1. Caste categories for NREGS pay
It will complicate payment system, may lead to a reduction in funding: experts
The Centre has asked the States to split wage payments under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme into separate categories for the Scheduled Castes, the Scheduled Tribes and others from this financial year. Workers’ rights advocates said this will complicate the payment system, and expressed fears that it may lead to a reduction in scheme funding.
“Government of India has decided to provide separate budget heads for SC and ST categories under MGNREGS from the financial year 2021-22 for wage payment. The existing system for wages under the scheme is for only one type that is there is no category wise provision of wage payment,” said the advisory sent by Rural Development Ministry Director Dharmvir Jha to all State governments on March 2. The Hindu has seen a copy of the advisory, which does not include any rationale for the new procedure.
A video conference was held with State representatives to lay out the new process in March. One of the participants said that States were asked to verify if job cards for SC and ST beneficiaries were being properly allocated at the field level. They were told they would be given fund allocations according to this criteria, indicating that labour budgets would also be segregated on a caste basis.
“The Ministry may be thinking that this allocation is all being taken by the general category people, so they want to segregate based on the population of the district. And even the projection is done like that. Government thought: ‘Why not take exclusive allocation for SC and ST?’” said the State representative, who did not wish to be named.
“These new modalities are bound to create complications in a payment system that is actually begging to be simplified,” said a statement by the NREGA Sangharsh Morcha.
“All NREGA workers have the same rights. Segregating them into three groups for purposes of budgeting and wage payments serves no purpose,” it added.
Some activists expressed the fear that the reform is meant to reduce funding.
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)
The scheme was introduced as a social measure that guarantees “the right to work”. The key tenet of this social measure and labour law is that the local government will have to legally provide at least 100 days of wage employment in rural India to enhance their quality of life.
- Generation of paid rural employment of not less than 100 days for each worker who volunteers for unskilled labour.
- Proactively ensuring social inclusion by strengthening livelihood base of rural poor.
- Creation of durable assets in rural areas such as wells, ponds, roads and canals.
- Reduce urban migration from rural areas.
- Create rural infrastructure by using untapped rural labour.
The following are the eligibility criteria for receiving the benefits under MGNREGA scheme:
- Must be Citizen of India to seek NREGA benefits.
- Job seeker has completed 18 years of age at the time of application.
- The applicant must be part of a local household (i.e. application must be made with local Gram Panchayat).
- Applicant must volunteer for unskilled labour.
Key facts related to the scheme:
- The Ministry of Rural Development (MRD), Govt of India is monitoring the entire implementation of this scheme in association with state governments.
- Individual beneficiary oriented works can be taken up on the cards of Scheduled Castes and Scheduled Tribes, small or marginal farmers or beneficiaries of land reforms or beneficiaries under the Indira Awaas Yojana of the Government of India.
- Within 15 days of submitting the application or from the day work is demanded, wage employment will be provided to the applicant.
- Right to get unemployment allowance in case employment is not provided within fifteen days of submitting the application or from the date when work is sought.
- Social Audit of MGNREGA works is mandatory, which lends to accountability and transparency.
- The Gram Sabha is the principal forum for wage seekers to raise their voices and make demands.
- It is the Gram Sabha and the Gram Panchayat which approves the shelf of works under MGNREGA and fix their priority.
Role of Gram Sabha:
- It determines the order of priority of works in the meetings of the Gram Sabha keeping in view potential of the local area, its needs, local resources.
- Monitor the execution of works within the GP.
Roles of Gram Panchayat:
- Receiving applications for registration
- Verifying registration applications
- Registering households
- Issuing Job Cards (JCs)
- Receiving applications for work
- Issuing dated receipts for these applications for work
- Allotting work within fifteen days of submitting the application or from the date when work is sought in the case of an advance application.
- Identification and planning of works, developing shelf of projects including determination of the order of their priority.
Responsibilities of State Government in MGNREGA:
- Frame Rules on matters pertaining to State responsibilities under Section 32 of the Act ii) Develop and notify the Rural Employment Guarantee Scheme for the State.
- Set up the State Employment Guarantee Council (SEGC).
- Set up a State level MGNREGA implementation agency/ mission with adequate number of high calibre professionals.
- Set up a State level MGNREGA social audit agency/directorate with adequate number of people with knowledge on MGNREGA processes and demonstrated commitment to social audit.
- Establish and operate a State Employment Guarantee Fund (SEGF).
2. UNGA head: India to vote for Maldives
Decision will disappoint Afghanistan, which has Zalmai Rassoul in the race
India will vote in support of Maldives’ Foreign Minister Abdulla Shahid in the election of the President of the United Nations General Assembly next week, a decision which will disappoint another close neighbour, Afghanistan, which has former Foreign Minister Zalmai Rassoul in the running.
The race between the South Asian neighbours for the post, which is being chosen this time from the Asia-Pacific grouping, will be decided in the election on June 7.
According to a senior official in Kabul, the Ghani government has formally requested India to vote for Mr. Rassoul, and was still hopeful of securing support. However, at least three government officials aware of the process here have said that India has made it clear that it cannot vote for Afghanistan as it had committed support for the Maldives, and suggested that Mr. Rassoul’s candidature had been announced only in January, which was quite late for the race. “Normally it takes about a year to canvass for a position like the UNGA President,” said one official. “While Afghanistan had sounded us out earlier, they did take very long to announce the candidate, and by then we had already taken a call [on the Maldives].”
Sources suggested that the announcement of Mr. Rassoul’s decision to run had taken many in Delhi by surprise, as they had hoped that Mr. Shahid to be a consensus candidate in the Asian grouping, which gets its turn once every five years.
“A vote for the President of the GA is always very divisive both for the concerned regional group, as well as for the wider membership of the UNGA. Such a situation allows the major powers who have veto privileges outside the UNGA to use the elections to pursue their own agendas,” former Indian Permanent Representative to the United Nations Asoke Kumar Mukerji told The Hindu.
In 2016, Fiji won the election after a bitter contest with Cyprus that saw the U.S. and China taking different sides.
Officials suggested that in the current contest, China could support Afghanistan.
While most countries have not disclosed their vote yet, India had confirmed its support to the Maldives during a virtual meeting between External Affairs Minister S. Jaishankar and Mr. Shahid in August 2020, and Foreign Secretary Harsh Shringla had made a public statement during a visit to Male last November.
“With his vast diplomatic experience and leadership qualities, Foreign Minister Shahid has the best credentials to preside over the General Assembly in these tumultuous times,” Mr. Shringla had said.
Given major global moves on Afghanistan as the U.S. prepares to pull out all troops in September this year, New Delhi is keen that its stand is not seen as taking a position against Afghanistan, and officials stressed that the vote was not an indicator of bilateral ties with either country.
3. Norms for foreign-made vaccines eased
Requirement to test every batch has been waived
To ease the supply of imported COVID vaccines, the Drug Controller General of India (DCGI) on Tuesday waived the requirement of conducting bridging clinical trials and testing of every batch of vaccine by the Central Drugs Laboratory (CDL), Kasauli for foreign-made vaccines.
The decision applies to vaccines that have the approval of the U.S. Food and Drug Administration; European Medicines Agency; Medicines and Healthcare products Regulatory Agency, U.K.; Pharmaceuticals and Medical Devices Agency, Japan; or those listed in WHO Emergency Use Listing. As millions of individuals have already been vaccinated with them, the requirement of conducting post-approval bridging clinical trials and of testing every batch of vaccine by CDL, Kasauli can be exempted, if the batch/lot has been certified and released by the National Control Laboratory of the country of origin, the DCGI said.
The DCGI, in its one-page notice, said scrutiny of the summary lot protocol and certificate of analysis of batch or lot shall be undertaken by the CDL for release as per standard procedures and requirement of assessment on the first 100 beneficiaries for seven days for safety outcomes before the vaccine is rolled out for further immunisation.
The Health Ministry on Wednesday said with the aim of vaccinating the entire eligible population at the earliest, domestic production is being steadily ramped up.
“As part of this initiative, three public enterprises are being supported by the Department of Biotechnology under Atmanirbhar Bharat 3.0 Mission Covid Suraksha. These enterprises are Haffkine Biopharmaceutical Corporation Ltd, Mumbai; Indian Immunologicals Ltd, Hyderabad and Bharat Immunologicals & Biologicals Ltd, U.P. Haffkine Biopharma is getting ready to manufacture Covaxin under technology transfer arrangement with Bharat Biotech Ltd, Hyderabad. The production will take place at the Parel complex of the company,’’ said the release.
Sandeep Rathod, MD of Haffkine BioPharma, said the company proposes to produce 22.8 crore doses of Covaxin in a year. “For undertaking production of Covaxin, Haffkine Biopharma has been provided with ₹65 crore grant by the Centre and ₹94 crore from the government of Maharashtra,” he said.
“We have been given a timeline of eight months and the work is being executed on a war footing,” he added.
Drug Controller General of India
The Drug Controller General of India (DCGI) heads the Central Drugs Standard Control Organization (CDSCO).
- CDSCO is the central drug authority in India.
- CDSCO is a national level regulatory body under the Ministry of Health and Family Welfare.
- The body is responsible for approving licenses for certain categories of drugs.
- It is headquartered in New Delhi.
- There are six functioning central drug-testing laboratories under CDSCO.
- The DCGI also establishes standards for the manufacturing, sales, import, and distribution of drugs in India.
- The DCGI also regulates medical and pharmaceutical devices.
- In case of any dispute with respect to the quality of the drug, the DCGI is the appellate authority.
- The DCGI prepares and maintains the national reference standard for drugs.
- He ensures that there is uniformity in the implementation of the Drugs and Cosmetics Act.
- He is responsible for the training of Drug Analysts deputed by State Drug Control Laboratories and other Institutions.
- He is also in charge of the analysis of cosmetics received from the CDSCO as survey samples.
- The DCGI is also the central licensing authority for medical devices, which fall under the Medical Device Rules 2017.
Functions of the CDSCO
The CDSCO is responsible for the following:
- Drug approval under the Drugs and Cosmetics Act.
- Conducting clinical trials.
- Setting standards for drugs.
- Quality control over drugs imported into the country.
- Coordinating activities of the state drug control organisations.
- Registration of foreign manufacturers of drugs and medical devices whose products are to be imported into the country.
- Grant of licences to import drugs by Government hospitals or Medical Institutions for the use of their patients.
- Recommend banning of drugs considered harmful or sub-therapeutic under section 26A drugs and Cosmetics Act.
4. Remembering the Tulsa race massacre 100 years later
Hundreds were killed in Tulsa by racist mobs in 1921
This week, U.S. President Joe Biden became the first sitting American head of state to officially recognise one of the worst incidents of violent racial hate in the country’s modern history — the Tulsa Race Massacre of May-June 1921.
The widespread killings in Tulsa, Oklahoma, targeting relatively well-to-do African Americans, and the extensive damage to their property by rampaging white mobs at the time shocked the nation and world. Over the decades since then, it has led to introspection and policy actions that have sought to bridge the racial chasm that continues to haunt American society.
In 1921, it was the affluent, predominantly African American neighbourhood of Greenwood, Tulsa, founded by descendants of slaves and having earned a reputation as the “Black Wall Street” of the U.S., that faced the carnage unleashed on May 31 and June 1.
Tulsa was especially known for being an unofficial sanctuary city for African Americans suffering the consequences of harsh segregation or Jim Crow laws in pre-civil rights America.
It appears that deep resentment that a community of colour, and one subject to centuries of oppression, had risen to the higher echelons of the economic pyramid blended with historical racist hatred, resulting in lethal violence culminating in the deaths of hundreds, bodily injury to thousands and millions of dollars of damage to the homes and neighbourhoods burned down by the rampaging mob.
Covering up tracks
What followed was in a sense even worse — survivors, gripped by fear of reprisals and unable to speak out about the violence they had faced, and losses suffered, had to contend with an elaborate attempt to cover up the massacre and protect the perpetrators.
For years, the massacre was barely mentioned in government circles, and in newspapers and textbooks. It was only in 2000 that it finally made an appearance in the Oklahoma public schools’ curriculum. Immediately after the massacre, the Tulsa police chief reportedly ordered officers to confiscate from photo studios all the pictures taken of the violence unfolding.
Further, according to historians who have studied the events surrounding the massacre closely, not only did Tulsa city officials cover up the crimes committed, they also “deliberately shifted the narrative of the massacre by calling it a ‘riot’ and blaming the Black community for what went down”.
While the Tulsa “Race Riot” Commission was formed to investigate the events in 1997 and officially released a report in 2001, it is clear that much has remained buried — quite literally.
It is this painfully sordid, and as yet unresolved history of racist hatred that has prompted Mr. Biden to say, “We do ourselves no favours by pretending none of this ever happened… We should know the good, the bad, everything. That’s what great nations do: They come to terms with their dark sides.”
Yet the greater challenge for Mr. Biden’s government is to go beyond the question of reparations to survivors and address the root causes of disparity that continue to plague American society.
In that regard African-American communities may welcome Mr. Biden’s plans to address racial discrimination in the housing market by issuing new rules on fair housing practices and curbing inequities in the home appraisal process; by directing more federal spending to small and minority-owned businesses; and to close the wealth gap between the African American community and others through new initiatives focused on economic opportunities for minorities.
Tulsa race massacre
- The 1921 Attack on Greenwood was one of the most significant events in Tulsa’s history. Following World War I.
- Tulsa was recognized nationally for its affluent African American community known as the Greenwood District.
- Greenwood, dubbed “Black Wall Street,” boasted hotels, law offices, doctors’ offices and other businesses owned and operated by Black people at the time of the massacre. Greenwood was founded in 1906 on the north side of Tulsa.
- By 1920 Greenwood had a population of more than 10,000 Black residents at a time when racial segregation was strict – and the violent white supremacist Ku Klux Klan had a robust membership in Oklahoma.
- The neighbourhood’s progress stoked resentment in the eyes of Tulsa’s White residents, and racial tensions triggered in 1921 led to it being nearly wiped out by violence.
About the massacre
- A white woman, Sarah Page, told police a Black man, Dick Rowland, grabbed her arm as they rode in an elevator in a downtown Tulsa commercial building on May 30, according to the National Endowment for the Humanities.
- The following day, police arrested Rowland. The Tulsa Tribune reported Rowland had tried to assault Page. That evening, white Tulsans surrounded the courthouse, demanding Rowland be handed over. Black men, including World War One veterans, went to the courthouse to protect Rowland. A white man tried to disarm a Black veteran and a shot rang out, touching off further violence.
- Over the next six hours, carloads of white residents conducted “drive-by” shootings in Greenwood. Whites also looted and burned homes and businesses and dragged Blacks from their beds and beat them, according to historical accounts.
- Authorities deputized members of the mob, instructing them to shoot Black people. State National Guardsmen arrested Black people.
- The Oklahoma Bureau of Vital Statistics officially recorded 36 dead. A 2001 state commission examination of events was able to confirm 36 dead, 26 Black and 10 white. However, historians estimate the death toll may have been as high as 300.
- No one was ever charged for the violence.
- Some residents of Greenwood managed to rebuild, even though the city passed zoning laws after the massacre that made that difficult and insurance companies refused to cover the damage.
- Today, the sidewalk of the main boulevard, Greenwood Avenue, is studded with plaques identifying buildings as: “Destroyed 1921, rebuilt.”
- Wealth, employment and health disparities remain between Blacks, who still live for the most part in north Tulsa, and whites.
- The Tulsa Historical Society & Museum has created a traveling exhibit on the history of the Greenwood Area and the 1921 Tulsa Race Massacre for the purpose of educating the community.
5. U.S. sets, stays tariff on 6 nations for digital taxes
India, U.K. among countries targeted
The United States on Wednesday announced 25% tariffs on over $2 billion worth of imports from six nations over their digital services taxes, but immediately suspended the duties to allow time for international tax negotiations to continue.
The U.S. Trade Representative’s office said it had approved the threatened tariffs on goods from Britain, Italy, Spain, Turkey, India and Austria after a “Section 301” investigation concluded that their digital taxes discriminated against U.S. companies.
USTR said it would impose 25% tariffs on a range of goods from the six countries including $118 million worth from India.
The potential tariffs aim to equal the amount of digital taxes that would be collected from U.S. firms, a USTR official said.
The move underscores the U.S. threat of retaliation as finance leaders from G7 countries prepare to meet in London on Friday and Saturday to discuss the state of tax negotiations, including taxation of large technology companies and a U.S. proposal for a global minimum corporate tax.
The United States Trade Representative (USTR) initiates investigations into Digital Service Taxes
- The United States Trade Representative (USTR) has initiated investigations into taxes adopted or under consideration by 10 nations, including India.
- These nations had charged taxes on revenues of American digital service companies like Netflix, Airbnb, Spotify, etc.
- Such taxes are known as Digital Service Taxes.
- The US is probing the 2% Digital Services Tax (DST) that India adopted in March and which went into effect on April 1, 2020.
- The tax applies only to non-resident companies with annual revenues over $267,000, and covers online sales of goods & services to persons in India.
- Further, equalisation levy at 6% has been in force since 2016 on payment exceeding Rs. 1 lakh a year to a non-resident service provider for online advertisements.
- This is applicable for e-commerce companies that are sourcing revenue from Indian customers without having significant presence in the particular country.
- It is argued that India’s equalisation levy is complex and ambiguous which includes the possibility of double taxation.
- In India’s case, the probe could potentially affect the outcome of a bilateral trade deal that India has been looking to forge with the US.
- Further, India continues to be on the ‘Priority Watch List’ of USTR for lack of adequate Intellectual Property (IP) rights protection and enforcement.
Important value additions
The Office of the United States Trade Representative (USTR)
- It is responsible for developing and coordinating US international trade.
- The Section 301 gives the USTR broad authority to investigate and respond to a foreign country’s actions which may be unfair or discriminatory and may negatively affect US commerce.
- Section 301 was adopted through the 1974 Trade Act.
- It allows the US President to impose tariffs or other curbs on foreign nations.
- However, the law mandates consultations with trading partners.
Digital Services Taxes (DSTs)
- These are the adopted taxes on revenues that certain companies generate from providing certain digital services.
- E.g. digital multinationals like Google, Amazon and Apple etc.
- The Organisation for Economic Cooperation and Development (OECD) is currently hosting negotiations with over 130 countries that aim to adapt the international tax system.
- One goal is to address the tax challenges of the digitalization of the economy.
6. Editorial-1: Adverse changes, federalism imperilled
There needs to be a federal coalition to preserve the idea of a plural India, in terms of culture and politics
When Dr. Vinod K. Paul, NITI Aayog Member (Health), asserted last week that it was the lack of centralisation that has led to poor management of the ongoing COVID-19 vaccination drive, States joined issue with this statement. Going by the response to this assertion from State governments, it was clear that this claim was not backed by good evidence. Not many could have misread the subtext of this claim for centralisation. It lies within, and simultaneously contributes to, a narrative and practice of the growing centralisation of power by the current government. This sits well with the growing incursions of the Union government into sectors where State governments have a primary responsibility to govern such as health, education and agriculture. Slogans such as ‘one nation-one tax, one market and one ration’ are again part of such appeals to a narrative of a strong nation state rather than one of governance.
To be sure, such moves to erode the powers of State governments are not new. In post-independent India, 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 adverse changes to federal relations at present are more systemic.
To understand what has changed, at the risk of repetition, there has been increasing centralisation in resource allocations and welfare interventions. The gap between the revenue that State governments are allowed to generate and the expenditure that they are expected to incur has been widening, particularly with the implementation of Goods and Services Tax (GST). The shortfall of GST this year and the Centre’s lackadaisical response to demands for compensation by State governments are again known.
On the other hand, the Centre has been encroaching into domains under State government control through centrally sponsored schemes in sectors such as education and health where States are required to spend about 85% and 82% of public expenditure, respectively (https://bit.ly/3z734Ai). Though some of these have been initiated and supported by previous governments, the intensification of this process is aligned strongly with the rise of the Bharatiya Janata Party (BJP) since 2014. This is particularly visible across the following three domains. While we identify these domains based on Tamil Nadu’s experience, they are equally relevant to States such as Assam, Kerala, Punjab and West Bengal.
While coalition governments in the past enabled the rise and the visibility of regional businesses in post-reform India, the current dispensation is working towards centralising economic power in conjunction with political centralisation. It is becoming clear that aligning politically with the BJP is critical to do business. While the rise of yoga guru Baba Ramdev’s business empire is indicative of this, the decline of business groups from southern India over these last few years suggest the reverse of this process.
We can also see the consolidation and expansion of a few big business groups seen to be close to the BJP, 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 has eroded the power of small businesses through support for GST and the call for a single national market. Clearly, bigger players are more likely to benefit from a removal of State-level barriers to trade at the expense of smaller regional players. This re-calibration of State-capital relations works against smaller entrepreneurs and entrepreneurship.
The BJP also seeks to centralise rent-seeking in parallel to restrict the political financing of regional parties. Regional parties tend to rely on region-specific rent-thick sectors for political funding such as mining and real estate. The BJP has sought to curtail this through a levelling of corruption allegations and the use of central agencies to keep them in check. The reduced avenues for accumulation among regional capital weaken the ability of regional parties to compete with the BJP electorally.
The second challenge is in the use of executive and legislative aggression. Central institutions are increasingly weakening the policy levers of State institutions. Institutions such as the Income Tax Department, the Enforcement Directorate and the National Investigation Agency are being used to intimidate opponents. Appointments are not untouched either.
For instance, the Centre has been meddling with the appointments of vice-chancellors in universities funded and run by State governments. Direct transfers to beneficiaries of welfare schemes bypassing States are also contributing to this dynamic. Further, as recent events suggest, 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. An example was a recent meeting by Minister of Education Ramesh Pokhriyal Nishank with State Education Secretaries on implementation of the New Education Policy.
Such transgressions, often with the help of Governors, allow the BJP to actively control administrative decisions including faculty recruitments to align with a majoritarian agenda. Governors perform active administrative roles instead of their signatory roles. Importantly, such moves are also meant to ensure national uniformity in educational institutions. One such example is NEET, or the National Eligibility cum Entrance Test in medical education, which subverts the affirmative action policies developed at the regional level in response to local political demands.
This is evident in the domain of health as well. Apart from imposing a national lockdown during the first wave of the novel coronavirus pandemic without consulting State governments, the Centre has now put State governments at a disadvantage in vaccine usage by fixing differential pricing for procuring vaccines for them. This forces State governments to pay more even as they are deprived of their revenue shares.
The third and crucial challenge lies in the social-cultural foundations of federalism. As Partha Chatterjee argues, beside the legal-constitutional aspects of federalism, it is diversity in cultural foundation of regions that sustains Indian federalism. Regional identities and cultural traditions have worked against the homogenisation agenda of the BJP. However, this diversity is being challenged at present. Markers of regional identities and regional socio-cultural practices are now interpreted as belonging to a pan-Indian Hindu tradition. Tamil, which has stood as a symbol of an anti-Vedic tradition, is now seen as a segment of that Hindu past, with Tamil Muslims and Christians becoming outsiders. ‘Dravidian’ is attacked as a creation of the British with support from Christian missionaries, emptying the term of its anti-caste politics. Tamils, therefore, need to be mainstreamed by reuniting them with their ‘Hindu’ past. A similar narrative is being built in other regions — Muslims and Christians become less Malayalee, less Bengali and less Assamese. In Bengal, the BJP tried a strategy of linking “Sonar Bangla” to a Hindu past.
This erosion of federal relations is often countered through appeals to restore the constitutional powers of States. However, history tells us that such calls may not amount to much in the absence of regional political assertion. Constitutional powers including fiscal relations are inherently biased towards the Centre. Vesting of all residuary powers with the Centre and giving over-ruling powers to the Centre on matters in the Concurrent list are the primary sources of this bias. What is seldom recognised is that the degree of federalism in India has depended largely on two variables: the nature of political coalitions at the Centre and role of States in such coalitions (the period 1996 to 2014 for example), and the cultural diversity of regions. Hence, what is needed is a federal coalition that looks beyond the legal-constitutional aspects of federalism to preserve the idea of a plural India in terms of both culture and politics.
7. Editorial-2: A far-reaching tax measure
The U.S. push for a global minimum corporate tax may help India, but it can also cause international disagreements
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 and 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. The move intends to achieve minimum effective taxation of more than 10%, possibly up to 15%, given the latest proposal put forward by the United States. The objective is to minimise tax incentives and ensure that companies choose to be situated in a particular country based on other commercial benefits.
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 perhaps intended to disincentivise American companies from inverting their structures due to the increase in the U.S. corporate tax rate. The proposal is similar to Pillar Two, except for the rate of the effective minimum tax. While the OECD was considering a 10-12% rate, the U.S. proposed a 21% rate. This caused pushback from countries such as Ireland, which made a case for fiscal autonomy for smaller jurisdictions to compete with larger economies. The U.S. is now discussing a floor of 15% for the minimum tax rate despite the fact that it may have difficulty securing Congress support if the floor is too low. Even at 15%, it is unclear whether Ireland would agree, given its 12.5% marginal rate, thereby impacting a European Union-wide adoption of the 15% rate.
India has been part of the Pillar Two discussions and has not objected in principle to the proposal. The proposal, along with the increased tax bill for U.S. companies, may benefit the Indian revenue department. The tax department might benefit even at a 10% rate since the proposal would cover offshore structures set up by Indian companies.
Pillar Two acts as a set of controlled foreign corporation rules, where, 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. 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, where the cumulative ODI for the period primarily went through Singapore, Mauritius, the U.S., the Netherlands, and the United Kingdom.
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.
Other major factors
With tax incentives neutralised, countries may have to compete on other factors like better regulatory regimes, ease of doing business, access to global talent, among others. The U.S. proposal indicates that the country is pushing the OECD to swiftly achieve consensus on the global minimum tax rate, in the absence of which the U.S. proposes to apply its domestic law version of Pillar Two at a rate of 21% (which may now be 15%).
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. 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. Given that the U.S. is now pushing for a 15% rate, the fate of Pillar Two will depend on whether this proposal is acceptable to other countries.
The U.S. appears keen on closing the negotiations around the 15% floor, which should also benefit India. Presumably, the remaining obstacles to gaining a consensus are the issues with Pillar One. 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.