Thursday, May 18, 2017

GST in India: For Better or Worse?


Apple has started manufacturing iPhones in India. According to a WSJ report, the the iPhone SE series is being produced by Wistron, near Bangalore. Since the locally manufactured or assembled products will not attract import duties, it seems the prices are going to about USD 100 lower than imported phones.

Import duties and taxes make a big difference to a companys' fortunes. India's tax system is often cited as one of the top reasons why global manufacturers prefer to stay away from India. For instance, JCCII, a body representing Japanese corporate's, puts out every year "Suggestions to the Government of India". These suggestion have remained more or less unchanged for many years, and it is always complaints about the tax system that tops the lists.

In the latest 2016 list too, JCCII's tax-related suggestions include -
  • Removal of Permanent Establishment (PE) taxation
  • Easing of Transfer Pricing assessments by classifying Japanese Trading Companies (Sogo Sosha), not as traders but as Service Providers
  • Exemption from Minimum Alternate Tax (MAT) in the SEZs
  • Exemption from Dividend Distribution Tax (DDT) paid to foreign shareholders
  • Exemption of Service Tax on exports from India
In other words, the Japanese companies are saying, "If you don't let us take our profits home, we will not be able to invest more in India". In the official cover note JCCII also says, "While we await...the all-important GST bill, our concerns on the Tax system...remain."

So is the GST going to really improve our tax system and east of doing business? Much of what I have read so far has been gung-ho about GST, and about how it is going bind the whole country into one large happy market for goods and services.

An interesting contrarian view is held by Aravind Datar, who is quite convinced that GST, in its present form, is only going to worsen the ease-of-doing-business scenario in India. Here is the video -



The critical points are -

* More Laws, More Confusion: As of today, 29 states in India have their own VAT / Sales Tax laws, and separate laws for Service Tax and Excise Duty (total 32 laws). When GST is adopted by all the states we will have 29 StateGSTs (SGSTs), one Central Service Tax (CST) and one Inter-State GST (IGST). In all, 31 laws instead of 32.

* Lack of Checks and Balances: The GST Council can make only recommendations, which cannot be enforced. The state governments are free to make GST laws as they please (as per the 101 Amendment, Article 246A, and the Supreme Court judgement of 11 Dec., 2016)

* Cumbersome Reporting Requirements: Service providers currently file their returns twice a year. Now they will have to file 49 returns every year! (3 returns per month online - 10, 15, 30th + 12 TDS returns + 1 annual returns = 49)

* Discouraging Economies of Scale: Any company earning more than INR 2 million will have to file returns. So this will only encourage those who want to stay below that threshold, as in the old "License Permit Raj" days.

* Enormous potential for tax evasion, and tax-related harassment: Unlike other countries which have one single GST rate (eg. Singapore - 7%), we are going to have slabs - 0%, 5%, 10%, 28%. This encourages ambiguity, and the discretionary powers of tax officers.

* More Ambiguity, Not Less: Lack of clarity on General Anti Avoidance Rules (GAAR) and Place of Effective Management (POEM) is sure to discourage manufacturers and FDI investors.

Datar is a great communicator and his speeches, articles and arguments are quite convincing. Is there anybody in the establishment who has come up with a point-wise rebuttal of the concerns raised by him?

---------------------------------------------------
LINKS:

* (2017) WSJ - https://www.wsj.com/articles/apple-assembles-first-iphones-in-india-1495016276

* JCCII's Suggestions to GoI (2016) - http://www.jccii.in/Docs/0333_2016_suggestions_jccii_summary_english.pdf

* Aravind Datar on GST - https://www.youtube.com/watch?v=xGmJyxugA2E

* (2015) Aravind Datar, IE - GST's Seven Deadly Defects - http://indianexpress.com/article/opinion/columns/gsts-seven-deadly-defects/

Sunday, May 14, 2017

To OBOR or not to OBOR




A grand summit is now on in China. Around 65 countries are participating in the One Belt One Road (ORBOR) meeting which envisages construction of international trunk passageways and an infrastructure network connecting all sub-regions in Asia, and between Asia, Europe and Africa.

There is big money promised for these projects - China has committed a total of about $100 billion to three new infrastructure funds: a $ 40 billion fund to the Central Asia-focused Silk Road Fund, a $ 50 billion fund to a new Asian Infrastructure Investment Bank (AIIB) and a $ 10 billion fund to the BRICS-led New Development Bank.

India, however, has opted out. It is anything but enthusiastic about the CPEC, a highway that cuts through territory that has been illegally occupied by Pakistan.

What does this mean to countries that are enthusiastically participating in OBOR? Perhaps they expect a windfall by way of investments and market access. Or perhaps they will take a closer look at countries that have already borrowed tons of money from China, and ten contemplate - like Sri Lanka - whether they did the right thing.

Sri Lanka is currently in $58.3 billion debt to foreign financiers, and 95.4% of all government revenue is currently going towards paying back its loans. Of this, about $8 billion is owed to China alone, of which $1.4 billion was borrowed by the Sri Lankan government for constructing the Hambantota port.

Since these investments are not bringing in revenue as projected during the - rather hasty and secretive - planning & approval, the state is handing over its assets to Chinese companies on long-term lease:
  • 80% of its Hambantota port has been handed over for 99 years, to China Merchants Holdings.
  • Colombo’s South Container Terminal is a 35-year Build-Operate-Transfer (BOT) arrangement with the same company
  • IZP, a Chinese informational technology company, has been put forward as a potential purchaser of Mattala International Airport.

So is there a pattern here? Borrow on easy terms, belatedly discover that the revenue model was flawed, and grudgingly hand over your land and assets to the foreign lender?



--------------------------------------------
LINKS & REFERENCES


* (2017) ET - http://economictimes.indiatimes.com/news/international/world-news/obor-summit-in-china-know-what-it-is-and-why-india-is-not-attending/articleshow/58656653.cms

* (2017) IE - http://indianexpress.com/article/what-is/china-one-belt-one-road-project-obor-4653564/

* (2017) IE - Belt Road Initiative - http://indianexpress.com/article/explained/china-belt-and-road-initiative-in-giant-trade-belt-road-to-new-growth-rush-4651727/

* (2017) FT - One belt, one road and many questions -- https://www.ft.com/content/d5c54b8e-37d3-11e7-ac89-b01cc67cfeec

* (2017) - Bloomberg - https://www.bloomberg.com/view/articles/2017-05-17/can-china-afford-its-belt-and-road

* (2017) Wanda Bullish on India - http://m.indiatoday.in/story/china-one-belt-one-road-meet-india-boycott-wang-jianlin/1/955695.html

* (2017) Express edit - https://www.google.co.in/amp/indianexpress.com/article/opinion/editorials/after-the-no-show-india-china-one-belt-one-road/lite/

* (2017) The Guardian - https://www.theguardian.com/world/2017/may/15/eu-china-summit-bejing-xi-jinping-belt-and-road

* (2017) Dawn, Pakistan - CEPC for Pakistan - A Colonial Enterprise?  - https://www.dawn.com/news/1333244

* (2016) Wire -- https://thewire.in/40388/one-belt-one-road-shaping-connectivities-and-politics-in-the-21st-century/


Hanbantotta - China's own port in Sri Lanka

* (2017) Forbes - India Tells Sri Lanka: You Can Take Your Port And Shove It - https://www.forbes.com/sites/wadeshepard/2017/01/21/india-tells-sri-lanka-take-your-trincomalee-deep-sea-port-and-shove-it/#14a10f915f88

* (2016) Forbes -- https://www.forbes.com/sites/wadeshepard/2016/07/31/china-to-sri-lanka-we-want-our-money-not-your-empty-airport/#27d0ecb21beb



Thursday, May 11, 2017

Solar: Upstream and Downstream



Amazing things are happening in India's renewable energy market - especially solar power.

Yesterday , it was reported that at an auction of a 250 MW capacity plant at Bhadla (Rajasthan), South Africa’s Phelan Energy Group and Avaada Power bid INR 2.62 (USD 0.04) per kilowatt-hour (kWh) to win contracts to build capacities of 50MW and 100MW, respectively, at Adani Renewable Energy Park Rajasthan Ltd. This is a new record low. The bidding wars seem to have now reached a point where experts are wondering if it is commercially viable to produce produce power at these rates.

If the unit price is surprising, so is the sheer scale of the new 'solar farms' that are coming up. The current world record the world's largest solar project in a single location is now held by Adani's 648-megawatt Kamuthi plant (near Marurai, Tamil Nadu), which went online in September, 2016. The second largest solar plant, the Topaz Solar Farm in California, has a capacity of 550 megawatts.



For a country that located in the tropics, India has a huge potential for switching over to solar energy. Consider these facts -

  • The solar  radiation incident over India is equal to 4–7 kWh per square meter per day with an annual radiation ranging from 1200–2300 kWh per square meter. 
  • It has an average of 250–300 clear sunny days and  2300–3200 hours  of sun shine per  year. 
  • India's electricity needs can be met on a total land area of 3000 km2  which  is  equal  to  0.1%  of  total  land  in  the country 
  • Currently  India is  generating  4.59%  of solar energy  of  total  produced  renewable  energy  installed capacity in India


Over the past few years, thanks to a concerted push by the government, India has quadrupled its solar-generation capacity from 2,650 MW on 26 May 2014 to 12,289 MW in 10 March 2017.  Yet, behind all these impressive numbers, fact remains that present and future growth is completely hinged on the import of equipment from China. In 2015-16, the value of imported solar cells and modules tripled to $2.34 billion, with China accounting for 83 per cent ( $1.9 billion).

Despite having a dedicated Ministry for New and Renewable Energy (MNRE) for the past 15 years, why is it that India has not been able to it own supply chains? Why is it that Indian manufacturers have no access to domestic upstream raw material supplies of poly-silicon and wafers?

According to a KPMG report (2015), India has not been able to create economies of scale in solar manufacturing, mainly due to insufficient government support - loans, tax holidays, subsidized utility services, easy access to land and technology support.

Is that a rather simplistic view?


-----------------------------
REFERENCES & LINKS

* (2017) Wire - Why Increasing India’s Solar Energy Capacity Won’t Work -- https://thewire.in/116842/solar-energy-india-capacity/

* (2017) Mint - http://www.livemint.com/Industry/MKI7QvOhpRoBAtw3d4PM5K/South-African-firm-bid-takes-solar-power-tariffs-to-new-low.html

* (2017) - Solar panel imports - https://www.zauba.com/import-solar-panel-hs-code.html -- HSCode - 39209919

* (2017) - http://indianexpress.com/article/business/economy/pm-modi-calls-for-all-solar-power-city-model-stresses-job-creation-4648770/

* (2016-Dec) -- http://indianexpress.com/article/india/indias-87-per-cent-solar-cell-imports-from-china-in-april-september-piyush-goyal-4417312/

* (2016) - BL - Import of solar panels triples in 2015-16 -  http://www.thehindubusinessline.com/economy/import-of-solar-panels-triples-in-201516/article8788743.ece

* (2016) - Adani's Kamuthi Solar Power Project - http://www.ecowatch.com/india-solar-market-2118202661.html

* (2016) - India's solar energy push to generate 1 mn green jobs -- http://www.business-standard.com/content/b2b-manufacturing-industry/india-s-solar-energy-push-to-generate-1-mn-green-jobs-116021500523_1.html
- Report by Natural Resources Defense Council (NRDC) and the Council on Energy, Environment and Water (CEEW) -- ‘Filling the skill gap in India’s clean energy market: Solar energy focus’
- The country will need new skilled workforce & training to achieve its ambitious national target to add 100 gigawatts (GW) of installed solar energy by 2022
- one million new engineers, technicians, solar installers, maintenance workers and performance data monitors
- International Solar Alliance (ISA) -  alliance of more than 120 solar-rich countries aims to facilitate widespread deployment of solar power and supporting knowledge exchange on manufacturing and skills.

* (2015) - DTE - WTO rules against India in Domestic Contents Reqirements for the Solar Industry -- http://www.downtoearth.org.in/news/wto-rules-against-india-s-domestic-content-requirements-in-solar-power-50977
- Indian manufacturing capacity of solar cells and modules is limited to 1,386 MW and 2,756 MW respectively. The Mission's target at the time of the complaint stood at 10,000 MW to be achieved in the period from 2013 to 2017.
- Since the solar target has been revised to 100,000 MW or 100 GW by the Modi government, the target now stands at 29,000 MW.

* (2015) - Research Paper - Potential of Solar Energy in India - https://www.researchgate.net/publication/306034848_Potential_of_Solar_Energy_in_India_A_Review
-  The solar  radiation incident over India is equal to 4–7 kWh per square meter per day with an annual radiation ranging from 1200–2300 kWh per square meter.
- It has an average of 250–300 clear sunny days and  2300–3200 hours  of sun shine per  year.
- India's electricity needs can be met on a total land area of 3000 km2  which  is  equal  to  0.1%  of  total  land  in  the country

Potential of Solar Energy in India
- Currently  India is  generating  4.59%  of solar energy  of  total  produced  renewable  energy  installed capacity in India

--------------------------------------------------
* India Solar Resource Maps - http://mnre.gov.in/sec/solar-assmnt.htm
* NREL - National Renewable Energy Lab - http://www.nrel.gov/international/ra_india.html

* International Solar Alliance (ISA) - http://intsolaralliance.org/

* (2016) Yes Bank - Compendium of Global Success Stories in Solar - http://intsolaralliance.org/docs/CompendiumofGlobalSuccessStoriesinSolarEnergy.pdf

* (2015) - KPMG Solar Manufacturing Report - http://www.energetica-india.net/download.php?seccion=articles&archivo=3Eksv7L8BosildPLOdK84G1zZk6Ew1co6BVp8hm0LThwxw9APH9HOx8.pdf

* Wiki - List of solar manufacturing companies - https://en.wikipedia.org/wiki/List_of_photovoltaics_companies