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Subject: Economics

  • Balancing competition and sustainability for India

    Why in the News?

    • In 2023, the Securities and Exchange Board of India (SEBI) introduced an updated framework for corporate sustainability reporting.
    • The revised Business Responsibility and Sustainability Report (BRSR) framework mandates that companies assess and disclose the environmental impact of their entire value chain.

    Business Responsibility and Sustainability Report (BRSR) 

    • In 2021, the Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Report (BRSR) framework, mandating that the top 1,000 listed companies in India disclose their performance on environmental, social, and governance (ESG) parameters.
    • This initiative aimed to enhance transparency and encourage responsible business practices, building on the earlier Business Responsibility Report (BRR) introduced in 2012.

    Key Features of the BRSR Framework

    • Expanded Reporting Requirements: The BRSR Core builds upon the initial Business Responsibility and Sustainability Report (BRSR) introduced in 2021, which mandated the top 1,000 listed companies in India to disclose their ESG performance.
    • Mandatory Assurance: Starting from FY 2023-24, the BRSR Core mandates that the top 150 companies obtain reasonable assurance on their ESG disclosures. This requirement aims to improve the credibility of the reported data and combat greenwashing, ensuring that companies provide reliable information about their sustainability practices.
    • Nine ESG Attributes: The framework is structured around nine critical ESG attributes, which include greenhouse gas emissions, water usage, energy consumption, and employee well-being.
    • Comply or Explain Principle: SEBI has adopted a “comply or explain” approach, allowing companies to either adhere to the specified reporting requirements or provide valid reasons for non-compliance.
    • Alignment with International Standards: The BRSR Core is aligned with several internationally recognized frameworks, such as the EU Taxonomy and the Global Reporting Initiative (GRI) standards.  
    • Focus on Value Chain: A significant aspect of the BRSR Core is its emphasis on assessing the ESG impacts of a company’s supply chain.

    For India, every economic sector must contribute to greener means of production 

    For India to achieve its sustainability goals and contribute effectively to greener means of production, every economic sector must play a vital role.

    Importance of Sectoral Contribution to Sustainability

    • Diverse Economic Sectors: The key sectors such as agriculture, construction, power, manufacturing, transport, and tourism are crucial for transitioning to a green economy. For example, electric transport and eco-tourism.
    • Government Initiatives: The Indian government is actively promoting green growth through investments in priority sectors, which include manufacturing, renewable energy, and electric mobility.  For example, An allocation of ₹19,700 crore for the production of green hydrogen.
    • Green Manufacturing: The manufacturing sector is a significant focus for greening efforts, with studies indicating that sustainable manufacturing practices can lead to substantial reductions in greenhouse gas emissions. For example, the (Zero Defect Zero Effect) ZED initiative aims to create a competitive, qualitative, and clean manufacturing ecosystem.
    • Renewable Energy Commitment: India has set ambitious targets for increasing its non-fossil energy capacity to 500 gigawatts by 2030.
    • Collaboration and Policy Frameworks: Initiatives like the Partnership for Action on Green Economy (PAGE) and various policy dialogues aim to facilitate collaboration among sectors to promote inclusive and sustainable economic growth.

    Way forward: 

    • Enhanced Accountability: Ensure stricter enforcement of the BRSR and BRSR Core frameworks, expanding the scope to cover more companies and sectors beyond the top 1,000 listed companies.
    • Capacity Building: Provide training and resources to companies, especially small and medium enterprises (SMEs), to improve their ESG reporting capabilities and integrate sustainability into their core operations.

    Mains question for practice:

    Q Discuss the significance of the Business Responsibility and Sustainability Report (BRSR) framework introduced by the Securities and Exchange Board of India (SEBI) in promoting sustainable business practices among Indian corporations. 15M

  • What do Scientists make of the Budget?     

    Why in the News?

    Modi’s government launched advanced tech missions and boosted private space participation, achieving a moon landing, amid concerns over basic research neglect and stagnant research funding.

    Priority areas – productivity and resilience in agriculture, energy security, and manufacturing and services:

    • Productivity and Resilience in Agriculture

        • The Union Budget emphasizes transforming agricultural research to enhance productivity and climate resilience.
        • Initiatives such as “speed breeding platforms” have been established to accelerate the development of climate-resilient crop varieties, allowing multiple generations of crops to be grown in a single year.

    • Energy Security

        • The budget prioritizes energy security with a focus on research and development of small and modular nuclear reactors and advanced thermal power plants.
        • The proposed “Critical Minerals Mission” is expected to enhance research in critical minerals essential for clean energy technologies.

    • Manufacturing and Services

      • The budget highlights the importance of enhancing domestic manufacturing capabilities and attracting foreign investment through initiatives like the Production Linked Incentive (PLI) schemes.
      • Plans for “plug and play” industrial parks in 100 cities are expected to facilitate the uptake of indigenous technologies and boost manufacturing output.
      • The focus on commercializing technologies with private sector involvement aims to strengthen the manufacturing sector’s contribution to the economy.

    Concerns about the sidelining of basic research and stagnation in research funding 

    • Sidelining of Basic Research

        • Focus on Advanced Technology: The previous two terms of the Indian government emphasized advanced technology missions (e.g., supercomputing, quantum technologies), which raised concerns that basic research was being neglected.
        • Limited Funding for Basic Research: The establishment of the Anusandhan National Research Fund (ANRF) aims to prioritize basic research, but there are concerns that the emphasis on “prototype development” alongside basic research may indicate a shift towards translational research, potentially sidelining pure scientific inquiry.
        • Disparity in Funding Distribution: Currently, about 65% of research funding is allocated to premier institutions like IITs, while state-run universities receive only about 11% of the funds provided by the Department of Science and Technology (DST). This disparity hampers the growth of basic research across a broader range of institutions.

    • Stagnation in Research Funding

      • Actual Expenditure vs. Allocation: Concerns were raised that the actual expenditure on science and technology and higher education in 2023-2024 was much less than the initial allocation for that year.  
      • Demand for Increased Funding: The scientific community has long demanded higher government funding for basic research, as the private sector has shown limited interest in investing in this area.
      • Impact of Inflation: The nominal increases in budget allocations for research may not be sufficient to counteract inflation, leading to a real decrease in available funding for research activities.

    Way forward: 

    • Increase Research Funding: Need to boost the overall research funding as a percentage of GDP to ensure adequate resources for both basic and applied research. This includes adjusting allocations to counteract the effects of inflation.
    • Equitable Distribution: The government should ensure a more balanced distribution of funds across premier institutions and state-run universities to foster a broader base of scientific inquiry and innovation.

  • [pib] CIL ASHIS Scheme

    Why in the News?

    Coal India Limited (CIL) has launched a CSR initiative named CIL ASHIS to provide scholarships to children who lost their parents to COVID-19 and were unable to continue their studies.

    What is CIL ASHIS Scheme?

    • The CIL ASHIS Scheme, launched by Coal India Limited (CIL), stands for Ayushman Shiksha Sahayata.
    • The scheme aims to provide financial support for the education of children who lost their parents to COVID-19, ensuring they can continue their studies and achieve their dreams.

    Features of the CIL ASHIS Scheme

    • Each eligible child receives a scholarship worth ₹45,000 per year.
    • The scholarship is provided for a period of 4 years.
    • The scheme targets 1,645 children who have been identified as needing assistance.
    • Compassionate Appointment for:
      • Dependents of CIL employees who lost their lives while in service.
      • Beneficiaries need to apply for compassionate appointments through CIL’s established procedures.

    PYQ:

    [2024] With reference to Corporate Social Responsibility (CSR) rules in India, consider the following statements:

    1. CSR rules specify that expenditures that benefit the company directly or its employees will not be considered as CSR activities.
    2. CSR rules do not specify minimum spending on CSR activities.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

  • An unstated shift in Modi’s economic direction             

    Why in the news?

    The introduction of the new ELI scheme for corporates by the Narendra Modi government acknowledges the disconnect between GDP growth and job creation.

    About Employment Linked Incentives (ELI)

    • The ELI scheme aims to encourage companies to hire more employees by providing financial incentives for each new hire.
    • Target Sectors: The scheme is expected to focus on labour-intensive sectors such as toys, textiles, apparel, furniture, tourism, and logistics, which have significant potential for job creation.
    • Incentives Offered: Financial incentives may include tax relief and wage subsidies for new jobs created, along with non-financial incentives like reduced regulatory burdens and support for skill development programs.

    Government’s Failure of Initiatives

    • Previous Economic Strategies: Over the past decade, the Indian government relied on traditional economic models, such as the trickle-down approach and production-linked incentives (PLI), which did not yield the expected job growth.
      • Initiatives like “Make in India” and corporate tax cuts aimed to stimulate investment but failed to translate into significant employment opportunities.
    • Jobless Growth: Despite policies designed to boost production, employment growth has been stagnant, with a study indicating a negligible employment growth rate of just 0.01%.

    Issue of Job and Ideas Deficit

    • Jobs Deficit: The lack of job creation has prompted proposals like reserving jobs for locals, reflecting political pressures in a democracy where job scarcity is prevalent.
    • Ideas Deficit: Economists often suggest reforms in labour, education, and business practices as solutions to job creation, but these are complex and difficult to implement.
    • Unemployment Trends: The unemployment rate has shown fluctuations, with a reported decline from 6.0% in 2017-18 to 3.2% in 2022-23. 

    What can be done?

    • Policy Shift: The ELI scheme represents a significant policy shift towards prioritizing job creation over mere economic output. By encouraging firms to hire rather than invest solely in automation, it aims to address the capital-labour imbalance in the economy.
    • Support for MSMEs: Special focus on micro, small, and medium enterprises (MSMEs) is crucial, as they employ a substantial portion of the workforce.
    • Alignment of Goals: Need to Collaborate among various ministries, particularly finance, skill development, and labour, is essential to ensure that skill development aligns with industry needs, enhancing employability and job creation

  • [pib] Approval of Major Port at Vadhavan, Maharashtra

    Why in the News?

    The Ministry of Ports, Shipping and Waterways has approved the project proposal for setting up a Major Port at Vadhavan, Palghar District of Maharashtra.

    About Vadhavan Port Project 

    • The project involves the development of core infrastructure, terminals, and other commercial infrastructure through a public-private partnership (PPP) mode.
    • The shareholding for the project is divided between the Jawaharlal Nehru Port Authority (74%) and the Maharashtra Maritime Board (26%).
      • The project aims to create a total capacity of 298 million metric tonnes per annum (MMTPA).
    • Trade routes facilitated:

    Existing Major Ports in India

    • India has 12 Major Ports: Chennai, Cochin, Deendayal (Kandla), Jawaharlal Nehru (Nhava Sheva), Kolkata, Mormugao, Mumbai, New Mangalore, Paradip, V.O. Chidambaranar (Tuticorin), Visakhapatnam, and Kamarajar Port Limited.
    • Private Sector participation is allowed in Major Ports for specific projects/berths/terminals through concession agreements for a specific period via open competitive bidding on revenue share/royalty between the Concessionaire and the Major Port Authority.
    • After the expiry of the concession period, the asset is handed over to the Port Authority.

    Significance of Major Ports

    • Major ports play a critical role in facilitating international trade and commerce.
    • They serve as gateways for the import and export of goods, significantly contributing to the country’s economy.
    • Ports generate substantial revenue for the government through customs duties, port fees, and other related charges.
    • Ports facilitate international collaboration and partnerships, enhancing diplomatic and trade relations with other countries.

    PYQ:

    [2016] Recently, which of the following States has explored the possibility of constructing an artificial inland port to be connected to sea by a long navigational channel?

    (a) Andhra Pradesh

    (b) Chhattisgarh

    (c) Karnataka

    (d) Rajasthan

  • The relevance of pumped storage projects      

    Why in the news?

    The Union Budget for 2024-25 announced that “a policy will be introduced to promote pumped storage projects aimed at electricity storage and ensuring the seamless integration of the increasing share of renewable energy.

    Why is renewable power generation subject to variations and weather changes?

    • Due to Intermittent nature: Renewable energy sources, particularly solar and wind, are inherently intermittent. Solar energy is only available during daylight hours and is affected by weather conditions such as cloud cover, while wind energy varies with wind speed and direction. This variability leads to fluctuations in power generation, making it challenging to match supply with demand consistently.
    • Daily and Seasonal Variations: The generation capacity of renewable sources can change significantly over short periods (hours to days) and longer periods (seasonal). For instance, solar power generation peaks during sunny days and drops to zero at night, while wind power can vary greatly depending on seasonal weather patterns.

    Significance of Pumped Storage Projects

    • Grid Stabilization: Pumped storage projects are critical for stabilizing the power grid by addressing the variability and intermittency of renewable energy sources like solar and wind.
    • Energy Storage Capacity: PSPs account for over 94% of the installed global energy storage capacity, making them the most widely used technology for large-scale energy storage.
    • Flexible Energy Generation: These projects can provide both base load and peaking power, offering flexibility in energy generation.  
    • Environmental Benefits: Pumped storage is a clean and environmentally friendly technology.
    • Economic Viability: The cost of energy from pumped storage is competitive compared to other energy storage technologies.

    How do Power Managers decide which energy source to use?

    • Use of forecasting Techniques: Power managers utilize advanced forecasting techniques to predict renewable energy generation based on expected weather conditions. This allows them to plan the operation of different power plants in advance, ensuring a steady supply of electricity.
    • Demand and Supply Management: Decisions on which energy source to use are based on real-time demand and the availability of renewable energy. When there is a surplus of renewable energy (e.g., during sunny or windy periods), it may be used to pump water in pumped storage systems. Conversely, when renewable generation is low, power managers may rely on more stable sources like hydro, coal, or nuclear power to meet demand.

    Where are some of the Pumped Storage Projects of India situated?

    • Kadamparai: Located in Tamil Nadu, this facility has a capacity of 400 MW and operates by pumping water to a higher reservoir during periods of surplus power generation.
    • Other Notable Projects: India has several other pumped storage projects, including those at Nagarjunasagar, Kadana, and Panchet. These facilities contribute to managing the variability of renewable energy generation in the country.

    How do the reservoirs in Kadamparai, Tamil Nadu operate?

    • The Kadamparai pumped storage plant consists of two reservoirs at different elevations. Water is pumped from the lower reservoir to the upper reservoir when there is surplus power available, typically from solar or wind sources.
    • When demand rises, especially during peak evening hours, water flows from the upper reservoir to the lower reservoir, turning turbines to generate electricity. This operation allows the plant to provide power for three to four hours during peak demand periods, effectively stabilizing the grid.
    • The plant can switch between pumping and generating modes, allowing it to respond quickly to changes in power demand. This flexibility is crucial for integrating variable renewable energy sources into the grid.

    Conclusion: The need to Develop a robust and flexible grid infrastructure that can efficiently handle the integration of renewable energy sources is crucial. Implementing smart grid technologies, including real-time monitoring, advanced forecasting techniques, and automated demand-response systems, can optimize the balance between supply and demand.

  • States can directly buy Rice from FCI

    Why in the News?

    The Union Food and Consumer Affairs Minister announced that States can now directly purchase rice from the Food Corporation of India (FCI) under the Open Market Sale Scheme (Domestic) without participating in e-auctions.

    Key Announcements:

    Direct Rice Purchase of Rice by the States:

    • States can procure rice directly from FCI at ₹2,800 per quintal (excluding transportation cost), down from the earlier rate of ₹2,900 per quintal.
    • This new rate applies to rice procured over the stipulated 5 kg of free grain per individual under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY).

    Launch of Price Monitoring System (PMS) 4.0:

    • Minister Joshi launched the 4.0 version of the Price Monitoring System (PMS) mobile app.
    • The app, which previously monitored prices of 22 commodities daily, will now include 38 commodities.
    • The additional 16 food items are bajra (whole), jowar (whole), ragi (whole), suji (wheat), maida (wheat), besan, ghee, butter (pasteurised), brinjal, egg, black pepper, coriander, cumin seed, red chillies, turmeric powder, and banana.

     

    About Open Market Sale Scheme

    Details
    Purpose Enhance the supply of food grains, especially wheat, during the lean season to moderate open market prices, especially in deficit regions.
    Administered by Food Corporation of India (FCI)
    Method of Sale Surplus stocks of wheat and rice sold at pre-determined prices through e-auction on the National Commodity and Derivatives Exchange (NCDEX) platform.
    Participants Bulk consumers, private traders, State Governments, and Union Territory Administrations
    Auction Frequency Weekly
    Reserve Price Fixed by the government; bidders cannot quote less than the reserve price.
    Schemes under OMSS
    1. Sale of wheat to bulk consumers/private traders through e-auction.
    2. Sale of wheat to bulk consumers/private traders through e-auction by dedicated movement.
    3. Sale of Raw Rice Grade ‘A’ to bulk consumers/private traders through e-auction.

     

    PYQ:

    [2017] Which of the following is/are the advantage/advantages of implementing the ‘National Agriculture Market’ scheme?

    1. It is a pan-India electronic trading portal for agricultural commodities.

    2. It provides the farmers access to nationwide market, with prices commensurate with the quality of their produce.

    Select the correct answer using the codes given below:

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

  • What is the Sovereign Gold Bond Scheme?

    Why in the News?

    Recent reports suggest that the government might reduce or discontinue the Sovereign Gold Bond (SGB) scheme due to its high cost.

    Decline in Popularity of SGB:

    • This speculation follows the Union budget’s decision to slash customs duties on gold and silver from 15% to 6%.
    • The reduction in customs duties is expected to decrease demand for SGBs, which has already led to a 2-5% drop in their prices on the National Stock Exchange (NSE).

    About Sovereign Gold Bonds (SGBs)

    Details
    Launch 2015
    Nature
    • Government securities denominated in grams of gold.
    • Issued by RBI.
    Objective Reduce dependence on gold imports and shift savings from physical gold to paper form.
    Eligibility Resident in India, including individuals, HUFs, trusts, universities, and charitable institutions.
    Denomination and Tenor
    • Denominated in multiples of grams of gold, with a basic unit of 1 gram.
    • Tenor of 8 years with an exit option from the 5th year on interest payment dates.
    Investment Limits
    • Minimum: 1 gram of gold.
    • Maximum: 4 kg for individuals and HUFs,
      • 20 kg for trusts and similar entities per fiscal year.
    Benefits
    • Quantity of gold protected, receiving market price at redemption.
    • Eliminates storage risks and costs.
    • Assured market value at maturity and periodic interest.
    • Free from making charges and purity issues.
    • Held in RBI books or demat form, eliminating scrip loss risk.
    Add-ons
    • Can be used as collateral for loans.
    • Loan-to-value (LTV) ratio set equal to ordinary gold loans.

     

    PYQ: 

    [2016] What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

    1. To bring the idle gold lying with Indian households into the economy
    2. To promote FDI in the gold and jewellery sector
    3. To reduce India’s dependence on gold imports

    Select the correct answer using the codes given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

    https://indianexpress.com/article/business/commodities/gold-customs-duty-may-take-some-shine-off-sovereign-gold-bonds-9485686/

  • [pib] Artificial Insemination in Cattle

    Why in the News?

    • The Department of Animal Husbandry and Dairying is implementing the Rashtriya Gokul Mission.
      • The mission aims to develop and conserve indigenous bovine breeds, genetically upgrade the bovine population, and enhance milk production and productivity.

    About Rashtriya Gokul Mission:

    Details
    About
    • Initiated in December 2014.
    • Announced under the National Programme for Bovine Breeding and Dairy Development during the 12th Five Year Plan. 
    • Continued under Rashtriya Pashudhan Vikas Yojana (2021-2026) with a budget of Rs. 2400 crore.
    Nodal Ministry Ministry of Fisheries, Animal Husbandry, and Dairying
    Objectives
    • Enhance productivity of bovines and increase sustainable milk production using advanced technologies.            
    • Propagate the use of high genetic merit bulls for breeding.
    • Expand artificial insemination coverage by strengthening the breeding network and delivering services at farmers’ doorsteps.
    • Promote scientific and holistic conservation of indigenous cattle and buffalo rearing.
    Significance
    • Increased productivity, benefiting all cattle and buffaloes in India, with a focus on small and marginal farmers.
    • Empowers women, who perform over 70% of livestock farming tasks.
    Components
    1. Availability of High Genetic Merit Germplasm
    2. Extension of Artificial Insemination Network
    3. Development and Conservation of Indigenous Breeds
    4. Skill Development
    5. Farmers’ Awareness
    6. Research, Development, and Innovation in Bovine Breeding
    Implementing Agency State Implementing Agency (SIA) viz. Livestock Development Boards
    Significant Initiatives
    • Gopal Ratna Awards: For farmers maintaining the best herd of Indigenous Breed and practicing best management practices.          
    • Kamdhenu Awards: For best-managed Indigenous herd by Institutions/Trusts/ NGOs/ Gaushalas or best-managed Breeders’ societies.
    • Gokul Grams: Integrated cattle development centers focusing on promoting indigenous cattle rearing and conservation in a scientific manner.
    • National Kamdhenu Breeding Centre (NKBC): Centre of Excellence for the holistic and scientific development and conservation of Indigenous Breeds.
    • E-Pashu Haat: Web portal providing information on pet cattle and facilitating trading of bovine animals.
    • Nakul Prajnan Bazaar: E-market portal connecting breeders and farmers for quality, disease-free bovine germplasm.
    • Pashu Sanjivni: Animal wellness program providing animal health cards and unique identification, uploading data on the National Database.
    • Advanced Reproductive Technology (ART): Includes Assisted Reproductive Technique- IVF/Multiple Ovulation Embryo Transfer (MOET) and sex-sorted semen technique.
    • National Bovine Genomic Center for Indigenous Breeds (NBGC-IB): To be established for selecting breeding bulls of high genetic merit at a young age using highly precise gene-based technology.

    Key Initiatives for Artificial Insemination:

    • Multi-Purpose Artificial Insemination Technicians in Rural India (MAITRI): This initiative provides trained manpower for delivering quality artificial insemination services at farmers’ doorsteps.
    • Nationwide Artificial Insemination Programme: This programme extends artificial insemination coverage among bovines using semen from high genetic merit bulls of indigenous breeds.
    • Induction of High Genetic Merit Bulls: This program produces bulls with known genetic potential through progeny testing and pedigree selection, supplying these bulls to semen stations for quality semen dose production.
    • Strengthening of Semen Stations: Efforts are made to improve the quality of semen production by formulating minimum standard protocols and establishing a Central Monitoring Unit for evaluation and grading of semen stations.
    • Breed Purity Tests: To protect indigenous breeds from indiscriminate breeding, breed purity tests are conducted for all imported germplasm.
    • Guidelines for Import and Export of Bovine Germplasm: The Department has formulated guidelines to regulate the import of germplasm and prevent the ingress of exotic diseases, ensuring the safety and purity of bovine genetics within the country.

    PYQ:

    [2012] Consider the following crops of India:

    1. Cowpea
    2. Green gram
    3. Pigeon pea

    Which of the above is/are used as pulse, fodder and green manure?

    (a) 1 and 2 only

    (b) 2 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

    [2015] Livestock rearing has a big potential for providing non-farm employment and income in rural areas. Discuss suggesting suitable measures to promote this sector in India.

  • On discarding indexation for LTCG    

    Why in the news?

    Finance Minister Nirmala Sitharaman’s decision to eliminate indexation for calculating long-term capital gains (LTCG) tax in the Union Budget has received a lukewarm response from stakeholders.

    Changes in the LTCG Regime

    • The new LTCG regime removes the indexation benefit for property, gold, and other unlisted assets.
    • The LTCG tax rate is reduced from 20% to 12.5%.
    • For assets purchased before 2001, the fair market value as of April 1, 2001, is considered the cost of acquisition.

    What is long-term capital gains (LTCG) tax? 

    • LTCG refers to the profit realized from the sale of an asset that has been held for more than one year. This includes various types of assets such as stocks, bonds, real estate, and mutual funds. 
    • If an asset is sold before this holding period, the gains are classified as short-term capital gains (STCG) and are taxed at different rates.

    Why has the Union Finance Minister done away with indexation for computing long-term capital gains (LTCG) tax?

    • Simplification of Tax Computation: The Finance Minister proposed the change to “ease computation of capital gains for the taxpayer and tax administration.” The intention is to simplify the tax process.
    • Uniform Tax Rate: Long-term gains on all financial and non-financial assets would now be taxed at a flat rate of 12.5%, replacing the previous tiered structure.
    • High real estate return: The Income Tax department believes that the real estate returns (12-16% per annum) are higher than indexation for inflation (4-5%). Thus, it predicts “substantial tax savings” for a “vast majority” of taxpayers under the new system.

    What is indexation?

    • Indexation is a mechanism used to adjust the original purchase price of an asset to account for inflation. It helps in calculating the real gains and prevents inflation from inflating the tax liability. The adjusted purchase price is called the indexed cost of acquisition.

    How does Indexation help in Tax Savings?

    • Adjusts the purchase price for inflation: Indexation increases the original purchase price of an asset to account for inflation between the time of purchase and sale. This results in a lower taxable capital gain.
    • Reduces the taxable capital gains: By revising the purchase price upwards using the Cost Inflation Index, indexation reduces the difference between the sale price and purchase price. This lowers the taxable capital gains amount.
    • Leads to lower tax liability: With a reduced taxable capital gain, the tax payable on it also decreases. For example, on a ₹48 lakh gain from selling a house, indexation can bring down the taxable gain to ₹28.6 lakh, saving ₹4,264 in tax (assuming 20% LTCG rate).

    What has been the feedback from corporates and industry regarding the move?

    • Concerns Over Increased Tax Liability: Many stakeholders expressed apprehension that the removal of indexation would lead to higher tax obligations for ordinary investors, particularly in the real estate sector.
      • There are fears that this might encourage the undervaluation of properties to reduce capital gains tax and potentially increase black money transactions in real estate.
    • Mixed Reactions from Realty Players: While some real estate developers and consultants indicated that the removal of indexation might not significantly impact demand and prices, especially for primary home buyers, they noted that high-end properties could see a drop in demand.
      • Some developers viewed the changes positively and said that the lowered tax rate (from 20% to 12.5%) could make real estate a more attractive long-term investment.
    • Government Justifications and Clarifications: The government has argued that the new tax regime simplifies the capital gains tax structure and is beneficial for most taxpayers.

    Way forward: 

    • Transitional Provisions: Govt. should implement transitional provisions for existing investments to ease the shift from the old system to the new one.
    • Strengthen the monitoring system: Need to strengthen monitoring mechanisms to prevent the undervaluation of properties and reduce black money transactions.

    Mains PYQ: 

    Q Comment on the important changes introduced in respect of the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. (UPSC IAS/2018)