-HC-KAR-IT), upheld the levy of sales tax on the entire value of the contract, including the service element. On appeal, the Apex Court has held that in an indivisible contract (involving sale of materials and rendering of services), there was no justification for levy of sales tax on the entire transaction value.

Some of the highly relevant wordings used by the Apex Court are reproduced below:

“A distinction must be borne in mind between an indivisible contract and a composite contract. If in a contract, an element to provide service is contained, the purport and object for which the Constitution had to be amended and clause 29A had to be inserted in Article 366, must be kept in mind”  (Para 25).

The Apex Court further states in Para 28 of its order, as follows:

“28. Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided”.

We need to keep in mind, the decision rendered by the Apex Court in the BSNL Case, wherein the Apex Court had held in Para 85 of the judgment that “in a composite contract of service and sale, it is possible for the State to tax sale element provided there is a discernible sale and only to extent relatable to such sale”, which continues to hold good, despite this judgment.

This position is understandable, in the light of the VAT laws of the country, wherein, in the case of levy of VAT on works contracts, a deduction towards labour and like charges are allowed, while computing the taxable turnover. There is a corresponding logic that we have under the service tax law, wherein, the value of the goods and materials sold by the service provider to the recipient of the service, are exempted from the levy of service tax, in terms of Notification No. 12/2003-ST dated 20th June 2003, which is still valid.

Startup: OId wine in a new bottle,Start-up is term which is quite in news for last few months. Let us look into few analysis of the term.

Background:

So, it is the term and concept new to the world? No, it is as old as history of the mankind itself. The feature was always prominent within the business family. Generally, successful businessman or their children started a new branch to the family business. It was well a start up, just the term to describe was not available.
Also, the feature was common, when a potential entrepreneur would start his business.
So, we may safely say that it is an old wine in a new bottle.
Definition:
The plain meaning would to be - to start something. In today’s parlance, we would refer it to new business ideas.
The GOI has taken special interest interest and defined the startup as follows:

An entity will be identified as a startup.
1. Till up to five years from the date of incorporation.
2. If its turnover does not exceed 25 crores in the last five financial years.
3. It is working towards innovation, development, deployment, and commercialisation of new products, processes, or services driven by technology or intellectual property.
Now, point number 3 requires attention. GOI has added as new and interesting angle to it. The term includes innovation, development, deployment and commercialization of NEW product, process or services driven by technology or Intellectual property.
So if I am already running a business and add a new branch to it or I start a new business say e-commerce, it will not be called start up.
Provided the mere act of developing :

1. Products or Services or Processes which do not have potential for commercialization
2. Undifferentiated Products or Services or Processes.
3. Products or services or Process with no or limited value for customers or workflow

Will not be covered under this definition.
The GOI has defined entity as:
Entity means a private limited company (as defined in the Companies Act, 2013), or a registered partnership firm (registered under section 59 the Partnership Act, 1932) or a Limited Liability Partnership (under the Limited Liability Partnership Act, 2008).
Recognition of the Start-ups:
The Process of the registration of the start up is through mobile app/portal of Department of the Industrial Policy and Promotion. Startup are also required to submit application with any of the following documents :
1. A recommendation in a format specified by DIPP from an incubator established in a post-graduate college in the country.
2. A letter of support from any central or state government funded incubator to promote innovation.
3. A recommendation in a format specified by DIPP (with regard to innovative nature of business) from any incubator recognised by the Central Government.
4. A letter of funding of not less than 20 per cent in equity by any incubation or angel fund/PE fund/accelerator or angel network duly registered with Securities and Exchange Board of India that endorses its innovative nature of business.
5. A letter of funding by the Central or State government as part of any scheme to promote innovation.
6. A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.
Until such app or portal is launched, DIPP will make alternative arrangements to recognise a startup. Once the application is uploaded, a recognition number will be issued to the startup in real time. If the number is found to be obtained without uploading the documents, or uploading the forged documents, a fine on the applicant will be levied, which shall be 50 per cent of the paid-up capital of the startup and not less than Rs 25,000.
Funding:
The start-ups have the funding problem. However, unlike earlier periods there are loads of investors in the current scenario who are willing to invest; the only thing they look for is innovative idea and the commercial feasibility of the innovation.
When to start the start-up:
The answer is whenever you want. However it is always advisable to have a plan and strategy before starting the same. Today youngster as old as 20 years old is starting the entrepreneurship and are quite successful.
What if I fail:
We start the initiative with hope and hard work. The failure to successfully launch the startup does not mean it’s the end of world. It only means it's time to go through the plan again. Success always bow to hard work, but smart hard work.
Hope you find the article useful and innovate.

The author can also be reached at Sonuandfirm@gmail.com