Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Model Tenancy Act
The Union Cabinet has approved the Model Tenancy Act (MTA) to be sent to the States and Union Territories to enact legislation or amend laws on rental properties.
Model Tenancy Act
- MTA is aimed at opening up of the vacant housing stock for rental housing purposes and helping bridge the trust deficit that exists between tenants and landlords by clearly delineating their obligations.
- The housing and urban affairs ministry had floated the draft model tenancy law in July 2019.
Major provisions of MTA
(1) Rent Court and Rent Tribunal:
- To ensure speedy redressal of disputes, the Act calls for establishing a separate Rent Court and Rent Tribunal in every state/UTs to hear appeals for matters connected to rental housing.
- Only the rent court and no civil court will have the jurisdiction to hear and decide the applications relating to disputes between landowner and tenant and matters connected with it.
- It calls for the disposal of complaints and appeals by the Rent Court and Rent Tribunals within 60 days.
(2) Tenancy Agreements:
- It also seeks to establish an independent authority in every state and Union Territory for the registration of tenancy agreements.
- Under the Act, unless otherwise agreed in the tenancy agreement, the landlord will be responsible for activities like structural repairs except those necessitated by damage caused by the tenant etc.
- On his part, a tenant will be responsible for drain cleaning, switches and socket repairs, kitchen fixtures repairs, replacement of glass panels in windows, doors and maintenance of gardens and open spaces, among others.
For residential and commercial properties
- The Act will apply to premises let out for residential, commercial or educational use, but not for industrial use. It also won’t cover hotels, lodging houses, inns, etc.
- This model law will be applied prospectively and will not affect existing tenancies.
- It seeks to cover both urban as well as rural areas.
- The Act says that a security deposit equal to a maximum of two month’s rent in the case of residential premises and a maximum of six month’s rent in the case of non-residential premises would have to be paid by the tenants.
How will states implement it?
- As per the MoU signed under PMAY-U, the states and union territories would legislate or amend the existing rental laws on the lines of the MTA.
Why was a need felt to bring this on?
(1) For a rental economy
- Without a well-rounded rental policy and the proper implementation of the rental contracts, there was no sound mechanism to resolve tenant-landlord conflicts.
- Property owners find it challenging to evict tenants if they misuse the property.
- To steer clear of such complications, such property owners often chose to keep these homes vacant instead of renting them out.
(2) Unattractive rental yield
- In India, the rental yield for residential property is quite low, even in bigger cities. It is in the range of 1.5% to 3% of the capital values.
- This has disincentivized people from investing in second or third homes which could be rented out.
- Often, they also prefer to leave their properties vacant in case they return to India.
- NRIs avoid leasing their residential properties for fear of squatters and dealing with the legalities of eviction.
How will MTA help?
(1) Unlocking homes
- It will unlock vacant houses for rental purposes
- It will enable the creation of adequate rental housing stock for all the income groups thereby addressing the issue of homelessness.
(2) Helping migrants
- Rental housing is a preferred option for students and migrants.
- It will balance the rights of both landlords and tenants.
(3) Effective negotiations
- There is no monetary ceiling under MTA, which enables parties to negotiate and execute the agreement on mutually agreed terms.
- It will give confidence to landlords to let out their vacant premises, the housing ministry said.
- The Act also tries to address how a renter can legitimately increase the rent.
(4) Control over encroachments
- It has proposed limiting the advance security deposits to two months’ rent and has also suggested heavy penalties for tenants who decide to overstay.
- Those who do may have to shell out double the rent for two months and even four months.
(5) Rights of tenants
- The landowner cannot cut power and water supplies in case of a dispute and would have to provide a 24-hour notice to tenants to carry out repair work.
- Should the landlords wish to increase the rent, they will need to provide a three-months notice to the tenants.
- These measures would go a long way in protecting the rights of a tenant as it regulates the rent hikes that tenants have had to face.
Challenges ahead
While the proposals of the Act have been widely welcomed, their implementation may not be very simple.
(1) Not Binding nature
- The Act is not binding on the states as land and urban development remain state subjects.
- Like in the case of RERA, the fear is that states may choose not to follow guidelines, diluting the essence of the Model Act.
(2) Issues over paltry rents
- Also, the Model Act is prospectively applicable and will not affect the existing tenancies.
- The repeal of rent control Acts can be governed by political exigencies.
- This may be a complicated process in cities like Mumbai, where tenants have occupied residential properties in prime areas for absurdly low rents.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Digital Services Taxes
Mains level: Read the attached story
The US government has announced the further suspension of punitive tariffs for six months on India, Austria, Italy, Spain, Turkey, and the UK while it continues to resolve the DST investigation amid the ongoing multilateral negotiations at the OECD and the G20.
Do you remember?
GAFA tax—named after Google, Apple, Facebook, Amazon—is a proposed digital tax to be levied on large technology and internet companies.
What are the Digital Services Taxes in India?
- The NDA government had moved an amendment in the Finance Bill 2020-21 imposing a 2 percent digital service tax on trade and services by non-resident e-commerce operators with a turnover of over Rs 2 crore.
- The new levy has expanded the ambit of the equalization levy for non-resident e-commerce operators involved in the supply of services, including the online sale of goods and provision of services.
- E-commerce operators are obligated to pay the tax at the end of each quarter.
- Estimates by the USTR indicate that the value of the DST payable by US-based company groups to India will be up to approximately $55 million per year.
Also read:
What are Digital Services Taxes?
What is the story?
- The US is focused on finding a multilateral solution to a range of key issues related to international taxation, including our concerns with digital services taxes.
- It is trying to reaching a consensus on international tax issues through the OECD and G20 processes.
Investigation regarding DST
- The US has conducted a year-long investigation into digital services taxes imposed by countries, stating that they are against tech companies like Apple, Amazon, Google, and Facebook.
- It had determined that the digital services taxes adopted by Austria, India, Italy, Spain, Turkey, and the UK has discriminated against US digital companies and were inconsistent with principles of international taxation, and burdened US companies.
What’s the case against India?
- In the case of India, the USTR’s proposed course of action includes additional tariffs of up to 25 percent ad valorem on an aggregate level of trade.
- Around 26 categories of goods are in the preliminary list of products that would be subject to the additional tariffs.
- This includes shrimps, basmati rice, cigarette paper, cultured pearls, semi-precious stones, silver powder and silver articles of jewelry, gold mixed link necklaces, and neck chains, and certain furniture of bentwood.
Why does India need DST?
- The agenda to reform international tax law so that digital companies are taxed where economic activities are carried is still a work in progress.
- Due to this, countries are worried that they might cede their right to tax incomes. Therefore, many countries have either proposed or implemented a digital services tax.
- The proliferation of digital service taxes (DSTs) is a symptom of the changing international economic order.
- Countries such as India which provides large markets for digital corporations seek a greater right to tax incomes.
- The taxation of the digitalized economy turned out to be a relatively contentious issue because there is a huge asymmetry in digital service providers and consumers.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Missions on Venus
Mains level: Planetory exploration
NASA has selected two missions to the planet Venus, Earth’s nearest neighbor. The missions are called DAVINCI+ and VERITAS.
DAVINCI+ and VERITAS
(1) DAVINCI+
- DAVINCI+ is short for ‘Deep Atmosphere Venus Investigation of Noble gases, Chemistry, and Imaging’ and is the first US-led mission to the planet’s atmosphere since 1978.
- It will try to understand Venus’ composition to see how the planet formed and evolved.
- This mission also consists of a decent sphere that will pass through the planet’s thick atmosphere and make observations and take measurements of noble gases and other elements.
- Significantly, this mission will also try to return the first high-resolution photographs of a geological feature that is unique to Venus.
- This feature, which is called “tesserae” may be comparable to Earth’s continents.
- The presence of tesseraes may suggest that Venus has tectonic plates like Earth.
(2) VERITAS
- The second mission called VERITAS is short for ‘Venus Emissivity, Radio Science, InSAR, Topography, and Spectroscopy’.
- It will map the planet’s surface to determine its geologic history and understand the reasons why it developed so differently from Earth.
- VERITAS will orbit Venus with a radar that will help to create a 3D reconstruction of its topography which might be able to tell scientists if processes such as plate tectonics and volcanism are still active there.
- This mission will also map the emissions from Venus’s surface that may help in determining the type of rocks that exist on Venus–a piece of information that is not exactly known yet.
- It will also determine if active volcanoes are releasing water vapor into the atmosphere.
Why study Venus?
- The results from DAVINCI+ are expected to reshape the understanding of terrestrial planet formation in the solar system and beyond.
- Taken together, both missions are expected to tell scientists more about the planet’s thick cloud cover and the volcanoes on its surface.
- Further, scientists speculate about the existence of life on Venus in its distant past and the possibility that life may exist in the top layers of its clouds where temperatures are less extreme.
Have humans visited Venus?
- Because of the planet’s harsh environment, no humans have visited it and even the spacecraft that have been sent to the planet have not survived for a very long time.
- Venus’ high surface temperatures overheat electronics in spacecraft in a short time, so it seems unlikely that a person could survive for long on the Venusian surface.
- So far, spacecraft from several nations have visited the planet.
- The first such spacecraft was the Soviet Union’s Venera series (the spacecraft, however, could not survive for long because of the planet’s harsh conditions).
- It was followed by NASA’s Magellan Mission that studied Venus from 1990-1994. As of now, Japan’s Akatsuki mission is studying the planet from Orbit.
Back2Basics: Venus
- For those on Earth, Venus is the second-brightest object in the sky after the moon.
- It appears bright because of its thick cloud cover that reflects and scatters light.
- Surface temperatures on Venus can go up to 471 degrees Celsius, which is hot enough to melt lead, NASA notes. Surface temperatures on Venus can go up to 471 degrees Celsius, which is hot enough to melt lead, NASA notes.
Some unknown facts
- While Venus, which is the second closest planet to the Sun, is called the Earth’s twin because of their similar sizes, the two planets have significant differences between them.
- For one, the planet’s thick atmosphere traps heat and is the reason that it is the hottest planet in the solar system, despite coming after Mercury, the closest planet to the Sun.
- Further, Venus moves forward on its orbit around the Sun but spins backwards around its axis slowly.
- This means on Venus the Sun rises in the west and sets in the East.
- One day on Venus is equivalent to 243 Earth days because of its backward spinning, opposite to that of the Earth’s and most other planets.
- Venus also does not have a moon and no rings.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: OneWeb, LEO
Mains level: Space internet concept
Following the successful launch of 36 satellites, OneWeb’s Low Earth Orbit (LEO) constellation reached 218 in-orbit satellites.
What is OneWeb?
- OneWeb is a global communications company that aims to deliver broadband satellite Internet around the world through its fleet of LEO satellites.
- OneWeb satellites are built at a OneWeb and Airbus joint venture facility in Florida that can produce up to two satellites a day.
- The launch roll-out of the satellites is facilitated by French company Arianespace using Russian-made Soyuz rockets.
- The company has announced plans to enter the Indian market by 2022.
About its constellation
- The company has one more launch to complete before it obtains the capacity to enable its ‘Five to 50’ service of offering internet connectivity to all regions north of 50 degrees latitude.
- The Five to 50 service is expected to be switched on by June 2021 with global services powered by 648 satellites available in 2022.
What are LEO satellites?
- LEO satellites have been orbiting the planet since the 1990s, providing companies and individuals with various communication services.
- They are positioned around 500km-2000km from earth, compared to stationary orbit satellites which are approximately 36,000km away.
- Latency, or the time needed for data to be sent and received, is contingent on proximity.
- As LEO satellites orbit closer to the earth, they are able to provide stronger signals and faster speeds than traditional fixed-satellite systems.
- Additionally, because signals travel faster through space than through fiber-optic cables, they also have the potential to rival if not exceed existing ground-based networks.
- However, LEO satellites travel at a speed of 27,000 kph and complete a full circuit of the planet in 90-120 minutes.
- As a result, individual satellites can only make direct contact with a land transmitter for a short period of time thus requiring massive LEO satellite fleets and consequently, a significant capital investment.
Criticisms of LEO satellites
- During the days of the Sputnik and Apollo missions, governments dominated and regulated space-based activities.
- There are logistical challenges with launching thousands of satellites into space as well.
- Satellites can sometimes be seen in the night skies which creates difficulties for astronomers as the satellites reflect sunlight to earth, leaving streaks across images.
- Satellites traveling at a lower orbit can also interrupt the frequency of those orbiting above them, an accusation that has been leveled against Starlink satellites already.
- Another worry is that there are already almost 1 million objects larger than 1cm in diameter in orbit, a byproduct of decades of space activities.
- Those objects, colloquially referred to as ‘space junk,’ have the potential to damage spacecraft or collide with other satellites.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Artificial Sun
Mains level: Concept behind artificial sun
China’s Experimental Advanced Superconducting Tokamak (EAST), which mimics the energy generation process of the sun, set a new record.
What is China’s ‘artificial sun’ EAST?
- The Experimental Advanced Superconducting Tokamak (EAST) reactor is an advanced nuclear fusion experimental research device.
- The purpose of the artificial sun is to replicate the process of nuclear fusion, which is the same reaction that powers the sun.
- The EAST is one of three major domestic tokamaks that are presently being operated across the country.
- Apart from the EAST, China is currently operating the HL-2A reactor as well as J-TEXT.
- Since it first became operational in 2006, the EAST has set several records for the duration of confinement of exceedingly hot plasma.
- The EAST project is part of the International Thermonuclear Experimental Reactor (ITER) facility, which will become the world’s largest nuclear fusion reactor when it becomes operational in 2035.
- The project includes the contributions of several countries, including India, South Korea, Japan, Russia and the United States.
How does the ‘artificial sun’ EAST work?
- The EAST Tokamak device is designed to replicate the nuclear fusion process carried out by the sun and stars.
- Nuclear fusion is a process through which high levels of energy are produced without generating large quantities of waste.
- Previously, energy was produced through nuclear fission — a process in which the nucleus of a heavy atom was split into two or more nuclei of lighter atoms.
Fission vs. Fusion
- While fission is an easier process to carry out, it generates far more nuclear waste.
- Unlike fission, fusion also does not emit greenhouse gases and is considered a safer process with a lower risk of accidents.
- Once mastered, nuclear fusion could potentially provide unlimited clean energy and very low costs.
But what is Fusion?
- For nuclear fusion to occur, tremendous heat and pressure are applied on hydrogen atoms so that they fuse together. `
- The nuclei of deuterium and tritium — both found in hydrogen — are made to fuse together to create a helium nucleus, a neutron along with a whole lot of energy.
- Fuel is heated to temperatures of over 150 million degrees C so that it forms a hot plasma “soup” of subatomic particles.
- With the help of a strong magnetic field, the plasma is kept away from the walls of the reactor to ensure it does not cool down and lose its potential to generate large amounts of energy.
- The plasma is confined for long durations for fusion to take place.
What is the latest record and why does it matter?
- The EAST reactor set a new record on Friday when it achieved a plasma temperature of 216 million degrees Fahrenheit and also managed to run for 20 seconds at 288 million degrees Fahrenheit.
- To put this in perspective, the sun’s core only reaches about 15 million degrees Celsius, which means the reactor was able to touch temperatures that are 10 times hotter than that.
- The next goal for the scientists behind the experimental reactor is to maintain the high temperature for a long period of time. Previously, the EAST had reached a record temperature of 100 million degrees Celsius in 2018.
China is not the only
- But China is not the only country that has achieved high plasma temperatures.
- In 2020, South Korea’s KSTAR reactor set a new record by maintaining a plasma temperature of over 100 million degrees Celsius for 20 seconds.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: SDG Index
Mains level: India's quest for SDGs
The third edition of the SDG India Index and Dashboard 2020–21 was released by NITI Aayog.
SDG India Index
- The index measures the progress at the national and sub-national level in the country’s journey towards meeting the Global Goals and targets.
- It has been successful as an advocacy tool to propagate the messages of sustainability, resilience, and partnerships, as well.
- From covering 13 Goals, 39 targets, and 62 indicators in the first edition in 2018-19 to 17 Goals, 54 targets and 100 indicators in the second; this third edition of the index covers 17 Goals, 70 targets, and 115 indicators.
Aims and objectives
- The construction of the index and the ensuing methodology embodies the central objectives of measuring the performance of States and UTs on the SDGs and ranking them.
- It aims at supporting States and UTs in identifying areas which require more attention; and promoting healthy competition among them.
Methodology and Process
- The index estimation is based on data on indicators for the first 16 goals, with a qualitative assessment for Goal 17.
- The technical process of target setting and normalization of scores follow the globally established methodology.
- While target setting enables the measurement of the distance from the target for each indicator, the process of normalization of positive and negative indicators allows for comparability and estimation of goal-wise scores.
- The composite score of a State is derived by assigning each goal the same weight, keeping in mind the indivisible nature of the 2030 Agenda.
- The selection of indicators is preceded by a consultative process undertaken in close coordination with MoSPI, Union Ministries and stakeholders from States and UTs.
Highlights of the 2021 Report
States and Union Territories are classified as below based on their SDG India Index score:
- Aspirant: 0–49
- Performer: 50–64
- Front-Runner: 65–99
- Achiever: 100
Its significance
- The index represents the articulation of the comprehensive nature of the Global Goals under the 2030 Agenda while being attuned to the national priorities.
- The modular nature of the index has become a policy tool and a ready reckoner for gauging the progress of States and UTs on the nature of goals including health, education, gender, economic growth and climate change and the environment.
Back2Basics: Sustainable Development Goals
- The UN General Assembly in its 70thSession considered and adopted the Sustainable Development Goals (SDGs) for the next 15 years.
- The 17 SDGs came into force with effect from 1st January 2016.
- Though not legally binding, the SDGs have become de facto international obligations and have the potential to reorient domestic spending priorities of the countries during the next fifteen years.
- Countries are expected to take ownership and establish a national framework for achieving these goals.
- Implementation and success will rely on countries’ own sustainable development policies, plans, and programs.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Real interest rate
Mains level: Paper 3- Challenge of managing inflationary pressure
The article discusses the challenges in managing the inflationary pressure while ensuring the low interest rates and sufficient liquidity in the covid battered economy.
Growing inflationary pressure
- As the second wave eases, producers could pass on more cost increases to consumers, pushing up inflation.
- Inflationary pressures are on the rise, globally and domestically.
- Real rates in India have moved into the negative terrain and some measures of inflation expectations have begun to rise gently.
- WPI inflation was subdued last year during the first wave of the pandemic due to falling global commodity prices.
- This year is different, as inflationary pressures have surfaced in the WPI.
- And within WPI inflation, input prices are rising much faster than WPI output prices.
- Producers do not seem to be passing on much of the rise in raw material costs to output prices, perhaps worried that already uncertain demand could weaken further.
- After states roll back local lockdowns, the demand for goods and services will gradually picks up, producers may feel more confident about passing on raw material cost increases to output prices, pushing core inflation higher, particularly in the second half of FY22.
RBI’s role: Dealing with impossible trinity?
- Last year, RBI was faced with conflicting objectives on inflation, bond yields and the rupee, also known as the impossible trinity.
- It bought dollars to prevent the rupee from strengthening too much and purchased government bonds to keep bond yields from spiralling out of control.
- But this created excess rupee liquidity in the banking system, which over time can stoke inflation and other financial imbalances.
- These conflicting objectives are also likely to linger this year, and RBI will have to juggle them carefully.
- As the year progresses, space could open up for RBI to gradually shift the focus to inflation control.
- With the current account moving into deficit, the balance of payments surplus is likely to fall, so RBI may not have to purchase as many dollars as last year.
- The will result in decrease in domestic liquidity and ultimately an important part of the normalization of monetary policy and inflation control.
- RBI would still need to buy government bonds to support the administration’s borrowing programme.
- However, a large carry-over of cash balances could act as a buffer—they totalled ₹2.5 trillion at the end of FY21, almost double the recent average.
- This could help fund some of the unbudgeted rise in the fiscal deficit.
Way forward on controlling inflation
- If the need to buy dollars is lower than last year, RBI could gradually shift the focus to controlling inflation.
- Starting in 4Q 2021, when the proportion of the population vaccinated will hopefully reach critical mass, RBI need to start reducing the level of surplus liquidity, raise the reverse repo rate, and change its monetary stance to neutral.
- The aim should be to gradually push up short-end rates towards 4%, so that real rates don’t remain hugely negative for too long.
- An increase in the benchmark repo rate— currently 4%— can wait, perhaps until there are surer signs that the private investment cycle is rising.
Conclusion
Dealing with the three elements of impossible trinity this time is not as difficult for the RBI as it was last year, it needs to shift focus to inflation control at the opportune moment.
Back2Basics: Real interest rate
- A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor.
- The real interest rate of an investment is calculated as the difference between the nominal interest rate and the inflation rate.
Real Interest Rate = Nominal Interest Rate – Inflation (Expected or Actual)
The impossible trinity
- A theory that states that, in the long-run, a central bank that hopes to conduct independent monetary policy must choose between maintaining a fixed foreign exchange rate and allowing the free movement of capital.
- For instance, a central bank that chooses to increase the total money supply by adopting loose monetary policy cannot hope to maintain the foreign exchange value of its currency unless it resorts to restricting the sale of domestic currency in the currency market.
- The idea is derived from the academic works of Canadian economist Robert Mundell and British economist Marcus Fleming.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 2- Growing tendency towards centralisation
The article highlights the challenges faced by the federalism in India in various domains and forms and suggests the ways to deal with these challenges.
Growing tendency towards Centralisation
- Moves to erode the powers of State governments are not new.
- The Centre, on several occasions, has used its powers to dismiss or use the Governor to intimidate democratically elected governments.
- During the Emergency, education was moved to the Concurrent list which was until then a State subject under the constitutional division of responsibilities.
- However, the changes to federal relations at present are more systemic.
- There has been increasing centralisation in resource allocations and welfare interventions.
- After GST, the gap between the revenue that State governments are allowed to generate and the expenditure that they are expected to incur has been widening.
- The Centre has been encroaching into domains under State government control through centrally sponsored schemes in sectors such as education and health.
Three domains in which federalism faces challenges
1) State-capital relation
- At present there is growing trend towards centralising economic power in conjunction with political centralisation.
- The consolidation and expansion of a few big business groups is taking place, probably at the expense of smaller players.
- On the one hand, the Centre has sought to insulate Indian big business from global competition by choosing not to enter into the Regional Comprehensive Economic Partnership (RCEP).
- But the power of small businesses is eroded through support for GST and the call for a single national market.
- So, big businesses are more likely to benefit from a removal of State-level barriers to trade at the expense of smaller regional players.
2) Institutional transgression
- Central institutions are increasingly weakening the policy levers of State institutions.
- There are growing allegations of the misuse of institutions such as the Income Tax Department, the Enforcement Directorate and the National Investigation Agency are being used to intimidate opponents..
- Direct transfers to beneficiaries of welfare schemes bypassing States are also contributing to this dynamic.
- The Centre is increasingly ignoring elected representatives of State governments, holding meetings with State secretaries and district collectors on issues that are primarily under State control.
- Governors perform active administrative roles instead of their signatory roles.
- To ensure national uniformity in educational institutions NEET was introduced in medical education.
- But it subverts the affirmative action policies developed at the regional level in response to local.
- In the domain of health, the Centre has now put State governments at a disadvantage in vaccine usage by fixing differential pricing for procuring vaccines.
3) Socio-cultural foundations
- Beside the legal-constitutional aspects of federalism, it is diversity in cultural foundation of regions that sustains Indian federalism.
- Markers of regional identities and regional socio-cultural practices are now interpreted as belonging to a pan-Indian Hindu tradition.
Conclusion
To stem this trend towards centralisation we need to provide more legal and constitutional safeguard to the States, strong regional political assertion and a strong federal coalition.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3- Global Minimum corporate tax and issues associated with it
The article deals with the issue of global minimum tax proposal floated by the US, challenges it faces and its implications for India.
The US proposal for global minimum tax
- In its recent proposal, the U.S. sought to impose a global minimum tax on foreign income earned by U.S. corporations.
- The proposal is intended to disincentivise American companies from inverting their structures due to the increase in the U.S. corporate tax rate.
- The U.S. is now discussing a floor of 15% for the minimum tax rate.
- The proposal is similar to Pillar Two, except for the rate of the effective minimum tax.
Similarity with Pillar Two Proposal
- The Pillar Two proposal was the Organisation for Economic Co-operation and Development’s (OECD) plan to plug the remaining Base Erosion and Profit Shifting (BEPS) issues
- It provide jurisdictions the right to “tax back” where other jurisdictions have either not exercised their primary taxing right or have exercised it at low levels of effective taxation.
- For instance, if an Indian-headquartered multinational corporation (MNC) has an entity in Singapore or the Netherlands through which global operations are run, and its income from global operations is not taxed at an effective rate of 10% or 15%, then it can be taxed in India.
- India has been part of the Pillar Two discussions and has not objected in principle to the proposal.
How Global Minimum Tax would benefit India?
- The proposal, along with the increased tax bill for U.S. companies, may benefit the Indian revenue department.
- The State of Tax Justice report of 2020 notes that India loses over $10 billion in tax revenue due to the use of offshore structures, particularly through investments made by Indian residents through Mauritius, Singapore and the Netherlands.
- This is supported by the overseas direct investment (ODI) data from 2000 to 2021 published by the Reserve Bank of India.
- Start-ups and large Indian conglomerates commonly use offshore structures for conducting global operations.
- Revenue from such operations is often retained offshore and not repatriated to India.
- Tax advantages incentivise such structures, due to which taxes on such income are not paid in India.
- Once these proposals are implemented, Indian companies would have to pay additional taxes on their offshore structures to the extent that the effective rate of tax is lower than the global minimum tax rate.
Challenges
- Lack of consensus: Several countries have taken a different approach to the rate of global minimum tax.
- While France and Germany have expressed support, the EU has raised concerns regarding the high rate proposed by the United States.
- Tax sovereignty issue: Countries have stated that the proposal infringes upon their tax sovereignty and that the fight against unfair tax competition should not become a fight against competitive tax systems.
Consider the question “What are the factors that led to the demand of global minimum corporate tax? What will be its implications for India?”
Conclusion
As economies struggle amid the COVID-19 pandemic, the necessity of encouraging trade and economic activity should be prioritised over disagreements on tax allocations. A tax-related trade war or entrenchment of unilateral levies may further harm both global and national economies.
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