Shell companies in MCA-21 submitting balance sheets regularly very much part of measurement, says former chief statistician

The deficiencies found in the MCA-21 database of the corporate sector, where more than a third of the sample companies were either untraceable, out of coverage, or closed, will not have a major impact on the calculation of GDP and GVA, according to prominent statisticians closely associated with the subject.

A recent report by the National Sample Survey Organisation titled ‘Technical Report on Service Sector Enterprises in India’ found that nearly 38% of the companies it surveyed using the MCA-21 database were unusable for data collection purposes. About 21% were designated “out of coverage”, 12% as untraceable, and 4.5% as closed. The government has started using the MCA-21 database to calculate the Gross Domestic Product and the Gross Value Added. The deficiencies in the database have alarmed a section of economists, who pointed out that this weakens the integrity of the national accounts data. However, noted statisticians The Hindu spoke to said this was not the case.

“In the sample we took from the MCA-21 database, about 36% of the firms don’t exist,” Pronab Sen, former Chief Statistician of India said. “That doesn’t surprise me one bit. The reason is we know that the MCA-21 contains shell companies. But, when you have shell companies in the MCA-21, and they are submitting their balance sheets regularly, they are very much a part of what I am measuring.”

“The question is whether this is wrong, and the answer is no,” Mr. Sen added. “Because, if I don’t measure their output, I am not capturing a part of GDP. Shell companies are benami companies where you have a legitimate company doing a legitimate business, but for tax purposes is routing a lot of transactions through the shell company. The value creation is happening. If I ignore that, I am saying value creation is not happening, which is wrong.”

“Not being able to reach a company at a particular address means that the address is wrong, not that the production is not happening,” a senior government official associated with the Ministry of Statistics explained. Also, as growth rates are measured over a period of time, the major factor that would affect them is the regularity with which the companies being measured file their returns, the official added.

Regularity in returns

“Growth rates are influenced more by the regularity with which people file returns,” the official, a statistician himself, said. “So, if a large part of your growth is essentially determined by a set of companies that file regularly, then the growth profile will be unaffected by the fact that there are a number of companies not being measured. But the level of the economy will be affected.”

In other words, if 62 out of 100 companies have been regularly filing their returns, then the growth rate will be determined by the change in the revenue reported in these 62 companies’ returns. The growth rate will not be affected by the 38 companies not filing returns.

The other factor to be kept in mind with the MCA-21 database is that it is a compilation of the audited financial returns filed by companies and this is reconciled with the corporate tax collected by the Income Tax Department. “If the database was unusable, then they would not match up with the tax collections,” the government official said. “But they do. What is filed in the company accounts is reconciled with taxes paid.”

“The MCA-21 is giving me audited data, whereas the data collected from the field is not audited,” Mr. Sen said. “One would imagine that audited data would always be better than unaudited data. The MCA data is capturing value creation by an entity that is a registered corporate. Now where that value is coming from — whether from the company itself or it is merely a book entry from some other company, doesn’t matter as far as GVA is concerned,” Mr. Sen said.

However, existence of shell firms does create some lower-level problems, Mr. Sen acknowledged, especially with regard to growth rates and levels of different sectors. “If I have a manufacturing company that has set up a shell company that is shown as a trading company, then what will end up happening is that the GVA that would have been counted in manufacturing would actually get counted in trade,” Mr. Sen said. “But the total remains correct. My ultimate objective is to capture the total.”

Former officials in the Ministry of Statistics point to the mechanisms in place within the Central Statistics Office to account for errors of this sort. P.V. Mohanan, former member of the National Statistical Commission said, “Companies change addresses but not in the official database, or the way it is registered, if it is registered for one activity but is doing another. But the National Accounts people make some adjustments to make sure that the data they are using is for factories that are there and operating.”

In addition to this, the government is in the process of strengthening its various databases by sharing data. The Income Tax Department recently announced an MoU signed with the Goods and Services Tax (GST) Network that would allow the sharing of information to pin down irregularities. The Ministry of Statistics is also looking to use the GST data to further bolster its own data collection activities.

“On-ground verification is something that GST is now trying to do by integrating with e-way bills so that everything is traced from the point of production to the destination,” the government official said. “There is a lot of agitation happening around that because companies are saying it is very intrusive.”

Mr. Sen is also now chairing a committee that is looking to integrate GST data for the next services survey because companies have to provide their current addresses while registering for GST.