The Insolvency and Bankruptcy Code: All you need to know

Aravind Gayam - May 10, 2016

The Insolvency and Bankruptcy Code, 2016 is listed for passage in Rajya Sabha today. Last week, Lok Sabha passed the Code with changes recommended by the Joint Parliamentary Committee that examined the Code.[1],[2] We present answers to some of the frequently asked questions in relation to the Insolvency and Bankruptcy Code, 2016. Why do we need a new law? As of 2015, insolvency resolution in India took 4.3 years on an average. This is higher when compared to other countries such as United Kingdom (1 year) and United States of America (1.5 years). Figure 1 provides a comparison of the time to resolve insolvency for various countries. These delays are caused due to time taken to resolve cases in courts, and confusion due to a lack of clarity about the current bankruptcy framework. What does the current Code aim to do? The 2016 Code applies to companies and individuals. It provides for a time-bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency within a 180-day period. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency. Who facilitates the insolvency resolution under the Code? The Code creates various institutions to facilitate resolution of insolvency. These are as follows:

Insolvency Professionals: A specialised cadre of licensed professionals is proposed to be created. These professionals will administer the resolution process, manage the assets of the debtor, and provide information for creditors to assist them in decision making.

Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for their performance.

Information Utilities: Creditors will report financial information of the debt owed to them by the debtor. Such information will include records of debt, liabilities and defaults.

Adjudicating authorities: The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for individuals. The duties of the authorities will include approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.

Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code. The Board will consist of representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.

What is the procedure to resolve insolvency in the Code? The Code proposes the following steps to resolve insolvency:

Initiation: When a default occurs, the resolution process may be initiated by the debtor or creditor. The insolvency professional administers the process. The professional provides financial information of the debtor from the information utilities to the creditor and manage the debtor’s assets. This process lasts for 180 days and any legal action against the debtor is prohibited during this period.

Decision to resolve insolvency: A committee consisting of the financial creditors who lent money to the debtor will be formed by the insolvency professional. The creditors committee will take a decision regarding the future of the outstanding debt owed to them. They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate) the assets of the debtor to repay the debts owed to them. If a decision is not taken in 180 days, the debtor’s assets go into liquidation.

Liquidation: If the debtor goes into liquidation, an insolvency professional administers the liquidation process. Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence: i) insolvency resolution costs, including the remuneration to the insolvency professional, ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors, iv) dues to government, v) priority shareholders and vi) equity shareholders.

What are some issues in the Code that require consideration?

The Bankruptcy Board (regulator) will regulate insolvency professional agencies (IPAs), which will further regulate insolvency professionals (IPs). The rationale behind multiple IPAs overseeing the functioning of their member IPs, instead of a single regulator is unclear. The presence of multiple IPAs operating simultaneously could enable competition in the sector. However, this may also lead to a conflict of interest between the regulatory and competitive goals of the IPAs. This structure of regulation varies from the current practice where the regulator directly regulates its registered professionals. For example, the Institute of Chartered Accountants of India (which regulates chartered accountants) is directly responsible for regulating its registered members.

The Code provides an order of priority to distribute assets during liquidation. It is unclear why: (i) secured creditors will receive their entire outstanding amount, rather than up to their collateral value, (ii) unsecured creditors have priority over trade creditors, and (iii) government dues will be repaid after unsecured creditors.

The smooth functioning of the Code depends on the functioning of new entities such as insolvency professionals, insolvency professional agencies and information utilities. These entities will have to evolve over time for the proper functioning of the system. In addition, the NCLT, which will adjudicate corporate insolvency has not been constituted as yet, and the DRTs are overloaded with pending cases.

The Insolvency and Bankruptcy Code, 2016, http://www.prsindia.org/administrator/uploads/media/Bankruptcy/Bankruptcy%20Code%20as%20passed%20by%20LS.pdf.
Report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015, April 28, 2016, http://164.100.47.134/lsscommittee/Joint%20Committee%20on%20Insolvency%20and%20Bankruptcy%20Code,%202015/16_Joint_Committee_o n_Insolvency_and_Bankruptcy_Code_2015_1.pdf

A version of this blog appeared in the Business Standard on May 7, 2016.

Policy

Petrol and Diesel Prices

Shashank Srivastava - October 21, 2021

In the past few months, retail prices of petrol and diesel have consistently increased to all-time high levels. On October 16, 2021, the retail price of petrol in Delhi was Rs 105.5 per litre, and that of diesel was Rs 94.2 per litre. In Mumbai, these prices were even higher at Rs 111.7 per litre and Rs 102.5 per litre, respectively.

The difference in fuel retail prices in the two cities is due to the different tax rates levied by the respective state governments on the same products. In this blog post, we look at the tax components in the price structure of petrol and diesel, the variation in these across states, and the major changes in taxation of these products in the recent years. We also discuss changes in the retail prices over the past few years and how it compares vis-à-vis the global crude oil prices.

Taxes make up around 50% of the retail price

Public sector Oil Marketing Companies (OMCs) revise the retail prices of petrol and diesel in India on a daily basis, according to changes in the price of global crude oil. The price charged to dealers includes the base price set by OMCs and the freight price. As on October 16, 2021, the price charged to dealers makes up 42% of the retail price in the case of petrol, and 49% of the retail price in the case of diesel (Table 1).

The break-up of retail prices of petrol and diesel in Delhi (as on October 16, 2021), shows that around 54% of the retail price of petrol comprises central and states taxes. In the case of diesel, this is close to 49%. The central government taxes the production of petroleum products, while states tax their sale. The central government levies an excise duty of Rs 32.9 per litre on petrol and Rs 31.8 per litre on diesel. These make up 31% and 34% of the current retail prices of petrol and diesel, respectively.

Table 1: Break-up of petrol and diesel retail prices in Delhi (as on October 16, 2021)

Component	Petrol		Diesel
Component	Rs/litre	% of retail price	Rs/litre	% of retail price
Price Charged to Dealers	44.4	42%	46.0	49%
Excise Duty (levied by centre)	32.9	31%	31.8	34%
Dealer Commission (average)	3.9	4%	2.6	3%
Sales Tax/ VAT (levied by state)	24.3	23%	13.8	15%
Retail Price	105.5	100%	94.2	100%

Note: Delhi levies 30% VAT on petrol and 16.75% VAT on diesel.
Sources: Indian Oil Corporation Limited; PRS.

While excise duty rates are uniform across the country, states levy sales tax/ Value Added Tax (VAT) which varies across states. For instance, Odisha levies 32% VAT on petrol, while Uttar Pradesh levies 26.8% VAT or Rs 18.74 per litre, whichever is higher. Refer to the table 3 in annexure for sales taxes/VAT levied across the country. The figure below shows the different tax rates levied by states on petrol and diesel. In addition to the tax rates shown in the graph, many state governments, such as Tamil Nadu, also levy certain additional levies such as cess (Rs 11.5 per litre).

Figure 1: Sales tax/VAT rates levied by states on petrol and diesel (as on October 1, 2021)

Note: The rates shown for Maharashtra are averages of the rates levied in the Mumbai-Thane region and in the rest of the state. Only percentages are being shown in this graph.
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Note that unlike excise duty, sales tax is an ad valorem tax, i.e., it does not have a fixed value, and is charged as a percentage of the price of the product. This implies that while the value of excise duty component of the price structure is fixed, the value of the sales tax component is dependent on the other three components, i.e., price charged to dealers, dealer commission, and excise duty.

Retail prices in India compared to global crude oil price

India’s dependence on imports for consumption of petroleum products has increased over the years. For instance, in 1998-99, net imports of petroleum products were 69% of the total consumption, which increased to around 95% in 2020-21. Because of a large share of imports in the domestic consumption, any change in the global price of crude oil has a significant impact on the domestic prices of petroleum products. The two figures below show the trend in the price of global crude oil and retail prices of petrol and diesel in India, over the last nine years.

Figure 2: Trend of the global crude oil price vis-à-vis retail prices of petrol and diesel (in Delhi)

Note: Global Crude Oil Price is for the Indian basket. Petrol and diesel retail prices are for Delhi. Figures reflect average monthly price.
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Between June 2014 and October 2018, the retail selling prices did not adhere to change in global crude oil prices. The global prices fell sharply between June 2014 and January 2016, and then subsequently increased between February 2016 and October 2018. However, the retail selling prices remained stable during the entire period. This disparity in the change in global and Indian retail prices was because of the subsequent changes in taxes. For instance, central taxes were increased by Rs 11 and 13 between June 2014 and January 2016 on petrol and diesel respectively. Subsequently, taxes were decreased by four rupees between February 2016 and October 2018 for petrol and diesel. Similarly, during January-April 2020, following a sharp decline of 69% in the global crude oil prices, the central government increased the excise duty on petrol and diesel by Rs 10 per litre and Rs 13 per litre, respectively in May 2020.

Sharp increase in excise duty collections

As a result of the increase in excise duty in May 2020, the excise duty collection increased sharply from Rs 2.38 lakh crore in 2019-20 to Rs 3.84 lakh crore in 2020-21. The year-on-year growth rate of excise duty collection increased from 4% in 2019-20 to 67% in 2020-21. However, sales tax collections (from petroleum products) during that period remained more or less constant (Figure 3).

Figure 3: Excise duty and sales tax/ VAT collection from petroleum products (in Rs lakh crore)

Note: The excise duty component in the figure includes cess on crude oil.
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Share of states in excise duty has decreased over the years

Though central taxes (such as excise duty) are levied by the centre, it has only 59% of the revenue from these taxes. The remaining 41% of the revenue is required to be devolved to the state governments as per the recommendations of the 15^th Finance Commission. These devolved taxes are un-tied in nature, states can spend them according to their own discretion. The excise duty levied on petrol and diesel consists of two broad components: (i) tax component (i.e., basic excise duty), and (ii) cess and surcharge component. Of this, only the revenue generated from the tax component is devolved to states. Revenue generated by the centre from any cess or surcharge is not devolved to states. Currently, the Agriculture Infrastructure and Development Cess, and the Road and Infrastructure Cess are levied on the sale of petrol and diesel in addition to the surcharge.

In the Union Budget 2021-22, the Agriculture Infrastructure and Development cess on petrol and diesel was announced at Rs 2.5 per litre and Rs 4 per litre, respectively. However, simultaneously, the basic excise duty and surcharge were reduced by equal amounts, so that the overall rate remains the same. Essentially, this provision shifted a revenue of Rs 1.5 per litre of petrol and Rs 3 per litre of diesel from the states’ divisible pool of taxes to the cess and surcharge revenue, which is entirely with the centre. Similarly, over the last four years, the share of tax component in the excise duty has decreased by 40% in petrol and 59% in diesel (table 2). At present, majority of the excise duty levied on petrol (96%) and diesel (94%) is in the form of cess and surcharge, due to which it is entirely under the centre’s share (Table 2).

Table 2: Break up of excise duty (Rs per litre)

Excise duty	Petrol				Diesel
Excise duty	Apr-17	% share of total	Feb-21	% share	Apr-17	% share of total	Feb-21	% share
Tax (devolved to states)	9.48	44%	1.4	4%	11.33	65%	1.8	6%
Cess and surcharge (centre)	12	56%	31.5	96%	6	35%	30	94%
Total	21.48	100%	32.9	100%	17.33	100%	31.8	100%

Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS

As a result, the devolution to states out of the excise duty has declined over the last four years. Even though the excise duty collections have increased sharply between 2019-20 and 2020-21, the devolved component has declined from Rs 26,464 to Rs 19,578 (revised estimate) in the same period.

Annexure

Table 3: Sales taxes/VAT rates levied on petrol and diesel across states (as on October 1, 2021)

State/UT	Petrol	Diesel
Andaman & Nicobar Islands	6%	6%
Andhra Pradesh	31% VAT + Rs.4/litre VAT+Rs.1/litre Road Development Cess an d Vat thereon	22.25% VAT + Rs.4/litre VAT+Rs.1/litre Road Development Cess and Vat thereon
Arunachal Pradesh	20%	13%
Assam	32.66% or Rs.22.63 per litre whichever is higher as VAT minus Rebate of Rs.5 per Litre	23.66% or Rs.17.45 per litre whichever is higher as VAT minus Rebate of Rs.5 per Litre
Bihar	26% or Rs 16.65/Litre whichever is higher (30% Surcharge on VAT as irrecoverable tax)	19% or Rs 12.33/Litre whichever is higher (30% Surcharge on VAT as irrecoverable tax)
Chandigarh	Rs.10/KL cess +22.45% or Rs.12.58/Litre whichever is higher	Rs.10/KL cess + 14.02% or Rs.7.63/Litre whichever is higher
Chhattisgarh	25% VAT + Rs.2/litre VAT	25% VAT + Rs.1/litre VAT
Dadra and Nagar Haveli and Daman and Diu	20% VAT	20% VAT
Delhi	30% VAT	Rs.250/KL air ambience charges + 16.75% VAT
Goa	27% VAT + 0.5% Green cess	23% VAT + 0.5% Green cess
Gujarat	20.1% VAT+ 4% Cess on Town Rate & VAT	20.2% VAT + 4 % Cess on Town Rate & VAT
Haryana	25% or Rs.15.62/litre whichever is higher as VAT+5% additional tax on VAT	16.40% VAT or Rs.10.08/litre whichever is higher as VAT+5% additional tax on VAT
Himachal Pradesh	25% or Rs 15.50/Litre- whichever is higher	14% or Rs 9.00/Litre- whichever is higher
Jammu & Kashmir	24% MST+ Rs.5/Litre employment cess, Reduction of Rs.0.50/Litre	16% MST+ Rs.1.50/Litre employment cess
Jharkhand	22% on the sale price or Rs. 17.00 per litre , which ever is higher + Cess of Rs 1.00 per Ltr	22% on the sale price or Rs. 12.50 per litre , which ever is higher + Cess of Rs 1.00 per Ltr
Karnataka	35% sales tax	24% sales tax
Kerala	30.08% sales tax+ Rs.1/litre additional sales tax + 1% cess	22.76% sales tax+ Rs.1/litre additional sales tax + 1% cess
Ladakh	24% MST+ Rs.5/Litre employment cess, Reduction of Rs.2.5/Litre	16% MST+ Rs.1/Litre employment cess , Reduction of Rs.0.50/Litre
Lakshadweep	Nil	Nil
Madhya Pradesh	33 % VAT + Rs.4.5/litre VAT+1%Cess	23% VAT+ Rs.3/litre VAT+1% Cess
Maharashtra – Mumbai, Thane , Navi Mumbai, Amravati & Aurangabad	26% VAT+ Rs.10.12/Litre additional tax	24% VAT+ Rs.3.00/Litre additional tax
Maharashtra (Rest of State)	25% VAT+ Rs.10.12/Litre additional tax	21% VAT+ Rs.3.00/Litre additional tax
Manipur	32% VAT	18% VAT
Meghalaya	20% or Rs15.00/Litre- whichever is higher (Rs.0.10/Litre pollution surcharge)	12% or Rs9.00/Litre- whichever is higher (Rs.0.10/Litre pollution surcharge)
Mizoram	25% VAT	14.5% VAT
Nagaland	25% VAT or Rs. 16.04/litre whichever is higher +5% surcharge + Rs.2.00/Litre as road maintenance cess	16.50% VAT or Rs. 10.51/litre whichever is higher +5% surcharge + Rs.2.00/Litre as road maintenance cess
Odisha	32% VAT	28% VAT
Puducherry	23% VAT	17.75% VAT
Punjab	Rs.2050/KL (cess)+ Rs.0.10 per Litre (Urban Transport Fund) + 0.25 per Litre (Special Infrastructure Development Fee)+24.79% VAT+10% additional tax on VAT	Rs.1050/KL (cess) + Rs.0.10 per Litre (Urban Transport Fund) +0.25 per Litre (Special Infrastructure Development Fee) + 15.94% VAT+10% additional tax on VAT
Rajasthan	36% VAT+Rs 1500/KL road development cess	26% VAT+ Rs.1750/KL road development cess
Sikkim	25.25% VAT+ Rs.3000/KL cess	14.75% VAT + Rs.2500/KL cess
Tamil Nadu	13% + Rs.11.52 per litre	11% + Rs.9.62 per litre
Telangana	35.20% VAT	27% VAT
Tripura	25% VAT+ 3% Tripura Road Development Cess	16.50% VAT+ 3% Tripura Road Development Cess
Uttar Pradesh	26.80% or Rs 18.74/Litre whichever is higher	17.48% or Rs 10.41/Litre whichever is higher
Uttarakhand	25% or Rs 19 Per Ltr whichever is greater	17.48% or Rs Rs 10.41 Per Ltr whichever is greater
West Bengal	25% or Rs.13.12/litre whichever is higher as sales tax+ Rs.1000/KL cess – Rs 1000/KL sales tax rebate (20% Additional tax on VAT as irrecoverable tax)	17% or Rs.7.70/litre whichever is higher as sales tax + Rs 1000/KL cess – Rs 1000/KL sales tax rebate (20% Additional tax on VAT as irrecoverable tax)

Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

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The Insolvency and Bankruptcy Code: All you need to know

Petrol and Diesel Prices

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