Quest to widen direct tax net

Quest to widen direct tax net
There is need to drastically reduce the income tax exemption slab; say, down to Rs1 lakh from the current minimum threshold of Rs2.5 lakh

Is there a wide gap between India’s political democracy and fiscal democracy? This year’s Economic Survey has a telling graph, a picture that speaks a thousand words. It shows that in Norway, for every 100 voters, there are 100 taxpayers. In India for every 100 voters, we have seven taxpayers. It is as if the voters form the government, and the taxpayers help fund it. Of course, these numbers are only for people who pay income taxes. The burden of indirect taxes is upon all of us. But is this fair?

Indirect taxes are regressive, don’t depend on the income or paying capacity of the payer, and ultimately hurt the poor disproportionately. The goods and services tax (GST) is an indirect tax, and its rates and average burden are expected to be even higher than what prevails now. Indirect taxes in the form of excise taxes have risen by almost 50% for two consecutive years. Tax on petrol itself is up by 150% since July 2014. It is time we confront the curse of the silently escalating indirect taxes in India.

That cannot be done unless we increase direct tax collection, and widen the net to cover more direct tax payers. Why are we so reluctant to take this initiative?

The recent data released on direct taxes pertaining to three years ago, shows taxes foregone on capital gains to be of the order of Rs54,000 crore. A senior official of the Central Board of Direct Taxes is on record as having said that tax loss due to abuse of capital gains tax exemption could be to the tune of Rs80,000 crore this fiscal year. This year’s budget was kind to the real estate sector, making capital gains on sale of real-estate-tax exempt after just two years, instead of three. In most developed economies, capital gains on sale of assets is taxed at 15%. If we want to keep these gains tax exempt, let’s at least have a uniform holding requirement of three years, across all asset classes.

Our generosity extends not just to capital gains, but to income tax payers as well. The minimum threshold below which no income tax is paid is Rs2.5 lakh. This is 250% of India’s per capita gross domestic product (GDP). That makes India one of the most generous exemptors in the world, as shown by Praveen Chakravarty in a recent piece, “Decoding India’s Low Tax Base Conundrum”, in Bloomberg Quint. In most countries, income tax becomes payable when your income is about one-half or one-fourth of the average income in your country. Indeed, in Russia, you pay income tax from the very first rouble that you earn. With such a generous exemption, is it any wonder that only 3% of Indians pay income tax?

This tax-paying class is so vociferous and politically active that the exemption slabs keep creeping up every year. What we probably need is a drastic reduction in the exemption slab; say, down to Rs1 lakh. Of course, the applicable rate in the lower slab should remain low.

Income tax payers have two pet peeves. One is that they say, why are you letting agriculture income go tax-free? Second, they say, when everyone is paying such steep taxes in the form of value-added taxes (VAT), excise and service taxes, why do you want to hike income taxes? Both these are misguided.

First, only 14% of national income is from the agriculture and allied sectors. Almost 95% of the farmers who own land have barely 2-hectare holdings. Even with very high productivity, they can make only a modest income, which if all taxed, will add possibly 1% of gross domestic product (GDP) to tax collections. This won’t even move the needle. Besides, this would need a constitutional amendment. What’s needed, instead, is to catch the crooks who go scot-free misrepresenting their income as coming from agriculture.

The second peeve is like mixing up cause and effect. We have high incidence of indirect taxes because we do so poorly on direct taxes. The former would reduce automatically, if direct tax collection improved substantially. So, arguing that we should simply abolish income taxes altogether, because we collect so little of it, is an absurd proposition which hides our basic failure. The root cause is our inability to shake off the tightening shackle of indirect taxes. Incidentally, indirect taxes also tend to be inefficient, as compared to direct taxes. Until VAT and GST came along, we had cascading taxes, tax on tax, adding to inefficiency. Even the current GST excludes real estate, electricity and petro-products, thus diminishing the offset of credit for tax paid on inputs, and thus retaining inefficiency. Direct taxes in contrast have no such drawback.

One silver lining is in the outcome of demonetisation. Next year, the Union budget expects national (nominal) income to go up by 12% but personal income-tax collection will rise by 25%. Indeed, in the first three quarters of this year, personal tax collection is up 34%. For the past two years, direct taxes have risen by 17% in each year, even though rates have stayed unchanged. That shows a healthy widening of the tax net. Post demonetisation and the surge in bank deposits, about 1.8 million people have received “Hello” letters from tax authorities because of suspiciously high deposits. Most of them will hopefully join the income-tax payers’ club.

India’s ratio of direct to indirect taxes is 1:2, which is exactly the opposite of most advanced economies. We need to urgently correct this skew, for the sake of efficiency, fairness and reducing inequality. Paying direct income tax from your pocket is to be seen as your membership fee for this robustly functioning democracy. That’s the way of reducing the wide gap between our political and fiscal democracy.

sandalwood plantations in India

At $1,500 each, these aromatic trees are very precious parasites
The aromatic trees are maturing just as prices soar amid a production shortfall from the biggest producer India and rising demand from China
Currently there are about 6,000 acres of sandalwood plantations in India, and the area planted is increasing by more than 2,000 acres a year.
In a climatic sweet spot running across the far northern Australian outback, 15 years of patience may be about to pay off for two of the world’s biggest growers of plantation sandalwood trees.

The parasitic trees—prized for their aromatic wood and essential oil that’s used in perfumes, cosmetics and medicines—are approaching maturity, more than a decade after they were planted.

The trees are maturing just as prices soar amid a production shortfall from the biggest producer India and rising demand from China. A kilogram of Indian sandalwood oil now sells for about $3,000, or about five times as much as silver, and prices are rising by at least 20 to 25% a year, according to the South India Sandalwood Products Dealers & Exporters Association. That makes the mature trees on the Australian plantations run by TFS Corp. and KKR & Co.—backed Santanol Group worth about $1,500 apiece.

“You have a fundamental supply demand imbalance,” TFS chief executive officer Frank Wilson said in an interview from Perth. “We are a price maker.”

Global demand for sandalwood is set to gain five-fold to 20,000 tonnes of wood a year in the decade to 2025, according to TFS, the largest plantation operator in Australia. China will account for half of the increase, where it’s used in traditional medicines, handicrafts and fragrances. That comes as M. M. Gupta, the honorary secretary of South India Sandalwood Products Dealers & Exporters Association, says supply of legally sourced sandalwood from India is limited partly because of government restrictions on production and exports.

“The business can be very big,” Remi Clero, the CEO of Santanol, said by phone from Paris. Santanol currently sells the oil for just under $3,000 a kilogram, which Clero said “corresponds to a long-term price.”

India has historically been the dominant supplier but sales from government auctions plunged in recent years due to over exploitation and smuggling, according to papers presented at a Food and Agriculture Organization conference in 2011.

Centuries-old restrictions that made all sandalwood government property in India also severely discouraged private growers, Gupta said in an e-mail response to questions.

Santanol’s plantation at Kununurra, on the border of Western Australia and the Northern Territory some 3,000 kilometers (1,900 miles) from WA’s capital, Perth, will be among the sources filling the gap, Clero said.

Sales of sandalwood sourced illegally from natural forests in India are estimated to dwarf official production, which was mostly state-controlled until the middle of last decade. Supply from India remains variable and fell to just 250 tons of wood a year in 2016 from almost 4,000 tons a year in 1970 and more than 1,300 tons in 2002, according to government data. That variability increases the attractiveness of plantation supply.

“When you create a fragrance, a formula, you need to be able to give to your customers a consistent product,” Santanol’s Clero said. “They need to be able to do deals with companies like ours for 10 years or more of guaranteed supply.”

India isn’t standing still, however. The government of Karnataka, one of the largest growers of sandalwood in India, is backing cultivation in a bid to rebuild supply. Some 470 farmers have so far joined up to the plan covering an area of more than 2,000 acres of land, according to the website of Karnataka Soap and Detergents Ltd, the state-backed company that oversees the program. That may pressure future prices of both sandalwood oil and timber. A fifteen-year-old tree produces about 500 milliliters of oil, according to Clero.

“Australia will capture share of the Indian sandalwood market for another 10 years,” Gupta said. “Cultivators should have the free hand in cutting and sale/export, since they have to conserve and protect sandalwood for over 15 years. There will be no theft and illegal smuggling since the farmers can help themselves in protecting the property as they are doing for other crops.”

Currently there are about 6,000 acres of sandalwood plantations in India, and the area planted is increasing by more than 2,000 acres a year, Gupta said.

Still demand from new sectors, dwindling Indian output and the difficulty of replicating the maturing Australian plantation trees, has TFS confident in the future.

TFS plans to increase output 30-fold to 10,000 tons of timber a year from its 30,000 acres of plantations located in a strip of land running through the northern parts of Western Australian, the Northern Territory and Queensland. “It is very beautiful, rugged, high rainfall, very fertile area,” Wilson said. “It’s an oasis in the desert.”

The company manages about 5.4 million trees maturing at different stages and completed its first commercial harvest in 2014, according to its website. The trees, which need a host plant to help them get water and other nutrients from the soil making them semi-parasitic, are harvested whole. TFS uses almost the entire tree, selling oil—that it refines at its Mount Romance distillation plant—as well as wood chips, wood powder and resins.

Santanol manages about 2,200 hectares of sandalwood in Kununurra. It first harvested trees in 2014 and is selling “tons” of oil a year, said Clero who declined to give more detail.

The biggest growth in demand will come from pharmaceuticals and TFS is in the process of developing dermatological products to treat conditions including acne and psoriasis.

“There’s not a business in the world where good economics don’t attract competition and we’ll be the same,” Wilson said. “But there are many barriers to entry because it takes a long time to grow, it’s a difficult crop to grow and there’s a narrow band of geography where it can grow.”

Wilson, a former lawyer and also TFS’s largest shareholder, said revenue will grow more than tenfold to $1.5 billion by 2025.

TFS, founded in 1997, sold shares to the public in 2004 at 20 Australian cents each. They have risen about seven-fold since then. Its customers include Estee Lauder Cos, which uses sandalwood oil as a base note in its Pleasures brand perfume.

“We need a lot more customers to absorb the supply but they are not very hard to find,” Wilson said.

Decoding the direction of monetary policy

Decoding the direction of monetary policy
The committee is now aiming to reach a position where it is able to maintain inflation close to 4%

Reserve Bank of India governor Urjit Patel, in an interview to Network 18, once again explained the rationale behind the change in policy stance of the monetary policy committee (MPC). On 8 February, the rate-setting committee changed the policy stance from accommodative to neutral in order to give itself more flexibility. The change surprised the market and many analysts interpreted this as an end to rate-cut possibilities in the current cycle. Consequently, bond yields shot up as the market was expecting the MPC to cut policy rates by 25 basis points (one basis point is 0.01 percentage point).

The policy statement clearly explained the reasons for changing the stance; this was also reiterated by Patel in the interview. For instance, lower headline inflation in recent months has been largely driven by a fall in food prices—which may rebound as the supply of cash improves in the economy. It is possible that food prices, particularly those of vegetables, fell because of a cash crunch in the aftermath of the government’s currency-swap initiative. Core inflation continues to remain sticky at about 5%. Global commodity prices have firmed up in recent months and the volatility in the foreign exchange market can also put upside pressure on inflation. The central bank expects inflation to remain in the range of 4-4.5% in the first half and 4.5-5% in the second half of the next financial year.

While the policy stance of the committee surprised many analysts, the sharp reaction of the market is equally surprising—it was, in any case, expecting a long pause after a 25-basis point cut. It is also likely that since the lending rates have come down significantly because of the currency swap, a rate cut at this stage would not have made much difference.

In terms of policy direction, there are at least two important points worth noting. First, a change in stance from accommodative to neutral does not necessarily mean that rates cannot be reduced from the present level. If inflation continues to undershoot the target, the committee may decide to cut rates at a later date. Differently put, it is difficult to argue that policy rates can only go up from the present levels. Second, the committee is now aiming to reach a position where it is able to maintain inflation close to 4%, which should be seen as a big positive for the economy.

After the rates were reduced in October, some market participants were of the view that perhaps the committee would be comfortable with inflation readings closer to the upper end of the given band. But that is not the case. The minutes of the December meeting, for instance, showed that in Patel’s view, “securing 4% (inflation target)—the central point of the notified target range—remains the primary objective”. If the committee is able to maintain inflation at about 4% on a durable basis, it will enhance macroeconomic stability in a big way and boost growth prospects. It will also open up space for a significant cut in policy rates. As Patel, in the above-mentioned interview, also explained: “The best way that a central bank can support growth on a durable basis is to ensure that the inflation is low, stable…. Very few countries grow at a high rate, if inflation is high and volatile. I think, in a way, we are doing our bit to support a higher growth rate but on a durable basis.”

Along with implications for economic stability and growth, it is also important for the rate-setting committee to maintain inflation closer to the target as it will cement its credibility. This will also help in dealing with short-run supply shocks. A recent working paper put out by the International Monetary Fund, Inflation-Forecast Targeting For India: An Outline Of The Analytical Framework, noted in this context: “As the FIT (flexible-inflation-targeting) regime gains credibility, and wins the public confidence in its ability to ensure price stability even in an economy subject to price level shocks, inflation expectations would remain aligned to the medium-term target, which in itself would ensure that the effects of supply shocks on inflation remain transitory.”

Therefore, the change in policy stance by the MPC should be seen from the broader perspective of its objective. To be sure, maintaining inflation close to the 4% level may not be easy for the committee due to the underlying complications of the economy. But keeping inflation close to the 4% target will not only help growth in the medium to long run, but will also build a strong track record for the committee which will have a bearing on its actions in the future.

Will low and stable inflation boost growth prospects?

Russia overtook Saudi Arabia as the world’s largest crude producer

Russia overtook Saudi Arabia as the world’s largest crude producer in December, when both countries started restricting supplies ahead of agreed cuts with other global producers to curb the worst glut in decades.

1. Russia – 10.9 million oil barrels / day – which make for 13.28% of the world’s oil production
2. Saudi Arabia – 9.9 million oil barrels / day – which are 12.65% of the total number of oil barrels produced in the world per day
3 United States – 8.45 million oil barrels / day – which are 9.97% of the world’s daily oil production.
4. Iran – 4.23 million oil barrels / day – 4.77% of the total daily oil production
5. China – 4.073 million oil barrels / day – 4.56%

Russia pumped 10.49 million barrels a day in December, down 29,000 barrels a day from November, while Saudi Arabia’s output declined to 10.46 million barrels a day from 10.72 million barrels a day in November, according to data published Monday on the website of the Joint Organisations Data Initiative in Riyadh. That was the first time Russia beat Saudi Arabia since March.

Saudi Arabia and fellow producers from the Organization of Petroleum Exporting Countries decided at the end of November to restrict supplies by 1.2 million barrels a day for six months starting Jan. 1, with Saudi Arabia instrumental in the plan. Non-member producers, including Russia, pledged additional curbs. Brent crude prices have climbed about 20 percent since the end of November.

The U.S. was the third-largest producer, at 8.8 million barrels a day in December compared with 8.9 million barrels a day in November, according to JODI. Iraq came in fourth at 4.5 million barrels a day, followed by China at 3.98 million barrels a day, the data show.

Saudi Arabia’s crude exports declined to 8 million barrels a day in December, from 8.26 million barrels a day, the biggest outflow for any month since May 2003, according to JODI data.

Weak official response to the pollution of Bengaluru’s wetlands threatens public health

Weak official response to the pollution of Bengaluru’s wetlands threatens public health

The extraordinary sight of a lake in Bengaluru on fire, with a massive plume of smoke that could be seen from afar, is a warning sign that urban environments are crashing under the weight of official indifference. If wetlands are the kidneys of the cities, as scientists like to describe them, Karnataka’s capital city has entered a phase of chronic failure. No longer the city of lakes and famed gardens, it has lost an estimated 79% of water bodies and 80% of its tree cover from the baseline year of 1973. Successive governments in the State have ignored the rampant encroachment of lake beds and catchment areas for commercial exploitation, and the pollution caused by sewage, industrial effluents and garbage, which contributed to the blaze on Bellandur lake. The neglect is deliberate, since some of the finest urban ecologists in the city have been warning that government inaction is turning Bengaluru into an unliveable mess. It is time the State government took note of the several expert recommendations that have been made, including those of the Centre for Ecological Sciences of the Indian Institute of Science. The priority, clearly, is to end pollution outfalls into the water bodies, which will help revive them to an acceptable state of health. Identifying all surviving wetlands and demarcating them using digital and physical mapping will help communities monitor encroachments, while removal of land-grabbers and restoration of interconnecting channels is crucial to avoid future flooding events.

Loss of natural wetlands is an ongoing catastrophe in India. A decade ago, when the Salim Ali Centre for Ornithology and Natural History released a conservation atlas for all States using space applications, it reported the tragic fact that 38% of wetlands had already been lost nationally; and shockingly, in some districts only 12% survived. The Centre has since issued rules for conservation and management, and chosen 115 water bodies in 24 States for protection support, but this is obviously too little. Moreover, research studies show that the concentration of heavy metals in such sites is leading to bioaccumulation, thus entering the plants and animals that ultimately form part of people’s food. It should worry not just Bengaluru’s residents, for instance, that soil scientists have found higher levels of cadmium in green vegetables grown using water from Bellandur. More broadly, the collapse of environmental management because of multiple, disjointed agencies achieving little collectively and legal protections remaining unimplemented pose a serious threat to public health. Every city needs a single lake protection authority. India’s worsening air quality is now well documented, and most of its wetlands are severely polluted. Citizens must assert themselves to stop this perilous course.

The historically low solar tariffs at Rewa

Solar energy has become the cheapest it has ever been in India, thanks to historically low tariffs achieved in the reverse auction bid for three units in the Rewa plant in Madhya Pradesh earlier this month. But what does this mean for the solar industry in India?

What exactly happened?

The two-day reverse auction bid for three 250 MW blocks in the Rewa solar plant in Madhya yielded a tariff of Rs 2.97 for each of the blocks and a levelised tariff of Rs 3.3 over the course of the 25-year power purchase agreement. The winners of each of the bids were Mahindra Renewables, ACME, and Solenberg Power. The Rewa plant is a joint venture of Solar Energy Corporation of India and Madhya Pradesh Urja Vikas Nigam (MPUVN).
A reverse auction in such a scenario is basically a situation where companies bid for a unit by offering the lowest tariffs at which they will sell the energy generated from the unit. The lowest tariff wins the bid.

How were such low rates achieved?

Companies bidding for the Rewa units were able to commit to such low tariffs because of various factors, some to do with the industry, and others to do with the specific bid.
The industry-related factors include the fact that solar energy producers in India have been able to greatly reduce their costs due to the import of cheap photovoltaic panels from China. In addition, in keeping with the government’s renewable energy push, especially its commitment to achieve 100 GW of solar energy by 2022, it has expedited the land acquisition process and has reduced excise duties on various components required to set up a solar plant.

Specific to the Rewa bid, the Madhya Pradesh government implemented a few favourable and unique structures in the project power purchase agreements. For example, it included a state government guarantee for the contracted capacity by the utility as well as a compensation for deemed generation in case of non-availability of grid. These factors allowed the bidders to commit to lower tariffs than they would otherwise have been able to.

What does this mean?

While this does mean that solar energy will be cheaper, several industry experts have warned that, at such low tariffs, margins are also very slim. This could mean that even a slight increase in input prices—such as pricier imports from China—could push many of these projects into unprofitability.

 

Scientists claim discovery of drowned Pacific Ocean continent Zealandia

The 4.5-million square km land mass is 94% under water and only its highest points — New Zealand and New Caledonia — are visible.

A continent two-thirds the size of Australia has been found beneath the south-west Pacific Ocean, scientists reported in the journal of the Geological Society of America.
Known as Zealandia, the land mass of 4.5 million square kilometres (1.74 million square miles) is 94 per cent under water and only its highest points — New Zealand and New Caledonia — poke above the surface.
“It’s rather frustrating for us geologists with the oceans being there,” said Nick Mortimer, a geologist at GNS Science in Dunedin, New Zealand. “If we could pull the plug on the oceans, it would be clear to everyone we have mountain chains and a big high-standing continent above the ocean crust.”
Mr. Mortimer was the lead author of the paper titled Zealandia: Earth's hidden continent which says the new discoveries prove what had long been suspected.
Suspected since the 1920s
“Since about the 1920s, from time to time in geology papers, people used the word ‘continental’ to describe various parts of New Zealand and the Catham Islands and New Caledonia,” Mr. Mortimer said. “The difference now is that we feel we’ve gathered enough information to change ‘continental’ to the noun, ‘continent.’”
Mr. Mortimer said geologists early in the previous century had found granite from sub-Antarctic islands near New Zealand and metamorphic rocks on New Caledonia that were indicative of continental geology. If the recent discovery is accepted by the scientific community, cartographers will probably have to add an eighth continent to future maps and atlases.
“The paper we’ve written unashamedly sticks to empirical observations and descriptions,” Mr. Mortimer said. “The litmus test will really be if ‘Zealandia’ appears in maps and atlases in five or 10 years’ time.”

Split 80 million years ago?

Zealandia is believed to have broken away from Australia about 80 million years ago and sank beneath the sea as part of the break up of the super-continent known as Gondwanaland.