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Thursday,22-October-2020

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GST compensation: 1st option set to get nod with 21 states on board

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GST

With 21 states expressing their preference for the Borrowing Option-1 proposed by the Centre to meet the GST compensation needs of states this year, decks have been cleared for the GST Council to approve the new compensation mechanism and make it universally applicable across all states and Union Territories at its next meeting on October 5.

Finance Ministry sources said that GST Council, as per the GST Act, needs only 20 states to pass any resolution, in case voting is required on any issue. With 21 on board with the first option, this could well be considered for adoption by the Council.

Among the 21 states/UTs opting for first option on GST compensation are: Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand and Uttar Pradesh.

Manipur, the only state which had earlier chosen Option-2, later preferred to change it to Option-1.

A few more states are, also, to give their borrowing option in a day or two.

However, states like Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, and West Bengal are yet to respond to the GST Council proposal.

If the other states do not submit their options before the due GST Council meet next month, then they will have to wait till June 2022 to get their compensation dues, subject to the condition that the GST Council extends the cess collection period beyond 2022, the Ministry sources said.

Under the existing GST Act, compensation for shortfall in GST collection, under an agreed formula, is payable by the Centre for the first five years of the operations of new tax system from July 2017 to June 2022.

On August 27, the GST Council, in its 41st meeting, had decided to give its member states two borrowing options to meet their compensation shortfall and a response time of 7 working days from the formal receipt of the detailed proposal on options by email.

Almost 15 states had submitted their options by September 15 and more have joined now.

The first option on GST compensation brought before the Council last month allows states to borrow, under a special dispensation from the RBI, a sum of about Rs 97,000 crore being the shortfall calculated by the Centre that is directly on account of GST implementation.

Under this option, borrowing will not be treated as debt of the state and they would also be permitted to avail full additional borrowing limits given under Aatmanirbhar Bharat package unconditionally. Also, interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of the transition period ie June 2022 and subsequently principal and interest will also be paid from proceeds of the cess, by extending the cess beyond the transition period.

The second option given by the Centre allowed states to borrow entire projected GST compensation shortfall of Rs 2,35,000 crore (total shortfall of Rs 3 lakh crore minus Rs 65,000 crore collected as GST compensation cess) for FY21.

But this borrowing will be allowed by subsuming the additional unconditional borrowing limit of 0.5 per cent and the final (bonus) tranche of 0.5 per cent given to states as special limit to fight the Covid pandemic.

Also, the interest on borrowing taken by states under this option will have to be paid by them from their resources. The principal on the amount borrowed under the option, after the transition period, will be paid from proceeds of the cess.

Sources said that the Centre was not in favour of the second option as it would have crowded the market with the state borrowing pushing pressure on the interest rates and bond yields. Also, it would add further debt pressure on states.

The last meeting of the GST Council took place against the backdrop of the opinion of the Attorney General on the compensation cess issue where he has opined that there is no obligation on the Centre under the GST laws to compensate for loss of revenue. It is the GST Council and not the Central government which has to find ways, according to the Attorney General, to meet the compensation shortfall.

Also, a state can borrow, even on the strength of future receipts from the compensation fund, within the parameters of the Articles 292 and 293 of the Constitution wherein the entitlement of a state to borrow is set out in Article 293(1).

The limitation on such right is found in Clause (3), which prohibits a state from raising any loan, without the consent of the Centre, and Clause (2) of Article 292 authorises Parliament to make loans to a state, subject to any limit which may have been fixed by law made by Parliament.

Therefore, after the meeting, the GST Council offered two options to the states to borrow, as the Central government is committed to help the states and has, time and again, stated that the entitlement of the states would always be for full compensation and the entire compensation sum on account of shortfall in collections of GST will be paid and honoured.

Business

Supreme Court: Can’t suppress material facts while availing life insurance

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Insurance

The Supreme Court has said that a contract of insurance is of utmost good faith and a proposer who is keen to obtain a policy of life insurance is duty-bound to disclose all material facts.

A bench comprising Justices D. Y. Chandrachud, Indu Malhotra and Indira Banerjee said: “A contract of insurance is one of utmost good faith. A proposer who seeks to obtain a policy of life insurance is duty-bound to disclose all material facts bearing upon the issue as to whether the insurer would consider it appropriate to assume the risk which is proposed.”

The top court emphasised that it is with this principle in view that the proposal form requires a specific disclosure of pre-existing ailments, which will enable the insurer to arrive at a considered decision based on the actuarial risk.

The top court set aside the March this year a verdict of the National Consumer Disputes Redressal Commission (NCDRC) which dismissed an insurance firm plea challenging the order asking it to pay full death claim along with interest to the mother of the deceased. The insurance company informed the top court during the pendency of the proceedings the entire claim was paid.

The bench, taking into account the age of the deceased’s mother who is seventy years old and the death of the assured on whom she was likely to be dependent, directed that no recoveries of the amount which has been paid shall be made.

Terming the NCDRC bad in law, the top court said: “The medical records which have been obtained during the course of the investigation clearly indicate that the deceased was suffering from a serious pre-existing medical condition which was not disclosed to the insurer.”

The bench noted that the deceased was hospitalised to undergo treatment for a condition in proximity to the date of his death, which was also not disclosed in spite of the specific queries relating to any ailment, hospitalisation or treatment undergone by the proposer in Column 22 of the policy proposal form. “The investigation by the insurer indicated that the assured was suffering from a pre-existing ailment, consequent upon alcohol abuse and that the facts which were in the knowledge of the proposer had not been disclosed”, noted the top court.

In August 2014, a man submitted a proposal for obtaining insurance policy. The life insurance form contained specific questions to health, medical history and also required a specific disclosure on existing ailment, hospitalisation or treatment, which he had undergone.

He answered these queries in the negative and an insurance policy was issued based on these answers. In September 2014, the man died following which a claim was lodged.

During the investigation, it was revealed that he had been suffering from Hepatitis C. The insurance firm rejected the claim in May 2015 citing non-disclosure of material facts.

The nominee initiated a consumer compliant before the district consumer disputes redressal forum. The forum directed the insurance firm to pay claim along with interest.

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Business

Equity indices in red, healthcare stocks plunge

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Bombay-Stock-Exchange

The key Indian equity indices traded in the red on Thursday morning with the BSE Sensex trading over 130 points lower.

Heavy selling pressure was witnessed in the healthcare stocks. Auto and banking stocks also were largely on a negative note.

Around 10.35 a.m. Sensex was trading at 40,572.83, lower by 134.48 points or 0.33 per cent from the previous close of 40,707.31.

It opened at 40,531.31 and has so far recorded an intra-day high of 40,721.57 and a low of 40,413.65 points.

The Nifty50 on the National Stock Exchange was at 11,888.50, lower by 49.15 points or 0.41 per cent from its previous close.

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Business

Government may sweeten deal further for Air India sale bid

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Air-India

The government may further extend the date for submission of bids for Air India sale date beyond October 30 to give investors more time to make an offer while sweetening the deal terms further, finance minister officials privy to the development said.

The submission of initial bid or expression of interest (EoI) may be extended by 45 days to two months to December. Also, officials said that bidders would be given the option to decide on the quantum of debt in Air India books that they will like to absorb rather than freezing the debt amount and seeking investors bids.

As per the Air India EoI floated by DIPAM in January, of the airline’s total debt of Rs 60,074 crore as of March 31, 2019, the buyer would be required to absorb Rs 23,286.5 crore, while the rest would be transferred to Air India Assets Holding Ltd (AIAHL), a special purpose vehicle.

With the proposed changes, buyers will decide on the level of debt that they will take and the one taking the largest debt may be considered favourable to be declared winner.

Disinvestment secretary Tuhin Kanta Pandey has also hinted at changes in the current structure of Air India transaction process in an interaction with journalists last week.

For the government, Air India has now become a test case on how to get investor interest in adversarial market conditions. While the airlines financials are already under severe pressure, the Covid -19 pandemic had further dented the prospects of the aviation industry putting the sale process under further problems. The bidding process for the debt-ridden airline has been postponed four times earlier and of October 30 deadline is changed now, it would be fifth such extension.

Sources said that changes in the structure of the sale process to facilitate investors would go by the principle of letting buyers decide the enterprise value of Air India rather than its market cap or using other valuation methodology. The enterprise valuation determines the value of an entity based on its market capitalisation and also debt in books and cash balances.

Sources said that changes in the valuation method has be approved by a CGD (Core Group on Disinvestment) headed by the cabinet secretary at its meeting last week and now it would be has placed before AISAM (Air India Specific Alternative Mechanism).

For Air India, the government is finding it tough to get investors on board. A Tata Group led consortium was considered favourite to take over the airline earlier but its interest in the airline lately has been subdued. With foreign airlines bleeding over fall in air travel during the pandemic, getting investors would be difficult. But Air India, with vast pool of international flying slots and a running overseas operation under the Vande Bharat scheme, is expected to get some investor interest.

Air India has been been unprofitable since its 2007 merger with state-owned domestic operator Indian Airlines Ltd., and since then is flying on government budgetary support adding pressure to central resources.

Air India disinvestment will be a key component of this years sell target of Rs 2.1 lakh crore. The government has so far mobilised a mere Rs 5,500 crore as disinvestment receipt.

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