The Reluctant Entreuprener: Perils of Over Invoicing

If one walks through the older industrial estates  either in Goa or elsewhere one will see many closed units. A newer estate like Verna has less of such closed units. What is the reason.? Usually if one looks at the history of the closed unit you will notice a majority of them were born during the subsidy era. An era when subsidy was paid almost as you started. Subsequently as the Governments became cash strapped they paid subsidy after many years. We got our subsidy after 10 years .

Is there a contradiction here, was subsidy not an incentive to help entrepreneurs. If yes then how come it is responsible for atleast some of the failures? The answer lies in an innocuous element, OVERINVOICING. Simply put it means that a supplier will be asked to invoice a machine for say 150 when the actual cost is 75. Why should this be a reason for the downfall  of a company?  The advantage of over invoicing is very apparent. The difference between the 150 charged and the actual cost of 75 will be returned to the entrepreneur in cash and he can claim a little more by way of subsidy

Anyone who is not commercially sound will believe that there is nothing wrong or problematic in the transaction.  Nothing can be further from the truth. Over invoicing is like the proverbial iceberg, one sees only the tip and major danger lurks below. And like the proverbial iceberg it has the potential to sink your titanic.

Let us examine the pitfalls. First, the perceived benefit. One actually never gets the full amount over invoiced back. The supplier will state that since he has to pay income tax on the additional amount he will try and keep atleast 30% back. Never mind the fact that to pay you cash he makes fake expense vouchers and thus reduces his tax liability. Despite you negotiation skills you will lose a minimum of 15%. The subsidy comes at a price as the officials claim their pound of flesh.

Then this money is refunded in cash  and faster than you can say “Jack Robinson” the money will disappear into non asset expenses and be lost forever.

Having paid the supplier, the total appears on your balance sheet as an asset. The bank would have funded this amount to the tune of approx 75%. So the instalments and interest will be higher than if one had not over invoiced. So there is a financial burden.

When you begin costing for your product, the extra depreciation, the extra interest has to be loaded. This makes the cost that much more expensive and therefore that mush more uncompetitive. In case you believe you can cost the product or for that matter sell the product at the market determined price and thus these simple aspects can be ignored. Think again.

When you sell at a lower price which has not factored the extra interest or depreciation you will show a loss in your balance sheet. So you are dammed if you factor in  the extra costs ie no one will buy your product and you are dammed if you do not factor in the extra costs, you will be selling at a loss.

In a short while the Company will begin to go under. The weight of over invoicing will begin to have its effect. Once under, the financial institution will try and sell the asset to recover the original loan. They will find that there are no takers as a new machine will cost less than your depreciated asset. The asset will lie idle, double whammy, it lost money now it cannot sell.

 The simple act of over invoicing has led to the sinking of the Company. So every over invoice situation is actually making a hole in your boat. With such a boat you will not get across a pond, leave alone an ocean called the “marketplace”.

Suggested reading: Financial basics.

The Reluctant Entrepreneur : Knowing it all

Recently a Law Maker confessed to not being aware of applicable rules.  This is a familiar territory for an entrepreneur. The law maker might just get away with the explanation but we cannot. Therefore it is imperative that every entrepreneur takes time out to study and to keep abreast of the changes in laws and rules.

This is easier said than done given the already long list of pending decisions, meeting with suppliers, customers etc. Where is the time to study law. I remember when we set up shop we were given a tax holiday for five years. However while every newspaper or minister harped on this point to attract investors not one mentioned the fine print. One had to employ, ten employees to be eligible, just starting was not enough. Some smart CA’s advised their clients to show 10 employees when t hey realized this gap.

A couple of years later as they are wont to do, the ESIC inspectors looked at this list of ten employees and asked the entrepreneurs to pay ESCIS from the day ten employees were shown on the books. This had to be paid with interest and penalty since an establishment with 10 employees is liable to be covered under ESIC. Today as per the updated rules, 10 employees attracts the provisions of Provident Fund Act.

CA’s are not concerned with ESIC and PF and hence overlooked this point when advising clients purely from the Income tax aspect. The hot potato is back in the lap of the entrepreneur. He has to know all the laws, not knowing does not given him any respite.

The simplest way but the most difficult way is to take a crash course on all applicable laws. It is also impractical. The best way is to be “networked”. When you are part of an industry  group, they will most likely send you copies of gazette notifications, they will send you case studies which have been decided in tribunals, courts etc. Also in meetings you will overhear or discuss situations or transgressions pointed out by inspectors. Based on these inputs you will have to go back to your own unit and check compliance.

I came across a situation where the industry association was reluctant to appraise its members of a new law.  The 2011 Union budget had imposed a 1% tax on an activity. A superintendent of Central Excise charged with the responsibility of collecting this tax, tried to meet a few heads of companies affected by the tax, based in his jurisdiction. His attempt was greeted with suspicion. He was told that the companies CA had said this was not applicable or that representations had been made to reverse the decision. Some questioned him as to how the tax would be collected since customers had already signed Purchase orders which did not reflect this tax? Good question except that it has to be addressed to the customer and not the enforcing officer, he does not make the law, just enforces it.

Ideally a proactive industry body would have implemented a two pronged strategy. On one hand they would have applied to the government for a review or rollback. On the other hand, they should have begun to train members to handle the new tax. On what basis will the new tax be calculated? What kind of returns have to be submitted and when. What happens to the running bills already paid before March 2011 and the product will be billed after March 11? How are customers to be approached to claim this tax if is not mentioned in Purchase Order.

They can invite tax experts, Department officials and members can ask question so that their doubts get cleared.  By doing this the association will keep its members abreast of the changes. Any other reaction especially ignoring the change expecting it to go away is akin to the proverbial “Ostrich Head in the sand approach”.

Very often we see technically qualified and sound entrepreneurs fail, because they lacked commercial skills and did not think it was important enough to pay attention to those factors. For example, while the product is technically sound, the accounting is horrible and therefore there is no control over working capital. This leads to the product and entrepreneurs downfall. A simple matter of over invoicing to claim more subsidy is akin to making a hole in your own boat. This is a factor many entrepreneurs who have no commercial background fail to realize. Go to any industrial estate and you will see this hard reality, units which over invoiced to claim subsidy are closed, none stood the test of time.

Jack of all trades could be applied to an entrepreneur, and if not the master, he must know master in all trades so that he can run his business well.  Knowledge has always been the key, today more than ever this remains true, except that the knowledge bank changes fast and one has to keep up.

Blaise

Suggested reading material: GCCI came up with a list of all acts and a reading of them would make one realize which maybe applicable to a particular business.

The Reluctant Entrepreneur : MICROSOFT Proof your business

Many years ago a direct mailer from the world’s richest man came to me. The mailer went of to say, “Blaise, if you do not want to wear a real pair of handcuffs, buy and use only originalMicrosoft products”.  That helped me decide to avoid Microsoft products.  Linus Torvalds had the same idea but he went one step ahead, he designed the LINUX kernel, a  software to match Microsoft's windows,  but made it free, open source was born.

Subsequently, when we were deciding how to go about building an enterprise software for our Company, our discussions evolved around the choice of operating software. Mr. Saha, the then Director at ETDC was promoting Linux, after discussing with him on the pros and cons, the decision was LINUX.

The easier decision could have been MICROSOFT's Oracle, Novel Netware and My SQL. In addition we would need windows operating systems and at the minimum windows office.  All this would have set us back a few lacs. Upgrades or new versions coupled with increasing number of nodes in the network would have added to the cost. All this would have been easily taken care with pirated versions. This is the route most small or start up businesses take.

By opting for LINUX we were actually venturing into uncharted territory. REDHAT LINUX, APACHE, Postgrace and Open office were free. Setting up and support were key issues.  LINUX did not install on any and every PC as it does so today. A change of mother boards was on the cards and technically sound people were required. Luck they say favours the brave and we got all the support we needed at the correct time.

In one case the money was being spent on an asset creation while in another it was for a CD. In one case handcuffs could be provided if we were not careful or freedom from the hand cuffs. 

Today, ten odd years later that decision has paid rich dividends. A compliance officer from Microsoft, called my office and took details unauthorisedly about the number of PC’s and also called up our hardware supplier. We, later got a mail from him, offering to help us transition to legal software assuming that we were using pirated copies. We did speak to him, after that he was clear that he had chased the wrong Company. We even got a polite notice from a Delhi law firm on the same issue, “anti piracy education” it is called.  Apparently there is a fine of 2 lacs and jail for using pirated software. They did not mention the invasion of our privacy. No one can call Microsoft and get information from any one in the organisation.

I am sure even today as people decide to set up, the last item on their agenda or may not even be on the agenda is regular day to day software. They will buy an office computer and for the boss a laptop and slowly increase the nodes as the Company grows. Despite the fact that pirated software is a well known issue no one worries about it. That is till Microsoft compliance officers come after you.

There are options which are not expensive, Ubuntu is a good example of a desktop OS, while Redhat can be an enterprise version. The standard accounting software Tally can be run using Linux Wine. Some propriety software necessarily requires a windows environment, buy the license. Rationalise the use, load all software using the windows environment on one system as far as possible. Instead of paying good money for windows office opt for libre office with similar functionality of MS office. If funds are not an issue try the apple products, lots of free apps available and graphics fantastic. The  advantage of a non windows environment, usually you are safe from virus and the blue screen of death. Change over if you are already running pirated windows, it is pretty simple, just needs the will.

Go ahead do an audit of your software usage, see where you stand. Either buy the license and sleep easy or switch and be free for ever.

Blaise Costabir

GIDC: A lesson for Bureaucrats

The recent Governmental actions to stem the rot in a scam tainted GIDc is a lesson for Babus. All Government actions were directed at them. If one were to look at the actions themselves it would be clear that the problem lies with the MD and senior staff. Therefore actions against them would be the logical conclusion. However we all know and believe the real culprit has got of scot free.

Therefore henceforth Babus, must think before they collude with higher political authorities because as and when the proverbial S7%t hits the ceiling, the only ones in the firing line are the ones who sign on the dotted  lines. The person who actually benefits only issues verbal orders and is therefore not easy to catch.

The Chairman of GIDC must believe he is the right hand of God or God himself. His actions despite the focus on the wrongdoings at GIDC over the past few months, must make him believe he cannot be caught for the reasons stated above.

How would you explain the Multiplex Bio Tech P Ltd transaction reported recently. The plot was revoked in Jan 11 and was unallocated till Aug 11. During this period GIDC officials were telling prospective entrepreneurs that there was no plots available. Yet a subdivided plot of 5000 sqm was allotted to Damu Naik and 2500 sqm was ear-marked M/s Shetye. Neither featuring in the list of pending applications. The GIDC top management has been summarily returning applications and stone walling any new applicant under the guise of Task Force Report is awaited. They have entertained these two application and gone ahead. The balance 21000sqm with a street value of Rs 11 crores is stock in trade. Whose stock is this? If reports coming from inside GIDC are to be believed the Chairman has started an investigation into the leak. Why, should he not be finding out who hoarded the plot or benefited? One reason he already knows.

When subdividing a plot under TCP rules which as per RTI replies states that GIDC comes under their ambit, 15% of the land is supposed to be left as open space. This was not done and is therefore a violation. This means that the subdivision of the Mehul plot has a similar violation. No intimation has been given to TCP and how many such plots exist?

This subdivision is done by GIDC to enable the Chairman/Managing Director to allot plots, as the rule says plots less than 10000 sqm do not need Board approval. It is good to know that GIDC follows rules. But can we seriously believe that only the MD was responsible for the above transaction? That the plot was allotted or earmarked to a select person, with possibly a good project out of turn without the concurrence of the Chairman.

Would the MD of GIDC give a plot to Damu Naik who is an opposition MLA and risk the wrath of his Chairman who is a congress man? It is possible but not feasible. On paper the MD is the one responsible. The fact that this happened as late as Aug 11, when the heat and spotlight was well and truly focused on GIDC, implies that everyone believed they could get away because an unseen hand offered protection. Yet the file noting will not or never have a mention as to who gave instructions to do the wrong things.

Obviously, this protection does not apply to bureaucrats, given the actions. They are easy to scarfice. The officers who rise to senior positions from the ranks or on deputation or officiating are more vulnerable to getting caught in a compromising position. Their weakness is exploited and the end result is sad, a career is at stake or retirement benefits after years of hard work are put in jeopardy. A pity.

Unless the real culprit stands up and raises his hand the bureaucrats will be in trouble in the GIDC case. Therefore the moral of the story for career bureaucrats is keep GIDC story cuttings on your respective desks to remind you about the perils of blindly following verbal instructions of unscrupulous politicians. 

ANNA v/s Robbing Hoods

Most of our elected representatives seem to believe they are modern day “robinhood”. They use this logic to demand bribes, to squeeze out any and sometimes everything from common people and everyday processes. They to ensure the robinhood myth is perpetuated by giving out a few crumbs to the less fortunate, while keeping the major part of the pie. Are they really “Robin Hoods”

The original Robin Hood lived in the forest with his band of merry men. They robbed fat rich men who usually had come by their wealth by dubious means, most likely by exploiting the poor peasant. At no time did we hear of Robin’s men troubling poor folks. Robin Hood opposed the Sheriff of Nottingham who was the law. While the Sheriff ate and drank at high table, Robin and his band sat around a fire in the forest, but had a merry time all the same. At no time, did Robin and his men attack local traders or businessmen, rob a bank or the Government treasury for that matter. Whoever they robbed, no deal was made, the target was relieved of all his processions and usually deserved no sympathy. All responsibility was owned by Robin Hood for his acts.

When shared it appeared most if not all was handed over to the peasants. From the beginning to the end Robin and his men remained at the same, strong principled men with no processions. If push came to shove the entire countyside would have backed Robin of Loxley.

If you contrast this to the modern day claimants to the TITLE, there are stark differences. For starters they live in palaces. The road from almost nothing to the titles of many properties is paved with dubious deals. These aspiring robin hoods are the law. No one or nothing is spared in the quest to collect booty. How else would you explain stories of poor people paying for the privilege of getting a government job or losing land to threat of acquisition? Even the act of recommending someone’s name for a ration card comes with a price, his vote, apart from the cash to be paid up front. Businessmen and traders are primary targets, any and every occasion is an opportunity to make a deal. The lions share is taken by the aspiring robin hood. The businessman on the other hand has to make his money short changing the project. So you will get a bridge, but less cement will be used so it falls in 10 years rather than the hundred it was supposed to last. When enquiry’s are held it is only the businessman who has to pay the price.

The best part I save for last, only crumbs are given out and the cream of the collection is added to the family’s silver, gold and BMW collection. These earnings are responsibility free. There is no money back guarantee. In one curious case aspirants are told that if the Government of the day falls and the promised job cannot be given, forget the money paid. They do not rob just people, they rob the exchequer, that effects us all.

In short, these are not Robin Hoods of yore, but simply Robbing Hoods.

Maybe we all knew this simple fact but were powerless to do anything. Not anymore, ANNA is there. The entire country side is up in arms, every nook and corner of India is bursting, the frustration is palpable, the fake robin hoods on the run. Unlike the original, who was chased by the law, today’s Robbing Hoods are using the law to try and suppress this frustration. There is not just one “Sheriff of Nottingham” in India, there are many. They are ganging up to safeguard their ill gotten interests.

Therefore, the “peasants” in India too must all join hands with ANNA HAZARE and get not only the JAN LOKPAL bill passed but the Lokayukta implemented in Goa. The time is now, stand up and be counted. STOP THE LOOT, BRING LOOTERS TO BOOK.

Jai Hind.