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Subject: Economics

  • GST Council must uphold fiscal federalism

    Context

    The recent ruling of the Supreme Court held that the states were free to use means of persuasion ranging from collaboration to contestation.

     Simultaneous or concurrent powers under Article 246A

    • Article 246A confers simultaneous or concurrent powers on Parliament and the state legislatures to make laws relating to GST.
    • This article is in sharp contrast to the constitutional scheme that prevailed till 2017.
    • It clearly demarcated taxing powers between the Centre and states with no overlaps.
    • After 2017, several central and state levies were subsumed into GST.
    • Each state was to have its own GST Act, all of them being almost identical to the Central GST Act.
    • Inter-state supplies and imported goods are liable to IGST.

    Composition of GST Council

    • The GST Council has the Union finance minister as the chairperson and the Union minister of state in charge of revenue or finance as a member.
    • Centre has one-third voting power, 31 states (including two Union Territories) share the remaining two-thirds of the vote.
    • The GST Council has a total of 33 members.
    • Out of a total of 33 votes, 11 belong to the Centre and 22 votes are shared by 31 states/UT, with each state/UT having a 0.709 vote.
    • Any decision of the GST Council requires a three-fourth majority or a minimum of 25 votes.
    • As the Centre has 11 votes, it requires an additional 14 votes.
    • Unlike so many statutes, Article 279A has made no provision to make the decision of the majority binding on the dissenting states.
    •  Paragraph 2.73 of the Select Committee Report on the 122nd Constitution (Amendment) Bill, 2014, noted that this voting pattern was to maintain a fine balance as, in a federal constitution, the dominance of one over the other was to be disallowed.

    Role of GST Council

    • Under Article 279A, the GST Council has to make “recommendations” on various topics including the tax rate and exemptions.
    • The Union of India argued that the “constitutional architecture” showed that Articles 246A and 279A, when read together, made the GST Council the ultimate policy-making and decision-making body for framing GST laws.
    • The GST Council was unique and incomparable to any other constitutional body and its recommendations would override the legislative power of Parliament and state legislatures.
    • Neither of them could legislate on GST issues independent of the recommendations of the GST Council.
    • The argument went further: On a combined reading of Article 279A, the provisions of the IGST and CGST Acts and the recommendations of the GST Council were transformed into legislation.
    • The Supreme Court rightly noted that several sections in the state GST laws, CGST and in IGST, cast a duty even on dissenting states to issue notifications to implement the recommendations of the GST Council.

    Observations on federalism

    • Delving into legislative history, the court ruled that a draft Article 279B, which provided for a GST Disputes Settlement Authority, was omitted because it would have effectively overridden the sovereignty of Parliament and the state legislatures, and diminished the fiscal autonomy of the states.
    • It was desirable, the Court said, to have some level of friction, some amount of state contestation, some deliberation-generating froth in our democratic system.
    • Putting to rest any controversy, the court held that the recommendations of the GST Council had only a persuasive value.
    • To regard them as binding edicts would disrupt fiscal federalism because both the Union and states were conferred equal power to legislate on GST.
    • Rule-making power bound by recommendations of GST Council: The Court held that the state governments and Parliament, while exercising their rule-making powers under the provisions of the State GST Acts, CGST & IGST Acts, are bound by the recommendations of the GST Council.
    • States can amend GST laws: But even this did not mean that all recommendations of the GST Council are binding on state legislatures or Parliament to enact primary pieces of legislation on GST.
    • In effect, states can amend their GST laws if they so choose.

    Way forward

    •  If the GST Council meets periodically as mandated and there is active participation of the states in making recommendations, no state will oppose a recommendation that has been carefully deliberated and is in the national interest.

    Conclusion

    Indeed, there is little chance of cracks developing in the GST edifice as long as the spirit of cooperative and collaborative federalism prevails.

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  • For India, a lesson in food security from Sri Lanka

    Context

     India needs to have a strategy of self-reliance in basic foods, including edible oils.

    Contrasting cases of Sri Lanka and Saudi Arabia

    • Sri Lanka, a country with 21.5 million population imported dairy products valued at $333.8 million in 2020 and $317.7 million in 2021.
    • The island nation’s imports of whole milk powder (WMP) alone were 89,000 tonnes and 72,000 tonnes in these two years.
    •  The 89,000 tonnes of powder imported in 2020 would have, thus, “produced” almost 2.1 million litres per day (MLPD) equivalent of milk.
    • This is as against the 1.3 MLPD that Sri Lanka produces from its own cows and buffaloes.
    • It translates into an import dependence of over 60 per cent.
    • At the other end, we have Saudi Arabia, home to over 35 million inhabitants (including immigrants) and also the world’s largest vertically integrated dairy company.
    • Almarai Company has six dairy farms producing more than 3.5 MLPD of milk.
    • The animals are sourced from the US and Europe.
    • The entire feed and also forage given to them are procured from abroad.
    • Why is Saudi Arabia taking such pains to produce its own milk?
    • The answer is food security.
    • The Saudis — other Persian Gulf countries have also copied the Almarai model — are prepared to pay any price when it comes to ensuring the availability of basic food like milk.

    Lessons for India: Reducing import dependence on edible oil

    • India annually imports 13.5-14.5 million tonnes of vegetable oils, again roughly 60 per cent of its total consumption.
    •  Low international prices meant that the import bill, though high, fell from $9.85 billion in 2012-13 to $9.67 billion in 2019-20.
    • However, in the last couple of years, retail prices of most oils more than doubled
    • The value of India’s vegetable oil imports surged to a record $19 billion in 2021-22.

    Conclusion

    As a country with a population many times that of Sri Lanka and Saudi Arabia, India needs to have a strategy of self-reliance in basic foods.

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  • Gig Workers’ Rights

    The Union Labour Ministry is organizing a program aimed at sharing information and good experiences on policies and global practices relating to gig and platform workers and their social security.

    What is the Gig Economy?

    • In a gig economy, temporary, flexible jobs are commonplace and companies tend toward hiring independent contractors and freelancers instead of full-time employees.
    • A gig economy undermines the traditional economy of full-time workers who rarely change positions and instead focus on a lifetime career. e.g Employee models of Uber, Ola, Swiggy etc
    • In this economy, tech-enabled platforms connect the consumer to the gig worker to hire services on a short-term basis.
    • Gig workers include self-employed, freelancers, independent contributors and part-time workers.

    Where does gig culture exist in Indian Economy?

    • Sectors such as media, real estate, legal, hospitality, technology-help, management, medicine, allied and education are already operating in gig culture.
    • The gig economy can benefit workers, businesses, and consumers by making work more adaptable to the needs of the moment and demand for flexible lifestyles.

    Key Drivers for Gig Economy

    • Unconventional work approach by millennials: Hectic lifestyles of employees in private sectors have created a negative perception of full-time employment among millennials.
    • Emergence of a start-up culture: The start-up ecosystem in India has been developing rapidly. For start-ups, hiring full-time employees leads to high fixed costs and therefore, contractual freelancers are hired for non-core activities.
    • MNCs are hiring contractual employees: MNCs are adopting flexi-hiring options, especially for niche projects, to reduce operational expenses after the pandemic.
    • Rise in freelancing platforms: Rise in freelancing platforms has also aided in the development of the gig economy.
    • Business Models: Gig employees work on various compensation models such as fixed-fee (decided during contract initiation), time & effort, actual unit of work delivered and quality of outcome.
    • Impact of Covid-19: Many laid-off employees are focusing on developing skills to avail freelance job opportunities and become a part of this burgeoning economy.

    Why is Gig Economy preferred by workers?

    • Profit through multiple work: One can work on freelancing as well as work full-time somewhere else.
    • Women empowerment: It is very beneficial for womenwho work on this concept when they cannot continue their work or take a break from career due to marriage or child birth.
    • Leisure and dependency: Retired peoplecan stay active after retirement as this will keep them engaged away from loneliness and depression and can earn as well on their own.
    • Flexibility and diversity to the workers: It offers flexibility when workers can work according to their convenience and schedule rather than routine like in full-time jobs.
    • Work from home: The travel costs and energy to travel to the workplace is reduced.

    Why is Gig Economy preferred by Employers?

    • Efficiency, efficacy and productivity of workers in the gig economy are much more than that of a stable full-time job.
    • More rconomical for employers-when employment givers can’t afford to hire full-time workers, they hire people for specific projects and pay them.
    • Start-up companies and entrepreneurs – who do not have big financial space – can grow only if they can leverage the services of contract employees or freelancers.
    • In a gig economy, businesses save resources in terms of benefits, office space and training.
    • Competition and efficiency among workers is improved.

    Challenges faced in Gig economy

    • No perks and benefits: There are no labour welfare emoluments like pension, gratuity, etc. for the workers.
    • Job insecurity: Gig workers may face unfair termination. They may also attain minimum wages and less paid leave.
    • No legal protection: Workers do not have the bargaining power to negotiate a fair deal with their employers.
    • Unionization of workers will be difficult.
    • Confidentiality of documents etc. of the workplace is not guaranteed
    • Urban nature: The gig economy is not accessible for people in many rural areas where internet connectivity and electricity is unavailable.

    Way Forward

    • The gig economy has been on the rise and is expected to beat the pre-pandemic estimates due the expected influx of gig workers transitioning from full-time employment.
    • While the government has taken the initial steps to ensure social security of gig workers, the ‘Code on Social Security’ needs to be fine-tuned.

     

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  • What is Liquid Nano Urea?

    During his visit to Gujarat, Prime Minister inaugurated the country’s first liquid nano urea plant at Kalol.

    Liquid Nano Urea (LNU)

    • Urea is chemical nitrogen fertiliser, white in colour, which artificially provides nitrogen, a major nutrient required by plants.
    • LNU is essentially urea in the form of a nanoparticle.
    • It is sprayed directly on the leaves and gets absorbed by the plant.
    • Fertilisers in nano form provide a targeted supply of nutrients to crops, as they are absorbed by the stomata, pores found on the epidermis of leaves.
    • According to IFFCO, liquid nano urea contains 4 per cent total nitrogen (w/v) evenly dispersed in water.
    • The size of a nano nitrogen particle varies from 20-50 nm. (A nanometre is equal to a billionth of a metre.)

    Significance of LNU

    • This patented product is expected to not only substitute imported urea, but to also produce better results in farms.
    • Apart from reducing the country’s subsidy bill, it is aimed at reducing the unbalanced and indiscriminate use of conventional urea.
    • It will help increase crop productivity, and reduce soil, water, and air pollution.

    Using LNU

    • The liquid nano urea produced by Indian Farmers Fertiliser Cooperative (IFFCO) Limited comes in a half-litre bottle priced at Rs 240, and carries no burden of subsidy currently.
    • By contrast, a farmer pays around Rs 300 for a 50-kg bag of heavily subsidised urea.
    • According to IFFCO, a bottle of the nano urea can effectively replace at least one bag of urea.

    How efficient is LNU?

    • While conventional urea has an efficiency of about 25 per cent, the efficiency of liquid nano urea can be as high as 85-90 per cent.
    • Conventional urea fails to have the desired impact on crops as it is often applied incorrectly, and the nitrogen in it is vaporized or lost as a gas.
    • A lot of nitrogen is also washed away during irrigation.
    • Liquid nano urea has a shelf life of a year, and farmers need not be worried about “caking” when it comes in contact with moisture.

     

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  • Unicorn boom in India

    Prime Minister has praised India’s startup ecosystem as he highlighted that the country has reached a landmark figure of 100 unicorns with a valuation of more than $300 billion.

    What is a Unicorn Startup?

    • Unicorns are privately held, venture-capital-backed startups that have reached a value of $1 billion.
    • The valuation of unicorns is not expressly linked to their current financial performance.
    • This is largely based on their growth potential as perceived by investors and venture capitalists who have taken part in various funding rounds.

    Some of the successful Indian unicorns:

    • Lenskart
    • Cred
    • Meesho
    • PharmEasy
    • Licious
    • Grofers etc.

    When was the term first used?

    • American venture capitalist Aileen Lee is credited with coining the term in 2013.
    • It was used to emphasize the rarity of the emergence of such startups.

    Unicorn boost in India

    • The growth of Unicorns in India has been phenomenal in the past two years.
    • From 17 Unicorns in 2018 the number went up to 38 in 2020 and it’s 71 and counting in 2021.
    • Many of these unicorns, which have cumulatively raised more than 9 billion dollars till date, have also seen a surge in valuations.

    Features of a unicorn Start-up

    To be a unicorn is no cakewalk and each unicorn today has its own story with a list of features that worked in its favour.

    The few pointers that are commonly seen across all the unicorns is as under:

    • Disruptive innovation: Mostly, all the unicorns have brought a disruption in the field they belong to. Uber, for example, changed the way people commuted.
    • ‘Firsts’: It is seen that unicorns are mostly the starters in their industry. They change the way people do things and gradually create a necessity for themselves.
    • High on tech: Another common trend across unicorns is that their business model runs on tech. Uber got their model accepted by crafting a friendly app.
    • Consumer-focused: Often, theirgoal is to simplify and make things easy for consumers and be a part of their day-to-day life.
    • Affordability: Keeping things affordable is another key highlight of these startups. Spotify, for example, made listening to music easier to the world.
    • Privately owned: Most of the unicorns are privately owned which gets their valuation bigger when an established company invests in it.
    • *Mostly software based: A recent report suggests that 87% of the unicorns’ products are software, 7% are hardware and the rest 6% are other products & services.

    Entrepreneurship today is ‘survival-driven’ self-employment, formed out of necessity, as well as opportunity motivated, largely because poverty and lack of formal employment opportunities rear their ugly head in striving economies.

    Reasons for sudden success

    • COVID pandemic: The pandemic accelerated adoption of digital services by consumers helping start-ups and new-age ventures that typically build tech-focused businesses delivering an array of offerings to customers.
    • Boost in online services: Many Indians who had traditionally been subscribers of brick-and-mortar businesses moved online and explored a host of services ranging from food delivery and edu-tech to e-grocery.
    • Work-from-home culture: This added significant numbers to start-ups’ user base and expedited their business expansion plans and attracting investors.

    Inherent challenges to Start-ups in India

    • Financial scarcity: Availability of finance is critical for the startups and is always a problem to get sufficient amounts.
    • Lack of Infrastructure: There is a lack of support mechanisms that play a significant role in the lifecycle of startups which include incubators, science and technology parks etc.
    • Regulatory bottlenecks: Starting and exiting a business requires a number of permissions from government agencies. Although there is a perceptible change, it is still a challenge.
    • Compliance hurdles: For example, earlier Angel tax, which stands removed no, falls under corruption and bureaucratic inefficiencies.
    • Low success rate: Several startups fail due to shifting away the focus on the fundamentals of business grows.
    • Lack of an Innovative Business Model: To be successful a start-up must be innovative. Unfortunately, Indian startups are less innovative than startups elsewhere.
    • Non-competitive Indian Markets: Too many startups serving too few consumers are saturating the Indian market.  Most startups serve the fraction of Indians who live in urban India.
    • Digital divide: The majority of Indians who live in rural areas and small towns remain untouched by most startups.

    Various initiatives by the Govt.

    There are numerous government initiatives to assist start-ups:

    • MUDRA Scheme: Through this scheme, start-ups get loans from the banks to set up, grow and stabilize their businesses.
    • SETU (Self-Employment and Talent Utilization) Fund: Government has allotted Rs 1,000 Cr in order to create opportunities for self-employment and new jobs mainly in technology-driven domains.
    • E-Biz Portal: It is India’s first government-to-business portal that integrates 14 regulatory permissions and licenses at one source.
    • Credit Guarantee Fund: launched by the GoI to make available collateral-free credit to the micro and small enterprise sector.
    • Fund of Funds for Start-ups (FFS): 10,000 Rs corpus fund established in line with the Start-up India action plan under SIDBI for extending support to Start-ups.
    • Tax Sops: Tax exemption on Capital gain tax, Removal of Angel tax, Tax exemption for 3 years and Tax exemption in investment above Fair Market Value.

    Roadmap for the future success of start-ups

    Start-ups can judiciously take cues from unicorns in understanding the ecosystem and building a business model that adds value while being sustainable.

    • New-age startups should devise a customer-centric business model.
    • Through proper branding and strategy, they should make sure that this value proposition reaches the end-user.
    • What brings startups closer to success is the execution and customer acquisition strategy, where all the action occurs.
    • Notably, technology (rather deep-technology) has played a key role in the making of pioneer business models.

    Attracting venture capitalists

    • VCs are actively looking for investment opportunities in early-stage startups.
    • They possess the selection ability to effectively screen startups having a higher potential to succeed.
    • VCs primarily look for a mindset alignment with promoters and companies where they, as investors, can add value by leveraging their industry experience, expertise, network and reputation.

    Conclusion

    • The current economic scenario in India is in expansion mode.  Indian Startups are now spread across the length and breadth of the entire country.
    • The word ‘unicorn’ has come a long way from just being a mythological creature to a regular feature in business and finance discussions.
    • Innovation and economic growth depend on being able to produce excellent individuals with the right skills and attitudes to be entrepreneurial in their professional lives.
    • The Indian government’s policies like Make in India, Digital India, Atmanirbhar etc. shows the enthusiasm to arrest this talent.

     

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  • Price Rise and GST

    The GST regime is due for an overhaul in tax rates levied on different products because of structural anomalies and to reduce the multiple tax slabs.

    What is GST?

    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
    • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

    What are GST Slabs?

    • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
    • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
    • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
    • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
    • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

    Why rationalize GST slabs?

    • From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs are taxed more than the final product.
    • These are far too many rates and do not necessarily constitute a Good and Simple Tax.
    • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
    • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.

    Haven’t GST revenues been hitting new records?

    • Yes, they have – GST revenues have scaled fresh highs in three of the first four months of 2022, going past ₹1.67 lakh crore in April.
    • But there is another key factor — the runaway pace of inflation.
    • Wholesale price inflation, which captures producers’ costs, has been over 10% for over a year and peaked at 15.1% in April.
    • Inflation faced by consumers on the ground has spiked to a near-eight year high of 7.8% in April.
    • The rise in prices was the single most important factor for higher tax inflows along with higher imports.

    Can we expect the rate reset this year?

    • Any re-arrangement of GST rates will entail some products being taxed higher, with concomitant ripple effects on prices.
    • The Centre and the States are not unmindful of the desperate need to rationalise the rate slabs and structure but we just need to get the timing right.
    • Presently inflation is the top worry.
    • With inflation, much of it imported through pricier fuels, commodities and food items, expected to hover high through the year, the GST rate reset hopes appear bleak in 2022-23.

     

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  • GST collections touched a record high of Rs 1.67 lakh crore in April.

    Context

    There has been a remarkable upswing in GST collections in recent months. Collections touched a record high of Rs 1.67 lakh crore in April.

    GST

    GST Interstate Model Example

    What are the reasons for increased collection?

    • 1] Inflation: First, the sharp rise in inflation has played a significant role.
    • Notwithstanding concerns over the unevenness of the economic recovery, in nominal terms, the economy grew by 19.4 per cent in 2021-22 as per the second advance estimates.
    • Deflating GST collection suggests that a large part of the recent increase in collections is driven by rising prices.
    • 2] Higher imports: Part of the overall increase in collections can be traced to higher imports.
    • Higher buoyancy: Even if one is to exclude the revenue accruing from imports, the rise in GST collections has outstripped GDP growth, indicating higher buoyancy.
    • 3] Tightening of the rules: In order to improve compliance levels, the GST Council has been tweaking the rules to tighten the system.
    • Returns filed have gone up, while the number of non-filers and those who delay filing have fallen.
    • Alongside, the administration has also taken steps to tackle the menace of fake invoices by placing restrictions on the quantum of input tax credit that can be used to pay of tax obligations.
    • The introduction of e-invoicing has also played a role.
    • Until recently, this was being implemented for firms with a turnover of more than Rs 50 crore.
    • From April, this process has been extended to firms above Rs 20 crore.
    • The incremental gains from bringing smaller firms into its ambit, while consequential, are unlikely to be of the same order.
    • 4] Industrial activity:  The higher collections in April 2022 seem to be led by increase in industrial activity. This is borne by strong growth in collections in states such as Maharashtra, Karnataka and Odisha which house lot of industries. Relatively tepid growth in more populous states such as Bihar (-2.47 per cent), West Bengal (7.80 per cent) and Jharkhand (4.86 per cent) shows that the GST collections was not propelled by revival in private consumption.
    •  The real challenge lies in improving compliance levels across the entire spectrum of industries where inputs/raw materials are sourced largely from the informal sector.
    • 5] Changing the structure of the economy: The formalisation of firms, the growing concentration of economic power in the hands of a few, imply that for the same level of output, the tax paid will be higher.

    Suggestion

    • Increase tax rate: Around two-fifths of the taxable value (or turnover) falls under the 18 per cent slab as per research by some analysts.
    • This implies that simply merging the 12 per cent and the 18 per cent slab as some have been suggesting would lead to a revenue loss.
    • Before opting for such adjustments, the GST Council must first ascertain the potential revenue (net of cess and refunds) at varying levels of compliance, tax rates and exemptions afforded.
    • Now, as per some estimates presented to the 15th Finance Commission, with existing exemptions in place, the current tax regime should ideally yield revenues equivalent to 8.23 per cent of GDP.
    •  In another scenario, even if existing exemptions are kept in place, and if a single rate of 14 per cent is levied, then collections should rise to 8.93 per cent.

    Conclusion

    Considering the current economic situation, now may not be an opportune moment to raise taxes. But there is no getting around it. Both the Centre and the states need to work towards this.

     

  • Global Chip Shortage and Related Issues

    CEOs of AMD, Nvidia and Intel have said at different forums last year that the chip situation will remain tight for the rest of 2022.

    Genesis of shortage

    • After reaching its peak in 2011, the laptop market growth slowed down with the rise of alternatives such as smartphones and tablets.
    • Then, the pandemic hit.
    • People switched to work from home, children connected to schools through laptops, and get-togethers happened over video calls.
    • This shift led to a surge in demand for laptops and tablets.
    • The stay-at-home rules also made several people pick up console-based learning and gaming.
    • Each of these devices were in high demand and are run on thumbnail-sized semiconductors, performing various functions on a single device.

    Also read:

    [Sansad TV] Perspective: Semiconductor Industry & India

    What led to the production anomaly?

    • Manufacturers produce them as 200mm or 300mm wafers. These are further split into lots of tiny chips.
    • While the larger wafers are expensive and mostly used for advanced equipment, the devices that were in high demand needed smaller diameter wafers.
    • But the manufacturing equipment needed to make them were in short supply even before the pandemic began.
    • Industry is moving in the direction of 5G and advanced communication, which requires expensive wafers.
    • High consumer demand for low-end products, coupled with large orders from tech firms chocked chip makers whose factories were also closed during lockdowns.
    • As the industry gradually tried to pull itself out of the supply crunch, and logistical complexities have exacerbated the problem.

    Impact of Ukrainian War

    • Separately, Russia’s invasion of Ukraine has strained exports of essential commodities used to make chip sets.
    • Moscow supplies rare materials like palladium, and Kyiv sells rare gases to make semiconductor fab lasers.
    • This combination is required to build chipsets that power a range of devices, from automobiles to smartphones.

    Global supply chain

    • About a decade and half back, semiconductors barely drew attention from large companies that have now come to rely on the thumbnail-sized semiconductor piece.
    • During this period, firms developed a system to make chip sets.
    • The system was made by interconnecting several parts of the world to make a single device.
    • It is what we now call as the global supply chain.

    How intricate is this network?

    • Semiconductor manufacturing involves roughly 25 countries in the direct supply chain, and 23 countries in allied functions, according to a joint study by Global Semiconductor Alliance and Accenture.
    • The report estimates a semiconductor-based product could cross international borders about 70 times before finally making it to the end customer.
    • Wafer fabrication is the most globally dispersed, with 39 countries directly involved in the supply chain and 34 involved in allied activity.
    • They provide services like photolithography, etching and cleaning.
    • Designing happens across 12 countries; product testing and manufacturing each are done across 25 countries.

    COVID is the only raison d’être

    • Supply chain dynamics back fired due to the pandemic, and the recent geopolitical events.
    • When the pandemic began, carmakers stopped requesting chips from suppliers due to low demand for new vehicles.
    • And now, as they ramp up production to meet consumer demand, chip makers are down on supply because they have cut deals with other industries.
    • As the geopolitical events in Central Europe and production shutdowns in China continue to add pressure to the already complicated semiconductor supply chain.

     

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  • Supreme Court’s ruling on GST deepens the churn in the tax regime

    Context

    Last week, the Supreme Court ruled that the decisions taken by the GST Council are merely recommendations with “persuasive value” and are not binding.

    GST as a advisory body

    • The court has rejected the Centre’s contention that the entire structure of GST would crumble if the Council’s decisions were not treated as enforceable.
    • In some ways, the verdict states the obvious.
    • Article 246-A inserted after the 122nd constitutional amendment states, “Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every state, have the power to make laws with respect to the GST imposed by the Union or by such state.”
    • Thus, the power to levy the central GST (CGST) vests with Parliament, the power to levy state GST (SGST) vests with state legislatures and Parliament has exclusive power to make laws with respect to the GST on items that are part of inter-state trade or commerce.
    •  Thus, the GST Council is only an advisory body and the actual decisions regarding model GST levies, principles of levy, apportionment of GST levied on inter-state supplies, principles relating to place of supply, exemptions and rate structure and any special provisions will have to be taken by either Parliament in the case of CGST and IGST or the states in the case of SGST.
    • In effect, decisions on the structure and operation of the tax can be made by the Centre and individual states without discussion and deliberation in the Council and both can ignore any recommendation made by the Council.
    • The judgment reiterates that the sovereign right to levy the tax still exists with the Union and state governments and it is for them to consider the recommendations of the Council.
    • The chance of having a harmonised GST and reforms in the tax regime will crucially depend upon continued negotiation and bargaining between the Union and states.
    • Intergovernmental cooperation has been kept alive to ensure a harmonised GST and unless both the Centre and the states see the gains, reforms will be hard to come by and if the Centre desires the reforms more than the states, it will have to ensure a “buy in” from the states to agree for the reform.

    Implications of the judgement

    • Given that the GST Council has been declared as only an advisory body with a persuasive value, what happens to the dream of having a harmonised one nation, one tax, if a state or a group of states decides to deviate?
    • But the judgment paves the way for more intensive bargaining and negotiations, placing states on an equal footing with the Centre in taking decisions on the structure and operations of the tax.
    • At present, decisions get approved in the GST Council when passed by a majority of three-fourths of the weighted votes of the members present and voting, with the Centre having one-third weight and individual states (and UTs) having an equal share of the remaining two-thirds weight.
    • However, in the past, all decisions in the Council have been taken by consensus (except in the case of determining the rate on lotteries), and the Supreme Court decision reinforces this convention.
    • The immediate impact of this will be bargaining by states for extending the period of compensation for the loss of revenue.
    •  As the five-year period of compensation gets over at the end of June, this decision will now help the states to bargain hard for the extension.

    Way forward

    •  Though the period of collecting compensation cess has been extended till March 2026 to meet the interest and repayment requirements of the funds borrowed from the RBI to meet the compensation requirements, the lasting solution lies in increasing the revenue productivity of the tax by pruning the list of exempted items, rationalising the rates and taking administrative measures.
    • These reforms will require strengthening the cooperative spirit.

    Conclusion

    This has come at a time when reforms have to be set in motion and hopefully, the Court’s decision will strengthen the cooperative spirit in reforming the domestic consumption tax system in the country.

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  • What is the Service Charge levied by Restaurants on Customers?

    The Centre has called a meeting of restaurant owners over service charge levied by them on customers.

    Why in news?

    • The restaurants are collecting service charges from consumers by default, even though collection of any such charge is voluntary and at the discretion of consumers and not mandatory as per law.

    What are the components of a food bill?

    • A restaurant bill in India comprises food charge (from the menu), with an addition of service charge (anywhere between 5 to 15 per cent) and a 5 per cent GST on this amount (IGST+SGST).
    • This is for all kinds of standalone restaurants.
    • In case a restaurant is located inside a hotel wherein room rate is upwards of Rs 7,500 (mostly in case of five-stars), the GST would be 18 per cent.

    Nature of Service charge

    • While the GST is a mandatory component as per law, the service charge is supposed to be optional.
    • It is the equivalent of what is known as gratuity around the world, or tip, in casual parlance.
    • Most restaurants decide the service charge on their own, and print it at the bottom of the menu with an asterisk.

    Policy measures

    • The Ministry of Consumer Affairs had come out with “Guidelines on Fair Trade Practices Related to Charging of Service Charge from Consumers by Hotels/ Restaurants”.
    • Here it was clearly mentioned that a component of service is inherent in the provision of food and beverages ordered by a customer.
    • Hence the pricing of the product is expected to cover both the goods and service components.
    • It said that the bill “may clearly display that service charge is voluntary, and the service charge column of the bill may be left blank for the customer to fill up before making payment.”

    What do the restaurants say?

    • The levy of service charge by a restaurant is a matter of individual policy to decide if it is to be charged or not.
    • There is no illegality in levying such a charge.
    • Once the customer is made aware of such a charge in advance and then decides to place the order, it becomes an agreement between the parties, and is not an unfair trade practice.
    • GST is also paid on the said charge to the Government.

    Where does the fund go?

    • Restaurants claim that a major chunk of the service charge thus collected goes to the staff, while the rest goes towards a welfare fund to help them out during good and bad times.
    • It’s a default billing option, even as customers can choose not to pay it if they don’t want to.
    • Of course, they are paid the salaries but the service charge works as an incentive for them.
    • Restaurateurs also say that patrons can decide not to pay the charge and tip the server directly, but in this case, the backroom staff doesn’t get anything.
    • A service charge ensures all staff members are rewarded evenly.

    What is the issue then?

    • The issue is that almost all restaurants have put service charge (fixed at their own accord) as a default billing option.
    • And if a consumer is aware that it is not compulsory and wants it removed or wants to tip the server directly, the onus is on them to convince the management why they don’t want to pay it.
    • The department says they received several complaints saying it leads to public embarrassment and spoils the dining experience since at the end of it, they either pay the charge quietly and exit the place feeling cheated, or have to try hard to get it removed.
    • Also, there is no transparency as to where this charge goes.
    • The officials also say that collecting service charge on their own and paying GST on it to the government doesn’t make it authorised.

    Problems faced by customers

    • It is this component which has come under dispute from time to time, with consumers arguing they are not bound to pay it.
    • It also said that hotels and restaurants charging tips from customers without their express consent in the name of service charges amounts to unfair trade practice.

     

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