Daily Editorial Analysis for 1st July 2021

DAILY EDITORIAL ANALYSIS

(Source: The Hindu, Indian Express, The Economic Times, PIB, etc.)

(1^ST July 2021)

GS PAPER III EDITORIAL

GST is more than just a tax reform

Why in News

• In recent times, the world over, countries have been convulsed by agitations for sub­national autonomy — Scotland from Great Britain, Catalonia from Spain, and Quebec from Canada.
• India has bucked these trends by launching the GST (Goods and Services Tax) in July 2017, in which the Centre and the States voluntarily relinquished their unilateral rights of fiscal sovereignty and opted for an arrangement of pooled sovereignty.
• It was an audacious fiscal arrangement done in the hope that it would strengthen the fiscal capacity of the country.
• After four years of implementation of the GST, it appears that the toxins of transition are slowly yielding to the nectar of greater revenues.
• Fiscal buoyancy has returned largely due to better compliance, facilitated by matching of supplier and buyer invoices and more rigorous rules of granting registrations.
• This has brought down the volume of fraudulent input invoices and enhanced the cash­to-credit ratio in the total duty payable. There is some evidence to show that the traditional 20:80 cash­to­credit ratio may be moving to a level of 25:75.
• This means that we are moving towards a new normal of monthly GST collection of ₹1.25­lakh crore instead of the usual ₹1­lakh crore.
• This buoyancy in GST revenues can be further boosted if the incidence of duty is raised from the current level of 11.8 per cent to 14 per cent which, according to the IMF study cited in the Fifteenth Finance Commission report, would be the revenue neutral rate.
• This requires a slew of policy measures, including rationalization of GST rates and merger of the slabs suggested by the Fifteenth Finance Commission.
• The other measures would include phasing away exemptions and bringing in more excluded items into the GST net like electricity and real estate.

Entry tax, CST

• The integration of State and Central indirect taxes in the GST led to the abolition of entry tax and the Central Sales Tax (CST).
• This has had important spillover effects on the economy. The abolition of entry tax has reduced trip times on the major road corridors leading to cost benefits for the manufacturers.
• A GST impact study conducted by EY­World Bank for the Ministry of Road Transportation and Highways found that due to the removal of commercial tax check­posts by States post implementation of the GST led to the reduction in trip time by around 17.45 per cent.
• Also, phasing away of the CST has led to a major churning in the warehousing sector. Instead of having multiple warehouses in each State to avoid payment of CST through stock transfers, large companies are creating bigger warehouses located either near the production sites or the consumption centre depending on the demands from the sector.
• We are also seeing the phenomena of transport companies morphing into larger logistics players providing a whole range of transportation, storage and distribution services.
• But the impact of GST reform is not only confined to fiscal buoyancy.
• The abolition of entry tax has created a national common market by breaking physical barriers down at State borders.
• Further, the introduction of GST has led to the implementation of destination-based tax in which large poorer consumption States like Bihar and Uttar Pradesh are likely to benefit, resulting in greater fiscal equity.
• Finally, we have also been able to create a truly federal institution in the form of a GST Council where States and Centre participate in joint indirect policymaking.
• This experiment can be replicated in other sectors like health, agriculture and transportation and will enrich policymaking.

Tax administration

• In order to further capitalize on the gains of the GST reforms, the States need to restructure their tax administration around key business processes, namely, ‘registration’, ‘return filing’, ‘payment of duty’, compliance verification, dispute resolution, and so on.
• The administrative arrangements for compliance verification must critically distinguish between the three prongs of compliance verification system, namely, ‘return scrutiny’, ‘audit’ and ‘intelligence-based investigations.
• There is also the need for the States and the Centre to collaborate in capacity building of officers, especially in the areas of services taxation where the States require more hand­holding.

Conclusion

• The GST reform has had an impact going well beyond fiscal buoyancy and extending into the political economy. In the GST journey, we have created an enduring institution like the GST Council.
• We can create similar institutional forums for Centre State dialogue, realising the goal of cooperative federalism envisioned by our Constitution makers.

GS PAPER III

Securing energy needs

Why in News

• India’s growing economy is the third largest consumer, and the second largest importer, of oil globally, importing 80 per cent of its needs.
• Prior to the pandemic, India imported nearly 1.5 billion barrels of oil annually. While India’s oil consumption (and imports) fell during 2020­21 due to the pandemic, both are likely to resume its upward trajectory as the economy opens up.
• Given the high dependence on imported oil, the ongoing spike in oil prices, currently over $70 per barrel, is a cause for concern.
• To secure its energy source, India can invest in overseas oil and gas fields. In the past, PSUs such as ONGC, Bharat Petroleum and Indian Oil invested in a number of oil and gas assets in Russia, Mozambique, Vietnam, Colombia, Venezuela, and Sudan.
• It is high time to shift course to safe sites in developed countries, and in particular oil­rich Organisation for Economic Cooperation and Development (OECD) countries like Canada, Norway and the US.
• So far, India has avoided these destinations because of the high valuations of their oil and gas assets. But India may be missing out on a boom.
• From 2009 to 2019, the maximum new oil production was not in Saudi Arabia or Venezuela or Nigeria but the US and Canada.
• India has a wide choice of OECD members to invest in, those which have significant scope for export of oil
• and gas — the US, Canada, Norway, Australia, and Israel.
• Traditionally, Indian investments have been done through (a) PSUs which have (b) acquired direct stakes in assets. This was an acceptable government­to­government engagement in emerging markets such as Russia, where the state has a major role.
• However, the US and Canada have both placed restrictions on significant acquisitions by state-owned companies.
• So, instead of acquiring and managing oil and gas assets directly, India can take a minority shareholding position in such companies.
• During rising oil prices, the increased dividend payout will partly offset the burden of high prices. Second, these investments need not be made only by PSUs; they can be made via a sovereign wealth fund (SWF) just as Singapore’s Tamasek does.

Sovereign wealth fund path

• As financial investors rather than acquirers, SWFs face fewer restrictions than do state-owned companies. Financial investors from all the five developing nations, including pension funds and SWFs, are already invested heavily in India.
• Reciprocal investments from India into these countries will be welcomed. These OECD countries routinely top the list of most transparent/least corrupt nations globally and offer a safe investment avenue for India.
• This is an opportune time for India to establish an SWF. Oil rich countries like Norway, the UAE, Kuwait and others set up SWFs to cushion against low oil prices. India is in exactly the opposite situation; low oil prices are good but high prices hurt.
• An SWF to cushion against high oil prices is in order. The energy world has seen multiple upheavals in the past decade. In the past, India was a marginal player in the global energy market and was hurt by sharp price fluctuations.

Conclusion

• India must use the current window of moderate oil prices to reduce its vulnerability to price fluctuations and unfavourable geopolitical developments.
• It is imperative to take a broader approach than that allowed in the past, choosing a new type of investment — financial rather than physical — and targeting OECD rather than emerging markets.