India Signs First Bilateral Advance Pricing Agreement (APA)

India Signs First Bilateral Advance Pricing Agreement (APA) With A Japanese Company; APA Period is Five Years; APA Scheme Introduced to Bring About Certainty and Uniformity in Transfer Pricing Matters of Multi-National Companies and Reducing Litigation

Central Board of Direct Taxes (CBDT) signed here today a bilateral Advance Pricing Agreement (APA) with a Japanese Company. This is India’s first bilateral APA. The APA is for a period of five years. The APA has been finalized in a period of about one and a half years, which is shorter than time normally taken in finalizing APAs internationally. The APA scheme has been introduced to bring about certainty and uniformity in transfer pricing matters of multi-national companies and reducing litigation. APAs will improve investment climate in the country. In the context of growing economic ties between Japan and India, especially after the Prime Minister Shri Narendra Modi’s visit to Japan, this APA is expected to generate positive sentiments among Japanese investors in India.

GSLV Mark III takes to the skies in test flight

ISRO takes a step towards manned space flight

The first experimental flight of the Geosynchronous Satellite Launch Vehicle (GSLV) Mark III registered success as it lifted off from the second launch pad at the Satish Dhawan Space Centre in Sriharikota on the dot at 9.30 a.m. on Thursday, taking India much closer to realising the dream of manned space flight.

The mission control centre erupted in smiles and claps and the scientists hugged each other, as the GSLV Mark III moved a step closer to its first development flight with the functional C25 cryogenic stage.

Also known as LVM3/CARE, the suborbital experimental mission was intended to test the vehicle’s performance during the critical atmospheric phase of its flight and this carried a passive (non-functional) cryogenic upper stage.

The vehicle, exactly five-and-a-half minutes after take-off, carried its payload — the 3,775-kg crew-module atmospheric re-entry experiment (CARE) — to the intended height of 126 km. Two massive S-200 solid strap-on boosters, each carrying 207 tonnes of solid propellants, ignited at lift-off and separated 153.5 seconds later. The L110 liquid stage ignited 120 seconds after lift-off.

“This new launch vehicle performed very well and was a great success. We had an unmanned crew module to understand re-entry characteristics. That went off successfully and the crew module splashed as expected in the Bay of Bengal,” said Indian Space Research Organisation Chairman K. Radhakrishnan from the mission control centre.

With the module gently landing in the Andaman Sea, about 1,600 km from Sriharikota, the GSLV Mk-III X/CARE mission concluded successfully. “As it made its way back into our atmosphere, the parachutes performed as per the speed that we expected,” said S. Unnikrishnan Nair, Project Director, Human Spaceflight Programme.

The former ISRO Chairman K. Kasturirangan, who was present, said, “ Every GSLV should go higher not only physically, but mentally too.”he first experimental flight (GSLV Mk-III X/CARE) of India’s next generation launch vehicle GSLV Mk-III was successfully conducted today (December 18, 2014) morning from Satish Dhawan Space Centre SHAR, Sriharikota. Also known as LVM3-X/CARE, this suborbital experimental mission was intended to test the vehicle performance during the critical atmospheric phase of its flight and thus carried a passive (non-functional) cryogenic upper stage. 

The mission began with the launch of GSLV Mk-III at 9:30 am IST from the Second Launch Pad as scheduled and about five and a half minutes later, carried its payload – the 3775 kg Crew Module Atmospheric Re-entry Experiment (CARE) – to the intended height of 126 km. Following this, CARE separated from the upper stage of GSLV Mk-III and re-entered the atmosphere and safely landed over Bay of Bengal with the help of its parachutes about 20 minutes 43 seconds after lift-off. 

Two massive S-200 solid strap-on boosters, each carrying 207 tons of solid propellants, ignited at vehicle lift-off and after functioning normally, separated 153.5 seconds later. L110 liquid stage ignited 120 seconds after lift-off, while S200s were still functioning, and carried forward for the next 204.6 seconds. CARE separated from the passive C25 cryogenic upper stage of GSLV Mk-III 330.8 seconds after lift-off and began its guided descent for atmospheric re-entry. 

After the successful re-entry phase, CARE module’s parachutes opened, following which it gently landed over Andaman Sea about 1600 km from Sriharikota, there by successfully concluding the GSLV Mk-III X/CARE mission.

Carbon-dioxide emissions at all-time high in 2013

4.2 % rise in India’s discharge of the greenhouse gas: study

Global carbon-dioxide emissions from burning of fossil fuels and production of cement reached a high of 35.3 billion tonnes in 2013, mainly due to the continuing steady increase in energy use in emerging economies such as India, a new report says.

Brazil (6.2 per cent), India (4.4 per cent), China (4.2 per cent) and Indonesia (2.3 per cent) reported a sharp rise in emissions of the greenhouse gas that year.

The global emissions, however, increased at a notably slower rate of 2 per cent than the average yearly 3.8 per cent since 2003. The slowdown, which began in 2012, signals a further decoupling of global emissions and economic growth, mainly reflecting the lower emissions growth rate of China, says the annual “Trends in global CO emissions” released by the Netherlands Environmental Assessment Agency and the European Commission’s Joint Research Centre.

The top three

China, the United States and the European Union remain the top three emitters of carbon dioxide, accounting for 29 per cent, 15 per cent and 11 per cent, respectively, of the world’s total. After years of a steady decline, the emissions of the gas by the U.S. grew by 2.5 per cent in 2013, mainly due to a shift in power production from gas back to coal and an increase in gas consumption for space heating, the report says.

In the European Union, emissions continued to fall — by 1.4 per cent in 2013.

The much lower increase in emissions in China — 4.2 per cent in 2013 and 3.4 per cent in 2012 — was primarily due to a decline in electricity and fuel demand from the basic materials industry, and aided by an increase in renewable energy and improvements in energy efficiency.

“With the present annual growth rate, China has returned to the lower annual growth rates that it experienced before its economic growth started to accelerate in 2003, when its annual carbon dioxide emissions increased on average by 12 per cent a year,” the report says.

Increase in life expectancy more in women in India

A Global Burden of Disease Study 2013 published today (December 18) in the journal The Lancetpoints out that in the case of India, the life expectancy at birth during the period 1990 to 2013 had increased for both men and women.

In the case of men, the increase in life expectancy was from 57.3 to 64.2 years and in the case of women, it was from 58.2 to 68.5 years between 1990 and 2013. The reduction in death rate was seen both in adults and children. Though the death rate per year witnessed a drop both in adults and children, it was more in the case of children than adults. At 3.7 per cent, the death rate reduction per year in children was much more than that of adults, which was at 1.3 per cent.

According to the report, ischemic heart disease was the number one cause of death in India in 2013. The other leading causes (in descending order) were lower respiratory track infections, tuberculosis, neonatal encephalitis, preterm birth complications, diarrhoea, stroke, chronic obstructive pulmonary disease (COPD), suicide, and finally road injuries.

“COPD is caused due to lung damage. Smoking is one of the causes of COPD. But in the case of women in India, COPD is more due to indoor pollution than smoking. Even TB could be an important cause,” Dr. Soumya Swaminathan, Director of the Chennai-based National Institute for Research in Tuberculosis (NIRT) told this Correspondent. While TB is the number three cause, diarrhoea is way down at the sixth position. Referring to this, Dr. Swaminathan said: “That shows that interventions for diarrhoea have really worked and reduced the number of deaths, while in the case of TB the interventions have been less effective in reducing deaths. This is despite RNTCP being effective and bringing about 20 per cent reduction in TB deaths in India.”Across the world, deaths from diarrhoeal diseases between 2000 and 2013 fell by about 31 per cent.

Though there has been much reduction in the number of deaths in under-five children across the world and in India, lower respiratory track infections and diarrhoea are two of the three causes seen in India. But other causes like neonatal encephalitis and preterm birth complications that affect children continue to be major causes of death in India. Globally, neonatal deaths fell significantly since 2000.

Half of all suicide deaths that occur in the world are in India and China. “Suicide is a major and growing public health problem in India,” notes a release. What is of great concern is that though India and China account for half of global suicide deaths, the number of suicides was reducing “rapidly” in China while it was “rising” in India during the period 1990-2013. “Both countries have undergone economic growth and urbanisation, a key factor in limiting access to lethal pesticides, a common method of suicide by poisoning in both countries. Therefore, as yet unexplained reasons must exist for the divergence between the two countries,” the paper notes.

What becomes abundantly clear is that ischemic heart disease is the only lifestyle disease in the top ten causes of deaths in India. This is in complete variance with what is seen in the developed countries.

Good Serviceable Tax

The Central government must address five challenges if its April 1, 2016, deadline for rolling out the GST is to be met.

First, the challenge of GST design. This has to be arrived at in two steps. First, the tax base needs to be agreed on. Second, the methodology of levy, collection and appropriation needs to be finalised. So far, neither has been done. The states have not yet agreed to the Centre’s proposal to subsume taxes on petroleum products and entry into the GST. No unanimity has been reached on the proposed threshold of Rs 10 lakh. Also, two major issues that will significantly broaden the GST base and lower the revenue neutral rate (RNR) have not been examined: the inclusion of real estate and the treatment of e-commerce in the GST.

 Preliminary calculations reveal that an additional revenue of about Rs 20,000 crore can be generated by including property transactions in the GST. The ongoing confrontation between Amazon and the government of Karnataka on tax payable on e-commerce transactions highlights the need to put in place transparent and predictable point-of-sales rules for this burgeoning sector.

The empowered committee of state finance ministers (EC) is reportedly considering a recommendation that the RNR for state GST (SGST) be 14 per cent, and 12.7 per cent for Central GST (CGST). This adds up to 26.7 per cent, against the present tax rate of about 26.5 per cent. Imposing a GST with a higher RNR than the present aggregate rate may not be worth the effort. The 13th Finance Commission had suggested a model GST base, according to which the SGST would be 7 per cent and CGST, 5 per cent. The Centre should ensure that the tax base is not diluted unreasonably and all revenue options are explored to keep the RNR as low as possible.

Further, which agency will have the last word on design is unclear. As per the draft Constitutional (122nd Amendment) Bill, all the parameters will be finalised by the GST council, which will come into being only after the amendment. However, the amendment won’t be passed until there is agreement on the design, the RNR as well as the levy and appropriation modalities. The bill should be amended to allow the GST design to be frozen prior to its approval.

The second challenge is the need to promote inclusion. So far, discussions have been confined to two of the four stakeholders: the Centre and the states. Since the EC takes decisions on consensus, issues raised by a minority often hold sway. The other stakeholders in the GST framework industry, traders and consumers —  are not involved in the debate. This can be done by making the proceedings of the EC more transparent by publishing not only its meeting agenda and minutes on its website but also the reports of its various committees. Further, trade, industry and consumer representatives should be invited to address the EC on all issues of importance. 

Third, the reinforcement of trust between the Centre and the states. The states have not yet received compensation promised by the Centre for the reduction of Central sales tax. No provision has been made for this in the 2014-15 Union budget. 

This is dampening the states’ enthusiasm. Further, there is an asymmetric burden on the states for the implementation of the GST. They surrender more taxes than the Centre to the GST pool and have less revenue sources outside this pool than the Centre. Keeping this in mind, the Centre should relax its present stance and agree to the states’ demand to compensate GST losses for a period of five years. The fourth challenge relates to operational issues, the most important being the goods and services tax network (GSTN). 

There is need for an information-intensive electronic network to allow for uniform registration, reporting and tax-payment practices across all the states. While the GSTN company has been set up, the states will have to run complementary portals that can integrate with this network. Many small states do not have this capacity. We must, therefore, allow for differential implementation. Some states could join the network at their own pace. In addition, the operating procedure and training manuals need to be finalised along with integrated GST and place of supply rules. Operating staff as well as traders and dealers will have to be trained. 

The fifth challenge is timing. As was seen during the implementation of the VAT in 2005, some states may not join the GST for reasons other than fiscal. If the 2016 deadline is to be met, the design must be tweaked to accommodate staggered implementation. Thus, the GST design should provide for both staggered and differential implementation. Unless these five challenges are holistically addressed, it may be difficult to meet the GST deadline. To catalyse this process, the Centre could consider implementing a CGST with effect from April 1, 2015. The present Central excise and service tax levies should be merged into a single CGST, allowing for a common return, assessment, and audit and refund framework for both these taxes. Taking this step would signal the Centre’s strong commitment to the GST

The weakest link

The lack of formal banking and cash is one of the toughest constraints in the rural areas of India. The Jan Dhan Yojana might be the best strategy to overcome this. But this ambitious scheme has one critical flaw that could ruin it and result in its failure to deliver on promises: the RuPay debit card. To ensure the success of the yojana, it is essential that the RuPay debit card plan be shelved, because it poses a huge reputation risk — the failure of the card could have damaging consequences for the scheme as a whole.

For families which have been offered bank accounts under the scheme, the advantages of a cash-based economy are just a step away.

Except in the case of the lowest deciles, poor families do have some assets but, in the absence of a ready market for them, they are forced to make distress sales for even routine transactions. Having cash in the bank and, more importantly, a way to easily deposit and withdraw money, will be a force-changer for these families once the banking habit spreads.

The weakness in the system comes from the introduction of the debit card. It introduces the risk of a third party meddling with the savings bank deposits of crores of first-time account users. Earlier government programmes have become non-starters for similar reasons. But before going into this in detail, just imagine the landscape the debit card would create for new bank account holders. Recollect the tense times we went through when we first got cards — debit or credit. Recollect those tentative moments eons ago, when we operated an ATM machine for the first time.

In lakhs of villages across India, instead of offering frugal banking, we are trying to replicate these experiences. The debit card has to be preserved, kept reasonably dust free and intact for its magnetic strip to operate. Though the account won’t be frozen if the card is not used, the accident insurance cover gets cancelled if it is inactive for 45 days.

But this isn’t the chief obstacle. Repeated observations of auditors and independent studies about previous government schemes throw up two concerns. First, there is always one stage or point at which the beneficiary has to approach the district administration or the bank to get into the scheme. This is the point at which money could leak out of the scheme. The second concern is complication. The RBI list of frequently asked questions on the Jan Dhan Yojana, sent to all banks, acknowledges this — the “branch manager will have to advise all the related risks to the illiterate account-holder at the time of issuance of RuPay card”. The RuPay debit

card is in line to be the leakage point from the scheme. It has the weakness of being complex and requiring a third party to administer.

The results could be devastating. Remember, for instance, in the Integrated Rural Development Programme, the loan scheme had two components: a subsidy provided by the government and a loan given by the bank. People may recall the standing instructions issued by bank headquarters to hand over the subsidy to the district or zila parishad representative but not to disburse the loan. The recipient got some money, the officials took a cut, and there was no pressure to repay a loan.

The Jan Dhan overdraft could meet the same fate, of being parcelled out, with the account holder getting the smallest share. To reduce the hassle and risk of keeping the card with themselves, a sizeable percentage of people, typically the weakest, might give it to someone else for safekeeping — a village leader or the bank manager. This is a real risk. The account holder knows if she does not put more money in the bank, she is safe from further loss, so, she will keep her account dry. Yet the safekeepers could purloin the account holder’s share of government subsidy.

The RuPay debit card’s problem is that it is a physical object and, like any government property, lends itself to widespread misuse. A far better option would have been a frugal banking plan based solely on a single-number platform like Aadhaar, with biometric identification, or a telecom number-based identification platform like M-Pesa for the Jan Dhan account holders to remember and use. Every benefit could have been credited to this account.

The debit card adds nothing to the experience of operating a bank account for the new entrant but has all the elements necessary to wreck it.

By the states, for the states

One of the first decisions of the new government has been the decision to scrap the Planning Commission. The Planning Commission, set up in 1950, has increasingly become an anachronistic behemoth, although it did play a crucial role in the initial years when public investment was an overwhelmingly large part of overall investment in the economy. Those were the days when centralised planning, and hence the Planning Commission, had an important role. Obviously, increasing reliance on the market economy in a globalised world and the growth of the domestic private sector have resulted in the commission becoming more or less irrelevant.

Quite apart from the growing irrelevance of the Planning Commission is the fact that there have been serious charges against its actual functioning. Since the government will soon announce a new body that will replace the commission, it is important to keep these in mind, so that the same mistakes are not repeated in future.

Perhaps the most important allegation is that the commission has strayed a long distance away from the role that was initially visualised for it. There has been little attempt to ground the planning process within a consultative framework within which the states and the Central government are equal partners. The Planning Commission has become increasingly autocratic and has typically enforced its diktat over different states. “We know best” may well have become the slogan of the commission. Not surprisingly, state inputs into Five Year Plans have become perfunctory. There are anecdotes that interactions with the commission have become so scarce and meaningless that state allocations are decided even before any interaction with the states. Of course, there are investment projects that are truly national in character, since their reach spans several states. But there are other smaller, state-specific projects whose benefits are more or less contained within the state itself. There can be no justification for allowing officials in Yojana Bhavan to decide unilaterally the contours of such projects.

Another equally serious charge is that the commission has become an agent of the ruling political party or coalition at the Centre. A large fraction of the resources transferred to the states from the Centre are governed by formulas — for instance, those arising from various Finance Commission awards. However, a sizeable component of the transfers is on account of what are called Central plan schemes and Centrally sponsored schemes, and these are almost entirely discretionary in nature. There is overwhelming evidence that the Planning Commission has allowed itself to become an agency of the ruling party or coalition at the Centre, as a disproportionately large fraction of such discretionary grants go to those states that are politically aligned with the ruling party in New Delhi.

There have been reports that the government has been looking at similar bodies in other countries, presumably in order to import best practices from elsewhere. The National Development and Reform Commission (NDRC) in China has often been mentioned in this connection. However, the list of “main functions” of the NDRC is rather frightening. This list seems to include oversight over practically all economic activities in the country. For instance, the NDRC is entrusted with the formulation and implementation of annual and medium-term development plans, to monitor macroeconomic and social development trends and provide forecasts of key economic variables, to summarise and analyse the fiscal and financial situation, and so on. The list is endless — practically nothing seems to be left outside the purview of the NDRC. This format may well be suitable for the Chinese economy as, despite the large size of its private sector, political power in China is after all highly centralised. There is hardly any attempt to have a federal structure — quite unlike the Indian framework.

Perhaps the most important principle that needs to be kept in mind during the restructuring process is to respect the federal structure of our polity. One way in which this can be enforced is by allowing the states themselves to nominate members to the new commission. Of course, each state cannot have its own representative — that would make the commission too big and unwieldy. But the states could be divided into, say, four or five groups, perhaps on the basis of geographical proximity or per capita incomes. And each group can “elect” its own representative.

A system in which members are elected by the states will ensure that the states’ interests are protected, at least partly because the members will know that they owe their appointment to the state grouping to which they belong, and not to the Central government.

Hopefully, this will reduce the misuse of plan funds for narrow political purposes. It will also facilitate the incorporation of state inputs into the planning process.

There is also the issue of specifying the main functions of the restructured commission. The commission should limit itself strictly to its original mandate of allocating resources for Central and state plans. Perhaps a division could also be in charge of the implementation and evaluation of Central plans. Even this may not be required, since different Central ministries surely have a large number of personnel, and each nodal ministry is perfectly capable of carrying out this task. Of course, the new body should certainly not be entrusted with the task of either formulating or evaluating different state plans. Let each state be responsible for its own destiny.

A cursory look at the Planning Commission website reveals that there are about a hundred officers with the rank of deputy secretary and above. There must be a huge support staff as well. Given the reduced role of the planning process in the economy, do we really need such a large number of people? There is no doubt that the commission workforce can be slashed without any effect on its effectivity. This would also be in consonance with the prime minister’s slogan of “minimum government, maximum governance”.