Economic Development: May 2023 UPSC Current Affairs | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly PDF Download

New GST Compliance Measures

Context:

The government has decided to lower the threshold for businesses to generate e-invoice for business-to-business (B2B) transactions, from Rs 10 crore to Rs 5 crore, and has rolled out the automated return scrutiny module for GST returns in a backend application for central tax officers.

What is the automated return scrutiny module?

• It is a module that will enable the officers to scrutinise GST returns of centre-administered taxpayers selected on the basis of data analytics and risks identified by the system.
• Discrepancies on account of risks associated with a return will be displayed to the tax officers.
• They will interact with the taxpayers through the GSTN common portal for communication of discrepancies noticed and subsequent action.
• It has already commenced with the scrutiny of GST returns for FY 2019-20, with the requisite data already with the tax officers.

e-Invoicing:

• The GST Council in 2019 had approved the standard of e-invoice with the primary objective to enable interoperability across the entire GST ecosystem.
• Under this, a phased implementation was proposed to ensure a common standard for all invoices.
• An e-invoice is generated by one software which is capable of being read by any other software and through machine readability, an invoice can then be uniformly interpreted.
• It is expected to help to curb the actions of tax evaders and reduce the number of frauds as the tax authorities will have access to data in real-time.
• E-invoicing was initially implemented for large companies with turnover of over Rs 500 crore, and within three years the threshold has now been lowered to Rs 5 crore.

What are the recent changes for e-invoicing?

• The government has also lowered the threshold for businesses to generate e-invoice for business-to-business (B2B) transactions to Rs 5 crore from Rs 10 crore under GST.
• The changes will come into effect from August 1.
• At present, businesses with turnover of Rs 10 crore and above are required to generate e-invoice for all B2B transactions.

Carbon Border Adjustment Mechanism (CBAM)

The EU has agreed to the world’s first Carbon Border Adjustment Mechanism (CBAM), a measure aimed at preventing “carbon leakage”.

• CBAM will initially cover several specific products in some of the most carbon-intensive sectors.
• CBAM, which some argue violates international trade rules, also aims to incentivize trading partners to decarbonize.
• CBAM extends the concept of carbon pricing to imports for the first time.

Carbon Border Adjustment Mechanism (CBAM) is a tariff on carbon-intensive products, such as cement or fertilizer. While CBAM’s implementation is still being worked out, we at least know the scheme’s scope. The new levy is to deter carbon-intensive processes and encourage manufacturers to “green” as much of their processes as possible.

• The levy would mirror the EU’s carbon market price to prevent “carbon leakage”.
• That’s when the EU’s emission reduction efforts are offset by increased emissions outside the bloc through relocation of production to non-EU countries with less ambitious climate policies, or offset through increased imports of carbon-intensive products.
• Companies in countries with a domestic carbon pricing regime equivalent to the EU’s will be able to export to the EU without buying CBAM certificates.

CBAM will initially cover several specific products in some of the most carbon-intensive sectors at risk of “carbon leakage”:

• iron and steel (including some downstream products such as nuts and bolts)
• cement
• fertilizers
• aluminum
• electricity
• hydrogen (which was recently added because it is mainly produced with coal in non-EU countries).

CBAM is part of the “Fit for 55 in 2030 package”, the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, in line with the European Climate Law. The EU’s primary mechanism for incentivizing industry to decarbonize is through carbon pricing and to meet its 2050 targets; these prices will need to rise substantially.

India and Carbon Border Adjustment Mechanism

CBAM has been criticized as a trade-restrictive policy, especially by developing countries like India, which has set a target of becoming carbon neutral by 2070. India has expressed concerns about CBAM at various international forums, including the World Trade Organization (WTO), emphasizing the importance of non-discriminatory treatment for the same products and warning that such measures could lead to protectionist practices.

• India’s exports of energy-intensive goods including steel, aluminum, cement, and fertilizers are anticipated to suffer significantly from the EU’s adoption of the CBAM.
• In the EU market, Indian exporters are expected to see increased pricing, less competitiveness, and decreased demand for their products.
• Implementing the CBAM is expected to pose a significant challenge to India’s metal sector. In 2022, 27 percent of India’s exports of iron, steel, and aluminum products went to the EU.
• Starting January 1, 2026, the EU will begin collecting carbon tax on each consignment of steel and aluminum, which will result in Indian firms paying an amount equivalent to 20-35 percent of tariffs.

The impact of CBAM on India will depend on the carbon intensity of the exported products and their substitutes in the EU market. If there are no low-carbon substitutes for Indian products in the EU market, then the impact of CBAM on Indian exports may be limited.

• India has to put in place a carbon pricing mechanism, develop low-carbon technology, and maintain its competitiveness in the global market while reducing the effects of CBAM.
• This will assist Indian companies in adhering to CBAM rules and lowering the carbon intensity of their products. India must also re-evaluate its export strategy and find new markets for its goods to maintain their competitiveness in the face of CBAM’s effects on the EU market.

Steps Taken by India

The Indian government is also considering several measures to address the potential impact of the EU’s carbon border tax:

• Negotiating with the EU: Talks with the EU to provide a discount or exemption for Indian manufacturing. The intention is to prevent unfairly taxing Indian businesses for their emissions.
• Developing a carbon pricing mechanism: Developing a national carbon pricing system to incentivize businesses to cut their emissions. This will increase the competitiveness of Indian enterprises and assist India’s policies in complying with the EU’s carbon reduction targets.
• Promoting renewable energy: Encouraging renewable energy sources to cut carbon emissions, such as solar and wind power. To assist the Indian industry in switching to greener energy sources, the government intends to continue investing in renewable energy infrastructure.
• Investing in carbon capture technology: Investigating how carbon capture and storage (CCS) technology may be used to lower emissions of carbon from manufacturing operations. Before they are discharged into the environment, this technology collects carbon emissions and stores them below.

Global Concerns

Companies and countries outside the EU may raise two concerns over CBAM:

• It places a carbon charge on companies from countries that did not primarily cause climate change.
• According to the EU, CBAM is designed to be in full compliance with WTO rules and international climate law.
• However, questions have been raised over the consistency of CBAM with international trade law and environmental principles.
• Given its innovative nature and global impact, it is likely to be the subject of a legal challenge to the WTO.

The trade tensions that measure such as the EU CBAM and the US Inflation Reduction Act can cause are also being raised.

• Given the very different ways the EU and the United States have chosen to incentivize decarbonization, finding equivalence between the two blocs will be challenging.

Way forward

India’s manufacturing industry is expected to be significantly affected by the EU’s new carbon border tax, especially companies that export products to the EU. The Indian government is taking proactive steps to ensure the country’s manufacturing industry remains competitive by reducing carbon emissions and promoting renewable energy sources.

• India is also laying the foundation for the creation of a carbon market. In this regard, the Ministry of Power published a draft of the Carbon Credits Trading Scheme (CCTS) on March 27, 2023.
• The draft comprehensively outlines the institutional framework and operational mechanisms that will govern the forthcoming carbon credit market in India.

Under the provisional agreement, CBAM will begin to operate from October 2023 onwards. Initially, a simplified CBAM would apply with importers obliged to collect and report carbon data.

• From 2026 onwards, the full CBAM will kick in and the levy linked to the EU’s carbon market price will be payable.
• If companies cannot provide emissions data or their data are regarded by the EU as unacceptable, they will face punitive default values for emissions.
• According to the European Commission, several countries, including Canada and Japan, are planning initiatives like CBAM.

The world needs to find a way to square the need to take climate action with the fundamental principles that underpin the global trading system. The year 2023 will be critical in working through how best to do this.

Advisory Committee Suggests Ban on Diesel 4-Wheelers

Why in News?

Recently, the Energy Transition Advisory Committee formed by Union Ministry of Petroleum and Natural Gas has recommended that India should ban diesel-powered 4-wheeler vehicles by 2027 and switch to electric and gas-fuelled vehicles in cities with more than a million people and polluted towns to reduce emissions.

• The Committee, headed by former petroleum secretary Tarun Kapoor, also suggested phasing out motorcycles, scooters, and three-wheelers with internal combustion engines by 2035.

What are the Recommendations of the Committee?

• Move Towards Renewable Energy:
  • India is one of the largest emitters of greenhouse gases globally, and to achieve its net-zero goal for 2070, it wants to produce 40% of its electricity from renewables.
  • In line with this, the panel report suggests that no city buses should be added that are not electric by 2030, with diesel buses for city transport not to be added from 2024 onwards.
  • It called to partially shift to electric and partially to ethanol-blended petrol with almost 50% share in each category.
• Incentives to Boost EV Use:
  • To boost electric vehicle (EV) use in the country, the report calls for the targeted extension of incentives under the Faster Adoption and Manufacturing of Electric and Hybrid Vehicles scheme (FAME).
• Transition to Gas-Powered Trucks and Railways:
  • The panels also recommended that new registrations of only electric-powered city delivery vehicles should be allowed from 2024, with higher use of railways and gas-powered trucks for the movement of cargo.
  • The railway network is anticipated to be fully electric in two to three years. The panel recommended that long-distance buses in India be powered by electricity in the long term, with gas used as a transition fuel for 10-15 years.
• Increase in Share of Gas in its Energy Mix:
  • India aims to raise the share of gas in its energy mix to 15% by 2030 from the current 6.2%.
  • To achieve this goal, the panel suggests building underground gas storage equivalent to two months' demand.
  • The panel also recommends the use of depleted oil and gas fields, salt caverns, and aquifers for building gas storage with the participation of foreign gas-producing companies.

What about Diesel Consumption in India?

• Consumption Trends:
  • Diesel currently accounts for about 40% of India’s petroleum products consumption with 80% of that being used in the transport sector.
  • Petrol and diesel demand in India is expected to peak in 2040 and decline post that due to electrification of vehicles.

• Reasons for High Preference of Diesel:
  • The higher fuel economy of diesel engines over petrol powertrains is one factor. This stems from the greater energy content per litre of diesel, and the inherent efficiency of the diesel engine.
  • Diesel engines do not use high-voltage spark ignition (spark plugs), and thus use less fuel per kilometre, as they have higher compression ratios, making it the fuel of choice for heavy vehicles.
  • Also, diesel engines offer more torque (rotational or turning force) and are less likely to stall as they are controlled by a mechanical or electronic governor, thereby proving to be better for haulage.
• Impact of Diesel-Powered Vehicle:
  • Air Pollution: Diesel engines emit higher levels of particulate matter and nitrogen oxides, which contribute to air pollution and can have negative health impacts on humans and wildlife.
  • Greenhouse Gas Emissions: While diesel engines are more fuel-efficient, they also emit higher levels of carbon dioxide, which contributes to climate change.
  • Noise Pollution: Diesel engines are typically louder than gasoline engines, which can contribute to noise pollution and negatively impact quality of life in urban areas.
  • Environmental Damage: Diesel spills can cause significant environmental damage, especially if they occur near water sources or sensitive ecosystems.

Why is Implementing a Diesel Ban for Commercial Vehicles Challenging

• Practicality and Implementation:
  • Uncertainty about the practicality of the proposed ban vis-a-vis medium and heavy commercial vehicles.
  • It may result in disruption in the transport of goods and public transportation services.
• Dominance of Diesel in Transport Segment:
  • High dependency on diesel for long-haul transportation and city bus services.
  • Diesel sales account for around 87% in the transport sector; trucks and buses contribute to approximately 68% of diesel fuel sales.
• Conversion Challenges:
  • Transitioning diesel trucks to compressed natural gas (CNG) poses limitations.
  • CNG usage is primarily suited for shorter distances and has lower tonnage carrying capacity.
• Compliance with Current Emission Norms:
  • Automakers argue that diesel vehicles comply with existing emission norms.
  • Significant investments made by car manufacturers to transition diesel fleets to BS-VI emission norms; diesel ban might imply that all the time, money and efforts were in vain.

What are India’s Initiatives for a Renewable Energy based Transport Sector?

• FAME Scheme:
  • Provides fiscal incentives for EV manufacturing and adoption.
  • Aims to achieve 30% EV penetration by 2030.
  • Supports deployment of charging technologies and stations in urban centers.
• National Mission on Transformative Mobility and Battery Storage:
  • Aims to improve air quality, reduce oil import dependence, and enhance uptake of renewable energy and storage solutions.
  • Drives strategies for transformative mobility and phased manufacturing programs for EVs, EV components and batteries.
• Customs Duty Exemption for Lithium-ion Cell Batteries:
  • The government has exempted the import of lithium-ion cell batteries from customs duties to bring down their cost and scale up their production in India.
• National Green Hydrogen Mission:
  • This mission aims to develop green hydrogen as a clean and affordable energy source for various sectors such as industry, transport, and power.
  • It envisages setting up of green hydrogen production plants, storage and distribution infrastructure, and end-use applications.
• Ethanol blending
  • It involves mixing ethanol with petrol to reduce reliance on fossil fuels and decrease greenhouse gas emissions.
  • The level of ethanol blending in petrol in India has reached 9.99%. The target for 20% ethanol blending in petrol (also called E20) has been advanced to 2025 from 2030.
• Incentives under PLI Scheme:
  • It has been rolled out for various industries including the automobile and auto-component industry.
  • Around Rs.18,000 crore was approved for development of advanced cell chemistry battery storage manufacturing.
  • These incentives further aim to encourage indigenous development of Electric Vehicles (EVs) so as to bring down their upfront cost.
• SATAT Scheme:
  • Sustainable Alternative Towards Affordable Transportation (SATAT) initiative aims to promote Compressed Bio-Gas (CBG) as an alternative, green transport fuel.

IRDAI Vision 2047

Why in News?

The Insurance Regulatory and Development Authority of India (IRDAI), as part of its Vision Insurance for all’ by 2047, has allotted states and union territories to every insurer to increase insurance penetration in India.

• IRDAI is also planning to launch Bima Trinity - Bima Sugam, Bima Vistar, Bima Vaahaks – in collaboration with general and life insurance firms to make insurance activities hassle free.

What is IRDAI Vision 2047?

• Objective:
  • Insurance for All by 2047 aims that every citizen has an appropriate life, health and property insurance cover and every enterprise is supported by appropriate insurance solutions.
  • It also aims to make the Indian insurance sector globally attractive
• Pillars:
  • Insurance customers (Policyholders)
  • Insurance providers (insurers)
  • Insurance distributors (intermediaries)
• Focus Areas:
  • Making available right products to right customers
  • Creating robust grievance redressal mechanism
  • Facilitating ease of doing business in the insurance sector
  • Ensuring the regulatory architecture is aligned with the market dynamics
  • Boosting innovation
  • Competition and distribution efficiencies while mainstreaming technology and moving towards principle based regulatory regime.
• Significance:
  • It can help people in households all over the country to have access to an affordable insurance policy that covers health, life, property, and accidents.
  • These policies would offer faster claim settlements, sometimes within hours, and additional benefits like gym or yoga memberships.

What is Bima Trinity?

• Bima Sugam:
  • It is a unified platform that combines insurers and distributors. It simplifies policy purchases, service requests, and claims settlement for customers in one convenient portal.
• Bima Vistar:
  • It is a comprehensive bundled policy that covers life, health, property, and accidents. It provides defined benefits for each risk category, ensuring quick claim payouts without surveyors.
• Bima Vaahaks:
  • It is a women-centric workforce operating at the Gram Sabha level. They will educate and convince women about the benefits of comprehensive insurance, particularly Bima Vistar. By addressing concerns and emphasizing advantages, Bima Vaahaks empower women and enhance their financial security.

What is the State of Insurance Sector in India?

• According to the Economic Survey 2022-23, life insurance density in the country increased from USD 11.1 in 2001 to USD 91 in 2021. Total global insurance premiums in 2021 increased 3.4% in real terms, with the non-life insurance sector registering 2.6% growth, driven by rate hardening in commercial lines in developed markets.
• According to the Economic Survey 2022-23, India's insurance market is poised to emerge as one of the fastest-growing markets globally in the coming decade.
• As per the IRDAI, insurance penetration in India increased from 3.76% in 2019-20 to 4.20%in 2020-21, registering a growth of 11.70%.
  • Also, the insurance density increased from USD 78 in 2020-21 to USD 91 in 2021-22.
• Life insurance penetration in 2021 was 3.2%, almost twice as high as the emerging markets and slightly above the global average.
• India is at present the 10^th biggest market in the world it is projected to be 6th biggest by 2032.

What are the Challenges Related to Insurance Sector?

• Lower Adoption Rate:
  • Insurance is not widely adopted in India compared to other countries. This is because many people are not aware of insurance or don't trust it.
  • In rural areas, where a large portion of the population lives, only a small percentage have life insurance coverage.
  • The insurance industry's contribution to India's GDP (Gross Domestic Product) is less than 5%, which is lower than the global average. In simple terms, insurance is not widely used in India, and efforts are needed to increase awareness and trust in insurance products.
• Lack of Product Innovation:
  • The insurance sector in India has been slow in product innovation. Many insurance companies offer similar products, which leads to a lack of differentiation in the market.
• Fraudulence:
  • Fraud includes things like making false claims and lying about information.
  • The use of digital technology and customer-focused policies may have unintentionally given fraudsters more chances to steal identities and make fake claims.
  • Over 70% of Indian insurers have seen an increase in fraud cases in the past two years.
• Talent Management:
  • The insurance sector in India faces a talent shortage. The industry needs skilled professionals in areas such as actuarial science, underwriting, claims, and risk management.
  • Attracting and retaining talented professionals is a challenge for the industry.
• Slow Rate of Digitalization:
  • The insurance sector in India has been slow to adopt digitalization compared to other industries, which has resulted in several challenges such as inefficient processes, lack of transparency, and poor customer experience.
• Claims Management:
  • The claims process in India is often seen as complicated, slow, and opaque, which can lead to customer dissatisfaction and loss of trust in the insurance industry.
  • This can be due to a lack of transparency, inefficient processes, and poor communication with customers.

What is IRDAI?

• IRDAI, founded in 1999, is a regulatory body created with the aim of protecting the interests of insurance customers.
  • It is a statutory body under the IRDA Act 1999 and is under the jurisdiction of Ministry of Finance.
• It regulates and sees to the development of the insurance industry while monitoring insurance-related activities.
• The powers and functions of the Authority are laid down in the IRDAI Act, 1999 and Insurance Act, 1938.

Way Forward

• To improve the insurance sector in India, several steps can be taken to leverage technology, align with customer behavior, optimize data usage, simplify claims management, adopt hybrid distribution models, and tackle fraud.
• Digitalization should be a priority across the value chain to reduce costs, improve efficiency, and support ecosystem development. This involves using technology to enhance employee skills and productivity through upskilling programs.
• Insurers need to align with dynamic changes in customer behavior and preferences. By offering quick personalized products and prioritizing flexibility over mass offerings, insurers can better meet customer needs and manage perceptions.

Economics of Climate Change

Context

• Last week, the World Meteorological Organisation (WMO) announced that global temperatures are likely to surge to record levels in the next five years, fuelled by heat-trapping greenhouse gases (GHGs) and an El-Niño event.
• The WMO warned that the economic cost of extreme weather, climate and water-related events has been rising.

What is Climate Change?

• Climate change refers to long-term shifts in temperatures and weather patterns.
• Such shifts can be natural, due to changes in the sun’s activity or large volcanic eruptions.
• But since the 1800s, human activities have been the main driver of climate change, primarily due to the burning of fossil fuels like coal, oil and gas.
• As per current standing,close to 12,000 climate change induced disasters/extreme weather events have been reported between 1970 and 2021, resulting in over 2 million deaths and $4.3 trillion in economic losses.
• For perspective, the total losses are roughly 25% more than India’s annual GDP.

Some Visible Evidences of the Climate Change

• Temperature Anomalies
  • Annual average temperature in India has been increasing gradually.
  • RBI’s latest report on currency and finance states that the rise has been significantly sharper during the last 20 years than during any other 20-year time interval since 1901.
• Irregular Monsoon
  • The south west monsoon is more erratic.
  • While the average annual rainfall at the all-India level during 2000-2020 saw a rise over that during 1960-1999, annual average rainfall in India has gradually declined.
• Increased Dry and Wet Spells: RBI’s research suggests that while dry spells have become more frequent during the last several years, intense wet spells have also increased.
• Frequent Floods and Storms
  • Research about natural disasters since 1975 has shown that India is relatively more exposed to floods and storms (cyclonesand hailstorms) than droughts and heatwaves.
  • “Such incidences pose significant risks to agricultural production and food price volatility,” states the RBI.

How Vulnerable is India?

• The Global Climate Risk Index 2021 had ranked India 7th in the list of most affected countries in terms of exposure and vulnerability to climate risk events.
• India’s diverse climate is not only exposed to different temperature and precipitation patterns, but is also vulnerable to extreme weather events, posing wide-ranging spatial and temporal implications for the economy.

Economic Vulnerability

• The structure of Indian economy has evolved since independence.
• Bulk of economic activity now happens in the services sector as against the agriculture and alliedsectors.This has implications for carbon emissions.
• According to the RBI, ‘Services’ are globally considered to be emission-light with relatively lower energy intensity of output.
• A sectoral break-up shows that thehighest emission-intensive sectors — metal industries, electricity, andtransports (air, land, andwater)— together account for around just 9% of India’s total GVA (gross value added) in 2018-19.
• This implies that the sectoral composition of the Indian economy helps reduce its carbon emissions.

The Macroeconomic Impact

• Can affect supply and Demand: Climate change can adversely impact both the supply side as well as the demand side. It can stroke inflation, reduce economic output, trigger uncertainty and change consumer behaviour.
• Employment Loss: In 2020, the World Bank said that India could account for 34million of the projected 80 million global job losses from heatstress-associated productivity declineby2030.
• Coastal floods due to Sea Level Rise
  • In 2022, the Intergovernmental Panelon Climate Change (IPCC) stated that India isone of the most vulnerable countries globallyin terms of the population that would be affected by the sea level rise.
  • By the middle of the present century, around 35 million people in India could face annual coastal flooding, with 45-50million at risk by the end of the century.

Government's Policies to Fight Climate Change

• On 30th June 2008, the National Action Plan on Climate Change (NAPCC) was released.It is a national strategy of 8 sub-missions to help adapt and magnify ecological sustainability in India’s development path.
• These are:
  • National Solar Mission (NSM),
  • National Mission for Enhanced Energy Efficiency (NMEEE),
  • National Mission on Sustainable Habitat (NMSH),
  • National Water Mission (NWM),
  • National Mission for Sustaining the Himalayan Ecosystem (NMSHE),
  • National Mission on Strategic Knowledge for Climate Change (NMSKCC),
  • National Mission for a Green India (GIM),and
  • National Mission for Sustainable Agriculture (NMSA).
• On 3 August 2022, the Union Cabinet under the Chairmanship of the Prime Minister passed the updated Nationally Determined Contribution (NDC) for consideration by the UNFCCCunder the Paris Agreement, to reach India’s goal of net zero emissions by 2070.
  

Policy Actions' Impact on GDP Growth Rate and Inflation

• The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) have created an analytical framework called the National Institute Global Econometric Model (NIGEM)“to produce policy insights”.
• In this model, the researchers looked at how GDP growth rate and inflation would be affected under different policy stances when compared to the baseline (which is the best-case scenario involving no impact of climate change).

Impact on GDP growth rate

• Policy actions have negative impact on India’s GDP no matter what.
• By 2050, India’s GDP is likelyto lower by anywhere between8.5% to almost 10% under current policy scenario, if India follows the NDCs) pathof achieving net zero by2070.
• However, if the globalCO2 emissions reach net zero by 2050,then the hit to India GDP will be the lowest.

Impact on Inflation

• The effect of stricter policy action will be opposite.
• No change policies will keep inflation low at present but higher later.
• Policies to achieve net zero by 2050 will result in higher inflation in the near-term.

Conclusion

• In 2020, India was the third biggest emitter of green house gases.
• As per climate analysts, India will not hit the peak of emissions by 2030, but instead, achieve the same between 2040-2045.
• This trend may create hindrance for India’s energy transition plans for the second half of this century and therefore a pragmatic and far-sighted approach is necessary.

US Debt Ceiling Deal

Context

The US government is facing a crucial issue regarding the debt ceiling.  

About Debt Ceiling

New Tax Rules on Online Gaming

Why in News?

The Central Board of Direct Taxes (CBDT) has recently introduced new tax rules for online gaming platforms in India. These rules aim to bring clarity and establish guidelines for Tax Deducted at Source (TDS) on winnings from online gaming.

What are the New Tax Rules for Online Gaming?

• No TDS on Winnings up to Rs 100:
  • Online gaming platforms will not be required to deduct tax at the source for a player if the net winning does not exceed Rs 100.
  • This threshold provides relief for players with smaller winnings.
• Taxable Deposits:
  • Bonus, referral bonus, and incentives provided by the online gaming company are considered taxable deposits.
  • These deposits will be subject to tax under Rule 133 of the Income-tax Act.
• Calculation of Net Winnings:
  • Calculation of net winnings in the online gaming industry will consider each user account separately when a user has multiple accounts.
  • The deposit, withdrawal, or balance in the user account refers to the total amount across all user accounts associated with the individual.
  • Transfers between user accounts under the same online intermediary, belonging to the same user, will not be treated as withdrawals or deposits.
  • However, if a withdrawal or deposit occurs between one user's account and another user's account, such transfers will be considered as withdrawals.
• Valuation of Winnings:
  • The valuation of winnings in kind will be based on the fair market value, except when the online gaming intermediary has purchased the winnings before providing them to the user.
  • If the online gaming intermediary manufactures items as winnings, the fair market value will be considered.
• TDS Provision for Online Gaming:
  • To regulate online gaming transactions, the Finance Act 2023 introduced section 194BA in the Income-tax Act, 1961, requiring online gaming platforms to deduct income tax on net winnings in a user's account.
  • TDS at a rate of 30% will be applicable on the net winnings from any online gaming platform.
  • Tax is required to be deducted at the time of withdrawal and at the end of the financial year.
• Impact:
  • Increased tax burden on online gamers.
  • Impact on professional gamers and streamers, potentially higher taxes and more complex financial management.
  • Esports organizations may need to adjust financial models and consider tax implications for revenue streams.
  • Financial implications and potential reduction in gaming income.
  • Compliance challenges in understanding and adhering to new tax rules.
  • Possibility of players migrating to jurisdictions with more favorable tax regulations.

What is CBDT?

• It is a statutory authority that functions under the Central Board of Revenue Act, 1963.
  • It is a part of the Department of Revenue in the Ministry of Finance.
• It provides inputs for policy and planning of direct taxes in India and is also responsible for the administration of direct tax laws through the Income Tax Department.
• Direct Taxes include income tax, corporation tax etc.

What are the Other Tax Regulations Related to Digital Assets?

• The Government of India has decided to regulate transactions of Virtual Digital Assets in the Union Budget 2022.
  • Provisions have been proposed in the Income-tax Act, 1961 to regulate investments in cryptocurrencies, NFTs, and other virtual digital assets.
• Income from digital assets will be taxed at a rate of 30%.
• A 1% tax deductible at source will be applicable on transactions involving virtual digital assets.
• Gifts of virtual digital assets will also be subject to taxation.
• No deductions and exemptions are allowed, and losses from the transfer of such assets cannot be set off against any other income.

RBI Becomes Net Seller of USD in FY23

Why in News?

Recently, the Reserve Bank of India (RBI) witnessed a significant shift in its foreign exchange transactions during the fiscal year 2022-23. After being a net buyer of the US dollar for three consecutive years, the RBI turned into a net seller, selling 25.52 billion USD in the spot market.

• The spot exchange is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery.

Why and How did the RBI Turn into a Net Seller in FY23?

• Stabilisation of the Rupee:
  • The RBI maintains that its intervention in the foreign exchange market is aimed at stabilising the rupee's movement.
  • The sale or purchase of dollars by the RBI impacts its profit and is reflected in dividend payouts to the government.
  • Without the RBI's dollar sales, experts suggest the rupee could have weakened further, potentially reaching 84-85 levels against the dollar.
• Depletion of Forex Reserves and Valuation Losses:
  • The country's foreign exchange reserves decreased from $606.475 billion to $578.449 billion during FY23. This was primarily due to valuation losses resulting from the appreciating US dollar and higher US bond yields.
• Selling of Dollar:
  • The RBI sold significant amounts of dollars in FY23 to counter the rupee's depreciation resulting from the Ukraine-Russia conflict and the US Federal Reserve's interest rate hikes.
  • The rupee depreciated by approximately 8% during FY23, with the RBI's intervention preventing further weakening.
  • The rupee declined from around 76 levels on April 1, 2022, to nearly 82 as of March 31, 2023.
• Impact:
  • The RBI's dollar sales in FY23 resulted in significant profits, leading to a higher dividend payout to the government.
  • The Central Board of the RBI approved a 188% increase in surplus transfer to the government for the accounting year 2022-23.

What Other Measures Can Help Curb Depreciation of Rupee?

• Increase capital flows into the country, such as promoting foreign investments and encouraging Non-resident Indian (NRI) deposits.
• Monitor and intervene in the foreign exchange markets to reduce excessive volatility in the rupee's value.
• Consider utilizing foreign exchange reserves selectively to counter excessive depreciation and maintain stability.
• Foster a favorable business environment and policies that support economic growth and exports.
• Strengthen monetary policy frameworks to effectively manage inflation and maintain stability.
• Enhance coordination with other relevant government agencies to implement comprehensive strategies for managing currency depreciation.
• Encourage trade in rupees and promote pricing of India's trade transactions in the domestic currency.
• Continuously monitor and assess the impact of policy measures on the rupee's depreciation and make adjustments as necessary.