A brief of newspaper articles for the day bearing
relevance to Civil Services preparation
National
[1]. Tax on seed funding to be scrapped
Context:-
The government has decided to scrap a tax on seed funding provided to start-ups by Indian angel investors.
What is Seed Funding?
Seed capital often comes from the company founders’ personal assets or from friends and family. The amount of money is usually relatively small because the business is still in the idea or conceptual stage. Such a venture is generally at a pre-revenue stage and seed capital is needed for research & development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of venture capitalists.
Current tax provision:-
The tax provision in question treats funds given by domestic angel investors to start ups as income. This makes India the only country in the world to penalise local angel investors in such a manner.
The tax takes away roughly 30 per cent of the investment from the start-up’s cash flow.
Deterring local investors:-
This tax applies only to domestic investors and thus acts as a disincentive to local funding for start-ups that the government wants to incentivise instead.
It is one of the key reasons that 90 per cent of Indian start-ups are financed by foreign venture capital and angel funds.
Government has decided to iron out many of the regulatory issues that are deterring access to finance for start-ups and forcing them to look overseas for funding.
[2]. Making commercial courts work
Context:-
The article highlights the challenges of the new commercial court systems that seeks to expedite settlement of commercial disputes and improve ease of doing business
Its success is critically dependent on how well the states respond to the need for setting up new courts and divisions. Also the financial threshold is considered too low for such cases.
The law:-
The framework for these courts has been laid down under the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015.
These courts would be equivalent to the district courts and serve as the courts of original jurisdiction for all commercial disputes.
For the high courts of Bombay, Delhi, Calcutta, Himachal and Madras, which are vested with original jurisdiction for commercial disputes over a certain value, the new law contemplates the setting up of a special commercial division to exercise such jurisdiction.
This has the effect of streamlining the dispute resolution process as well as cutting down the time for which a dispute may be pending in the system
Challenges:-
Low pecuniary threshold:-
Law commission suggest that rather than increasing the burden of the courts, the focus should be on reducing the number of cases by increasing the pecuniary jurisdictional threshold of civil suits in such high courts.
The pecuniary threshold of Rs 1 crore is considered too low.
Infrastructure:
Implementation will remain a challenge, as right amount of infrastructure will be required to back up the intent and to ensure that the timelines as provided for are adhered to.
The statute itself does not provide for any specific financial allocation for setting up of these courts, it puts the onus on the state governments
Huge coverage area
It covers just about everything.
The law lists some 20 areas ranging from carriage of goods to intellectual property rights that could produce ‘commercial disputes’ that come under the ambit of commercial courts.
Accepting global practices:-
A key challenge is acceptance and adoption of the new regime and global practices introduced by all the stakeholders including the judiciary and lawyers.
As there are new processes and cost regime being introduced, it is crucial that all stakeholders quickly understand and implement the law, in letter and spirit.
Economic Digest
[1]. Gains and Pains of Digital Transformation
Context:-
The article speaks about how companies are undergoing rapid digital transformation to stay competitive and the challenges they face.
Digital era:-
A positive correlation between business performance and the emerging technologies is seen and hence companies are fast-forwarding to digital transformation.
Digital transformation is about integrating platforms and departments to get a unified experience.
The customer now wants everything quick, flexible, scalable, and as much as possible on fingertips.
Apps are being created for specific tasks that would otherwise take a long time to punch in if one has to follow traditional methods of accessing company’s intranet.
Challenges:-
Partially integrated:-
Most companies say their digital processes are only partially integrated with their traditional business functions, and very few claim to be able to present a seamless customer experience across channels. A big challenge is the change in the IT customer who is now behaving like a consumer.
Infrastructural issues:-
Though cloud is perceived as a panacea for many infrastructural issues, moving on-premise data is easier said than done. There is also the problem of awareness, especially among established old economy enterprises.
Public cloud also comes with issues of security and policies regarding backing up of data.
Keeping updated:-
Since technology now becomes faster than ever before, companies have to scout for fresh talent. Often there aren’t programmers with required knowledge base. Coupled with this is the need to re-skill existing employees.
Shrinking average age of companies:-
Companies are fast-forwarding to new technologies, often fearing competition.
In the 1950s the average age of a company in the Standard & Poor’s index was about 60 years.
It’s trending towards 15 years now, and we think it’s going to be about 12 years by 2020. Digital Darwinism is unkind to those who wait.
[2]. Mandating CSR spending won’t help
Context:-
The article highlights the limited utility of corporate social responsibility act as a means of promoting awareness of social responsibility in the corporate world.
Misunderstanding corporate activity:-
The inclusion of CSR spending in the Companies Act suggests a basic misunderstanding of the role of corporate activity in an economy.
Corporate activity cannot be a substitute or proxy for the government in enhancing human development indicators. One obvious reason is scale: No company, no matter how large and open-handed, can match the spread or penetration of a government – particularly in India.
For the most part, large manufacturing companies tend to confine their CSR activities to the ambit of their operations. Many others tend to view them from an amoral image-building perspective and shape their CSR programmes to a specific corporate message.
It is also telling that many of India’s largest corporate philanthropists have spent appreciably less on CSR in this year of slowdown, with the honourable exception of Azim Premji.
Conclusion:-
Mandating CSR spending is an inadequate answer to what are deeper structural problems concerning policy choices. In the long run, shaping constructive regulation, durable institutions and sensible policy frameworks are a far better way of improving India’s social indicators than any amount of corporate spending.
Opinions & Editorials
[1]. Playing games with the taxman
Context:-
According to the latest report on illicit financial flows (IFFs), released last month by Global Financial Integrity (GFI) $510 billion of black money flowed out of India from 2004 to 2013.
These did not include or cover misinvoicing of trade in services, cash transactions, and hawala transactions. If we took into account all those, the total outflow would be much higher.
Transfer Pricing:-
A single group of companies with 500 subsidiaries is assumed to consist of 500 independent taxable entities in diverse locations. This leaves plenty of scope for profit shifting and tax games.
The most popular mechanism for shifting profits is transfer pricing.
For IT giants such as Google or Microsoft which are engaged in services, transfer pricing takes the form of a licensing fee or a royalty payment or interest paid by a subsidiary to a parent company located offshore. These payments are then treated as a cost in the jurisdiction where revenues are being generated, thereby slashing profits.
Tax havens:-
Transfer pricing channels a subsidiary’s profits through a cascade of companies incorporated in different jurisdictions, to eventual safety in a tax haven. Google has used Bermuda. Amazon uses Luxembourg. Microsoft uses Bermuda. Pepsi uses Mauritius. Pfizer uses Cayman Islands. The list could be expanded to include nearly every Fortune 500 company. But here’s the thing: it’s all legal.
Lethal combination:-
This lethal combination of transfer pricing and tax havens makes it impossible to curb illicit capital flows, even as more and more economies confront rising public debt.
The problem is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.
The Goods and Services Tax — a hard-to-evade indirect tax that would squeeze the salaried classes and local small and medium enterprises — to make up for the billions of dollars of direct tax revenue that the state is either unable or unwilling to collect from treaty-shopping MNEs.
MNE’s Domination:-
With global trade being dominated by MNEs, it was found necessary to put in place a tax regime that ensured revenue for every country while avoiding double taxation. Two model tax treaties were developed, one by the United Nations, and another by the OECD.
UN Model:-
The UN model favoured taxing income at the ‘source country’ — that is, wherever the income-generating economic activity took place, regardless of the residence of the enterprise’s owners.
This was good for developing countries which, for years, had allowed their natural resources to be extracted by foreign capital, only to see the profits flow to offshore entities without doing much to enrich the local population.
OECD Model:-
In the OECD model, residents of a country would be taxed on their worldwide income, while non-residents would be taxed only on their domestic income.
It is residence taxation that has become predominant in tax treaties, for it suits the MNEs very well.
The MNEs end up paying little tax in their own residence jurisdiction, since the bulk of their revenue is generated overseas.
As for the countries where they actually make their money, there too they avoid paying income tax as they are non-residents and so are not eligible to be taxed anyway.
It is this discrepancy of double tax avoidance that’s been at the heart of most disputes between Indian taxmen and foreign MNEs( Nokia and Vodafone cases).
Seeking FDI:-
India, in its Double Taxation Avoidance Agreements, has opted for a predominantly OECD model, which means that the FDI will pay very little or no tax in India on the income it generates from India.
The Finance Bill 2015’s much talked about Place of Effective Management, which is essentially a residence taxation concept assuring investors that such controversies will not arise.
Conclusion:-
A saner approach would have been to simply link taxation to sales and assets in India rather than the (putative) residence of ‘effective’ management.
Curbing illicit capital flight ought to be a higher priority than courting foreign capital.
It is more sensible to try and get your hands on money that’s already rightfully yours than trying to get others to part with theirs for your development.
[2]. Widening the net beyond the income norm
Context:-
As per the official press release, subsidy would not be available for domestic LPG consumers, if the consumer or his/her spouse had taxable income of more than Rs. 10 lakh for the previous financial year.
Reforming LPG Subsidy:-
Direct cash transfer:-
The roll-out of the modified Direct Benefit Transfer for LPG (DBTL) scheme (also known as PAHAL) was launched with the objective to prevent diversion of subsidised LPG, by transferring the subsidy amount directly in the bank accounts of the consumers.
It has become the world’s largest cash transfer scheme and has significantly reduced subsidy leakage towards non-domestic uses.
Give it up campaign:-
The government then launched the ‘Give It Up’ scheme which was aimed at urging well-to-do households, who can easily afford LPG at market price, to give up LPG subsidy, in order to extend the subsidy benefits to poorer households, without increasing the fiscal burden.
As a result of an intensive awareness campaign, nearly 57 lakh beneficiaries have voluntarily given up their LPG subsidy. Even though this is a significant achievement, it represents a mere 3.6 per cent of the active consumer base.
Excluding well to do households:-
At present the rich households account for 25 per cent of the active consumer base. Studies also highlights that the richest 10 per cent households in India corner 22 per cent of LPG subsidy, while the bottom 50 per cent households together receive only 30 per cent of LPG subsidy.
Thus, the government’s move to target beneficiaries by excluding well-to-do households from the subsidy net is well-founded and timely.
Challenges:-
Self Declaration:-
The government has planned to use taxable income (greater than Rs. 10 lakh per annum) as the basis for exclusion and self-declaration of income as the means for identification.
Though self-declaration is a useful form of policy ‘nudge’, the success relies entirely on the integrity of the respondent.
Individual income rather than household income:-
Even though the LPG subsidy is given on a household basis, the announcement suggests that the income threshold is applicable to individual incomes and not that of the entire household.
Benefitting tax evaders:-
Less than 3 per cent of India’s population pays income tax and a significant proportion under-reports taxable income. Thus, exclusion based on reported income alone would be indirectly benefiting the tax evaders.
Suggestions to improvise:-
Using PAN:-
The government should consider enforcing the scheme by linking LPG consumer data with the PAN number.
Multiple Criteria:-
It would be more practical and efficient to exclude households based on multiple criteria, simultaneously. One such criterion could be asset-ownership of high-end consumer durables.
This will capture the material status (wealth) of households than only relying on reported income, particularly in a country where the informal economy is as big as or larger than the formal economy.
Car ownership can be an effective criterion for identifying well-to-do households. It could be achieved by using the national vehicle registration database maintained by Ministry of Road Transport and Highways. However, this database would need streamlining to enable a direct mapping with the LPG consumer database.
Similarly, simultaneous ownership of a refrigerator and an air conditioner, or ownership of multiple air conditioners, could serve as another criterion to identify well-to-do households
Each criterion has its limitation when applied standalone. However, a combination of criteria such as taxable income and ownership of high-end assets, along with a robust database and stringent enforcement mechanism, would help identify and exclude well-to-do households from LPG subsidy effectively.
[3]. Speaking of Science
Context:-
This year’s congress at Mysore University has attracted criticisms for a presentation positing that Shiva was an ecological pioneer.
Purpose of ISC:-
It was the mandate of the ISC, an early attempt at cross-disciplinary academics, to draw multiple threads of science and mathematics together.
At the ISC, it is more important for specialists to collaborate across specialisations to evolve a general direction for Indian science, and to communicate it to the media and the public
Cost benefit analysis for researches:-
Government declared that within two years, all labs under the Council of Scientific and Industrial Research would attempt to become self-financing, and would focus on research for national missions like Swachh Bharat and Skill India.
Cost-benefit analyses and the social benefits of research would matter. Such a policy would immediately value applied science over fundamental research, from which everything springs, and which has traditionally been funded by governments in scientifically capable countries.
Criticisms:-
What is the cost-benefit analysis of the Higgs boson? What is the social benefit of ribosomal research, for which Ramakrishnan won a Nobel? To clarify its mind, the government only needs to ask itself the very simplest questions.
By: ForumIAS Editorial Team
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