Economy

Why The Regulatory Relaxations Announced By The Finance Minister Were Needed

Finance Minister Nirmala Sitharaman speaking at an event. 
Snapshot
  • Several experts and commentators have argued on the need to use this opportunity and extend the financial year till December as we gradually move to a January-to- December financial year.

On 24th of March, the Finance Minister made several announcements that were to relax the regulatory compliances along with extension of deadline for filing of taxes. There was a sense of urgency for these relaxations, as we’re in March, which is the end of the financial year.

Several experts and commentators have argued on the need to use this opportunity and extend the financial year till December as we gradually move to a January to December financial year.

Ideally, the government should consider this as at some point we will have to bite the bullet on this one.

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On yesterday’s announcements, many commentators have missed their significance, especially for MSMEs which are extremely vulnerable to the economic disruption that has been caused due to Covid-19.

This, at a time when we do not know when the lockdown would be lifted, made it essential for the government to ease some of these norms.

A good way to understand this would be to consider a business that generates a cash flow over a period of time. It is through this cash-flow that businesses are able to meet their operating expenses and tax liabilities.

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In the event of a lock-down, the cash flow is bound to get disrupted. Indeed, many businesses cannot operate from home and even those services that can continue with a work from-home-facility, their value addition will eventually be hit as overall economic activity is shut.

This creates a situation where businesses are unable to generate a steady stream of income while their liabilities in the form of salaries to their workers, payments to their suppliers, utility bills, interest on borrowings and statutory taxes along with other compliances stay just as before.

It is obvious that without a steady stream of income, several businesses will not be in a position to honour their commitments. While they can still negotiate for extension of credit with their suppliers, the key expense in the form of fixed expenses, salaries and legal liabilities are bound to continue irrespective of whether a business operates, or it doesn’t.

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The only exception here is indirect taxes, which will anyway be limited as the value addition at such a time would be negligible.

The current Covid-19 economic disruption happened just as the economy was beginning to recover, albeit at a slow pace and this was followed by a weeklong shut-down.

Therefore, most businesses don’t have the necessary funds or cash to be able to sustain and honour all its commitments.

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Yesterday’s relaxation focusses primarily on the commitments as it extends the last day for filing of taxes, thereby giving people relief in terms of managing their cash.

The moves on the IBC front are also welcome and the government would have to further relax the provisions so as to prevent bankruptcies.

The best way would be to restructure all debt and offer a 3-to-6 month moratorium whereby no EMIs are paid for the next 3 months while the tenure of the loan extends by 3 months (or 6 months).

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Of all liabilities of a firm, the most immediate one where government can act is the ones that arise due to regulatory and taxation commitments.

Therefore, as a part of the first step, the government has eased the pressure. This will benefit not just MSMEs but even large enterprises which can redirect whatever cash-holdings they have.

However, the cash-flow mismatch would invariably spill-over to other liabilities, primarily towards salaries for the existing workforce. But the government has already indicated more measures, as the Finance Minister explicitly mentioned that a fiscal package is already in the works.

This is a situation that is fast evolving and we may have to wait for a few more days to see just how much of the economic impact is absorbed by the government.

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