GST may need an overhaul to plug a revenue shortfall

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: about GST and its significance; Why is GST still a contentious issue?

News: Fifteenth Finance Commission (FFC) chairman N.K. Singh has said GST should be redrafted. Too many changes to GST rules and several items being exempted could be blamed for the Rs. 63,200 crore shortfall in compensation cess for FY20.

What is the Finance Commission saying?

According to data compiled by the Fifteenth Finance Commission, more than 38 changes have been carried out in GST in the two years since it was rolled out. The frequent changes have made the tax unstable and cluttered it too much, making compliance difficult for businesses. The commission has held that the cumbersomeness of compliance and the frequency with which rates have been changed are the important factors for the revenue realization from GST falling short of targets. Therefore, GST should be returned to the drawing board for redrafting from scratch, Singh has said.

What is the root cause of the problems?

In case of revenue shortfalls during the first five years after GST’s introduction, the Centre has guaranteed compensations to states. GST revenue is falling short of the revenue growth of 14% on the FY16 base guaranteed to states under the GST compensation law. The compensation guarantee has created a perverse incentive. States are not sweating to plug leakages, increase compliance or simplify GST. Even states with good growth rates have not seen commensurate growth in GST revenue. Nor have consuming states such as Bihar or Uttar Pradesh made the kind of gains as was expected.

Are integrated GST (IGST) refunds a problem too?

In a pre-budget consultation, states have sought immediate release of arrears of IGST collected on the interstate supply of goods and services and imports. They alleged that the Centre resorted to incorrect accounting for IGST in 2017-18. Earlier, the CAG said devolution of unallocated IGST to states did not happen for 2017-18 according to law.

What is the way forward on this?

The best way to tackle revenue shortfalls is by removing all the infirmities in GST. States should get incentives to reduce leakages and compliance burdens. Revenue neutrality should be a medium-term goal. The Thirteenth Finance Commission and a panel headed by then chief economic adviser Arvind Subramanian had shown the average GST rate ought to be 16-17% to make it revenue neutral. Today, the average is 11.6% because a large number of items are at 0%, although indirect taxes are by definition regressive.

Should India go for a single-rate GST?

Given low state capacity, the best option for India is a single-rate GST. Eighty per cent of countries that introduced GST after 1995 opted for a single rate. If the rate is kept low and exemptions at a minimum, the revenue collection will be good. It will reduce the scope of evasion and leakage. States can impose sin taxes over and above GST on luxury and demerit goods: some may decide to do so for alcohol and others for vehicles that run on fossil fuels.

Banks need to restart lending to industries to revive growth: RBI

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: About the RBI report and its significance; concerns raised by the report

News: In its Report on Trend and Progress of Banking in India 2018-19, released on Tuesday, the central bank said banks need to restart lending to industries in order to stimulate the capex and investment cycle.

• The Reserve Bank of India (RBI) wants banks to resume lending to large industries instead of restricting themselves to the low-risk retail sector.
• According to RBI, there has been a shift of focus toward retail loans due to the subdued profitability of corporates, low-interest coverage ratio, and deleveraging by corporates along with risk aversion of banks.

Background

The latest in a series of bad news came earlier last month as India’s economic growth fell to 4.5% in the September quarter. Moreover, the core sector, comprising eight infrastructure industries, contracted 5.8% in October, the second consecutive month of contraction.

Figures supporting RBI’s argument

• Outstanding bank loans to industries increased 5.6% year-on-year (y-o-y) to 33.04 trillion in FY19, but declined 3.95% between March and September 2019. At the end of September, it stood at 31.74 trillion. Retail loans, on the other hand, grew 18.5% y-o-y to ?23.02 trillion in FY19 and 18.1% between March and September 2019 to ?24.64 trillion, albeit on a smaller base. ‘The need of the hour is to kick-start industrial credit and use the impetus therefrom to regenerate a virtuous cycle of capex, investment and growth,’ said RBI.

Concerns raised in the RBI report

• The central bank’s report said while diversifying from industrial loans to retail acts as a risk mitigation tool, it has its own limitations. For instance, the slowdown in consumption and overall economic growth, RBI said, may affect the demand for and the quality of retail loans.
• Moreover, household leverage and indebtedness need to be kept in focus in the context of overall financial stability.
• The regulator also cautioned that banks must follow proper risk pricing so that the health of the banking sector is not compromised, while ensuring adequate credit to these sectors.
• On capital raising, RBI said in the coming years the financial health of public sector banks (PSBs) should increasingly be assessed by their ability to access capital markets instead of the tendency to depend excessively on the government.
• The central bank also raised the issue of corporate governance practices in banks and other financial institutions. Without naming them, it said the recent governance failures in some financial entities have highlighted the impact of the quality of corporate governance on efficiency in the allocation of resources as well as on financial stability. RBI said it is in the process of issuing draft guidelines on corporate governance for regulated entities and the objective is to align the current regulatory framework with global best practices.

Status of Banks

• RBI said PSBs led the recovery in capital ratios for the banking sector in FY19. They were recapitalized with 90,000 crore in FY18 and another ?1.06 trillion in FY19. This bolstered their capital position, even as they battled with the overhang of impaired assets.
• Private banks and foreign banks remained well-capitalized and above the regulatory minimum of 10.875% of risk-weighted assets in March 2019. However, private banks experienced a marginal decline in capital adequacy ratio in FY19 after the reclassification of IDBI Bank as a private bank.

Chief of Defence Staff gets Cabinet nod

Syllabus subtopic: Various Security forces and agencies and their mandate

Prelims and Mains focus: about the newly created post of CDS and its significance

News: The Union Cabinet chaired by Prime Minister, on Tuesday approved the creation of the post of Chief of Defence Staff (CDS) and the charter of duties.

Background

• PM Modi, in his Independence Day address this year, announced the appointment of a CDS. Following this, the Implementation Committee was constituted to determine and finalise the ``exact responsibilities, an enabling framework`` for this new post.
• As part of higher-level military reforms, a number of committees, the Kargil Review Committee, the Group of Ministers (GoM) Report, the Task Force on National Security and the Lt. Gen. (retd.) D.B. Shekatkar Committee has studied and recommended the creation of CDS or Permanent Chairman, COSC.
• In 2012, the Naresh Chandra Committee recommended the appointment of a Permanent Chairman as a midway to allay apprehensions over the CDS.
• Currently, the most senior of the three Chiefs functions as the Chairman of the COSC but in an additional role and the tenures have been very short.
• The CDS was also one of the 99 recommendations made by the Shekatkar panel, which submitted its report in December 2016 and had 34 recommendations pertaining to tri-Service integration.
• The issue of a single-point military adviser and the creation of theatre commands have been on the agenda of the government in the previous term as well. This was emphasised by Mr Modi in discussion with the Combined Commanders Conference at Dehradun in 2017.
• A pointer to the impending announcement was made by Mr Modi in his speech on Kargil Vijay Diwas this year where he stressed ``jointness``. He said it was time to connect among three Services in terms of ``action and system.``

About the post of CDS

• The post of CDS will be in the rank of a four-star General with a salary and perquisites equivalent to a Service Chief.
• The CDS will also head the Department of Military Affairs (DMA) to be created within the Ministry of Defence (MoD) and function as its Secretary.
• The creation of a CDS, who will be above the three Service Chiefs, has been a long pending demand as part of higher-level military reforms for a single-point military advisor to the government.
• The government also recently informed Parliament that the CDS would come into the ambit of ‘The right to Information Act, in accordance with the provisions of the RTI Act, 2005.
• The Cabinet Committee on Security (CCS), which discussed the issue, had approved the recommendations of the Implementation Committee headed by the National Security Adviser (NSA) on the role and charter of the CDS. Army Chief Gen. Bipin Rawat, who is set to superannuate on December 31, is the front runner for the post. Vice Chief of the Army Staff Lt. Gen. Manoj Mukund Naravane has already been appointed as the next Chief of the Army Staff (COAS).

Role and responsibilities of CDS

• The armed forces will be brought under the ambit of the DMA and will deal with works relating to the three Services and procurement exclusive to the Services except capital acquisitions, as per prevalent rules and procedures.
• The broad mandate of the CDS includes bringing about jointness in `operations, logistics, transport, training, support services, communications, repairs and maintenance of the three Services, within three years of the first CDS assuming office.`
• He will act as the Principal Military Adviser to Defence Minister on all tri-Services matters.
• However, the three Chiefs will continue to advise the Minister on matters exclusively concerning their respective Services.
• The CDS would not exercise any military command, including over the three Service Chiefs, so as to be able to provide impartial advice to the political leadership.
• In his capacity as the Permanent Chairman, COSC (Chiefs of Staff Committee), the CDS would administer tri-Services organisations, agencies and commands related to Cyber and Space.
• The CDS will also be a member of the Defence Acquisition Council chaired by the Defence Minister and the Defence Planning Committee chaired by the NSA.
• In the strategic domain, the CDS would function as the ``Military Adviser to the Nuclear Command Authority`` chaired by the Prime Minister.
• The recently created specialised tri-Service divisions, special operations, cyber and space will come under the ambit of the CDS. The government recently named two-star officers from the Services, who will now oversee the setting up of the organisations.

Composition of tri-Service divisions

• While each of division will draw personnel from all three Services, the Special Operations Division, headquartered in Agra, will be headed by the Army. The Defence Cyber Agency (DCA), based in Delhi, will be headed by the Navy and Defence Space Agency, based in Bengaluru,by the Indian Air Force.
• Following Mr. Modi’s announcement, the recent Army Commanders Conference debated the need for creating arrangements and structures to synergise and pave the way for effective integration and discussed the ``requirement of a Joint Services Act.`` Currently, each Service has individual Act passed by Parliament.