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Goods and Services Tax (GST), India: A Dangerous Domino

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Government loves taxation; the citizens, justifiably, loathe it with a passion. Parting with one’s hard-earned money, which will be pressed towards lofty goals and unfeasible projects, hardly gets people’s cheers.

India is infamous for its Byzantine system of multiple taxes on consumption: value-added tax (VAT), Octroi, cess, excise duties, a hefty customs duty, and sales tax. In 2017, the Modi administration undertook the task to take to consummation a long-standing endeavor to subsume different taxes into a transparent, unevadable, convenient, nationwide, single tax.

And so they did! On July 1, 2017, Indian Prime Minister, Narendra Modi, rolled out the goods and services tax (GST) to replace all existing taxes at the central (federal), state, and local level. The new tax reform, a surrender of taxation powers by the states to the center, promised to mop up leakages in the tax collection under the old system and boost government revenues through collecting taxes at the consumer end, thus, casting a wider net to cover the massive informal economy of India.

The deal was bittersweet, as it led to the states losing autonomy to design their own tax systems, while on the other hand receiving assurances of a steady allocation in the tax revenues collected at the center.

The reception of GST was a mixed bag, with the opposing coalition in the legislature boycotting the rollout ceremony, political pundits and media gurus casting doubts on its success, rumor-mongering on social media, and a state of panic and doom in the minds of the citizenry.

Predictably, Prime Minister Modi, in his usual smug demeanor and insufferably professorial manner of speaking, at the launch event talked up the GST, drawing equivalencies between the tax reform and historic events like the Declaration of Independence and installation of the Constitution. A religious reference was thrown in for good measure.

GST isn’t a panacea for India’s economic ailments. Quite the contrary, it will raise difficulties that could undercut free market principles, choke small-scale enterprises, stifle entrepreneurship, and throw cold water on industrialization in India.

GST subtly affects the feedback mechanism in the political governance of a federal republic like India. As the new tax elbows out scores of made-to-order and customizable tax systems of different states and union territories, it concentrates much of the economic decision-making in the hands of the central government, thus, widening the messaging gap between the citizens and the representatives.

It will be near impossible for the states to influence demand and consumption of goods and services through changing the tax rate. Also, a steady flow of tax revenues from the center to the states will make the latter less cognizant of people’s feedback on public goods, resulting in poor services.

It seems like India’s bureaucratic boffins threw the merits of diversity to the wind, a tenet that is peddled out every once in a while to hold together the fractious society. Diversity in taxation across state lines creates a competitive economic environment in which state heads have to work to attract businesses. For businesses, especially startups, there is a wide range of options to pick from.

States, as a result, function as laboratories where different economic policies play out and the ones that produce a business friendly environment and steady growth are duplicated elsewhere.

A single, centralized tax system undercuts the economic diversity and disables competition and free markets, something that developing nations ought to get hold of, if they are earnest about progress and growth.

Under GST, the definition of small and medium enterprises (SMEs), based on turnover, has been narrowed, thus, expelling many SMEs from the tax benefit cover. SMEs form the dominant share of most OECD economies around the world, where they are responsible for job creation, innovation, and becoming indispensable links in the supply chains of larger firms.

This cannot be any truer for an economy like India, where the informal sector makes for a substantial share of the GDP and employs a large number of semi-skilled and unskilled workers.

Despite being hailed as a transparent and streamlined tax system, the implementation of GST means that employers will have to go through a steep learning curve, trying to learn the ropes of the new system. Not only does this present an opportunity cost (a one-off), it is touted that legal compliance will cost business owners a substantial sum of money, raising overhead costs. While this tradeoff is favorable for big businesses, it is a cause for concern for SMEs.

While Narendra Modi, the darling of the educated youth of India, promised oodles of progress, prosperity, and ‘happy days’; the tax schedule of GST seems to be telling a slightly different, and perhaps, an insidious story.

According to Piruz Khambatta, Chairman at the Indian Industries’ National Committee of Food Processing, per the GST tax schedule, the tax rate on processed (canned and bottled) produce is higher than that on un-branded, loosely-sold fresh produce.

This can have a dis-incentivizing effect on mass-produced, processed food, in turn discouraging industrialization, innovation, and establishment of food hygiene standards. Also, mass produced goods tend to be uniform, cheap, and abundant. An over reliance on goods produced through a non-industrialized informal sector, despite resulting in job creation, could over time, hold back industrialization and technological advancement.

Another example of such glaring incoherency is illustrated by a comparison of tax rates on items listed under serial numbers 24 and 25 of the schedule. In an incredible move, machinery used in agriculture, horticulture, forestry, apiculture, and poultry farming is taxed at 5% and 12%, while miscellaneous items used in Hindu religious ceremonies are tax-free. It’s almost as if religious pandering has taken precedence over mechanization of key sectors of economy.

Without belaboring the above point, it merits noting that low-demand, artisanal, non-mechanized industries like ‘khadi’* are also given a tax break, while mass produced cotton goods are taxed at 5%.

This pandering to religious and anti-colonial, nationalistic sentiments, a classic example of third-world politics, flies in the face of the ‘progress, prosperity, and happy days’ narrative from Modi’s campaign trail.

In essence, unwittingly or otherwise, GST seems to be a potential quagmire, delivering questionable amounts of economically-sound nuggets, but served with generous portions of feel-good, religious nationalism.

‘Good days will surely come.’ Hunker down for turbulence and retrogression.

* a variety of home-made Indian yarn, which during colonial times, symbolized dissidence towards British effort to dump cheap, mass-produced English yarn/thread in Indian markets, while dismantling the domestic yarn industry.

An ex-dentist and a business graduate who is greatly influenced by American conservatism and western values. Having born and brought up in a non-western, third world country, he provides an ‘outside-in’ view on western values. As a budding writer and analyst, he is very much stoked about western culture and looks forward to expound and learn more. Mr. Malkar receives correspondence at saurabh.malkar[at]gmail.com. To read his 140-character commentary on Twitter, follow him at @saurabh_malkar

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Economy

Is Myanmar an ethical minefield for multinational corporations?

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Business at a crossroads

Political reforms in Myanmar started in November 2010 followed by the release of the opposition leader, Aung San Suu Kyi, and ended by the coup d’état in February 2021. Business empire run by the military generals thanks to the fruitful benefits of democratic transition during the last decade will come to an end with the return of trade and diplomatic sanctions from the western countries – United States (US) and members of European Union (EU).  US and EU align with other major international partners quickly responded and imposed sanctions over the military’s takeover and subsequent repression in Myanmar. These measures targeted not only the conglomerates of the military generals  but also the individuals who have been appointed in the authority positions and supporting the military regime.

However, the generals and their cronies own the majority of economic power both in strategic sectors ranging from telecommunication to oil & gas and in non-strategic commodity sectors such as food and beverages, construction materials, and the list goes on. It is a tall order for the investors to do business by avoiding this lucrative network of the military across the country. After the coup, it raises the most puzzling issue to investors and corporate giants in this natural resource-rich country, “Should I stay or Should I go?”

Crimes against humanity

For most of the people in the country, war crimes and atrocities committed by the military are nothing new. For instances, in 1988, student activists led a political movement and tried to bring an end to the military regime of the general Ne Win. This movement sparked a fire and grew into a nationwide uprising in a very short period but the military used lethal force and slaughtered thousands of civilian protestors including medical doctors, religious figures, student leaders, etc. A few months later, the public had no better options than being silenced under barbaric torture and lawless killings of the regime.

In 2007, there was another major protest called ‘Saffron Uprising’ against the military regime led by the Buddhist monks. It was actually the biggest pro-democracy movement since 1988 and the atmosphere of the demonstration was rather peaceful and non-violent before the military opened live ammunitions towards the crowd full of monks. Everything was in chaos for a couple of months but it ended as usual.

In 2017, the entire world witnessed one of the most tragic events in Myanmar – Again!. The reports published by the UN stated that hundreds of civilians were killed, dozens of villages were burnt down, and over 700,000 people including the majority of Rohingya were displaced to neighboring countries because of the atrocities committed by the military in the western border of the country. After four years passed, the repatriation process and the safety return of these refugees to their places of origin are yet unknown. Most importantly, there is no legal punishment for those who committed and there is no transitional justice for those who suffered in the aforementioned examples of brutalities.

The vicious circle repeated in 2021. With the economy in free fall and the deadliest virus at doorsteps, the people are still unbowed by the oppression of the junta and continue demanding the restoration of democracy and justice. To date, Assistant Association for Political Prisoner (AAPP) reported that due to practicing the rights to expression, 1178 civilians were killed and 7355 were arrested, charged or sentenced by the military junta. Unfortunately, the numbers are still increasing.

Call for economic disengagement

In 2019, the economic interests of the military were disclosed by the report of UN Fact-Finding Mission in which Myanmar Economic Corporation (MEC) and Myanmar Economic Holding Limited (MEHL) were described as the prominent entities controlled by the military profitable through the almost-monopoly market in real estate, insurance, health care, manufacturing, extractive industry and telecommunication. It also mentioned the list of foreign businesses in partnership with the military-linked activities which includes Adani (India), Kirin Holdings (Japan), Posco Steel (South Korea), Infosys (India) and Universal Apparel (Hong Kong).

Moreover, Justice for Myanmar, a non-profit watchdog organization, revealed the specific facts and figures on how the billions of revenues has been pouring into the pockets of the high-ranked officers in the military in 2021. Myanmar Oil & Gas Enterprise (MOGE), an another military-controlled authority body, is the key player handling the financial transactions, profit sharing, and contractual agreements with the international counterparts including Total (France), Chevron (US), PTTEP (Thailand), Petronas (Malaysia), and Posco (South Korea) in natural gas projects. It is also estimated that the military will enjoy 1.5 billion USD from these energy giants in 2022.

Additionally, data shows that the corporate businesses currently operating in Myanmar has been enriching the conglomerates of the generals and their cronies as a proof to the ongoing debate among the public and scholars, “Do sanctions actually work?” Some critics stressed that sanctions alone might be difficult to pressure the junta without any collaborative actions from Moscow and Beijing, the longstanding allies of the military. Recent bilateral visits and arm deals between Nay Pyi Taw and Moscow dimmed the hope of the people in Myanmar. It is now crystal clear that the Burmese military never had an intention to use the money from multinational corporations for benefits of its citizens, but instead for buying weapons, building up military academies, and sending scholars to Russia to learn about military technology. In March 2021, the International Fact Finding Mission to Myanmar reiterated its recommendation for the complete economic disengagement as a response to the coup, “No business enterprise active in Myanmar or trading with or investing in businesses in Myanmar should enter into an economic or financial relationship with the security forces of Myanmar, in particular the Tatmadaw [the military], or any enterprise owned or controlled by them or their individual members…”

Blood money and ethical dilemma

In the previous military regime until 2009, the US, UK and other democratic champion countries imposed strict economic and diplomatic sanctions on Myanmar while maintaining ‘carrot and stick’ approach against the geopolitical dominance of China. Even so, energy giants such as Total (France) and Chevron (US), and other ‘low-profile’ companies from ASEAN succeeded in running their operations in Myanmar, let alone the nakedly abuses of its natural resources by China. Doing business in this country at the time of injustice is an ethical question to corporate businesses but most of them seems to prefer maximizing the wealth of their shareholders to the freedom of its bottom millions in poverty.

But there are also companies not hesitating to do something right by showing their willingness not to be a part of human right violations of the regime. For example, Australian mining company, Woodside, decided not to proceed further operations, and ‘get off the fence’ on Myanmar by mentioning that the possibility of complete economical disengagement has been under review. A breaking news in July, 2021  that surprised everyone was the exit of Telenor Myanmar – one of four current telecom operators in the country. The CEO of the Norwegian company announced that the business had been sold to M1 Group, a Lebanese investment firm, due to the declining sales and ongoing political situations compromising its basic principles of human rights and workplace safety.

In fact, cutting off the economic ties with the junta and introducing a unified, complete economic disengagement become a matter of necessity to end the consistent suffering of the people of Myanmar. Otherwise, no one can blame the people for presuming that international community is just taking a moral high ground without any genuine desire to support the fight for freedom and pro-democracy movement.

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The Covid After-Effects and the Looming Skills Shortage

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coronavirus people

The shock of the pandemic is changing the ways in which we think about the world and in which we analyze the future trajectories of development. The persistence of the Covid pandemic will likely accentuate this transformation and the prominence of the “green agenda” this year is just one of the facets of these changes. Market research as well as the numerous think-tanks will be accordingly re-calibrating the time horizons and the main themes of analysis. Greater attention to longer risks and fragilities is likely to take on greater prominence, with particular scrutiny being accorded to high-impact risk factors that have a non-negligible probability of materializing in the medium- to long-term. Apart from the risks of global warming other key risk factors involve the rising labour shortages, most notably in areas pertaining to human capital development.

The impact of the Covid pandemic on the labour market will have long-term implications, with “hysteresis effects” observed in both highly skilled and low-income tiers of the labour market. One of the most significant factors affecting the global labour market was the reduction in migration flows, which resulted in the exacerbation of labour shortages across the major migrant recipient countries, such as Russia. There was also a notable blow delivered by the pandemic to the spheres of human capital development such as education and healthcare, which in turn exacerbated the imbalances and shortages in these areas. In particular, according to the estimates of the World Health Organization (WHO) shortages can mount up to 9.9 million physicians, nurses and midwives globally by 2030.

In Europe, although the number of physicians and nurses has increased in general in the region by approximately 10% over the past 10 years, this increase appears to be insufficient to cover the needs of ageing populations. At the same time the WHO points to sizeable inequalities in the availability of physicians and nurses between countries, whereby there are 5 times more doctors in some countries than in others. The situation with regard to nurses is even more acute, as data show that some countries have 9 times fewer nurses than others.

In the US substantial labour shortages in the healthcare sector are also expected, with anti-crisis measures falling short of substantially reversing the ailments in the national healthcare system. In particular, data published by the AAMC (Association of American Medical Colleges), suggests that the United States could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, including shortfalls in both primary and specialty care.

The blows sustained by global education from the pandemic were no less formidable. These affected first and foremost the youngest generation of the globe – according to UNESCO, “more than 1.5 billion students and youth across the planet are or have been affected by school and university closures due to the COVID-19 pandemic”. On top of the adverse effects on the younger generation (see Box 1), there is also the widening “teachers gap”, namely a worldwide shortage of well-trained teachers. According to the UNESCO Institute for Statistics (UIS), “69 million teachers must be recruited to achieve universal primary and secondary education by 2030”.

From our partner RIAC

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Economy

Accelerating COVID-19 Vaccine Uptake to Boost Malawi’s Economic Recovery

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Lunzu market in southern Malawi. WFP/Greg Barrow

Since the onset of the COVID-19 pandemic, many countries including Malawi have struggled to mitigate its impact amid limited fiscal support and fragile health systems. The pandemic has plunged the continent into its first recession in over 25 years, and vulnerable groups such as the poor, informal sector workers, women, and youth, suffer disproportionately from reduced opportunities and unequal access to social safety nets.

Fast-tracking COVID-19 vaccine acquisition—alongside widespread testing, improved treatment, and strong health systems—are critical to protecting lives and stimulating economic recovery. In support of the African Union’s (AU) target to vaccinate 60 percent of the continent’s population by 2022, the World Bank and the AU announced a partnership to assist the Africa Vaccine Acquisition Task Team (AVATT) initiative with resources, allowing countries to purchase and deploy vaccines for up to 400 million Africans. This extraordinary effort complements COVAX and comes at a time of rising cases in the region.

I am convinced that unless every country in the world has fair, broad, and fast access to effective and safe COVID-19 vaccines, we will not stem the spread of the pandemic and set the global economy on track for a steady and inclusive recovery. The World Bank has taken unprecedented steps to ramp up financing for Malawi, and every country in Africa, to empower them with the resources to implement successful vaccination campaigns and compensate for income losses, food price increases, and service delivery disruptions.

In line with Malawi’s COVID-19 National Response and Preparedness Plan which aims to vaccinate 60 percent of the population, the World Bank approved $30 million in additional financing for the acquisition and deployment of safe and effective COVID-19 vaccines. This financing comes as a boost to Malawi’s COVID-19 Emergency Response and Health Systems Preparedness project, bringing World Bank contributions in this sector up to $37 million.

Malawi’s decision to purchase 1.8 million doses of Johnson and Johnson vaccines through the AU/African Vaccine Acquisition Trust (AVAT) with World Bank financing is a welcome development and will enable Malawi to secure additional vaccines to meet its vaccination target.

However, Malawi’s vaccination campaign has encountered challenges driven by concerns regarding safety, efficacy, religious and cultural beliefs. These concerns, combined with abundant misinformation, are fueling widespread vaccine hesitancy despite the pandemic’s impact on the health and welfare of billions of people.  The low uptake of COVID-19 vaccines is of great concern, and it remains an uphill battle to reach the target of 60 percent by the end of 2023 from the current 2.2 percent.

Government leadership remains fundamental as the country continues to address vaccine hesitancy by consistently communicating the benefits of the vaccine, releasing COVID data, and engaging communities to help them understand how this impacts them.

As we deploy targeted resources to address COVID-19, we are also working to ensure that these investments support a robust, sustainable and resilient recovery. Our support emphasizes transparency, social protection, poverty alleviation, and policy-based financing to make sure that COVID assistance gets to the people who have been hit the hardest.

For example, the Financial Inclusion and Entrepreneurship Scaling Project (FInES) in Malawi is supporting micro, small, and medium enterprises by providing them with $47 million in affordable credit through commercial banks and microfinance institutions. Eight months into implementation, approximately $8.4 million (MK6.9 billion) has been made available through three commercial banks on better terms and interest rates. Additionally, nearly 200,000 urban households have received cash transfers and urban poor now have more affordable access to water to promote COVID-19 prevention.

Furthermore, domestic mobilization of resources for the COVID-19 response are vital to ensuring the security of supply of health sector commodities needed to administer vaccinations and sustain ongoing measures. Likewise, regional approaches fostering cross-border collaboration are just as imperative as in-country efforts to prevent the spread of the virus. United Nations (UN) partners in Malawi have been instrumental in convening regional stakeholders and supporting vaccine deployment.

Taking broad, fast action to help countries like Malawi during this unprecedented crisis will save lives and prevent more people falling into poverty. We thank Malawi for their decisive action and will continue to support the country and its people to build a resilient and inclusive recovery.

This op-ed first appeared in The Nation, via World Bank

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