India is a democracy. Every adult whether rich or poor, educated or not, has equal right to vote. This was a revolutionary departure from the earlier system of voting rights that was prevalent in many democracies; system in which right to vote was only for the privileged class ie; the educated or taxpaying or whites or men. In fact India’s adoption of universal adult suffrage soon after independence with a illiteracy level of 85% was, as Ramachandra Guha noted, an act of faith which many people around the world believed was an act of madness.
Even today almost 30% of our population live below poverty line and are illiterate. The economic backwardness and lack of education and exposure to the world around often make this segment easily swayable with jingoism, case loyalties and fake promises. (I don’t suggest that the wealth always leads to education and this to matured thinking. But there is definitely decent correlation between education and matured thinking)
This has become a vicious cycle. It gives perverse incentives to the political leaders to keep the poor where they are and to continue with divisive strategies fanning internal insecurities, religious fanaticism and limiting parochialism.
The Samajawady Party’s election manifesto promising to discourage use of computers and English is a typical example. I really don’t think those leaders are against either computers or English. They are just trying to be smart in appealing to a mass of people whom they think will be swayed by this.
When politics became a numbers game that can be manipulated by caste, money, muscle and populism a large segment of middle class started moving away from active participation.
Many were disgusted with the lopsided priorities. Many were upset with the choice of leaders who are there for the wrong reasons. Some floating population was too lazy or too pained to get their name included in the voters list. Many were just selfish and happy to keep their agenda family focused with limited social focus.
They felt alienated with very limited opportunities for their voices to be heard. They were too busy with their private life. They gradually moved away. A large part of this segment stopped even casting their vote. This added to the cycle of social degeneration.
But in this election I see a welcome shift. We see quite a lot of involvement from the crowd that often kept away. Some like Meera Sanayal and Shashi Tharoor are standing for election. Many more are being active participants. People like Nandan Nilekany today keep apart a significant time for the betterment of society.
The technology is playing a big role. The SMS, Blogs, face book and a wide variety of easy tools for communication for sharing of ideas and quick dissemination of differing views are helping to bring, to the ring, those who normally keep away. Their voices are being heard. In their busy schedule they are able to play a more active role with limited commitment of time.
I certainly believe that this is a trend and a welcome trend. These new tools and this better visibility will make a difference and play a larger role in political process.
There is still much that can be achieved to improve the quality of governance using technology and better processes. And these are strengths we as a country have in decent quantity. We have seen what better technology and processes can do in cleansing the system and enhancing participation.
What NSE and NSDL achieved in capital market, to make Indian capital market infrastructure from being the worst in the world to one of the best in the world, is this.
What CBDT managed with TIN and other initiatives in technology upgrade and business process re-engineering, which helped direct tax collection to overtake indirect tax, is this.
What railways manage in rail reservation is this. There are many more examples of such success stories.
There are still scope for many more such areas. Starting from strengthening the voter registration process (it is a lot better than what it used to be) to bringing transparency in government spending and corresponding outcome can and will bring about efficiency and reduce corruption.
We can hope the new government that come will see this as a priority area.
Thursday, April 30, 2009
Thursday, April 23, 2009
Checks & Balances - Who checks and Who balances
Integrity in reporting of accurate matrices for measurement of risk and return of traded instruments and checks and balance that ensure this reporting are critical requirements for any decent financial market. But when we follow the events that have been unfolding the world over, it appears that there is still some way to go.
The most critical issue with respect to the Satyam saga in India has also been this. The company had good people, a respected client base, history of high quality delivery and a profitable and growing business. But the owners milked the company for their personal greed and misreported the financial status. The behavior of the venerable audit firm Price Waterhouse as the company auditor has raised questions about how independent were these independent outside auditors.
This is not a one-off incident. Neither is it something peculiar to India or doings of some small time firms. Enron, WorldCom, and Xerox are recent history.
Arthur Anderson was accused of improper audits in financial scandals in a number of cases in USA and had to go in for settlement in many of them. Enron was the icing on the cake, which took the audit firm along with it to extinction.
SEC took action against KPMG with respect to violation of anti fraud provisions with its audit of Xerox. E&Y was also accused by SEC of violating independence rules.
This problem was not just with respect to collusion by independent auditors in perpetuating financial frauds. It has been pointed out that one of the root causes of the collapse of world financial markets in the recent past has been the failure of credit rating agencies in reflecting the true nature of risks associated with many structured products that have been rated by them.
Why do we see such irresponsible behavior from a large cross section of professionals and professional organizations? When we go a little deep into the reasons behind this, we see that the one of the main reasons has been the failure of the checks and balances in avoiding conflicts of interest.
There are two serious contributors to this conflict of interest with respect to the independent auditors. One is the extent of multi-disciplinary non-audit related services these firms offered to their clients like legal, consulting services etc. Realizing the conflicts associated with such practices we have seen a number of regulatory restrictions on such multi-disciplinary offers.
The other issue is that the audit firm is selected and their remuneration is fixed by the company management. Robert Prentice, professor of business law at the McCombs School of Business after exploring literature in psychology, decision theory, behavioral finance, and behavioral economics has suggested that auditors works are significantly affected by ‘self serving bias’. Based on behavioral experiments, Professors Bazerman, Loewenstein and Moore suggests that because of the subjective nature of accounting, and the close financial and personal ties of auditors and corporate managers, even the most honest and meticulous of auditors can unintentionally distort the numbers in ways that mask a company’s true financial status. They have also referred to a study of 139 auditors employed at large U.S. accounting firms in which half of the participants were asked to assume that they were auditors hired by the company while the other half were asked to assume they were hired by another company that conducts business with the audited company. With respect to five given ambiguous auditing vignettes, auditors who were hypothetically hired by the audited company were on the average 30% more likely to find the financial reports complied with GAAP
Same is the case with incentive structure in the credit rating agency. The agency is paid by the entity who is getting its instruments rated and not by the investor who uses this rating for their investments. The criticality of these ratings are quite high because the regulators of capital market, banking , pension funds and mutual funds use these ratings to specify the asset quality mixture that brokers / banks / pension funds were allowed to hold. As Frank Partnoy a professor at the university of San Diego school of law observed “rather than selling opinions to investors, the credit rating agencies were selling licenses to borrowers”.
While stronger regulatory oversight can address these issues, more efforts are needed to develop models where the incentive structures would ensure better checks and balances.
Models suggested by Professor Joshua Ronen of New York University and Peter K M chan of US SEC are thought provoking in this direction.
The basic structure of Prof Ronen’s Financial Statement Insurance (FSI) may be described as follows :
‘Instead of appointing and paying auditors, companies would purchase financial statement insurance that provides coverage to investors against losses suffered as result of misrepresentation in financial reports. The insurance coverage that the companies are able to obtain is publicized, along with the premiums paid for the coverage. The insurance carriers then appoint and pay the auditors who attest to the accuracy of the financial statements of the prospective insurance clients. Those announcing higher limits of coverage and smaller premiums will distinguish themselves in the eyes of the investors as the companies with higher quality financial statements. In contrast, those with smaller or no coverage or higher premiums will reveal themselves as those with lower quality financial statements. Every company will be eager to get higher coverage and pay smaller premiums lest it be identified as the latter. A sort of Gresham's law in reverse would be set in operation, resulting in a fight to quality’.
The model suggested by Peter MK Chan is as follows:
‘The interests of auditors with those who have the greatest interest in accurate financial reporting and the investing public should align, making use of advances in Internet technology. The companies should be required to make available over the net significant amount of raw financial data on a real-time basis. Using these raw data the investor-hired auditors should be able to perform meaningful audits or reviews of corporate financial data. Regulations should also be directed toward ameliorating any negative effects associated with such increased access, including regulations designed to reduce litigation risks. The market will take care of the rest’.
I am not trying to analyze the pros and cons to the above proposals nor do I suggest that one of the above be adopted. The simple point I am making is that we should modify the regulatory framework to ensure that the checks and balances are built with no/ minimum conflicts of interest. And today is a good time to debate, indentify and implement such reforms, as we are in a world which has been rudely awaked to the risks of these conflicts of interest. Strike when the iron is hot.
The above is not just a case of public policy. It is also a lesson for any entity who is actively involved in defining or refining business processes in any organization.
The most critical issue with respect to the Satyam saga in India has also been this. The company had good people, a respected client base, history of high quality delivery and a profitable and growing business. But the owners milked the company for their personal greed and misreported the financial status. The behavior of the venerable audit firm Price Waterhouse as the company auditor has raised questions about how independent were these independent outside auditors.
This is not a one-off incident. Neither is it something peculiar to India or doings of some small time firms. Enron, WorldCom, and Xerox are recent history.
Arthur Anderson was accused of improper audits in financial scandals in a number of cases in USA and had to go in for settlement in many of them. Enron was the icing on the cake, which took the audit firm along with it to extinction.
SEC took action against KPMG with respect to violation of anti fraud provisions with its audit of Xerox. E&Y was also accused by SEC of violating independence rules.
This problem was not just with respect to collusion by independent auditors in perpetuating financial frauds. It has been pointed out that one of the root causes of the collapse of world financial markets in the recent past has been the failure of credit rating agencies in reflecting the true nature of risks associated with many structured products that have been rated by them.
Why do we see such irresponsible behavior from a large cross section of professionals and professional organizations? When we go a little deep into the reasons behind this, we see that the one of the main reasons has been the failure of the checks and balances in avoiding conflicts of interest.
There are two serious contributors to this conflict of interest with respect to the independent auditors. One is the extent of multi-disciplinary non-audit related services these firms offered to their clients like legal, consulting services etc. Realizing the conflicts associated with such practices we have seen a number of regulatory restrictions on such multi-disciplinary offers.
The other issue is that the audit firm is selected and their remuneration is fixed by the company management. Robert Prentice, professor of business law at the McCombs School of Business after exploring literature in psychology, decision theory, behavioral finance, and behavioral economics has suggested that auditors works are significantly affected by ‘self serving bias’. Based on behavioral experiments, Professors Bazerman, Loewenstein and Moore suggests that because of the subjective nature of accounting, and the close financial and personal ties of auditors and corporate managers, even the most honest and meticulous of auditors can unintentionally distort the numbers in ways that mask a company’s true financial status. They have also referred to a study of 139 auditors employed at large U.S. accounting firms in which half of the participants were asked to assume that they were auditors hired by the company while the other half were asked to assume they were hired by another company that conducts business with the audited company. With respect to five given ambiguous auditing vignettes, auditors who were hypothetically hired by the audited company were on the average 30% more likely to find the financial reports complied with GAAP
Same is the case with incentive structure in the credit rating agency. The agency is paid by the entity who is getting its instruments rated and not by the investor who uses this rating for their investments. The criticality of these ratings are quite high because the regulators of capital market, banking , pension funds and mutual funds use these ratings to specify the asset quality mixture that brokers / banks / pension funds were allowed to hold. As Frank Partnoy a professor at the university of San Diego school of law observed “rather than selling opinions to investors, the credit rating agencies were selling licenses to borrowers”.
While stronger regulatory oversight can address these issues, more efforts are needed to develop models where the incentive structures would ensure better checks and balances.
Models suggested by Professor Joshua Ronen of New York University and Peter K M chan of US SEC are thought provoking in this direction.
The basic structure of Prof Ronen’s Financial Statement Insurance (FSI) may be described as follows :
‘Instead of appointing and paying auditors, companies would purchase financial statement insurance that provides coverage to investors against losses suffered as result of misrepresentation in financial reports. The insurance coverage that the companies are able to obtain is publicized, along with the premiums paid for the coverage. The insurance carriers then appoint and pay the auditors who attest to the accuracy of the financial statements of the prospective insurance clients. Those announcing higher limits of coverage and smaller premiums will distinguish themselves in the eyes of the investors as the companies with higher quality financial statements. In contrast, those with smaller or no coverage or higher premiums will reveal themselves as those with lower quality financial statements. Every company will be eager to get higher coverage and pay smaller premiums lest it be identified as the latter. A sort of Gresham's law in reverse would be set in operation, resulting in a fight to quality’.
The model suggested by Peter MK Chan is as follows:
‘The interests of auditors with those who have the greatest interest in accurate financial reporting and the investing public should align, making use of advances in Internet technology. The companies should be required to make available over the net significant amount of raw financial data on a real-time basis. Using these raw data the investor-hired auditors should be able to perform meaningful audits or reviews of corporate financial data. Regulations should also be directed toward ameliorating any negative effects associated with such increased access, including regulations designed to reduce litigation risks. The market will take care of the rest’.
I am not trying to analyze the pros and cons to the above proposals nor do I suggest that one of the above be adopted. The simple point I am making is that we should modify the regulatory framework to ensure that the checks and balances are built with no/ minimum conflicts of interest. And today is a good time to debate, indentify and implement such reforms, as we are in a world which has been rudely awaked to the risks of these conflicts of interest. Strike when the iron is hot.
The above is not just a case of public policy. It is also a lesson for any entity who is actively involved in defining or refining business processes in any organization.
Tuesday, April 14, 2009
To be or not to be (Part 2) – Of Good being Bad
In the first part of this article I discussed about how any system of governance will always have a mixture of ‘good’ and ‘bad’ use of the system. I have used the word good use and bad use in a figurative way. Good use is when the system is used for the larger good of the humanity and bad use naturally its opposite.
The relative proportion of good and bad in the society is determined primarily by the value system of the majority. The natural tendency of this mix is to gradually degenerate with the proportion of bad getting more and more; the bad drives out the good.
This is similar to the income distribution and its shift in a society. In a society however evenly distributed the wealth is to begin with, eventually the mix becomes skewed with smaller percentage of the society controlling larger part of wealth.
The question is not whether it will degenerate. But how long it will take! Some social shocks and scams may cause periodic correction of this degeneration and eventually the society/ civilization degenerates to its cyclical low. May be the cycle will start all over again.
One of the key contributors of this degeneration is the inaction by the good. As the proverb says; “the best thing that the bad can expect is the good to do nothing”
The greatest tragedy is that the people who want to use the system for their private agenda (let is refer to them loosely as the bad people) have some of the good traits that help them prosper and the people who want to use the system for the larger benefits of the society (let us refer to them as the good people) have some of the worst traits that weaken them. Let us take a deeper look at these qualities.
Co-operation
The bad people are generally too happy to co-operate with anybody so long as that co-operation brings them power or wealth or both.
The good people generally carry a chip of honesty on their shoulder that they seldom co-operate even with people with similar value system. They believe that their goodness is one step higher and they are ready dump and run if the other guy doesn’t play along exactly as he feels is right. In fact they almost make such renunciation a virtue.
Courage
The bad normally has the courage and with impunity cooks the account books /investigation/ assessment or any administrative process for their gain.
The good is often scared to take bold decision and hides behind rules and technicality. The obstructive bureaucracy is often a result of such cowardliness and not just self serving actions of the bad.
Power of Interpretation
The bad will interpret laws and technicality so long it meets its end or favors an ally.
The good often tries to interpret with limited appreciation of what it stands for; by the time they finish splitting the hair it fails to be achieve any good.
Sacrifice
The bad is capable of sacrifice for what it stands for. Sacrifice its principals, society, environment and much more.
Good will hold onto technical correctness, its pride and prejudice even at the cost of its ultimate benefit to the society
Loyalty
The bad often demands and commits substantial loyalty to its partners so long as such loyalty is rewarding. They are willing invest in this loyalty for quite some time.
The good often has little commitment to his partners if it feels that their goodness is not of the same type. They are willing to abandon and run and not pull together.
Risk taking
The bad is willing to take its risk, because they see potential reward in taking risk.
The good is often too risk averse. The potential reward for sticking the neck out could be some brickbats. With no upside benefit for self and downside uncertain and costly, the good normally avoid getting involved.
Now we ask the question “How good is good”. There is a saving in our tongue which translates to “the good often bears the fruits of the bad”
I do agree there are many ‘good’ who are as good as the ‘bad’ and it is through them that we have gained anything.
What we need to do to avoid/delay of decay of our society is to develop a willingness to learn the ‘good’ from the ‘bad’, stick together and support each other for what we stand and not be a utopian island of fruitless good.
Willingness to co-operate, to take risks, to take a position, to believe in the intention of the fellow good, not to be cowed down by oppositions and mild differences in styles and not to run away to our comfort zones is what is needed today.
The relative proportion of good and bad in the society is determined primarily by the value system of the majority. The natural tendency of this mix is to gradually degenerate with the proportion of bad getting more and more; the bad drives out the good.
This is similar to the income distribution and its shift in a society. In a society however evenly distributed the wealth is to begin with, eventually the mix becomes skewed with smaller percentage of the society controlling larger part of wealth.
The question is not whether it will degenerate. But how long it will take! Some social shocks and scams may cause periodic correction of this degeneration and eventually the society/ civilization degenerates to its cyclical low. May be the cycle will start all over again.
One of the key contributors of this degeneration is the inaction by the good. As the proverb says; “the best thing that the bad can expect is the good to do nothing”
The greatest tragedy is that the people who want to use the system for their private agenda (let is refer to them loosely as the bad people) have some of the good traits that help them prosper and the people who want to use the system for the larger benefits of the society (let us refer to them as the good people) have some of the worst traits that weaken them. Let us take a deeper look at these qualities.
Co-operation
The bad people are generally too happy to co-operate with anybody so long as that co-operation brings them power or wealth or both.
The good people generally carry a chip of honesty on their shoulder that they seldom co-operate even with people with similar value system. They believe that their goodness is one step higher and they are ready dump and run if the other guy doesn’t play along exactly as he feels is right. In fact they almost make such renunciation a virtue.
Courage
The bad normally has the courage and with impunity cooks the account books /investigation/ assessment or any administrative process for their gain.
The good is often scared to take bold decision and hides behind rules and technicality. The obstructive bureaucracy is often a result of such cowardliness and not just self serving actions of the bad.
Power of Interpretation
The bad will interpret laws and technicality so long it meets its end or favors an ally.
The good often tries to interpret with limited appreciation of what it stands for; by the time they finish splitting the hair it fails to be achieve any good.
Sacrifice
The bad is capable of sacrifice for what it stands for. Sacrifice its principals, society, environment and much more.
Good will hold onto technical correctness, its pride and prejudice even at the cost of its ultimate benefit to the society
Loyalty
The bad often demands and commits substantial loyalty to its partners so long as such loyalty is rewarding. They are willing invest in this loyalty for quite some time.
The good often has little commitment to his partners if it feels that their goodness is not of the same type. They are willing to abandon and run and not pull together.
Risk taking
The bad is willing to take its risk, because they see potential reward in taking risk.
The good is often too risk averse. The potential reward for sticking the neck out could be some brickbats. With no upside benefit for self and downside uncertain and costly, the good normally avoid getting involved.
Now we ask the question “How good is good”. There is a saving in our tongue which translates to “the good often bears the fruits of the bad”
I do agree there are many ‘good’ who are as good as the ‘bad’ and it is through them that we have gained anything.
What we need to do to avoid/delay of decay of our society is to develop a willingness to learn the ‘good’ from the ‘bad’, stick together and support each other for what we stand and not be a utopian island of fruitless good.
Willingness to co-operate, to take risks, to take a position, to believe in the intention of the fellow good, not to be cowed down by oppositions and mild differences in styles and not to run away to our comfort zones is what is needed today.
Thursday, April 9, 2009
Call of Duty – Different Tunes
I wrote an article in my blog titled ‘Call of duty. It discussed the need and relevance of political participation of more mature, educated and young people with values. After reading this post, I got a variety of responses. I felt that couple of these comments and my thoughts on these are worth sharing. And hence this.
“I have no time in my busy schedule”
Availability of time depends on what priority you ascribe to an activity in relation to all the other demands on you time.
If you think it is your responsibility to make a difference to your country, try to assign a small amount of time. One hour in a day? In a week? In a month??
You can write a meaningful article, a blog, tell a friend, forward a few emails and most importantly cast your vote. All these can make a difference
Can we be a bit less selfish when we give our time? Today we give our time only where we have to highest ROI to self/ family. But not willing to make our contribution which individually make little difference but can collectively make all the difference.
“I am not talented, capable or skilled to stand for an election and win.”
Participating in politics does not essentially mean standing for election.
Just like you participate in clubs like rotary/ lions or participate in religious activity you can participate in political process too.
You can act as a research supporter for your elected representatives or help in a variety of ways in the campaign of a person you support. At the minimum forward a few SMS endorsing your support.
You can act as a whistle blower and help publish the wrongdoing of the government or an officer.
You don’t have to be a part of a political party. But you can be a part of the political process.
May be you can put together a group that influences the local party decision of whom they are fielding.
May be you can put your money and power individually or collectively to get a good candidate elected. With the way the votes are split these days, the number needed to win may not be so big.
At the least by ensuring that each of your friends cast his/ her vote.
“I have no time in my busy schedule”
Availability of time depends on what priority you ascribe to an activity in relation to all the other demands on you time.
If you think it is your responsibility to make a difference to your country, try to assign a small amount of time. One hour in a day? In a week? In a month??
You can write a meaningful article, a blog, tell a friend, forward a few emails and most importantly cast your vote. All these can make a difference
Can we be a bit less selfish when we give our time? Today we give our time only where we have to highest ROI to self/ family. But not willing to make our contribution which individually make little difference but can collectively make all the difference.
“I am not talented, capable or skilled to stand for an election and win.”
Participating in politics does not essentially mean standing for election.
Just like you participate in clubs like rotary/ lions or participate in religious activity you can participate in political process too.
You can act as a research supporter for your elected representatives or help in a variety of ways in the campaign of a person you support. At the minimum forward a few SMS endorsing your support.
You can act as a whistle blower and help publish the wrongdoing of the government or an officer.
You don’t have to be a part of a political party. But you can be a part of the political process.
May be you can put together a group that influences the local party decision of whom they are fielding.
May be you can put your money and power individually or collectively to get a good candidate elected. With the way the votes are split these days, the number needed to win may not be so big.
At the least by ensuring that each of your friends cast his/ her vote.
Sunday, April 5, 2009
To be or not to be (Part 1) - The Art of Cooking
“Son, you have two options when you come to the witness stand as your name is called. One is to confirm what you just read in the CB- CID report when I ask you leading questions. Then you go back home and forget about the whole case”. The public prosecutor assured. He continued nonchalantly.
“Other is to tell the judge that the whole thing, the report of CB-CID circle inspector, the investigation report and prosecution case, are pack of lies. Then you continue fighting and forget about your studies in IIM as you will have to here most of the time for the matters of the case” He was just stating a fact.
This happened some time after I had competed my engineering and was getting ready to join for my post graduation in IIM. My neighbor was my professor and also my uncle. Few years ago while his family was away there was a burglary at his house and quite a lot of gold ornaments and other valuables were lost. The police were called and they asked me to give my name as a witness. I was eager and willing as my role was only to conform that such a burglary had taken place.
Years went by and I forgot about the incident. One fine day I got a summons from the court asking me to appear as a witness for prosecution. I was asked to meet the public prosecutor. He asked me to sit down read the case file.
Suddenly I saw a statement that was purported to have been made by me in front of a circle inspector of police. As per this statement, after the police caught the thief, I was called in and asked to identify the man and I remembered that this was the same man who was standing in front of my uncle’s house in a suspicious manner and whom I had asked what he was doing.
I was horrified. I had never met a fellow standing in front of my uncle’s house. I was never called to the police station to identify the thief and I had never made any statement to any police officer.
The prosecutor understood my dilemma and what I narrated in the beginning of this article was my conversation with him. He also showed me lots of other proofs which included recovered gold and his confession.
Though I felt less guilty and felt that I was contributing to the punishment of the guilty (like we see in the movies where the hero takes extra legal methods to punish the guilty) there was, and still is, a vague sense of uneasiness. Especially when the prosecutor explained to me that this cooking of documents is almost a standard operating procedure in law enforcement. He further added how the same culinary skills help to let the guilty scot free too.
Over the years I had a number of occasions to experience this cookery magic in a variety of circumstances. I realized that in the business of governance, it is an essential skill to succeed. “Yes Minister” is one of the most humorous depictions of this art form that I have seen. Private sector is no exception. But here it is used more in company structuring and financial engineering.
Although transparency and clarity in laws of governance can address this to a great extent, it can never control the human ingenuity in the way it uses the system; whether it is used for good or bad of the humanity at large.
The good and bad use of the system will always be there in any society. What determines the proportion or the level of good and bad is the value system of its populace.
I was reading the history book of my daughter and I was fascinated by Fa- Hian’s account of the administration and general life of people during the Golden Age of Indian History- the Gupta period. I quote below some exerts that I believe will touch a chord in our heart.
“The people do not have to register their households or attend to any magistrates. If they desire to go they go or if they like to stop they stop. Taxes were low, roads were safe, and one could travel to any place without fear. The people being good and disciplined, only very mild laws were needed. Capital punishment was not given. There was no dishonesty whatsoever. Bribery was not heard of. …”
This is not fairytale. This is our history; the history of our forefathers. Somewhere along the line we seem to have lost our link with these values. In fact, the heartland of the Gupta dynasty Magadh and Pataliputra today have become citadels of dishonesty, graft, muscle and money power.
When growth becomes synonymous with material goods and respectability is measured in cash, we start tolerating and then encouraging the leaders who were willing to sacrifice anything for power and money. A vicious cycle, feeding on each other. ‘Yadha Raja, Tadha Praja” The society gets the king it deserves and the society get molded by its kings. This is what happens today.
Foot Note: At this time of national election will we remember to vote with our values or with/for our purse. I hope the Mallika Sarabha, Meera Sanyal, Shashi Tharoor and Capt. Gopinadh will keep this in their mind when they are trying to make a difference in the political landscape.
“Other is to tell the judge that the whole thing, the report of CB-CID circle inspector, the investigation report and prosecution case, are pack of lies. Then you continue fighting and forget about your studies in IIM as you will have to here most of the time for the matters of the case” He was just stating a fact.
This happened some time after I had competed my engineering and was getting ready to join for my post graduation in IIM. My neighbor was my professor and also my uncle. Few years ago while his family was away there was a burglary at his house and quite a lot of gold ornaments and other valuables were lost. The police were called and they asked me to give my name as a witness. I was eager and willing as my role was only to conform that such a burglary had taken place.
Years went by and I forgot about the incident. One fine day I got a summons from the court asking me to appear as a witness for prosecution. I was asked to meet the public prosecutor. He asked me to sit down read the case file.
Suddenly I saw a statement that was purported to have been made by me in front of a circle inspector of police. As per this statement, after the police caught the thief, I was called in and asked to identify the man and I remembered that this was the same man who was standing in front of my uncle’s house in a suspicious manner and whom I had asked what he was doing.
I was horrified. I had never met a fellow standing in front of my uncle’s house. I was never called to the police station to identify the thief and I had never made any statement to any police officer.
The prosecutor understood my dilemma and what I narrated in the beginning of this article was my conversation with him. He also showed me lots of other proofs which included recovered gold and his confession.
Though I felt less guilty and felt that I was contributing to the punishment of the guilty (like we see in the movies where the hero takes extra legal methods to punish the guilty) there was, and still is, a vague sense of uneasiness. Especially when the prosecutor explained to me that this cooking of documents is almost a standard operating procedure in law enforcement. He further added how the same culinary skills help to let the guilty scot free too.
Over the years I had a number of occasions to experience this cookery magic in a variety of circumstances. I realized that in the business of governance, it is an essential skill to succeed. “Yes Minister” is one of the most humorous depictions of this art form that I have seen. Private sector is no exception. But here it is used more in company structuring and financial engineering.
Although transparency and clarity in laws of governance can address this to a great extent, it can never control the human ingenuity in the way it uses the system; whether it is used for good or bad of the humanity at large.
The good and bad use of the system will always be there in any society. What determines the proportion or the level of good and bad is the value system of its populace.
I was reading the history book of my daughter and I was fascinated by Fa- Hian’s account of the administration and general life of people during the Golden Age of Indian History- the Gupta period. I quote below some exerts that I believe will touch a chord in our heart.
“The people do not have to register their households or attend to any magistrates. If they desire to go they go or if they like to stop they stop. Taxes were low, roads were safe, and one could travel to any place without fear. The people being good and disciplined, only very mild laws were needed. Capital punishment was not given. There was no dishonesty whatsoever. Bribery was not heard of. …”
This is not fairytale. This is our history; the history of our forefathers. Somewhere along the line we seem to have lost our link with these values. In fact, the heartland of the Gupta dynasty Magadh and Pataliputra today have become citadels of dishonesty, graft, muscle and money power.
When growth becomes synonymous with material goods and respectability is measured in cash, we start tolerating and then encouraging the leaders who were willing to sacrifice anything for power and money. A vicious cycle, feeding on each other. ‘Yadha Raja, Tadha Praja” The society gets the king it deserves and the society get molded by its kings. This is what happens today.
Foot Note: At this time of national election will we remember to vote with our values or with/for our purse. I hope the Mallika Sarabha, Meera Sanyal, Shashi Tharoor and Capt. Gopinadh will keep this in their mind when they are trying to make a difference in the political landscape.
Thursday, April 2, 2009
Lessons from Tax Information Network - IT Enabled Compliance and Enforcement
One of the greatest expectations with regard to any new invention or technology is the belief that the world is waiting for it with open arms and an eager welcome. The reality is often the exact contrary. There are hardly any new ideas, art or solutions that were given an immediate and enthusiastic reception when they were first introduced. This is true of the incandescent bulb Edison invented or telephone by Alexander Graham Bell or the introduction of demat trading in Indian capital market.
They all began with a sense of euphoria among a few who introduced it, accompanied by a buildup of media expectation followed by disappointment that the concept has not caught on like wild fire. It took some time for the import of the idea to percolate down, from the few early adapters to the public at large, through a gradual process of churning among a whole host of people and processes.
The same is true for Tax Information Network (TIN) that has been established by NSDL on behalf of Income Tax Department. The core of TIN is creation of a consolidated tax ledger for each taxpayer giving the complete details of tax deducted (withholding tax) on his behalf by all deductors (entity withholding tax) and the tax deposited by him directly with the banks.
This consolidated tax ledger is expected to help the tax department to ensure that the tax credit given to the taxpayer is indeed against funds received into the government coffers.
This also aids the taxpayer to verify, well in advance, whether the deductors and the banks have done their jobs properly to reflect a complete view of his tax credits in the tax ledger. Such a comprehensive tax statement can remove the need for the taxpayers to collect Form 16s (Certificates giving details of tax withheld from the entity withholding the tax) from all the deductors who have deducted tax for getting credit of all the TDS.
TIN was inaugurated in January 2004. First challenge was to put in place the systems, procedure and infrastructure for the 13000 odd tax collecting bank branches for uploading to the TIN central system, details of the tax challans (for tax payment instrument identification) on a daily basis.
The second challenge was to establish a nationwide network of facilitation centres to interface with the taxpayers and also an online facility for the deductors to furnish their returns directly. (This infrastructure had to take care of the difference in ICT infrastructure of the large and small companies across the country)
The central system was also to be equipped to match the TDS returns with the challan details (details of tax payment instruments) so that the tax ledgers giving the details of all incomes and tax deducted could be created.
Establishment of infrastructure is the easier part. But ensuring high degree of compliance and data quality is an uphill task of enablement, education, feedback and enforcement. It needs conviction, patience and discipline. It also requires ability to keep the big picture in mind and taking one incremental step at a time to reach the ultimate goal. It is easy to lose heart or get impatient on the way and run after quick-fix solutions.
Like any other project that attempts significant transformation, TIN is also confronted by such woes. There were many who were ready to condemn this. This crowd consisted of many varieties. Some of them were taxpayers and taxmen getting scared of the increased transparency and the resulting ‘loss of flexibility’ in tax compliance and tax enforcement. Some were those who felt that they lost the lime light in this new initiative. There was turf war and professional jealousies. Then there were those who were simply impatient and felt disappointed that the change did not materialize like the transformation of Cinderella and they were too eager to keep tinkering which was sometimes counterproductive.
The encouraging thing is that in spite of these, the project is going forward. This was possible only on account of the diligent and patient efforts by some of the officers of the department. The Directorate of System being the nodal agency for this project naturally took the lead. Many officers of the department from the field also played active role. Office of the Principal Chief Controller of Accounts and the Reserve Bank were some of the other agencies who extended helping hand.
One of the most significant initiatives by the department in this direction was the efforts it took to garner support from the taxpayers in improving the compliance and data quality.
TIN provides an online facility for the taxpayers to view a comprehensive view of their tax credits over the net. But many taxpayers were unaware of this and many did not feel it important to refer to this as they continued to get their credit on the basis of the certificate provided by the deductor.
The department decided to address this issue in a taxpayer friendly fashion. It commenced forwarding of the tax credit statement by email and letters for the current and past year directly to the taxpayer with explanation on what to do to ensure that all the eligible credits have been accounted.
This has helped to educate the taxpayers that in future they may have little difficulty in getting tax credit if they ensure that their tax credit statement is correct and complete.
Similarly the reminder letters that TIN forwards to the deductors have helped those forgetful souls about their responsibility under the law to deposit tax deducted and file returns. The central system of TIN where all the returns were consolidated made it easier for the Department to track the defaulters and take appropriate action.
Inconsistency letters sent by TIN to the deductors is helping the deductors to identify their mistakes and to take necessary precautions to prevent such errors in future. It also reminded those deductors who paid TDS but did not file returns and those who filed returns but did not deposit tax. This information is also available online helping the deductors to rectify their errors.
This is a total cultural change for the department. For the first time, instead of sending notices, the department is communicating with the taxpayer feedback on information related to tax credit it has with respect to each taxpayer. Advising him to verify whether it is correct and rectify errors, if any, much before the department look at these details with the eye of an enforcer and start taking actions.
These movements towards transparency and more automated enforcement have helped the tax collection effort of the government. As per newspaper reports, in the last three years (Till 2008) the direct tax collection grew by more than 30% per year overtaking the indirect tax collection first time in history. The contribution of these efforts in strengthening the tax administration was acknowledged in a public function in August 2008 by Shri P Chidambaram who was the Finance Minister of India.
I am sure that co-coordinated efforts from various stakeholders can help to provide a tax administration system that is efficient, effective and provides high standards of service to taxpayers, at the same time, collects the revenues required by law to fund necessary public services.
They all began with a sense of euphoria among a few who introduced it, accompanied by a buildup of media expectation followed by disappointment that the concept has not caught on like wild fire. It took some time for the import of the idea to percolate down, from the few early adapters to the public at large, through a gradual process of churning among a whole host of people and processes.
The same is true for Tax Information Network (TIN) that has been established by NSDL on behalf of Income Tax Department. The core of TIN is creation of a consolidated tax ledger for each taxpayer giving the complete details of tax deducted (withholding tax) on his behalf by all deductors (entity withholding tax) and the tax deposited by him directly with the banks.
This consolidated tax ledger is expected to help the tax department to ensure that the tax credit given to the taxpayer is indeed against funds received into the government coffers.
This also aids the taxpayer to verify, well in advance, whether the deductors and the banks have done their jobs properly to reflect a complete view of his tax credits in the tax ledger. Such a comprehensive tax statement can remove the need for the taxpayers to collect Form 16s (Certificates giving details of tax withheld from the entity withholding the tax) from all the deductors who have deducted tax for getting credit of all the TDS.
TIN was inaugurated in January 2004. First challenge was to put in place the systems, procedure and infrastructure for the 13000 odd tax collecting bank branches for uploading to the TIN central system, details of the tax challans (for tax payment instrument identification) on a daily basis.
The second challenge was to establish a nationwide network of facilitation centres to interface with the taxpayers and also an online facility for the deductors to furnish their returns directly. (This infrastructure had to take care of the difference in ICT infrastructure of the large and small companies across the country)
The central system was also to be equipped to match the TDS returns with the challan details (details of tax payment instruments) so that the tax ledgers giving the details of all incomes and tax deducted could be created.
Establishment of infrastructure is the easier part. But ensuring high degree of compliance and data quality is an uphill task of enablement, education, feedback and enforcement. It needs conviction, patience and discipline. It also requires ability to keep the big picture in mind and taking one incremental step at a time to reach the ultimate goal. It is easy to lose heart or get impatient on the way and run after quick-fix solutions.
Like any other project that attempts significant transformation, TIN is also confronted by such woes. There were many who were ready to condemn this. This crowd consisted of many varieties. Some of them were taxpayers and taxmen getting scared of the increased transparency and the resulting ‘loss of flexibility’ in tax compliance and tax enforcement. Some were those who felt that they lost the lime light in this new initiative. There was turf war and professional jealousies. Then there were those who were simply impatient and felt disappointed that the change did not materialize like the transformation of Cinderella and they were too eager to keep tinkering which was sometimes counterproductive.
The encouraging thing is that in spite of these, the project is going forward. This was possible only on account of the diligent and patient efforts by some of the officers of the department. The Directorate of System being the nodal agency for this project naturally took the lead. Many officers of the department from the field also played active role. Office of the Principal Chief Controller of Accounts and the Reserve Bank were some of the other agencies who extended helping hand.
One of the most significant initiatives by the department in this direction was the efforts it took to garner support from the taxpayers in improving the compliance and data quality.
TIN provides an online facility for the taxpayers to view a comprehensive view of their tax credits over the net. But many taxpayers were unaware of this and many did not feel it important to refer to this as they continued to get their credit on the basis of the certificate provided by the deductor.
The department decided to address this issue in a taxpayer friendly fashion. It commenced forwarding of the tax credit statement by email and letters for the current and past year directly to the taxpayer with explanation on what to do to ensure that all the eligible credits have been accounted.
This has helped to educate the taxpayers that in future they may have little difficulty in getting tax credit if they ensure that their tax credit statement is correct and complete.
Similarly the reminder letters that TIN forwards to the deductors have helped those forgetful souls about their responsibility under the law to deposit tax deducted and file returns. The central system of TIN where all the returns were consolidated made it easier for the Department to track the defaulters and take appropriate action.
Inconsistency letters sent by TIN to the deductors is helping the deductors to identify their mistakes and to take necessary precautions to prevent such errors in future. It also reminded those deductors who paid TDS but did not file returns and those who filed returns but did not deposit tax. This information is also available online helping the deductors to rectify their errors.
This is a total cultural change for the department. For the first time, instead of sending notices, the department is communicating with the taxpayer feedback on information related to tax credit it has with respect to each taxpayer. Advising him to verify whether it is correct and rectify errors, if any, much before the department look at these details with the eye of an enforcer and start taking actions.
These movements towards transparency and more automated enforcement have helped the tax collection effort of the government. As per newspaper reports, in the last three years (Till 2008) the direct tax collection grew by more than 30% per year overtaking the indirect tax collection first time in history. The contribution of these efforts in strengthening the tax administration was acknowledged in a public function in August 2008 by Shri P Chidambaram who was the Finance Minister of India.
I am sure that co-coordinated efforts from various stakeholders can help to provide a tax administration system that is efficient, effective and provides high standards of service to taxpayers, at the same time, collects the revenues required by law to fund necessary public services.
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