India-EU trade and investment agreements – The way forward

India, EU, European Union

There is a sense of déjà vu in the air. Of times not too far back, in 2019, when there were passionate debates about the pros and cons of free trade agreements in the context of the ongoing Regional Comprehensive Economic Partnership (RCEP) talks. Of whether India should or should not. Till finally and dramatically, India on the occasion of the signing ceremony of the mega-free trade agreement stepped back.

The trigger now is the recently concluded India-EU Leaders meeting when amongst other things the leaders “welcomed the decision to resume negotiations for balanced and comprehensive free trade and investment agreements.”

There is a commitment to achieve the early conclusion of both the agreements together. And a belief that this “will enable the two sides to realize the full potential of the economic partnership.” The focus of this article is on the proposed free trade agreement.

EU is an important trading partner of India. More than 11 percent of India’s trade is with the EU — 14 percent of India’s exports go to the EU.

A whole range of products is exported from India. Textile articles, engineering goods, pharmaceuticals, ceramics, granite slabs and marble, footwear, machinery parts, rice, tea and coffee being the more important exported goods. The belief is that a free trade agreement will increase trade furthermore specifically exports.

Free Trade agreements involve both reductions in tariffs and easing non-tariff barriers (NTB). All countries resort to NTBs, as a means of ensuring the goods meet the regulatory requirements of that country. And also as a means of controlling trade.

Free trade agreements when entered between developed economies and developing economies generally work to the advantage of the former. India’s FTA’s with Sri Lanka and SAARC are a case in point. And the converse is true, as in India’s FTA with ASEAN where the trade deficit is in excess of $22 billion.

The only detailed study in the public domain about the efficacy of India’s free trade agreements (A Note on Free Trade Agreements and their Costs) by NITI Aayog has pointed out that India’s exports to FTA countries have not outperformed overall export growth or exports to the rest of the world.

Only about 22 percent of exports are to the FTA partner countries. So, while undoubtedly exports are essential and necessary, FTAs have not entirely served that purpose.

On the contrary, imports through the FTA route have increased. Nearly 30-35 percent of all imports are from FTA partners with a corresponding cost in terms of the estimated revenue impact being Rs.65,000 crore for 2019-20.

This, apart from the damage that imports at preferential rates of duty had caused to the domestic industry. The Government had also appointed experts to study separately the impact of Free Trade Agreements on goods and services, these reports are not in the public domain.

We need to keep this background in mind while we proceed to engage in negotiations for our 17th Free Trade Agreement. The negotiations for the India -EU trade and investment agreement had commenced in 2007. The last round of discussions was held in 2013. Obviously the ‘gaps in the level of ambition of India and EU’ stalled progress.

Tariff barriers are not a barrier in exporting to the EU; we would have to reduce our tariffs a lot more. The margin of preference (the difference between the most-favoured-nation rate of duty (the import duty rate which is applied to all countries) and the preferential rate of duty), which EU imports into India would enjoy would be much more.

This brings us to the key issue: How does India capitalise on a free trade agreement? Or to put it differently, how do we make our exports competitive?

The high cost of production makes exports uncompetitive. It is essential that we focus on improving our domestic manufacturing. With easier credit, improved logistics, better infrastructure, emphasis on quality and creating a competitive environment, domestic manufacturing will improve.

Exports will follow. But it is essential that exporters are supported. The Remission scheme (RoDTEP) announced in 2020 to obviate unreimbursed costs to exporters is yet to see the light of the day.

India’s exporters will need to adapt to the demands of the sophisticated EU market. EU has in the form of specifying standards in effect created multiple NTB’s.

As the report ‘2020 National Trade Estimate on Foreign Trade Barriers’ of the United States Trade Representative brings out starkly there is no shortage of trade barriers erected by the EU:

  • An average MFN rate of 5.2 percent ( agricultural products at an average of 12 percent and 4.2 percent for non-agricultural products ),
  • the non-tariff barriers range from special measures for pharmaceutical products,
  • transfer pricing issues,
  • a special Meursing table tariff code, (EU charges a tariff based on the content of milk, sugar, protein for confectionary/baked products)
  • sanitary and phytosanitary barriers,
  • restrictions on import of chemicals and renewable fuels,
  • quality schemes for agricultural products,
  • government procurement policies that permit member states to reject bids with less than 50 percent EU content,
  • various barriers restricting services, including, digital trade and electronic commerce,
  • investment barriers.

While the report is in the context of exports from the USA, they would be similar if not more for the Indian exports. These are the challenges India negotiators will need to be very conscious about.

It is paramount that the lessons learnt in the previous FTA negotiations are not lost. Institutional memory has never been our strong point.

But the RCEP negotiations got over not too far back and could be a useful starting point. It is essential that Industry, Chambers of Commerce, Export Promotion Councils are taken into confidence and their concerns addressed.

We should never overlook the fact that India offers a significant market to the EU. At 446 million EU’s population is a fraction of our population of 1.40 billion.

Surjit Bhalla in 2019 headed a high-level Advisory Group constituted by the Ministry of Commerce and Industry for boosting India’s share and importance in global merchandise and services trade. Its aim was to increase exports from $500 billion in 2018 to $1000 billion by 2025. The group had made several important recommendations.

The report, had among other things, emphasised the need for strengthening the EXIM bank, using data analytics to build an export strategy, optimising FTA negotiations and usage. It also highlighted the need for sectoral analysis to assess the price competitiveness of Indian products and to involve industry in the process of negotiations.

We would be well advised to act on them if we are to make a success of the India-EU agreement.

— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal
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Global minimum tax – a welcome development

When Justice Oliver Wendell Homes in a dissenting 1927 US Supreme Court judgement stated that taxes are what we pay for a civilised society, he was stating truism-the money collected from taxes pays for the development of a country, for providing essential services to its citizens. Any government expects its citizens, as also the corporates, to pay taxes due. While governments had reasonably effective enforcement machinery to ensure their citizens did pay their taxes, the challenge was in ensuring that corporates, particularly, multinational enterprises, did pay what was due.

The G20 countries, an informal grouping of 19 countries and the European Union, which accounts for two-thirds of the global population, and the Organization for Economic Cooperation and Development (OECD) had in this backdrop, suggested an inclusive Framework on Base Erosion and Profit Shifting (BEPS) project, which targeted tax-planning strategies that sought to shift profits to low tax jurisdictions. These tax planning strategies relied ‘on mismatches and gaps that exist between the tax rules of different jurisdictions, to minimise the corporation tax that is payable overall, by either making tax profits “disappear” or shift profits to low tax operations where their little or no genuine activity. The BEPS reports released in 2015 were aimed at improving the ‘coherence, substance and transparency of the international tax system’.

Base erosion as has been pointed out constitutes a serious risk to sovereignty, tax fairness, and tax revenues for both developed and developing countries alike. For instance, Tax Justice Network, a UK-based organisation has estimated that India lost each year to tax havens a whopping $10 billion.

India ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – and deposited the Instrument of Ratification to OECD, Paris under the Convention. These have entered into force for India on October 1, 2019, and its provisions on India’s DTAAs from FY 2020-21 onwards.

However, the BEPS project did have very many shortcomings. OECD, released blueprints of proposed solutions to address these challenges – it introduced a two-pillar approach to international tax reform in 2019 to address the digital economy (Pillar One) and unresolved BEPS issues (Pillar Two).

Pillar 1 was aimed to “adhere to the concept of net taxation of income, avoid double taxation, and be as simple and administrable as possible.” In simple terms, the OECD did agree to the concerns of governments that companies were not paying enough tax in jurisdictions where they had ‘market-facing’ activities.

Pillar 2 sought to give governments the “right to ‘tax back’ where other jurisdictions had not exercised their primary taxing rights, or the payment was otherwise subject to low levels of effective taxation.” Essentially, Pillar 2 sought to establish a minimum level of taxation on multinational companies doing business around the world; and if companies fell below those thresholds, they would owe additional tax. Pillar 2 required companies to “top up” the tax paid to bring the amount to a minimum effective tax rate.

OECD Pillar 2 was to apply after Pillar 1, rather than concurrently. Companies would first allocate the tax due to jurisdictions where they generate revenue under Pillar 1; then, if they were still below the minimum effective tax rate, Pillar 2 guidelines would be applied.

The OECD proposals got a push when US President Joe Biden came to power leading to what UK Chancellor Sunak termed as ‘seismic tax reforms. The historic G7 Finance Ministers communique of June 5th committed to the principal design elements of the OECD’s two-pillar approach for international tax reform. This includes a commitment to introduce a global minimum tax of at least 15 percent on a country-by-country basis. The agreement will now be discussed in further detail at the G20 meeting in July.

The brilliant French Economist Gabriel Zucman, (a protégé of Thomas Picketty) known for his research on tax planning and tax havens and at the forefront of the fight to bring multinationals within tax jurisdictions, has estimated that the redistribution of profits from high tax countries to tax havens or lesser tax countries has resulted in around 40 percent of profits having shifted. The resultant loss was said to be in the range of $620 billion in 2015. This he has pointed out, has resulted in headline economic indicators -like GDP, trade balance, getting distorted.

Thus, the G7 decision is a huge step forward and will reduce tax rate arbitrage. Concerns have been raised that the proposal impinges on a nation’s right to decide on tax policy; that taxation is a sovereign policy determined by local factors and whether it would in any way tackle tax evasion. This is a myopic view-no country in this globalised interconnected world would like to facilitate corporate tax planning bordering on the illegal.

India has in 2019 reduced its corporate tax rate to 22 percent for domestic companies and 15 percent for new manufacturing companies. However, its large domestic market size should continue to attract global players. There has been no official government reaction thus far. India which is a member of the G20 will be watching these developments closely.

The global minimum tax should in the words of US Treasury Secretary Janet Yellen “end the race to the bottom in corporate taxation”. Nothing can be better.

— Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

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43rd GST Council meet: Hits and misses

The long-awaited, much delayed 43rd GST Council meeting is finally over. Coming in the backdrop of a horrific increase in COVID infections and deaths, a shortage of medical essentials, the medical infrastructure stretched, all of which had a debilitating impact on the economy, there was a lot of expectation riding on the outcome of this meeting.

There was a consistent demand from the states to exempt all COVID-related equipment and medications as a possible measure towards effectively combating the pandemic. The demands came from across the political spectrum-but more vehemently voiced by the opposition ruled States, making what was a fairly reasonable ask, into a political issue. The FM reacting a few days before the meeting, through a series of 16 tweets (to overcome the 280-character limit) listed out the items already exempted from both basic customs duty and IGST, all of which incidentally were subject to conditions, and to further elaborate that exemption was a bad idea since the taxes paid on inputs would stick to the final product and increase costs.

The FM also highlighted the fact that out of every Rs 100 collected, the state’s share was Rs. 70.50. Newspaper reports also suggested that the Fitment Committees, which consists of officers drawn from the Centre and States, had also not recommended any such exemption. So, it was evident that the GST council meeting convened in the dire backdrop would be a contentious affair.

The Council meeting on May 28 has recommended that IGST exemption on a host of commodities such as medical oxygen, oxygen concentrators and other oxygen and transportation equipment and COVID vaccines be extended even if imported on payment basis (as against the previous condition that the import should be free of cost) for donating to the government. The exemption would thus be from both basic Customs duty and IGST till 31.8.21, extended from the present 30th June. This, in effect, means a relaxation of the condition and an extension of 3 months from the present position. A new drug for the treatment of Black Fungus has been added to this list.

Regarding the issue of extending the items for exemption, the Council decided to constitute a Group of Ministers ‘to go into the need for further relief to COVID-19 related individual items immediately ‘. The GOM is to be headed by the Chief Minister of Meghalaya, a Wharton graduate, but perhaps it would have been more appropriate if a minister from a bigger state like Karnataka or Gujarat had been tasked to head this committee. The GOM is to submit its report by 08.06.2021. Its recommendations would need the endorsement of the GST Council for the Central Government to thereafter issue the necessary notifications.

The argument given that exemption adds to costs since the taxes paid on inputs sticks to the final products is valid. There is no gainsaying denying the fact that exemptions in a value-added taxation scheme are never good. They militate against the concept of a VAT. But given the sheer number of exemptions that dot the CGST and IGST tariff, this is not a convincing argument, especially in the present time. There were requests by some states for zero-rating, which in simple terms means the entire value chain of the supply is exempt from tax. The law as it stands today permits zero-rating in very limited specific situations and would require a major amendment. The decision to constitute a GOM to examine extending the exemption to other individual items would mean an anxious wait for many.

The need is now and would have cost the Government very little in terms of revenue but would been a huge step forward in regaining the trust of the States.

The Finance Secretary in the press conference while explaining why exemptions were not considered raised the issue that the benefit of such exemptions would not reach the intended recipient since in the hands of a private hospital the patient would be charged. Here too the State governments are equipped under the powers vested under the Disaster Management Act to enforce discipline in the private hospital space. They could have been suitably advised to do so. These gestures would have been small but would have had a huge impact. This was an opportunity missed in building bridges with the States. And so, very promptly after the Council meeting, we had the sight of some opposition ministers accusing the Central Government of lack of ‘compassion’.

‘Compassion’, as has been mentioned by one commentator, has been shown in extension of timelines for filing returns, to the small taxpayers (under Rs 5 crore), in the capping of late fee for pending returns, and some beneficial dispensation for the larger taxpayer. This would reduce compliance burdens. Some other simplification measures have also been recommended by the Council as also reduction of/exemption from, liability on supply of certain services -services supplied to an educational institution, for the conduct of examinations by the National Board of Examination, extension of maintenance, repair, operation (MRO) facility as available to the aviation sector to the shipping industry also.

The one real positive was the forthright mention in the press conference (not mentioned strangely in the press release though) that the Central Government would stand by its commitment to meet the GST compensation shortfall. This is one major bone of contention less. The compensation shortfall has been estimated to be around Rs.1.58 lakh crore- the amount dependent upon the revenue collection going forward in 2021-22. The FM also mentioned that a special Council meeting would be called to discuss the issue of extending the 5-year limit of compensation. This too is a welcome measure. And should a consensus emerge for an extension of the compensation timelines, the opportunity should also be used to examine if the very high 14% rate to calculate compensation should continue. The States should be persuaded to accept a more realistic 10-12%. There would be an argument that given the present fiscal position this may perhaps not be the right time -but this is an issue for which they can never be the right time.

All in all, an opportunity was missed to address several concerns-and more importantly in reducing the trust deficit. The GST Council is too important an institution to be reduced to a political football. While it is ‘not the end of the road for India’s GST ‘as some political commentators have claimed, the fact remains that the Council needs careful nurturing-and the ball is firmly in the Centre’s court.

—Najib Shah is retd. Chairman of Central Board of Indirect Taxes and Customs. The views are personal.

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Intellectual property rights and vaccine production

The United States’ agreement to support the proposal moved by India and South Africa to waive patent rights is a testimony to the diplomatic skills of the representatives of the two countries who worked in tandem.

This proposal was pending in the Council for Trade-Related Aspects of Intellectual Property Rights of the World Trade Organization (WTO) since October 2020. Despite support from more than 100 developing and least developed countries, the proposal was not progressing because of opposition from the US and Europe.

The US nod is the first step in what is going to be a long journey to eventually get the waiver, which should ramp production of desperately needed vaccines.

However, it is necessary at the outset to establish the relationship between Intellectual Property (IP) and trade. Unlike most other aspects of the Uruguay round agreements, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) is not a subject covered in GATT 1947.

This was pushed by the US, the logic being that piracy, counterfeiting and infringement of IP rights hurt trade; the availability of such tainted goods being a barrier to genuine trade. The other argument was that innovation and inventions cost money and effort and the incentives will go away if inventors do not get to enjoy their profits.

Thus, TRIPS became part of the WTO in 1995 despite the presence of the World Intellectual Property Organization (WIPO), a specialized agency set up in 1967 to promote the protection of intellectual property. This was primarily because WIPO does not have any enforcement powers while the WTO through the dispute settlement mechanism has.

A patent confers a statutory privilege granted by the government ‘to inventors and to persons deriving their rights from the inventor’, for a fixed period. Such a right thus effectively excludes other persons from manufacturing or selling a patented product or process.

A patent holder can utilize the Patent Cooperation Treaty route to file for patent protection in multiple countries by one application. The TRIPS Agreement establishes rights and obligations between WTO members.

This is why a waiver of patent rights was sought. The communication from India and South Africa to the WTO makes a powerful case and spells out the exceptional circumstances under which the waiver is being sought.

The outbreak of the devastating pandemic needed an effective response, including access to affordable medical products as the sharp increase in demand lead to shortages. The reports of intellectual property right holders hindering or potentially hindering timely provisioning of affordable medical products, needed global solidarity. And hence, the request for a waiver from the ‘implementation, application and enforcement of Sections 1,4,5 and 7 of Part II of the TRIPS Agreement became important.

The communication for waiver will require a consensus among the 164 members of the WTO to become a reality. Germany has been opposing it as has the EU and Bill Gates. The powerful pharmaceutical lobby led by Pfizer has argued that an IP waiver would not result in an increase in vaccine production, rather it would disrupt the flow of raw materials and hurt innovation and research.

Coming from a company that reportedly is expected to reap revenue in excess of USD 25 billion, these concerns do appear hollow.

The next formal Council for TRIPS meeting is scheduled for June 8, but the waiver process will be long. Given that India has yet to vaccinate a large populace (with an estimated under 10 percent of its population having been vaccinated with one dose and under 3 percent being fully vaccinated), this would mean an anxious wait.

Which brings us to the very puzzling question — why is India not invoking the provisions of the TRIPS and its domestic laws to meet this emergency?

Per the article 27 (2) of TRIPS, WTO members are excluded from patentability, inventions that danger human, animal, or plant life or health or the environment, the only condition being that exclusion ‘must be necessary and not merely because the exclusion is prohibited by their law’.

Article 31 provides for compulsory licensing, which in simple terms is the authorization given by the government to produce the patented product or process without the consent of the patent owner. As has been pointed out, compulsory licensing reflects ‘the Agreement’s overall balance between promoting access to existing drugs and promoting research and development into new drugs’.

The Indian law on the subject, the Patents Act has corresponding provisions (Sections 92 and 100) empowering the government to issue such compulsory licenses in a public health emergency.

Despite the gentle prodding of the Supreme Court to consider invoking these provisions, the Central Government has gone on record to rule out the possibility. It has stated that ‘availability of raw materials and essential inputs is the main constraint’ and that the government is engaged in ‘diplomatic level talks with other countries’ for procurement of vaccines and medicines and that any discussion on the exercise of the powers under the Patents Act ‘can only prove to be counter-productive at this stage’.

As has been pointed this is a strange contradiction – while we are seeking a waiver of the provisions of TRIPS, nothing is stopping us from invoking the other provisions of TRIPS that can address our vaccine crises much faster.

Another possible reason for the reluctance of the developed countries to agree with the waiver is our perceived poor track record in enforcing IP rights. India has a robust National IPR Policy 2016 with the aim to ‘establish an ecosystem in the country conducive to innovation and creativity not only in terms of IP awareness and creation but also commercialization and enforcement’.

Despite good work being done, India figures in the 2019 OECD report on ‘Trends in Trade in Counterfeit and Pirated Goods’ as among the top producers of counterfeit goods.

The 2021 Special 301 Report of the office of the United States Trade Representative places India among the countries for ‘priority watch list’. Obviously, we would need to ensure our IPR enforcement, which is primarily done by the hard-pressed police, improves.

In the meantime, and more urgently we would need to relook at our stand and invoke the available legal options. This will not be the first time a country will be resorting to the compulsory licensing provisions. If not now, then when?  There are too many lives at stake.

—Najib Shah is retd. Chairman of Central Board of Indirect Taxes and Customs. The views are personal.

The exorbitant COVID-19 treatment charges

The second wave of the pandemic is sweeping across the country leaving behind death and suffering in its wake. Most newspapers carry a daily report about the extent of the spread- a ‘Carona meter’ or a ‘carona watch’ which gives the distressing per diem statistics. Statistics of, cases for the day, active cases, deaths and of those who have been fortunate enough to recover. These statistics numb us and hide the pain which several million have undergone as also the trauma which their carers have faced. The statistics hide the challenges the medical infrastructure has faced-they were never designed to handle these numbers nor were they designed to handle a deadly contagious pandemic. These statistics hide the number of families who have to deal with a new grim reality with the death, in very many cases, of the sole earning member; of the huge expense which the patients and their kith and kin have had to bear. And the hefty charges imposed by hospitals for treating the covid afflicted patients.

Health care is a state subject. Government hospitals have been extending free treatment. They are however hugely inadequate-in number of beds, doctors, and other infrastructure. Patients have necessarily to rush to private health care facilities. This is where either the complete lack of insurance cover or the inadequate insurance cover hurts the patients.

India’s insurance penetration is poor. The measure of insurance penetration and density reflects the level of development of the insurance sector. Insurance penetration is measured as a percentage of insurance premium to GDP; insurance density is measured as per capita premium. Insurance penetration in India is under 4-risen from a low of 2.71 percent in 2001. The insurance density itself is in the region of the equivalent of $55-up from a low of $9.1 in 2001.

The reasons for the poor insurance penetration are a combination of poor awareness, poor understanding, and the financial implications of having to take an insurance cover. The Economic Survey 2020-21 has extensively dealt with the issue in the context of the health infrastructure.

Insurance as has been said, is a contract, a legal agreement between an individual and an insurance company under which the insurer promises financial coverage (sum assured) against contingencies for an amount (premium) which the insured has to pay. Health Insurance which falls under the category of General Insurance (as opposed to Life Insurance) promises to cover expenses incurred due to medical care. The insurance cover typically extends to hospitalization, treatment of critical illness, post-hospitalization charges, daycare procedures. The extent of coverage is linked to the amount of premium paid and/or the type of policy the insured has taken from the company.

When the pandemic hit the country, hospitals were swamped with patients. Those were the early days of the pandemic and treatment protocols were getting firmed up. The General Insurance Council (GIC) moved in swiftly in June 2020 and in consultation with ICMR and a NitiAyog Panel suggested the rates that would be applicable for Covid-19 treatment. The rates suggested were representative of the ‘Usual, Customary and Reasonable ‘charges prevalent in the Indian market at that time and designed to ensure that they ‘do not cause hardship to insurance customers.’

The rates on a per diem basis covered type of stay and treatment during hospitalization, the type of hospital and the place-city or district. The rates specified ranging from Rs 10,000 to Rs 18,000 per day, specifically included the cost of PPE’s also, apart from a whole range of activities-from consultation, nursing charges, drugs. The circular is exhaustive and leaves no room for doubt that the Council would like to ensure that patients are not overcharged such that would result in the insurance company rejecting the claim.

Taking a cue from this, almost all State governments recognizing the impact of the pandemic have under the Disaster Management Act announced similar package rates -again depending upon the type of ward, and treatment, with or without ventilators. The rates made a distinction between patients who were covered under an insurance package and those who were not-those not covered under insurance, getting a higher rate. This order for instance in Karnataka applied to all private hospitals operating in the state. The Karnataka State government order also makes explicit that non-compliance with the order would attract punishment under the provisions of the Disaster Management Act and the Indian Penal Code.

Unfortunately, despite these specific instructions, private hospitals across the country are tending to charge far in excess of the prescribed rates. Instances of private hospitals tending to charge nearly 20-30 percent of the total charge of the bill on account of PPE alone have become very common. The insurance companies deny these claims as the GIC guidelines specify the rates which is inclusive of the PPE’s. Thus, there are instances of hospital bills of Rs 1.2 lakh being settled by the insurance company for as low as Rs 60,000; of hospital charging in excess of Rs 4-6 lakhs and claims being settled for far less. This is cruel in these difficult times.

There is an urgent need for the State authorities to step in and ensure the hospitals do not charge exorbitantly. The State Governments need to invoke the provisions of the Disaster Management Act, under which the notification prescribing rates have been issued, to ensure that delinquent hospitals fall in line.

There is a need for a well-informed regulator for the private hospitals to examine if the hospitals are justified in charging the rates that they do. And if so, the IRDA and the State authorities need to accordingly revise the rates to reflect the ground reality. In the meantime, the existing guidelines should be enforced strictly so that the patient or their loved ones, already reeling under COVID 19, do not suffer the additional shock of a bill that is beyond, both her means and insurance coverage.

Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

The galloping GST revenue

GST

The GST revenue collection for April 2021, the first month of the new fiscal set a new record. A total of Rs 1,41,384 gross GST revenue was collected, which is by far the highest since the introduction of GST in 2017. The March 2021 collection at Rs 1,23,902 crore being the previous highest.

The PIB release of the Ministry of Finance gushes, ’despite the second wave of COVID-19 Pandemic affecting several parts of the country, Indian Businesses have once again shown remarkable resilience by not only complying with the return requirements but also paying GST dues in a timely manner during the month’. Yes, there is a lot of cause for celebration since it is the seventh successive month that the Rs 1 lakh crore mark has been breached.

April 2021 also witnessed a spurt in merchandise exports to USD 30.21 billion. The increase is to the order of 197 percent when compared to the export figure of April 2020. But this is lesser than the merchandise exports of USD 34.0 billion achieved in the very previous month of March 2021. Imports at USD 45.45 billion also showed an increase of 165.99 percent over imports of April 2020.

India continued to be a net importer with a trade deficit of USD 15.24 billion. The Gross Fixed Capital Formation (GFCF) an important indicator of investment also rose in Q3 2021 to 27.7 percent.

All this would suggest the economy is looking up-but this flies in the face of facts on the ground. The pandemic induced lockdowns in large parts of the country especially critical states like Maharashtra and Karnataka is hurting economic activity.

The eight-core sector output fell sharply by 4.6 percent in February 2021 when compared to the corresponding month of the last year. Coal fell by 4.4 percent, crude oil by 5.2 percent, Natural Gas by 1 percent, refinery products by 10.9 percent, Fertilizers by 3.7  percent, steel by 1.8 percent, cement by 5.5 percent and electricity by 0.2 percent.

All this cumulatively suggests lower power generation, lower demand for infrastructure, lower buoyancy in the industrial sector and a drop in construction activity.

The last quick estimates of Index of Industrial Production (IIP) and use-based index for the month of February 2021, released in mid-April also suggest that the economy is still in the throes of recovery.

The sectoral IIP figures showed a dip in mining and manufacturing; the overall growth having contracted by 3.6 percent. The IIP use based data showed a drop by 3.8 percent. The monthly index of production across the major industrial groups also revealed a dip. NSDL data shows that net FPI flows turned negative in April; the CMIE data reveals a similar negative trend in the current account balance in Q3 2021. The CMIE data also shows a spurt in unemployment.

The last HIS Markit India Services PMI based on data compiled from monthly replies to questionnaires to about 350 private sector service companies showed a decline to 54.6 in March 2021 from 55.3 in the previous month. Any number above 50 is still good and suggests the service sector has done well. The extensive and extended electioneering has seen more footfalls in the long-suffering hospitality and travel sectors.

Anecdotal evidence suggests that several high-end hotels in the states which went in for elections had up to 100 percent occupancy for long periods with a corresponding spurt in the various support services. The IPL caravan too is a major contributor to the service sector.

So, while the breakup of revenue between goods and services is not readily available, it would be safe to surmise that the service sector has contributed significantly to the overall GST revenue. The data available also suggest that substantial revenue has also been collected as IGST on import of goods.

Another possible reason for the increase in GST revenue is of course that overall compliance has indeed improved. This was one of the avowed goals for the introduction of GST. The fact that GSTN has also settled down and is truly acting as a facilitator for hassle-free filing of returns has also played a significant role.

The increase in collections is also a testament to the power of sharing of data across departments that were working in silos till not too far back. The CBDT, MCA, Customs with CBIC and GSTN have established clear protocols for the sharing of data which leads to more informed analysis and targeted action.

And there is also no doubt that the sustained enforcement action against fake invoicing is bearing fruit. As economist Joel Slemrod has said ’no government can announce a tax system and then rely on taxpayers’ sense of duty to remit what is owed’

Thus, detections continue as evidenced by the recent detection by a CGST Commissionerate of a GST fake invoice fraud case of taxable value in excess of Rs.150 crore. Two persons involved in the generation of fake invoices were arrested. Such detections have a huge persuasive effect on fence-sitters.

Incidentally, it may be mentioned that the introduction of the provisions of arrest in GST law was hotly debated when the draft law was being finalized. The discussions were spread across several GST council meetings. Given the experience of Central Excise and Service Tax as also of several state VAT administrators, it was finally introduced with appropriate safeguards to check possible misuse. And as the revenue numbers would suggest, have acted as a huge deterrent.

Going forward there is no room for complacency. The numbers will start to reflect the debilitating impact of the pandemic on the economy. We have to be prepared for stressful times.

Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

IPL in times of the virus

The nation is going through a catastrophic crisis. COVID is decapitating whole swathes of the country’s population. Many have survived; far too many have met a painful, lonely death. I shall not repeat the numbers which numb and sadden you. The health system has bravely attempted to cope with this deluge. Shortage of essentials has tied the hands of the medical fraternity as they struggle to handle the numbers. The economy is paying a price- the projected GDP growth being constantly revised as critical parts of the country goes into lockdown. I shall not go into how and why this second wave has happened, whether it could have been prevented. That is for the experts to write about. I shall write instead of the continuing IPL.

Cricket is a wonderful game. A game of skill, concentration and sublime grace. The 20:20 version has reduced the game into one of brute force. Made for TV and instant gratification. The short version of the game is also a money spinner-both for the players and the organizers.

In this background the continuation of the tournament even while the country suffers is strange. Here are matches being played in Mumbai which has suffered devastation and is under a lockdown; in Delhi which looks like a ghost city under the impact of the virus; in Chennai where the damage has been similar and relentless and now moved on to Ahmedabad-again not spared by the overwhelming impact of the pandemic. These are teams and players drawn from all parts of the country, playing in empty stadia and immune to the immense, untold suffering of their countrymen. They jump in apparent excitement and joy when scoring a six or taking a wicket -with pumped fists and shake of the heads. Even more bizarre are the commentators drumming up breathless excitement, analyzing the game.

Are we all so oblivious to all that is happening around us? A pandemic, the likes of which we and indeed the world, have never seen? Should the players even while discussing strategy and tactics, ask themselves and each other what are they doing, playing, while friends, family, acquaintances are struggling to cope with the sheer sweep of the pandemic? Nobody even acknowledging what is happening around them, wearing a black band as a mark of respect, to observe a minute’s silence before every game for the departed countrymen? Should the organizers display such apathy that the game should go on to such absurd lengths? Or is it necessary that the game goes on since it will help in taking the mind of the grim reality all around us at least for a couple of hours every day? Or does it? Or does it, should it, evoke a deep sense of disquiet?

Some of the overseas players have reacted-some leaving the tournament and some contributing money to fund relief work. We have not heard from any of our Indian players which again is unfortunate. Empathy makes you a better person and it most certainly will make the players, better players too.

The tournament is too far gone by for us to expect that it would be curtailed now. The organizers and the players can do no better than acknowledging the difficult circumstances they are having to play and yes, partake some percentage of their handsome earnings towards relief and rehabilitation. That is the least they can and should do. And do it now.

And we as TV spectators should learn to switch off our sets -in support of our countrymen and as a mark of respect for the dead and dying. But as Suresh Menon has in his brilliant article in The Hindu ‘Millions of reasons why the IPL needs to rethink priorities’ mentions, ‘even turning off the TV will not turn off the inappropriateness of its rude health and larger than life images being beamed across homes in India when the country is struggling with both health and life.’

Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Opium cultivation in private sector: A welcome partnership

The news that the government of India is considering a partnership with the private sector to increase the production of concentrated poppy straw (CPS) for improving the yield of alkaloids is big-and did not get the coverage which it deserved. To appreciate the significance of the development, it is necessary to put matters in perspective.

India is among the few countries (Australia and Turkey are the others) permitted by the International Narcotics Control Board (INCB) to cultivate opium licitly. Poppy growing has played a significant historical role in traditional culture in several parts of India. This status as a traditional supplier was also recognised through a resolution of the UN Commission on Narcotic Drugs.

Given the fact that opium is the source for alkaloids which have significant therapeutic value, and is also the source of that most heinous of substances, heroin, the government controls all aspects of its cultivation. The entire process of opium production, including the licensing the farmers, collection of opium is overseen by officers of the Central Bureau of Narcotics (CBN).

The government annually in terms of the Narcotics Drugs & Psychotropic Substances Rules notifies the general conditions for grant of licenses for the cultivation of opium. Opium cultivation is permitted in notified tracts in the states of Madhya Pradesh, Rajasthan and Uttar Pradesh. Cultivators who have a track record are accorded permission. Planting is undertaken in October-November for harvesting the following February-March. Each field of every cultivator is measured by the officers to ensure they do not exceed the area licensed.

These are subject to a minimum qualifying yield to be tendered by the cultivators of each of these three states to be eligible for license in the succeeding year. For instance, the permission is given for specific dimensions of land ,10 to 15 acres and subject to an average yield which is about 58 kgs to 65 kgs per hectare.

Opium pods are manually lanced and gum extracted. The entire yield is purchased by the government. The CBN sets up weighment centers during the harvest season where the cultivators bring the black sticky substance.

The stakes are high. Heroin, the highly addictive and illegal drug of choice of millions across the globe, is made from the resins of poppy plants. India is particularly vulnerable for many reasons. It is a transit country, sandwiched as it is, by Pakistan on one side and Myanmar on the other, countries where illicit cultivation of opium and manufacture of heroin, is rampant. India has also factories, manufacturing for licit purposes, the necessary precursor chemicals needed for conversion of opium to heroin. Hence, there is grave danger of diversion of licitly cultivated opium. And, hence the high degree of control at all stages of the cultivation of opium and production of alkaloids.

Opium so collected is sent to the two government run Alkaloid factories – at Neemuch and Ghazipur (the setting of Amitva Ghosh’s brilliant novel Sea of Poppies). Indian opium gum has all the naturally occurring alkaloids morphine, codeine, thebaine, noscapine and papaverine unlike the Turkish or Australian produce which have only two of these alkaloids.

The alkaloids derived from opium in these factories are essential for the pharmaceutical industry. A whole range of medicines are manufactured-from pain killers to cough remedies. Codeine phosphate has the largest demand-in fact the production in the Indian factories is insufficient to meet the demands of the pharma industry. And India has often to import thebaine for instance.
It is in this background that the decision to go in for a public-private partnership to commence production of CPS has to be seen. Two types of narcotics raw material can be produced from opium poppy- opium gum and CPS. Presently, the two alkaloid factories extract alkaloids only from opium gum. CPS has not been produced from opium poppy thus far in India. Experiments have shown that the higher concentration of alkaloids can be extracted from CPS.As per the trial findings conducted by two private entities, imported seeds of certain CPS varieties have resulted in favorable results especially in greenhouse conditions. This has significant bearing as this would mean that it would now be possible to have two-three crop cycles in one season and more than make up for the shortage of essential alkaloids. Export of alkaloids is an important source of foreign exchange too which can now be ramped up.

The decision to go in for a public-private partnership is also significant since it shows a welcome change in mind set. The private partnership will also result in the alkaloid factories getting modernised -and that would be welcome since the factories have not had any infusion of funds for upgradation for a long time.

Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

A multiple tax levy for petroleum products?

Oil price

Sushil Modi, Member of Parliament, has in a recent op-ed piece in a daily eloquently justified why petroleum products have been kept out of the ambit of GST.

He has argued that the Centre and the states earn substantial revenue from petrol and diesel; that the revenue generated from Central Excise duty and the special additional excise duty form part of the divisible pool of taxes (approximately Rs.52,000 crore) which goes to the States. Modi has applauded the sagacity of the NDA government which while bringing petroleum products within the ambit of GST, ensured that they would be subject to GST with effect from such date as the GST council may recommend.  He points out in the present scheme, petroleum products if brought within GST would fall in the 28 percent slab, which would dramatically bring down the prices of petrol and diesel to around Rs.55 per litre. He has mentioned that this will involve a ‘staggering loss of revenue to both Centre and States’-around Rs 4.1 lakh crore for both the Centre and states.

He argues for a commensurate levy of non-creditable excise/VAT duty to offset the loss of revenue-a dual system as a possible way forward.  Sushil Modi was till recently the Finance Minister of Bihar and a respected voice in the GST council. He headed a Group of Ministers to oversee the technology-related implementation challenges of GST. He has sound credentials to speak on the subject.

VAT in principle is intended to tax consumption on a destination basis using the invoice-credit (output tax minus input tax) method. India’s journey towards GST was precisely this. A path to consolidate the multiplicity of taxes and levies under one umbrella law where credit of tax will be available on taxes paid at the earlier stages of the value-add chain. And having embarked on this transformational path, a lot of ‘bad features’ such as multiplicity of rates, compensation cess, removing a whole bunch of goods out of the GST regime, exemptions, were perhaps necessary for its political acceptance. The danger of course was that with the passage of time it would become difficult to get rid of these distortions. Which is the crossroads we are at today.

Everybody accepts that multiplicity of rates is not good. Convergence is becoming a mirage. The recommended 15.5 percent to 16 percent revenue-neutral rate necessary for ensuring no serious loss of revenue is an economic necessity but a political challenge.

As are the exemptions.  Even more so as Sushil Modi has mentioned, is the inclusion of petroleum products in the GST ambit. Revenue in any tax regime is a function of the tax base and the rate. Petroleum products were undoubtedly kept out to sweeten the acceptance of GST. In the process, though the tax base was whittled. But even as GST nears its fourth anniversary a serious debate is required as to how we wish to go forward. And Shri. Modi’s article is an excellent starting point. We should never forget that keeping a whole bunch of commodities out of GST negates the very concept of GST; of credit being available for taxes paid at the earlier stage. Petroleum products are ubiquitous-their usage is near-universal. The Central Excise and VAT paid on them are not available for availing credit. What this means is that the tax sticks to the products, and increases costs. The argument that the Centre and the States earn nearly Rs.5.5 lakh crore from Central Excise and VAT is justification for keeping petroleum products out of GST is no argument. The seductive appeal of keeping all high revenue yielding commodities out of GST would defeat the very concept of GST.

So is the specious argument that 42 percent of the revenue collected is shared with the states. This is a Constitutional commitment given; the very glue which binds federal relations. But once within GST, obviously, the burden of sharing will also not be there. Modi agrees that bringing petroleum products within the GST net will mean a sharp decrease in prices which is precisely the argument being made for its inclusion.

This when the inflation rates are threatening to go out of control, will be a huge soothing factor. The RBI, mandated to keep an eye on inflation, has in its last Monetary Policy Committee also called for “calibrated unwinding’ of high retail taxes in the main oil products.  Another aspect that needs to be kept in mind is that the non-inclusion of petroleum products in effect means that exports to get impacted-these are taxes that add to the cost of the exported product. This will hurt more in the absence of the MEIS scheme and the RoDTEP which is still in the works.

In this background, the suggestion given of a structure to take care of both, the revenue concerns of the Centre and states, and the integrity of GST need serious debate. Thus a 28 percent GST rate on Petroleum products as also a Central Excise/ VAT equivalent to offset the loss because of the goods moving to GST. This is not the best of solutions; it would in effect mean three rates-GST, Central Excise and VAT.

To the extent that this will help in ensuring some credit being available there will be a reduction in costs. This will have an impact up the value chain. The non-creditable Central Excise/VAT will of course add to costs. However, for this proposal to succeed it is incumbent that both the Centre and the States agree to not indiscriminately increase the Central Excise or VAT rate-portions which will be out of the purview of the GST Council. Ideally, the VAT rates should be uniform across States.  Obviously, the states will have to come on board; both the Centre and the states will have to ‘be willing to take deep cuts in their revenues’ for the proposal to get the nod of the GST council. This will require a lot of persuasions more so in these pandemic ravaged times. But worth the try and perhaps the only feeble half-step forward towards the larger goal. Who better than Sushil Modi to push this idea forward?

Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here

A bright end to a dismal year

GST

March 2021 has ended with a whopping GST revenue collection of Rs 1,23,902 crore. This is the highest since the introduction of GST. It is the sixth straight month where revenue has crossed the Rs 1 lakh crore mark.

As the Ministry of Finance press note points out, the GST revenue has witnessed a growth rate of (-) 41 percent, (-) 8 percent, 8 percent and 14 percent in the first, second, third and fourth quarter of the last financial year as compared to the same period last year.

The increasing trend over this period last year is an indication of economic recovery after the devastating impact of the pandemic triggered slowdown.

The increase in revenue trends would also suggest that GSTN is settling down. Better monitoring against fake billing, data analytics, close coordination and sharing of information between GSTN and CBDT, customs IT wing, MCA accompanied with an effective tax administration have all contributed.

To put matters in perspective, the revenue for the fiscal year 2020-21 ended at a very satisfactory Rs 11,36,803 crore which given the fact that the economy had seen never before levels of contraction, did not seem likely.

This is undoubtedly lesser than Rs 12,32,131 crore achieved in 2019-20 or the Rs 11,77,369 crore reached in 2018-19 but remarkable and clearly shows progress. CBIC has indeed great cause to celebrate. To echo the RBI report which the finance minister approvingly quoted from some time back, there is a restless energy in the air in India to resume high growth.

This development has also to be seen with the fact that the entire estimated GST compensation shortfall of Rs 1.10 lakh crore for 2020-21 had been released by the centre to the states. Further, the government had also released on March 31 Rs 45,000 crore as additional devolution to the states.

As per the RE 2020-21, Rs 5,49,959 crore being 41 percent of the shareable pool of taxes and duties was to be released to the states; the centre showing remarkable commitment to the spirit of federalism has devolved a total of Rs 5,94,996 in keeping with the revenue buoyancy of Q4 2020-21.

All these are good tidings for centre-state relations — at the end of the day transparency in matters fiscal is the glue which holds the two together.

However, it is important to juxtapose these positive developments with the March 31 press release of the Ministry of Commerce and Industry regarding the performance of the index of core industries.

The combined index of eight core industries as on February 2021 declined by 4.6 percent (provisional ) as compared to the index of February 2020.

The cumulative growth during April to February 2020-21 was a disappointing (-) 8.3 percent. Thus coal production declined by 4.4 percent, crude oil production by 3.2 percent, natural gas by 1.0 percent, petroleum refinery production by 10.9 percent ,fertilizers by 3.7 percent, steel production by 1.8 percent, cement by 5.5 percent, electricity generation by 0.2 percent, in February 2021 over the corresponding period of the previous year.

What this means is that IIP which includes around 35-40 percent of the core sector components will also see a decline which could be up to 2.5 percent.

The fiscal deficit is in excess of Rs 14.05 lakh crore and projected to be in the region of 9.6 percent of the GDP. The retail inflation as measured by the consumer price index is in the region of 5.03 percent. The rise in COVID cases in key industrial states like Maharashtra and Karnataka and the looming threat of a partial lockdown do not bode good. It is of paramount importance that the pandemic is not permitted to go out of control.

Despite sharp improvement in the enforcement efforts of the centre and the states leading to better compliance, GST fraud is rampant. The modus operandi continues to be creation of fake firms, generation of fake invoices and availment of illegal credit. The month of March saw just in Delhi detection of input tax credit fraud cases to the tune of more than of Rs 850 crore. This hurts the economy in more ways than one. It triggers a domino effect – consequent evasion of income tax and a host of other laws. Technology is the answer. A constant upgrading of GSTN, apart from close coordination between the various wings of the government, is the key.

So, yes, while there is a lot to cheer about, there definitely is no room for the authorities to become sanguine. 2021-22 is going to be a challenging year.

 

Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here