No longer easy to cook up the books

If auditors disagree with the results, the financial impact of their observations will have to be plainly spelt out

As a regulator of listed companies, the Securities and Exchange Board of India recently issued a plethora of amendments to different regulations. One of the significant amendments relates to filing of a statement on impact of audit qualifications in a tabular format with stock exchanges.

Unlike certain developed jurisdictions such as the the US, where companies are not allowed to file financial statements with audit qualifications, Indian stock exchanges (or SEBI or other regulators) continue to accept financial statements with a qualified auditors’ report.

In the US, if financial statements do not conform to the generally accepted accounting principles or GAAP, they are presumed to be inaccurate or misleading, irrespective of any explanatory disclosures.

Matter of difference

Audit qualification is generally a matter of disagreement between the auditor and the management. A modified/qualified audit report indicates that the financial statements/results are materially misstated. The impact of qualification/s may be quantifiable or may not be determinable.

Still, the qualifications may indicate that financial results presented by the management do not reflect the true and fair affairs of the financial transactions of the company and may accordingly have a significant impact on stakeholders’/investors’ decision making.

An audit provides users of financial statements reasonable assurance that the statements are in conformity with GAAP and relevant regulations. The contribution of the independent auditor is to give credibility to financial statements, which are relied upon by creditors, bankers, stakeholders, the government and other interested third parties.

Ideally, qualifications should be avoided as they bring a negative perception for companies. This can be possible only if the issues are resolved between the management and the auditor. Further, for qualifications that are not quantifiable (e.g. lack of sufficient appropriate audit evidence/scope limitation), the auditor is permitted to state the fact through a limitation of scope or disclaimer of opinion.

While qualification is a common practice in case of a disagreement, SEBI provided for a mechanism to address qualified audit reports. Till November 2015, listed entities were required to submit a form (Form B) for a qualified audit report together with annual report.

The qualified opinion was reviewed by a SEBI committee and the Institute of Chartered Accountants of India (ICAI), and based on their recommendations, SEBI could ask the companies to either get the opinion rectified or revise the financial information to address the qualifications.

The revised financial information was submitted as pro-forma results (revision to the results already filed/ submitted) and companies would further adjust their next year financial statements for a prior period error.

Further, it should be noted that Form B was required to be submitted along with the annual report which are filed must later than the financial results (filed within 60 days of the year-end). Also, no information about the qualifications was required to be filed for the quarterly results.

There’s more

While this process provided a meaningful mechanism to address the disagreement between the auditors and management, it failed to provide timely information to stakeholders.

Essentially, a financial result published by a company could be misstated by a significant amount and not known to the investors at the time investment decisions are being taken. Also, Form B provided for limited information — i.e. qualifications with management explanations and not matters such as quantification and the impact on the financial results.

In September 2015 and May 2016, SEBI amended listing regulations which now require a ‘statement of cumulative impact of audit qualifications’ to be filed instead of Form B. Further, the statement needs to be submitted along with the annual financial results.

It seems that statement may be required for quarterly results as well. The statement contains detailed information such as net worth, net profit, turnover, total expenditure, earnings per share, total assets and total liabilities in a tabular form.

The numbers need to be disclosed on the basis of audited financial results/statements and also after adjusting the related qualifications. Thus, instead of simple qualification information, SEBI requires filing of adjusted numbers.

Further, auditor needs to continue to report for each audit qualification separately, as far as the details, type and frequency of qualification is concerned.

The revision by SEBI is a welcome change and addresses most of the deficiencies noted in previous requirements. The new requirements could be challenging but nevertheless provide the much needed information at the right time.

Also, it seems the SEBI review mechanism of the qualified reports has been done away with. The review needs to be undertaken by stock exchanges now.

It is currently not clear on how the review will be performed but it is interesting to note that in June 2016, sections related to re-opening of accounts and revision to financial statements under the Companies Act 2013, have been made effective. These sections became effective along with the constitution of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT).

These sections provide for the revision/ restatement for financial statements after approval from NCLT/ NCLAT. Additionally, unlike the existing Indian GAAP, the newly adopted IFRS converged standards (Ind AS) require restatement of previously issued financial statements, in case an error is noted for past periods. Reading all the requirements together, it seems India Inc. is entering the world of restatement (a common phenomenon in the western countries).

Necessary changes

Accordingly now, SEBI/ stock exchanges can apply to the Tribunal for restatement of financial statements of a company, if they believe that the accounts were prepared in a fraudulent manner, on the basis of qualifications filed along with financial results. This could be a significant change from the current practice of recording past period errors in the current year financial statements as a prior period item.

It should be noted that restatements have generally been viewed negatively as they reflect inaccurate financial reporting in the past. Most of the restatements have accompanied consequential adverse impact on the stock prices.

Overall, the amendments bring in some very necessary changes to improve financial reporting by corporate India and providing the relevant information on a timely basis.

As the changes have been introduced within a short-span of time, implementation of the same continues to be a challenge. It is imperative that corporates’ internal processes and systems are robust enough to address the changing requirements.

Piramal eyes more M&As in pharma, will launch new funds: Chairman Ajay Piramal

Piramal Enterprises has acquired US-basedAsh Stevens in an all cash-deal valued at $43 m

Piramal Enterprises has acquired the US-based Ash Stevens, a contract development and manufacturing company, in an all-cash deal valued at nearly $43 million. Ash Stevens will be the third facility for Piramal Enterprises in the North American market. Speaking to BTVI, Piramal Group Chairman Ajay Piramal says the company is looking at growing both organically and through acquisitions in the pharma space. The group is also looking at renewable and financial services as major growth opportunities, he said. Excerpts:

Can you take us through the benefits, the synergies and the rationale behind the Ash Stevens deal?

Ash Stevens is a manufacturer of high-potency API (active pharmaceutical ingredients). This is a niche, fast-growing market. In the last six years, the CAGR in this business has been about 9.9 per cent as far as the high-potency APIs are concerned. And we believe that this will form an important part of our client strategy

In North America, we have a facilityin Canada which makes high-value, low-volume products, intermediates and finished products. We also have an injectable facility in Lexington, Kentucky; and this will fit in well with that.

Besides, the customers that we have for Ash Stevens and our existing customers are very complementary to each other. Therefore, we will expand the customer base that we have; the sales force we have today will be able to sale these products as well. So we just increased our overall product offering to our customers.

You have been accumulating assets with niche abilities and capabilities. Where would your next focus area be in terms of geographic exposure or the addition of another such facility? Is it safe to assume that the interest will continue in the US?

In a pharmaceutical business, we have really three components. One is contract research and manufacturing (CRAM) or what we call pharma solutions. The other is critical-care product from which we make products such as inhalation and anaesthesia products, which go into critical-care centres such as surgery. And the third is OTC (over-the-counter).

Whereas CRAM and critical-care are both global businesses, OTC is an Indian business. So we look at growing both organically and through acquisitions in all these areas. So you could see acquisitions, both for products as well as for services.

It will not necessary happen only in the US, even though the US is the largest market. It could be also in Europe or in Japan as well. In the OTC space, which is only an Indian market that we carter to, we will do acquisitions only in India.

In the last eight months, we have acquired a series of three groups of brands for OTC in India.

You also recently invested ₹800 crore in ACME Solar. What is the rationale behind that and what are your future plans for it?

We are not really running these businesses as investment. It is not like we do in Ash Stevens. These are loans from which we earn interests over a fixed period of time and we will get it back. That is one thing.

On the other hand, we do feel that solar and renewable energy is a high-growth area and we want to back good promoters in this area so that they can create value and so can we.

The results have been good and you have been making acquisitions as well. What can we expect from the group in FY17?

As far as growth is concerned, I think we are fortunately well placed in those areas where we see good growth. So first, we see financial service, which is growing well with the growth in economy and PSU banks taking a little bit of back seat. It gives a good opportunity for NBFCs and private-sector companies to do well and gain market share. We will also launch a few funds in the near future.

Favourable policies boost retail space offtake: JLL India chief

Malls seeing healthy rate of pre-commitment, occupancy

Anuj Puri,
India Head, JLL

After a three-year lull, malls are experiencing healthy rate of pre-commitment and occupancy, thanks to favourable policies that have boosted retail space offtake.

The main reasons attributed for the surge in space offtake are the recently policies announced in favour of the retail sector — 100 per cent FDI in single brand retail, relaxation of sourcing norms for multi-brand retailers, 100 per cent FDI in marketing of food products and the revised Model Shop and Establishment Act (that allows shops to remain open 24x7). After witnessing a dull period in terms of new supply of Grade-A malls during the last three years, 2015 saw a remarkable jump in completions,” said Anuj Puri, Chairman and Country Head, JLL India.

The major completions coincided with the festival season in India and included the Mall of India and Gardens Galleria in NCR Delhi, VR Mall in Bengaluru and Acropolis Mall in Kolkata, among others.

“This time around, malls were experiencing healthy rate of pre-commitments and as a result, their occupancy during commencement is remarkable. Despite rise in completions, vacancy rate fell across major cities of India,” said Puri.

Rents mostly stagnant

“Rents at the mall were mostly remained stagnant for most part of the 2012-14 period. However, after May 2014 when the elections happened and results were declared, rents started to go up marginally as enquiries from retailers went up,” he added. As availability of retail eased, tenants now prefer superior malls. This is witnessing a key transition in the organised retail space across major cities.

“Retailers are now looking for malls that can be classified as quality structures — modern design that promotes good brand visibility, reasonably large floor-plates with ample open areas, professional mall management practices, good upkeep, suitable tenant profile and a good catchment. These factors helped the market to characterise mall properties into three buckets — superior malls, average malls and poor malls,” Puri explained.

Over the years, the best retail tenants started to approach only the superior malls, leaving some average malls and poor malls behind in the new cycle of resurgence in retail.

Consequently, the vacancy rate in superior malls was under 10 per cent as of year 2015, while average and poor malls saw vacancy in the range of 15-40 per cent on an average.

Period of transition

Puri said in terms of rental values, the superior malls witnessed a sharper rise, while the average and poor malls saw a drop in a few cases. The retail real estate market was in a period of transition where mall quality, average footfalls and trading densities were given higher importance than merely having a retail structure at the right location.

We want to nurture our financial services business as another UltraTech: AB Group

Chief Strategy Officer, on why the group merged AB Novo with Grasim

SAURABH AGRAWAL 
Chief Strategy Officer, Aditya Birla Group

Coming close on the heels of the controversial merger of Cairn India with Vedanta, the restructuring exercise of the Aditya Birla Group had drawn a lot of flak initially. However, things seem bullish for the AB Group, with both Grasim Industries and Aditya Birla Nuvo Ltd (ABNL) closing in the green on Wednesday. In an interview with BusinessLine, Saurabh Agrawal, the group’s Chief Strategy Officer, said the deal is good for investors as Grasim is getting a business which can be grown akin to UltraTech, while ABNL shareholders get to participate in new businesses through Grasim.

Why the restructuring now?

For seven years Grasim’s growth rate was very small in retail investors’ perspective while that of financial services reached a scale where we had to do something. Funding for ABNL — with interest in fast growing businesses like payment bank, health and life insurance and housing finance — was primarily coming from promoters. Now, with this business getting into a significant growth path, the fund requirement is going up. Moreover, there has been consolidation in the insurance and asset management business, where ABNL has exposure. The NBFC business has built a book of ₹27,000-28,000 crore, growing at a CAGR of 40 per cent for the past five years. If the NBFC business grows at 30 per cent CAGR for the next three years, the lending book will be ₹70,000-80,000 crore. For this to happen we need to put in capital of ₹6,000-7,000 crore every year, even at a 6:1 debt-equity ratio. The raw material for the NBFC business is money. We have to raise funds efficiently since we do not accept deposit like banks.

ABNL could have raised its own money...

Its current balance sheet is already leveraged three times the Ebidta and does not have enough cash to take care of the financial needs. Moreover, it needs to have stronger parentage, which is extremely important. Today it enjoys a credit rating of AA plus and Grasim has AAA rating. A better rating helps in lowering the cost of fund. With the new Grasim as promoter, ABFS can get a better rating and raise money at 25-50 basis point lower. With a book size of ₹80,000-90,000 crore in NBFC, and leveraging at ₹70,000-75,000 crore, it leads to a saving of ₹300-350 crore. With lower cost of borrowing we would be able to deliver a better quality loan book. Our NPA is 0.6 per cent. If we demerge financial services from ABNL and list it directly there would have been a lot of discomfort with SEBI, RBI and IRDA as well.

Will the promoters increase their holding in ABFS to pump in capital?

We are starting with 57 per cent shareholding so that we have enough room for the financial services business to raise money. We are having Grasim at the back end. In case the market options are not open Grasim can put in the money. All these led us to give the financial services business the parentage of Grasim and grow it like UltraTech. We want to nurture the financial services business as another UltraTech. We had incubated a cement business with VSF (viscose staple fibre) cash flow for seven-eight years. That’s where the thought came from.

Just like financial service, the strong parentage can also help Idea raise money?

That’s right. Since Idea has a well established business it could raise money on its own. It is well capitalised right now. It generates about ₹2,500 crore of free cash flow every quarter. It is among the least leveraged in the telecom industry.

It has a leverage of 3.3 times and has enough room to raise funds. It has a lot of assets as well — a huge portfolio of towers worth ₹15,000-16,000 crore. Bharati has been monetising towers to raise money. Idea has that option as well.

Will minority shareholders be left high and dry with the promoters’ holding, along with that of Grasim, going up to 64 per cent in Aditya Birla Financial Services post-restructuring?

Post restructuring, Grasim will own 57 per cent in ABFS and the promoters will have 17 per cent. However, the promoters own only 39 per cent in Grasim. So, the promoters will own only 39 per cent of 57 per cent of Grasim’s holding in ABFS. On the other hand, currently the promoters directly own 58 per cent in ABNL. Frankly, the promoters can control the financial services more now with a 58 per cent stake in ABNL than after the merger.

Will Grasim provide guarantee for loans taken by Idea?

Why should that happen? It is all a wrong perception being perpetrated by vested interests. It was not there in the back of our minds when we worked out this restructuring. We have not funded Idea in the last seven-eight years. Just because RJio is launching people are putting two plus two together and that is where we are getting coloured.

If you see, the ABNL stock price has gone up hugely because of speculation. People thought the promoters are having a 58 per cent stake and it is going to be significantly favourable. But the valuation was not done by us but by independent valuers. So some people were caught on the wrong foot.

Infrastructure companies planning to mop up funds through Infrastructure Investment Trusts (InvITs)

IRB Infrastructure Developers is planning to raise ₹5,000-6,000 crore, expected to file the DRHP within a month. IRB intends to use the proceeds mainly to fund new road projects it intends to bid for and also for existing ones. The company would also be bringing its six NHAI toll road projects, valued at ₹7,000-8,000 crore, into the trust. The company has mandated Deutsche Bank, Credit Suisse and IDFC Bank as merchant bankers for InvITs, sources close to the development told BusinessLine.

Other players are in the queue

Companies such as Adani Group, GMR Infrastructure, IL&FS Transportation Networks and L&T are also understood to be looking at InvITs to raise funds. Sterlite Power Transmission, a company that was demerged from Sterlite Technologies, is also planning to file the DRHP for InvITs by September. SPTL had filed an application for InvITs with SEBI in June. According to the sources, it was planning to raise ₹2,500-3,000 crore.

About InvIT

IRB fund raising could be the first fund-raising through an InvIT after it was first proposed in the Union Budget in 2014. In this year’s Budget speech, Finance Minister had proposed that any distribution made out of income of a SPV to InvITs having specified shareholding will not be subjected to dividend distribution tax, giving a much-needed fillip to the trust.

InvITs, much like mutual funds, enable individuals to pool investments into the infrastructure sector and earn a return on the income (after deducting expenditure). InvITs can invest in infrastructure projects, either directly or through SPVs, while in case of public-private partnership projects, such investments can be made only through SPVs.In India, InvITs are regulated by SEBI and are mandated to be listed.

Source: http://buff.ly/2b5YU1r

GST & Indian Railways Sustainability

RAMAKRISHNAN T S

Doctorate in Public Systems from IIM Ahmedabad and currently teaches at TAPMI, Manipal 

With the passage of the Goods and Services Tax (GST) Bill in Parliament, there is a sense of well-being in the country, as it is expected that this tax would turn India into a single market, cut the flab in the logistics industry and remove distortions created by inter-state taxes, thereby make the manufacturing sector more competitive. Growth of the manufacturing sector would spur growth of the logistics industry. The transport sector would be happy with the double benefit of growth in its business and reduction in transportation costs.

But Indian Railways (IR) should be worried with the arrival of the GST, unless it wants to remain in a sthitpragya state.

Why so?

Because IR’s sustenance, freight traffic, — which accounts for about 70% of its revenue from transport operations — has been plateauing of late, registering about 1.095 billion tonnes in 2014-15 and 1.107 billion tonnes in 2015-16.

Indian Railways had commissioned the National Council of Applied Economic Research (NCAER) to assess the prospects of its freight traffic in 2016-17 as well as to suggest possible strategies.

NCAER recommended reduction of freight rates, removal of 10% port congestion charges, review of 15% season surcharge, some changes in operations such as reviewing the two point loading restriction, restoring the long- term committed business segment of short- distance freight traffic with concessions and abolishing dual freight rates for transporting iron ore (30% more for export than for domestic use). All these recommendations were made essentially on the principle of price elasticity — that with decreased freight charges, demand would increase substantially and hence, overall revenue would also increase. IR removed 10% port congestion charges and 15% season charges effective from May 1, 2016. It abolished dual freight rate for transporting iron ore effective from May 10. These measures did benefit IR — a three% overall increase in freight loading — but there was also a seven% overall drop in revenue in June 2016 compared to June last year. This apart, in April and May this year, there was a decrease in freight loading by two% from the figure during the same months in 2015. In a nutshell, IR did not generate as much revenue in the first quarter of 2016 as it did in the same quarter last year. Neither the existing freight charges nor the reduced freight charges helped IR increase its revenue from freight traffic — decreased freight charges did help it transport some more freight but with a loss of revenue. Why? Price elasticity works only when the service delivery is the same across competitors. IR’s service delivery has been worse than other transport modes. It became convenient for IR to go for the knee- jerk measure of reducing freight rates based on the NCAER report without even assessing by itself what was essentially wrong with its freight service model. NCAER, on its part, did not analyse the issue in a holistic manner to arrive at path- breaking solutions to increase rail freight traffic.

What was the core issue that stopped IR from increasing its freight transport output? It is this: IR has been unable to provide faster and timely transportation of non- bulk freight transport and hence has been unable to make a foray into non-bulk freight transportation. Whether it is the transportation of raw material, partly processed goods or finished goods, those who look for faster and committed delivery don’t prefer transporters who transport goods at their own will and are non- committal about delivery.

To understand this fully, we need to know the freight transport pattern in general. There are two categories of freight — bulk and non- bulk materials. Materials defined by weight and volume such as coal, iron ore, food grains, petroleum and cement are bulk materials.

There is a qualitative difference in the transportation and handling of bulk and non- bulk materials. Some of the bulk items such as iron ore and coal are of low value, whereas most of the non- bulk items are invariably of high value. Materials in transit also form the inventory.

Hence, the transportation of non-bulk materials happens in smaller consignments, rather than accumulating and transporting them in one go. End-to end transport also has to be faster, safer (for the material) and the material has to be delivered in the committed time, even if the transportation cost is higher. On the other hand, the sole criterion for transportation of low- value bulk material is that it should be cheap. Given this condition, IR had a clear edge over road transport in transporting low- value bulk materials of coal and iron ore. IR also has an edge in transportation of high- value bulk materials such as cement, fertilisers, food grains, petrol, oil and lubricants, especially if these are transported over long distances. As a result, bulk items contribute about 89% of freight loading and 85% of freight earnings of IR. However, IR pays a price for transporting bulk items, as 40% of the wagon movement is on empty rakes. This is a huge flab IR carries for capturing and retaining low- value bulk material transportation.

In bulk freight traffic, coal is the single major source of revenue for IR, contributing about 30%, against 29% of the entire passenger transport.

Hence this would hit IR’s financials. The NCAER study estimated that freight transport for IR would grow at 2.1% in 2016- 17 and half the growth would come from coal alone. However, IR may not be able to achieve any addition to coal transportation volume as conditions are not conducive.

As of 2016 India has surplus power and its power sector has been steering towards solar power. Against this backdrop, IR cannot depend any more on coal to augment its freight traffic and hence, its revenues. Moreover, pipeline and coastal shipping have also forayed into transportation of bulk items, giving IR tough competition. For medium distances, cement transportation has already moved towards trucks. In such a situation, it is difficult for IR to retain existing bulk freight transport volume, let alone augment it.

Rationalise passenger transport to gain freight traffic

The capacity released thus would help the Indian Railways move freight traffic at an average speed of 50 km per hour. This would enable it to make inroads into transportation of non-bulk items

To overcome the plateauing of freight traffic, the Indian Railways' (IR) Hobson's Choice is to increase transportation of non-bulk freight. The larger issue for IR is providing faster and more reliable end-to-end connectivity than road transport, rather than a comparison of its freight transport fares with that of road transport. In India, a truck travels about 280 km in a day; freight trains cover about 576 km (at an average speed of 24 km per hour) during the same period.

However, for non-bulk freight, less frequency, lack of facility to transport smaller consignments, cost and uncertainty associated with last-mile connectivity in rail freight transport mean that truck transport has remained competitive.

The issue becomes much larger for IR with GST. With the removal of state border checkpoints, a truck is expected to travel about 440 km in a day. Hence, to capture non-bulk traffic, IR needs to increase the average speed of its freight trains from 24 kmph to at least 50 kmph. There is no restriction on the part of IR's trains (either passenger or freight) to reach a maximum speed of about 90 kmph on any section of the network -almost all stretches support that speed. The issue is about priority in accessing track infrastructure and hence, the associated reduced average speed. Although about 70% of revenues from transport for IR comes from freight transport, it gets the least priority in the waterfall model of allowing access to tracks. Also, it uses only about 33% of the IR's network capacity. Luxury trains such as Shatabdi, Rajdhani, Duronto travelling at an average speed of 80 to 100 kmph, Express/Mail trains with an average speed of 50 to 60 kmph and ordinary (passenger) trains running at an average speed of 36 kmph get first, second and third preference, respectively. Freight trains come next in the order of preference.

Although a detailed study would yield a blueprint for how IR could achieve both higher passenger volume and freight transport for the given network, the directions in which it should move are outlined here. To achieve an average speed of 50 kmph, freight trains should get access to at least 50% of IR's network. Then the question is how the existing volume of passenger traffic can be maintained, if not increased, with just 50% access to network capacity against the current 67% access.

The share of passenger traffic in ordinary trains decreased from 37.5% in 2005-06 to 28.42% in 2014-15, whereas the share of faster trains increased from 62.5% in 2005-06 to 71.58% in 2014-15. Since 2013-14, passenger traffic in ordinary trains has been decreasing in absolute numbers also. Even some of the Mail/Express and luxury trains have been running without much demand for years together.

The Comptroller and Auditor General (CAG) of India has been highlighting this anomaly consistently in its earlier reports. For instance, in its report in 2009, the CAG highlighted that 30% of the newly introduced trains in nine zones between 2002-03 and 2007-08 had less than 50% occupancy; yet many of them are still running. The Bibek Debroy report submitted in 2015 mentioned that there are at least eight luxury trains, which have been running on losses. Their losses are because of poor occupancy, as evidenced from the hundreds of tickets available even on the day of journey of these trains.

Against this backdrop, IR should go for a major overhaul of the schedule of its passenger trains. Although there are regular official orders that instruct railway zones to identify trains with an occupancy rate of 50% and reduce their services or coaches, there is no concerted effort in that direction on the basis of train data analysis.

The first measure I would recommend in this direction is that IR operate passenger trains based only on demand; populist trains introduced in the last two decades without commensurate patronage should be trimmed by reducing their frequency, if not altogether stopping them. Even as several trains have more than 200 waitlisted passengers every day, running some trains with so many vacant seats is a criminal waste of the scarce resource of a railway network.

The second measure I would recommend is that IR estimate the total transport demand (rail, bus, car and air) in terms of O-D pairs between cities or clusters and then reschedule trains that provide faster connectivity between the cities or clusters with limited stop service at originating and terminating cities or clusters.

Although Railway Minister Suresh Prabhu has not yet yielded to the pressures of additional stops or unviable trains, more than enough damage has already been done. That damage has to be reversed.

The third measure I would recommend is that IR phase out at the earliest ordinary trains that have lost patronage and which cause congestion on a high-density network. IR locomotives take about 10 minutes to reach their maximum speed permitted on that section. The problem with ordinary trains is that with stoppages as frequent as every 15 km, they have been decelerating even before accelerating to reach the maximum speed. The basic theme of all these measures is that trains (both passenger and freight) are supposed to continuously run all the time, except for pick-up and drop at points determined by the O-D data.

If the flab in scheduling of passenger trains is removed, according to the measures suggested here, IR could achieve the same passenger traffic - or even more - by utilising just 50% of its network. The average speed of passenger trains would shoot up by at least 25 kmph, thereby leaving 50% of the network for freight traffic. With the capacity released by this rationalising measure, freight traffic would be able to move at an average speed of 50 kmph, thus making major inroads into the transportation of non-bulk items. Without a rationalisation in passenger transport, IR may lose high-value bulk and non-bulk freight traffic to road transport completely. It would then have to live like a parasite on the subsidy provided by the Budget.

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Article Collated by Surya Narayan Nayak

GST impact on SEZ, EOU & DTA

‘One nation, One tax’. This slogan has gained currency to justify introduction of the proposed national Goods and Services Tax (GST). This catchy slogan is rather misleading but deserves to be taken seriously, as an objective to be achieved in due course.

GST as envisaged at present is far from the ideal of a single tax working seamlessly through the supply chain of all goods and services. Many items will be out of its net. Some types of taxes will not be covered. Exemptions will be there. States will have the right to levy new taxes. Taxes levied by local bodies continue. Even so, it is a beginning. In its present form as envisaged, GST promises to widen the base, simplify processes, bring greater compliance and make it easy to carry on business. More important, it gives an opportunity to raise questions regarding continuation of some other exemption schemes.

India is fragmented by way of different tax dispensations for special economic zones (SEZ), export oriented units (EOU) and the domestic tariff area (DTA). SEZs are deemed to be foreign territories for the purpose of application of certain tax laws. EOUs till recently were bonded warehouses but now operate under special tax exemptions. Different businesses in the DTA get different types of exemptions, under the excise, customs, service tax and sales tax laws.

The SEZ scheme was introduced in 2000, as an improved version of the earlier Free Trade Zone (FTZ) and Export Processing Zone ( EPZ) schemes. Special legal dispensations by way of the SEZ Act, 2005, and SEZ Rules, 2006, were put in place with great hopes of facilitating creation of world- class infrastructure where investment would flow, generating a lot of employment and exports. Liberal tax exemptions were given to SEZ developers and units set up in SEZs for manufacturing, trading and for providing services. However, the scheme has not succeeded as expected. It is time to examine whether this scheme should continue.

The EOU scheme was introduced in 1980, when domestic economic policies were very restrictive. The scheme succeeded in that environment and even for years after liberalisation of the economic policies. However, for the past few years, the scheme’s advantages have eroded, as they’ve been brought nearly at par with DTA units in fiscal benefits. The income tax exemption for EOUs have been taken away. DTA units are also able to import capital goods dutyfree against the export obligation. The only benefit not available for DTA units but available for EOU is refund of central sales tax ( CST) on purchases for export production.

On the flip side, DTA units get benefits under the Services Exports from India scheme; EOU ones do not. The CST refund benefit will go with the adoption of GST. So, there might not be good enough reasons to continue with the EOU scheme.

Just as multiplicity of taxes results in complications and higher compliance costs, a multiplicity of schemes to boost exports also result in unnecessary difficulties and pointless paperwork. It would be better to scrap superfluous schemes and end many of the exemptions that now serve very little purpose.

So, on this Independence Day, let us hail the initiative to bring in something new by way of GST and hope it will help generate fresh ideas.