GS-IIII: A tax policy that could work.

Indian government desperate to raise more tax revenues. It missed its tax targets last fiscal year, (poor goods and services tax (GST) collections). Its declared budgetary target for the current year requires tax receipts to increase by around 25%, when the first quarter increase was only 6%.

MNCs Tax Evasion:

• MNCs manage to avoid taxation in most countries, by shifting their declared costs and revenues through transfer pricing across subsidiaries, practices described as “base erosion and profit shifting” (BEPS).
• Digital companies, some of the largest of which make billions of dollars in profits across the globe, but pay barely any taxes anywhere.
• The International Monetary Fund has estimated that countries lose $500 billion a year because of this.

Base erosion and profit shifting (BEPS):

• Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to “shift” profits from higher–tax jurisdictions to lower–tax jurisdictions, thus “eroding” the “tax–base” of the higher–tax jurisdictions
• The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as also “exploiting gaps and mismatches in tax rules
• Initiatives to curb BEPS by the OECD and the Trump administration have failed.

The OECD G20 Base Erosion and Profit Shifting Project (or BEPS Project):

• It is an OECD/G20 project to set up an international framework to combat tax avoidance by multinational enterprises (“MNEs”) using base erosion and profit shifting tools
• The aim of the project is to mitigate tax code loopholes and country-to-country inconsistencies so that corporations cannot shift profits from a country with a high corporate tax rate to countries with a low tax rate.
• Implementation phase, 116 countries are involved, including a majority of developing countries.
• The BEPS project looks to develop multilateral dialogue and could be achieved thanks to successful international cooperation, unavoidable when it comes to such a domestic and sovereign topic.

Conclusion:

A government that is currently ineffective in battling both economic slowdown and declining tax revenues cannot afford to neglect this crucial opportunity.

GS-III: A lodestar to steer the economy.

News

There is a anxiety all over about the economic slowdown in the country. While the government is still in denial mode data flowing uninterrupted that sector is starting at a seriously challenging situation.

Data:

• Private consumption has contracted and is at an 18-quarter low of 3.1%
• Rural consumption is in a deep southward dive and is double the rate of the urban slowdown
• Credit off-take by micro and small industries remains stagnant;
• Net exports have shown little or no growth;
• GDP growth is at a six-year low with the first quarter of FY20 registering just 5%;
• Unemployment is at a 45-year-high.

Recession:

• The technical term for the same is growth recession.
• A recession is defined in economics as three consecutive quarters of contraction in GDP. But since India is a large developing economy, contraction is a rarity.
• The last instance of negative growth for India was in 1979.

Consumption:

• The growth of the Indian economy had been predominated by consumption inclusive of both Private Final Consumption Expenditure (PFCE) as well as the Government Final Consumption Expenditure (GFCE).
• The recent sharp fall in PFCE in the June quarter to 3.1 per cent compared to 7.2 per cent in the March quarter has significantly contributed to the recent slowdown.

Measures taken and their impacts :

• Recently announced Bank mergers further disturb a major chunk of the banking system in the coming year.
• Recently announced package for the automobile sector or making banks pass on interest rate cuts to businesses have little impact
• The announcement of a transfer of Rs 1.76 lakh crore from the RBI to the government will allow the government to maintain the fiscal deficit target at 3.3%. But, this will not provide the needed stimulus.( fiscal deficit today is 9%)
• Government revised GST for the automobile sector, opened up FDI in contract manufacturing sector and even announced the recapitalization of the banking sector.

Way forward:

Focus on optimum utilization of funds granted by RBI and direct them to boost investment in the economy both infrastructural and research investment.

Structural shifts over the long run can be achieved through tapping into the health and education sectors that long for quality improvements.

GS-IV: Prize for peace

News

The Norwegian Nobel Committee awarded this year’s Peace Prize to Abiy Ahmed, the Prime Minister of Ethiopia.

Reasons for the prize:

• It is a recognition of his efforts for peace in East Africa.
• Mr. Abiy, became Prime Minister in April 2018 after his predecessor Hailemariam Desalegn resigned amid a political crisis and social unrest.
• He has taken steps to politically stabilise the country and establish peace on its borders.

Conflict with Eritrea:

• Eritrea gained independence from Ethiopia in 1991 and has fought a disastrous border war during 1998-2000 with its big neighbour.
• It split thousands of families and killed about 80,000 people.
• In Eritrea, the dictatorship used the prolonged border conflict as a convenient excuse for conscription and repression of its critics leading to a mass refugee outflow.
• Mr. Abiy took steps to resume the stalled peace process. He led Ethiopia’s first state visit to Eritrea and met its President, Isaias Afwerki.

Reforms at home:

• He also initiated reforms at home, such as lifting the ban on opposition political parties, releasing political prisoners and jailed journalists and removing media curbs.
• Half of his Cabinet members are women and his government has welcomed the dissidents who were living in exile to return.

Challenges ahead:

• His biggest challenge is to calm ethnic tensions in his conflict-ridden country.
• Ethiopia is a multi-ethnic federation ruled by the Ethiopian People’s Revolutionary Democratic Front with a tight grip.
• Mr. Abiy has loosened this grip and called for a pan-Ethiopian identity and a freer economy and polity.
• His reform agenda was challenged by ethno-nationalists both within and outside his party.
• His government remained a spectator when ethnic violence was unleashed in several parts of the country over the past year, and sub-nationalisms emerged stronger.

Conclusion

Being a Nobel peace prize winner, he should come up with a national action plan to end violence, ease ethnic tensions and resettle the thousands displaced by the violence.