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Daily Current Affairs 17.01.2022 (Predatory pricing is prising Indian livelihoods apart,Taxing cryptocurrency transactions,SC verdicts have flagged the threat of hate speech,Volcano caused ‘significant damage’)

Daily Current Affairs 17.01.2022 (Predatory pricing is prising Indian livelihoods apart,Taxing cryptocurrency transactions,SC verdicts have flagged the threat of hate speech,Volcano caused ‘significant damage’)

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1. Predatory pricing is prising Indian livelihoods apart

The economic dogma of lower prices, regardless of the means, as a sole and worthy pursuit is being challenged

Last week, and all of a sudden, people in the small town of Talode in Nandurbar district in Maharashtra could not buy Colgate toothpaste from their only local store. It was because Nandurbar’s distributor had decided to boycott Colgate’s products and not supply them to the kirana store in Talode. Further, all consumer goods distributors in Maharashtra were protesting against Colgate’s alleged unfair treatment of traditional distributors vis-à-vis B2B technology companies such as Reliance’s JioMart, Udaan and others.

Breaking the flow

Nearly half-a-million of India’s distributors pick up goods from consumer companies such as Colgate and deliver them to 13 million small local stores located in 7,00,000 villages and towns across the country through a web of millions of traders and other intermediaries. A vast majority of these distributors and traders are small family businesses that have developed relationships with their local stores over many decades.

The kirana store in Talode sells a 100g tube of Colgate toothpaste to the consumer for ₹55, the maximum retail price (MRP). The Nandurbar distributor sells Colgate toothpaste to the Talode store for ₹45 and the manufacturer, Colgate, sells it to the distributor for ₹40. This is an illustrative but typical example of the current supply chain for consumer goods products in India.

Enter the new age technology B2B companies. They have developed technologies to connect directly to the kirana store in Talode through a mobile phone app, bypassing the intermediaries. They supply Colgate toothpaste to the local store for ₹35, lower than the ₹45 charged by the distributor. Ostensibly, the people of Talode will also benefit from these lower prices at their local store.

Unable to match such prices and facing the peril of losing business, India’s distributors claim these are unfair practices and want manufacturers such as Colgate to stop supplying goods to the technology companies. Colgate has refused to do so and, hence, the distributors have decided to boycott its products.

Hardly ‘creative disruption’

New innovations disrupting an existing process and rendering incumbents futile is generally a healthy process of ‘creative destruction’, as the Austrian economist, Joseph Schumpeter, postulated. But if this disruption is driven not entirely by technology innovation but also through pricing power, would it still be healthy?

These technology companies bear a 15%-20% loss on every Colgate toothpaste they sell to the local store. They deliberately offer their product at a price lower than what it costs them, to lure local stores away from the traditional distributors. Further, they offer extensive credit terms and working capital to the local stores. In other words, these technology companies rely not just on their mobile phone app innovation but also steep price discounting and cheaper financing to win customers.

Udaan has suffered total losses of more than ₹5,000 crore in just five years and JioMart reports even greater losses. Indian companies are able to absorb such heavy losses because they have access to copious amounts of money. These companies are flush with funds from foreign venture capital firms, which in turn are largely funded by American pension funds and university endowments. To put it cheekily, an American senior citizen is discounting Colgate toothpaste for a Talode villager while displacing the Nandurbar distributor, thanks to what economists call global capital flows. Such capital flows foster innovation and yield enormous consumer benefits is the neo-classical economic doctrine.

The flip side is that India’s millions of distributors and intermediaries have no access to such finance. They are typically small businesses built over many decades by pledging their personal assets as collateral in return for meagre bank loans. These small companies are cut off from the endless stream of free foreign money that gushes into new age ‘startups’ and established large corporates. Evidently, these companies use the money to not only build new technologies but also to undercut competitors and steal market share. They are able to sustain huge losses for several years until they destroy incumbents and gain dominant market share. After which, they will presumably raise their prices to turn profitable. It is similar to what India experienced in the telecom sector with Jio.

This practice, called predatory pricing, is illegal in most countries including India. Behind the veil of technology innovation of these startups lies a murky abuse of pricing power. If this was true ‘creative destruction’, then these technology companies would lure the Talode store owner only with their innovative app and efficiency than also suffering losses on every sale and offering cheaper finance.

While consumers may benefit from lower prices, should the livelihoods of millions of distributors, traders and their families suffer only because they do not have equal access to easy money as these technology companies? The distributor and trader in Nandurbar and the kirana store owner in Talode belong to the same local community. Surely, there will be social ramifications within that community for some of these families being thrown in disarray?

A global problem

To be sure, this is not just an India problem but a global one. The conventional economic notion that lower prices, regardless of the means adopted, are a sole and worthy pursuit is under severe challenge. Social media companies such as Facebook give away their products for free and e-commerce companies such as Amazon sell at lower prices, benefiting consumers enormously, but also causing immense social strife and disharmony. The new Chairperson of the Federal Trade Commission in America, Lina Khan, who is a fierce critic of abuse of pricing power by technology companies, is seeking to frame new rules to check such anti-competitive behaviour.

What India faces

But in India’s case, there is an added complexity of foreign capital flows. Large sums of free money printed in America are finding their way to India’s stock and start-up markets. Access to this capital is only available to a tiny proportion of Indian businesses but threatens the livelihoods of millions of Indian families, as in the case of distributors, causing massive income and social disparities. Even erstwhile champions of free capital flows are now cautious about their social implications.

To be clear, this is not a Luddite argument against e-commerce or technological innovations. The issue is about illegal predatory pricing and abuse of pricing power by startups and big corporates through preferential access to easy foreign money. By some estimates, there are more than 20 million families (100 million people) in India whose livelihoods depend on intermediary roles in the consumer goods supply chain. If suddenly these families are displaced and left stranded, it can cause enormous social unrest in the nation. Perhaps, the residents of Talode may even be willing to pay slightly more for their tube of toothpaste if they realise that some families in their community are being put to misery by free American money.

Predatory pricing

  • Predatory pricing is the illegal act of setting prices low to attempt to eliminate the competition.
  • Predatory pricing violates antitrust laws, as it makes markets more vulnerable to a monopoly.
  • Consumers may benefit from lower prices in the short term, but they suffer if the scheme succeeds in eliminating competition, as this would trigger a rise in prices and a decline in choice.
  • Prosecutions for predatory pricing have been complicated by the short-term consumer benefits and the difficulty of proving the intent to create a market monopoly.
  • The difference between predatory pricing and competitive pricing is during the recouping phase of lost profits by the dominant firm charging higher prices.
  • Under the Indian jurisprudence, Predatory pricing is described as ‘unfair or discriminatory’ pricing, and is forbidden by law under Section 4 of the Competition Act, 2002 (hereinafter referred to as “the Act”), which refers to the “Abuse of a Dominant Position”.

2. Taxing cryptocurrency transactions

A streamlined tax regime is pivotal to a clear, constructive and adaptive regulatory environment

Notwithstanding the eventual introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill in Parliament, cryptocurrencies continue to proliferate. In fact, a liberal estimate suggests that as many as 10 crore Indians may already have investments exceeding a total of $10 million in them. This not only creates an avenue for generation of tax revenue for the nation but also puts forth a Herculean challenge for the tax authorities who have to track and tax transactions involving cryptocurrencies.

Although the Income Tax Act, 1961 (“IT Act”) does not specifically mention cryptocurrencies, it does cast a wide enough net to bring crypto transactions under its ambit. Trading in cryptocurrency may be classified as transfer of a ‘capital asset’, taxable under the head ‘capital gains’. However, if such cryptocurrencies are held as stock-in trade and the taxpayer is trading in them frequently, the same will attract tax under the head ‘business income’. Even if one argues that crypto transactions do not fall under the above heads, Section 56 of the IT Act shall come into play, making them taxable under the head ‘Other sources of income’.

However, this in itself is not sufficient in order to put in place a simple yet effective taxation regime for cryptocurrencies. Since cryptocurrencies are unlike any other asset class, stored and traded virtually, there are varied challenges which need to be addressed in order to streamline the process of taxing crypto transactions.

Varied interpretations

First, the absence of explicit tax provisions has led to uncertainty and varied interpretations being adopted in relation to mode of computation, applicable tax head and tax rates, loss and carry forward, etc. For instance, the head of income under which trading of self generated cryptocurrency (currencies which are created by mining, acquired by air drop, etc.) is to be taxed is unclear. If these are taxed under capital gains, what should be taken as the cost of acquisition for the purpose of computation? If the acquisition cost is to be taken as the fair market value of the said cryptocurrency as on date of generation, how does one arrive at this value? Since there is no consistency in the rates provided by the crypto-exchanges, it is difficult to arrive at a fair market value. Conversely, there are divergent views in the market treating such an income as ‘business income’ or ‘other sources of income’, which are taxable at individual tax rate slabs (which may be higher than those applicable to capital gains). Similarly, when a person receives cryptocurrency as payment for rendering goods or services, how should one arrive at the value of the said currency and how should such a transaction be taxed?

Second, it is often tricky to identify the tax jurisdiction for crypto transactions as taxpayers may have engaged in multiple transfers across various countries and the cryptocurrencies may have been stored in online wallets, on servers outside India. In such cases, it becomes difficult to pinpoint which jurisdiction’s tax laws would become applicable and what kind of tax treatment would be effected especially in light of various nations having differing tax treatment for crypto assets including imposition of a general ban on them.

Third, the identities of taxpayers who transact with cryptocurrencies remain anonymous. Each crypto address comprises a string of alphanumeric characters and not the person’s real identity, giving tax evaders a cloak of invisibility. Exploiting this, tax evaders have been using crypto transactions to park their black money abroad and fund criminal activities, terrorism, etc.

Fourth, the lack of third party information on crypto transactions makes it difficult to scrutinise and identify instances of tax evasion. One of the most efficient enforcement tools in the hands of Income Tax Department is CASS or ‘computer aided scrutiny selection’ of assessments, where returns of taxpayers are selected inter alia based on information gathered from third party intermediaries such as banks. However, crypto-market intermediaries like the exchanges, wallet providers, network operators, miners, administrators are unregulated and collecting information from them is very difficult. Another consequence of this lack of information is that the tax authorities are left with hardly any tools to verify any crypto transactions which do get reported. They are instead forced to fully depend on the data provided by the taxpayers.

Fifth, even if the crypto-market intermediaries are regulated and follow Know Your Customer (KYC) norms, there remains a scenario, where physical cash or other goods/services may change hands in return for cryptocurrencies. Such transactions are hard to trace and only voluntary disclosures from the parties involved or a search/survey operation may reveal the tax evaders.

While the aforementioned challenges provide enough food for thought to policymakers, certain steps can be taken to provide a robust mechanism for taxing crypto transactions going forward.

To begin with, the income-tax laws pertaining to the crypto transactions need to be made clear by incorporating detailed statutory provisions. These could include provision of a definition for crypto assets for tax purposes and guidelines addressing the major taxable events and income forms associated with virtual currencies. This should be followed by extensive awareness generation among the taxpayers regarding the same.

The practice of having separate mandatory disclosure requirements in tax returns (as is the case in the United States) should be placed on the taxpayers as well as all the intermediaries involved, so that crypto transactions do not go unreported. Additionally, the existing international legal framework for exchange of information should be strengthened to enable collecting and sharing of information on crypto-transactions. This will go a long way in linking the digital profiles of cryptocurrency holders with their real identities.

Training is important

Furthermore, the Government must impart training to its officers in blockchain technology. In this regard, it may be noted that the United Nations Office on Drugs and Crime’s ‘Cybercrime and Anti-Money Laundering’ Section (UNODC CMLS) has developed a unique cryptocurrency training module, which can aid in equipping tax officers with requisite understanding of the underlying technologies. Tax authorities should also equip themselves with the latest forensic software (such as Elliptic Forensics Software is being used by the USA Internal Revenue Service and GraphSense used in the European Union) which can analyse a high volume of crypto transactions at a time and raise red flags in cases of suspicious transactions.

It is certain that cryptocurrencies are here to stay. A streamlined tax regime will be essential in the formulation of a clear, constructive and adaptive regulatory environment for cryptocurrencies.

Cryptocurrency regulation in India: What can be allowed

– Cryto trading will continue. Investors will be allowed to buy and sell cryptocurrencies from exchange platforms that follow certain guidelines.

– India’s approach towards cryptocurrencies seems to be ‘protective’. Any measure included in the crypto bill is likely to be towards ensuring that investors’ money is protected. So, anyone who has invested in crypto, need not panic.

– There are multiple signs suggesting that crypto will be classified as an asset class rather than a currency. This means people will be able to invest and grow their money in crypto.

– The government may start levying tax on cryptocurrencies. The new bill may provide better clarity on how the government plans to tax cryptocurrencies. It is believed that the government is exploring ways to generate revenue from cryptocurrencies.

Cryptocurrency regulation in India: What may not be allowed

– It will become difficult to create cryptocurrencies. As of now, anyone with a working internet connection can make a crypto coin. The regulations may ensure that only those who fulfil certain criteria are able to create crypto.

– Crypto will not become a legal tender. Earlier this year, a lot of people rallied behind the idea of cryptocurrency replacing the rupee or co-existing with it as a legal tender. That is highly unlikely now. In simple words, you will not be able to use Bitcoin to purchase a burger or pizza.

One important thing that remains to be seen is who will regulate cryptocurrencies. The Reserve Bank of India (RBI) seems to be the most logical option but has expressed intentions of introducing its own crypto. The other possible option among the existing organisations is SEBI. It won’t be surprising if the government comes up with a new body altogether for regulating crypto.

3. SC verdicts have flagged the threat of hate speech

‘They attack individual dignity, threaten national unity’

The seeming delay in taking criminal action against the perpetrators of hate speeches in Haridwar and Delhi is despite the Supreme Court’s judgments that hate speech is an attack on dignity in the “matter of thought, expression, belief, faith and worship” and threatens the unity of the nation as a whole.

“The unity and integrity of the nation cannot be overlooked and slighted, as the acts that promote or are likely to promote divisiveness, alienation and schematism do directly and indirectly impinge on the diversity and pluralism, and when they are with the objective and intent to cause public disorder or to demean dignity of the targeted groups, they have to be dealt with as per law,” the Supreme Court observed in its December 7, 2020 judgment in the Amish Devgan case.

Intent of Preamble

The court reminded the government that the Preamble to the Constitution consciously puts together fraternity, assuring dignity of the individual, and the unity and integrity of the nation.

It said the dignity of the individual and unity and integrity of the nation are linked, one in the form of rights of individuals and other in the form of individuals’ obligation to others to ensure unity and integrity of the nation.

Hate speech not only “insidiously weaken virtue and superiority of diversity, but cuts back and lead to demands, depending on the context and occasion, for suppression of freedom to express and speak on the ground of reasonableness”.

By issuing threats upon the liberty and freedom of others, the Supreme Court said, orators of hate challenge the unity and integrity of the nation.

Wider acceptance

In the Sabarimala judgment, Justice D.Y. Chandrachud noted that “religious beliefs and faiths ensure wider acceptance of human dignity and liberty, but when conflict arises between the two, the quest for human dignity, liberty and equality must prevail”.

Justice Sanjiv Khanna, in the Amish Devgan case, defines “dignity” as the “basic entitlement as a member of a society in good standing, his status as a social equal and as bearer of human rights and constitutional entitlements”.

Participatory equality in inter-personal relationships among citizens, and between the State and the citizens fosters “self worth”, he added.

Loss of dignity

“Loss of dignity and self-worth of the targeted group members contributes to disharmony amongst groups, erodes tolerance and open-mindedness which are a must for multi-cultural society committed to the idea of equality. It affects an individual as a member of a group,” Justice Khanna wrote.

Dignity is a part of the individual rights that form the fundamental fulcrum of collective harmony and interest of a society, the court said in its judgment in the Charu Khurana case.

Laws restricting the freedom of expression

India prohibits hate speech by several sections of the Indian Penal Code, the Code of Criminal Procedure, and by other laws which put limitations on the freedom of expression. Section 95 of the Code of Criminal Procedure gives the government the right to declare certain publications “forfeited” if the “publication … appears to the State Government to contain any matter the publication of which is punishable under Section 124A or Section 153A or Section 153B or Section 292 or Section 293 or Section 295A of the Indian Penal Code”.

Section 153(A)

Section 153A of the Indian penal code says, inter alia:

Whoever (a) by words, either spoken or written, or by signs or by visible representations or otherwise, promotes or attempts to promote, on grounds of religion, race, place of birth, residence, language, caste or community or any other ground whatsoever, disharmony or feelings of enmity, hatred or ill-will between different religious, racial, language or regional groups or castes or communities, or (b) commits any act which is prejudicial to the maintenance of harmony between different religious, racial, language or regional groups or castes or communities, and which disturbs or is likely to disturb the public tranquillity, . . . shall be punished with imprisonment which may extend to three years, or with fine, or with both.

Section 295(A)

Section 295(A) of the Indian Penal Code (IPC) enacted in 1927[4] says:

Whoever, with deliberate and malicious intention of outraging the religious feelings of any class of [citizens of India], [by words, either spoken or written, or by signs or by visible representations or otherwise], insults or attempts to insult the religion or the religious beliefs of that class, shall be punished with imprisonment of either description for a term which may extend to [three years], or with fine, or with both.[6]

Legislative history of Section 295(A)

A book, Rangila Rasul, was published in 1927. The book concerned the marriages and sex life of Muhammad. On the basis of a complaint, the publisher was arrested but later acquitted in April 1929 because there was no law against insult to religion. The publisher was murdered in Court by Ilm-ud-din. As a result, Ilm-ud-din was honored with the honorifics ‘Ghazi’ and ‘Shaheed’.[7] As the book did not cause enmity or hatred between different religious communities, it didn’t violate Section 153(A). The Indian Muslim community demanded a law against insult to religious feelings. Hence, the British Government enacted Section 295(A). The Select Committee before enactment of the law, stated in its report that the purpose was to punish persons who indulge in wanton vilification or attacks upon other religions or their religious figures. It however added that a writer might insult a religion to facilitate social reform by grabbing attention. Therefore, it recommended that the words with deliberate and malicious intention be inserted in the Section.

4. Volcano caused ‘significant damage’

Underwater eruption in Tonga triggers tsunami waves, flooding Pacific coastlines

A massive volcanic eruption in Tonga that triggered tsunami waves around the Pacific caused “significant damage” to the island nation’s capital and smothered it in dust, but the full extent was not apparent with communications still cut off on Sunday.

The eruption on Saturday was so powerful it was recorded around the world, triggering a tsunami that flooded Pacific coastlines from Japan to the United States.

The capital Nuku’alofa suffered “significant” damage, New Zealand Prime Minister Jacinda Ardern said, adding there had been no reports of injury or death but a full assessment was not yet possible with communication lines down.

There has been no word on damage in the outer islands and New Zealand will send an air force reconnaissance aircraft “as soon as atmospheric conditions allow”, the country’s Defence Force tweeted.

Tonga has also accepted Canberra’s offer to send a surveillance flight, Australia’s foreign office said, adding it is also immediately prepared to supply “critical humanitarian supplies”.

The United States was “deeply concerned for the people of Tonga”, Secretary of State Antony Blinken said, pledging support for the island nation. In California, the city of Santa Cruz was hit by flooding due to a tidal surge by the tsunami.

Peru closed 22 ports as a precaution while waves of around 1.2 metres hit along Japan’s Pacific coast.

Volcano

A volcano is an opening in the earth’s crust through which gases, molten rocks materials (lava), ash, steam etc. are emitted outward in the course of an eruption. Such vents or openings occur in those parts of the earth’s crust where the rock strata are relatively weak. Volcanic activity is an example of endogenic process. Depending upon the explosive nature of the volcano, different land forms can be formed such as a plateau (if the volcano is not explosive) or a mountain (if the volcano is explosive in nature).

Magma vs Lava: The difference

Magma is the term used to denote the molten rocks and related materials seen inside earth. A weaker zone of the mantle called asthenosphere, usually is the source of magma.

Once this magma came out to the earth surface through the vent of a volcano, it is called as the Lava. Therefore, Lava is nothing but the magma on earth surface.

The process by which solid, liquid and gaseous material escape from the earth’s interior to the surface of the earth is called as Volcanism.

Types of Volcanoes

Volcanoes are classified on the basis of nature of eruption and the form developed at the surface.

Types of Volcanoes

Shield Volcanoes

How to identify: They are not very steep but are far and wider. They extend to great height as well as distance.

They are the largest of all volcanoes in the world as the lava flows to a far distance. The Hawaiian volcanoes are the most famous examples.

Shield volcanoes have low slopes and consist almost entirely of frozen lavas.

If you were to fly over top of a shield volcano, it would resemble a warrior’s shield, hence the name.

These volcanoes are mostly made up of basalt (less viscous), a type of lava that is very fluid when erupted. For this reason, these volcanoes are not steep.

They are of low explosive in general, but if somehow water gets into the vent they may turn explosive.

The upcoming lava moves in the form of a fountain and throws out the cone at the top of the vent and develops into cinder cone

Cinder Cone Volcanoes:

Cinders are extrusive igneous rocks. A more modern name for cinder is Scoria.

Small volcanoes.

These volcanoes consist almost entirely of loose, grainy cinders and almost no lava.

They have very steep sides and usually have a small crater on top.

Composite Volcanoes:

Shape: Cone shaped with moderately steep sides and sometimes have small craters in their summits.

Volcanologists call these “strato-” or composite volcanoes because they consist of layers of solid lava flows mixed with layers of sand- or gravel-like volcanic rock called cinders or volcanic ash.

They are characterized by the eruption of a cooler and more viscous lavas than basalt.

These volcanoes often result in explosive eruptions.

Along with lava, large quantities of pyroclastic materials and ashes find their way to the ground.

This material accumulates in the vicinity of the vent openings and leading to the formation of layers, and this makes the mount appears as composite volcanoes.

Caldera:

These are the most explosive of the earth’s volcanoes.

They are usually so explosive that when they erupt they tend to collapse on themselves rather than building any tall structure. The collapsed depressions are called calderas.

Their explosiveness indicates that its magma chamber is large and in close vicinity.

A caldera differs from a crater in such a way that a caldera is a huge depression caused by a collapse after a large-scale eruption, whereas a crater is a small, steep side, volcanic depression bored out by an eruptive plume.

Flood Basalt Provinces

These volcanoes outpour highly fluid lava that flows for long distances.

The Deccan Traps from India, presently covering most of the Maharashtra plateau, are a much larger flood basalt province.

Mid-Ocean Ridge Volcanoes

These volcanoes occur in the oceanic areas.

There is a system of mid-ocean ridges more than 70,000 km long that stretches through all the ocean basins.

The central portion of this ridge experiences frequent eruptions.

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