What to Read in Indian Express Editorial (Topic and Syllabus wise)

Editorial 1 : A Tax in Our Interest

Context: Equalisation levy

Genesis of the Equalisation Levy

• Introduction and Legal Framework
  1. Introduced in 2016 via the Finance Act and not the Income-tax Act.
  2. 6% levy on online advertising services.
  3. Objective: Address tax avoidance by digital corporations and bypass treaty overrides.
• Strategic Rationale
  1. Treaty Override Prevention: Taxpayers could not challenge the levy under international tax treaties.
  2. Targeting Low-Tax Practices: Aimed at multinational tech firms with historically low global tax rates.

 

International Tax Developments

• OECD's BEPS Initiative
  1. OECD’s Base Erosion and Profit Shifting (BEPS) program failed to deliver a unified solution for taxing digital economies.
  2. India’s Unilateral Move: Introduced the levy despite criticism of undermining international tax diplomacy.
• Global Responses
  1. Criticisms: Accusations of double taxation, increased consumer costs, and unilateralism.
  2. Domino Effect: Inspired other countries to adopt similar measures.
• Key Negotiation Challenges
  1. Profit Allocation Debate: The US preferred to draw a line in the sand with only residual returns, India firmly believed that an agreed formulary apportionment of profits was the way ahead.
  2. OECD’s Compromise: Lengthy negotiations influenced by US dominance.

 

Shift to the UN Framework

• UN Tax Convention (2024)
  1. 110 Countries supported an UN-led tax convention.
  2. Proposal: Simpler withholding tax on cross-border digital service payments.
  3. Significance: Highlighted alternatives to OECD’s consensus-driven model.
• Challenges to UN Model
  1. Withholding Tax Limitations: Similar consensus hurdles as OECD’s approach.
  2. Dilemma of Developing Countries: Growing scepticism about OECD’s fairness.

 

US-India Tensions and Retaliation

• US Trade Actions
  1. 2020 USTR Investigation: Declared India’s expanded levy (2% on digital services) discriminatory.
  2. Retaliatory Tariffs: Threats under Trump and Biden administrations.
• Impact on India’s Policy
  1. Withdrawal of 2% Levy: To avoid trade tensions.
  2. 2024 Context: Potential withdrawal of 6% levy amid renewed US pressure.

 

Critiques and Defence of the Levy

• Opposition Arguments
  1. Discriminatory Design: Allegedly targeted US tech firms.
  2. Consumer Burden: Costs passed to end-users.
• Defence and Revenue Impact
  1. Revenue Generation: ₹40 billion in 2022.
  2. Tax Avoidance Check: Levied in absence of global profit taxation mechanisms.

 

Withdrawal and Implications

• Timing and Motives
  1. Pre-emptive Move: Likely to de-escalate US trade tensions.
  2. Global Deal Vacuum: No OECD or UN agreement in place.
• Long-Term Lessons
  1. Domestic Measures as Tools: Demonstrated developing nations’ ability to assert tax sovereignty.
  2. Consensus Illusion: Highlighted limitations of relying on international cooperation.

 

Conclusion: The equalisation levy was a bold experiment in taxing digital economies, despite its eventual rollback. It reinforced the need for equitable global tax frameworks and exposed power imbalances in international tax diplomacy.

 

Editorial 2 : Re-Engaging Dhaka

Context: Muhammad Yunus’ China visit and India-Bangladesh relations.

 

India’s Diplomatic Success Under Sheikh Hasina

• Strengthened Cooperation
  1. Economic and security ties between India and Bangladesh deepened under Hasina’s leadership.
  2. Cross-border insurgency reduced due to Dhaka’s crackdown.
  3. Countered Chinese influence in South Asia, aligning with India’s strategic interests.
• Strategic Advantage
  1. Bangladesh served as a key partner in India’s Neighbourhood First policy.
  2. Enhanced connectivity projects and trade agreements bolstered regional stability.

 

Current Developments: Shifting Dynamics Post-Hasina

• Political Transition
  1. Sheikh Hasina’s ouster in August 2024 led to the formation of an Interim Government under Chief Advisor Muhammad Yunus.
  2. Domestic political uncertainty persists, with elections pending.
• India’s Muted Engagement
  1. PM Modi sent a congratulatory note to Yunus but has avoided direct engagement.
  2. Missed opportunities for meetings at the UN General Assembly last year and uncertainty around the BIMSTEC Summit in Thailand.
  3. Recent outreach via Modi’s letter on Bangladesh National Day (March 26) signals cautious diplomacy.

 

Challenges for India

• Bangladesh’s Growing Ties with China
  1. Military and Economic Collaboration
     • Bangladesh joined China’s Belt and Road Initiative (BRI).
     • Conducted joint military drills and pursued Chinese defence acquisitions.
  2. Recent Engagements
     • Yunus visited China (March 26–29, 2024).
     • High-level exchanges between Chinese and Bangladeshi officials, including a 21-member delegation to China.
• Renewed Bangladesh-Pakistan Relations
  1. Four ISI officials visited Dhaka, followed by a Bangladeshi military delegation’s trip to Pakistan.
  2. This indicates Bangladesh’s intent to revive ties with Pakistan, partly to counterbalance India’s influence.
• Strategic Implications
  1. China and Pakistan aim to reduce India’s dominance in South Asia.
  2. Bangladesh seeks to diversify partnerships, reducing reliance on India.

 

Way Forward: Strategic Recommendations for India

• Engage Proactively with the Interim Government
  1. Dialogue with Yunus: Prioritize high-level meetings to sustain bilateral momentum.
  2. Recognize Transitional Nature: Avoid overinvesting in the Interim Government. Focus on long-term stability post-elections.
• Broaden Political Outreach
  1. Engage Opposition Parties: Initiate dialogue with the Bangladesh Nationalist Party (BNP) and National Citizen Party to hedge against political shifts.
  2. Avoid Election-Centric Approach: Prepare for all electoral outcomes rather than waiting for a preferred result.
• Reinforce Security and Collaboration
  1. Border Security: Address cross-border threats through intelligence-sharing.
  2. Counter-Terrorism and Trade: Expand cooperation on counter-terrorism and regional connectivity projects (e.g., BIMSTEC).
• Address Minority Concerns: Urge the Interim Government to ensure the safety of Hindu minorities to prevent communal tensions affecting bilateral relations.

 

Conclusion: Key Considerations for India

• Upcoming Elections: The Interim Government’s temporary mandate underscores the need for India to stay neutral and flexible.
• Domestic Uncertainty in Bangladesh: Political volatility necessitates a multi-stakeholder approach.
• Balancing Regional Rivals: Countering China and Pakistan’s influence requires a mix of diplomacy, economic incentives and security assurances.