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Tax cuts may impact fiscal deficit, capex: Economists

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New Delhi, Sep 20 : As the exuberance of stock market and corporates over the tax cuts settles downs, economists and experts on Friday warned of fiscal slippages due to such reduction that may impact fiscal deficit, capital expenditures and cause higher borrowings.

Though the positive effects of the changes are also not ruled out by them economists also said the cuts may not exactly boost consumption, investment demands in a big way.

“We expect today’s announcement to provide a big boost to business sentiment in the immediate term, with a modest knock on impact on consumption demand, particularly for big ticket items. However, the impact on fresh investment activity may be visible with a lag,” Aditi Nayar, Vice President, Principal Economist told IANS.

“Today’s announcement would complement the expected further repo rate cut in the October 2019 policy review. We continue to expect a 25 bps rate cut in the upcoming MPC review. In light of the likely backended pickup in investment activity and expenditure restraint that would be required, particularly at the state government level, we are not yet revising our FY2020 GDP forecast upward from 6.2 per cent,” she added.

Former chief government statistician Pronob Sen said, “It is certain concern for fiscal deficit of 3.3 per cent which will be under pressure. The tax cuts pushes up for more borrowings due to gap between revenues and expenditure. But if they want to keep the fiscal deficit under control, they have to cut capital expenditure as from revenue side they can cut very little like cutting PM Kisan Card. But in a slowing economy, if you cut capital expenditure, it does raise an alarm.

“It is actually more worrying now with such kind of tax cuts as it is not going to have an expansionary impact immediately but if you cut expenditure it may have an immediate contractionary impact. That will further sink the economy. Inflation may go down further.”

Sen said RBI would now still go for a rate cut but of lesser magnitude. They might still look at 25-35 bps cuts instead of 100 bps cuts as was being talked of.

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) in August lowered its repo rate by an unconventional 35 basis points to 5.4 per cent. He also raised the issue of transmission to the common man from corporates any lower rates.

“It can’t be. This is a tax on profits which come at the end of the year. In order to determine how much you can pass on depends upon your estimate of how much you expect to sell. And thats not easy to work out in advance. There may be some insignificant reduction in price,” N.R. Bhanumurthy, Professor at National Institute of Public Finance and Policy said.

“3.3 per cent of fiscal deficit was never a sacrosanct number. It was given under an assumption of 8 per cent GDP growth and 12 per cent nominal growth both of which have been proved wrong as of now. But it is difficult to predict to what level it may go up as new policy measures are coming at regular intervals almost creating uncertainties and is a situation of ‘work-in-progress’.

“But there is a need for fiscal stimulus when the economy is going through a cyclical and structural slowdown, when the economy needs such fiscal stimulus, worry about fiscal deficit should be kept aside. Now the the cut of corporate taxes, fiscal deficit would widen.

“Tax cut and tax revenues are not linear function. There may be some increase in tax base due to the announcements will increase to some extent tax revenues. If the government has ruled out sovereign borrowings programmes, then an additional 10 billion dollars worth of money has to be generated internally. With the recent government measures, all these have fiscal impact. It now depends how RBI assesses the situation.”

He said today’s corporate tax cut will not lead to any consumption demand but may create some investment demand. One part of demand story is taken care today. For consumption demand to rise, ministries should front-load their expenditures particularly in rural development ministry which has huge allocation on road, housing, MNREGA.

For the current fiscal the fiscal deficit is 3.3 per cent. As per the July 5 Budget, the government’s own capital expenditure (capex) is projected to rise a shade less than 7 per cent in 2019-20 (FY20) to Rs 3.38 trillion. In her maiden Budget presented in July this year, Finance Minister Nirmala Sitharaman had pegged the Union government’s market borrowings to be at Rs 4.48 lakh crore in FY2019-20. According to sources, Centre may scale down FY20 tax aim by Rs 1 lakh crore. The government has kept a direct tax target of Rs 13.35 lakh crore for FY20.

Both the GST and direct collections have been disappointing. As on early September, direct taxes are growing at 5 per cent against a budgeted growth rate of 17.3 per cent, a huge gap there to be flagged off. GST collections are also growing at 6 per cent, against a required growth rate of 15 per cent to achieve the FY20 budget estimates.

Officials say the government needs to collect Rs 1.10 lakh crore to Rs 1.13 lakh crore a month to stay on course on GST collections, which hasn’t been the case at all so far.

While a fiscal slippage now appears inevitable given that the government’s tax collections will fall substantially short of its budget estimates, expenditure cuts may still be required to prevent the fiscal deficit as well as G-sec yields from rising too sharply in FY2020. Additionally, lower central tax collections will impact the state governments’ fiscal situation as well through likely cuts in central tax devolution, and borrowing constraints may necessitate state government expenditure restraint or deferral.

The government has slashed the corporate tax rates to 22 per cent for domestic companies and 15 per cent for new domestic manufacturing companies and other fiscal reliefs in order to promote growth and investment, a new provision has been inserted in the Income-tax Act with effect from FY 2019-20 which allows any domestic company an option to pay income-tax at the rate of 22 per cent subject to condition that they will not avail any exemption/incentive.

The effective tax rate for these companies shall be 25.17 per cent inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax. The total revenue foregone for the reduction in corporate tax rate and other relief is estimated at Rs 1,45,000 crore, the Finance Minister had said.

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Singh Bros were alter egos acting with impunity

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Shivinder Mohan Singh, Malvinder Mohan Singh,

New Delhi, Oct 20 : How were the Singh Bros — Malvinder Mohan Singh (MMS) and Shivinder Mohan Singh (SMS) — the centrifugal forces behind the Rs 3,000 crore Religare Group fraud?

Working in conjunction with CEO Sunil Godhwani (SG), the troika stripped Religare Finvest (RFL) and other group companies bare through a craftily structured construct which allowed them to fly under the radar and even operate with impunity to avoid detailed regulatory supervision of the RBI.

It is pertinent to mention that at the time the loan was extended, SMS, MMS and SG were fully controlling RFL and were acting as its alter egos. Therefore, it is impossible that the aforesaid transaction was carried out without their knowledge and support. In addition to cheating, SMS, MMS and SG are also liable for the offence of criminal breach of trust since RFL and its shareholders had reposed their trust in the said erstwhile promoters and senior management of the parent entity REL and of RFL.

Since the Board of Directors of RFL was accustomed to the act as per their advice and instructions, they thus exercised deep and pervasive control over it.

In this context, it is pertinent to mention that RFL separately also extended loans cumulatively amounting to Rs 120 crore to Vitobha, Best and Devera and even those loans have not yet been repaid, which is indicative of yet another set of fraudulent transactions intended to siphon off monies and cause wrongful loss to RFL, and its shareholders.

Tara Alloys Ltd admits that a loan amount of Rs 85 crore was disbursed on May 24, 2017 by RFL to it taken as a Short Term Loan (for short “the STL”) which carries an interest @14 per cent p.a. Tara alleged that the amount was transferred back to RFL on May 24, 2017 through intermediary companies, allegedly at the behest of RFL to enable to repayment of loans obtained from it by other third parties, within hours of the receipt on the same day. It appears that upon obtaining the loan money from RFL, Tara transferred the same to some other entities and never intended to repay this loan to RFL.

Gurudev Financial Services Pvt. Ltd. admits that the loan amount of Rs 100 crore was disbursed on May 24, 2017 taken as STL, which carries an interest @14 per cent p.a. Gurudev submitted that 5th loan amount of Rs 100 crore obtained from RFL was further transferred to intermediary companies, alleged at the behest of RFL to enable a repayment of loans obtained from it by other third parties, within hours of the receipt on the same day.

It appears from the documents annexed that Gurudev transferred the funds received from RFL to some other entities and never intended to repay the loan to RFKL.

Annies Apparel Pvt Ltd also admits that the loan amount of Rs 100 crore was disbursed on February 1, 2017 by RFL to it as a STL, which carries an interest @14 per cent p.a. The said loan was to be repayable by Annies to RFL on March 31, 2017. Annnies submits that the loan amount was further transferred to intermediary companies, allegedly at RFL’s behest to enable a repayment of loans obtained from it by other third parties, within hours of the receipt on the same day. It appears from documents annexed that the amout has been transferred further by Annnies to other entities and never intended to repay the loan to RFL.

Shri Dham Distributors Pvt Ltd. (earlier known as Abhiruchi Distributors Pvt Ltd) admits that the loan amount of Rs 92.40 crore was disbursed on February 1, 2017 by RFL to it as STL which carries an interest @14 per cent p.a. and the loan amount further transferred to intermediary companies, allegedly at the behest of RFL, to enable a repayment of loans obtained from it by other third parties, within hours of the receipt on the same day. It appears from documents annexed to the reply that the amount has been transferred further by Shri Dham to other entities and it never intended to repay this loan back to RFL.

One needs to add that the all these aforesaid entities are clearly connected and were acting as one economic unit while internal inquiries point to the fact that they are controlled by the brothers’ stockbroker N.K. Ghoshal and the registered office address of the aforesaid entities is also the same – 2764/17, 2nd floor, Hamilton Road, Mori Gate, North Delhi, Delhi 110006.

The plea adopted by the entities is also identical i.e. funds disbursed by RFL were transferred to intermediary companies to enable a repayment of loans obtained from RFL by other third parties. It is evident from the above that while these entities admit receipt of money and admit that since inception of the transaction(s), they never intended to repay the money back to the complainant company. Instead as intended, they transferred the money to certain intermediary companies. The loan(s) advanced to the aforesaid entities were never repaid, and it appears from their replies that they colluded with other entities and amongst themselves (since they are acting as a single economic unit, controlled by one person) to conspire and abet in the siphoning away of money from RFL, thereby causing a wrongful loss to RFL and its shareholders.

In the present case it appears from their admission that RFL was cheated by the directors/persons controlling these entities, which in addition to its directors as the relevant time is believed to be Ghoshal) and the directors and persons controlling the so-called intermediary companies to which the money was transferred, and allegedly in collusion and conspiracy with the erstwhile promoters and senior management of REL/RFL. While the replies do not clearly mention the name of the intermediary companies, the documents annexed to the reply show transactions with many entities who have taken other loans from RFL under the Corporate Loan Book portfolio.

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India-Turkey relations under Erdogan: Back to square one?

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Turkey Pres Erdogan and PM Modi

New Delhi, Oct 20 : Turkey and India, though not the best of friends, have been trying for the past three decades to overcome their differences, and strike a balance in ties, with a little give and take from both sides. But the relation appears to have nosedived of late under the Presidentship of Recep Tayyip Erdogan, who has taken on the mantle of becoming a “global Islamic leader”.

Bilateral relations have soured to an extent that India has decided to call off an upcoming visit of Prime Minister Narendra Modi to Ankara later this month, which would have been his first stand-alone official visit to the nation since taking over in 2014.

Erdogan has been openly cosying up with Pakistan, especially its Prime Minister Imran Khan. His sharp statement on Kashmir at the UN General Assembly last month, where he raked up the UN resolutions, and accused the world of ignoring the plight of “eight million people stuck” in Kashmir, have not gone down well with India.

Turkey has also markedly increased its defence cooperation with Pakistan. Ankara is building four MILGEM medium-sized warships for the Pakistan Navy, in a deal estimated to be worth over $1 billion. According to the deal, two ships would be built in Turkey and the other two in Pakistan under technology transfer. The two countries last year also inked a $1.5 billion deal for the supply of 30 Turkish attack helicopters – in the largest defence deal between the two sides.

Other reasons for the drifting apart of India and Turkey are New Delhi declining to accede to Ankara’s request for backing of its nuclear ambitions, and also Erdogan’s ire at India for allegedly not cracking down on the institutes of his close rival – Fethullah Gulen.

Turkey blames the Fethullah Gulen Terrorist Organisation (FETO) for a failed coup to topple Erdogan in 2016. Ankara has alleged that FETO has “infiltrated” India, and Erdogan feels India is not doing enough to curb its activities.

Explaining the Turkey-India relations, Professor A.K. Pasha, Associate Dean, School of International Studies at the JNU, says that Erdogan’s statement on Kashmir at the UNGA came as a “surprise”.

“Over the last 30 years, during almost all presidential visits and other visits from both the countries, we had agreed that Kashmir will be bilaterally resolved through the Simla agreement. But now he has raised the international issue of UN resolutions, which has come as a real surprise,” Pasha told IANS.

“In the last three-four years, we thought they have de-hyphenated their ties between India and Pakistan. But now it appears that they are slowly reviving the military relationship with Pakistan too, which is a matter of concern.”

According to the expert, in the 1965 and 1971 India-Pakistan wars, Turkey “supplied substantial military equipment of American origin” to Pakistan. “The Pakistani weapons were largely of American origin, and they needed spare parts, ammunition and other equipment, for which America had given the green signal to pass on to Pakistan,” he said, adding that “the Saudis then had also financed a major part of it”.

However, India has been able to strike a good relationship with Riyadh, especially under Modi.

“The Saudis we have been able to disentangle from other relationships,” he said.

According to Pasha, India had kept the Turks on “short leash” by supporting the Greek Cypriots at the UN. “So it was a quid pro quo, give and take — that we will not raise the invasion and occupation by Turkey of northern Cyprus, and Turkey would not raise the Kashmir issue at the international forums.”

Even when Turkey became a member of the Organisation of Islamic Cooperation (OIC) contact group on Kashmir along with Saudi Arabia, and other countries, Ankara explained to India that “since there is no voting taking place and resolutions are passed by consensus, so we have explained our position – that bilaterally Kashmir should be resolved between the two countries”.

But the OIC resolution passed by the Kashmir contact group on the sidelines of the UNGA last month was very harsh.

“The contact group not only passed resolutions which were very critical of India during the UN General Assembly, but also they went many steps ahead by voicing concerns about human rights and the need to resolve Kashmir through UN resolutions,” he added.

“So now we are back to square one, despite 30 years of diplomacy, and all the high-level visits there, and several rounds of talks have been held – at the NSA level, the foreign ministers level etc. Both sides had wide consensus on a wide variety of issues, on Afghanistan, Kashmir, and Greece and Cyprus.

“But now suddenly Erdogan has become a sort of global Islamic leader, which has come as a real surprise,” Pasha said, adding that the strain in ties would be diplomatically resolved.

In October last year, Erdogan had declared that “Turkey is the only country that can lead the Muslim world”.

Turkey has a fairly advanced defence industry, which manufactures small arms and ammunition. India was planning to buy two naval ships from Turkey, but the deal has been cancelled over Erdogan’s raking up Kashmir at the UN and other fora.

In terms of bilateral trade too, it lies in India’s favour. “There is nothing much we can import from Turkey. For the last 30 years, we have been buying pulses, cotton, machinery, and other things; but there is very little else we can buy from them. So the balance of trade is in our favour. Turkey has been maintaining that both sides should bring the balance to more acceptable levels.”

“The Turks were a little upset. They felt that the advantages were only accruing to India, and that they were at the receiving end,” which led to building up of animosity.

According to him, Turkey was also keen that both countries should cooperate in the construction industry in the West Asia and North Africa region. “But that did not work out.”

Turkey had two requests of India. It wanted India’s help in the nuclear field. “Turkey has nuclear ambitions, and India has huge thorium reserves in Kerala, and we have a fast breeder reactor which we have developed using thorium. Turkey wanted our technical skills, but the India government declined.”

“And the last straw that broke the camel’s back” was India’s refusal to close down the Gulen-controlled schools and other institutes in India, said Pasha.

The Gulen-controlled schools and institutes are spread across many parts of India, from Delhi, to Bengaluru, to Mumbai. “Some are disguised as schools, some as research centres,” he said.

“The Erdogan government was really upset that we have done nothing. He feels that America is using Gulen, and will bring him back to Turkey and organise a coup against him.”

“These are some of the issues that have led to cancellation of the visit of Modi,” says Pasha.

Gulen, a leading figure in the politics and religious affairs of Turkey, is exiled in Pennsylvania. Erdogen alleges that Gulen played a pivotal role in the attempted coup against his regime in 2016. His government has demanded Gulen’s extradition, but the US State Department has asked for “credible evidence of his terrorist” activity.

Gulen, who lives in Saylorsburg, Pennsylvania, since he was forced to flee Turkey in 1998 to escape trial for treason against the state, is known to be linked to the CIA.

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Singh bros deliberately imperiled Religare Finvest to siphon off money

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Ranbaxy Shivinder Singh

New Delhi, Oct 19 : Singh Brothers — Malvinder Mohan Singh (MMS) and Shivinder Mohan Singh (SMS) — were the lynchpins in the Rs 3,000 crore Religare Group fraud.

The FIR in possession of IANS describes the modus operandi of how the money was siphoned off.

The construct was as follows: The same company was funded with equal or higher amount on the day payment was received from it towards previous dues. In some cases, it appears that ledger entries were done on the earlier dates, but repayments were received on the same day or in a time span of 1-2 days when the same or some other companies were funded.

So, the whole thing assumed a rolling sort of plan, where money came from dues and then repaid elsewhere. It was a calibrated plan which though cut to cut worked like clockwork. Such was the level of chicanery that the two brothers, along with CEO Sunil Godhwani, practised that they deliberately imperiled Religare Finvest so that the money siphoning operation ran without interference.

Here is the architecture: For instance, on June 17, 2009, Rs 34 crore was received in total from Blue Line Finance, GYS Real Estate, Ligare Aviation, Ligare Voyage, Linear Commercial and Sharan Hospitality and on the very same day, Rs 54 crore was funded to Dion Global, Religare Technova Business Intellect and Religare Technova IT Services.

On August 17, 2009, Rs 200 crore was funded and repayment of Rs 100 crore was received from Religare Financial Consultancy. On March 30, 2010, Rs 36 crore was extended to nine companies and on the same day, repayment of Rs 32 crore was received from six other companies except Ligare Aviation from which repayment of Rs 13 crore was received and to which Rs 14 crore was extended on the same day.

On January 31, 2011, repayment of Rs 175 crore was received from Adept Creation, Leon Realtors, SVIIT Softwares and Vectra Pharmaceuticals and on the very next day, i.e. on February 1, 2011, Rs 174 crore was extended to Ligare Aviation, Oscar Investments, Religare Comtrade, RHDFC and RWL Health World.

A copy of the internal report based on inquiries by Religare Finvest, the complainant company, shows the firm’s exposure on account of the Corporate Loan Book (CLB) to the above mentioned related/friendly borrower entities is to the tune of Rs 2,397 crores.

While the aforesaid transactions had been taking place for sometime by way of round-tripping of funds, the loans were purportedly serviced. However, it appears that when the promoters realised that they would lose control over REL and its subsidiaries (including the complainant company), they caused the complainant company to extend loans, but then willfully defaulted on these loans.

Due to the various defaults on account of the CLB, RFL initiated legal proceedings under the Insolvency and Bankruptcy Code, 2016, against these entities in the NCLT. Before the NCLT, seven of the said borrower companies, which had been extended loans under the CLB, filed replies on solemn affirmation which shockingly is an admission of financial fraud, cheating, criminal breach of trust, money laundering, conspiracy and abetment in respect of the subject unpaid unsecured loans/CLB transactions.

While these entities have intentionally tried to give vague replies, it is clear from all their replies that they knowingly were part of a criminal conspiracy to siphon away funds to the tune of hundreds of crores from the complainant company.

It is believed by the complainant company (on the basis of internal inquiries) that five of these entities — A&A Capital Services Limited (A&A), Shri Dham Distributor Pvt Ltd (earlier known as Abhiruchi Distributors Pvt Ltd), Annies Apparel Pvt Ltd (Annies), Gurudev Financial Services Pvt Ltd (Gurudev), and Tara Alloys Limited (Tara) — are related to and controlled by N.K. Ghoshal, the stockbroker of MMS and SMS.

The following submissions have been made by the aforesaid N.K. Ghoshal controlled entities before the NCLT: A&A Capital Services Pvt Ltd. A&A was used as a medium to transfer monies and was promised a fee for facilitating the transaction. It was an agreed understanding that the transaction money will not be demanded back. It is for the same reason that loans worth several crores were advanced to entities with authorised capital of Rs 5,50,00,000 and paid up capital of Rs 5,49,95,000 without any diligence, security, documentation or security and merely on the basis of a one pager document purportedly called as Memorandum of Understanding. S

Substantial sums were transferred to three entities, i.e., Vitobha Realtors Private Limited (Votobha), Devera Developers Private Limited (Devera) and Best Health Management Pvt Limited (Best), which are entities eventually controlled by SMS and MMS and they act as the alter egos of these companies.

It is evident from the above that A&A admits receipt of money; it admits that since the inception of the transaction, the intention was not to repay the loan to RFL, and conspiracy to divert the loan to third parties which allegedly used the monies to repay their loans to RFL.

As planned in the conspiracy, the loan advanced to A&A was never repaid, and it appears from A&A’s reply that it colluded with entities like Artfice, Best, Vitobha and Devera to siphon away money from RFL, with the intention of never to repay the said unsecured loan and thereby causing a wrongful loss to RFL, which has been deceived and cheated by the directors/persons controlling A&A (which in addition to its directors at the relevant time is believed to be N.K. Ghoshal) and allegedly by and in collusion with persons controlling Artifice, Best, Vitobha and Devera (which in addition to their directors are believed to be SMS and MMS) and persons in control of the management and affairs of RFL, including the erstwhile promoters.

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