THE HINDU – CURRENT NOTE 03 APRIL
Counterfeiting of new notes worries agencies
Officials want security features changed every 3-4 years
•That the new ₹2,000 and ₹500 notes have the same security features as the old ₹500 and ₹1,000 ones has the security agencies worried.
•At a high-level meeting last week to discuss the presence of fake currency notes, officials at North Block were informed that the “covert security features” had not been changed since 2005.
•The Hindu had reported on November 11, 2016, that the security features were changed last in 2005 when notes of all denominations with new security features were introduced.
•Water marks, security thread, fibre and latent image comprise the security features and these require several representations, evaluation and a Cabinet nod.
•An official had said then that since the decision to introduce the new notes was taken only around May 2016, there was no time to alter the security features as the entire exercise takes between five and six years.
•Officials have suggested now that to check counterfeiting, the security features of higher denomination notes, such as ₹2,000 and ₹500, should be changed every 3-4 years in accordance with global standards.
•In the four months since the government announced its decision to scrap the old ₹500 and ₹1,000 notes on November 8, 2016, fake ₹2,000 notes with a face value of over ₹66 lakh have been detected by the Reserve Bank of India and the State police forces across the country.
Investigations under way
•The government informed the Lok Sabha that investigations were on to determine whether the security features of the new notes had been compromised.
•On November 8, 2016, Prime Minister Narendra Modi announced that the old notes were being scrapped and new ₹2,000 ones were being introduced as part of the government’s efforts to weed out black money and fake currency, which would eventually eradicate corruption and terror funding.
•As per the Home Ministry’s reply in the Lok Sabha, from November 9, 2016, to March 7 this year, 3,346 pieces of fake ₹2,000 notes had been recovered.
•The issue was discussed threadbare at a high-level meeting on Thursday, which was attended by senior officials of the Ministries of Finance and Home, including Union Home Secretary Rajiv Mehrishi.
•Home Ministry officials said most developed countries change the security features of their currency notes every 3-4 years.
•Therefore, it is absolutely necessary for India to follow this policy.
•The change in design of Indian currency notes of higher denominations was overdue.
•“The newly introduced notes have no additional security features and were similar to those in the old ₹1,000 and ₹500 notes. Though the fake notes recovered so far have all been photocopies and of poor quality, it is not impossible for the enemy country to replicate them,” a senior official who was present in the meeting said.
•The NIA had sent three fake notes for forensic analysis and the report said they were of low quality and were mostly scanned and colour copies of the original notes.
•The report also said the notes were being printed in Bangladesh. According to the NIA, they were printed on the “security document of Bangladesh’s currency paper, which said Praja Tantri Bangladesh.”
Swap terrorism for tourism, Modi tells Kashmiri youth
The Chenani-Nashri tunnel will now reduce the travel distance between Jammu and Srinagar by 30 kilometres
•Prime Minister Narendra Modi on Sunday inaugurated the country’s longest road tunnel that links Kashmir Valley with Jammu by an all-weather route and reduces the distance by 30 km.
•The 9-km long ‘Chenani-Nashri Tunnel,’ built at the cost of ₹2,500 crore, was dedicated to the nation by the Prime Minister in Chenani in the presence of Jammu and Kashmir Governor N.N. Vohra and Chief Minister Mehbooba Mufti.
•"Kashmiri youths have two options: tourism and terrorism. For 40 years terrorism gave you nothing but bloodshed, deaths and destruction. Had you chosen tourism, the benefits today would have been phenomenal," said Mr. Modi after the inauguration.
•"Want to tell the Kashmiri youth what actually is the power of stones. On one side, youth in Kashmir throwing stone. On other side, people giving their blood and sweat, cutting rocks for Kashmir's development," he added.
•After the inauguration, Mr. Modi, along with Mr. Vohra and Ms. Mehbooba, travelled in an open jeep through the tunnel for some distance.
•The Prime Minister, the Governor and the Chief Minister then posed for a photograph with the engineers who were involved in construction of the tunnel.
"Tunnel to bring Kashmir closer to the country"
•J&K Chief Minister Minister Mehbooba Mufti welcomed Mr. Modi and said the tunnel would bring Kashmir closer to the country. "The tunnel will not just reduce the physical distance but bring Kashmir closer to the country. The inauguration of tunnels will also help (sic) to join the hearts of the people," she said.
•She thanked Mr. Modi for his support during the unrest in the State in 2016. "The situation has improved now but lot needs to be done. We have won all wars but our real strength is democracy. We have to help to bring the people out of trouble through agenda of alliance," she added.
•"The J&K tour operators have a message for you: Kashmir is a safe place for tourists," she further said.
Tunnel to reduce travel time
•The tunnel, bypassing snow-bound upper reaches, will reduce the journey time by two hours and provide a safe, all-weather route to commuters travelling from Jammu and Udhampur to Ramban, Banihal and Srinagar.
•The estimated value of daily fuel savings will be to the tune of ₹27 lakh, according to the PMO.
•The tunnel is equipped with world-class security systems, and is expected to boost tourism and economic activities in the State of Jammu and Kashmir.
•The Chenani-Nashri Tunnel is a single-tube bi-directional tunnel with a 9.35-metre carriageway and a vertical clearance of 5 metres.
•There is also a parallel escape tunnel, with ‘Cross Passages’ connecting to the main tunnel at intervals of 300 metres.
•It also has smart features such as an integrated traffic control system; surveillance, ventilation and broadcast systems; fire fighting system; and SOS call-boxes at every 150 metres.
Sharpen the focus on growth
If there has to be investment resurgence, it is necessary to create the climate which promotes this faith
•Now that the dust and din around the State Assembly elections have settled down, it is time for policymakers to turn their attention to the major task of accelerating economic growth. As of now the prospects are not encouraging. The Central Statistics Office’s second advanced estimates indicate that the growth rate of GDP for 2016-17 will be 7.1% as against 7.9% in 2015-16. The growth rate of gross value added at basic prices in 2016-17 will be 6.7% as against 7.8% in 2015-16. The growth rates projected for 2016-17 do not capture the impact of demonetisation, which when taken into account may bring down the projected growth rate by around 0.5%.
•The decline in the growth rate is not a recent phenomenon. It started in 2011-12. The persistence of relatively low growth over a five-year period calls for a critical examination. Even though the new numbers on national income give us some comfort, they do not tell the whole story.
Determinants of growth
•Ultimately, the growth rate is determined by two factors — the investment rate and the efficiency in the use of capital. As the Harrod-Domar equation puts it, the growth rate is equal to the investment rate divided by the incremental capital-output ratio. The incremental capital-output ratio (ICOR) is the amount of capital required to produce one unit of output. The higher the ICOR, the less efficient we are in the use of capital. There are many caveats to this bald proposition. As we look at the Indian performance in the last five years, two facts stand out. One is a decline in the investment rate and the second is a rise in ICOR; both of which can only lead to a lower growth rate.
•As growth was coming down sharply initially, the investment rate was falling only slowly, implying a rising ICOR. ICOR is a catch-all expression which is determined by a variety of factors including technology, skill of manpower, managerial competence and also macroeconomic policies. Thus delays in the completion of projects, lack of complementary investments in related sectors and the non-availability of critical inputs can all lead to a rise in ICOR.
•The Economic Survey of 2014-15 reported that there were in all 746 stalled projects, with 161 in the public sector and 585 in the private sector of a total value of ₹8.8 lakh crore. As of 2015-16, there were still 404 stalled projects, 162 in the public sector and 242 in the private sector with a total value of ₹5.5 lakh crore. In the short run, the biggest gain in terms of growth will be by getting “stalled projects” moving. Of course some of them may be unviable because of changed conditions. A periodic reporting by the government on the progress of stalled projects will be of great help.
Declining investment rate
•India’s investment rate reached a peak in 2007-08 at 38.0% of GDP. With an ICOR of 4, it was not surprising that a high growth rate of close to 9.4% was achieved. One sees a steady decline in the investment rate since then. The decline in the rate was small initially but has been more pronounced in the last two years. According to the latest estimates, the gross fixed capital formation rate fell to as low as 26.9% in 2016-17. With this investment rate, it is simply impossible to achieve a growth rate in the range of 8 to 9%.
•The major issue confronting us is: why did the investment rate fall? Why are not new investments forthcoming? In 2011 and 2012, in discussions on the Indian economy, the one phrase that used to be bandied about was “policy paralysis”, pointing to the inability of the government to take policy decisions because of “coalition compulsions”. It is true that around this period, the government was preoccupied with answering many issues connected with graft. But that does not explain the steady fall in the investment rate except for a sense of uncertainty created in the minds of investors.
•The external environment was also not encouraging. The growth rate of the advanced economies remained low and the recovery from the crisis of 2008 was tepid which had an adverse impact on exports. However, India benefited by large capital inflows except in 2013. For almost three years beginning 2010, India had to cope with a high level of inflation which also had an adverse impact on investment sentiment. Once the growth rate starts to decline, it sets in motion a vicious cycle of decline in investment and lower growth. The acceleration principle begins to operate. We need to break this chain in order to move on to a higher growth path.
Solutions
•What are the solutions, given the current situation? The standard prescription, whenever private investment is weak, is to raise public investment which can take a longer term view. This standard suggestion is very much appropriate in the present context as well. In the best of times, public investment has been 8% of GDP. The Central government’s capital expenditures even after some increase in the last two years, is only 1.8% of GDP. About 3 to 4% of GDP comes from public sector undertakings and the balance from State governments. What is needed now is for public sector undertakings to come out with an explicit statement indicating the extent of investment they intend to make during the current fiscal. And this intention must be monitored every quarter. This will inspire confidence among prospective private investors.
•However, it is also necessary to enhance private investment, and that too private corporate investment. During the high growth phase, corporate investment reached the level of 14% of GDP. Since then it has fallen. In fact, a recent study shows that the total cost of projects initiated by the corporate sector has come down from ₹5,560 billion in 2009-10 to ₹954 billion in 2015-16. This continuing trend must be reversed.
•Three things need attention. First, reforms to simplify procedures, speed up the delivery system and enlarge competition must be pursued vigorously. Some significant steps have been taken in this regard in recent years such as moving forward on the GST Bill, passing of the Bankruptcy Act, and enlarging the scope of foreign direct investment.
•Second, all viable “stalled” projects must be brought to completion. Third, financial bottlenecks need to be cleared. The banking system is under stress. The non-performing loans of the system have risen and are rising. This has squeezed the profitability of banks with some showing loss. More distressing is the minimal flow of new credit. The problem is often referred to as the twin balance sheet problem. If corporate balance sheets are weak, automatically the banks’ balance sheets also become weak. Really speaking, it is two sides of the same coin.
•The solution to clean up the balance sheet of banks lies in taking some “haircuts”. At least some part of the accumulation of bad debts has been due to the slowdown of the economy. The old saying is “bad loans are sown in good times”. Even though a haircut cannot be avoided, wilful defaulters must not go unpunished. Asset restructuring companies are part of the solution and we have some experience of them.
Long-term lending
•This is also the appropriate time to revive an idea which had withered away during the reform process and that is to have institutions focussed on long-term lending such as IDBI and ICICI as they were before 1998. The details can be worked out. But the idea needs a rethink.
•Investment, as they say, is an act of faith in the future. If there has to be investment resurgence, it is necessary to create the climate which promotes this faith. We have already outlined the actions that can be taken in the purely economic arena. But “animal spirits” are also influenced by what happens in the polity and society. Avoidance of divisive issues is paramount in this context. Undiluted attention to development is the need of the hour.
Digital push must be disability-inclusive
As India catapults towards a digital economy, making ICT accessible to the disabled is a must
•Around 8-10% of India’s population lives with disabilities, with an equal number constituting the aged. Information and Communication Technologies (ICT) have the potential to significantly impact the lives of these groups, facilitating access of services available to them and allowing them to handle a wide range of activities independently, enhancing their social, cultural, political and economic participation. Making ICT accessible no longer remains an option but has become a necessity.
•Poor accessibility due to lack of focussed information and political will has led to social exclusion of people with disabilities, exacerbating the negative impact of the existing digital divide. The new call for action of disability rights activists now is “Cause No Harm”, thus ensuring future generations are not excluded from mainstream activities due to a hostile infrastructure.
•This assumes a greater thrust given the unprecedented developmental activity in the country under the various missions launched by the present government, such as the Smart Cities Mission and Digital India. Accessibility for disabled people is a cross-cutting theme across all of these and care must be taken to ensure disability-inclusive development.
Accessibility as a link
•Incorporation of accessibility principles across all new developments will also complement the Accessible India Campaign, the flagship campaign launched by the Prime Minister on World Disability Day which aims at achieving universal accessibility for all citizens and creating an enabling and barrier-free environment. India was one of the first countries to ratify the United Nations Convention on the Rights of Persons with Disabilities. The recently passed Rights of Persons with Disabilities Act, 2016 mandates adherence to standards of accessibility for physical environment, transportation, information and communications, including appropriate technologies and systems, and other facilities and services provided to the public in urban and rural areas. These include government and private developments. The Act also mandates incorporation of Universal Design principles while designing new infrastructure, electronic and digital media, consumer goods and services. Most importantly, the Act sets timelines to ensure implementation of the above and punitive action in the event of non-compliance.
•Accessibility therefore forms the common thread weaving together the Accessible India Campaign, the Rights of Persons with Disabilities Act, the Smart Cities Mission and the Digital India campaign to achieve the combined goal of creating an inclusive society that will allow for a better quality of life for all citizens, including persons with disabilities.
•Beyond the social implications, accessibility makes for business and economic sense too. If principles of Universal Design are incorporated at the design stage, cost implications are negligible. Retrofitting, on the other hand, has huge cost implications.
•Exclusion of persons with disabilities from education, employment and participation on account of a hostile infrastructure and inaccessible technology has huge economic implications. UN agencies put this cost at around 7% of national GDP. On the other hand, accessible services and business premises can broaden the customer base, increasing turnover and positively impacting the financial health and social brand of the company. Recent research pegged the market size of different product categories needed by persons with disabilities in India at a whopping ₹4,500 crore.
•Disability is not an isolated issue. It is cross-cutting and can impact everyone irrespective of caste, gender, age and nationality. Thus ensuring a disability-sensitive development agenda across all ministries, sectors and causes becomes critical if growth has to be truly inclusive. ‘Nothing about us without us’ assumes even greater significance in the current context.
The importance of synergy
•As India catapults towards a cashless and digital economy and as human interface between service providers and end users gives way to digital, it becomes imperative to ensure accessibility for inclusion. The need is for representation of persons with disabilities in all ministries and key missions, commissions and committees to advise and ensure inclusion in all policies, programmes and developments. The government’s procurement policy too must mandate accessibility as a key criterion. Adherence to the latest Web Content Accessibility Guidelines should be made mandatory while developing websites and mobile applications.
•Also important is the synergy between various arms of the government. The Smart Cities Mission focusses on comprehensive development leading to the convergence of other ongoing government programmes such as Make In India, Digital India, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Pradhan Mantri Awas Yojana, National Heritage City Development and Augmentation Yojana (HRIDAY), etc. but the Accessible India Campaign does not even find a mention! This is so when as many as 39 cities out of the 50 cities of the Accessible India Campaign are also among the shortlisted Smart Cities.
•Much after Independence, there has been minimal change in the fortunes of India’s disabled population. It becomes our collective responsibility to ensure inclusive development, one that engages all stakeholders through a pragmatic and judicious combination of interventions while effectively leveraging technology to ensure truly inclusive and sustainable development.
India must reaffirm its Paris pledge
This will make a difference to global climate outcomes in the context of U.S. recalcitrance under Trump
•In March, U.S. President Donald Trump signed an executive order, ostensibly promoting U.S. energy independence and economic growth, but with potential collateral damage to global efforts to limit climate change. What exactly did he authorise, what are its implications, and what does it mean for India’s strategic interests in energy and climate change?
•The executive order defines America’s interest narrowly in terms of developing the country’s energy resources. It establishes a time-bound process to review several Obama-era regulatory actions that might “burden” their development, and revokes certain actions. A centrepiece is a review of the U.S. Clean Power Plan, which aims at reducing greenhouse gas emissions from the American electricity sector. This was a key element in President Barack Obama’s plans to meet America’s climate pledge under the Paris Agreement.
•Other actions lift a moratorium on leasing federal land for coal mining, and revisit rules to limit methane emissions. Yet another withdraws estimates of the “social cost of carbon”, an economic approach that sets a dollar value to the gains from reducing carbon, providing a basis for further regulatory action. In brief, the aim is to invigorate domestic energy production but by setting the clock back to an era before any climate-focussed regulation, thereby giving a boost to coal, oil and gas production.
From a virtuous to vicious cycle
•Despite green advocates in the U.S. putting on a brave face, the cumulative effects of these actions undoubtedly have implications for the trajectory of America’s greenhouse gas emissions. They are correct in arguing that efforts to boost the coal industry are likely fruitless. Even without the Clean Power Plan, the falling price of wind and solar energy and the availability of cheap gas could signal the end of coal in the U.S. But the same cannot be said for efforts to limit methane. And the removal of the single agreed social cost of carbon as a basis for regulatory efforts hamstrings the effectiveness of other regulations. These orders set back climate mitigation efforts in the U.S. The only question is how much, and whether America’s Paris Agreement pledge is still within reach.
•But the deeper significance of the order rests in the political signal it sends to the world, and the reactions it may elicit. The Paris Agreement is, at the core, a confidence game. Each country is required to submit a national ‘pledge’ to limit emissions growth, which is to be reviewed internationally, and updated and enhanced every five years. The intent is to generate a virtuous cycle of enhanced actions over time, as countries gain confidence in each other’s commitment to climate action.
•Mr. Trump’s order risks turning a fragile global virtuous cycle into a vicious one; with global confidence punctured, other countries may follow the U.S. lead and dilute their national actions too. While the order is silent on America’s formal commitment to the Paris Agreement for now, an explicit announcement on this is expected in May, when the G7 leaders are scheduled to meet. A formal withdrawal, though complex and time-consuming, could further dent appetite for collective action.
•For veteran climate watchers, what makes this order particularly galling is that the Paris Agreement was, in substantial measure, written to accommodate the U.S. and enable its participation. And this is not the first time the U.S. has pulled the rug out from under the global community. In the mid-1990s, it notably walked away from the Kyoto Protocol, which requires developed countries to take the lead. With this order, as a senior U.S. government official put it: “The U.S. is going to pursue its interests as it sees fit” based on “an America First energy policy.”
Implications for India
•In this context, what are India’s interests, and how best can it pursue them? It is certainly the case that the developed world has consistently taken on less leadership than it should have, and the global climate regime could be better moored in principles of equity in addressing climate change. It would be tempting to conclude that India could use the U.S. retreat to stage one of its own, go slow on its own obligations, and adopt an approach of benign neglect towards the Paris Agreement.
•However, this would be flawed and incomplete thinking. India’s interests are best served by buttressing the Paris Agreement, using its mechanisms to hold to account the developed world, and maintaining its own pledges.
•India has a lot to gain from a virtuous cycle because it is extremely vulnerable to climate impacts. While the ability of the Paris Agreement to slow warming may be more modest than is ideal, it will certainly have more effect than no agreement at all.
•Moreover, India has little to gain from going slow on implementing its own pledge. India’s greenhouse gas limitation pledge is appropriately cautious and, in key areas such as renewable energy promotion, existing domestic policy targets are more ambitious than India’s Paris pledge. Its approach is based on accelerating a transition to renewable energy, which would bring gains in terms of energy security and air pollution. But in doing so, India importantly retains the right to meet its energy access needs and energy for development through fossil fuel use, particularly coal, if needed. The Paris Agreement does not constrain this approach, which is based on Indian interests.
•Should the Paris Agreement unravel, there will almost certainly be a push to re-negotiate a new agreement when political conditions in the U.S. change. At that time, developed country emissions will be lower, India’s emissions will likely be rising faster than any other country, and it will have considerably more pressure to take on more ambitious pledges that could, in fact, risk constraining its energy choices.
•Could India’s stance actually make a difference to global climate outcomes in the context of U.S. recalcitrance? Unambiguously yes. India is emerging as a swing player in global climate politics. With the U.S. adopting the role of the leading naysayer, the Chinese have skilfully stepped into the role of climate champions, reaffirming their own commitment to the Paris Agreement. As a large emerging country, whose yearly emissions follow only these two nations, India has enormous leverage as a deciding factor in the future of the Paris Agreement. It should insist that Western countries maintain their obligations, including financial. Indeed, the Trump order provides an opening to enhance India’s global standing. Skilfully executed, such a climate position could even be useful in a larger foreign policy sense, serving as a soothing element in an otherwise fraught relationship with China, and signalling independent pursuit of interests to the Americans.
•History will likely judge the Trump order an own goal, born of the poisoned politics that prevails in the U.S. today. It will likely hurt the interests of the U.S. in the long run because it postpones an inevitable but complex readjustment of energy systems around renewable energy, undermines confidence in the U.S. as a reliable global partner, and even revokes preparation for climate impacts meant to safeguard American citizens. Fortunately, India is in a position to think and act more clearly. It should do so by re-affirming its Paris pledge and placing its weight behind implementing the Paris Agreement.
GAAR raises issue of taxman’s powers
Arbitary use of authority a big concern
•With the government implementing its anti tax avoidance rules from April 1, industry is concerned about the greater subjective authority being given to the tax department and how this could render transactions unprofitable.
•The General Anti-Avoidance Rules (GAAR) are designed to prevent the avoidance of tax by taking advantage of international tax laws.
•The rules say that if the major outcome of a transaction is a tax benefit and there is no sound business basis for the transaction, then the government can invoke GAAR and reclassify the transaction or the profits arising from it.
•“The concern is about the arbitrary usage of the powers that the officers might have under GAAR,” Vipul Jhaveri, Managing Partner, Tax and Regulatory at Deloitte Haskins & Sells told The Hindu. “Conceptually, if the power is used judiciously it can’t be anybody’s argument that any anti-avoidance rule is a bad thing.”
•“Canada has had such a law since 1988 and they are still facing problems,” Neha Malhotra, Executive Director at Nangia and Co added. “Such rules create subjectivity. Suppose a transaction makes sound business sense but also results in substantial tax savings, then does it make them a tax evader?”
•Similarly, Mr Jhaveri explained, there could be cases where the tax benefit accrues upfront whereas the business advantages of a transaction could accrue only with a delay. In such a case, would the transaction be treated as one conducted purely to evade tax?
•In any case, tax experts agree that the government has included several safeguards against bullying by tax authorities, such as several layers of permissions required before GAAR is invoked.
•The assessing officer seeking to apply GAAR has to get her proposal vetted by a principal commissioner and then needs to obtain the approval of a panel headed by a high court judge.
•“These are the anxieties, that how objective will the principal commissioners be, will they look at it from the revenue perspective or from a business perspective,” Mr. Jhaveri said.
•“Under the rules, the tax authorities under GAAR can reclassify a transaction or the profits arising from it and make them taxable,” Ms. Malhotra added. “But that could then undermine the business reasons behind the deal by increasing the deal size or reducing profits.”
•Originally, the rules were supposed to be implemented from April 1, 2014 onwards, but protests from foreign investors meant the implementation was delayed twice. Earlier this year, the Income Tax Department issued a set of clarification aimed at clarifying the issues raised by the foreign investors.
•The Department clarified that GAAR will not be invoked in cases where investments are routed through tax treaties that have a sufficient limitation of benefit (LOB). Such LOB clauses usually require the investor to meet certain investment and employment requirements so that only resident companies benefit from the deal.
‘Foreign ownership norms a barrier’
USTR report lists trade irritants for investors in e-commerce, banking, insurance in India
•Indian regulations on foreign ownership in e-commerce, banks, insurance and other online-related services were major barriers for overseas investors, according to a report by the U.S. President Donald Trump’s administration.
•The findings were part of the report on foreign trade barriers from the Office of the United States Trade Representative (USTR). The annual report points to a list of trade irritants in 63 nations.
•“India allows for 100% foreign direct investment in business-to-business (B2B) electronic commerce, but largely prohibits foreign investment in business-to-consumer (B2C) electronic commerce transactions,” according to the report.
Inventory-based model
•Foreign direct investment is allowed in a market-based electronic retailing model, but not in the inventory-based model, it added.
•According to the report, the only exception that was granted was to single-brand retailers. Single-brand retailers who meet certain conditions including the operation of physical stores in India may undertake to trade through electronic commerce. “This narrow exception limits the ability of the majority of potential B2C electronic commerce foreign investors to access the Indian market.”
•The trade barriers report also pointed out India’s tax (6% equalisation levy) on foreign online advertising platforms was not par with the international norms and warned the levy in its current form may impede foreign trade and increase the risk of retaliation from other countries where Indian companies are doing business.
•“India recently began assessing an ‘equalisation levy’, which is an additional 6% withholding tax on foreign online advertising platforms, with the ostensible goal of “equalising the playing field” between resident service providers and non-resident service providers. However, its provisions do not provide credit for tax paid in other countries for the service provided in India,” according to the report.
•The report also pointed out that the levy would result in taxes on business income even when a foreign resident does not have a permanent establishment in India or when underlying activities are not carried out in India.
•“The current structure of the equalisation levy represents a shift from internationally accepted principles, which provide that digital taxation mechanisms should be developed on a multilateral basis in order to prevent double taxation.”
Data storage
•According to the USTR, the Indian requirements of storage of data within India reduce productivity, dampen domestic investment and undermine the ability of information and communications technology companies to offer cutting-edge services.
•The 2012 National Data Sharing and Accessibility Policy, issued by the Ministry of Science & Technology, which requires that all data collected using public funds — including weather data — be stored within the borders of India, it added. It also pointed out the Department of Electronics and Information Technology (DEITY) guidelines requiring cloud computing service providers to store data within India to qualify for bidding for government procurements. The report stated that ownership restrictions in terms of insurance and banks, was a hurdle for foreign investors.
•Even though the FDI limit in insurance has been increased to 49%, the regulatory requirement for the appointment of directors and other operational requirements are a concern, it said.
•“Foreign investors have expressed concern that the new requirements create a rigid structure that ignores operational realities and will dilute the rights of foreign investors in Indian insurance companies, making additional FDI in the sector unattractive.”
•The report also highlighted Insurance Regulatory and Development Authority’s (IRDA) discussion paper that called for the compulsory public listing of life insurers that have been in operation in India for seven years or more.
•“Such a requirement to publicly list is rare, and companies generally decide whether to undertake an initial public offering based on an analysis of company-specific facts. If implemented, this requirement would be another measure that would have a discouraging effect on foreign investors,” it noted.
•“Foreign banks are required to submit their internal branch expansion plans on an annual basis, and their ability to expand is hindered by non-transparent limitations on branch office expansion. Foreign banks also face restrictions on direct investment in Indian private banks,” according to the report.
