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Cartels set up ‘briefcase’ firms, defraud GST regime of thousands of crores






New Delhi: Parliament was informed that 3,626 cases of tax evasion had been detected in the three quarters of FY19 under the goods and services tax (GST) regime. The total evasion in these cases works out to Rs 15,278 crore, of which Rs 9,959 crore has been recovered.

This revelation comes after recent data indicated compliance under GST was declining. The percentage of taxpayers not filing returns rose from 15.44 per cent in April 2018 to 28.75 per cent in November 2018. Even among composition tax payers, the percentage of non-filers rose from 19.28 per cent in Q1FY19 to 25.37 per cent in Q2FY19.

Why is it that compliance levels have not stabilised even a year and a half after GST was put in place? One reason, indirect tax authorities are finding, is mushrooming input credit frauds run by ‘briefcase’ companies. A formal admission of this problem was made in the GST Council meeting in August by the finance minister. He observed that if such companies were not traceable, the recipient who had used the input tax credit would be liable to pay even though he might have paid the tax to the seller, according to the minutes of the meeting.


Business Standard spoke to senior GST officials and experts, and reviewed official records that reveal the modus operandi of scams to get a sense of the magnitude.

“We are seeing the tip of the iceberg. The one-nation one-tax concept has created, for the first time, countrywide cartels specialising in defrauding the GST system,” said one of the senior GST officials involved in detecting frauds.

Under GST, taxes paid at intermediate levels in a production chain can be claimed as input credit, which is set off against the total liability. Sellers are required to upload sale invoices to GST Network (GSTN). These automatically get reflected as purchases of the taxpayer in the supply chain, allowing the latter to claim input credit. This allowed officials to cross-check vouchers of inward and outward purchases, known as voucher matching. This could be done online, reducing the requirement of physical inspections.

But faced with outcry over consequent high compliance burden, granular voucher matching was deferred. “The only way the system could oversee voucher matching was through GSTR-2 return. But that has not been activated. We are now going by whatever the taxpayers say. The only way to catch is by physically inspecting suspicious individual entities or transactions,” another senior GST official said.

A former member of the Central Board of Indirect Taxes and Customs (CBIC) said, “This is the reason why matching (of invoices) was contemplated. This has dogged us in both CST and VAT regimes.”

Take the case of a scrap iron and steel business busted in Bengaluru in November. A single person had registered 20 fake companies on the GSTN. “They floated fake companies at fake addresses, issued fake GST invoices and generated fake e-way bills, with fake vehicle registration details without supply of any goods… causing loss to the exchequer,” a government report disclosed. In this case, fake invoices worth Rs 1,200 crore had been generated to avoid GST liability of Rs 200 crore. Business Standard has reviewed records of several such cases.

“We are discovering links between such cartels and networks that run deep and wide. A large number of cases are being observed in trading,” said another official. “In effect, by fraudulently generating input credit in the system for GST taxpayers, these cartels are creating illegal money out of the GST system. Yet, they are to be prosecuted under relatively lax provisions of tax evasion.”

KYC norms for registering on GSTN were loosened to reduce compliance burden on taxpayers and prevent petty corruption that existed under the older tax regime.

Proprietorships and others can register by providing basic documents of identity and residence. These are difficult to verify digitally. And Aadhaar is not mandatory.

“PAN numbers of random people are being uploaded against ghost entities. These are available in the black market for as low as Rs 2,000. On physical verification, even electricity bills and rent deeds are being found to be bogus,” said another GST official.

Detecting such frauds will require much more than just data analytics. In all the cases that Business Standard reviewed, authorities required tip-offs and physical verification to catch culprits. And, while e-way bills were meant to improve compliance, as the system is hosted on National Informatics Centre servers, it is not deeply integrated with the GSTN that hosts the rest of the GST data.

The only way to catch culprits is to dig through all the layers of transactions to the point of origin. These layers, for a single case of evasion, can involve detecting dozens of fraudulent firms, thousands of vouchers generated from entities registered in different parts of the country.

“A lot of cases are being detected. In the initial period, we did not want to frighten everyone, so we moved softly. But people took advantage. We lost a lot of revenue in the initial months. We lost several trillions to transitional credit, which too was a scam and there was no verification of stocks,” the former member of CBIC said. “In the absence of granular voucher matching and in the face of a leaky KYC system, the best option is to study patterns of input credit that can legitimately exist at a point in time, in different production chains,” the member said. He added that while this would provide a sense of which sectors are to be tracked more closely, it would be a tedious exercise.

The GST Council has now decided to bring out a tweaked version of voucher matching in the next financial year. Pilots for this would be launched in April. The government plans to allow taxpayers to upload their vouchers on a daily basis if they find that easier.



RBI Governor takes public sector banks to task on rate cut




Mumbai: Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday came down heavily on public sector banks (PSBs) for not reducing their lending rates despite liquidity remaining ample, bond yields being at a multi-year low, and policy rates being lowered by 75 basis points (bps) in the past six months.

“Bond yields have come down, policy rates have fallen, the borrowing cost for banks is low, as is evident from softening rates on certificates of deposit (CD), and liquidity is in surplus. I am surprised banks are still not lowering lending rates,” Das told top PSB executives during a meeting, confirmed multiple sources.

According to a statement uploaded on the RBI website, the governor discussed credit and deposit growth amid a slowing economy. Even as credit growth remains muted, the flow of credit to the needy sectors should not be hampered “while following prudent lending, robust risk assessment and monitoring standards”, he said.


Sources said the governor had a word of caution for the retail segment. Since all banks are now devising their growth strategy focusing on retail, which is a small sub-set of the overall, banks need to be cautious and retail growth should be in sync with the risk policies set by individual bank boards, Das said, adding that risk monitoring and assessment should be robust for retail loans.

The governor also nudged banks to lend to non-banking financial companies (NBFC), instead of remaining risk-averse, since NBFCs are dependent on bank loans.

RBI Governor Shaktikanta Das takes public sector banks to task on rate cut

The statement by the RBI said Das discussed the “recent initiatives to address issues relating to NBFCs and the role banks can play in mitigating lingering concerns”.
Banking sources said the governor stressed that the central bank had taken enough measures to help provide liquidity to the sector through banking channels, but banks had not shown much willingness to avail of those. He discussed giving impetus to the resolution of stressed assets facilitated by the revised framework for resolution announced by the RBI on June 7, according to the statement.

Das was also critical of banks’ recovery efforts. According to the governor, banks are not doing enough to improve their recovery mechanisms, but are content with whatever they get by invoking the Insolvency and Bankruptcy Code (IBC). He also disapproved of the practice of aggressive write-offs of bad loans, instead of putting extra efforts to recover them,sources said.

The governor was also disappointed with banks’ inability to detect frauds early and prevent them.

The recent fraud involving Bhushan Power should have been picked up early, he said, adding banks needed to improve on their early warning signs. “On the suggestion of the governor, it was agreed that banks will identify one district in each state to make it 100% digitally enabled within a time frame of one year in close co-ordination and collaboration with all stakeholders …,” the statement said.

But the highlight of the meeting undoubtedly was governor’s criticism of banks for not lowering their lending rates. “The governor was unusually critical today, and the message was put out very clearly that lending rates on both new and old loans need to come down, and quite fast,” said a banker who attended the meeting, requesting anonymity.

The RBI cannot force a bank to cut rates, since it is a commercial decision. Instead, it can create enabling provisions to help them lower their rates. While the RBI has created such conditions, banks have been dragging their feet in order to recover their costs needed to do provisioning for bad debts.

The governor, sources said, was in no mood to listen to the same old argument of small savings rates being much higher than bank deposit rates. “His central argument was that all things remaining equal, banks are morally obliged to pass on the rate benefit that they are enjoying now because of the enabling conditions,” said a source.

The bankers promised to the governor that his viewpoint would be taken up at the board level for consideration. They said deposit rates would have to come down first.

Since February, RBI has executed three back-to-back policy rate cuts of 25 bps each in every bi-monthly policy meet, but banks have lowered lending rates on new loans only by about 30 bps. On old loans, the banking system does not pass on the rate benefit.

Most economists expect the central bank to cut the repo rate by another 25 to 50 bps. However, unless banks cut their lending rates, policy rate cuts become meaningless.

So far the banks’ logic was that the system liquidity was in deficit, which kept yields at an elevated level. And since lending rates are linked with bond yields, they couldn’t lower it. However, yields on the 10-year bonds have fallen about 110 bps since the start of the year, aided by a record Rs 3 trillion secondary market bond buyback by the central bank. The system is running a liquidity surplus of Rs 1.5 trillion, from a deficit of more than Rs 1 trillion two months ago.

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Rajan signals Brexit politics deterred him from seeking BOE job




Mumbai: Former Reserve Bank of India governor Raghuram Rajan has indicated the political challenges posed by Brexit were the reasons he didn’t apply to head up the Bank of England.

In an interview with the BBC, Rajan confirmed he hadn’t sought the position and cited the fact that central banking “has become much more political in recent times” as an explanation for why not.

The government is seeking a successor to Mark Carney, who will step down in January. Carney has been thrust into the heart of the Brexit debate either by having to adjust monetary policy to react to it or because of criticism from some lawmakers that he is overly pessimistic about the economic risks of leaving the European Union.


“It’s best a country has someone who understands the political situation within that country and knows how to navigate that,” Rajan told the BBC. “It’s obvious I’m an outsider and I have very little understanding of the deep ebbs and flows of politics in that country.”

Rajan, who now teaches at Chicago Booth School of Business and once served as chief economist of the International Monetary Fund, was recently named as the second most likely to get the BOE job by economists in a Bloomberg News survey. He trailed Andrew Bailey, the chief executive of the Financial Conduct Authority.

Chancellor of the Exchequer Philip Hammond started searching for a replacement for Carney in April and has attracted 30 applications. He met with Rajan in January, according to the Treasury, although Rajan declined to tell the BBC if he had been approached to run the central bank.

“I’m perfectly happy in my job,” he said. “I haven’t applied for any job.”

Hammond, who is likely to exit the Treasury once a new prime minister takes office next week, had spoken of looking for a new governor with international experience. Former Federal Reserve Chair Janet Yellen also didn’t apply, a person familiar with the matter said this week.

The reluctance of foreign economists to step forward may boost the chances of domestic contenders such as Bailey or current BOE officials Andrew Haldane, Jon Cunliffe, David Ramsden and Ben Broadbent. Others linked to the role include Shriti Vadera, the Santander Plc chair, and Sharon White, outgoing chief executive officer of regulator Ofcom.

Gerard Lyons, a former economic adviser to Boris Johnson, the likely next prime minister, has been interviewed for the job, according to The Times.

Rajan knows first hand of the political challenges of being a central banker. He left India’s central bank after just one term amid heavy criticism from segments of the government for offering opinions on matters unrelated to monetary policy.

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Mukesh Ambani caps his annual salary at Rs 15 cr for eleventh year in a row

Press Trust of India



New Delhi: Richest Indian Mukesh Ambani has kept his annual salary from his flagship firm Reliance Industries capped at Rs 15 crore for the eleventh year on the trot.

Ambani has kept salary, perquisites, allowances and commission together at Rs 15 crore since 2008-09, forgoing over Rs 24 crore per annum.

This is at a time when remunerations of all whole-time directors of the company, including cousins Nikhil and Hital Meswani, saw a handsome increase in the fiscal year ended March 31, 2019.


“Compensation of Shri Mukesh D Ambani, Chairman and Managing Director, has been set at Rs 15 crore, reflecting his desire to continue to set a personal example for moderation in managerial compensation levels,” RIL said in its latest annual report.

His remuneration for 2018-19 included Rs 4.45 crore as salary and allowances, which is marginally lower than Rs 4.49 crore he got in the previous 2017-18 fiscal.

Commission has been unchanged at Rs 9.53 crore while perquisites have risen to Rs 31 lakh from Rs 27 lakh. Retirement benefits were Rs 71 lakh.

Ambani voluntarily capped his compensation at Rs 15 crore in October 2009 amid a debate over right-sizing of CEO salaries. The salary cap continued even as all other executive directors saw their remunerations go up.

Ambani’s cousins Nikhil R Meswani and Hital R Meswani saw their compensation rise to Rs 20.57 crore each. They earned Rs 19.99 crore each in 2017-18 and Rs 16.58 crore in 2016-17. In 2015-16, Nikhil had got Rs 14.42 crore while Hital took home Rs 14.41 crore. In 2014-15, they had got Rs 12.03 crore each.

Also, one of his key executives, Executive Director P M S Prasad saw his remuneration go up to Rs 10.01 crore from Rs 8.99 crore in the previous year. He too has seen his remuneration rise steadily — from Rs 6.03 crore in 2014-15, to Rs 7.23 crore in the next fiscal and Rs 7.87 crore in 2016-17.

Refinery chief Pawan Kumar Kapil saw his compensation rise to Rs 4.17 crore from Rs 3.47 crore in 2017-18. In the previous fiscal, his remuneration had fallen to Rs 2.54 crore, from Rs 2.94 crore in 2015-16. He had earned Rs 2.41 crore in 2014-15. The two however did not get any commission in 2018-19.

“Performance criteria for two Executive Directors, entitled for Performance Linked Incentive (PLI), are determined by the Human Resources, Nomination and Remuneration Committee,” RIL said in the annual report.

RIL’s non-executive directors, including Nita Ambani, also got Rs 1.65 crore each as commission, besides sitting fees. The commission was Rs 1.5 crore in 2017-18 and Rs 1.3 crore in the previous year.

Former State Bank of India (SBI) chairman Arundhati Bhattacharya got only Rs 75 lakh as commission as she was appointed to the board of RIL only with effect from October 17, 2018.

Ambani’s wife Nita Ambani, a non-executive director on the company’s board, earned Rs 7 lakh as sitting fee, up from Rs 6 lakh in the previous year.

Apart from Ambani, the RIL board has Meswani brothers, Prasad and Kapil as wholetime directors.

Besides Nita Ambani, other non-executive directors include Mansingh L Bhakta, Yogendra P Trivedi, Dipak C Jain, Raghunath A Mashelkar, Adil Zainulbhai, Raminder Singh Gujral, Shumeet Banerji and Aruundhati Bhattacharya.

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