Return of the Licence Raj!

Are we creeping back to controls on corporate decision making? Three moves over the past eight months reinforce this notion, says Kanika Datta.

Illustration: Uttam Ghosh/Rediff.com

There was a time when the Government of India told companies in certain key industries how much to make, where to sell it and at what price.

Those days now lie in the mists of unpleasant memory, but businesses today could be forgiven if they fear the return of the fell hand of officialdom in the nitty-gritty of corporate decision-making.

Three moves over the past eight months reinforce this notion.

They are: Anti-profiteering rules under the Goods and Services Tax (GST); the income tax (I-T) department’s ruling that online retailer’s discounts and marketing expenses be reclassified as capital expenditure; and the Budget announcement that the stock market regulator would frame rules for large companies to source a quarter of their borrowing requirements from the bond market.

All of them betray a fundamental misconception about the basics of business.

At the very least, it is possible to predict that disputes arising from the first two will soon clog India’s congested legal system further.

The anti-profiteering rules under the GST are, so the official reasoning goes, designed to ensure that companies pass on to consumers the benefits of lower costs that are expected to accrue from the GST offsets or when rates on goods and services are lowered.

A five-member National Anti-Profiteering Authority (NAPA), headed by (who else?) a senior bureaucrat, was constituted in November to oversee this process.

The NAPA has a two-year term; who knows, it could last longer since government institutions have a habit of enduring well past their sell-by date.

The anti-profiteering bandobust is meant to add credibility to the government’s strenuous claims that the enormously complex tax reform that is the GST will lower prices all round.

To the ordinary consumer the argument is compelling, but there is a conceptual problem here.

Pricing in any dynamic marketplace -- whether at the retail end or among intermediaries in the value chain -- is not just a function of cost.

It involves a web of complex decisions, from, say, negotiated, long-term bulk rates with suppliers to questions of brand values and image to competitive pressures.

In a nutshell, it is market dynamics that determine price.

Companies that choose not to lower prices in response to lower rates will do so at their own peril, and any business person understands these risks.

They may choose to retain the benefits of lower tax rates for further investments or even to underline the premium image of their good or service.

These are all hard business decisions, not necessarily taken with the intent of profiteering.

The NAPA almost recalls the Bureau of Industrial Costs and Prices, which enjoyed its heyday when market entry was restricted by licensing procedures so that the risks of cartelisation were high.

The irony was that from cement to tyres, tractors and edible oil, producers regularly pre-agreed price rises anyway.

The same visceral distrust of standard business practices marks the I-T department’s ruling, recently upheld by an appellate tribunal, for Flipkart, India’s largest domestic online retailer, to reclassify expenditure on marketing and discounts as capital expenditure instead of revenue expenditure.

This implies that discounts will henceforth be subject to tax.

The I-T department’s reasoning for this extraordinary ruling: That discounts are being used to create huge intangible assets for the company and therefore constitute capital expenditure.

No need to spell out the conceptual absurdity of this ruling, except to highlight the point acerbically made by one tax consultant: “A brand is something you can’t go to the market and buy; you never know how much expenditure will go towards building a brand”.

It is possible that Flipkart, which incurs huge losses on account of its deep discounting policies as does every other online retailer, may show profits if it reclassifies marketing expenditure.

But whether its investors will want to stick with a company that is constrained from building market share is another question altogether.

Since discounts are the lifeblood of this fledgeling and uber-competitive business, this ruling can reliably ensure the failure of Start-Up India, one of Prime Minister Narendra Modi’s ambitious programmes to create a vibrant entrepreneurial culture.

It also raises uncomfortable questions about how market-share building discounts in other industries, such as brick-and-mortar retail and telecom, should be treated by the tax authorities.

These two examples betray the licence raj proclivities that assail every regime and create a vicious circle.

Politicians or bureaucrats are yet to understand the difference between excessive interference and enlightened regulation; few have cottoned on to the connection between micro-intervention and the proliferation of dodgy business practices.

The diktat that the Securities and Exchange Board of India (Sebi) frame rules for large corporations (undefined) to source 25 per cent of their borrowings from a market that practically doesn’t exist is another example.

Sebi chief Ajay Tyagi promised “light touch” regulations, scheduled for September. He was speaking without irony.

Dictating how a company should source its capital can scarcely be described in this way.

But then, Indian governments have rarely allowed hazy logic to interfere with their agendas.

This is a factor that no World Bank index can capture, no matter what callisthenics it employs in its calculations.