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Analysis & Simplification of important Articles published in Yojana Magazine

Insights into

Yojana: November 2016

W W W . I N S I G H T S O N I N D I A . C O M

Insights into Yojana: November 2016

www.insightsonindia.com

Table of Contents

1) Tax Reforms: Past, Present and Future ................................................................................................. 3

2) India’s Tax System: Increasing Progressivity .......................................................................................... 4

3) Ushering in a New Era of Tax Reforms .................................................................................................. 7

4) Black Money Menace: Government on War-footing ............................................................................ 9

5) GST: Game Changer for Indian Economy?..........................................................................................11

6) Goods and Services Tax: The International Experience......................................................................14

7) GST: Rejuvenating the Manufacturing Sector.....................................................................................16

8) GST and the Constitutional Conundrum.............................................................................................18

9) Facts for Prelims.................................................................................................................................20

a. India climbs steadily in the Global Competitiveness Index (GCI)

b. Venture Capital Funds for Scheduled Caste

c. HIMANSH, India’s Remote, High-Altitude Station

d. Project SAKSHAM

10) North East Diary..................................................................................................................................21

a. North-East states as ‘Priority States’ for PMUY



Tax Reforms: Past, Present and Future

Introduction

Tax reforms are an integral part of the development process of any country. Developed countries such as UK and US too undertook reforms in the last few years. India is no exception to tax reforms.

How should the taxation system be?

Any taxation system should be reasonable, fair and non-discriminatory so that, both the individual tax payer, corporates and industry became not only tax compliant, but feel the social and civic obligation to pay taxes.

The main aim should be to encourage people to become tax compliant and bring in a large population into the tax net.

While the tax to GDP ratio may be progressive, the tax to demographic population is abysmal, hardly 2% of the population pays tax and this population is concentrated in the urban agglomerate.

Goods and Services tax (GST)

The single most critical tax reform that stands out is the Goods and Services Tax (GST).

The GST will help transform the economy ushering in transparency and bringing the concept of “One Country One Tax”.

GST forges a single economic zone for the country from overlapping federal and state taxes.

The New York Times described the legislation as the biggest tax reform since 1991.

GST is hugely consequential for the ease of doing business, and for demonstrating to the outside world that India is dragging its economy into the 21st century.

GST is in line with Cooperative Federalism wherein the centre and the states work together for the nations benefit.

In the longer run, the GST is expected to attract foreign investment reducing the cost of capital goods; raise manufacturing and exports, increase tax collections and create jobs.

It is expected that GST will put an end to “Tax Terrorism”.

Direct Tax Code (DTC)

Tax reforms don’t end with GST. The DTC will simplify the direct taxes structure benefitting a large number of populations.

DTC seeks to replace the Indian Income Tax Act of 1961 by amending all laws relating to direct taxes, namely income tax, dividend distribution tax, fringe benefit tax and wealth tax with a view to establish equitable direct tax system that can facilitate voluntary compliance and help increase the tax-GDP ratio.

DTC reduce the scope for disputes and minimize litigation. It seeks to provide stability in the tax regime as it is based on accepted principles of taxation and best international practices.

It will eventually pave the way for a single unified taxpayer reporting system.

Questions

1) Why GST is seen as one of the biggest taxation reforms often called as big bang reform. How will it help in economic growth? Explain



India’s Tax System: Increasing Progressivity

Introduction

The taxes we pay play an important role in financing different functions that the government performs.

There are many responsibilities that the government is required to fulfil. These include ensuring the rule of law; providing public goods and services; building physical and social infrastructure; investing in education of the population; alleviating poverty, etc.

The government mobilises financial resources for funding its activities mainly through taxes, user fees/ service charges and borrowings.

The sources of funds which neither create liabilities nor reduce assets are called Revenue Receipts. Other sources such as borrowings which create liabilities or reduce assets (e.g. disinvestment) are called Capital Receipts.

Tax Revenue and Non-Tax Revenue

Government’s revenue receipts can be further divided into two categories: tax revenue and non-tax revenue.

Tax Revenue: Tax Revenue refers to the money collected by the government through payments imposed by law.

Non-Tax Revenue: Non-Tax Revenue refers to the revenue of the government raised through instruments other than taxes such as fees/ user charges, dividends and profit of public sector enterprises, interest receipt, penalty or fine, etc.

For most countries across the world, tax revenue forms a significant proportion of government revenues.

Direct and Indirect Taxes

Direct Taxes: Those taxes for which, the burden of tax falls on the entity that is being taxed are known as direct taxes.

Indirect Taxes: Those taxes for which the tax-burden can be passed on to other persons later through business transactions of goods/ services.



Distribution of Revenue Collected in the Central Tax System

A Finance Commission is set up once every five years to recommend sharing of financial resources between the Centre and States.

At present revenue collected from all central taxes, barring those collected from Cesses, Surcharges and taxes of Union Territories is taken as the sharable / divisible pool of Central Tax Revenue.



The 14th Finance Commission has recommended devolution of 42% of the sharable / divisible pool of Central Tax Revenue to States every year.

Tax-GDP Ratio and Progressivity of Taxes in India

A country’s tax-GDP ratio is an important indicator that helps to understand how much tax revenue is being collected by the government as compared to the overall size of the economy.

A higher tax-GDP ratio gives more room in a government’s budget so that it can spend more without borrowing.

India’s tax-GDP ratio continues to remain low, so much so that it has the lowest tax-GDP ratio among the BRICS countries. There is therefore, an urgent need to raise this ratio.

Another aspect of India’s structure is the lack of progressivity in it. Indirect taxes are generally considered to be regressive since the rich and the poor are subject to the same tax rate for similar goods.

Direct taxes, on the other hand are considered to be progressive since they are linked to the tax-payee’s ability to pay tax and the average tax rate increases as the taxable income of the tax payer increases.

In India, more than 60 per cent of total tax collected (Centre and State) is accounted for by indirect taxes, implying that the tax structure is extremely regressive.

Questions

1) “The GST can be a big boon if it has right kind of rate and legislation.” Explain.

2) What is goods and services tax (GST)? Discuss salient features and benefits of passed GST bill.

3) Which of the following is/are true?

1) Both the State and Centre will have power to make laws on taxation of goods and services.

2) Parliament’s law will not override a state law on GST.

a. Only 1 b. Only 2 c. Both 1 and 2 d. Neither 1 nor Ans: a

4) What is Integrated Goods and Services Tax? a. Tax imposed on imported goods and services b. Tax imposed on value additions to exports c. Tax imposed on interstate trade d. Tax on international trade

Ans: c



Ushering in a New Era of Tax Reforms

Major steps taken by the Government to tackle Black Money

The major step taken by the government to unearth black money from domestic market was the Income Declaration Scheme (IDS)-2016 which was a huge success.

It provided an opportunity to persons who had not paid full taxes in the past to come forward and declare their domestic undisclosed income and assets.

Under IDS-2016, 64275 declarations were filed upto the midnight of 30th September, 2016 with an aggregate of Rs.65,250 crore worth of undeclared incomes.

Other major steps include: o Making tax crimes predicate offence under Prevention of Money Laundering Act (PMLA). o Amendment of Foreign Exchange Management Act (FEMA) to provide for confiscation of

domestic assets in place of foreign assets. o Enactment of Black Money Law and Amendment to Benami Act.

Tax initiatives in case of Direct Taxes

Tax initiatives in case of Direct Taxes undertaken by the government include: o Reversal of retrospective tax laws o Increase in the threshold limit for filing appeals by the Income Tax Department o Making the tax laws simpler and transparent

The effort of the government is to widen the tax base by including maximum people who are liable to pay the taxes under its tax net.

This will not only increase the revenue collections of the government, but would also help in bringing down the tax rates to a reasonable level.

Other Tax initiatives by the Government

The government focuses to provide maximum tax based services online so that there is minimum human interaction i.e., Minimum Government, Maximum Governance.

This will bring down corruption, more transparency and efficiency in the tax system.

The Prime Minister in various Pro-Active Governance and Timely Implementation (PRAGATI) Meetings had also asked the tax officials to take care of pending grievances and resolve them at the earliest.

Terming litigation as a “scourge” for a tax friendly regime which also creates an environment of distrust, the Finance Minister in the Budget had announced a Dispute Resolution Scheme (DRS).

Domestic and Foreign investors are gaining comfort from the government’s attempt to have transparent tax policies.

Tax initiatives in case of Indirect Taxes

The Economic Survey 2015-16 had termed GST as a reforms measure “perhaps unprecedented in the modern global tax history”

The government expects that it would give a boost to the country’s ranking in the Ease of Doing Business Report, where it is currently placed at 130 out of 189 countries. The government hopes to bring India among the top 50 countries on the ranking.



The IMF in its recent World Economic Outlook had said that the advent of GST would boost India’s medium term growth prospects.

IMF report said, “GST and the elimination of poorly targeted subsidies are needed to widen the revenue base and expand the fiscal envelop to support investment in infrastructure, education and healthcare.”

As per various estimates, GST will boost revenue collections by plugging leakages and evasion and will have the potential to boost the country’s GDP by as much as 2%.

Questions

1) Recently, the Union government mopped up black money from the economy by giving taxpayers amnesty to declare undisclosed past income by paying tax on it at an effective, slightly high rate of 45 per cent. Do you think measures like this are addressing root cause of black money? Critically comment.

2) Taxes on services can be levied by a. Centre b. States c. Centre and States both d. None of the above

Ans: a

3) Who of the following will be the members of the GST Council?

1. Union Finance Minister 2. Union Minister of State in charge of Revenue or Finance 3. Chief Ministers of States

a. 1, 3 b. 1, 2 c. 2, 3 d. All of the above

Ans: b

4) Which of the following statements are true

1. India’s tax-GDP ratio is highest among the BRICS countries

2. The sources of funds which create liabilities are called Revenue Receipts and those funds

which do not create liabilities are called Capital Receipts.

a. 1 only

b. 2 only

c. Both 1 and 2

d. Neither 1 nor 2

Ans: d



Black Money Menace: Government on War-footing

Introduction

Of the over 120 crore population in the country, less than 5% individuals pay taxes. Although it is difficult to ascertain the quantum of black money flow in the economy, various

estimates peg it at anywhere between 20% and 70% of the size of India’s 2 trillion-dollar economy. The government is working on a multi-pronged strategy to tackle the black money menace.

Non-Intrusive Target Evaders

‘Project Insight’ with the help of L&T InfoTech will allow the government to collate all information available with the Income Tax Department from various sources and systematically profile people using PAN details.

Several government departments like Central Board of Direct Taxes, Intelligence Bureau and others are working closely on the project.

The government has also made it mandatory to furnish PAN for all transactions over Rs 2 lakh through all payment modes from January 1, 2016.

It has also revised monetary limits for furnishing of PAN for gold jewellery to above Rs 2lakh from the earlier limit of Rs 5 lakh.

All fixed deposits with post offices, cooperative banks, Nidhis, NBFCs will also need PAN.

SIT for Capping Cash Transactions

The special investigative team on black money constituted in 2014 and chaired by former SC judge MB Shah has called for a complete ban on cash transactions over Rs 3 lakh to curtail black money circulation and a limit of Rs 15 lakh on cash holdings in its recent report.

The limit on cash transaction could only succeed if there was a limit on cash holding. It suggested that if any person of industry required holding more cash, they may obtain necessary

permission from the Commissioner of Income Tax of the area. The SIT has suggested that an Act be framed to declare such transactions as illegal and punishable

under law. The panel has asked the RBI to develop an institutional mechanism, in consultation with the

revenue department, to share export-import and foreign exchange transaction information with the investigative agencies, to curb illicit financial flows out of the country.

It called for a mechanism to allow sharing of information of RBI databases with enforcement authorities – the Department of Revenue Intelligence (DRI) and Enforcement Directorate (ED) – for verification.

Unaccounted Money Stashed Abroad

The Indo-Us Foreign Account Tax Compliance Act (FATCA), is aimed to ensure that tax is paid on income generated from wealth abroad.

India has already started receiving information under Automatic Exchange of Information (AEOI) under FATCA.



Revising DTAAs

Tax evaders have often exploited loopholes in the existing tax treaties with low or zero tax jurisdictions like Mauritius, Singapore and Cyprus, ensuring complete tax avoidance.

This ensures that unaccounted money kept overseas is routed back to India disguised as foreign capital.

While Double Taxation Avoidance Agreements (DTAA) is aimed to ensure that taxpayers do not face the burden of double taxation in both countries, evaders have managed to avoid taxes in both countries.

The government is on a spree to revise the DTAA with these countries and gain taxation rights over capital gains, which currently rests with these low or no tax jurisdictions.

India has revised DTAA with Mauritius and Cyprus and is close to amending the pact with Singapore.

Mauritius and Singapore are the top two FDI sources in India, making up for about half of total direct investments into the country.

General Anti Avoidance Rule (GAAR) being rolled out from April 1, 2017 is a set of rules designed to give Indian authorities the right to scrutinize and tax transactions which they believe are structures solely to avoid taxes.

India amended the DTAA with Mauritius allowing New Delhi to impose capital gains tax on shares.

India has DTAA with 82 nations, including all popular tax havens countries.

Cyprus has also agreed to give India taxation rights over shares in return for removal from the blacklist.

Benami Transactions Act

The Benami Transactions (Prohibition) Amendment Act saw widening of definition and increase in penalty and punishment for those who hold assets in the name of other person to avoid taxation.

The legislation is intended to effectively prohibit Benami transactions and thereby prevent circumvention of law through unfair practices.

Investment in property or real estate is used commonly to park unaccounted money. A significant number of transactions in real estate are not reported or are under-reported.

The Bill has made the penalty and prosecution provisions more stringent like penalty for providing false information.

Way Forward

With all major economies of the world uniting against the cause of eradication of black money, seen from Base Erosion and Profit Sharing (BEPS) and multilateral information exchange pacts, it will become very difficult to carry out tax evasion.

While the efforts using technology are in the right direction, the focus must be on discouraging cash transactions and encouraging card payment in the economy

Questions

1) Critically assess efforts made during last two years to tackle the generation of black incomes and to bring black money back to India.



GST: Game Changer for Indian Economy?

Introduction

The passage of the Constitutional Amendment Bill as well as release of the Model GST laws indicates the determination of the government to implement GST at the earliest.

In order to make India a manufacturing hub, it is imperative that the foreign investors / companies find it conducive to do business here.

One of the major impediments to a smooth business, especially in the manufacturing sector is the uncertain and unpredictable indirect tax regime.

Major Benefits of GST

GST is expected to ease a cumbersome tax system, help goods move seamlessly across state borders, curb tax evasion, improve compliance, raise revenues, spur growth, stimulate investment and make doing business in India easier.

GST will increase the resources available for poverty alleviation and development of the country. This will happen indirectly as the tax base becomes more buoyant and as the overall

resources of the centre and state governments increases. But it will also happen directly because the resources of the poorest states (E.g. Uttar

Pradesh, Bihar, and Madhya Pradesh) who happen to be large consumers will increase substantially.

Advantages to the Government

The GST will facilitate ‘Make in India’ by bringing India on a single tax platform. GST provides credits for the taxes paid by producers earlier in the goods / services chain.

This would encourage these producers to buy raw material from different registered dealers and would bring in more vendors and suppliers under the preview of taxation.

GST would improve tax governance in two ways: The first relates to the self-policing incentive inherent to a value-added tax. The second relates to the dual monitoring structure of the GST-one by the states and

one by the centre. Amalgamating several central and state taxes into a single tax would help mitigate the

double taxation, leading to a common national market. GST’s successful implementation would give a signal to the foreign investors about India’s

ability to support ease of doing business. Greater use of IT will reduce human interface between the taxpayer and the tax

administration, which will reduce corruption. Reduction in prices: Manufacturers or traders would not have to include taxes as a part of

their cost of production, which would lead to reduction in prices. Ultimately, it will help in poverty eradication by generating more employment and more

financial resources.

Advantages to Trade and Industry

From the consumer’s point of view the advantage would be in terms of a reduction in overall tax burden on goods, which is currently estimated at 25% to 30%.

Various tax barriers such as check posts and toll plazas lead to a lot of wastage for perishable items being transported, a loss that translates into major costs through higher



need of buffer stocks and warehousing costs as well. A single taxation system could eliminate this roadblock for them.

There will be more transparency in the system as the customers would know exactly how much taxes they are being charged and on what base.

GST also removes the custom duties applicable on exports. Our competitiveness in foreign markets would increase on account of lower cost of transaction.

Because the GST would be applied on imports, the negative protection favouring imports and disfavouring domestic manufacturing would be eliminated.

Reduction in compliance costs – No multiple records keeping for a variety of taxes – so lesser investment of resources and manpower in maintaining records.

Sectoral Impact

Real Estate Sector

The real estate sector has strong economic multiplier effects through backward and forward linkages.

Construction is the second largest employment generator in the country after agriculture and accounts for a significant proportion of the GDP.

Under the current indirect tax regime, the real estate industry has been embroiled in disputes due to ambiguity in provisions as well as multiple taxation.

Sale of under construction property attracts multiple taxes under the current regime, leading to cascading of taxes and higher tax cost burden on house purchases.

The GST is likely to result in transparency in the real estate sector, which will significantly reduce tax evasion through more efficient transaction-tracking methods, and improved enforcement and compliance.

Health Care Sector

One of the major concerns is the current inverted duty structure that adversely affects domestic manufacturers, cost of inputs being higher than output. This discourages investment in this industry.

GST may either remove the inverted duty structure or allow refund of accumulated credit. GST is expected to have a positive effect on pharmaceutical sector since 8 different taxes

are levied in the pharmaceutical industry at the moment. A consolidation of all these into one tax would ease doing business.

GST will also result in operational efficiency by streamlining the supply chain which can alone add 2% to India’s pharmaceutical market size.

Banking and Financial Services

In India most of the banking and financial services are exposed to service tax, at the rate of 14.5%, while GST is expected to be 18% to 20%. Thus services are likely to be costlier.

Due to GST, financial service providers may be required to adhere to compliances across multiple states instead of the current single, centralised registration compliances.

As GST is a destination based tax, it might be a challenge to determine the destination of certain services. This may lead to difficulty in determining state GST, central GST or inter-state GST on B2B and B2C transactions.

Imposing GST on banking and financial services may become a challenge and India, if successful, will chart a new course, which could become a model for the rest of the world.



Travel, Tourism and Hospitality

India’s travel, tourism and hospitality industries have multiple taxes, levied by both the centre and the states. It is expected that under GST, supplies of hotels and restaurants will be subjected to a single tax. However, it may also lead to increase in tax rates.

Education Sector

The education sector currently enjoys various tax exemptions and benefits; services

provided by schools and colleges are either not taxed or are covered in the negative list.

The situation is likely to continue even after the implementation of GST.

Questions

1) How will GST impact India’s international trade and its trade strategy? Examine.

2) “Goods and services tax, which will facilitate the movement of commodities and lead to expansion of economic activity, is one of the boldest reforms in post-Independence India.” Discuss why GST is hailed as a boldest reform.

3) Discuss how GST differs from the current regimes, how it will work?

4) Critically analyse merits of the Goods and Services Tax (GST).

5) Which of the following statement/s is/are correct about GST?

1. It will make India one unified common market. 2. It seeks to enhance fiscal federalism by removing indirect tax barriers across states. Options a) Only 1 b) Only 2 c) Both d) None

Ans: C

GST aims to bring uniform indirect tax regime throughout the country by subsuming central and state indirect taxes into single indirect tax.

5) Who will be the Chairman of GST Council that is tasked with optimising tax collection for goods and services by the State and Centre?

a. RBI governor b. Finance secretary c. Union Finance Minister d. Union Minister of State in charge of revenue or Finance

Ans: C

The Bill seeks to establish a GST Council tasked with optimising tax collection for goods and services by the State and Centre. The Council will consist of the Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each State government.



Goods and Services Tax: The International Experience

International Experience

International experience shows that the success of a GST depends mostly on the model and effective implementation.

Over time, many countries have fine-tuned their framework to reap the benefits of GST in terms of growth, revenues, and price stability.

France was one of the first countries to implement GST on 1954, followed by Germany in 1968 and the United Kingdom in 1973.

Canada and Brazil have dual GST like India proposed GST.

GST has made these economies more competitive, help improve exports, generate more revenues to the exchequer and stabilise prices.

Malaysia is among the recent countries in Asia to introduce GST and China is working towards a uniform system of taxes.

Australia implemented GST in 2000 and has experienced positive outcomes in case of tax revenues and current account balance.

New Zealand is also successful in implementing GST.

International Experiences: Lessons

International experience shows that inflation went up in the short term as a lot of new services and goods are taxed under GST which was not taxed earlier.

Lesson from Malaysia is that businesses need to start early with the implementation process to be GST ready.

The International experience with GST suggests that it is necessary to keep the exemptions to the minimum.

Among different countries, New Zealand has the least number of exemptions and the most comprehensive coverage of GST.

It is important to resist the political pressures to accord exemptions to fulfil ostensible objectives of equity, administrative ease, regional development and many more.

Operational Issues

The main challenge is the setting of revenue-neutral rate (RNR) and the threshold limit in the GST.

Ensure that through RNR the revenues of the government remain the same despite of giving tax credits.

Similarly, fixing an appropriate threshold limit to ensure that there is no taxing burden on small businessmen.

Challenges include the rolling out of IT platform for implementing GST and sorting out administrative arrangements.

Effective tax litigation system has to be evolved before implementation of GST.

Improvement in banking system, providing extensive training to tax administration staff, safeguarding the interests of the less developed states are few of the other key challenges.

Ensuring high speed IT connectivity across states with huge geographical disparity in such a short time is going to be a challenge.

The entire tax administration needs capacity building to handle the GST.



Questions

1) Should GST be growth-oriented or should it be revenue-neutral? Critically analyse.

2) It is argued that the roll-out of a nationwide GST also raises some concerns, which need to be

acknowledged and resolved in due course of time. What are these concerns? Analyse.

3) The Committee on Possible Tax rates under GST recommended a ‘Revenue Neutral Rate’ (RNR). What is RNR?

1. It refers to that single rate , which preserves revenue at desired (current) levels 2. It is the rate at which the resulting income equals expenditure (both capital and revenue) 3. It is the rate at which there would be minimal difference among states in overall tax

earnings 4. Both 2 and 3

Ans: a

4) Which of the following can be classified as an Indirect Tax? 1. Goods and Services Tax 2. Excise Duty 3. Securities Transaction Tax

Select the correct answer using the code given below:

a. 1 only b. 1 and 2 only c. 2 and 3 only d. 1, 2 and 3

Ans: b

“Securities Transaction Tax (STT) is a type of financial transaction tax levied in India on transactions

done on the domestic stock exchanges. The rates of STT are prescribed by the Central / Union Government

through its Budget from time to time. In tax parlance, this is categorised as a direct tax.”

5) Which of the following statements about “Project Insight” is incorrect?

1. Project Insight is the flagship programme of Ministry of Commerce and Industry.

2. It is aimed at widening the tax base by catching tax evaders using technology.

3. The project will track the Permanent Account Numbers being quoted on financial

transactions and tally them with income tax filings.

a. 1 only b. 1 and 2 c. 1 and 3 d. All of the above

Ans: a

Project Insight is the flagship programme of “Ministry of Finance”.



GST: Rejuvenating the Manufacturing Sector

Introduction

The richness of India’s demographic dividend needs to be properly utilised to accelerate our development process and to achieve higher GDP.

The benefits of the demographic dividend can be realized only by making these youth productive in terms of health, education and skill development.

To attain this, Indian manufacturing sector has great potential to absorb these youth and provide them the right forum to make them skilful.

India’s manufacturing sector contribution is approximately around 16% to GDP.

National Manufacturing Policy and Make in India

To break the vicious circle and stagnation of manufacturing sector, Government of India has formulated ‘National Manufacturing Policy’ to promote this sector and has taken various initiatives to trigger growth to its potential and set a target of achieving 25% of GDP by 2025.

Indian manufacturing sector has great potential to create 90 million jobs and is able to produce USD 1 trillion and can contribute approximately 25-30% to GDP by 2025 (McKinsey Report, 2012)

To achieve the same, ‘National Investment and Manufacturing Zone (NIMZ)’ has been created to boost the sector.

NIMZ planned to have single window to provide solutions and approvals to the sector and contribute in ease of doing regulations and laws, leverage on incentives etc.

‘Make in India’ initiative brought unprecedented changes in the investment landscape of India.

Multi National Companies are invited and encouraged to contribute in manufacturing sector.

Government has created necessary avenues for making ‘Make in India’ successful and ‘Skill India’ to unleash the true potential of manufacturing sector.

Tax Reforms and Manufacturing Sector

Public policy and its implications have tremendous impacts on our economic growth and social development.

To match with the pressing needs, government has initiated a series of tax reforms like tax concessions, tax reduction, tax holidays, simplifying tax formalities and ease of legal frameworks to facilitate faster economic development.

Tax reforms can be considered as efficient, when they result in enhancing the tax revenue with positive spill over effect in terms of accelerating productions, increasing employment and enhancing skills for job creation.

Reforms must address twin objectives namely, ‘feasibility in implementations and sustainable in revenue generation’.

To rejuvenate the manufacturing sector, tax incentives need to be provided to the manufacturing units in general and sector specific in particular.

Tax Reforms and Incentives

Unified tax code will bring down the cost and price especially in the manufacturing sector benefiting both producer and consumer. This will help in curbing inflationary situation and will improve profitability in the manufacturing sector.



GST will break the inter-state barriers across the states and will develop a common national market making the manufacturing sector more competitive in India and world as well.

Government has taken initiatives to create a litigation-free, investors-friendly environment to make India a hub of global manufacturing.

Government has made provisions for start-ups, new manufacturing companies and small sectors with tax deductions.

To reduce cost and improve competitiveness among domestic manufacturing industries, government has reduced custom and excise duties on certain inputs to make ‘Make in India’ scheme attractive along with reinstating the exemption of MAT for non-resident investors.

Conclusion

Manufacturing sector can be strengthened through fiscal interventions like tax concession, tax reduction on the manufacturing process, especially on import of technology and R&D.

Policy paradigm is the need of the hour and the initiatives undertaken by the government depends upon the outcome and their effectiveness rely on how the government monitor and implement the schemes meant for overall development of the nation and manufacturing sector in particular.

Questions

1) It is argued that GST will make manufacturing efficient and boost the ease of doing business. Examine how.

2) Do you think that GST broadens the tax base, sharpen the competitive edge of Indian exports by several tax distortions and create a unified national market by removing inter-state barriers to trade?

3) The process, formation and functioning of the GST Council has been approved by which authority? (a) The Parliament (b) The Union Cabinet (c) Ministry of Finance (d) The President Ans: b As per the amended Constitution, the President, within 60 days of the commencement of Article 279A (1), shall constitute the GST Council. But regarding the approval for its process, formation and functioning, it is the Union Cabinet which is responsible.

4) The Ease of Doing Business Index is released by a. International Monetary Fund b. World bank group c. World economic forum d. International Finance Corporation

Ans: b



GST and the Constitutional Conundrum

Introduction

GST may have one unintended consequence: turning India’s constitution from being described as ‘Federal with a Unitary Bias’ to a ‘Constitution for the Union with a Federal Bias’.

Present situation of states taxation

With VAT states remained staunchly independent in their taxation policy, led by their own fiscal imperatives and VAT was often supplemented by a variety of taxes, leading to India being described as one of the biggest taxed nations.

The ability of raising higher taxes gave states the ability to raise larger resources to address problems unique to them.

Many states had implemented wide ranging social sector reforms on the back of cash generated from its taxation programme.

Even more than states, it would be municipal bodies which could levy many taxes independently.

Changing situation with the introduction of GST

The Mumbai Corporations huge income from Octroi duty will be financially challenged and their power to tax would be virtually decimated with the roll out of GST.

Urban local bodies will have to deal with a huge fiscal gap once local Octroi and other entry taxes are scrapped.

GST effectively transfers the power of taxation to an unelected body.

GST Council takes the power of deciding tax rates from both the union parliament and state legislatures and will be the supreme body in determining tax rates.

State executive and legislature will have little say over what taxes can be raised in their respective states.

Conclusion

The world has not yet totally embraced GST as a panacea for its fiscal ills.

Unites States has not yet agreed to usher in any form of GST. Possibly because of the federal nature of its constitution.

In Canada the provinces have the power over direct taxes, while the federal government has the power to tax indirect taxes, which is why the GST did not entail any impact on the state powers.

It is yet to be seen how the Indian polity will respond to the challenge to the implementation of GST.

Questions

1) Recently, many committees such as GST council, monetary policy committee have been set up to take important decisions concerning Indian economy. Do you think these new institutional arrangements are good for India? Discuss.



2) In the light of the GST Council meeting, critically examine if GST is going to be good for cooperative federalism or not.

3) Will the implementation of GST erode states’ autonomy? Examine the implications of GST for India’s federalism.

4) In the light of GST and Fourteenth Finance Commission, it is said that India is seeing fiscal centralization and fiscal decentralization at the same time. Elaborate. Also examine the opportunities this situation has created.

5) Explain the rationale behind introducing Goods and Services Tax (GST). It is said that GST is good for business but a drawback for federalism. Examine why.

6) A joint sitting of the Parliament CANNOT be convened by the President to pass which of the

following bills? a. Goods and Services Tax Bill b. Bill on ratification of India-Bangladesh Land boundary Agreement c. Both (a) and (b) d. None

Ans: C

7) Which of the following statement about Double Taxation Avoidance Agreement are correct?

a. India recently amended its Double Taxation Avoidance Agreement (DTAA) with Mauritius to

plug certain loopholes.

b. India has DTAAs with more than eighty countries.

c. DTAAs are intended to make a country an attractive investment destination by providing

relief on dual taxation.

d. A large number of foreign institutional investors who trade on the Indian stock markets

operate from Singapore and the second being Mauritius.

1. 1 and 2

2. 2 and 3

3. 1, 3 and 4

4. All of the above

Ans: 4



Facts for Prelims

India climbs steadily in the Global Competitiveness Index (GCI)

According to data released by the World Economic Forum (WEF) India’s ranking in the GCI is 39 among 138 countries.

The 12 pillars underlying GCI include: o Institutions o Infrastructure o Macroeconomic environment o Health and primary education o Higher education and training o Goods market efficiency o Labour market efficiency o Financial market development o Technological readiness o Market size o Business sophistication o Innovation

Venture Capital Funds for Scheduled Caste

Ministry of Social Justice & Empowerment launched the Venture Capital Fund Scheme for Scheduled Castes. 50 SC entrepreneurs have till now benefitted from the scheme. It has helped in achieving economic empowerment.

The objectives of the Venture Fund are as follows: o It is a Social Sector Initiative to be implemented nationally in order to promote

entrepreneurship amongst the SCs who are oriented towards innovation and growth technologies

o To provide concessional finance to the SC entrepreneurs, who will create wealth and value for society and at the same time will promote profitable businesses. The assets so created will also create forward/ backward linkage. It will further create chain effect in the locality.

o To increase financial inclusion for SC entrepreneurs and to motivate them for further growth of SC communities.

o To develop SC entrepreneurs economically. o To enhance direct and indirect employment generation for SC population in India

HIMANSH, India’s Remote, High-Altitude Station

To study and quantify the Himalayan glacier responses towards climate change, National Centre for Antarctic and Ocean Research (NCAOR), Goa, under the Ministry of Earth Sciences has established a high altitude research station in Himalaya called HIMANSH.

It is situated above 13,500 ft at a remote region in Spiti, Himachal Pradesh.

Project SAKSHAM

‘Project SAKSHAM’ is a new Indirect tax network of the Central Board of Excise and Customs (CBEC) pertaining to systems integration.



The project is expected to help in the implementation of GST, extension of the Indian Customs Single Window Interface for Facilitating Trade (SWIFT) and will also facilitate taxpayer-friendly initiatives under Digital India and Ease of Doing Business of CBEC.

Questions

1) In which of the following ways will the execution of ‘Project SAKSHAM’ help? (a) Implementation of the Goods and Services Tax. (b) Enabling Nigerian officers to become effective and competent in counter-terror operations. (c) Revival of sick Central Public Sector Enterprises. (d) Improve India’s ranking in the ‘Global Competitiveness Index’ within the next 2 years so as to find itself in the top ten. Ans: a

2) Which of the following statements are correct? 1. National Centre for Antarctic and Ocean Research (NCAOR), Goa, under the Ministry of

Earth Sciences has established a high altitude research station in Himalaya called HIMANSH 2. HIMANSH is situated above 13,500 ft (> 4000 m) at a remote region in Spiti, Himachal

Pradesh. a. 1 only b. 2 only c. Both 1 and 2 d. Neither 1 nor 2

Ans: c

3) Which of the following statements about Venture Capital Fund for Scheduled Castes are Incorrect?

1. It is a Social Sector Initiative to be implemented nationally in order to promote entrepreneurship amongst the SCs

2. It enhances direct and indirect employment generation for SC population in India. 3. While selecting the SC entrepreneurs, women SC entrepreneurs would be preferred.

a. 1 only b. 1 and 2 c. All of the above d. None of the above

Ans: d

North East Diary

North-East states as ‘Priority States’ for PMUY

Ministry of Petroleum and Natural Gas will extend the benefits under Pradhan Mantri Ujjwala Yojana to the people of all Hilly States including North-East states by treating them as ‘Priority States’ and release LPG connections to the eligible beneficiaries.

This measure will help to tackle the difficulties faced by poor in accessing LPG.

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