Thursday, May 12, 2016

Insolvency and Bankruptcy Code 2016

Insolvency and Bankruptcy Code 2016 as recommended by T K Vishwanathan Committee was recently passed by Indian Parliament. Hailed as second biggest reform after GST, this code is significant because of followings :
> Overlapping jurisdictions of laws and lack of clarity in their provisions had made Indian Insolvency resolution framework a legal quagmire. This new code offers an effective and consolidated approach which will make resolution process timebound (180-270 days) and cost effective.
> Economic Survey 2015-16 notes that Indian economy is facing "Chakravyuh" challenge. Although business failures are inevitable in any economy but what makes that economy resilient is recovery rate which in turn requires strong winding up process. In this context, this code is significant.
> As an important pillar supporting ease of doing business, this code would be significant in freeing up and channelizing credit to productive sectors and attracting FDI (as lack of exit sometimes hinders entry too).
> Although not a magic wand of NPA problem but it would help significantly in destressing commercial banks.
> This code privatizes insolvency resolution process So hopefully efficiency would be there.
But there are some challenges too :
> Setting up of necessary institutional infrastructure like insolvency professionals (IPs), Insolvency and Bankruptcy Board of India ect will take time.
> Abjudication agencies (NCLT and DRT) are also facing problems. Like NCLT is yet to be set up and DRT is overloaded with case pendencies.
> Parliament Committee noted that furnishing the performance bond may deter IPs and IPAs from entering the sector.
Although its working is yet to be witnessed, passing of this code even in dysfunctional Parliament is great start.

new amendment to DTAA

Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). Mauritius has a DTAA with India and its tax rates in own country are too low. This ensures firms operating from Mauritius have to pay minimal tax for investments in India thus serving as tax haven for tax evaders.
Implications of new amendment to DTAA
a. It would prevent round tripping of capital wherein a foreign firm used to invest in India through establishing shell or paper companies in tax haven having DTAA with India.
b. Boost in revenue: Capital gains tax will help boost fiscal revenues and reduce fiscal deficit in line with FRBM act.
c. The DTAA amendment would provide a level playing field for all international investors, irrespective of domicile,that would help enhance India’s attractiveness as an investment destination in the long run.
d. It would also ensure India’s conformity to OECD and G20-led guidelines on combating base erosion and profit shifting. In 2015, the OECD had spelt out a series of measures countries needed to take to curb abusive tax avoidance by multinational enterprises — including steps to tighten double taxation avoidance treaties.
e. These steps would bring forth a predictable tax regime and avoid cases like vodafone capital gains tax case.A predictable tax regime is precursor to attract investment.
The amendment is a step in right direction to remove the ill conceived agreement misused hitherto by foreign investors.