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December 2016 Indian Economy


INDIAN ECONOMY

RBI raises Market Stabilisation Scheme(MSS) limit to Rs. 6 lakh crore to manage liquidity
In order to mop up extra liquidity from the system in view of demonetisation, government and the Reserve Bank  sharply raised the Market Stabilisation Scheme (MSS) ceiling to Rs. 6 lakh crore from Rs. 30,000 crore.

The short-term instruments issued under the MSS will suck out surplus liquidity, arising from the surge in deposits with the banking system on account of the on-going demonetisation drive.

National roll-out of Plan Accounting and Public Finance Management System
The Union Cabinet approved the national rollout of the Plan Accounting and Public Finance Management System (PA&PFMS) also known as Central Plan Scheme Monitoring System (CPSMS) over a period of four years till 2017 with a total outlay of Rs.1080 crore.

What it will do?
The new system provides for a financial management platform for all plan schemes, a database of all recipient agencies, and integration with core banking solution of banks handling plan funds, integration with State Treasuries and efficient and effective tracking of fund flow to the lowest level of implementation for Plan schemes of the Government. 

 It will provide information across all plan schemes/implementation agencies in the country on fund utilization leading to better monitoring; review and decision support would enhance public accountability in the implementation of plan scheme.

Taxation Laws (Second Amendment) Act, 2016 
The Taxation Laws (Second Amendment) Act, 2016 has come into force on 15th December, 2016.  The Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016 (the Scheme) introduced vide the said Act shall commence on 17th December, 2016 and shall remain open for declarations up to 31st March, 2017.

The Salient features of the Scheme are as under:

  •  Declaration under the Scheme can be made by any person in respect of undisclosed income in the form of cash or deposits in an account with bank or post office or specified entity.
  • Tax @30% of the undisclosed income, surcharge @33% of tax and penalty @10% of such income is payable besides mandatory deposit of 25% of the undisclosed income in Pradhan Mantri Garib Kalyan Deposit Scheme, 2016. The deposits are interest free and have a lock-in period of four years.
  • The income declared under the Scheme shall not be included in the total income of the declarant under the Income-tax Act for any assessment year.
  • The declarations made under the Scheme shall not be admissible as evidence under any Act (eg. Central Excise Act, Wealth-tax Act, Companies Act etc.). However, no immunity will be available under Criminal Acts mentioned in section 199-O of the Scheme.

The Taxation Laws (Second Amendment) Act, 2016 has also amended the penalty provisions in respect of search and seizure cases. The existing slab for penalty of 10%, 20% & 60% of income levied under section 271AAB has been rationalised to 30% of income, if the income is admitted and taxes are paid. Otherwise a penalty @60% of income shall be levied.

Japan drags India to WTO against steps on iron, steel imports
Japan has dragged India to the World Trade Organisation (WTO) against certain measures taken by New Delhi on imports of iron and steel products.

Background

  • In February, India imposed MIP(Minimum import price) of 173 products for six months, which was later extended twice for two months. Earlier this month, the government extended MIP on 19 products till February 4, 2017.
  • India has also imposed anti-dumping duties on certain steel products to guard domestic players from cheap imports.
  • India and Japan implemented a comprehensive free trade agreement in 2011. It gave easy access to Japan in the Indian steel market. Indian industry has time and again demanded to take out the steel sector from the pact.

What is the way ahead?

  •   As per the WTO’s dispute settlement process, the request for consultations is the first step in a dispute.
  •  Consultations give the parties an opportunity to discuss the matter and to find a satisfactory solution without proceeding further with litigation.
  •  After 60 days, if consultations fail to resolve the dispute, the complainant may request adjudication by a panel.

Minimum import price

  •  MIP (Minimum Import Price) is the minimum price per tonne that Indian firms have to pay while importing products into India.
  • In the current case aforementioned ,it can be seen as government's policy of promoting domestic growth of steel manufacturing industry and restricting and reducing dependence on externally manufactured steel products. (Without MIP, Indian importers would be able to import more steel since internationally the cost of steel is low owing to slow economic growth worldwide.) This would also help in reducing fiscal deficit.

Anti dumping duty

  • An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value.
  • Dumping is a process where a company exports a product at a price lower than the price it normally charges on its own home market. 
  • To protect local businesses and markets, many countries impose stiff duties on products they believe are being dumped in their national market.

'Google Tax' detrimental to start up ecosystem: Experts 
Google tax is expected to adversely affect the start-up ecosystem going forward, according to tax experts. 

Major highlights

  •  The levy which is at 6 per cent presently became effective on June 1. If passed on to start ups, the applicable tax is expected to be in excess of 22 per cent, including the 15 per cent service tax and could further increase if GST comes into effect. 
  • The fact that the levy has been notified in addition to taxes payable by a businessman on imported online services unduly increases the cost of doing business for start-ups which in turn stifles innovation.
  • It noted that emerging start-ups burn a lot of cash in the first few years before becoming profitable and when the levy is expanded to include a vast number of other digital services the burden is set to multiply exponentially, hampering even more serious cost to innovation.

What is Google Tax

  • Budget 2016 has introduced Equalization Levy, being popularly known to us as “Goggle Tax”.
  • Big Internet companies like Google, Facebook are located outside India, and hence they are not even subject to any taxes in India. These new business models have created new tax challenges by challenging the current manner of levy of tax which are based on the presence based on permanent establishment rules. So in this case Govt has introduced to impose Google tax.
  • Currently this equalization levy is only leviable on:

                    1.    Online Advertisement
                   2.    Any provision of digital advertising space or any service for the      purpose of online advertisement and, any other service to                             be notified by government.

  • This levy equalization would be in the same manner as TDS i.e. person making the payment for digital advertising would be required to deduct Equalization levy @ 6% of total payment & deposit same with central government.

India and Singapore Sign a Third Protocol for Amending the Double Taxation Avoidance Agreement (DTAA)
India and Singapore have amended the DTAA for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income, by signing a Third Protocol.

Major Highlights

  • This is in line with India’s treaty policy to prevent double non-taxation, curb revenue loss and check the menace of black money through automatic exchange of information.
  • The India-Singapore DTAA at present provides for residence based taxation of capital gains of shares in a company. 
  • The Third Protocol amends the DTAA with effect from 1st April, 2017 to provide for source based taxation of capital gains arising on transfer of shares in a company.
  • The Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases, which is a taxpayer friendly measure and is in line with India’s commitments under Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases. 
  • The Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion.
  •  It is similar to other measures which  India has taken during  recently revised treaties with Mauritius and Cyprus and the joint declaration signed with Switzerland.

DTAA

  • A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers in these countries can avoid being taxed twice for the same income. 
  •  A DTAA applies in cases where a tax-payer resides in one country and earns income in another.
  •  DTAAs can either be comprehensive to cover all sources of income or be limited to certain areas such as taxing of income from shipping, air transport, inheritance, etc.
  • India has DTAAs with more than eighty countries, of which comprehensive agreements include those with Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK and US.

BEPS
Base erosion and profit shifting (BEPS) is a tax avoidance strategy used by multinational companies, wherein profits are shifted from jurisdictions that have high taxes (such as the United States and many Western European countries) to jurisdictions that have low (or no) taxes (so-called tax havens).

Transfer Pricing

  • Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. 
  • For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price. Legal entities considered under the control of a single corporation include companies that are wholly or majority owned ultimately by the parent corporation.

Nepal rejects India’s ‘open sky’ offer
Nepal has rejected India’s ‘open sky’ offer to allow unlimited flights between the two countries.

Nepal said it was not yet ready for the ‘open-sky’ agreement and it might consider the proposal two years later.

Background

  • Under the National Civil Aviation Policy, approved by the Union Cabinet earlier this year, India intends to enter into ‘open-sky’ agreements with SAARC countries and with those beyond the 5,000-km radius from Delhi.
  •  Countries sign air services agreements (ASAs) through bilateral negotiations to decide the number of flights airlines can fly. Under the ‘open-sky’ agreement, there is no restriction on flights or seats.
  • Nepal has long been pushing for new airspaces to ease congestion on the existing routes and to save time and cost for air passengers.

Present Status
Among SAARC countries, India doesn’t have any ‘open sky’ agreement with Pakistan, Nepal and Afghanistan. It allows unlimited flights from Bangladesh and Maldives at 18 domestic airports, from Sri Lanka at 23 airports, and from Bhutan at all its airports.

Open Sky Agreement

  •  It allow carriers from our country to launch any number of flights to any destination.
  •  Greece is the first country that has signed open skies with India after the aviation policy was cleared by the Cabinet. 

Apex Corridor developmental body(NICDIT)
The Centre has approved the re-designation of the Delhi-Mumbai Industrial Corridor Project Implementation Trust Fund as National Industrial Corridor Development & Implementation Trust (NICDIT) — the apex body to oversee development of all industrial corridors across the country.

NICDIT will implement all the five proposed industrial corridors, together covering 15 States. 

About NICDIT

  • NICDIT would be the apex body under the administrative control of the department for industrial policy and promotion for co-ordinated and unified development of all the industrial corridors in the country.
  • It will channelize central as well as institutional funds while ensuring that the various corridors are properly planned and implemented keeping in view the broad national perspectives regarding industrial and city development
  • It will support project development activities, appraise, approve and sanction projects.
  • DMICDC will function as a knowledge partner to NICDIT in respect of all the industrial corridors in addition to its present DMIC work, till knowledge partners for other industrial corridors are in place.
  •  The Cabinet cleared a sum of Rs.1,585 crore for NICDIT for development of four additional corridors and NICDIT’s administrative expenses up to 31 March 2022.

Sample Questions

Q1.Which of the following is/are correct regarding Market Stabilisation Scheme (MSS).
1.    Under this scheme RBI on behalf issues securities, like Treasury Bills, Dated Securities, etc.
2.    It aims to increase the money supply in the market
3.    The money is stored in the Market Stabilization Scheme Account (MSSA).
Choose the correct option:
a)Only 1 ,2                  b)Only2,3
c)Only 1,3                   d)All


Q2.India and Singapore have amended the DTAA for the avoidance of double taxation and prevention, consider the following statement regarding DTAA.
1.    DTAA applies in cases where a tax-payer resides in one country and earns income in another.
2.    It aims to avoid double taxation by domestic and foreign country.
Choose the correct option:
a)Only 1                    b)Only 2
c)Both                        d)None


Answers:
Q1.c              Q2.c