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Subject: Economics

  • What is Sheltering of Taxes?

    This newscard is an excerpt from an original article published in TH.

    We can expect a statement based question comparing Tax Shelters and Tax Heavens.

    What is a Tax Shelter?

    • A tax shelter is a financial vehicle that an individual can use to help them lower their tax obligation and, thus, keep more of their money.
    • It is a legal way for individuals to “stash” their money and avoid getting it taxed.
    • A tax shelter is entirely different from a tax haven because the latter exists outside the country and its legality can, at times, be questionable.
    • A tax shelter, on the other hand, is entirely legal and keeps all monies within an individual’s home country.

  • Need for streamlining the Insolvency and Bankruptcy Code

    The article analyses the impact of Insolvency and Bankruptcy Code (IBC) on the insolvency resolution and on Indian economy.

    Measures that will improve investment

    1)  IBC: transforming insolvency resolution

    • IBC replaced inefficient bankruptcy law regime and has transformed insolvency resolution in India.
    • The IBC has focused on time-bound resolution, rather than liquidation.
    • IBC acts as an empowering tool to support companies falling within its ambit.
    • It has successfully instilled confidence in the corporate resolution methodology.
    • It has allowed credit to flow more freely to and within India while promoting investor and investee confidence.
    • The IBC is both flexible and dynamic, which makes it impactful, given how forward thinking the concept of an omnibus legislation of its nature actually is.
    • Through the Insolvency and Bankruptcy Board of India (IBBI), it has established an unprecedented organisation that both regulates and develops insolvency policy, and assesses market realities.

    Impact of IBC

    •  According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018.
    • Further, the recovery rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019
    • The overall time taken in recovery also improved nearly three times, coming down from 4.3 years in 2018 to 1.6 years in 2019.

    2) Decriminalisation of minor offences

    • Criminal penalties including imprisonment for minor offences act as major deterrents for investors.
    • The Government of India is also working toward decriminalisation of minor offences.
    • This will significantly reduce the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala fide intent.

    3) Other legislative measures

    • Together with the IBC, following 3 reforms suggests major and multi-dimensional effort by the government.
    • 1) The rolling out of the commercial courts.
    • 2) Commercial divisions and the Commercial Appellate Divisions Act, 2015, to allow district court-level commercial courts.
    • 3) Removal of over 1,500 obsolete and archaic laws.

    Way forward

    • There could perhaps be a look at institutionalising the introduction of a pre-packed insolvency resolution process.
    • This will also help resolve matters expeditiously, outside of the formal court system, and allow resolution even during the COVID-19 altered reality.

    Consider the question “Examine the impact of Insolvency and Bankruptcy Code (IBC) on the insolvency resolution procedure and suggest the further improvements in the IBC.”

    Conclusion

    The IBC has provided a major stimulus to ease of doing business, enhanced investor confidence, and helped encourage entrepreneurship while also providing support to MSMEs. Its further streamlining and strengthening will surely instil greater confidence in both foreign and domestic investors as they look at India as an attractive investment destination.

    B2BASICS

  • ATAL: World’s Longest Highway Tunnel

    PM Modi has inaugurated the Atal Tunnel at Rohtang at an altitude of above 3,000 metres in Himachal Pradesh.

    Refer this link to read more about Himalayan passes and rivers

    https://www.civilsdaily.com/the-northern-and-northeastern-mountains-part-1/

    Atal Tunnel

    • The 9.02 km-long-tunnel, built by the Border Roads Organisation (BRO), is the world’s longest highway tunnel and connects Manali to Lahaul-Spiti valley.
    • It provides all-weather connectivity to the landlocked valley of Lahaul-Spiti, which remains cut-off for nearly six months in a year as the Rohtang Pass is usually snow-bound between November and April.
    • Before the tunnel construction, the Lahaul Valley used to remain closed for vehicular movement due to bad weather conditions.
    • It reduces the distance by 46 km between Manali and Leh and the travel time by about 4 to 5 hours. It is expected to boost tourism and winter sports in the region.
    • The tunnel, also significant from the military logistics viewpoint, will provide better connectivity to the armed forces in reaching Ladakh.

  • Finishing the unfinished task of reform in land and labour markets

    The article discusses the issues faced by the various sectors of the economy and how the reform measures introduced by the government could help these sectors.

    Exploitation of farmers and consumers

    • The Indian farmer has bee treated as captive sources of producing cheap food grain while living at subsistence levels.
    • There was no freedom to choose the point of sale for his produce, he could not decide the price of his product and had no say in selecting the buyer.
    • The end consumer was equally short-changed with frequent cycles of persistent high inflation.
    • The only beneficiaries of this perverse system were middlemen who thrived under political protection.

    How reforms will help farmers

    • The stifling nature of the Essential Commodities Act and the APMC Act have both been removed.
    • Contract farming is now nationally enabled, allowing private investment to come in.
    • Private investment will bring in technology, modern equipment, better seeds, know-how for in-between-season crops, improved yields, better logistics and freer access to national and international markets.
    • The Indian farm sector will now finally begin to see the benefits of economies of scale.

    Need for the reforms in various sectors

    • There were 44 different labour laws with more than 1,200 sections and clauses that demanded compliance if one even thought of becoming an entrepreneur.
    • Different inspectors and departments administered these laws and this stunted many entrepreneurs.
    • The Companies Act of 2013 completely paralysed risk-taking and quick decision-making among the private wealth creators.
    • There were a large number of organisations that called themselves “banks” but were completely outside the ambit of RBI regulation.
    •  The politicians who controlled these banks were the primary obstacles in introducing any reforms in these sectors.
    • Indian mainstream banks, contrary to international norms, had a peculiar practice of “grossing” their bilateral liabilities rather than “netting”.
    • As per estimates, this locked anywhere between Rs 50,000 to Rs 70,000 crore funds.

    Reforms made by the government

    • In place of the 44 central labour laws,  the Parliament has now put in place four labour codes that are much simpler — the Code on Wages, the Industrial Relations Code, the Social Security Code and the Occupational Safety, Health and Working Conditions Code.
    • The bilateral banking netting law has been passed and a large corpus of unproductive capital has been freed to be deployed in the market.
    • Cooperative banks will now be regulated by the RBI and its customers will have the same protections as those of other regular banks.
    • The problematic sections of the Companies Act 2013 have been done away with and the fear of criminal prosecution gone.

    Conclusion

    The reforms in various sectors of the economy are bound to help the faster recovery of the economy as well as help the farmers realising their full potential.

  • Code on Wages 2019

    The article discusses the issues in the Code on Wages (yet to be notified) 2019 and how it fails to achieve what it seeks to achieve.

    Code on Wages 2019

    • The Code on Wages, 2019 seeks to consolidate and simplify four pieces of legislation into a single code. These 4 legislations are-
    • 1) Payment of Wages Act, 1936.
    • 2) Minimum Wages Act, 1948.
    • 3) Payment of Bonus Act, 1965.
    • 4) Equal Remuneration Act, 1976.
    • Its object and reasons stated that even the Second National Commission on Labour- 2002 suggested consolidating all labour laws into four codes.

    Issues with the consolidation

    • While the previous four pieces of legislation had a total of 119 sections, the new Code has 69 sections.
    • Any consolidation will impact the length of the sections.
    • Further, all requirements for enforcing the Act, have been relegated to the Rules.
    • As a result, the delegated pieces of legislation (Rules) will be bigger than the Code; this is no way to condense prior pieces of legislation.
    • All the four repealed pieces of legislation were enacted historically at different points in time and to deal with different situations.
    • The combining of asymmetrical laws into a single code is not an easy task and will only create its own set of new problems.
    • The central government will have the power to fix a “floor wage”.
    • Once it is fixed, State governments cannot fix any minimum wage less than the “floor wage”.
    •  The concept should be for a binding minimum wage and not have dual wage rates — a binding floor wage and a non-binding minimum wage.
    • Neither the Code nor the Rules (presently, draft Rules) prescribe the qualifications and experience required for appointment of competent authority.
    • Anew provision (Section 52) has been introduced where an officer will be notified with power to impose a penalty in the place of a judicial magistrate.
    • An essential judicial function is now sought to be vested with the executive in contravention of Article 50 of the Constitution.

    Issue of MGNREGA wages

    • There were cases as to whether the Minimum Wages Act would have an over-riding effect over the provisions of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 2005.
    • Several High Courts have placed the Minimum Wages Act to override MGNREGA.
    • That has been set to rest by excluding MGNREGA from the purview of the Code on Wages.
    • That has been set to rest by excluding MGNREGA from the purview of the Code on Wages.

    Conclusion

    The Code on Wages (yet to be notified) has neither succeeded in consolidation of laws nor will it achieve the expansion of the coverage of workers in all industries in the unorganised sector.

  • Lessons to learn from Vodafone ruling

    Context

    •  An Investor-State Dispute Settlement (ISDS) tribunal has ruled that India’s imposition of tax liability amounting to ₹22,000 crore on Vodafone is in breach of India-Netherlands bilateral investment treaty obligations.

    Background of the case

    • This case arose after the Indian Parliament in 2012 amended the Income Tax Act.
    • As per the amendment, income deemed to be accruing to non-residents, directly or indirectly, through the transfer of a capital asset situated in India is taxable retrospectively with effect from April 1, 1962.
    • This amendment was carried out to override the Supreme Court ruling in favour of Vodafone.
    • This amendment dented India’s reputation as a country governed by the rule of law, and shook the faith of foreign investors.

    Key lessons from Vodafone case

    • 1) All the three organs of the Indian state — Parliament, executive, and the judiciary — need to internalise India’s BIT and other international law obligations.
    • These organs need to ensure that they exercise their public powers in a manner consistent with international law, or else their actions could prove costly to the nation.
    • 2) India should learn that being a country that values the rule of law is an important quality to win over the confidence of foreign investors and international goodwill.
    • 3) It is likely that the government might challenge the award at the seat of arbitration or resist the enforceability of this award in Indian courts alleging that it violates public policy.
    •  It would mean that India does not honour its international law obligation.
    • 4) This ruling might have an impact on the two other ISDS claims that India is involved in with Cairn Energy and Vedanta on the imposition of taxes retrospectively.
    • 5) It is quite possible that India might use this award to further harden its antagonistic stand against ISDS and BITs.
    • India unilaterally terminated almost all its BITs after foreign investors started suing India for breaching BITs.
    • But the fact is that this case and several others are a result of bad state regulation.
    • 6) This decision shows the significance of the ISDS regime to hold states accountable under international law when in case of undue expansion of state power.
    • The case is a reminder that the ISDS regime, notwithstanding its weaknesses, can play an important role in fostering international rule of law.

    Consider the question “What were the issues involved in the Vodafone tax case? What are the implication of Investor-State Dispute Settlement ruling for India?”

    Conclusion

    If government is serious about wooing foreign investment, India should immediately comply with the decision.

  • What are the ESG funds?

    ESG funds are witnessing a growing interest in the Indian mutual fund industry these days.

    Try this PYQ:

    Sustainable development is described as the development that meets the needs of the present without compromising the ability of future generations to meet their own needs. In this perspective, inherently the concept of sustainable development is intertwined with which of the following concepts?

    (a) Social justice and empowerment

    (b) Inclusive Growth

    (c) Globalization

    (d) Carrying capacity

    What are the ESG funds?

    • ESG means using Environmental, Social and Governance factors to evaluate companies and countries on how far advanced they are with sustainability.
    • ESG investing is used synonymously with sustainable investing or socially responsible investing.
    • While selecting a stock for investment, the ESG fund shortlists companies that score high on the environment, social responsibility and corporate governance, and then looks into financial factors.
    • So, the scheme focuses on companies with environment-friendly practices, ethical business practices and an employee-friendly record.
    • They imbibe the environment, social responsibility and corporate governance in their investing process.

    Why so much focus on ESG now?

    • Modern investors are re-evaluating traditional approaches and look at the impact their investment has on the planet.
    • As a result of this paradigm change, asset managers have started incorporating ESG factors into investment practices.
    • Companies with good ESG scores tick most of the checkboxes for investing, tend to mitigate environmental and social risks and tends to have stronger cash flows, lower borrowing costs and durable returns.

  • Reform is about giving farmers choice

    The article analyses the regional variation in the problems and issues of the farmer and how it has implications for the reforms in agriculture.

    An issue of estimating the number of farmers in India

    • Almost 111 million are registered for the Pradhan Mantri Kisan Samman Nidhi (PM-Kisan).
    • Other than some categories being barred from PM-Kisan benefits, not every eligible farmer has necessarily registered for PM-Kisan.
    • The last Agriculture Census in 2015-16 gave us 146 million holdings.
    • If the agricultural landholding is conditional on being a farmer, apart from a possible further increase since 2015-16, 146 million is possibly the upper bound.
    • Every definition of “farmer” is not contingent on the ownership of land.
    • The Protection of Plant Varieties and Farmers’ Rights Act of 2001 is an example where status as a farmer depends on cultivating land (or supervising cultivation), not owning it.
    • That issue was also flagged by the National Commission on Farmers, such as in the Draft National Policy for Farmers (2006), where “farmers” included agricultural labourers, sharecroppers, tenants and so on.

    Issues with making landholding prerequisite for being a farmer

    • The Committee on State Agrarian Relations and the Unfinished Task in Land Reforms (2009) noted that “the Survey and Settlement Operations in the Permanently Settled Areas have not been taken up and where they have been taken up, for instance in Bihar, they tend to never conclude”
    • The last extensive survey and settlement in India was conducted two to three decades prior to Independence.
    • Post-Independence, some states have not undertaken a revisional survey and settlement so far.
    • There have been improvements since 2009 and the Department of Land Resources has a Digital India Land Records Modernisation Programme (DILRMP).
    • Punjab and Haryana rank 16th and 18th respectively in Records and Services Index (LRSI).
    • Gujarat, West Bengal and Tripura score high on this Index (over 90 per cent).

    Variation across the States

    • If land records are in this condition, some farmers will conceivably be excluded from the farmer definition.
    • With diverse and heterogenous agriculture, all farmers will not have identical views.
    •  2015-16 Agricultural Census tells us that most operational holdings are in UP, Bihar, Maharashtra and MP, in that order.
    • The highest operated areas are in Rajasthan, Maharashtra, UP and MP, in that order.
    • 86.1 per cent of holdings are small and marginal (less than 2 hectares) and only 0.6 per cent are large (more than 10 hectares).

    Conclusion

    The face of Indian agriculture has changed and is no longer what it was in the Green Revolution days, centred on Punjab, Haryana and western UP. Farmers, and governments, in Bihar and Kerala, don’t want APMCs, nor do UP, MP, Gujarat and Karnataka. There is no evidence that this has made those farmers worse off.

  • Growth compulsion, fiscal arithmetic

    The government faces the challenge of high fiscal deficit and declining revenue. This article discusses the challenge and suggests the way forward to deal with the situation.

    Dismal growth prospects

    • At (-)23.9% contraction for the first quarter of 2020-21, India’s growth showed one of the highest contraction globally.
    • What is most surprising in the Q1 data is that the sector ‘Public Administration, Defence and other Services’ contracted at (-) 10.3%.
    • This means that there was no fiscal stimulus.
    • The 2020-21 real GDP growth for India is forecast in the range of (-) 5.8% (RBI) to (-) 14.8% (Goldman Sachs).
    • The OECD in its September 2020 Interim Economic Outlook has projected a contraction of (-) 10.2% in FY21 for India.

    Challenge of decline in revenue

    • Due to a sharp contraction in nominal GDP growth, central and State tax revenue, both may contract.
    • . In the first quarter of 2020-21, the Centre’s gross tax revenues contracted by (-) 32.6%.
    • The CAG-based data pertaining to 19 States show a contraction of (-) 45% in their own tax revenues.
    • Given the adverse impact of the lockdown, even the budgeted non-tax revenues are not likely to be realised.
    • The revenue calculations of the Budget were made on the assumption that the nominal income of the country would grow at 10%.
    • Some estimates indicate that the tax and non-tax revenue and non-debt capital receipts in the current fiscal may fall well short of the budget estimates by an amount higher than ₹5-lakh crore.
    • The combined fiscal deficit of the Centre and the States will have to make up for the shortfall in tax and non-tax revenues, if the level of budgeted expenditures is to be maintained.

    Challenge of widening of fiscal deficit

    • In order for the central government to maintain the level of budgeted expenditure and also provide for additional stimulus, its fiscal deficit may have to be increased to close to an estimated 8.8% of GDP.
    • If one adds the Centre’s and States’ fiscal deficit, the combined fiscal deficit amounts to 13.8% of GDP.
    • If the nominal GDP actually contracts in 2020-21, the fiscal deficit as the percent of GDP would go up further.

    Role of the RBI

    • The International Monetary Fund, in its June 2020 update of the World Economic Outlook, estimated the fiscal deficit of India and China at 12.1% of GDP.
    • India doesn’t have adequate resources to support a fiscal deficit of nearly 14% of GDP.
    • All this will therefore require substantial support from the Reserve Bank of India which will have to take on itself, either directly or indirectly, a part of the central government debt.
    • In the direct mode, the RBI takes on the debt directly from government at an agreed rate.
    • It took India long to move away from the automatic monetisation of debt.
    • Even if the RBI wants to support the borrowing programmes, it should not do so directly.
    • The indirect method is preferable as the market still sends out the signals on interest rate.
    • In both cases, the RBI is the provider of liquidity.
    • The question ultimately relates to the extent of debt monetisation that may be undertaken.
    • The country has also to guard against high inflation.

    Role of government

    • The economic situation warrants enhanced government expenditure.
    • It appears that governments are withholding expenditure. That is not the right approach.
    • At the same time, there is a limit to monetisation of debt.

    Conclusion

    Perhaps the best course of action would be to keep the combined fiscal deficit at around 14% of GDP in the current year and find ways to finance it. This will have to be brought down gradually. It may take several years of normalisation.

  • Where are the funds collected through cess parked?

    The Comptroller and Auditor General (CAG) of India, in its latest audit report of government accounts, has observed that the government withheld in the Consolidated Fund of India (CFI) more than ₹1.1 lakh crore out of the almost ₹2.75 lakh crore collected through various cesses in 2018-19.

    Try this PYQ:

    Q.Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempted under GST (Goods and Services Tax)? (CSP 2018)

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

    Issues with the cess deposits

    • The CAG found this objectionable since cess collections are supposed to be transferred to specified Reserve Funds that Parliament has approved for each of these levies.
    • The nation’s highest auditor also found that over ₹1.24 lakh crore collected as Cess on Crude Oil over the last decade had not been transferred to the designated Reserve Fund — the Oil Industry Development Board.
    • Similarly, the Goods and Services Tax (GST) Compensation Cess was also “short-credited” to the relevant reserve fund.

    What is Cess?

    • The Union government is empowered to raise revenue through a gamut of levies, including taxes (both direct and indirect), surcharges, fees and cess.
    • While direct taxes, including income tax, and indirect taxes such as GST are taxes where the revenue received can be spent by the government for any public purpose in any manner it deems appropriate for the nation’s good, a cess is an earmarked tax that is collected for a specific purpose and ought to be spent only for that.
    • Every cess is collected after Parliament has authorised its creation through enabling legislation that specifies the purpose for which the funds are being raised.
    • Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.

    How many cesses does government levy?

    • A report submitted to the Fifteenth Finance Commission listed 42 cesses that have been levied at various points in time since 1944.
    • The very first cess was levied on matches, according to this report.
    • Post Independence, the cess taxes were linked initially to the development of a particular industry, including a salt cess and a tea cess in 1953.
    • Subsequently, the introduction of cess was motivated by the aim of ensuring labour welfare.
    • Some cesses that exemplified this thrust were the iron ore mines labour welfare cess in 1961, the limestone and dolomite mines labour welfare cess of 1972 and the cine workers welfare cess introduced in 1981.

    Cesses after GST

    • The introduction of the GST in 2017 led to most cesses being done away with and as of August 2018, there were only seven cesses that continued to be levied.
    • These were Cess on Exports, Cess on Crude Oil, Health and Education Cess, Road and Infrastructure Cess, Building and Other Construction Workers Welfare Cess, National Calamity Contingent Duty on Tobacco and Tobacco Products and the GST Compensation Cess.
    • And in February, Finance Minister Nirmala Sitharaman introduced a new cess — a Health Cess of 5% on imported medical devices — in the Finance Bill for 2020-2021.

    Why is the issue in the news currently?

    • For one, most crucially, the express purpose of this particular cess is to help recompense States for the loss of revenue on account of their having joined the GST regime by voluntarily giving up almost all the power to levy local indirect taxes on goods and services.
    • Also, the share of revenue to the Centre’s annual tax kitty from cess had risen to 11.88% of the estimated gross tax receipts in 2018-19, from 6.88% in 2012-13.
    • Given that cess does not need to be a part of the divisible pool of resources, this increasing share of cess in the Union government’s tax receipts has a direct impact on fiscal devolution.