Economy

GST Reforms and Tax Exemption

GST is all set for a major overhaul. The government might be contemplating paying greater attention to major GST reforms of the Goods and Services Tax structure.

A great haul is waiting for the GST as the administration will effectively complete its five years in July next year. This will be the year when the state’s compensation will end. Thus, the government is contemplating restructuring tax slabs and reducing exemptions.

According to the reports, the consumer can witness a new system that may be characterized by three major tax rates that can probably cover most of the items for the current four, i.e., 5%, 12%, 18%, and 28%. This will be emphatically done to simplify the structure and generate profits.

The states’ loss of funds

It is to be noted that a feasible plan is being drawn out for the states that would be facing the fall of revenue that they have gathered all these years for their functioning.

Though, it is to be noted that the center will effectively compensate the state for loss of income due to the strategic implementation of the five-year GST. Thus, one can state that the states’ will be significantly worried about the end of this compensation as the states are concerned about a significant reduction in their revenue.

In a recent turn of events, the Federal Finance Minister Nirmala Sitharaman “intentionally or unknowingly” had reduced the effective GST-based tax rate from 15.5% to 11.6% of the initial earnings neutrality due to multiple tax cuts since the launch of the GST in July 2017.

The plan to strategically renew the revenues of the states

The mere reason for the revision of the tax slabs that have been set up for review is that both the state and center policymakers want to endorse the slab review to address revenue issues that might materialize after the completion of 5 years.

In order to compensate for the lost revenue, the suggestions and propositions for the inclusion of the list of items for both goods and services that are currently tax-exempt are being explored. Thus, effectively removing the tax exemption list can heavily increase the GST base. This will help not only to increase revenue but also keep the overall tax rate at a reasonable level.

In order to incorporate a less intricate tax system and to increase the revenue for the states, options for effectively merging the 5% and 12% taxes to create one rate are being explored by the authorities.

In fact, exploration of strategic plans to create slab regimes of 18% and 28% of the merged rates are also on the table for discussion.

GST reforms throughout the years, is the loss of revenue a surprise?

GST, according to the experts has been a landmark tax reform. Though, it has come under fire for its prior overestimation of revenue collection which really didn’t materialize.

But during the pandemic, the country saw a substantial increase in the revenues of the state and center, which had worked well for the government’s functioning during the pandemic. but was this increase in GST collection really a perennial source?

The answer is an emphatic no. though the estimated revenue projections have gone down in recent years, during 2021, pent-up demand had effectively led to the whopping collection of GST. On top of that, commodity prices too had resulted in a record increase in GST collections in recent months.

Therefore, the increase in the GST collection wasn’t really a permanent source of income for the state and thus, a certain loss of the same shouldn’t get the government by surprise.

But indefinitely, the loss of revenue will be an issue that needs to be considered. Another implication of such high GST collection is also that covid-related concerns have subsided, and thus consumption demand is increasing.

Making the tax system less intricate

Apart from the four major tax slabs aforementioned, 0.25% and 3% effectively apply to jewelry and precious metals. It is no news that the GST web is a complicated one with many commonly used items exempt from GST.

This creates a complex system that is emphatically prone to classification disputes and leaks. According to the report, the GST does not usually tax nearly 150 goods and over 80 services, which leads to humungous complexity in deciphering which articles are exempt and which are not.

Thus, the strategic rationalization of the GST structure is important and the need of the hour and the government can start with the major haul it is preparing.

As aforementioned, the GST collection in recent months had shown promising results. Thus, it might be a good time to simplify the pricing structure. On another note, rationalization is also needed as multiple exemptions, and rates need to converge to two or three pricing structures.

In totality, it is highly recommended that the focus should not be merely or solely on raising the effective tax rate, but on further expanding the tax base. This should be achieved by keeping taxation moderate.

Furthermore, it is to be noted that from a tax policy perspective, it’s emphatically important to remove barriers which are in the form of restrictions on the application of GST based on packaging size, price, capacity, etc., and input credit billing.

Therefore, GST may actually see a large overhaul which will include a reduction of tax slabs, and pruning of the tax exemption list.

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Explaining The Global Minimum Tax System

The global Tax system has been a hot topic for the countries for years, so much so, that the group of Seven nations, namely, France, Italy, Canada, Germany, Japan, the United Kingdom, and the United States, effectively agreed on 2021 to promote a new global tax regime.

It is to be noted that the newer global tax regime would help solve the twin goals of the tax scheme. Firstly, to effectively make large transnational corporations and companies pay more tax while operating in tax havens or where they conduct their economic activities, and secondly to severely mitigate the attractiveness of tax havens for the multinational companies in pursuit to escape paying taxes.

The need for such a tax regime to mitigate the attractiveness of the tax havens is due to the fact that transnationals effectively often try to establish their tax homes in countries with low corporate income tax rates, in order to escape the high tax regimes in their own countries.

Thus, the proposed tax regime will help in transferring transnational companies’ profits from their home countries to the countries in which they make sales.

Additionally, it is to be noted that the newer tax regime will emphatically help set a global minimum tax rate of 15% for companies and multinationals all around the world.

It is worth noting here that the newer global tax regime is being pushed forward by wealthy economies that have systematically agreed to the global minimum tax proposal. These include the G7 and G20 members that are particularly wary of seeing profits made within their borders going untaxed or escaping the grasp of western tax systems.

To talk about the monetary loss that is accruing to western countries due to operations of multinationals through safe havens stands at a whopping $500 billion, which is effectively lost in revenue each year. This corroborates the fact that the western economies are quite inclined toward restoring their lost profits over the decades.

The full story?

This gives rise to a pertinent question is the problem of a non-existential global tax system only limited to monetary losses for the counties? Perhaps, there is more to the story than what meets the eye.

It is to be noted that of the annual revenue that is lost to tax havens, around $200 billion is lost by less-developed countries as well.

Developing countries: a boon or curse?

Given the fact that even underdeveloped countries have much to lose, will these countries join the race to mitigate such discrepancies? Not quite amicably.

This is due to the fact that various tax havens like the Cayman Islands would continue to offer enough incentives and exemptions to effectively and emphatically retain investments in its economy, which are needed to drive its economic growth.

Thus, such practices will be prevalent even if the government will adhere to an international minimum rate. Thus, this will significantly lead to the reduced effect of a minimum tax regime being crafted by the wealthier countries.

But given the incentive of the less developed countries do not to adhere to the global minimum tax, the more important question that arises is whether joining the race makes any sense for less-developed countries?

Though, according to the reports, there is effectively no guarantee that a global minimum rate of 15% would anyway shift investments from current tax havens to less-developed countries. Thus, the developed county’s proposal may partially bear fruits.

Though, the developing economies cannot be chastised or criticized for not adhering to the regime as they face enormous pressures to attract foreign capital for growth. Thus, they effectively cannot be faulted for this desire.

Though, it is to be noted that though finance might seem like the most viable and tantalizing option to grow, more effectively basic infrastructure, sound fiscal policies, and conditions, stable government, etc. play a larger role.

Thus, if the larger implication of the global minimum tax policy is to be scrutinized, it can be stated that it will at least contribute to the process of elimination of the temptation for other less-developed countries to systematically join the race to the bottom. In fact, according to the reports, we might even encounter beneficial changes in policies in the current tax havens.

Thus, given the aforementioned arguments, one can effectively argue that the minimum tax regime will bore well for the developed countries in order to attain its lost revenues but for the developing economies, the answer remains more complicated.

With the tantalizing benefits of investments in the economy that are presented to the developing countries, it is quite arduous to make a stance about the feasibility of the global minimum tax regime. With much more to lose, in terms of infrastructure, revenues, labor utility, etc. one can argue that the case for the developing countries is quite delicate and complex.

Thus, in totality, it can be maintained that the minimum tax regime has immense advantages for some well not much for others. Thus, it is a boon for the developed countries but for undeveloped countries, it is too soon to tell.

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The FUD Reality of Crypto Users

The Indian government has got the Indian crypto users or crypto traders anxious again due to its antagonistic stance against the contentious digital currency. The recent crypto regulation law has sent many traders desperately trying to sell a part, if not all, of their cryptocurrency portfolio, but, quite detestably, the trades wouldn’t go through. In a turn of recent events, the panic sell-off amongst crypto investors, which had recently warmed up to the technology, was triggered after it was announced that a crypto bill would be introduced in Parliament’s winter session.

What came across as concerning was the fact that the bill mentioned that trading of all private cryptocurrencies would be prohibited.

Given the speculative nature of the market, confirmation of such a humungous step was quite enough to send the market in frenzy. This led to plunging values in the crypto market with the prices fluctuating frequently. This has in fact been proven quite detrimental for the investors who were trying to sell or buy the stock.

With higher transaction values, the complaints about MobiKwik and the Wazir X app crashing were registered as well.

A hasty, uninformed decision?

Given the present circumstances prevailing in the crypto market, where does this make the crypto users stand? It is to be noted that the thousands of panic-stricken small investors have been left staring at their screens, being made to face the ordeal by the authorities.

This has led to venting out of frustration by the users on Twitter- which can appropriately be described as the fear, and uncertainty that can be seen among the investors in the market.

But given the uncertainty and mayhem that is at play in the crypto market, can the government be accused of an uninformed, hasty decision? Certainly not. One can perhaps argue, that the market was quite well versed with the government’s antagonistic and aversive attitude towards the contentious distal asset.

With various warnings of a ban, or curtailment, the latest bill shouldn’t come as a surprise for the users who might have been keeping tabs on the news in the market.

But has sagacious investing been a prominent choice for the investors? given the market conditions, one can emphatically argue that the humungous sell-off that happened earlier in the week across one of the biggest Indian crypto exchanges shows the exuberance and irrationality had always pervaded the better judgment of the investors in the market.

What is adding to the mayhem, is the fact that the exchanges keep on crashing, which happens to be becoming a pattern now. According to the reports, when the transactions are high, the exchanges usually crash. This effectively doesn’t let the trades go through.

But has there been a precedent that has been set for such a situation? The answer is affirmative. Similar problems were encountered earlier too when China’s central bank had effectively announced that all transactions involving cryptocurrencies were illegal.

This gives rise to a pertinent question, what exactly should be a preferred course of action under these circumstances? It is to be noted that a few smart investors have already started derisking themselves. This involves trading on various platforms to avoid a glitch.

According to the reports, the people and the traders have been demanding penalization of such exchanges which are working ineffectively. But why is such a glitch leading to such anguish amongst the investors if it merely represents delays in transactions? This is due to the fact that delays are leading the traders to fail in closing the trades.

This brings to the table the proposition that the trades and the platforms should be thoroughly be regulated like equities so that small investors don’t lose much money in the panic and anguish. This proposition has been brought to the table due to the mere fact that Sebi usually launches a probe if people lose money in equities due to a website’s glitches.

To top it all the need of the hour is the government’s intervention and assurance that needs to be provided to the panicking investors. with assurances that time will be given for withdrawal and closing of accounts, not leading to needless losses, such a panic state can be effectively crippled.

This is all the more needed, given the fact that there is already limited information that is coming from exchanges and the market is rife with unfounded rumors. In order to prevent slow down trading to prevent sell-offs, assurances by the government can help save the day.

What also needs to be considered is the fact that most of the investors on the exchange platforms are young and from smaller towns in India. Thus, they have limited financial knowledge of the asset class. Thus given the constricted knowledge horizons, one can effectively state that they tend to panic more, especially when there is such adverse news.

Thus, assurances and moderate actions are the need of the hour. now, whether the government takes that into consideration or not, is something only time will tell, but any further investments into the contentious digital asset will largely not be a sagacious idea.

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IPO Season 2021 in India

India in recent months has been witnessing spectacular, blockbuster IPO debuts. The debuts are being made by some of the very leading companies like Zomato, Nykaa, Mrs. Bector, Happiest Minds, Burger King, etc.

Thus, it can be rightfully stated that such robust IPOs are ushering in a new era of realizing the full potential of the startup culture in India.

Like the western countries, the startup culture in India is booming. This fact can be corroborated by pieces of evidence of astonishing IPOs being carried out in the market, the great pompous that surrounds them, and the public’s willingness to invest leading to overvalued stock.

It can be seen that the market is bullish, so much so that Zomato, which was a loss-making company, had its stock overvalued in the market with quite some buzz that was created around its name.

But, here it is worth mentioning that Zomato has emphatically ushered in the IPO season 2021.

An online food tech company going for an IPO in a competitive market sparked much confidence in others. thus, Zomato’s first step and Indian stock markets that are quite bullish this year emphatically led to the country’s emerging tech startups effectively gearing up their confidence.

This confidence was geared up encouragingly knocking on the doors of the public markets.

It is to be known, that 2021 isn’t the only year that saw a burgeoning IPO, 2020 too ended with two hot techs IPOs, but in the US stock market.

These were namely Airbnb and DoorDash. Thus, it can be rightfully stated that the amazing, gratifying success of these IPOs surely had an impact on the Indian investors.

On the other hand, this also led to the strengthening of their belief in technology startups.

 Thus, it is quite stratifying to decipher that the Indian IPO market has finally realized and deciphered the great potential of startups. These startups can be said to have been disrupting traditional ways of business.

One can also say that such a hunger in the market can be due to the burgeoning profits that such companies had earned during the pandemic. the avarice of such gains can also be a driving force to garner a large market share in different segments.

It is to be noted that 2020 and 2021 were unconventional years. With lockdowns and restrictions plaguing the economy, unusual and unconventional ways of business paved the way for the conducting of business activities.

On the other hand, the high exuberance in the market which made Zomato’s IPO an amazing success has inspired many to go for the same. This claim can be corroborated by the fact that all the recent IPOs, be it Zomato, CAMs, Route Mobile, Burger King, and Happiest Minds have all been effectively oversubscribed many times over and debuted with high multiples.

The government

But given the recent boom in the market, how is the Indian government coping with the recent, newfound mechanism of profit that is unfolding in the startup culture? It is to be noted that the Indian government seems to be, quite cheerfully, welcoming such tech IPOs.

In fact, India’s market regulator Securities and Exchange Board of India (SEBI) has effectively set up an Innovators Growth Platform. On the other hand, it has encouraged, through its recently announced consultation paper, that it is seeking comments for the new rules that will emphatically encourage startups to head for IPO.

 It is to be noted that companies opt for IPOs when their investors, who throughout their funding process need an exit.

Thus, given the circumstances and the trend in the IPO market, it can be rightfully stated that there are certain healthy tailwinds that are emphatically pushing startups towards IPO. The IPOs in the market are moving towards fundraising and to emphatically provide investors, as aforementioned, with a healthy exit.

But this gives rise to a pertinent, inquisitive query, what norms or regulations are actually supporting such techs to opt for IPOs?

It is to be noted that new norms that were announced by the SEBI are the answer. Its newer norms have provided regulations and framework for easier migration to the mainboard, special rights that come with IPO, and decreased holding period. Such norms are definitely making launching IPOs more lucrative in the market.

Also, the market is doing its magic as usual. With the cautious approach of the RBI and yields low in the bond market, many investors have moved to the stock market to incur high profits.

This is the very emphatic reason that IPOs are overvalued and are being sold at a higher price with so much buzz around them. The main contributor to the same has been the financial literacy that has grown in developing countries like India, which has also contributed its part.

Thus, lastly, it can be stated that the IPO market is on the boom right now with various tech companies opting for healthy financing. But how long will the exuberance surrounding the IPO season last, is something we will have to wait and decipher.

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GST Rise in India For Multinationals

India is a country where multinationals usually find their future quite uncertain and rapidly changing. Given the democracy that India is, with a government that considers regulation as its strong suit, such a thing can be expected. In the latest turn of events, the tax department in India has targeted or rather pointed towards the new regime of taxes that can be levied on the multinational fast food and hotel chains and tech companies. These are those multinationals or tech companies that effectively operate through the model of the franchisee in India.

But what part of their income has come under the taxmen’s lenses this time? Under scrutiny, this time is the royalty income of such multinationals. Here, the indirect tax department has emphatically raised questions on the pertinent nature of the agreement of these multinationals with their franchisees. It is here to be noted that the income tax department is effectively demanding higher GST given the nature of agreements that have been signed between the multinationals and the franchise.
But this might give rise to a pertinent question how is a multinational different from its own franchise? The answer is that it isn’t. it is here to be noted that under these franchisee models the multinationals allow Indian companies to actually operate them. These could lead to the management of hotels, entities, and stores by Indian companies under their global brand name. Against this arrangement or franchise model, these multinational companies charge a percentage of profit or you can effectively call them royalty or any other income.

But is this amount paid invariably? Not quite. This royalty tax that is being earned by these multinationals comes under the regulatory ambit of the Indian authorities. According to reports, most multinationals pay up to 12% Goods and Services Tax on such royalties. But, given the present scrutinization, the tax department is emphatically is trying to impose an 18% GST on such royalties.

Why such scrutinization?

The alleged revised GST collection of tax leads to a pertinent question what gave rise to such an analysis? It is to be noted that higher tax is being sought as the GST for payments that come under the “right to use” of the brand name is a mere 12 percent, but when this is compared to “transfer of the right to use”, the GST tax rate is actually18 percent. Thus, all the multinationals that were paying the applicable GST of 12% were because they claimed that they had not transferred the brand name or had effectively allowed the Indian entities to use their brand name permanently.

This mainly comes due to the controversy that prevails between the terms ’use rights’ and ’transfer of use rights. What actually leads to the discrepancy is that the tax department actually considers taxing both categories differently.

It is to be also noted that in India, not one but several multinational companies effectively operate under varied franchise models.

One other characteristic that is responsible for the taxman’s lenses on the multinationals is that most multinational chains mainly fast-food chains, tend to operate in grant microgeographic-based exclusivity. This effectively means that various franchise stalls can be installed at various geographical locations. Not only the fast-food franchise works or operates on this model, but mobile phone companies also try to adopt similar franchise models in terms of “exclusive brand stores” or “app stores”.

The tax department alleges that such models that are usually adopted by multinationals are used to essentially save taxes and escape the tax ambit of India. On the other hand, the tax department effectively wants to want to scrutinize the multinationals using the hardcore principles of “entity over form”.

As per the reports the newer taxes can also be levied on the software companies. Such a tax that can be levied on the multinationals will effectively lead to ambiguity in the Indian tax law that cannot be too accommodative for foreign investments. Given that India is currently recuperating from the covid debacle, FDIs are crucial for momentum.

What makes this matter even more intricate is that in this situation it is very crucial to firstly distinguish between goods, effectively known as permanent transfer, and service, known as a temporary transfer.

As aforementioned, this could materialize into a thorny issue as tax applicability is a sensitive issue for the multinationals that effectively operate in countries where such high taxes can be skipped. India being the most sought-after investment destination can put many multinationals in troubled waters with its uncertain tax laws regulating them.

It is not the first time that the Indian tax department has touched upon this sensitive issue. Previously, the Indirect Tax Department had beseeched or inquired some multinational corporations and foreign banks whether they will allow their entities and subsidiaries to use the brand name. Consequently, in the interest of the Indian entities, the inquiry was made into whether compensation had been duly paid for the use of the brand by a subsidiary.

For a long time, now many multinational companies and foreign banks have been under the tax department scanners. However, the issue was not carried forward due to the pandemic disrupting the functioning of the department. But with now the situation stabilized, the Income Tax department is ready for its sleuthing. What will be the future of the multinationals in India will be something we will decipher only in the future.

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