GST collections could fall short by about ₹2 lakh crore for the three months of April, May and June
The current fight is to conserve cash so companies should seriously re-evaluate litigation and opt for Vivad Se Vishwas scheme
The covid-19 pandemic has caused an unprecedented disruption to the world economy. The growth forecast for India has already been revised to 2.5%. While on one hand, the government is announcing a stimulus package, there are also instances of companies being chased for pending tax demands as the exchequer is staring at a massive dip in tax collections. Dinesh Kanabar, founder and CEO of Dhruva Advisors, a tax and regulatory boutique firm, spoke to Mint on the taxation and related challenges for Indian companies and promoters. Edited excerpts from an interview:
Tax collections due to the lockdown will severely be impacted as companies cannot pay due to one-third of estimated profitability not being visible anymore. The direct tax collection would be off by about 15% from the budgeted projections. Goods and Services Tax (GST) collections could fall short by about ₹2 lakh crore as for the three months of April, May and June there is virtually no trade. On conservative estimates, at least two months of GST collections just won’t be collected.
Coming to immediate taxation concerns what would they be?
Currently cash is king and the companies need to do everything to conserve cash. The central government, to ease the pain of these companies, should release tax refunds immediately, credits under GST needs to be released immediately. The step taken to release refunds up to ₹5 lacs is welcome. That needs to be across board without limit . The withholding tax (minimum tax recovered by tax department as upfront payment pending litigation of full demand) should be reduced to nil as the companies are not in a position to project any profitability. Not issuing nil withholding tax certificates would lead to cash leakages.
How about companies chasing refunds from government and tax litigation?
The current fight is to conserve cash so companies should seriously re-evaluate litigation and opt for Vivad Se Vishwas scheme to get some refunds.
Many multinational companies, due to the lockdown, are grappling with permanent establishment (PEs) and the related tax concerns. Organisation of Economic Cooperation and Development (OECD) has come out with a guidance note suggesting that the situation arising out of Covid19 is temporary or transitionary. India may also take cues from that. Even under treaties there are relaxation clauses due to unforeseen events to prevent certain officers working in India to be treated as PEs for taxation purposes. For instance, in UK treaty it is 60 days. Unless all countries come out with bilateral measures such taxations would need to be considered on case to case basis.
What according to you is the biggest concern for promoters?
In India, we are grappling with a scenario of over leveraged companies. So even if virtually all the economic activity has come to a standstill the debt is continuing to accumulate. Indian promoters who have pledged their shareholding to avail debt have seen a share price dip in the vicinity of 50-70%. So we are looking at a very real possibility of promoters losing control of their companies. Take the case of Future group, the pledged shares were invoked by lenders. Though the Bombay High Court has given a stay on it, the other lenders may still opt for share invocation till a final precedence is set by Supreme Court.
What happens if share invocation hits a pause during the Covid-19 linked lockdown?
Two scenarios. One future funding with shares as collaterals won’t be easy, lenders will be circumspect on covenants of lending against shares as it puts a question mark on sanctity of rights of a lender to sell the underlying asset. Second, we might see tri-party agreements of buying these shares, for instance a fund house could buy these shares from the lenders a very steep discount, again this would affect the promoters shareholding in the company. Another aspect is foreign funds specializing in distress assets could end up buying these shares at a very steep discount.
How will the virtual standstill of economic activity impact balance-sheets of Indian companies?
It is not secret that acquisitions, mergers that were to be completed in this quarter have been pushed back, till certainty emerges. So acquisitions which looked profitable one quarter or infact two months back are not profitable and you are looking at huge impairments or write downs and even write-offs. Indian companies may also have to relook at royalty payments they pay to their foreign shareholders in a bid to conserve cash.