THE GIST of Editorial for UPSC Exams : 01 August 2019 (Bitter brew: VG Siddhartha’s tragic demise raises concerns about tax terrorism (The Hindu))

Bitter brew: VG Siddhartha’s tragic demise raises concerns about tax terrorism (The Hindu)

Mains Paper 3: Economy
Prelims level : Tax terrorism
Mains level : Tex terrorism process and mechanism

Context

  • Café Coffee Day founder VG Siddhartha’s suicide perhaps the first recent case where a large promoter has succumbed to the pressure of financial distress has shaken the world of business and so many others who were familiar with his outlets in a more everyday sense.
  • But it has also shown up serious faultlines in the government-business interface. In his July 27 letter, Siddhartha has quite unambiguously spelt out harassment by income-tax authorities and pressure from private equity (PE) investors, who wanted him to buy back their stake, as factors that pushed him to the brink.
  • The I-T department has contended that it has followed due process, but that is less than convincing.
  • There is a growing sense that businesses are being targeted if not ‘terrorised’ by tax authorities, with a political element often thrown in.

Indicting tax distress

  • Post demonetisation and GST, reports have surfaced of small and medium scale entrepreneurs being driven to distress, debt and suicide.
  • Tax harassment comes at a time when the economy is in serious trouble, owing to both supply and demand factors.
  • Credit to business has evaporated with banks being risk-averse and NBFCs running out of liquidity after the ILandFS crisis.
  • On the demand side, investment has stagnated and jobs are evidently in free fall, having a knock-on effect on revenues of businesses.
  • The erosion of market cap since the Budget has impacted publicly-held companies such as CCD, with panicky investors demanding their pound of flesh precisely when the company is in trouble.
  • The last is a pointer to a crisis in business confidence.
  • The Centre needs to recast the tax regime as one that is geared to facilitate ease of doing business.
  • India’s efforts to be investor-friendly would appear inconsequential if the overall climate is one where fear of authority prevails over a sense of freedom.

Behavioural attitude of PE investers

  • This incident also shines a harsh light on the behaviour of PE investors when bad times visit a business.
  • In theory, PE investors exist to supply patient risk capital to nascent growth ventures.
  • But in practise, particularly in India, they seem to act as fair-weather friends who are wont to demand an exit at the first sign of distress afflicting their investee firms, that too on their own, and often unreasonable, terms.
  • Many PE deals with Indian entrepreneurs appear to be debt deals that are carefully camouflaged as equity contributions, with capital infusions being made against the allotment of hybrid instruments such as convertible preference shares or agreements with the entrepreneur for buybacks of equity stakes at a guaranteed price.
  • The relatively short maturities (typically 7-8 years) for which most Indian investors are willing to invest in PE funds also adds to the pressure for short-term results and incentivises short-cuts.

Conclusion

Prelims Questions:

Q.1) With respect to “Banning of Unregulated Deposit Schemes Bill 2019”, consider the following statements:
1. It defines deposit takers as an individual, a group of individuals, Banks or entities incorporated under any other law or a company who asks for (solicits), or receives deposits.
2. It provides for the appointment of government officers, not below the rank of Secretary to the state or central government, as the Competent Authority.

Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both
D. None

Answer: B
Mains Questions:
Q.1) Describe the strategy adopted by PE investors in Indian market.

UPSC 2019
Civil Services EXAM
Civil Services Preliminary
Civil Services Mains
IAS PRE GS
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