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GS3 (Internal security)

Public safety Act kills the soul of democracy. Critically discuss in the light of its frequent use in the recent unrest in the Kashmir valley.

GS2 (Polity and Governance)

UGC has failed to evolve according to the changing dynamics of higher education, and has fallen short of achieving its original mandate? Critically comment on this statement in the light of recent recommendation of TSR Subramaniam committee  on UGC.

GS1 (Indian History)

Discuss the significance of the Komagatu Maru incident in India’s freedom struggle? (Importance: Canada’s formal apology on this incident)

History Optional People. Can we start something to benefit each other and evolve a strategy? Maps and world history are the areas that can be focused upon or we can decide the daily dose.

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 What is GST?

• As the name suggests, the GST will be levied both on goods (manufacturing) and services.
• A single, comprehensive tax that will subsume all the other smaller indirect taxes on consumption like service tax, etc. [ Read :What are direct and indirect taxes? ]
• This is how it is done in most developed countries.
• GST was first mooted in the year 2003 by Kelkar Task Force on indirect taxes.

 How does it work?

• GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
• Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.

To better understand the working of GST, let’s watch the following video:

 What is the structure of GST?

• It would have a dual structure, a Central component levied and collected by the Centre and a state component administered by states.
• The central government will have the exclusive power to levy and collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST).
• At the Central level, the following taxes are being subsumed:
  • Central Excise Duty,
  • Additional Excise Duty,
  • Service Tax,
  • Additional Customs Duty commonly known as Countervailing Duty, and
  • Special Additional Duty of Customs.
• At the State level, the following taxes are being subsumed:
  • Subsuming of State Value Added Tax/Sales Tax,
  • Entertainment Tax (other than the tax levied by the local bodies),
  • Central Sales Tax (levied by the Centre and collected by the States),
  • Octroi and Entry tax,
  • Purchase Tax,
  • Luxury tax, and
  • Taxes on lottery, betting and gambling.
• Tobacco and tobacco products will be subject to GST. The centre may also impose excise duty on tobacco.

Which products are exempted from the purview of GST?

• Alcohol for human consumption has been exempted.
• Initially, GST will not apply to:
  • Petroleum crude
  • High speed diesel
  • Motor spirit (petrol)
  • Natural gas
  • Aviation turbine fuel(ATF)

The GST Council will decide when GST will be levied on them.

What is the scope of GST Council?

 The GST Council will consist of –

• Union Finance Minister (as Chairman)
• Union Minister of State in charge of Revenue or Finance.
• Minister in charge of Finance or any other Minister, nominated by each state government.

GST Council will make recommendations on –

•  Taxes, cesses, and surcharges to be subsumed under the GST
• Goods and services which may be subject to, or exempt from GST
• The threshold limit of turnover for application of GST
• rates of GST
• Model GST laws [To read more about the model GST law, click here. Also, related reading: E-commerce transactions in GST net]
• Principles of levy, apportionment of IGST and principles related to place of supply.

The GST Council may decide the mechanism for resolving disputes arising out of its recommendations.

What are the benefits of GST?

What is GSTN?

• It is a non-profit entity that is building the information technology backbone for the goods and services tax (GST).
• It will store all details related to the relevant transactions.
• Once sufficient amount of data is generated, it will be able to generate analytics based on the requirements of various stakeholders
• These analytics, based on data filed by millions of taxpayers, will help in plugging leakages. It will also help in identifying economic trends and ensure more focused economic-policy making.

Wonder why there is a clamour for keeping the GST rate at 18%?

Because the average rate of Organisation for Economic Co-operation and Development (OECD) group countries is 18.7%. Pegging the rate above 18 percent would hurt the country’s competitiveness.

Arguments made against GST:

1. It is feared that GST would erode the fiscal autonomy of the states. As of now, the States have complete autonomy over levy of sales taxes, which, on average, accounts for 80% of their revenue. But in the GST regime, the rates for both, the CGST and the SGST, will be fixed by the GST Council.
2. Similarly subsuming advertisement tax, betting and gambling tax would have adverse impact on revenues of local bodies.
3. Taxation powers are also used as a tool to control and restrict the consumption of some goods for social good. For example, Tobacco products generally attract huge tax rates as a measure to control the consumption on health grounds. Here tobacco producing States argue for lesser taxes for maximum sales and the Consumer States will demand for leverage for fixing higher taxes.  Whose interest would be protected in a uniform tax rate regime?
4. A uniformity of tax rates under the GST will undermine tax competition and result in a greater centralisation of power and decision-making will be concentrated in one place (the GST council) instead of being spread across 29 jurisdictions in the country.
5. Also, the composition of GST Council is such that it would give 1/3 voting power to the Centre. Thus, the Centre would have a virtual veto power over the States on all the decisions of the GST Council.
6. Even if it simplifies the tax regime, the GST could potentially lead to greater conflicts between states, and between the states and the centre. With different states having different needs, and regional parties with different political ideologies, we could see far greater friction in the future.
7. An integrated market — with no border delays and octroi — can be fully achieved with better use of information technology and better State-Centre coordination, and does not require a uniform tax rate in all the states. The European Union is a case in point, which achieved a single, efficient market while still having different value-added tax (VAT) rates for its member states using the VAT Information Exchange System.

Conclusion

There are concerns that the design of GST is flawed, but it needs to be realized that GST is the need of the hour. Also, in complex systems, change is introduced, learning from implementation takes place, leading to further and better change, as  was previously observed in the implementation of the value-added tax by the States.

Moreover the Indian GST regime offers advantages unlike the GST regime in other large federal polities, where the system is either

1. Too centralized, which deprives sub federal levels of fiscal autonomy, such as in Australia, Germany, Austria
2. Or, independently administered, which creates too many differences in tax bases and rates that make compliance difficult and also makes inter-state transaction difficult to tax, such as in South Africa

The Indian system establishes a modicum of coordination like in Canada. Common base and common rate will facilitate tax administration and ensure compliance. Reasonable exceptions, as decided by GST Council, will provide a degree of fiscal autonomy to the states.

That’s it for now. Please follow the news story here to keep yourself updated with the latest developments!

What is black money?

There is no uniform definition of black money in the literature or economic theory. According to the White Paper on Black money by the Finance Ministry, it is defined as:

“assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”

How is black money generated?

Black money can be generated through

1. Illegal activities like crime, drug trade and corruption, or
2. Failing to pay dues to the public exchequer in one form or another.

In the second case, activities might be legal but the perpetrator may simply have failed to report the income generated to avoid paying tax.

It should be noted that not all the unaccounted money is black. It is only that money which was legally required to be disclosed, but was not disclosed. Income tax provisions permit income below a certain threshold without disclosure.

Certain sectors are more vulnerable to black money issues. These include real estate, bullion and jewellery, financial markets, public procurement, the non-profit sector, informal sector and cash economy.

 The extent of black money generation in India:

India has been ranked the fourth-biggest source of black money in the world, with $510 billion worth of illicit financial flows during 2004-2013, or $51 billion annually, on average. This was stated in a report which was released recently by Global Financial Integrity (GFI), a research and advisory group based in Washington.

China tops the list for 2004-2013, with $139 billion average illicit financial flow per annum, followed by Russia and Mexico.

Effects of Black Money on economy:-

1.  Government loses tax revenue as tax on this money is not paid.
2. It is hard for RBI to frame effective monetary policy: Black money floating in economy is impossible to estimate and remains out of preview of government. RBI increases interest rates, CRR, SLR etc. to regulate money supply but more the black money, more the ineffectiveness of these measures.
3. Corruption – Black money is both a cause and effect of corruption.
4. National Security – Black money can be used to support a wide range of illegal activities.
5. Overpriced real estate prices – as immovable property is perceived as safest avenue for black money, most of the black money moves in to this. This has resulted in unrealistic real estate prices.
6. Capital Flight – In order to escape domestic rules and regulation scarce capital in India moves out to Tax havens and stalls the process of capital formation in the economy.

Institutions currently in place responsible for dealing with black money issues:

• Central Board of Direct taxes (CBDT)
• The enforcement Directorate (ED)
• The Financial Intelligence Unit (FIU-IND)
• The Central Board of Excise and Customs (CBEC)

The Central Economic Intelligence Bureau (CEIB), the National Investigating Agency (NIA), and the High Level Committee (HLC) act as coordinating agencies.

Government Strategy to tackle black money:

The government has employed a five pronged strategy which involves:

• Joining the global crusade against black money
• Creating an appropriate legislative framework
• Setting up institutions for dealing with illicit money
• Developing systems for implementation
• Imparting skills to personnel for effective action

Recent steps taken by the government to curb black money generation in India:

1. Reducing disincentives against voluntary compliance: The planned roll-out of Goods and Services Tax (GST) in April 2017 will help in reducing disincentives against voluntary compliance by measures like rationalization of tax rates and reduction of transaction costs etc. [Click here to read more about GST]

2. Reforms in sectors vulnerable to generate black money:

• Cash economy: The opening of a large number of payment gateways, Internet banking, and payment banks will prompt the use of banking transactions and plastic money to rise significantly.
• Real Estate Sector: Real Estate (Regulation and Development Act, 2016) aims to bring in much needed transparency in the sector. [Click here to read more about the act]

3. Creation of effective credible deterrence:

Recent initiatives by the government in this regard include:

• The benami transactions bill has been recently passed by Lok Sabha. The bill provides for confiscation of benami properties, or assets held in the name of another person or under a fictitious name to avoid taxation.
• Project Insight, the income-tax (I-T) department’s ambitious project to effectively utilize the vast amount of information at its disposal more effectively to track tax evaders, will roll out from May 2017. [For more information click here.]
• The monitoring regime of the income tax department has been strengthened. The department can detect large cash withdrawals, or large cash transactions which enter the system.
• Setting up institutions like Directorate of Income Tax and strengthening existing institutions like Central Board of Direct Taxes

4. Income Disclosure Scheme, 2016 provided a one-time opportunity to all persons who have not declared income correctly in earlier years to come forward and declare their undisclosed Incomes. These declarations would be taxed@45% and would enjoy immunity from prosecution under the IT Act and Wealth Tax Act and also the Benami Transactions (Prohibition) Act, 1988. Record collections have been made under the scheme. [For more information about the income declaration scheme, click here.]

5. A Special Investigation Team was constituted in 2014 which is chaired by ex-Supreme Court Judge Justice M.B. Shah. Many recommendations of SIT have been implemented. The recent proposals of SIT presently being considered by the government are:

• A 3-Lakh cap on cash transactions.
• An upper limit of Rs. 15 Lakhs on cash holding.

Steps taken by the Government to tackle the menace of black money stashed abroad:

• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. It was enacted to penalize those with unaccounted wealth abroad and has strict penalty provisions.
• India has joined the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information (AEOI). These standards will enable India to receive information from almost every country in the world including offshore financial centres. It will directly help the Government to curb tax evasion and deal with the menace of black money stashed abroad.
•  Strengthening DTAAs (Double taxation avoidance agreements): India recently revised DTAA with Mauritius and Cyprus & is in the process of revising its treaty with Singapore. These are aimed at preventing “round tripping” of funds i.e. the return to India of wealth that has not been accounted for by routing it through countries that provide easy channelling of funds without too many questions.

• Amendments made in Prevention of Money-laundering Act, 2002 to strengthen the legal framework for effective action against those holding unaccounted income.

• Amendments to Foreign Exchange Management Act (FEMA): The amendments provide for seizure and confiscation of value equivalent, situated in India, in case any person is found to have acquired any foreign exchange, foreign security or immovable property, situated outside India, in contravention of Section 4 of FEMA.

The way ahead:

• The tax department must spruce up its data-mining methods to expand the country’s shallow tax base.
• The introduction of these stringent laws against defaulters will help the Government widen the tax base but implementation of these proposals is the key as they may be rendered ineffective if not supported by advanced information gathering systems.
• The new laws should not offer unrestrained powers to the tax investigators as such a move may dampen the investment climate of the country.
• Also, the Government should ensure that an honest taxpayer is not caught in the web of these stringent laws.
• The government needs to attack the root cause of the problem of black money generation by making electoral funding transparent, curbing the misuse by the wealthy of tax-free income sops for farmers, and encouraging cashless transactions. [Related Reading: Cashless Society: Can India be one?]

That’s it for now. Please keep following the news story here to stay updated with the latest developments!

GS4 (Ethics)

What are codes of conduct? Have they been successful in preventing misuse of office by public servants? Provide suggestions to improve their effectiveness.

GS3 (Indian Economy)

How has the No titling law affected the land acquisition process in India? Also discuss the significance of Rajasthan’s recently passed Titling Law.