Date: 10/04/2023

Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development, and Employment.

Key Phrases: global economic landscape, globalization, Silicon Valley Bank, Monetary Policy Committee, Carbon Border Adjustment Mechanism (CBAM), Goods and Services Tax (GST), Reverse Charge Mechanism.

Why in News?

• The current global economic landscape is defined by increasing globalization and the risks that come with it.
• To mitigate these risks, policymakers around the world are looking for ways to balance the need for economic growth with measures to control risk.
• In this context, the Monetary Policy Committee's decision to pause the repo rate at 6.5% and renew the focus on banking regulation and supervision is a step in the right direction. However, there is more work to be done.

Importance of Banking Regulation and Supervision:

• The inability of some banks to pass on the substantial hike in policy rates over the past year has led to financial turbulence.
• This lack of coherence between monetary tightening in the US (Silicon Valley Bank) and banking regulation has resulted in the demise of banks like Credit Suisse in Switzerland.
• This has highlighted the need for every nation to pay more attention to the impact of monetary policy on its own regulated entities and to ring-fence itself against public policy disruptions elsewhere.
• Thus, renewed emphasis on banking regulation and supervision is a welcome move.

Re-balancing Consumption and Examining Growth Drivers:

• The key to controlling risk is to engage globally while watching the risk that goes with every move.
• The unilateral imposition of the Carbon Border Adjustment Mechanism (CBAM) by the EU is an example of a threat that nations need to watch out for.
• What every country needs is a fresh examination of its growth drivers, and a search for productivity enhancement options through avenues left unexplored because of the erstwhile focus on growing a few sectors through trade.
• It is time to rebalance consumption towards the unmet needs of the poor while discouraging the carbon-intensive consumption of the rich.

The GST Conundrum in India:

• In India, growth had declined for eight straight quarters before the onset of the pandemic followed by the Ukraine war.
• One of the reasons for this was the unfriendliness of the Goods and Services Tax (GST) to informal small-scale activity.
• While commendable measures have aided small-scale industry during the pandemic, those cover only GST-registered units within the ambit of the formal sector.
• Roadside enterprises not registered under GST, either below the turnover threshold or above it but unwilling to register because of the procedural complications of the GST reporting system, got overlooked.

The Paradox of Reverse Charge Mechanism in Central GST Act:

• The Central GST Act initially allowed for a Reverse Charge Mechanism (RCM) that facilitated transactions between registered buyers and unregistered sellers.
• However, the subsequent rules exempted such purchases from taxation, making registered sellers hesitant to engage with unregistered sellers.
• The Initial Promise of RCM:
  • The Central GST Act initially allowed for RCM under clauses 9(3) and 9(4), which enabled the buyer to pay the tax directly instead of paying it to the seller.
  • Clause 9(4) even permitted input purchases from unregistered sellers.
  • This mechanism allowed for a formal and respectable way to enable transactions across the divide between registered buyers and unregistered sellers.
• The Flaws in the Subsequent Rules:
  • However, the rules that followed did away with RCM and exempted such purchases from taxation altogether.
  • This exemption made registered sellers hesitant to engage with unregistered sellers since claiming exemption on an input purchase aroused suspicion.
  • This exemption removed the input tax credit advantage that comes with purchasing from a registered seller, leading to a decline in transactions between registered and unregistered sellers.
• Impact on Small Enterprises:
  • The removal of RCM has severely impacted millions of small enterprises selling small manufactured inputs or services such as cloth dyers, within-town bike couriers, and three-wheelers ferrying supplies between city shops and workshops/storage on the urban periphery.
  • These enterprises outcompete formal enterprises because of their low overheads.
• Solution:
  • The Reverse Charge Mechanism does not lead to revenue loss as the tax is paid (and recoverable like other input taxes).
  • If the RCM is feared as an inducement to falsification of turnover by those aiming to stay below the GST radar, a limit of, say, 10% can be imposed on total input credits claimed through RCM rather than through registered sellers.
  • Successful small enterprises will in any case scale up and choose the input credit advantage that goes with registration.

Conclusion:

• In a difficult global environment, countries need to exploit whatever domestic resources they have on hand.
• Enterprising youth entering the labour market without the necessary skills for paid jobs need livelihood options that allow them to engage with the formal sector respectably.
• Therefore, re-globalization with risk control should also mean a growth relook, focusing on productivity enhancement, rebalancing consumption, and the role of RCM in boosting small enterprises.

Source: Live-Mint

Mains Question:

Q. What are the challenges and opportunities of re-globalization with risk control, and how can countries ensure a balanced approach to growth while addressing the needs of small-scale enterprises and promoting sustainability?