Saturday, 27 August 2016

Zaibatsu Model for India?

Victors write history. Though the Zaibatsu model of Japan was thoroughly discredited because of the Second World War and it was dismantled(it transmorphed into something called Keiretsu), it is worth noticing whether it can fit into the Indian model or not. A Zaibatsu is a self sustaining family business entity with very little or no outside dependencies whatsoever in a supply chain market. This means, for all practical purposes, it maintains a presence in all the parts of a vertically integrated supply chain and with a bank in the centre which funds the business.
The deplction below gives the structure of the Sumitomo Group. The group has a clear presence in all sorts of trade related to metals – mines, forestry, smelting, heavy machinery, electricals and electronics and even cement, glass and chemicals. There is a firm to build it’s factories, a bank to finance it, an insurance group, a warehousing system and a trading front end.

British Petroleum sort of fits into this model, with Bank of England working as it’s bank.

The advantage it gives is an island of stability which can weather all sorts of climates simply because there is no external dependency whatsoever. The disadvantage is, beside cartelization and price-fixing, it is too big and too powerful for a country to take on without seriously hurting itself. After all, there need not be any speculation as to what will happen if British Petroleum is taken down by the British Government.
 A dangerous proposition though, but it is worth exploring if it is applicable to India. Tatas almost fulfil all the aspects of a Zaibatsu, except the central bank. 76% of the group is locked in trusts. They have got mines, smelting plants, sheet steel manufacturing and car manufacturing. It has got it’s own showrooms, it has got it’s own fleet of trucks, it has got it’s own communications, software firm to design software for it, insurance system, hospitality for visitors and even a city to manage. Except for the central bank and a merchant shipping fleet, it has got everything. Though fragmented now, Birla Group, JK Group and Ambanis also fit into the general profile.
By weathering all sorts of economic turmoils, these groups can give us a ray of hope prodding us to work hard in adversities. But, going by the fact that the power held by such groups is too heavy(don’t forget the Nabobs of East India Company) and the way they can misuse it, it is but natural for us to identify what can be done to have this as a successful model.
1.     Market capture should be desisted. No one should have a 100% presence in a market only by Zaibatsus.
2.     Cartelization should be avoided. Anything which can be classified as a Zaibatsu shouldn’t have shareholding in another Zaibatsu.
3.     Funding to political parties by the Zaibatsus should be banned.

4.     A separate governing code should be created for such with respect to management, taxation, approval for expansions and such.

Wednesday, 24 August 2016

Banning Large Cash Transactions - Have we got our Priorities Wrong?

The recent news that government is thinking of banning any cash transaction above two lakhs is supposed to be a good move. But, the reality is far different. As like always with regard to banking, the government has got it’s priorities wrong. If cash is banned, the only possible ways I can think of, any normal person will do will be an online payment, card based payment, cheque and DD. Let’s see them one by one. A person pays by DD. For every little thing, going to a bank to get a DD is a joke and getting it encashed, again, is a joke. On top of that, DD costs. Why will I do that? Cheque is even better and a cheaper option. If I finish my cheque book, I need to pay only Rs 20 for a reissue. Well, for example, my bank account is in Guwahati. Any cheque which I deposit anywhere will be outstation. And that, incurs charges. Now, let’s see the additional side effects of these two modes. Cheque and DD means someone will have to get them encashed. Encashed means someone will have to go somewhere to deposit them. And once deposited, someone should convert them to cash. We don’t have a system where a cheque is deposited somewhere and cash is deposited into the account yet. I have seen it in UK but not in India. But, even there, someone will have to stand at a booth loading cheques one by one. This means, a bank employee should be present to encash/deposit it. Think of the volume of cheques which needs to be encashed then. This means opening of new branches/increasing the size of existing branches. Once more branches are opened, the regular demands start – how to increase the footfall, how to increase turnover, targets and all such. In an age where we are going digital, what sense does it make to go retrograde?
Next comes online payment. If I go to a jewellery shop or for clothes, I would rather try them than buying online. Meaning, online payments will work only in some cases, not everywhere. Then, the most comfortable one – card payment. Well, the maximum card limit for an average card for daily withdrawl is around 25-50,000 and for payment is 50-75,000. What use will a debit card have when the need is to pay for more than two lakhs?
Yes, banning large transactions through cash is correct. But, with the constraints we have got, does it make any sense to implement this without correcting the actual problems we are going to face? What are we doing to ensure a payment happens? Do we have any ways to achieve it? The first thing government should do is to increase the cash withdrawl limits considerably, by five or ten fold and remove an upper cap for card swipes altogether. To achieve this, government should first encourage people to use debit cards.
1.     No surcharge for using debit card swipes. Rather, there should be a sort of discount(even 1% is fine) should be given to customers to encourage card payments

2.     No charges for cash withdrawl above a limited number of times. This will ensure people maintain cash in accounts and go to the ATM whenever they want cash, not withdraw a large amount to avoid usage charges. If charges are not there, you will always see that people don’t have cash in their pockets and this will force them to go for card swipes. It’s but a matter of time it become social habit. This is what our generation does – flush in cash in accounts and no cash in pockets
Well, all these need not be thought about simply because by enforcing mandatory invoicing in every outlet, we are looking at complete accountability - the sales tax collected on every transaction is sufficient to bring in black money into the open.

Tuesday, 23 August 2016

Taxing income or taxing expenses? Should I file or will you generate?

First of all, I am of the opinion that taxing expenses is much more meaningful than taxing income. On earning, a person does only two things – deposit in a bank or invest/buy. Anything he buys, he will have to pay a tax, anything he deposits, he will have to pay a tax on the interest. If you target income, you are only targeting declared income. Almost everyone forgets or the more apt word is, don’t know that they need to pay taxes over their share market earnings, they will have to pay an additional tax over the TDS in case of fixed deposits based on his tax slab and the likes. But note that, most of the taxes in India are paid by the salaried class only because a major part of their income is public. Another alternate is to tax what they spend. After all, people are supposed to eat something to live. As against the VAT of 14%, declare a flat service tax of say, 30% over everything and anything. What has the customer got in it? His income is not taxed and hence, he is goaded to save more. This will reduce the social security burden for the governments at a later date. What has the governments got in it? The concept of black money will be erased. After all, one day or the other, the person is supposed to bring it out and spend it. If he is only stashing and not spending, there is no difference between that money and papers lying in my dustbin. Instead of focussing on a ten thousand different sources of income and getting entangled in an impossible spider web, the focus can be shifted to one single aspect – how to ensure that everyone pays service tax. By ensuring every shop submits it’s statements correctly, we are reducing the number of entities to monitor and manage. But, due care should be taken to understand whether government loses income or gains by this.
Coming to the poor. To make the process simple, a BPL citizen should also pay taxes so that verification against the shopkeeper can be standardized. But since, a BPL citizen shouldn’t pay taxes, the billing kiosk can have, say, an option to mark the buyer as a BPL and give his reference number, scanned from the card provided. The money will be transferred immediately to the bank account of the BPL citizen. This has got another advantage – the amount deposited thus is an indication of his real wealth and the same number can be used as a justification to scrap off his BPL status.
Assuming we are stuck with Income tax. Let’s take the case of a common salaried employee in India. What are his sources of income? Salary and Fixed Deposits. What more does he generally have? Income as rent on second home and shares; and possibly, some farm income and sale of old stuff. 90% of the TDS class fits into this category. If this is the case, does it make any sense for asking these people to file tax returns and then penalizing them for not doing? Though the downside is that many tax consultants will lose their jobs, the upside is making lives of everyone simple. Why is it not possible to follow a single process and establish standards?
1.     PAN number is mandatory for a job, for renting a house, for providing rental receipts, for buying and selling stuff more than Rs 25000(or more apt, per capita income of the bottom 90% of India’s population), for DEMAT and for FD. After all, it is mandated for some of them; it’s just a matter of will to extend it further. Also, there is no scope of bluffing with rent because, if more rent is declared by the tenant, the owner should pay the tax.
2.     Authorization of IT Department to collect tax on a fixed date from the salary account. Allow an overdraft.
3.     In case bulk calculation for such huge number of accounts is going to create a problem, declare a flat 10% or 15% tax on share market, rent and fixed deposits irrespective of income. If the assesse need not pay taxes, he will ask for correction.
Since all the information is being tracked against a PAN number and since IT department is getting regular information from multiple sources, it’s just like generating a document like Form 26AS with the information it holds. Before finalizing the statement, provide a cut off for declaring anything extra – expenses, savings etc. Once this is done, it’s just a single document downloadable and used for all assessment purposes.

Next is, maintain a BPL database. Any entry in that need not pay any tax. Now, what is left is, balance of India and it’s but a matter of time we fit them into a pattern.