IASbaba’s Daily Current Affairs – 21st July, 2016

IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs July 2016, International, UPSC

IASbaba’s Daily Current Affairs – 21st July, 2016

ECONOMICS

TOPIC:

General Studies 2

Government policies and interventions for development in various sectors and issues arising out of their design and implementation

General Studies 3

Indian economy and issues relating to planning, mobilization of resources, growth, development and employment

Benami Transactions (Prohibition) (Amendment) Bill 2015

What is a ‘benami’ transaction?

When a transaction is done in name of a person other than the one who finances, is called benami transaction. (Benami literally means without name)

If person A pays the money for Property X, but the property is transferred in name of person B, person B is benamdar and Property X is called benami property. Person A is the real owner

Does the benami holder benefits?

The ultimate beneficiary is the person who pays for it, i.e. the real owner
Benami transactions act as escape-valve for the financers.
No benefit is intended upon the benamdar. He/She/It is just an alias

Purpose of benami transaction

The purposes are mostly illegal ones

They were made to find a way with land ceiling laws (the real owner had more property than legally mentioned due to benami transactions)
The land owner would transfer property in name of family and relatives or other fictitious/ghost names to evade taxation as provided by tax laws
To circulate black money in the market

Benami Transaction Act 1988

To put an end to such benami transactions
To empower government to recover benami properties

Loopholes

Lack of proper machinery for proper and strict implementation
Absence of appellate mechanism
Lack of provision with centre for vesting confiscated property

Excluded

Buying property through known source of income in names of spouse or children and others as specified
A karta of the Hindu Undivided Family
A person standing in fiduciary capacity for the benefit of another person such as a trustee, executor, partner or director of a company

Why in news?

The Union Cabinet has given approval to amend the Benami Transactions Act 1988 vide Benami Transaction (Provision) (Amendment) Bill 2015

It is in continuation with government’s efforts to curb black money.

Provides for: confiscation of assets held in name of another person or a fictitious name to avoid taxation or obtain wealth illegally.

Similar scheme to curb black money: Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 to catch those with undisclosed foreign assets.

Benami Transaction Bill

Flashback: It was tabled in 2015 and was referred to Parliament’s standing committee on finance.

Aim: to curb domestic black money

Fine: upto 25% of fair value of assets and 7 years of imprisonment. (Earlier bill had either fine or imprisonment)

Property: will cover movable, immovable, tangible and intangible properties. If joint ownership, tax payer will have to show financing sources

Other changes:

Providing more time to allow property holders to furnish information,
A time-bound process for initiating investigation and for filing appeals.

Amendments aims at

Strengthening the bill in terms of legal and administrative procedure so that practical difficulties be overcome
Prohibiting benami transactions and consequently prevent circumvention of law through unfair practices

Immunity to: those who declare their benami properties under income declaration scheme.

Details of

The bill is expected to be tabled in Monsoon session of Parliament in 2016

Curbing Black Money

Benami Transaction Bill can also be complemented by various government initiatives to curb black money. One of it is making a cashless Indian society.
A vast network of off-the-book transaction and unbanked money lies beyond the reach of tax authorities, anti-corruption investigators and creditors.

Estimated Figure: Around $460 billion a year. Bigger than GDP of Argentina

Reasons for black money

More than half of India’s output comes from small, informal sector. Dealing in cash is a norm
Taxes are cumbersome to pay, easy to avoid
Direct tax contributes only 35% of the total tax collected. (OECD ideal is two-thirds). The upper class is benefited most by existing tax benefits
Indirect taxes are distortionary and regressive due to excess dependence on indirect levies such as sales tax and excise tax.

Banking revolution: Can push up the need of cashless transaction.

It already provides for most sophisticated public payments infrastructure in the world.
Introduction of Unified Payment Interface by RBI- easier for consumers to use mobile phones for money transfer

The ideas is to shift from

Low-volume, high-value, high-cost and high fees à high-volume, low-value, low cost and no fees money transactions

Thus, concentrated efforts of government to barricade black money transactions from all sides viz. domestic laws, foreign agreements, banking reforms etc. is the need of the hour.

Connecting the dots:

The fight against black money is expected to be intensified post the enactment of new changes in Benami Transaction law. Identify the steps taken by government to curb the menace of black money.

Refer:

Black Money Law-will it act as deterrent?

No immunity for wealth generated from graft

Measures taken by the Government to Curb Black Money in the Country

INTERNATIONAL/ECONOMY

TOPIC: General Studies 2

India and its neighborhood – relations, India-Pakistan economic trade relations

Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.

The dynamics of India-Pakistan trade

In News:

A recent study by Delhi-based research institute Indian Council for Research on International Economic Relations (ICRIER) shows that informal trade between India and Pakistan is almost twice the value of formal trade between the two countries.

What is informal trade?

Informal trade is broadly defined as all trade between two countries that should be included in the national income statistics, according to conventional national income accounting, but is not.

What drives informal trade?

Factors such as high tariffs, political tension, infrastructure impediments, ease of trading goods via third countries have generated a thriving industry for informal trade between the two South Asian giants.

Pakistan’s negative list of 1,209 items is the most important factor pushing informal exports from India.

Items on the negative list are those that are not allowed to be imported from India. More than one in every two items exported informally to Pakistan were on Pakistan’s negative list. Clearly, the restriction has fuelled indirect trade.

58% of the traders cited ease of sending goods via a third country as the second biggest important reason. This highlights weaknesses in infrastructure for formal trade, consequently leading to high transport costs.
The third biggest reason was seen to be high tariffs. Compliance to the tariff liberalization plan of South Asian Free Trade Area (SAFTA) is expected to bring down tariff rates.

The agreement on SAFTA is a trade agreement to promote trade and economic growth in South Asia by reducing tariffs for intra-regional export. India also maintains a sensitive list of 614 items on which no tariff concessions are granted.

The fact that Pakistan has refrained from according the Most Favoured Nation (MFN) title to India has also hindered barrier-free trade, say trade analysts.

According to the World Trade Organisation, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners—whether rich or poor, weak or strong.

Which commodities are traded?

Real jewellery, including gold, diamond and precious stones, accounted for the largest share of 23% of informal exports from India to Pakistan.
About 30% of items on India’s current sensitive list comprise of textiles, indicating that shift to formal trade can be expected once India relaxes its tariffs.
While India’s imports from Pakistan included items such as dry fruits and spices, informal exports from India included chemicals, tyres, alcohol and tobacco products, among several others.

Informal exports from India to Pakistan in 2012-13 stood at $3.9 billion, much higher than the just over $2 billion worth of formal exports. Informal imports, on the other hand, from Pakistan valued $0.7 billion, slightly more than formal imports of $0.5 billion.

How does informal trade take place?

Most of informal trade between the two countries were also found to be via a third country, in particular Dubai.
About 68% of India’s informal export to Pakistan was found to be routed via Dubai.
59% of informal import from Pakistan was accounted for by passengers travelling by bus or rail.
24% of informal import from Pakistan was via Line of Control trade routes, while 17% was via Dubai.

India and Pakistan trade potential is huge

Experts say that trade via a circuitous route is itself an indication of the potential of bilateral trade between the two countries.
However, “the cost of non-cooperation is huge. People in third countries know what India has and what Pakistan wants, and their business thrives on the lack of information and hesitation of these two countries. The benefits of direct trade need to be explored.”

Formal trade routes are inefficient

The survey, which measured the efficiency of transport of goods via two routes—the Delhi-Lahore route and the Delhi-Mumbai-Dubai-Karachi-Lahore route—found that the latter route was 2.75 times more efficient in terms of transport per transaction cost incurred per container-kilometre.
Higher transaction cost per-tonne-per-kilometre on the direct route is because of factors such as limited number of items that can be exported via road route, cumbersome customs checks at Attari/Wagah customs station, transaction costs in the form of bribes incurred in getting customs clearances, physical examination of goods and poor infrastructure, among others.
While the total cost of shipping would still be lower in the formal channel, given the fact that the distance is one-tenth of the route via Dubai, predictability and comfort encourages traders to incur these high costs

The study highlights that – “if appropriate measures are taken, a significant share of informal trade can be diverted to formal channels”. Informal trade between India and Pakistan, though, is unlikely to be totally eliminated as ethnic networks between the two countries would continue to facilitate it at cheaper costs.

Connecting the dots:

Recent studies have shown that informal trade between India and Pakistan is almost twice the value of formal trade between the two countries. Discuss what factors are driving this informal trade and also suggest appropriate measures to be taken to convert this significant share of informal trade to formal trade.