MISCELLANEOUS

LIBERALISATION-PRIVATISATION & GLOBALISATION REFORMS 1991

The economic liberalisation in India refers to the economic liberalization of the country’s economic policies with the goal of making the economy more market and service-oriented and expanding the role of private and foreign investment. Indian economic liberalization was part of a general pattern of economic liberalization and modernization occurring across the world in the late 20th century.

Impact

1. Liberalisation
   • Competitive Market: After the new policy, Indian companies had to face all round competition which means competition from the internal market and the competition from the MNCs.
   • Market Oriented: Earlier firms were following selling concept, i.e., produce first and then go to market but now companies follow marketing concept.
   • Stimulant to Industrial Production: LPG policies have worked as a great stimulant to industrial production in the Indian economy. IT industries in India have reached the global level because of these LPG reforms.
   • Poverty: It has led to the rise in incomes and the emergence of a strong middle class in India bringing millions out of poverty.
     • Data: Poverty declined by 1.36 percentage points per annum after 1991, compared to that of 0.44 percentage points per annum prior to 1991. (World Bank)
   • Political Risks Reduced: Liberalisation policies in the country lessen political risks to investors. The government can attract more foreign investment through liberalisation of economic policies.
   • Divestment: The purpose of the sale is mainly to improve financial discipline and facilitate modernization.
2. Privatisation
   • Removal of PSU budgets: Prior to 1991 all the losses of the Public sector were used to be made good by the government by sanctioning special funds from budgets.
   • Reduced Fiscal Deficit: It was 8.5 percent of the GOP prior to 1991. Thanks to the LPG policies, government revenue has increased. As a result, the Fiscal deficit was reduced to 4% of the GOP (gross operating profit).
   • Banking: Since reforms, there have been three rounds of License Grants for private banks. Private Banks such as ICICI, HDFC, Yes Bank and also foreign banks have diversified Indian Banking.
   • Development of healthy competition: Integration of global markets reduces manufacturing costs, improves quality, reduces processing time, and business becomes dominant drivers.
3. Globalisation
   • Rise in Exports: To earn more foreign exchange many Indian companies joined the export business and got a lot of success in that.
     • Data: During the last 30 years, India’s exports have increased more than 17 times
   • GDP Growth: During 1990-91 India’s GDP growth rate was only 1.1% but after 1991 reforms GDP growth rate increased year by year and in 2015-16 it was estimated to be 7.5% by IMF.
   • Birth of IT sector: Software, BPO, KPO, LPO industry boom in India has helped India to absorb a big chunk of demographic dividend, which otherwise could have been wasted.
   • FDI: Opening up of the economy attracted foreign investment into the country and has helped in the developmental process in India.
     • Data: India’s FDI inflow has shown an overwhelming increase of 564 times since 1991.
   • Employment: The reforms led to a rise in employment and effectively reduced the unemployment levels in India.
   • High Standard of Living: With the outbreak of Globalisation, Indian economy and the standard of living of an individual has increased.
   • Integrated Supply Chains: Globalisation helped India embed itself in the global supply chains and be a vital trading economy.
     • Data: India’s share in global exports has moved up from mere 0.6 percent in the early nineties to 1.7 percent currently.

Challenges due to LPG

1. Liberalisation
   • Poor Informal Growth: The reforms were mainly for the formal sector of the economy, the agricultural sector, the urban informal sector and forest dependent communities were untouched by the reform.
   • Unfair Competition: On account of liberalisation, competition has increased for the Indian firms. Multinationals are quite big and operate in several countries which has turned out to be a threat to local Indian Firms.
   • Reduced Government Liability: Impact of FDI in Banking sector: Foreign direct investment allowed in the banking and insurance sectors resulted in decline of government’s stake in banks and insurance firms.

1. Privatisation
   • Profit Seeking Social Sector: There are many industries which perform an important public service, e.g., health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective.
   • Monopoly: A natural monopoly exists when the most efficient firms are limited or just singular.
   • Dilution of Stake of the Government: If in the process of disinvestments the private sector gained larger lives.stakes and neglecting the government’s welfare object.
2. Globalisation
   • Inflation: Strong demand for food and energy has caused a steep rise in commodity prices. Food price inflation (known as agflation) has placed millions of The world’s poorest people are at great risk.
   • Rise in Inequality: Market-based reforms led to the economic disparity between the rich class and the poor class.
     • Data: The top 10% of the Indian population holds 77% of the total national wealth.
   • MSME’s: Their products are contested by cheaper imports from China, many of them find it hard to compete domestically and globally against their products.
3. Others
   • Agriculture: Share of agriculture in employment has remained high whereas its share in the economy has gone down.
   • Manufacturing: Manufacturing growth has stagnated while the service sectors have grown exponentially.
   • Neglect of Social Sector: Social Sectors like Health, education were ignored in this reform which has led to poor health sector development and lousy educational growth.
   • Environmental Degradation: Rapid economic growth has often been at the cost of ecological degradation, deforestation and reduction in forest lands.

Economic Reforms 2.0

Need

• Red Tapism: India dismantled licence raj but permission raj persists. Successive governments have shied away from reviewing the process of clearances.
• Overregulation: Small and medium enterprises are the bulwark of employment and exports but suffer from over regulation and under provision of capital.
• Social Outcomes: India has struggled to up the spending on education and health.
• Poor Tax Base: Reliance on non-tax revenues for the government might not be a sustainable solution. Therefore, the tax base should be broadened for increasing tax revenues.
• Economic Inequality: India’s economic liberalisation has not reduced income inequality, but has further accentuated it instead, thus reforms are needed to reset this wrong.
• Share in Global Trade: India’s share in global trade has remained low compared to that of China in the last 30 years.
• Lack of Formal Jobs: The reforms have led to rise in informal employment rather than formalising the economy
  • Data: Share of informal employment in this sector increased from 32% in 1999-2000 to 54% in 2004-05 and 67% in 2011-12.
• Gender Inequality: Reforms are further needed to empower women and bridge the gender divide.
  • Data: India ranks 112th out of 153 in the gender inequality index 2020
• FDI Reforms: India’s policy on FDI has been defined less by objectives and more by crises. This has delayed expansion in the areas where access to capital and technology could have made India a dominant player – for instance in electronics and computer hardware.

Way Forward

1. Macro-Economic Reforms
   • Balance between Growth and Inflation: The interest rate is an important instrument to play with this trade-off. While growth is an efficiency concern, inflation which creates a negative impact on economic well-being and more severely on the purchasing power of the poor is an important equity concern.
   • Ease Liquidity for Banks: It is important for banks to now move towards self-regulated risk management. In that sense, banks should be sensitised to adhere to Basel III norms.
   • Invest in Social Sector: Economic gains must translate to also uplifting the social sectors, especially after Covid it is important to invest in the health and education sector.
   • Promote Gender Equality: With the women labour-force hobbled by inequities, the country’s critical productive resource base is impaired, resulting in serious losses to the economy and society.
   • Manage Migration from rural: India must deal with the large mass of people moving from the rural areas to urban centres in pursuit of better employment prospects, infrastructural development can ensure migrations are controlled.
   • Non-Conflicting growth of Capital: A bottom-up strategy should be developed, taking into account the interests of the country’s majority population. Such a strategy must strive for non-conflicting growth of capital, as enough evidence exists that social conflicts disrupt growth.

1. Industry Reforms
   • FTA Management: FTA must be used strategically as it is seen in the last 6 FTA have caused a rise in trade deficits for India.
   • Sunset Clause on legislations: Laws are drafted to address issues that are relevant at the time. However, its relevance might or might not remain in the long run, and the need for its continuity should be examined as it gets phased out over time.
   • Encourage Entrepreneurs: New-age entrepreneurs thus need to be encouraged through a package of incentives from the policy core, and creating greater opportunities.
2. Agricultural Reforms
   • Cooperatives: Encouraging the formation of cooperatives can improve the market linkage and profitability of the farm.
   • Integrating Agri Markets: The fragmented nature of the agricultural markets leads to inefficiencies in the agricultural marketing process.
   • Rationalise Supply Chains: Indian agriculture’s supply chain is elongated due to extensive intermediation, information asymmetries, and other forms of market imperfections that increase the transaction costs.
   • Land Reforms: Property rights need to be defined properly, and a law should be able to bring informal institutional mechanisms (that might be efficient) in the formal framework.
   • Rationalise Subsidies: This will bring in operational efficiency and better customer service, without any increase in government’s burden.
3. Environmental
   • Forest Management: Forest governance system is based on archaic British-era regulations. These need to be changed urgently to reflect the challenges of the current situation.
   • Disaster Management: India’s disaster management systems are failing to adhere to global best practices, thus causing a huge shortfall in economic potential in various regions.
     • Data: India loses $9.8 billion every year due to disasters
   • Climate Change: Reduction in fossil fuel consumptions and investments in renewables can bring down India’s dependencies in the long run.

It must be noted that while economic growth is important and needs to be treated as the necessary condition for economic well-being, it is not sufficient for human well-being, thus economic reforms today are necessary to convert growth into human well being as well.

LAND REFORMS

Land Reforms have been an issue in India since the British Raj, after independence it has been the responsibility of the governments to provide land to the landless tenants and curb excessive land holding, however due to various factors the implementation has been very slow.

Need/Advantages/Impact

1. Economic
   • Distribution of Wealth: Land reforms help in the distribution of land to the landless and spread wealth and land more equitably.
   • Better Farm Incomes: Higher incomes are generated with proper land distribution and administration that are outcomes of proper land reforms.
   • Livelihood: It also ensures all year round livelihood for the land owners and thus curbs migration and rural unemployment.
   • Prevents Concentration of Wealth: The ceilings on landholdings referred to legally stipulating the maximum size beyond which no individual farmer or farm household could hold any land.
   • Land Records: Due to the poor state of land records, today, farmers are easily ousted from their lands and reduced to being landless and poor.
   • Highly uneven land distribution: As reflected in Agricultural Census (2005-2006) data and other sources underlines the need to optimize the redistribution of land to the landless tillers.
2. Social
   • Poverty Reduction: Ownership of land helps in poverty reduction as wealth is redistributed to the landless poor.
   • Reduces Exploitation: Land reforms can help in ending the servitude of landless farmers and labourers who are exploited by the large landowners.
   • Abolishes intermediaries: As a result of the abolition of intermediaries, about 2 crore tenants are estimated to have come into direct contact with the State making them owners of land.
   • Rent Control: Tenancy reforms introduced to regulate rent, provide security of tenure and confer ownership to tenants.
   • Rural Society: To bring a systematic structural change in rural society for the attainment of the goal of food production and justice.
   • Social Justice: It made sure the farmers benefited from their own labor and promoted equality of wealth.
3. Environmental and Land Use
   • Land Fragmentation: Land reforms are necessary to check the increase in the land fragmentation.
   • Soil Productivity: Apart from the diversion of lands from cultivation to industry, housing, tourism and other non-agricultural uses and the extensive damage to cultivation due to industrial waste, pollution.
   • Agricultural Output: Another major advantage of such land reforms is that they can increase the agricultural output of the country.
   • Consolidating scattered land holdings: Consolidation of holdings means bringing together in one compact block all plots of land farmers which are scattered all over the village.
4. Political
   • State-Farmer collaboration: These reforms opened a dialogue between the government and the farmers. They both cooperated to boost the agricultural sector of our economy.
   • Empowerment: It empowers the actual tillers of the soil, and organizes and enables them to seek development benefits from the State.

Challenges/Issues to Land Reforms

1. Procedural

• Lack of political will: A lack of political will in resolving the land issues in rural India has been a big issue in the implementation.
• Bureaucracy: The apathetic attitude of the bureaucracy, especially with the issues of records and documentation makes land reforms difficult.
• Lack of Financial Support: Lack of financial support is still another hindrance in the way of land reforms. No separate allocation of funds was made in the Five Year Plans for financing land reforms.
• Poor Integration: Another reason for the failure of land reforms in India was the lack of integrated approach such as abolition of intermediary tenures, tenancy reforms and ceiling of holdings etc. They lack proper coordination in the programmes.
• Absence of up-to-date land records: This creates hurdles in identifying the true owners and impedes resolution.
• Legal hurdles: In the way of implementation of land reforms and high pendency of land disputes in the judiciary.

1. Implementation
   • Lack of uniformity: Land reform laws are not uniform throughout India with some states like West Bengal and Kerala having successful models whereas others states are languishing.
   • Corruption: It often results in the state machinery with a bias for larger rich landowners rather than for the poor farmers.
   • Landlord Lobbying: The rich peasant – landlord class had now gained political foothold and was capable of stalling reforms or diluting them to suit their interests.
   • Property Management: Resources, both natural and manmade, controlled and managed as common property present another challenge in the context of land-related issues.
   • Unorganised: Unorganized, Inarticulate and passive nature of agricultural workers especially the landless and the labourers impede the implementation.
   • Diverse Interests: The fundamental problem lies in the fact that the beneficiaries of land reforms do not constitute a homogeneous social or economic group.
   • Ecological Issues: There is a need to explore the linkages among rural poverty, landlessness, and skewed land tenure systems with particular attention to the problems of deforestation.

Government Initiatives

1. Abolition of intermediaries: Zamindari system was abolished. “Land to tillers” programme which recognized the tillers rights over land encouraged further investment in agriculture.
2. Tenancy reforms: They confirmed the occupancy rights of tenants and regulated rent that could be levied. This too encouraged the farmers to take proactive steps to improve farm produce.
3. Reorganization of land holdings: Land ceiling acts were enacted to regulate the amount of land an individual could hold. It met with limited success since only 2% of the land was reorganized by it.
4. Encouragement of Bhoodan and Sarvodaya movement: They appealed to the people’s consciousness to donate land for the welfare of people.
5. Consolidation of land holding: It was introduced to improve efficiency. It was successful in Punjab, Haryana but failed in Southern and eastern states.
6. Collective joint farming: It aimed to pool the individual land holdings under village communities to reap the benefits of economies of scale. It was unsuccessful since people didn’t want to alienate their land.
7. National Land Records Modernization Program: Launched in 2008 aimed at updating and digitizing land records. It has brought clarity to the title of land holders and infused transparency.
   • Data: Land records have been completed in more than 90 per cent of the states according to Government sources.
8. Ownership Rights to tenants: Legislative provisions have been made in many areas of the country for conferment of ownership rights on tenants or allowing cultivating tenants to acquire ownership rights on payment of compensation.
9. Non-Tribal Transfers: State government has accepted the policy of prohibiting transfer of land from Tribals to non-tribals and restoration of alienated land to tribals.

Legislative

• Right to Fair Compensation and Transparency in Land Acquisition Act 2013: The Act provides for land acquisition as well as rehabilitation and resettlement. It replaces the Land Acquisition Act, 1894.
• Land Ceiling Acts: In simpler terms, the ceilings on landholdings referred to legally stipulating the maximum size beyond which no individual farmer or farm household could hold any.
• Draft National Land Reforms Policy 2013: The National Land Reforms Policy focuses on those aspects of land reforms which if implemented in true letter and spirit will have the potential to tilt the balance in favor of the landless and poor.

Way Forward

• Land Market Development: In particular, it is important to build the necessary legal and policy framework and institutional mechanisms to enable farmers to transfer land rights.
• Collective Farming: Allow state or collective farm members to exercise various options on a continuing basis, including options to farm collectively, to withdraw their land as part of a small group, or to withdraw their land to create a family farm.
• Women Empowerment: Women should receive at least equal rights to distributed land, programs should be administered by local, beneficiary-dominated committees.
• Technical Assistance: Availability of technical assistance (crucial to the development of training, monitoring, dispute-resolution, and other measures that help facilitate effective implementation of land reform programs), Support from international donors.
• Contract Farming: This can help in more state-farmer collaboration and reduce agricultural distress.
• Land Leasing: Land leasing should be adopted on a large scale to enable landholders with unviable holdings to lease out land for investment, thereby enabling greater income and employment generation in rural areas.
• Digitisation: The digitisation of land records can help in accelerating the process of land reforms.

Draft National Land Reforms Policy Recommendations

• Stopping land-holding exemptions to religious, educational, charitable, research and industrial organisations beyond 15 acres
• Allowing smaller land-holdings in states where the existing limit is more than five to 10 acres for irrigated land and 10 to 15 acres for non-irrigated land
• A single-window to redistribute surplus land within a specified time
• A crackdown on benami— in someone else’s name— land
• A database of land inventories available for public scrutiny.

NITI Aayog’s Model Bill on Conclusive Land Titling

• State Governments: It will provide state governments power to order for establishment, administration and management of a system of title registration of immovable properties.
• Land Authorities: Land Authorities to be set up by each State government, which will appoint a Title Registration Officer (TRO) to prepare and publish a draft list of land titles based on existing records and documents.
• Appellate Tribunals: Over a three-year period, these titles and the decisions of the TRO and the LDRO can be challenged before Land Titling Appellate Tribunals, which will be set up under the law.

In India, the land is closely related to livelihood and social justice and thus land reforms form a critical component in ensuring a robust rural economy and the goal of boosting the agriculture sector and farmers to be more profitable.

LAND BANKS

Land banks are quasi-governmental entities created by counties or municipalities to effectively manage and repurpose an inventory of underused, abandoned, or foreclosed property. They are often chartered to have powers that enable them to accomplish these goals in ways that existing government agencies cannot.

Benefits of Land Banks

1. Land use efficiency: With 2.4% of the total land area of the World, India is supporting 18% of the World’s population which makes land a scarce resource.
2. Community Development: Land banks also encourage the re-development of older or abandoned communities that do not have many available lands thereby helping in long term community development.
3. Faster Land Disposal: A dedicated land bank will ensure time-bound disposal of unutilised land.
4. Ease of Doing Business: LARR Act 2013 (Refer box) is often seen as an impediment in land acquisition.
   • Data: A NITI Aayog study on strengthening arbitration estimated that disputes on land or real estate take an average time of 20 years in the courts to be resolved.
5. Promote Investment: Landbank can serve as a one-stop solution to the free and easy accessibility of all related industrial information which will help in informed decision making by investors, boosting investments.

Issues

• No Revenue: Vacant properties have several disadvantages. First of all, land revenue is one of the major sources of revenue of the state government. Vacant lands do not produce the maximum targeted property tax.
• Illegal activities: Vacant lands also attract crimes and create health hazards which become very problematic as resources are utilized in finding solutions for those. Illegal activities in these areas drain the government of their resources as said earlier and makes the neighbours feel unsafe.
• Potential of future conflicts: Reports have cautioned that there is a potential risk of future investments on banked lands facing conflicts similar to those that prevented the previously planned projects.
• Ignored ideals of Justice: A report submitted to the Planning Commission in 2011 suggested that unused land that was cultivable could be placed in a state land bank and later be distributed among the landless communities.

NEW LABOUR LAWS

Four labour codes were passed by Parliament in 2020 but they have not been implemented yet.

Labour

• Labour is a subject in the concurrent list under the constitution where both the Central and state government are empowered to enact legislation.
• 2nd National Commission on Labour (NCL) has recommended to simply existing labour laws.

Constitutional rights of labours

• Article 19(1) (c): Gives the right to form unions or associations.
• Article 23: Prohibits forced labour.
• Article 24: Prohibit child labour which includes that the child below age of 14 can’t be employed in hazardous jobs.
• Article 38(1): Promotes the welfare of people and labour.
• Article 38(2): Seek to minimize income inequality.
• Article 43(A): Participation of workers in management.

Need for reform of India’s labour laws

• Complexity: Existing labour laws are very complex and overlapping in nature.
• Poor enforcement: There is poor enforcement of laws due to various reasons such as delays, disposal and implementation etc.
• Large number of unions: Many labour union exists in single establishment which hampers the productivity.
• Inadequate coverage: Existing labour codes are not applicable to unorganized workers.

About the New Labour Codes 

The central government proposes to replace 29 existing labour laws with four Codes. The objective is to simplify and modernise labour regulation. Following are the 4 new labour codes:

• Code on Wages, 2019
• Code on Industrial Relations, 2020
• Code on Social Security, 2020
• Code on Occupational Safety, Health and Working Conditions Code, 2020

Code on Wages, 2019

1. Code on wages, 2019 subsumes the following acts:

• Payment of Wages Act, 1936;
• Minimum Wages Act, 1948;
• Payment of Bonus Act, 1965; and
• Equal Remuneration Act, 1976

1. Aim: It aims to regulate wages and bonus payments in all employments. It also aims at providing equal wages to employees performing work of a similar nature in every industry, trade, business, or manufacture.
2. Coverage: It will apply to all employees working in organized and unorganized sector.
3. Fixing floor wage: Floor wage will be fixed by the Central Government taking into account living standards of workers.
4. Fixes minimum wages: The minimum wages decided by the central or state governments must be higher than the floor wage and it will be revised and reviewed by the central or state governments at an interval of not more than five years.
5. Overtime wages: Overtime wage of employees must be at least double of normal wages.
6. Prohibit gender discrimination: Code on wages prohibit gender discrimination in matter to related of wages and recruitment of employees.

Code on Industrial Relations, 2020

1. The Code subsumes the following 3 central labour acts under one Code:
   • The Trade Unions Act, 1926
   • The Industrial Employment (Standing Orders) Act, 1946
   • The Industrial Disputes Act, 1947
2. Scope and Applicability: The Industrial Relations Code, 2020 provides a broader framework to protect the rights of workers to make unions, reduce the friction between employers, and workers and provide regulations for the settlement of industrial disputes.
3. Standing order: all industrial establishment with 300 or more workers must prepare standing orders on the matters relating to:
   • Classification of workers,
   • Manner of informing workers about work hours, holidays, paydays, and wage rates,
   • Termination of employment, and
   • Grievance redressal mechanisms for workers.
4. Closure, lay-off and retrenchment: An establishment having at least 300 workers is required to seek prior permission of the government before closure, lay-off, or retrenchment.
5. Formation of Negotiating Union and Council: This code provides formation of Negotiating union and council.
   • Sole Negotiating Union: The trade union having more than 51% of the workers as members would be recognised as the sole negotiating union, if there is more than one trade union in establishment.
   • Negotiation Council: In case no trade union is eligible as sole negotiating union, a negotiating council will be formed consisting of representatives of unions that have at least twenty percent of the workers as members.
6. Industrial Tribunals for settlement of disputes: Code provides for establishment for Industrial tribunal for dispute settlement which will be consist of judicial and administrative members.

Code on Occupational Safety, Health and Working Conditions Code, 2020

• Subsume: Code on Occupational Safety, Health and Working Conditions Code, 2020 subsumes several central legislations such as Factories Act, 1948; Mines Act, 1952 etc.
• Applicability: It will be applicable to factory which employs more than 20 worker if using power or employs more than 40 worker if not using power.
• Regulate working hours and working conditions: This code fixes daily working limit to 8 hours. Employment of women is permitted into all establishments and employer will provide adequate safeguards.
• Definition of Inter-State migrant worker: Any person who moves to another state in order to get employment there and is earning a maximum of Rs 18,000 per month, or such higher amount which the central government may notify.
• Database for inter-state migrant worker: Central and state government will maintain details of inter-state migrant workers in a portal. Migrant worker can register himself on portal with self-declaration and Aadhaar card.

Code on Social Security, 2020

• Subsume: Code on wages, 2019 subsumes nine central legislations.
• Applicability of social security: Central government is empowered to decide this code will apply to which establishment.
• Social security fund: Code on Social Security, 2020 provides establishment of social security fund by central government for the welfare of unorganized worker, gig worker and platform worker.
• Registration: This code provides registration of all 3 categories of workers namely- unorganized worker, gig worker and platform worker.
• National Security Board: This board will recommend the central government for suitable policy formulation for the welfare of unorganized worker, gig worker and platform worker.

Benefits of New Labour Codes

1. For workers
   • Expand the social security benefits: Earlier social security benefits were limited only to organized sector worker. New labour codes extend the social security benefits to workers working in unorganized sector also.
   • Universalize minimum wages: The new labour codes universalise minimum wages and timely payment of wages. They give priority to occupational safety of the workers.
   • Gender Parity: All sectors must allow women to work at night, but employers must ensure that security arrangements are made for them, and women must consent before working at night.
   • Four-day workweek: It is likely that employees may be able to enjoy a four-day workweek from next year, as opposed to the current five-day workweek.
2. For Employers
   • Consolidation and simplification of the Complex laws: The four Labour Codes, subsuming 29 central labour regulations, aim to rationalise, consolidate and simplify these complex labour legislations.
   • Promotes Ease of Doing Business: According to some industrialists and some economists, such reform will boost investment and improve ease of doing business. It reduces complexity of laws, increases flexibility and modernizes regulations on working conditions.
   • Short-term work contracts: Employers would have greater flexibility in rolling out short-term work contracts.

1. For both
   • Promote fixed term employment: Fixed term employment was not defined under any earlier labour legislations. Under the new code, employers are mandated to provide employment benefits to fixed term employees at par with those for the permanent workforce, including compensations and gratuity benefits, after 1 year of service.
   • Easier Dispute resolution: The codes simplify old laws dealing with industrial disputes and simplify the adjudication process, which will be helpful in early resolution of disputes.
   • Win-win situation: It will provide a big boost to industry & employment and will reduce multiplicity of definition and authority for businesses.
   • Formalization of the economy: With more workers in the organized sector, leakage in terms of direct as well as indirect taxes may be plugged.

Issues with new labour codes

1. Workers
   • No-Right Based Framework: The Code does not recognise social security as a right, nor does it make reference to its provision as mandated by the Constitution.
   • Urban Centric: The codes fail to extend social security benefits to the vast majority of informal sector workers who work in rural areas including migrant workers, self-employed workers, home-based workers and other vulnerable groups.
   • Low wages: It has been alleged that the new wage code will push the starvation of wages further by decreasing the income capacity and purchasing power of the informal worker and it will increase the economic inequality in society.
   • Impact take-home pay: A key change in the definition of “wage” would impact take-home pay, but increase retirement savings, something that a section employers are opposed to as it may increase their employee costs.
   • Strikes may become harder: Due to changes brought in new labour code, industrial strikes may become harder which poses negative impact on the workers.
   • No Recognition for Invisible Labour: Invisible labour is the part that goes unnoticed and unrecognised and is thus unregulated. Generally, unpaid work is called Invisible labour.
   • Small Startups and Informal Sector Left-out From Social Security Coverage: There are no specific provisions for social security of employees in small startups, Micro, Small and Medium Enterprises or workers in small establishments having less than 300 workers.
2. Employers
   • Burden on firms: Firms will have to bear a higher provident fund liability.
   • Difficulty in compliances: The labour codes also chalk out fines on businesses for non-compliance of provisions, second offences and officer-in-default. In the current pandemic situation, a majority of small businesses are in no position to adopt and implement the labour code changes.
   • Lack of Clarity in Defining Workers and Employees: More clarity was needed regarding matters such as the distinction between workers and employees, overtime compensation (particularly in light of Covid’s remote working policies) and the relationship between organisations and the gig workers.
   • Definition of ‘appropriate government: The new Labour Codes do not provides clarity over the jurisdiction of the appropriate government. The definitions vary from Code to Code and it fails to give clarity over appropriate government.

1. Government
   • Non-Inclusion of Charitable or Non-Profit Based Establishments: Code on Occupational Safety, Health and Working Conditions does not include charitable or non-profit based establishments. In fact, there is no central legislation which lays down the law governing charity or charitable organisations in India.
   • Constitutional issue: Labour is a concurrent list subject, so both the Centre and states have to frame laws and rules. Central government has codified existing 29 labour code into 4 but some state governments are yet to complete the process.
   • Fear of exclusion: As per new labour codes, registration of all workers (with Aadhar) on the Shram Suvidha Portal is mandatory to receive any form of social security benefit. This may lead to Aadhaar-driven exclusion of labours and workers will most likely be unable to register due to lack of information.

Way forward

• Cooperative federalism: Both the State and Centre need to find a way for making converging points on these labour reforms, as labour is a concurrent subject which will strengthen cooperative federalism.
• Recognizing Invisible Labour: A national policy for domestic workers needed to recognize their rights and promote better working conditions.
• Welfare of migrant workers: It is crucial for the draft rules to clearly state how their applicability will benefits to the migrant informal workforce.
• Notify these codes: To make these labour codes successful all the States and UT must prepare and notify these laws, which has not yet been done by some states.
• Employment information service: To support the new initiatives to provide employment guarantees in backward districts, employment information services need to be provided through e-governance.
• Integrated approach: Most of the provisions of the Codes address the past demands and discrepancies, acting as restorative justice for the past harms.
  • It is also essential that we adopt a futuristic approach when it comes to protecting workers and handling disputes regarding Automation and Robotics, AI-powered workforces, and bioengineering, which may hamper workers’ rights in the future.

While the labour codes could be called “historic” because they come after nearly a century, the exuberance of the Union govt terming them as “landmark” and “game-changer” is an exaggeration. The laws have adapted to the prevailing industrial and economic activity, but there is a long way to go to achieve a fine balance in the interest of workers and the industry.

PRODUCTION-LINKED INCENTIVE (PLI) SCHEMES

Keeping in view India’s vision of becoming ‘Atmanirbhar BHARAT’ and to enhance India’s Manufacturing Capabilities and Exports, Production Linked Incentive (PLI) schemes for 13 key sectors was launched for a period of five years starting from fiscal year (FY) 2021-22.

PLI Scheme

• Make in India: PLI scheme is an initiative that provides incentives to domestic industries to boost local production.
• Incentive: PLI scheme gives incentive of 4-6% on incremental sales over the base year of 2019-20 for a five-year period to eligible manufacturing companies.
• Investment: PLI scheme has been launched with an outlay of INR 1.97 Lakh Crores across 14 key sectors, to create national manufacturing champions and to create 60 lakh new jobs, and an additional production of 30 lakh crore during next 5 years.
• Reduce Imports: PLI scheme has been introduced with objective of boost domestic manufacturing and reduce dependence on imports.
• Implementation: The PLI scheme is implemented by the concerned ministries/departments.

Sectors covered under PLI Scheme 

So far government has announced the PLI Scheme for 14 sectors. Some of them are:

• Automobile and Auto Components
• Electronic and IT Hardware
• Telecom
• Pharmaceuticals
• Solar Modules
• Metals and Mining
• Textiles and Apparel
• White goods
• Drones
• Advance chemistry cell batteries
• Food processing
  

Objectives of the PLI Scheme

• Manufacturing hub: The scheme aims to make India self-reliant in manufacturing goods for local and export markets, positioning it as a global manufacturing hub.
• Reduce dependence on import: Government introduced PLI scheme to reduce India’s dependence on China and other foreign countries.
• Employment generation: It supports the labour intensive sectors and aims to generate new employment opportunities in India and reduces unemployment.
• Make In India: PLI aims at creating a robust manufacturing sector by inviting foreign companies to set up their manufacturing units in India.
• Export hub: PLI Scheme aims to enhance India’s exports and manufacturing capabilities for high-quality, competitive products.

Significance of PLI Scheme

1. Social

• Job creation: PLI Schemes are focused at labour intensive sectors and aims to generate new employment opportunities and it will bring down unemployment rate in country.
• Reduction in poverty: Due to increased flow of money, poverty will also decrease.
• Increased Per capita income: It is expected that if PLI schemes are successful then per capita income will increase significantly.
• Employment generation: Unemployment is ballooning due to post covid impact. PLI would help to give oxygen to MSMEs which are labour intensive sectors.
• Women empowerment: Predominantly, the textiles industry employs women, so the PLI scheme will encourage women and increase their participation in the formal economy.

1. Political
   • Less burden on State funds: PLI is important as the government has limited resources, and cannot continue making investments in these capital intensive sectors. Which requires longer times for start and giving the returns.
   • Taking benefit of demographic dividend: As per UN Population report, more than 54% of India’s population is aged below 25 year. If proper skill training given to them and employed, India can be benefitted from its demographic dividend.
2. Economical
   • Boost local manufacturing: PLI Scheme aims to boost India’s economic growth by allowing manufacturing companies to produce in India.
   • Capacity Development: To invite global companies with adequate capital to set up capacities in India they will also come with advanced technology which is very much essential for the sunrise industry.
   • Promote Make in India: It promotes make in India as it allow foreign companies to setup their manufacturing unit in country.
   • Performance linked incentive: Manufacturing companies get paid only when the incremental sales occurs.
   • Export hub: The scheme aims to encourage large manufacturers to produce in large scale and increase share in export.
   • Increase in GDP size: as of now, India is 5th largest economy in world. PLI schemes has the potential to make India third or fourth largest economy in world.
   • FDI Attraction: India is a consumer-based economy. By providing incentives, the PLI scheme attracts more foreign investment to India.
   • Lower Project costs: The PLI Scheme will provide low-cost indigenous products. So the cost associated with other projects like Digital India will also come down.
3. Global
   • Reducing Imports: It will reduce our import dependencies and spur domestic consumption and focus on enhancing exports.
   • Self reliance: In the framework of the Atmanirbhar Bharat (‘Self-Reliant India’) Programme, PLI schemes aim at enhancing Indian manufacturers’ competitiveness, attracting investments in cutting-edge technology, creating efficiencies.
   • Integration to global market: PLI Scheme attracts substantial investments for creation of large manufacturing facilities which will help Indian manufacturing companies to become globally competitive and integrate with the global markets.
4. Environment
   • Sustainable: PLI has brought hope to climate action, by incentivizing companies to produce goods that would replace the most polluting technologies. The government approved a PLI scheme for high-efficiency solar photovoltaic modules.

Impact of PLI schemes on various sectors

1. Automobile and its components: Incentive (PLI) Scheme in the Automobile and Auto Components sectors for Enhancing India’s Manufacturing Capabilities and Enhancing Exports – Atmanirbhar Bharat.
   • For example: It is estimated that over a period of five years, the PLI Scheme for Automobile and Auto Components Industry will lead to fresh investments of over Rs 42,500 crores, incremental production of over Rs 2.3 lakh crore and will create additional employment opportunities of over 7.5 lakh jobs.
2. Aviation: The PLI scheme and new drone rules are intended to catalyse supernormal growth in the upcoming drone sector.
   • For example: It is estimated investment worth ₹5,000 Crore for manufacturing sector drones will be done which in turn will bring a turnover of Rs 900 crore, and 10,000 job opportunities will be created.
3. Chemicals: The Production-Linked Incentive (PLI) Scheme is going to help in Advance Chemistry Cell Battery for Enhancing India’s Manufacturing Capabilities and Enhancing Exports – Atmanirbhar Bharat.
   • For example: The scheme envisages setting up of a cumulative ACC manufacturing capacity of 50 GWh for ACCs and an additional cumulative capacity of 5 GWh for niche ACC technologies.
4. Electronics system: The PLI Schemes for Large Scale Electronics Manufacturing and IT Hardware for Enhancing India’s Manufacturing Capabilities and Enhancing Exports – Atmanirbhar Bharat.
   • For example: Over the next 4 years, the PLI Scheme for IT Hardware is expected to lead to total incremental production of up to INR 3,26,000 crore, out of which more than 75% is expected to be exported. Also, it is expected that Domestic Value Addition for IT Hardware will rise to 20% – 25% by 2025 from the current 5% – 10%, due to the impetus provided by the scheme.
5. Food Processing: The PLI Scheme in Food Products for Enhancing India’s Manufacturing Capabilities and Enhancing Exports.
   • For example: The expected outcomes from the scheme are – Expansion of food processing capacity: Rs 33,494 crore; Exports: Rs 27,816 crore; Generation of employment: 2.5 lakh persons.
6. Medical Devices: The PLI scheme Promoting Domestic Manufacturing of Medical Devices and Production Linked Incentive Scheme for Pharmaceuticals have been introduced to provide an impetus to India’s vision of becoming a global manufacturing hub for medical devices.
   • For example: A total Committed Investment of Rs.873.93 crore.
7. Metals and Mining: The PLI Scheme in Specialty Steel for Enhancing India’s Manufacturing Capabilities and Enhancing Exports.
   • For example: The PLI scheme shall boost the production of identified specialty steel grades from the current 16 MTPA to over 37MTPA in 5 years, while attracting investments of over Rs 35,000 Cr.

1. Pharmaceuticals: The Production Linked Incentive Schemes for Key Starting Materials (KSMs)/Drug Intermediates (DIs) and Active Pharmaceutical Ingredients (APIs) is going to boost domestic manufacturing capacity, including high-value products across the global supply chain.
   • For example: A total Committed Investment of Rs. 5,366.35; Maximum Incentive proposed for disbursement: Rs. 6,000 crore and Expected Employment Generation of about 12140.
2. Renewable energy: The PLI Scheme in High Efficiency Solar PV Modules for Enhancing India’s Manufacturing Capabilities and Enhancing Exports.
   • For example: Over the next five years, the Scheme is expected to lead to a total production of about INR 10.5 lakh crore. More than 60% of production is expected to be exported. The scheme is also expected to bring in additional investment of INR 11,000 crore.
3. Telecom: The PLI scheme is expected to attract large investments from global players and help domestic companies seize the emerging opportunities and become big players in the export market.
   • For example: It is estimated that the scheme is going to give incremental production of around ₹ 2.4 Lakh crore with exports of around ₹ 2 Lakh crore over 5 years. It is also expected that the Scheme will bring investment of around ₹ 3,000 crore and generate huge direct and indirect employment.
4. Textile and apparel: The PLI Scheme in Textiles Products for Enhancing India’s Manufacturing Capabilities and Enhancing Exports – Atmanirbhar Bharat.
   • For example: It is expected that this scheme will result in fresh investment of above Rs 19,000 crore and an additional production turnover of over Rs.3 lakh crore in five years Higher priority for investment in Aspirational Districts & Tier 3/4 towns Scheme will positively impact especially States like Gujarat, UP, Maharashtra, Tamil Nadu, Punjab, AP, Telangana, Odisha etc.
5. White goods: Its prime objectives include removing sectoral disabilities, creating economies of scale, enhancing exports, creating a robust component ecosystem and employment generation.
   • For example: For companies in white goods, the PLI Scheme is expected to see an incremental investment of Rs 7,920 crore over five years along with incremental production worth Rs 1.68 lakh crore, exports worth Rs 64,400 crore, and direct and indirect revenues of Rs 49,300 crore.

Challenges

• Lack of common parameter: There is no common set of parameters to understand the value added by companies that have received or are likely to receive PLI scheme incentives. As of now, different ministries monitor the value addition of their respective PLI schemes, and there is no way to compare two different schemes.
• Obsolete Approach: India’s PLI scheme resembles the ‘piece rate’ method, which has actually been in decline worldwide. As manufacturing grew more complex, incentives grew in complexity as well, and generally focused more on productivity and quality rather than quantity.
• Higher manufacturing cost: A study by Ernst & Young show that if the cost of production of one mobile is Rs.100, then the effective cost of manufacturing the mobile is 79 in China, 89 in Vietnam, and 92 in India.
• WTO challenges: In September 2019, Chinese Taipei raises the concerns in tariffs under the Phased Manufacturing Programmes. If Phased Manufacturing Programme is found to be WTO non-compliant, then the growth of domestic industries will be limited.
• Financial issues: The scheme contains financial cap on incentives. This makes an over-performing company not to get the benefits of its over achievements.

• Biasness: Sector specific tariffs generates favouritism. All sectors of economy are not covered under this PLI scheme. Agriculture and service sector are not covered under PLI Scheme.
• Lack of cutting edge technology: India spends less than 0.25% of its GDP on research and development. This results in poor talent retention. Development of manufacturing industries under the PLI Scheme is questionable.
• Lack of local manufacturing base: Unlike global companies, most domestic manufacturing companies rely on 1-2 supply chains that have been severely disrupted due to Covid-19 lockdown, and these companies will not qualify for the incentive due to fault of not their own.
• Problem of Cheap imported goods: Domestic firms face stiff competition from cheap imports from countries like China.
• Regional imbalance: Majority of the manufacturing units are located in few states like Haryana, Punjab, Maharashtra and Karnataka while very few units are located in Bihar, West Bengal etc. It has led to regional imbalance in country.
• Low growth rate: Growth rate in manufacturing is less than service sector and its contribution is also less.

Way forward

• Expand reach: The scheme must focus on both sectors – Manufacturing & Services in order to achieve the target of $ 5 trillion economy by 2025.
• Structural reforms: there is need to implement structural reforms like land reforms, single-window clearance in order to get full benefits of PLI scheme.
• Regional balance: The focus should also be on the location of the companies to balance the regional economic growth.
• Incorporation of Service sector: India has an upper edge in IT related service sector. The PLI schemes should focus on both the service and manufacturing sectors and, both the sectors must not be seen as a trade-off.
• Focus on Global supply chain: Focus on supply chain co-location should be promoted under these schemes by encouraging the Foreign with their established industrial ecosystems.
• Focus on supply chain co-location: The government has to encourage the Foreign firms under the PLI policy to co-locate (placement of several entities in a single location) with their established industrial ecosystems.
• Reduction in costs: India also needs to consider reducing its factor costs of Utilities.
• China Issue: In issues related to China’s opposition, the Indian government should come out more forcefully on this policy.
• Competitive: Encouraging states to be competitive and not indulge in trade-restrictive practices like Job reservation for locals, etc.
• Logistic Cost: Government has already launched many freight corridors, and water transport also to be promoted for reducing logistic cost.
• India as design Hub: India industry should be emerged as a design-led hub. Top companies to be nudged to come out with an electronic hardware startup ecosystem.

Given the scale of incentives, the manufacturing sector of the country is set to transform in upcoming few years and its contribution to the GDP will increase significantly. If this scheme executed well then India has the potential to become global manufacturing hub.

PM GATI SHAKTI SCHEME

PM Gati Shakti is a digital platform that connects 16 ministries — including Roads and Highways, Railways, Shipping, Petroleum and Gas, Power, Telecom, Shipping, and Aviation — with a view to ensuring holistic planning and execution of infrastructure projects. The Gati Shakti scheme will subsume the Rs 110 lakh crore National Infrastructure Pipeline (NIP) that was launched in 2019.

Six pillars of PM Gati Shakti

• Comprehensiveness: It will include all the existing and planned initiatives of various Ministries and Departments with one centralized portal.
• Prioritization: Through this, different Departments will be able to prioritize their projects through cross-sectoral interactions.
• Optimization: For the transportation of the goods from one place to another, the plan will help in selecting the most optimum route in terms of time and cost.
• Synchronization: It will help in synchronizing the activities of each department, as well as of different layers of governance, holistically by ensuring coordination of work between them.
• Analytical: The plan will provide the entire data at one place with GIS-based spatial planning and analytical tools having 200+ layers, enabling better visibility to the executing agency.
• Dynamic: All Ministries and Departments will now be able to monitor the progress of cross-sectoral projects, through the GIS platform, as the satellite imagery will give on-ground progress periodically and the progress of the projects will be updated regularly on the portal.

Targets to be achieved by 2024-25 under the PM Gati Shakti Scheme

• 11 industrial corridors and 2 new defence corridors (Tamil Nadu and Uttar Pradesh), achieving a 1.7 lakh crore turnover in defence production.
• Around 38 electronics manufacturing clusters.
• 109 pharma clusters.
• Increase in the total cargo handled at Indian ports to 1759 MTPA.
• Adding over 200 airports, helipads, and water aerodromes.
• Extending 4G connectivity to all villages.
• Adding 17,000 km to the gas pipeline network is being planned.

Significance of PM Gati Shakti

1. Economic
   • Bring the economy out of pandemic impacts: The infrastructure projects will boost jobs and increase the demand for goods and commodities, besides attracting major investments.
   • Solve issues in logistics: According to a study, the logistical cost in India is about 13%-14% of GDP as against about 7-8% of GDP in developed economies. The plan will help India to cut down its logistics cost.
   • Support to Make in India: A holistic and integrated transport connectivity strategy will greatly support ‘Make in India’ and integrate different modes of transport.
   • Reduction in cost of infrastructure creation: Coordinated planning, execution and monitoring of infrastructure projects will result in cost and time saving. It will improve the sentiments of banks towards infrastructure lending.
2. Infrastructural

• Boosting cargo handling capacity: Besides cutting logistics costs, the plan is also aimed at increasing cargo handling capacity and reducing the turnaround time at ports to boost trade.
• Last-mile connectivity: By incorporating infrastructure schemes under various ministries and state governments, the GatiShakti platform will boost the last-mile connectivity.
• Information help with investing: It will provide the public and business community information regarding the upcoming connectivity projects, other business hubs, industrial areas and surrounding environment.

1. Administrative
   • Reduce implementation overlaps: The National Master plan will help to avoid implementation overlaps.
     • Example: If a railway line is being built, the Ministry of Road Transport may immediately give clearance for an overpass, and the Power Ministry can begin projects to ensure that trains can immediately have access to power on completion of the tracks.
   • Save taxpayers money: There is a wide gap between macro planning and micro implementation due to lack of coordination in infra projects. PM Gati Shakti would address the problem of government departments and Ministries working in silos.
   • Real time monitoring and resolution of issues: The portal will allow various government departments to track, in real time and at one centralized place, the progress of various projects, which will also enable fast resolution of issues.
   • Integration with other schemes: PM Gati Shakti will integrate infrastructure schemes from various Ministries and State Governments such as Bharatmala, Sagarmala, inland waterways, dry/land ports, UDAN, and so on.

Challenges

1. Economic
   • Low Credit Off-take: At present, there are concerns about the declining credit offtake trends from banks as they don’t want to get into another Non-Performing Asset (NPA) crisis in future.
   • Investments from states: With the pandemic and its associated challenges, the state governments don’t have enough finances to invest such large amounts. This will delay the implementation of the master plan.
   • Insufficient Demand: There is a lack of private and investment demand in the post-Covid-19 scenario.
2. Structural
   • Slow pace of implementation: Due to land acquisition delays and litigation issues, the rate of project implementation is extremely slow by global standards.
   • Red-tapism: Obtaining approvals for land access and environmental clearances is extremely difficult; additionally, pending litigation in court delays infrastructure projects.
   • Infrastructural challenges: Land acquisition challenges, litigation issues, alienation of local communities and the violation of environmental norms, etc. creates challenges.

Way Forward

1. Economic
   • Address certain key issues: To the proper implementation of PM Gati Shakti, India needs to address structural and macroeconomic stability concerns, emanating from high public expenditure.
   • Solve the credit offtake challenge: Government has to address the issues associated with low credit offtake for successful private investments.

1. Administrative
   • Tackle land acquisition decisions: With the availability of Geographic Information Systems and remote sensing technologies under the master plan, the policymakers have to do well to reclaim lands already subjected to degradation and pollution.
2. Technological
   • Incorporate the digital features in all spheres: India also needs digital solutions for aggregation of demand and supply, which can be done by bringing the open network and open protocols under the Gati Shakti initiative.
     • Example: Tata Projects has already been using such technological solutions for its various projects like the Dravyavati River Rejuvenation Project.
   • Improve the performance of roads: Roads should be made smart with automatic monitoring of traffic, drone-based support, including drone-based monitoring of maintenance of assets.
   • Resolve connectivity issues: There is a need for inexpensive, higher capacity connectivity by enabling spectrum usage for wireless and shared networks.
   • Better spectrum allocations: There is a need to establish easier access to spectrum for authorised institutions and researchers so that India’s R&D for commercial and defence is free from any obstacle.

The Gati Shakti will boost economic growth, attract foreign investments and enhance the country’s global competitiveness thereby enabling smooth transportation of goods, people and services and creating employment opportunities. Thus, the PM Gati Shakti will help India to realise its dream of becoming the “business capital” of the world. But all the challenges must be addressed on priority in order for the project to be a success.

GOODS AND SERVICES TAX (GST)

Goods and Services Tax (GST) is a comprehensive indirect tax for the whole nation, which makes India one unified common market on the manufacture, sale, and consumption of goods and services throughout India. It replaced the existing taxes levied by the central and state governments. It is a destination-based tax applied on goods and services at the place where final/actual consumption happens.

• Exception to GST: Goods GST is applied to all goods other than crude petroleum, motor spirit, diesel, aviation turbine fuel, and natural gas and alcohol for human consumption.
• Slabs of Tax: There are four slabs for taxes for both goods and services – 5%, 12%, 18%, and 28%.

Achievements of GST regime in India:

1. Simplify the process:
   • Expansion of Tax Net: A significant increase in tax base and a change in taxpayers’ compliance behavior. The number of registered taxpayers at the time when the GST was rolled out was Rs 65 lakhs and it increased to 1.23 crore active GST registrations as on 2020.
   • Revenue collections: It led to the increase in revenue collection. [In 2018-19, the average monthly collection was Rs 97,100 crore. In 2019-20, it reached INR 12.2 lakh crore].

• Reduced Interface with Tax Officials: Within a year about 12 crore returns have been filed, and 380 crore invoices have been processed by the GST Network (the IT backbone for taxpayers to pay tax, file returns, and claim refunds). This reduced the user’s interface with a tax official.
• Reduction in turnaround time: The turnaround time for transportation of goods has come down with the dismantling of barriers and check posts on state borders. This is gradually leading to the emergence of a truly national market.
• Rate rationalisation: The GST Council has brought many changes related to the rate cut for various sectors including automobiles. [In 2017, nearly 19 percent of items were under the 28 percent GST rate. But currently only 3 percent of the items are subject to the 28 percent GST rate].

1. Introduction of e-way bill system: Apart from few initial technical glitches, the e-way bill system has been largely streamlined. The total number of e-way bills (inter-state as well as intra-state) generated during Financial Year(FY) 20 were approximately 63 Crore. [A 13% growth when compared to FY-19(Approx 56 Crore)]
2. Legislative amendments and clarifications: The GST law has undergone significant changes since its inception on 1 July 2017. Within 3 years, there were almost 700 notifications, 145 circulars, and over 30 orders issued by the GST Council. These aimed to address taxpayers’ demand and to carry out procedural simplifications and curb tax evasion.
3. Center-State Relations: Since most decisions in the GST council have been unanimous this shows a better Co-operative Federalism in India.

Issues in GST Regime in India:

 The 15th Finance Commission report formally acknowledges that the GST regime in India is an economic failure that did not deliver on its early promises.

1. Tax Related:
   • Multiple Tax Rates: Unlike many other economies which have implemented this tax regime, India has multiple tax rates. This hampers the progress of a single indirect tax rate for all the goods and services in the country.
   • New Cesses crop up: While GST scrapped multiplicity of taxes and cesses, a new levy in the form of compensation cess was introduced for luxury and sin goods. This was later expanded to include automobiles.
   • Input tax credit: Eligibility of input tax credit has been a bone of contention between trade and authorities from the pre-GST era.
   • Higher tax rates: Though rates are rationalised, there are still 50 percent of items under the 18 percent bracket.
     • Apart from that, there are certain essential items to tackle the pandemic that were also taxed higher. For example, the 12% tax on oxygen concentrators, 5% on vaccines, and on relief supplies from abroad.
   • The complexity of tax filings: The GST legislation requires the filing of the GST annual returns by specified categories of taxpayers along with a GST audit. But, filing annual returns is a complex and confusing one for the taxpayers.
2. Economy Outside GST purview: Nearly half the economy remains outside GST. E.g., petroleum, real estate, electricity duties remain outside GST purview.
3. Political Issues:
   • End of revenue guarantee: During the enactment of GST, the Center promised compensation for loss of revenue faced by states. This revenue guarantee ends in July 2022.
   • Loss of fiscal autonomy of states: States surrendered the majority of their indirect taxation powers for the implementation of GST and GST revenues are uncertain sometimes.

Way Forward

• Expansion Of Tax Base: There are many goods that are still outside the GST net and hamper the seamless flow of input tax credit.
  • Key items outside its ambit are electricity, alcohol, petroleum goods, and real estate. Among fuels, it may be possible to bring natural gas and aviation fuel within GST.
  • Also, the government in the upcoming meeting can reduce the GST on essential items such as oxygen concentrators, vaccines, etc. to overcome the pandemic.
• Infusing tax predictability: The GST Council can adjust the rates only once a year. Further, the Center shouldn’t bypass GST by introducing any Cess. The Center can also rationalise the present Cess ecosystem in India to a bare minimum. This will ensure tax predictability to states and enhance the ease of doing business.
• More accommodative approach from the Center: To prevent an irretrievable breakdown during the pandemic the Center has to be more accommodative to State’s needs. Such as, allocating State’s share properly, procuring vaccines from abroad, etc. This will further enhance the State’s reliability on GST.
• Training: Rigorous training with evaluation required for the officers who are handling day-to-day affairs especially State officers.
• Regulatory Streamline: The bodies of Authority for Advance Rulings and Anti Profiteering have to be removed. It would take years to clear the mess created by these authorities by delivering revenue biased judgments.
• Grievance Redressal: The helpdesk created by the GSTN has to be improved. Simply for the sake of numbers, statistics / records replies are received as ‘resolved’ for the complaints raised even though it is not resolved.
• Implementation Gap: There is a big gap between the technological aspects and legal aspects due to lack of co-ordination between the two. Still many decisions taken by the GST Council are yet to be implemented. The gap should be reduced.
• Removing Exemptions: Bringing petroleum products, left out transactions pertaining to real estate into the GST regime would reduce the cascading effect to the assessees.
• Change Perceptions: Even though the laws changed, the perception / mindset of department officers has not changed. Still the assessees are treated as thieves or tax evaders instead of part in nation development.

GST is a positive step towards shifting the Indian economy from the informal to the formal one. But, the Center and States have to understand the limitations associated with Indirect Taxes and move towards the inclusion of people into the Direct tax bracket. But, to revive the GST Regime back on track India needs some radical steps such as an extension of revenue guarantee to States, restricting cesses, above all respecting the need of State governments facing fiscal problems.

TAXATION ON VIRTUAL DIGITAL ASSETS

The term ‘virtual asset’ refers to any digital representation of value that can be digitally traded, transferred or used for payment. It does not include the digital representation of fiat currencies. [Financial Action Task Force]

Indian Stand on Crypto-currencies and VDAs

• 2017: The Ministry of Finance issued a statement which clarified that virtual currencies are not legal tender and do not have any regulatory permission or protection in India.
• In 2018-19 budget speech, the finance minister announced that the government will take all measures to eliminate their use in financing illegitimate activities or as a part of payment system.
• 2018: RBI notified those entities regulated by it should not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies.
• 2020: Supreme Court lifted the ban imposed by the RBI on cryptocurrencies. The judgement itself did not offer any guidance on regulation but simply invalidated the RBI circular on the basis that it impinged the fundamental right of those engaged in virtual currency-related businesses without providing adequate rationale.

Current Taxation Regime of VDAs

1. Classification of VDAs: At the moment, there is no specific law that classifies virtual currencies as a good, service, security, commodity, derivatives or currency.
2. Goods and Services Tax: The matter of taxability of cryptocurrencies under GST is yet to be addressed by the government.
   • Crypto exchanges: Currently, 18% GST is levied only on service provided by crypto exchanges and it is categorised as financial services.
3. Property: For the first time vide Budget 2022-23 ‘Virtual Digital Asset’ is defined and included within the category of movable properties.

Amendments proposed in Budget 2022-23 and Central Board of Direct Taxes guidelines on TDS rule for VDAs 

In order to provide clarity on taxation of cryptocurrencies, vide the Finance Act, 2022, the following amendments have been proposed in the Income Tax Act, 1961. Recently, CBDT has come out with rules for providing clarity with respect to tax deduction at source provision.

1. Meaning of the term VDA: VDA mean any information or code or number or token (not being Indian or foreign currency), generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged.
   • Includes: Non-fungible tokens (NFTs), any other token of similar nature and any other digital asset as specified by Central Government in Gazette notification.

1. Rules provide:
   • Tax on gifting of VDAs
   • Tax on transfer of VDAs
   • Tax Deduction at Source on payment to a resident on the transfer of VDAs with certain threshold limits.

Need/Benefit of taxing/regulating Virtual Digital Assets

1. Economic benefits
   • Increase in Transactions: There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. – Finance Minister
   • Controlling the macroeconomic variables: VDAs operate as an alternate currency in the financial system because of which monetary policy becomes disconnected from the economy. Regulation of VDAs will help RBI to control the effect of VDAs regarding inflation etc.
   • Increase in government revenue: The government, after having seen the increased scale of transactions taking place VDAs, has decided to specifically tax transactions, as this provides it with an additional revenue source.
   • Clarity with respect to volume and value of transactions: A TDS on transfers of digital assets – will provide critical information that could inform the government about the nature and extent of transactions taking place in this industry.
   • Avoiding systemic instability: As the traditional financial system connects with the burgeoning crypto ecosystem, the growing interconnectivity raises concerns of spill over effects that could impact systemic stability. Regulation will help counter this.
2. Security benefits
   • Countering tax evasion: Better monitoring and proper guidelines will prevent tax evasion.
   • To avoid misuse of VDAs: As per FATF, without established regulation and oversight, VDAs risk becoming a virtual safe haven for the financial transactions of criminals and terrorists.
3. Other benefits
   • Helpful for taking stance on Crypto regulations: The data collection at a large scale with respect to extent and nature of transactions might prove to be extremely valuable when the government does in fact decide to take a stance on crypto regulations.
   • Streamlining of market: The application of the TDS aims to “streamline” the tax regime already in place for the sector “in the wake of a turbulent crypto market.”

Issues with the taxation regime

1. Determining the amount to be taxed
   • Determination of Fair Market Value [hereinafter ‘FMV’]: In absence of a corresponding provision similar to which deal with FMV on transfer of immovable property and unlisted equity shares, questions may arise on the valuation of VDAs for the purpose of computation of the taxable income.
   • Taxation issues due to changing price: The issue of determining FMV is further amplified since the trading price of VDAs on different exchanges may be different and, in some cases, even a single day fluctuation in price could be very significant.
   • Cost of acquisition: The proposed section 115 BBH does not explain the connotations of the term “cost of acquisition” for a VDA.
     • For example: for a miner, the digital asset will be a self-generated asset having no cost of acquisition, whether expenses incurred in setting up the mining equipment and other incidental expenses should be construed as “cost of acquisition.”
2. Impact on Crypto Market
   • Impact on liquidity: 1% TDS rate could drain the crypto market of liquidity, thus having a big impact in the long run. It will lock up capital for traders and suck liquidity from market. If liquidity is not there, retail investors will suffer.
   • Detrimental to development of VDAs: Taxing crypto is detrimental to the future of this nascent and evolving technology as it would be demotivating and may result in slowing down the adoption rate.
3. Compliance related issues
   • Maintenance of documents: Several of the recommendations made by CBDT, especially with regard to the documents required to be maintained between the transacting parties, for example agreement, challans, undertakings etc., may not be practical.
   • Added burden on exchanges: The responsibility on exchanges for deducting TDS, will increase the regulatory and compliance burden for them. The exchanges have to further disclose these transactions in their tax return and maintain a proper trail.
4. Other issues
   • Concerns with respect to legality of crypto assets: While it may seem logical that taxation of VDAs implies acceptance of such assets as legal, it may not be so. As per judicial precedents income earned from illegal activity is still taxable by Government.
   • Uncertainty under GST Law: The GST Council is yet to decide the classification of VDAs as goods or services and the applicable tax rate on same. Such uncertainties can prevent the development of market.

Way forward

• Legal Recognition: To legally recognise VDAs, it is essential that, Government provides for definitions and classifications of different types of VDAs and regulates VDAs as a separate asset-class either through a separate enactment or by amending existing enactments like the Securities and Contracts Regulation Act, 1956.

• Regulation of intermediaries: All entities involved in the process of providing a platform for buying and selling of VDAs (i.e., exchanges, brokers) play the role of technology intermediaries. These intermediaries must be regulated under the law.
• New regulator: Another approach, seemingly favoured by the European Union and UAE, proposes setting up entirely new regulators to deal with the industry in a comprehensive manner.
• Investigating authority: As SEBI has recommended, crypto assets related unregulated activities may be entrusted to an investigating authority appointed by the government and take further legal action.
• Awareness among public: There is a need to spread awareness regarding the volatile nature of VDAs as well as suspicious activities being undertaken.

Taxation regime in other countries

• Singapore: The Payment Services Act of 2019 legalises crypto and sets provisions to prevent illegal activity. Businesses engaged in buying and selling digital tokens are taxed on the profit derived from trading in digital token. Pertinently, no taxes are levied if gains accrue from disposal of digital tokens held as long-term investments. So, Singapore has given VDA the status of a capital asset.
• USA: In the US, VDAs are treated the same as stocks. Any losses can be used to offset income tax from the transfer of VDAs to a certain limit and any further losses can be carried forward to the next financial year. Short-term capital gain is taxed at the upper tax bracket based on the investors’ taxable income falls, and long-term capital gains (for VDAs held more than 12 months) are taxed at a much lower rate.
• Canada: The Canada Revenue Agency also has a system in place that tracks crypto investments and ensures accurate reporting of crypto investments and resulting tax liability.
• Portugal: In Portugal, crypto income is only taxable if it accrues from professional trading activity. Further, no tax is levied on the exchange of cryptocurrency for other currency which implies that buying or selling cryptocurrencies would not be subject to capital gain taxes or Value-Added Tax.
• El Salvador: El Salvador that have adopted Bitcoin as a legal tender. The country even announced a Bitcoin city for its residents where all transactions would happen via Bitcoin, thus, will be free from any property or capital gains taxes.

The need of the hour is to develop a clear and sound regulatory framework after conducting transparent multistakeholder consultations with relevant stakeholders including crypto exchanges, consumer organisations and allied organisations. While the substantive framework is important in itself, the initiation of an open democratic policy-making process will instil much-needed trust in the ecosystem.