Editorials/Opinions Analyses for UPSC – 24 May 2021

Contents

1. SC: On loans to corporate borrowers, Guarantor beware
2. The many benefits of an eco-tax in India

SC: On loans to corporate borrowers, Guarantor beware

Context:

• Supreme Court has ruled that creditors can proceed against promoters of defaulting companies to recover debt if such promoters have given personal guarantees to secure funds.
• This comes six months after the Supreme Court transferred all the cases related to personal insolvency to itself.
• The SC has also said that lenders can also proceed against the promoters of a defaulting company even when the corporate insolvency resolution process of the firm itself has not been completed.

Relevance:

GS-III: Indian Economy (Growth & Development of Indian Economy, Banking Sector & NBFCs)

Dimensions of the Article:

1. What is a personal guarantee?
2. Why does the government want promoters to be more liable?
3. About the recent SC Judgement
4. What did the Supreme Court say about personal insolvency under IBC?

What is a personal guarantee?

• A personal guarantee is most likely to be furnished by a promoter or promoter entity when the banks demand for collateral which equals the risk they are taking by lending to the firm, which may not be doing so well.
• It is different from the collateral that firms give to banks to take loans, as Indian corporate laws say that individuals such as promoters are different from businesses and the two are very separate entities.
• A personal guarantee, therefore, is an assurance from the promoters or promoter group that if the lender allows them the fund, they will be able to turn around the loss-making unit and repay the said loan on time.

Why does the government want promoters to be more liable?

• Bad loans have been a major problem for banks and financial creditors over the past decade. Add to that, promoters had been able to secure funds from banks without the due diligence in most cases because of their past transaction history.

Steps taken in 2019

• In 2019, to put a stop to bad loans, the government introduced the provision which gave banks the power to move application for initiation of insolvency against personal guarantors to corporate debtors. Also, the finance ministry nudged banks to also pursue personal insolvency cases against promoters who had furnished personal guarantees for the loans taken by their firms, which later was not re-payed as per the agreed schedule.
• Both these steps in 2019 were taken to make promoters more liable for their actions and to check the practice of securing monies for a particular project but then diverting it to other projects or works.

About the recent SC Judgement

• The SC Bench was considering a clutch of petitions challenging the government’s 2019 notification that made personal guarantors a separate category of individuals who could be proceeded against under the Insolvency and Bankruptcy Code as part of the insolvency proceedings initiated by lenders against defaulting corporate entities.
• The Supreme Court judgment upholding creditors’ right to proceed against personal guarantors to loans provided by them to a corporate borrower helps lift the uncertainty over the extent to which banks and other financial lenders can pursue not only the corporate debtor but also the individuals who had furnished personal guarantees to enable the flow of credit to the company they had stood surety for.
• This ought to be of significant consequence to the financial system, already under a mountain of bad loans, by helping expedite the resolution of such stressed assets.
• In dismissing the petitions, the judges made clear that the government was right in “carving out personal guarantors as a separate species of individuals”, given the “intimate connection between such individuals and corporate entities to whom they stood guarantee”.
• Banks now stand a real chance of recovering substantially more from the resolution of a stressed corporate entity, as in most cases it has been the relatively affluent promoters who have been standing as individual personal guarantors for the loans extended to the companies they promoted.

What did the Supreme Court say about personal insolvency under IBC?

• The Supreme Court said that mere approval of a resolution plan for a debt-laden company does not automatically discharge a promoter from their liability in lieu of the personal guarantee they had given to secure the funding for the company.
• Since personal guarantees from promoters are a kind of assurance to lenders that the monies being borrowed will be returned, the apex court has said that under the contract of guarantee, the liability of the promoter will be over and above the liabilities of the company.
• Since lenders are, in most cases, forced to take a haircut on their pending dues when a resolution plan is approved for a debt-laden company, the ruling by the Supreme Court allows them to pursue promoters for additional recovery of debt.

-Source: The Hindu

The many benefits of an eco-tax in India

Context:

The COVID-19 pandemic has also forced countries all over the world to rethink climate change and the need for preservation of the environment. Fiscal reforms for managing the environment are important, and India has great potential for revenue generation in this aspect.

Relevance:

GS-III: Environment and Ecology (Steps for Pollution Control, Conservation of the Environment), GS-II Polity and Governance (Government Interventions), GS-III: Indian Economy

Mains Questions:

In the context of the additional burden on India’s health sector, discuss the need and benefits of imposing ecotax. (10 Marks)

Dimensions of the Article:

1. Financial impact of the pandemic
2. Consequences of low public expenditure in the health sector
3. Understanding Eco tax / Environment Tax reforms
4. Benefits of Eco-Tax
5. Recently in news: Green Tax

Financial impact of the pandemic

• The second wave of the pandemic has induced lockdowns in several states and brought economic activity to a standstill. This will lead to a lower than estimated economic growth and a subsequent decline in tax revenue. This will lead to a larger than projected fiscal deficit in the current year.
• The fiscal deficit for FY 2020-21 (revised estimates) is projected to be 9.5% of the GDP; for 2021-22, it is pegged at 6.8%.
• The continued focus on fiscal discipline is bound to impact public expenditure which is vital for economic revival and also impact expenditure into the ailing health sector which is crucial in the fight against the pandemic.

Consequences of low public expenditure in the health sector

• The low public expenditure into the health sector results in the lack of adequate and quality public health care facilities, thus leading to the rise of private health care centres. Such a scenario invariably leads to a high out of pocket expenditure for health needs.
• The World Health Organization (WHO) data notes that 17.33% of the population in India made out-of-pocket payments on health exceeding 10% of the total household expenditure or income in 2011.
• This is higher than the global average of 12.67% and also the average for the Southeast Asian region which stands at 16%.
• Similarly, 3.9% of the population in India made more than 25% of out-of-pocket payments on health.
• The Economic Survey of India 2019-20 notes that an increase in public spending from the current level of 1% to 5-3% of GDP, as envisaged in the National Health Policy of 2017, can decrease out-of-pocket expenditure from 65% to 30%.
• The high out of pocket expenditure for health pushes many into poverty. Also, since a lower proportion of disposable income is available for other essentials like food and education, this would also have a long-term impact on the nutritional security and development of children of such families.

Alternative source of Financing and Environment

• Given the critical need for higher public expenditure in the health sector and the fiscal strain imposed by the pandemic, it becomes important to look for alternate sources of health financing in India.
• The COVID-19 pandemic has also forced a rethink on climate change and the need for environmental preservation.
• Environmental tax/Eco-tax is one of the alternative sources of financing to improve the health sector in India.

Understanding Eco tax / Environment Tax reforms

• Environmental tax reforms would mainly involve the following three activities:
  1. Eliminating existing subsidies and taxes that have a harmful impact on the environment.
  2. Restructuring existing taxes in an environmentally supportive manner.
  3. Initiating new environmental taxes.
• For example, in the energy sector, the following reforms may qualify as environmental fiscal reforms:
  1. Correcting the price differential between diesel and petrol.
  2. Differential taxation on vehicles in the transport sector based on fuel efficiency and GPS-based congestion charges.
  3. Taxes on thermal-based powers and tax rebates for renewable energy producers.
  4. Tax on high carbon footprint industries.

Different types of Environmental Regulation

Environmental Regulation can be of the following types:

1. Command and control approach wherein the government places strict regulations on pollutant emissions and there are fines on non-compliance.
2. Economic planning/urban planning approach involves inculcating sustainable management practices in policymaking.
3. Environmental tax (eco tax)/subsidies approach involves either taxing the polluters to disincentivize the use of high carbon footprint processes or products and also providing subsidies to encourage the adoption of green technology.
4. Cap and trade approach involves the government setting limits for emissions and the establishment of carbon trade markets.

India currently focuses majorly on the command-and-control approach in tackling pollution.

Benefits of Eco-Tax

• Environmental taxes help internalise the negative environmental externalities in the overall framework and thus incentivize greener products and processes and disincentivize polluting processes and products. This will reduce environmental pollution, encourage environmental preservation and adoption of an environmentally sustainable approach.
• Tax revenues can be generated through eco taxes by designing them as revenue augmenting.
• The additional revenue so generated can be used for the provision of environmental public goods or directed towards the overall revenue pool to be used in critical social sectors like health. This will help developing countries like India, constrained by limited fiscal space to address critical environmental health issues.
• The augmented revenue from eco tax can finance research and the development of new technologies thus encouraging the rise of new sunrise sectors and new jobs.
• The augmented revenue will also help finance social sectors which will aid in the development process and help reduce poverty.

Caveat

Environmental regulations may have significant costs on the private sector in the form of the high cost of compliance. This could lead to a possible increase in the prices of goods and services. This may disincentivize demand and thus hamper the economic growth of the nation.

Recently in news: Green Tax

In general, a green tax is imposed on the environment polluting goods or activities, to discourage people from anti-ecological behaviour and make them sensitive towards the environment.

What is India’s Green Tax on Vehicles?

• A green tax imposition in India is a recent development, and different vehicles are being monitored for emissions, especially at state border areas.
• An ECC (Environmental compensation charge) is imposed on different vehicles, both personal and commercial, depending upon their size.
• The green tax varies from state to state. For instance, in Maharashtra, private vehicles that are more than 15 years old or more and commercial vehicles aged 8 years or more are liable to pay the tax.
• Personal vehicles will be charged a tax at the time of renewal of Registration Certification after 15 years.

More about the Latest Proposal

• The proposal on green tax also includes steeper penalty of up to 50% of road tax for older vehicles registered in some of the highly polluted cities in the country.
• The levy may differ depending on fuel (petrol/diesel) and type of vehicle. The proposal will now go to the States for consultation before it is formally notified.
• It includes 10-25% of road tax on transport vehicles older than eight years at the time of renewal of fitness certificate.
• The proposal on green tax also includes steeper penalty of up to 50% of road tax for older vehicles registered in some of the highly polluted cities in the country.

-Source: The Hindu