The FRBM Act, 2003 requires the Government to maintain FD target of 3% to ensure fiscal discipline. However, during exceptional times such as Covid-19, such reasonable targets can force the government to adopt pro-cyclical fiscal policy and hence prolong economic revival.
As seen below, reasonable restriction on FD is extremely critical to promote higher Tax-GDP ratio, rationalisation of expenditure, ensure inter-generational equity and fiscal discipline and hence higher GDP growth rate.
However, during abnormal times such as Covid-19, the Government needs to adopt counter cyclical fiscal policy and hence such restrictions on FD can hinder economic revival. Thus, even though, increase in Fiscal deficit can have long term adverse consequences, the current economic scenario requires us to deviate from FD targets on account of following reasons:
Unprecedented Times: The Covid-19 has led to twin shocks leading to a record GDP contraction of -7.5% in 2020-21. Deviation of 0.5% in FD which is allowed under FRBM act is not sufficient. Unprecedented times call for unprecedented measures.
Sticking to FD Limit- Counter-Productive: Sticking to FD Limit-> Cutting down on Expenditure and Increasing the tax rates -> Decline in Investment and Consumption expenditure -> Decline in Employment -> Decline in GDP growth rates and Income levels (Pro-cyclical Fiscal Policy)
Key to Economic Revival: Both Investment and Consumption expenditure affected and unlikely to increase due to economic uncertainty. Hence, need for increasing Government expenditure (GFCE).
Increase in GFCE -> Creation of Infrastructure -> Crowd-in Private sector Investment -> Boost Demand in the economy -> Address Twin Shocks -> Boost GDP growth rate.
HIGHER FD- NOT A MATTER OF CONCERN
- Lower absolute debt
- Negative IRGD- Higher Debt Sustainability
- Long term maturity profile of India’s Debt
- Adequacy of forex Reserves
- Downgrade in Sovereign Credit Ratings--> Minimal impact on India’s GDP growth rate
Hence, as rightly pointed out by Economic Survey 2020-21, the Government need not be worried out higher FD to provide fiscal stimulus to deal with present economic scenario. However, at the same time, there is a need to ensure higher quality of Fiscal deficit by increasing the share of Capital expenditure and reducing share of revenue expenditure. Necessary amendments would have to be introduced in the FRBM Act, 2003.
DISINVESTMENT POLICY IN INDIA- PRIVATISATION AND WEALTH CREATION
EVOLUTION OF DISINVESTMENT POLICY
The liberalization reforms undertaken in 1991 ushered in an increased demand for privatization/ disinvestment of PSUs.
- First Phase: Sale of minority stake in bundles through auction.
- Second Phase: Separate Sale of each PSU
- Third Phase:
- Strategic Disinvestment- Sale of substantial portion of Government shareholding in identified Central PSEs (CPSEs) up to 50 per cent or more, along with transfer of management control.
- Launch of exchange traded funds (ETFs) - an equity instrument that tracks a particular index.
- Monetization of select assets of CPSEs.
STRATEGIC PUBLIC SECTOR ENTERPRISE POLICY
Under the new “Public Sector Enterprise” policy, various sectors will be classified as strategic and non-strategic sectors. The policy has identified 4 sectors as strategic sectors: i) Atomic energy, Space and Defence ii) Transport and Telecommunications iii) Power, Petroleum, Coal and other minerals iv) Banking, Insurance and financial services.
In strategic sectors, there will be bare minimum presence of the public sector enterprises. The remaining CPSEs in the strategic sector will be privatised or merged with other CPSEs. In non-strategic sectors, CPSEs will be privatised, otherwise shall be closed.
BENEFITS OF PRIVATISATION
- Strong positive effect of labour productivity and overall efficiency of PSUs in India: Post-privatization, the performance of the privatized entity improves significantly in terms of net worth, net profit, return on assets (ROA), return on equity (ROE), gross revenue
- Improved capital allocation and economic efficiency
- Cost reductions
- Privatisation has multiplier effect on other sectors of the economy.
- Enhanced Competitiveness
- Professionalism in management of CPSEs
WAY FORWARD
Privatisation or disinvestment program should aim at maximisation of Government's equity stake value. The learning from the experience of Temasek Holdings Company in Singapore may be useful in this context. The Government can transfer its stake in the listed CPSEs to a separate corporate Entity. This entity would be managed by an independent board and would be mandated to divest the Government stake in these CPSEs over a period of time. This will lend professionalism and autonomy to the disinvestment program.
EQUALISATION LEVY
RATIONALE BEHIND INTRODUCTION OF DIGITAL TAXES
The existing tax norms have been framed keeping in mind the brick-and-mortar business models. However, these norms are not suitable to regulate online services. With rapid advancements in the field of big data and AI, the digital companies have been able to harness the user generated data enabling them to earn huge revenues through digital advertisements. In spite of the fact that these companies earn revenue by harnessing the data generated in a particular country, these companies are not obliged to pay adequate taxes in source country. Hence, Equalization Levy has been introduced in the Union Budget 2016 in order to bring such Internet based companies within the ambit of tax.
DETAILS ABOUT EQUALIZATION LEVY
The equalization levy of 6% is applicable to the income accruing to a foreign E-commerce company which is not a resident of India. Any person or entity in India which makes a payment exceeding Rs 1 lakh in a financial year to a non-resident technology company (such as Google) for some B2B (Business to Business) transactions needs to withhold 6% of the gross amount to be paid as equalization levy.
Two conditions to be met to be liable to equalization levy:
- The payment should be made to a non-resident service provider.
- The annual payment made to the service provider should exceed Rs. 1 lakh in one financial year.
EXPANSION OF EQUALISATION LEVY IN UNION BUDGET 2020
The Finance Act, 2020 has inserted a provision to impose Equalisation levy of 2% on the revenues generated through the online sale of goods and services by non-resident e-commerce companies. The Equalisation levy would be applicable only if the aggregate revenues for a non-resident e-commerce companies exceed a threshold of Rs 2 crores.
| APPLICABILITY: PAYMENT MADE BY INDIANS TO THE FOREIGN COMPANIES NON-RESIDENT IN INDIA | ||
| Earlier Regime | Present Regime post 2020 | |
| Companies Covered | Foreign Companies which provide Digital Advertisements such as Google, Facebook, Twitter etc. | All the Foreign Companies with an annual turnover of Rs 2 crores and above. Amazon, Netflix, Trivago etc. |
| Goods andServicescovered | Only Digital Advertisements | Payment for Digital Advertisements to Foreign Companies+Payment for buying Goods and Services online. Applicable to companies such as Amazon, Flipkart, Netflix, Trivago etc. |
| Tax Rate | 6% of the total payment made for Digital Ads | Digital Ads: 6% of the total payment+Payment for buying Goods and Services online: 2% of the payment received. |
The new modification introduced in the Finance Act, 2020 has been opposed by the foreign e-commerce companies on account of following reasons:
WIDER APPLICATION OF TAXATION REGIME: Earlier, the Equalisation levy was applicable only on the advertising revenue of non-resident companies. Now, this would be applicable on the all the revenue earned through the online sale of goods and services by non-resident e-commerce companies. The scope of the application of Equalisation levy is so wide that it will bring almost all the foreign based technological companies under the tax bracket. This includes e-commerce companies such as Amazon; online streaming/ content service providers such as Netflix, Amazon Prime; online travel aggregators such as Trivago, TripAdvisor etc.
HIGHER TAX BURDEN: Earlier equalisation levy was applicable only on B2B transactions. But now, the new equalisation levy would be applicable on every transaction undertaken by non-resident e-commerce companies which includes both B2B as well as B2C transactions.
LACK OF DISTINCTION BETWEEN DIGITAL SERVICES AND GOODS/ SERVICES PROVIDED THROUGH DIGITAL MODE: If you watch a movie online on a digital platform such as Amazon Prime, Netflix etc., then it can be considered as Digital service. On the other hand, if you book a movie ticket online through a platform (such as Book My Show) and then watch it in a multiplex, then it cannot be considered as completely Digital Service.
Here, the booking platform is providing you with the service of booking a movie ticket through the Digital mode. It is not providing movie as a Digital service.
Hence, such booking platforms are quite distinct from streaming services such as Amazon Prime, Netflix etc.
Accordingly, some of the companies have pointed out that it would be unfair to tax the companies that provide Goods/services through Digital mode on par with companies that provide Digital Services. Hence, even though, the Government’s idea is to tax e-commerce transactions, but it may end up taxing even those transactions where Internet is just a medium.
PUBLIC FINANCIAL MANAGEMENT SYSTEM (PFMS)
The Public Financial Management System (PFMS) is a web-based online software application designed, developed, owned and implemented by the Office of the Controller General of Accounts. It has been started with the objective of tracking funds released under all Plan schemes of Government of India, and real time reporting of expenditure at all levels of Programme implementation. Subsequently, the scope was enlarged to cover direct payment to beneficiaries under all Schemes.
Functions of PFMS:
- Transfer the funds under various Government schemes to the implementation agencies
- Track the usage of funds by various implementation agencies
- Enable Implementing Agencies to transfer funds to lower-level agencies.
- Make e-payments to vendors, employees, and beneficiaries.
- Facilitating direct benefits transfer to beneficiaries under Government schemes such as MGNREGA, National Social Assistance Program (NSAP)
- Linking PFMS with State Treasury systems
- Enabling collection of Non-Tax Receipts
- Interface with the Banks for effective payments and reporting to scheme/ program managers.
BENEFITS OF PFMS
- Establishes a common electronic platform for comprehensive tracking of fund flows from the Central Government to a large number of programs implementing agencies, both under the central government and the state governments, till it reaches the final intended beneficiaries.
- Ensures timely release of funds to the implementation agencies and thus help in effective financial management
- Accountability to show the utilization of public funds
- Transparency for ready access to reliable and comprehensive information
- By facilitating DBT, PFMS has plugged leakages and eliminated ghost beneficiaries.
SINGLE NODAL AGENCY (SNA) MODEL
The Centrally sponsored schemes (CSS) account for around 20% fiscal transfers from centre to states. The SNA Model has been introduced as part of PFMS in 2021 for the better management of CSS funds. Under the SNA Model, each State is required to identify and designate a SNA for every centrally sponsored scheme. All funds for that State in a particular scheme are credited in this bank account, and all expenses are made by all other Implementing Agencies involved from this account.
The SNA Dashboard depicts releases made to different States by Ministries, further releases made by State Treasuries to the SNA accounts, expenditure reported by the agencies, interest paid by banks to SNA accounts etc.
HOW HAS SNA MODULE IMPROVED PUBLIC FINANCIAL MANAGEMENT?
Time bound transfer of funds: Earlier, there was no time limit for the transfer of funds by the concerned state governments to the implementation agencies. However, under the SNA Module, a time limit has been prescribed for transfer of the state's share.
Ensures Transparency and accountability: Earlier, the states used to spend money for all the centrally sponsored schemes (CSS) from a single account and hence it was not possible to track utilisation of funds. However, under the SNA model, for each and every CSS, a single nodal agency is to be designated. This enhances transparency and accountability.