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Five years ago, major tax reform of GST in the history of India was rolled out with a bang on midnight of 30th June 2017. The intent and purpose of introduction of GST was to subsume levy of multiple taxes imposed both by the States and Union of India, except Customs Duty including SAD, to create a business-friendly atmosphere, for ease of doing business, with uniform rates of taxes throughout the country and also eliminate cascading impact of taxes by allowing seamless credits all across the supply chain and introduce tax efficiencies in the tax administration. 

The taxes levied by Central Govt i.e. Central Sales Tax were included in the Integrated Goods & Service Tax Act, 2017 (IGST), the Service Tax and Central Excise Duty, Additional Duty of Excise, Additional Customs Duty – popularly known “Countervailing Duty – CVD, as were subsumed and were known as Central Goods and Service Tax Act, 2017 (CGST) . The State VAT, Luxury Tax, Entertainment tax, Purchase Tax etc., other than taxes levied by Municipal Corporation/Committees (SGST).

However, Liquor, power and petroleum were kept outside GST, because State Revenue Authorities and Politicians never wanted to part with rule making powers to tax almost 80% of the value in supply chain system. Thus, till date approximately revenue equivalent to 80% of value of goods and services related to production and trading of such goods revenue is outside GST. Thus, the basic purpose of introducing GST stood defeated. This position is further aggravated by imposing restrictions under section 17 of the CGST with regard to Works Contract services availed for self-construction, employee related services for call centers. Once liquor, power and petroleum are outside GST, all three cannot be taxed under GST. Therefore, because these are not taxable under GST, the value of services rendered in relation to all the three also cannot be taxed under GST, consequently, credit on account of input tax paid on purchase of all these items is not available. Consequently, there is no need to reverse the credit under the provisions Central/ State Goods and Services Tax Acts. 

Once we consider the impact of the break in chain of credit on account of Power, Petroleum and works contract put together, the sunk cost in any project works out to approx.33%. 

The background of including Electricity under GST can be traced to Minutes of Meeting of 9th Meting of GSTN Council held on 16th January 2017, while making presentation by various Ministry representatives on inclusion of Electricity, it was suggested to include Power in GST either at reduced rate or Nil Rate. Subsequently in 14th Meeting of GSTN Council held on 18 & 19 May 2017, once again the issue of inclusion of Power under GST as exempt supply was discussed, relevant text of which is reproduced as under :- xxxiv) Electricity: The Hon’ble Minister from Punjab stated that electricity also needed to be put under the exempted List. The Hon’ble Minister from Karnataka stated that in his State, electricity was exempte d f r o m VAT. The Hon’ble Deputy Chief Minister of Gujarat suggested that electricity should be exempted from GST. The Secretary stated that prima facie taxation on electricity was in the domain of the States as ‘taxes on the consumption or sale of electricity’ was covered under List II (Entry 53) of the Schedule 7 of the Constitution. He added that the issue could be examined further and if necessary, it could be put in the exempt List. The Council agreed to this suggestion. Finally, in the 15thMeeting of GST Council held on 3rd June, despite Constitutional embargo, and judgements from Apex Court,equating “Electricity” with “Tobacco – a sin goods” the Electricity was included in GST as “Exempted Goods” notified as exempted goods under notification no. 02/2017- Central Rate – Tax dated 28th June at serial no. 104. under Chapter Heading 2716 00 00 Electrical energy. The authorities, under CGST, armed with the exemption notification have started treating “Electricity” as an exempt supply and demanding reversal of input tax credit availed by the business entities and had issued show cause notices, thereafter, confirming demands. This has led to unwarranted litigation all over India. These demands are patently illegal, without authority of law and contrary to the provisions of the act. Now let us examine how brazenly the law is being flouted by all with impunity. The relevant definitions under section 2 of the CGST, that are reproduced as under:- 

(47) “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes nontaxable supply. (78) “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act. (108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act.Therefore, going by the definition of taxable supply” means the goods or services that are taxable under GST. Consequently, only those goods and services can be the “exempt supply” of goods or services, which are taxable under the CGST. Thus, the goods or services taxable under the CGST can be exempted by way of notification. In case of electricity, since it is outside GST, same cannot be exempted by way of notification. 

Once any goods or services are not taxable under the CGST, the question of availment of credit does not arise, therefore, reversal of credit goes beyond imagination. 

Now, the moot question arises, can a notification create liability in absence of charging section in the Act? The answer is a strict “No”. Once Electricity is outside the scope of the GST, which fact is known to the Council, Electricity could not have been included under GST as an Exempt item taxable at “Nil” rate. 

The issue of non-taxability of goods or services in absence of charging section has been settled against Union of India in catena of cases i.e. Laghu Udhog Bharti vs. Union of India 1999 (112) E.L.T. 365 (S.C.), Indian National Ship Owners Association vs Union of India – 2009 (13) S.T.R. 235 (Bom.), approved by Hon’ble Supreme Court in Union of India v. Indian National Shipowners Association — 2010 (17) S.T.R. J57 (S.C.)]and also in the matter of M/s TATA SKY LTD Vs STATE OF M.P AND OTHERS [2013-TIOL22-SC-ST]. 

This reminds me famous quote of Charles Dickens which is aptly applicable in India. The one great principle of English law is to make business for itself. (Author is CEO, of CAS Associates, Indirect Tax Advisors)

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India, Brazil, South Africa to press for labour & social issues, sustainability



The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment.

India, on Thursday, joined the G20’s two-day 2nd Employment Working Group (EWG) meeting under the Brazilian Presidency which is all set to address labour, employment and social issues for strong, sustainable, balanced and job-rich growth for all. India is co-chairing the 2nd EWG meeting, along with Brazil and South Africa, and is represented by Sumita Dawra, Secretary, Labour & Employment.

The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment. India has pointed out that the priority areas of the 2nd EWG at Brasilia align with the priority areas and outcomes of previous G20 presidencies including Indian presidency, and commended the continuity in the multi-year agenda to create lasting positive change in the world of work. This not only sustains but also elevates the work initiated by the EWG during the Indian Presidency.

The focus areas for the 2nd EWG meeting are — creating quality employment and promoting decent labour, addressing a just transition amidst digital and energy transformations, leveraging technologies to enhance the quality of life for al and the emphasis on gender equity and promoting diversity in the world of employment for inclusivity, driving innovation and growth. On the first day of the meeting, deliberations were held on the over-arching theme of promotion of gender equality and promoting diversity in the workplace.

The Indian delegation emphasized the need for creating inclusive environments by ensuring equal representation and empowerment for all, irrespective of race, gender, ethnicity, or socio-economic background. To increase female labour force participation, India has enacted occupational safety health and working conditions code, 2020 which entitles women to be employed in all establishments for all types of work with their consent at night time. This provision has already been implemented in underground mines.

In 2017, the Government amended the Maternity Benefit Act of 1961, which increased the ‘maternity leave with pay protection’ from 12 weeks to 26 weeks for all women working in establishments employing 10 or more workers. This is expected to reduce the motherhood pay gap among the working mothers. To aid migrant workers, India’s innovative policy ‘One Nation, One Ration Card’ allows migrants to access their entitled food grains from anywhere in the Public Distribution System network in the country.

A landmark step in fostering inclusion in the workforce is the e-Shram portal, launched to create a national database of unorganized workers, especially migrant and construction workers. This initiative, providing the e-Shram card, enables access to benefits under various social security schemes.

The portal allows an unorganized worker to register himself or herself on the portal on self-declaration basis, under 400 occupations in 30 broad occupation sectors. More than 290 million unorganized workers have been registered on this portal so far.

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India to spend USD 3.7 billion to fence Myanmar border



India plans to spend nearly $3.7 billion to fence its 1,610-km (1,000-mile) porous border with Myanmar within about a decade, said a source with direct knowledge of the matter, to prevent smuggling and other illegal activities. New Delhi said earlier this year it would fence the border and end a decades-old visa-free movement policy with coup-hit Myanmar for border citizens for reasons of national security and to maintain the demographic structure of its northeastern region.

A government committee earlier this month approved the cost for the fencing, which needs to be approved by Prime Minister Narendra Modi’s cabinet, said the source who declined to be named as they were not authorised to talk to the media. The prime minister’s office and the ministries of home, finance, foreign affairs and information and broadcasting did not immediately respond to an email seeking comment.

Myanmar has so far not commented on India’s fencing plans. Since a military coup in Myanmar in 2021, thousands of civilians and hundreds of troops have fled from there to Indian states where people on both sides share ethnic and familial ties. This has worried New Delhi because of risk of communal tensions spreading to India. Some members of the Indian government have also blamed the porous border for abetting the tense situation in the restive north-eastern Indian state of Manipur, abutting Myanmar.

For nearly a year, Manipur has been engulfed by a civil war-like situation between two ethnic groups, one of which shares lineage with Myanmar’s Chin tribe. The committee of senior Indian officials also agreed to build parallel roads along the fence and 1,700 km (1,050 miles) of feeder roads connecting military bases to the border, the source said.

The fence and the adjoining road will cost nearly 125 million rupees per km, more than double that of the 55 million per km cost for the border fence with Bangladesh built in 2020, the source said, because of the difficult hilly terrain and the use of technology to prevent intrusion and corrosion.

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However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity.

In a press briefing held on Wednesday, Interpol Secretary General Jurgen Stock unveiled alarming statistics regarding the extent of undetected money laundering and illegal trade transactions plaguing the global banking network. Stock revealed that over 96% of the money transacted through this network remains undetected, with only 2-3% of the estimated USD 2-3 trillion from illegal trade being tracked and returned to victims.

Interpol, working in conjunction with law enforcement agencies and private financial sectors across its 196 member countries, is committed to combating the rising tide of fraud perpetrated by illicit traders. These criminal activities encompass a wide spectrum, including drug trafficking, human trafficking, arms dealing, and the illicit movement of financial assets.

Stock emphasized the urgent need to establish mechanisms for monitoring transactions within the global banking network. Currently, efforts are underway to engage banking associations worldwide in setting up such a framework. However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity. The lack of real-time information sharing poses a significant obstacle to law enforcement agencies in their efforts to combat money laundering and illegal trade.

Stock underscored the role of Artificial Intelligence (AI) in exacerbating this problem, citing its use in voice cloning and other fraudulent activities. Criminal organizations are leveraging AI technologies to expand their operations and evade detection on a global scale. Stock emphasized the importance of enhanced cooperation between law enforcement agencies and private sector banking groups. Realtime information sharing is crucial in the fight against illegal wealth accumulation.

Drawing inspiration from initiatives such as the “Singapore Anti-Scam Centre,” Stock called for the adoption of similar models in other countries to strengthen the collective response to financial crimes. In conclusion, Stock’s revelations underscore the pressing need for concerted action to combat global financial crimes. Enhanced cooperation between public and private sectors, coupled with innovative strategies for monitoring and combating illicit transactions, is essential to safeguarding the integrity of the global financial system.

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FM defends Atal Pension Scheme, highlights guaranteed returns



Finance Minister Nirmala Sitharaman defended the Atal Pension Yojana (APY) against Congress criticism, asserting its design based on choice architecture and a guaranteed minimum 8% return. She emphasized the scheme’s opt-out feature, facilitating automatic premium continuation unless subscribers choose otherwise, promoting retirement savings. Sitharaman countered Congress allegations of coercion, stating the APY’s guaranteed returns irrespective of market conditions, supplemented by government subsidies.

Responding to Congress’s claim of scheme misuse, Sitharaman highlighted its intended beneficiaries – the lower-income groups. She criticized Congress for its alleged elitist mindset and emphasized the scheme’s success in targeting the needy. Sitharaman accused Congress of exploiting vote bank politics and coercive tactics, contrasting it with the APY’s transparent framework. The exchange underscores the political debate surrounding social welfare schemes, with the government defending its approach while opposition parties raise concerns about implementation and efficacy.

Finance Minister Nirmala Sitharaman’s robust defense of the Atal Pension Yojana (APY) against Congress criticism highlights the ongoing debate over social welfare schemes in India. Sitharaman’s assertion of the APY’s design principles, including its opt-out feature and guaranteed minimum return, underscores the government’s commitment to promoting retirement savings among lower-income groups. The Atal Pension Yojana, named after former Prime Minister Atal Bihari Vajpayee, was launched in 2015 to provide pension benefits to workers in the unorganized sector. It aims to address the significant gap in pension coverage among India’s workforce, particularly those employed in informal and low-income sectors. The scheme offers subscribers fixed pension amounts ranging from Rs. 1,000 to Rs. 5,000 per month, depending on their contribution and age at entry, after attaining the age of 60. Sitharaman’s response comes after Congress criticism alleging the APY’s inefficacy and coercive tactics in enrolment.

Congress General Secretary Jairam Ramesh described the scheme as poorly designed, citing instances of subscribers dropping out due to unauthorized account openings. However, Sitharaman refuted these claims, emphasizing the APY’s transparent and beneficiary-oriented approach. The finance minister’s defense focuses on three key aspects of the APY: Choice Architecture: Sitharaman highlights the opt-out feature of the APY, which automatically continues premium payments unless subscribers choose to discontinue.

This design element aims to encourage long-term participation and ensure consistent retirement savings among subscribers. By simplifying the decision-making process, the scheme seeks to overcome inertia and promote financial discipline among participants. Guaranteed Minimum Return: Sitharaman underscores the APY’s guarantee of a minimum 8% return, irrespective of prevailing interest rates. This assurance provides subscribers with confidence in the scheme’s financial viability and incentivizes long-term savings.

The government’s commitment to subsidizing any shortfall in actual returns further strengthens the attractiveness of the APY as a retirement planning tool. Targeting the Needy: Sitharaman defends the predominance of pension accounts in lower income slabs, arguing that it reflects the scheme’s successful targeting of its intended beneficiaries – the poor and lower-middle class. She criticizes Congress for its alleged elitist mindset and suggests that the party’s opposition to welfare schemes like the APY stems from a disconnect with the needs of marginalized communities. Sitharaman’s rebuttal also addresses broader political narratives surrounding social welfare policies in India.

She accuses Congress of exploiting vote bank politics and coercive tactics, contrasting it with the transparent and inclusive framework of the APY. The exchange underscores the ideological differences between the ruling Bharatiya Janata Party (BJP) and the opposition Congress, with each side advocating for their vision of social welfare and economic development. In addition to defending the APY, Sitharaman’s remarks shed light on the broader challenges and opportunities facing India’s pension sector.

Despite significant progress in expanding pension coverage through schemes like the APY, the country still grapples with issues such as financial literacy, informal employment, and pension portability. Addressing these challenges requires a multifaceted approach involving government intervention, private sector participation, and civil society engagement.

As India strives to achieve its vision of inclusive and sustainable development, initiatives like the APY play a crucial role in promoting economic security and social equity. Sitharaman’s defense of the scheme underscores the government’s commitment to addressing the needs of vulnerable populations and ensuring their financial well-being in the long run.

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Regulatory steps will make financial sector strong, but raise cost of capital



India’s financial system regulator, the Reserve Bank of India (RBI), is demonstrating a serious commitment to improving governance and transparency at finance companies and banks, with the RBI’s recent measures aimed at curtailing lenders’ overexuberance, enhancing compliance culture and safeguarding customers.

While the global ratings firm has appreciated the RBI’s “diminishing tolerance for non-compliance, customer complaints, data privacy, governance, know-your-customer (KYC), and anti-money laundering issues”, it has cautioned that increased regulatory risk could impede growth and raise the cost of capital for financial institutions. “Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI’s new measures are creating a more robust and transparent financial system,” says S&P Global Credit Analyst, Geeta Chugh. “India’s regulator has underscored its commitment to strengthening the financial sector. The drawback will be higher capital costs for institutions,” Chugh cautions.

The RBI measures include restraining IIFL Finance and JM Financial Products from disbursing gold loan and loans against shares respectively and asking Paytm Payments Bank (PPBL) to stop onboarding of new customers. Earlier in December 2020, the RBI suspended HDFC Bank from sourcing new credit card customers after repeated technological outages. These actions are a departure from the historically nominal financial penalties imposed for breaches, S&P Global notes.

Besides, as the global agency points out, the RBI has decided to publicly disclose the key issues that lead to suspensions or other strict actions against concerned entities and become more vocal in calling out conduct that it deems detrimental to the interests of customers and investors. “We believe that increased transparency will create additional pressure on the entire financial sector to enhance compliance and governance practices,” adds Chugh. The global agency has also lauded the RBI’s recent actions demonstrating scant tolerance for any potential window-dressing of accounts.

These actions include the provisioning requirement on alternative investment funds that lend to the same borrower as the bank finance company. Amidst the possibility of some retail loans, such as personal loans, loans against property, and gold loans getting diverted to invest in stock markets and difficulty of ascertaining the end-use of money in these products, S&P Global underlines the faith of market participants that the RBI and market regulator, the Securities and Exchange Board of India, want to protect small investors by scrutinizing these activities more cautiously.

On the flip side, at a time of tight liquidity, the RBI’s new measures are likely to limit credit growth in fiscal 2025 (year ending March 2025). “We expect loan growth to decline to 14 per cent in fiscal 2025 from 16 per cent in fiscal 2024, reflecting the cumulative impact of all these actions,” says Chugh. The other side of the story is that stricter rules may disrupt affected entities and increase caution among fintechs and other regulated entities and the RBI’s decision to raise risk weights on unsecured personal loans and credit cards may constrain growth. Household debt to GDP in India (excluding agriculture and small and midsize enterprises) increased to an estimated 24 per cent in March 2024 from 19 per cent in March 2019. Growth in unsecured loans has also been excessive and now forms close to 10 per cent of total banking sector loans.

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Penalty provisions for dissemination of deepfakes can create deterrent effect: CUTS



A senior official from the global think tank CUTS International has emphasized the significance of penalty provisions in deterring the creation and spread of deepfakes and misinformation. Amol Kulkarni, Director of Research at CUTS International, highlighted the need for technological interventions to curb the misuse of AI-generated content.

CUTS International, Director, Research, Amol Kulkarni told the media that internet users would require adequate opportunities to verify the genuineness of content and it becomes important during the election season while the role of credible fact-checkers and trusted flaggers becomes crucial. He said that while the government advisory on March 15 removes permission requirements, it continues to rely on information disclosures to users for making the right choices on the Internet.

“Though transparency is good, information overload and ‘popups’ across user journeys may reduce their quality of experience. There is a need to balance the information requirements, with other implementable technological and accountability solutions which can address the problem of deepfakes and misinformation,” Kulkarni said. After a controversy over a response of Google’s AI platform to queries related to Prime Minister Narendra Modi, the government on 1 March issued an advisory for social media and other platforms to label undertrial AI models and prevent hosting unlawful content. The Ministry of Electronics and Information Technology in the advisory issued to intermediaries and platforms warned of criminal action in case of non-compliance. The previous advisory has asked the entities to seek approval from the government for deploying under trial or unreliable artificial intelligence (AI) models and deploy them only after labelling them of “possible and inherent fallibility or unreliability of the output generated”.

The Ministry of Electronics and IT on March 15 issued a revised advisory on the use and rollout of AI-generated content. The IT ministry removed the need for government approval for untested and under-development AI models but emphasised the need for labelling AI-generated content and information to users about the possible inherent fallibility and unreliability of the output generated.

Kulkarni said that addressing the issue of deepfakes and misinformation will require clarifying the responsibility of all stakeholders in the internet ecosystem: developers, uploaders, disseminators, platforms and consumers of content. “Penalty provisions for the development and dissemination of harmful deepfakes and misinformation could also create a deterrent effect. Technological solutions to tag potentially harmful content and shifting the burden on developers and disseminators to justify the use of such content could also be designed,” he said.

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