December 23, 2021 Mr. Rajat Kumar Mishra 57 ,a/Mi Additional Secretary 8" 3nu Department of Economic Affairs Olo AS (MBC} Ministry of Finance, Government of India A·+es? North Block a/oa. , New Delhi 110001, India ' ; {±1 INDIA: Himachal Pradesh Public Financial Management Capacity Building Program (Loan No. 8753- IN) Amendment to Loan Agreement Dear Mr. Mishra: We refer to the Loan Agreement between India ("Borrower") and International Bank for Reconstruction and Development ("Bank") dated May 31, 201 7 ("Loan Agreement"), for the Himachal Pradesh Public Financial Management Capacity Building Program ("Program"). We also refer to letter dated June 4, 2021 from the Department of Economic Affairs (DEA), Ministry ofFinance, and to DEA's email dated October 26, 2021 conveying DEA's endorsement of the proposed restructuring of the Disbursement Linked Indicators (DLis) and the Results Framework for the Program. We are pleased to inform you that the Bank concurs with the request and accordingly amends the Loan Agreement as set forth below: (a) Section 3.3(iii) of Schedule 1 is deleted, and the remaining section is renumbered accordingly. (b) The Annex to Schedule 2 to the Loan Agreement is revised to read as set forth in Annexure I hereto. (c) The indicators/results framework agreed further to Section III.A of Schedule 2 to the Loan Agreement is revised accordingly and is set forth in Annexure II hereto. (d) Sections 1.21 (definition of HPBL) and 1.28 (definition of LoC) of the Appendix are hereby deleted. (e) A new definition of "HPSAD" is introduced in Section I (Definitions) of the Appendix to read as follows: India Country Office, 70 Lodi Estate, New Delhi 110 003, India P.O. Box 416, Phone: +911141479301 / +911149247601 Mr. Rajat Kumar Mishra -2- December 23, 2021 "HPSAD" means the Himachal Pradesh State Audit Department. Except as specifically amended by this Amendment Letter ("Amendment Letter"), all other provisions of the Loan Agreement shall remain in full force and effect. The Bank will disclose this Amendment Letter and related information m accordance with the World Bank's Policy on Access to Information. By entering into this Amendment Letter, the Borrower consents to disclosure of this Amendment Letter and related information. Please confirm your agreement to the foregoing by signing the form of confirmation set forth below, and returning one fully executed original of this Amendment Letter to us and retaining one original for your records. This Amendment Letter shall become effective as of the date of the last countersignature of this Amendment Letter, upon receipt by the Bank of the duly countersigned original of this Amendment Letter. Very truly yours, INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Junaid Kamal Ahmad Country Director, India AGREED: INDIA By: Authorized Representative Grd 45HR P/ Rajat Kumar Mishra Name: au a~a/ Additional_Secretary anffa af /epi. of Economic ITairs fa jar+a/Ministry of Finance Title: 7a wa/Government of India =ng ft/New Delhi Date: Mr. Rajat Kumar Mishra -3 - December 23, 2021 Copy to: Mr. Rajesh Khullar, Executive Director, World Bank Mr. Ritesh Kumar Singh, Senior Advisor to Executive Director, World Bank Government of India: Mr. Hanish Chhabra, Director, DEA, Ministry of Finance Mr. Navjot Singh, Under Secretary, DEA, Ministry of Finance Mr. Sukhbir Singh, Controller of Aid Accounts & Audit, DEA, Ministry of Finance Government of Himachal Pradesh: Mr. Prabodh Saxena, Additional Chief Secretary (Finance), GoHP Mr. J. C. Sharma, Principal Secretary (ETD), GoHP Mr. Akshay Sood, Secretary (Finance), GoHP Mr. Vikas Labroo, Secretary (IPH), GoHP Mr. Yunus, Excise and Taxation Commissioner, GoHP Mr. Deepak Bhardwaj, Additional Director, HP State Treasuries, GoHP ~- Annexure /: Revised Annex to Schedule 2 Annex to Schedule 2 Disb t-Linked Indicat Disb t-Linked Results and All tedA ts Applicable to the P DISBURSEMENT-LINKED RESULTS RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE ACHIEVED IN DISBURSEMENT-LINKED ACHIEVED IN ACHIEVED IN FY2018/19 ACHIEVED IN FY19/20 ACHIEVED IN FY2021/22 (YEAR INDICATORS FY2017/18 (YEAR 1) (YEAR 2) (YEAR 3) FY2020/21(YEAR 4) 5) Rollout to 30% Rollout to 65% DDOs Rollout to 100% Treasury DDOs DDOs Inspection DLI 1: Electronic interface of IFMIS function and the implemented in all HPSAD departments 1 2 strengthened Allocated Amounts US$2.0 million US$1.5 million US$2.0 million US$1.5 million US $ 7.0 million Revised treasury Budget preparation Medium-term debt Interface with RBI's Variance DLI 2: Internal controls rules, manuals (for process automated and management strategy e-Kuber operational between of the FD strengthened3 DDOs, treasuries rolled out to cover formulated, debt and biometric originally staff) adopted and 100% of the management manual verification system approved budget made operational plan/scheme budget developed, and Debt to expenditure outtums of six 1 "Roll-out to DDOs" is defined as: (a) extending of electronic interface for payment processing to each DDO; and (b) at least two staff of each DDO given 1-day training on the IFMIS. There shall be a Government order covering the electronic submission by DDOs with a cut-off date. Specific locations (as notified through a Government order) are affected by climatic conditions or poor connectivity; coverage would be 100% after excluding these locations. 2 Treasury Inspection function strengthened is defined as development of Standard Operating Procedures, at least one round of training to Deputy Directors and District Treasury Officers, and software solution Implemented (i.e. development and User Acceptance Testing of a web-based system). HPSAD strengthened means developing an audit manual (covering different types of auditee institutions, various types of audits like risk-based audit, statistical sampling, computer-aided audit, and performance audits), and development and User Acceptance Testing of a web-enabled Audit Management System covering the complete audit cycle.. 3 A Government order will be issued to make the following mandatory: revised Treasury rules; debt management system; and budget management system. There shall be full, real time interface between IFMIS; public financial management system; debt management system; and budget management system. Mr. Rajat Kumar Mishra -5- December 23, 2021 DISBURSEMENT-LINKED RESULTS RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE ACHIEVED IN DISBURSEMENT-LINKED ACHIEVED IN ACHIEVED IN FY2018/19 ACHIEVED IN FY19/20 ACHIEVED IN FY2021/22 (YEAR INDICATORS FY2017/18 (YEAR 1) (YEAR 2) (YEAR 3) FY2020/21(YEAR 4) 5) Management Modules for all IFMIS users large implemented implemented4 departments reduced to 15% Allocated Amounts US$1.0 million US$ LO million US$2.0 million US$1.0 million US$1.0 million US $ 6. 0 million Better disclosure, Real-time disclosure BI tools (on treasury including public on the GoHP website systems) rolled out DLI 3: Increased consultations and of contracts awarded/ for citizens to access transparency and citizen accepting off-line procurement key fiscal engagement feedback on the opportunities through information budget5 e-Procurement and progress on large IPH contracts6 Allocated Amounts US$ LO million US$1.0 million US$1.0 million US $ 3. 0 million 0 4 An operational interface with RBI's e-Kuber includes full electronic exchange of data and a reconciliation functionality. 5 "Better disclosure" means inter-year budget and expenditure reports/analysis (semi-annually on FD website); stakeholders' consultations through workshops (at least three each year); accepting off-line feedback on the budget and capacity building for citizens' budget literacy. 6 "Large IPH contract" means a contract involving procurement of works, goods and/or services costing above INR 1 million. Mr. Rajat Kumar Mishra -6- December 23, 2021 DISBURSEMENT-LINKED RESULTS RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE ACHIEVED IN DISBURSEMENT-LINKED ACHIEVED IN ACHIEVED IN FY2018/19 ACHIEVED IN FY19/20 ACHIEVED IN FY2021/22 (YEAR INDICATORS FY2017/18 (YEAR 1) (YEAR 2) (YEAR 3) FY2020/21(YEAR 4) 5) DLI 4: Increased Increase of 30% Increase of 60% over Increase of 90% value of over baseline8 baseline 9 over baseline, " transactions including at processed through least 20 the e-Procurement departments system7 Allocated Amounts US$ l.5 million 0 US$ l .5 million 0 US$2.0 million US$ 5. 0 million CMS customized to Implemented in 60% Implemented in 100% DLI 5: CMS in all needs of IPH and divisions divisions IPH Department implemented in 25% implemented' divisions Allocated Amounts US$ l .O million US$ LO million US$ l .9 l million US$ 3.91 million 0 0 DLI 6: Backlog12 Backlog reduced by Backlog reduced by Backlog reduced by Backlog reduced by of pending VAT/ 20% over baseline 50% over baseline and 70% over baseline 100% over baseline 7 Processing through thee-Procurement system includes usage of all modules of thee-Procurement software, namely tender creation, tender publication, bid submission, tender opening, negotiations and award of contract. . 8 For all procurement contracts with a value above INR 2 million, to be prescribed through a Government order. For all procurement contracts with a value above INR 1 million, to be prescribed through a Government order. 0For all procurement contracts with a value above INR 500,000, to be prescribed through a Government order. "Implemented" means: (a) full usage of all 14 modules of CMS at head office and in the field; (b) all transactions at divisions and sub-divisions; (c) discontinuation of manual transactions/ record keeping; and (d) submission of monthly accounts to the accountant general. A Government order shall be issued in Year 1, stating that all works contracts in Himachal Pradesh above INR 1 million in value shall be managed using a contract management software. Specific locations (as notified through a Government order) are affected by climatic conditions or poor connectivity; coverage would be 100% after excluding these locations. 12 "Backlog" shall include cases of2015-16 till date of GST implementation and shall exclude assessments when the matter is sub-judice. Mr. Rajat Kumar Mishra -7- December 23, 2021 DISBURSEMENT-LINKED RESULTS RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE ACHIEVED IN DISBURSEMENT-LINKED ACHIEVED IN ACHIEVED IN FY2018/19 ACHIEVED IN FY19/20 ACHIEVED IN FY2021/22 (YEAR INDICATORS FY2017/18 (YEAR l) (YEAR 2) (YEAR 3) FY2020/21(YEAR 4) 5) CST assessments and 75% of in-year 80% of in-year and 85% of in-year and 90% of in-year reduced' assessments assessments completed assessments assessments completed within 1 within 1 year of return completed within 1 completed within 1 year of return filing filing year of return filing year of return filing Allocated Amounts US$ LO million US$ LO million US$1.0 million US$1.0 million US$ 4. 0 million DLI 7: Institutional EIU functionally Formal service tax Audit system performance of the integrated within the specialization created strengthened"° ETD improved ETD' in the ETD'S Allocated Amounts US$1.0 million US$1.0 million US$1.0 million US$ 3.0 million DLI 8: e- FRS and System Systems Integrator (SI) Excise e-Governance Excise e-Governance Governance Requirement appointed; solution system rolled out in system rolled out in application for Specifications design (user 80% of the offices 100 % of the offices excise function (SRS) developed for acceptance testing implemented'' core excise function UAT) approved and 13 Sample for in-year assessments shall follow a risk based approach with 75%/80%/85%/90% of VAT/CST assessments selected completed within 1 year of return filing. The balance shall be completed within 2 years of return filing. This shall be issued in form of a Government order. 14 Integration of EIU functionality shall be evidenced by: (i) EIU created with positions such as excise and taxation officers, statistician, data analyst etc. reporting to the Commissioner or Additional Commissioner; (ii) training and handholding provided to a select officers; and (iv) production of analytic reports on tax revenue risk. 15 Service tax specialization shall be evidenced by: (i) a senior officer responsible for administering service tax be assigned; (ii) an adviser to handhold the department in service tax assessments be appointed for two years; and (iii) select staff be trained in service taxation. Strengthened audit system shall be evidenced by: (i) specialized function; (ii) staff complement; (iii) audit manual; (iv) audit strategy and plan; and (v) reports on the outcome from previous year's audit plan. 7 Rollout includes issuance of at least 90% transport permits through the e-Governance system and discontinuation of manual processes. Specific locations (as notified through a Government order) are affected by climatic conditions or poor connectivity; coverage would be 100% after excluding these locations. Mr. Rajat Kumar Mishra - 8- December 23, 2021 DISBURSEMENT-LINKED RESULTS RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE RESULTS TO BE ACHIEVED IN DISBURSEMENT-LINKED ACHIEVED IN ACHIEVED IN FY2018/19 ACHIEVED IN FY19/20 ACHIEVED IN FY2021/22 (YEAR INDICATORS FY2017/18 (YEAR I) (YEAR 2) (YEAR 3) FY2020/21(YEAR 4) 5) rolled out in 25% offices Allocated Amounts US$ l .O million US$ l .O million US$ l .O million US$ l .O million US$ 4.0 million Note: DLI results are not time-bound; the Fiscal Years in which they are expected to be achieved as per this schedule are for indicative purposes. These DLI results can accordingly be met up and until the Closing Date. Rollout should include all modules of the Excise e-govemance software to all district offices and check-posts and have clear service standards in terms of 'time'. Software to include transport permits, excise licenses, registration of labels, permits for hospitals, scanning of QR codes. Further all collections should be electronic and on-line. Annexure II: Revised Results Framework Project Development Objective. Improve the efficiency of Public Expenditure Management and Tax Administration in Himachal Pradesh Intermediate Results Results Areas PDO/Outcome Indicators (IR) Indicators (key indicators to (critical processes, Supported by Baseline measure the achievement outputs, or intermediate DLI# Unit of Measure End Target (2021-22) PforR (2015-16) of each aspect of the outcome indicators PDO statement) needed to achieve each aspect of the PDO) Results Area 1: PDO Indicator 1 : Reduce 2 Percentage change Variance (absolute) Variance between Improving variance between between originally originally approved budget efficiency of the originally approved budget approved budget to to expenditure outturns of FD in an enhanced to expenditure expenditure outturns of six large departments control six large departments reduced to 15% environment (demand heads)" was 19% (FY2015-16) IR Indicator 1.1 : 1 Rollout to % of DDOs Manual submission of Rollout to all DDOs Electronic interface of bills from departments IFMIS implemented in all (through 4,700 DDOs) departments to treasuries IR Indicator 1.2: Internal 2 Weak internal controls; Revised treasury rules; controls of the FD specific FM functions manuals adopted and made strengthened still manual operational and specific manual processes automated IR Indicator 1.3: n.a. Man-days of training Training neither Development of training Strengthening PFM in the strategic nor according needs assessment, training state by provision of to a plan plan, and provision of comprehensive and wide- adequate resources to ranging training deliver required training to all stakeholders IR Indicator 1 .4: n.a. Number of analytical No recent studies (last Recommendations made to Strengthening studies conducted review during PEFA the GoHP on fund, debt, components of the PFM 2009) conducted to revenue, and expenditure cycle through analytical management 18 Finance, Public Works, Primary Education, IPH, (higher) Education, Health Services Mr. Rajat Kumar Mishra -10- November 23, 2021 Intermediate Results I Results Areas PDO/Outcome Indicators (IR) Indicators I I (key indicators to (critical processes, Supported by Baseline measure the achievement outputs, or intermediate DLI# Unit of Measure End Target (2021-22) PforR (2015-16) of each aspect of the outcome indicators PDO statement) needed to achieve each aspect of the PDO) I studies of the core FD refine the core functions functions IR Indicator 1. 5: 3 Disclosure of Nascent citizen Scaling up citizen Increased transparency budget/execution engagement on budget; engagement on the budget and citizen engagement reports and citizen no disclosure of process; disclosure of (a) participation contract information; contract award and fiscal information only procurement opportunities through standard through e-Procurement reports and (b) progress on large contract through the new IPH system Results Area 2: PDO Indicator 2: 4 Percentage increase in Software implemented Increase in value of Increasing Increased value of value of e-Procurement in 5 departments and transactions processed efficiency and transactions processed 15 parastatals with through the performance through the e-Procurement sporadic usage (of the e-Procurement system by through better system six modules) and value 90% over baseline contract of transactions management processed at INR 24 .41 billion for value of tenders uploaded and INR 1.88 billion for value of contracts awarded IR Indicator 2.1: CMS in 5 Rollout of software in Used in 1 7 divisions Complete rollout of all 14 IPH Department % of divisions but usage irregular modules of CMS across implemented 100% divisions and head office Results Area 3: PDO Indicator 3: Backlog 6 Percentage of pending Pending tax Backlog reduced by 100% Unlocking revenue of pending VAT/ CST VAT/CST assessments assessments (VAT and over baseline and (90% of) potential through assessments reduced CST) is 294,000 in-year assessments modernization of (2011/12-2015/16) completed within 1 year of the ETD return filing Mr. Rajat Kumar Mishra -11- November 23, 2021 Intermediate Results Results Areas PDO/Outcome Indicators (IR) Indicators (key indicators to (critical processes, Supported by Baseline measure the achievement outputs, or intermediate DLI# Unit of Measure End Target (2021-22) PforR (2015-16) of each aspect of the outcome indicators PDO statement) needed to achieve each aspect of the PDO) IR Indicator 3 .1 : n.a. Implementation of Weak institutional and All accepted short- and Institutional strengthening accepted organization structure medium-term and modernization of the recommendations and obsolete e- recommendations ETD applications implemented including optimizing the assessing function IR Indicator 3.2: 7 Creation/enhancement No specialized units; Audit function, service tax Institutional performance of specialized functions recovery process is specialization, and EIU of the ETD improved weak functioning as an integral part of the ETD IR Indicator 3 .3: n.a. Number of staff/dealers GST rollout training to Field-level staff of the Enhanced capacity of trained be imparted and ETD trained in functional officials implementing systematic training aspects of GST. GST by providing instituted for the Additionally, training and training not covered by department communication provided the sovereign function to dealers. IR Indicator 3 .4: e- 8 Rollout of system No e-Governance Excise e-Governance Governance application across the state application for excise system rolled out in 100% for excise function function of the offices, including implemented issuance of at least 90% transport permits through the system