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Budget FY23 has extended support to the solar energy sector on enhancing domestic production capacity with an additional allocation of Rs 19500 crore in the form of Production-Linked Incentives (PLIs).

Budget FY23 signals fast-paced movement towards India’s renewable energy target of 450 GW by 2030 60% of which is expected to come from solar. India has already expanded its solar energy capacity by more than 18 times in the last seven-and-half years.  While there have been several successes the journey is far from over when it comes to global competitiveness in solar energy. India accounts for merely 1% of the global production capacity; in contrast China makes up 71%. With India missing competitiveness there is huge dependence on imports of solar cells and modules. The import bill for solar cells stood at Rs 4229 crore for FY22 (April to November) of which China accounts for 91%.

China’s cost-competitiveness is attributable to better technology economies of scale government support in the form of tax exemptions and credit guarantees. To combat this import dependence the finance ministry has already ordered imposition of 40% and 25% Basic Custom Duty (BCD) on the import of solar modules and solar cells respectively from April 1 2022.  Budget FY23 has extended support to the solar energy sector on enhancing domestic production capacity with an additional allocation of Rs 19500 crore in the form of Production-Linked Incentives (PLIs). This is expected to support the achievement of the goals such as 280 GW of installed solar capacity and increasing the non-fossil energy capacity to 500 GW by the year 2030.

Would these policy changes enhance the competitiveness of India’s solar sector? If not what is holding India back in terms of realising its potential on solar energy generation? The answer to this question broadly lies in the existing domestic policies governing conventional factors of production in the solar energy sector viz. land labour and capital.

In India purchasing the required material for solar energy production is a cost-intensive activity because of the existing policies which puts Indian companies in a disadvantaged position as compared to other foreign players. This includes missing tax incentives; recently the GST rate for solar cells and modules was increased from 5% to 12%. These policies need amendments to make the business climate favourable for the solar energy developers.

Like any other industrial unit a solar plant needs a reasonable quantum of land and it is imperative to facilitate land availability. Currently there are a number of constraints ranging from high land prices land ceiling limits and complex land acquisition processes. Skyrocketing land prices is one of the prime reasons for high project-cost in India. States should consider providing exemptions on stamp duty payments to promote solar energy production.

The dismal state of documentation of land ownership is one of the key reasons that cause complications in the land acquisition/purchase process. Without adequate verification of property titles any land purchase can fall into the trap of legal disputes. Though the Centre has been taking the necessary steps to digitise land records there is still a lot of work needed in this respect and the budget announcement on use of drones for digitising land records is a welcome step.

Other factors that need to be considered for facilitating land availability for setting up solar plants include relaxing land ceiling limits for solar energy developers. Some states like Madhya Pradesh and Punjab provide for such relaxations in their solar energy policies; this may be emulated by other states. Land banks are likely to help the solar project developers with land availability for their projects. They can also include areas freed up by retiring thermal power plants. While there are instances from Delhi and Punjab of such land being considered for solar power projects they are not included in the current land bank repositories.

The growing solar sector in India needs the right kind of labour to carry out different activities pertaining to production. One can clearly claim that job creation is a positive externality expected to emerge from the solar industry. Given India’s demographic dividend advantage labour supply does not appear to be a problem; however ensuring the right skilling is the key. This requires organising training programs that aim to impart the right skills needed for the solar energy sector and Budget FY23 has recognised and addressed these needs for the overall economy. Though India has government-run institutions that organise training programmes for this field the solar energy sector still sees a skill gap. One suggestion in this regard is to economise the cost of the training programmes as a way to incentivise potential workers to enrol in these programs. Currently some of the government run training programs cost around Rs 3500-9000 depending on the content which can prove a deterrent for people seeking such courses.

The solution for unlocking India’s solar potential lies in strengthening its domestic production infrastructure by lending support in terms of labour land and capital requirements. While some of these issues have been tackled by Budget FY23 escalating import duties of solar energy components in the short run will add to the overall cost of production. Instead a phased-restriction approach should be adopted as was done in the Defence Offset policy; that will give us time to fix inherent rigidities.

Prabhakar is associate fellow NCAER and Rangan is an independent researcher. Views are personal.

With the bond yields rising all around the world and credit rating agencies and foreign investors starting to discriminate across emerging markets laying down a fiscal pathway will help bolster their confidence in the strength of the Indian economy and in its key policy frameworks to yield stable policies for robust economic outcomes.

Last Thursday RBI decided to stay the course it has been following for nearly two years. This marks 21 months in a row when key policy rates have remained unchanged the last change being made in May 2020 when the repo rate was lowered by 40 basis points (bps) to 4 percentage points and the reverse repo rate and marginal standing rates were also lowered by 40 bps to 3.35% and 4.25% respectively. This status quo seems appropriate for India for three reasons.

One inflation in India for the most part has remained within the range admissible under the inflation-targeting framework. Consumer price index (CPI) headline inflation has averaged 5.6% since May 2020. While it is higher compared to 4.3% achieved during the preceding five-year period the increase in inflation has been more modest than the hikes being witnessed in advanced economies. The latter hikes are due to generous stimulus packages handed out by governments impact of the disruption of global supply chains inflation indexation of wages and collective bargaining and a very tight labour market. These factors do not matter as much for India.

Headline inflation is quite likely to increase in the coming months on account of higher oil prices which have spiralled by 60% during the last one year. Since India is a net importer of oil this is bound to adversely impact its inflation level. However until that happens hiking the rates merely in anticipation wouldn’t be a good idea. As such monetary policy would be a blunt tool to module CPI inflation emanating from imported oil price hike. A more appropriate tool would be the use of fiscal policy and a counterbalancing reduction in excise duty.

Two India is still experiencing a nascent economic recovery. As per the advance estimates for 2021-22 even till the end of the current financial year GDP will barely climb back to the level last seen in 2019-20 and consumption would still remain 3% below that level. A policy rate hike at this juncture would have been premature.

Three while fiscal policy has been accommodative implementing a tight monetary policy would have sent a confusing signal. There is merit in maintaining a consistent policy narrative across different policy establishments and in adhering to predictable and steady policy frameworks. By not tinkering with policy rates RBI has displayed confidence in its stance a sign of the maturity of its inflation-targeting framework.

Another useful component of the monetary policy statement is the projection for GDP growth and CPI inflation for 2022-23. RBI has projected real GDP growth at 7.8% and CPI inflation at 4.5% for next year. Meanwhile the budget has estimated nominal growth to be 11%. Inherent in this estimation as indicated by Nirmala Sitharaman is the assumption that the GDP deflator will grow at 3.0-3.5% and the real GDP will grow at 7.5-8.0% close to the estimates provided by RBI.

While the estimates for real growth rates are quite reasonable inflation rates may overshoot them. On RBI’s part however projecting the CPI inflation rate closer to 4% is a sensible strategy to anchor inflationary expectations. Due to the global headwinds and accommodating monetary and fiscal policies CPI headline inflation will likely end up at around 5% next year. Similarly the GDP deflator (which generally tracks the CPI inflation closely) too will likely grow by close to 4.5-5.0%.

Hence it seems quite likely that India will achieve nominal GDP growth rate of about 12-13% next year.

Taking India’s confidence to stabilise its policy frameworks forward in the coming months creating a fiscal pathway to achieve more sustainable outcomes would be welcome. Indeed if growth stabilises in a post-Covid world next year tax buoyancy picks up and the generation of non- tax revenue gathers momentum implementing such a framework should be quite feasible.

Similar to the inflation band in the inflation-targeting framework the proposed fiscal framework may initially be built around a range of fiscal targets rather than around point targets. The range can then be calibrated and narrowed down conditional on the pace at which these targets are attained and the manner in which the economic recovery unfolds.

With the bond yields rising all around the world and credit rating agencies and foreign investors starting to discriminate across emerging markets laying down a fiscal pathway will help bolster their confidence in the strength of the Indian economy and in its key policy frameworks to yield stable policies for robust economic outcomes.

The writer is Director General NCAER. Views are personal.

Opinion: Sudipto Banerjee

To put the prevailing apprehensions at rest the Modi government should hold talks with all stakeholders both on the taxability of virtual digital assets and their future legal position in India

Union Budgets are known for making news. With the recent Budget announcement India joins the league of nations that have brought cryptocurrencies within the tax net. The Finance Bill 2022 has introduced a new scheme to tax cryptocurrencies. A new definition called ‘virtual digital asset’ (VDA) is to be added to the Income Tax Act 1961 (IT Act) which would include information or code or number or token (not being Indian or foreign currency) generated through cryptographic means or otherwise and non-fungible tokens.

Further the government can notify any other digital asset within the meaning of VDA. Given the burgeoning size of the Indian crypto market the definition of VDA has been kept wide enough perhaps to augment the government’s tax kitty.

Highlights of new scheme

Interestingly the definition of VDA excludes Indian and foreign currencies; this seems to signal that VDAs are different from currencies. At the best the proposed scheme allows VDAs to be treated as ‘property’ under the IT Act. However in the absence of any definition of property under the IT Act it could be construed as every possible interest a person can acquire hold or enjoy. Placing VDAs at par with gambling and betting the Finance Bill proposes to tax gains earned on the transfer of VDAs at the highest rate of 30 per cent irrespective of the holding period. Gains from transfer of capital assets are taxed depending on the duration of the holding period.

Since the Finance Bill does not classify VDA as capital assets it would be taxed at a flat rate. For computing tax an investor in VDAs cannot claim any deduction in respect of any expenditure incurred on such assets (like computing cost electricity cost) except for the cost of acquisition. Making the proposed scheme more stringent the amendment neither allows setting off the loss from the transfer of VDAs against any other income nor does it allow the loss to be carried forward to succeeding assessment years. Put differently tax is to be calculated on gross income.

From the initial reading of the Finance Bill it appears that the proposed scheme is punitive. However considering the private cryptocurrency market is fraught with speculation crypto businesses and retail investors might greet the announcements as precursors to regulation. But just because an item is getting taxed does not ipso facto make it legal. This position was reiterated by the CBDT chairman in his recent interview after the Union Budget. Moreover tax can be imposed even on illegal activity. The Supreme Court [CIT v Piara (1980)] had allowed the assessee to claim expenses in a smuggling transaction which was subject to income tax. Also the Budget made an announcement on the introduction of the Central Bank Digital Currency but was silent on the position of private cryptocurrencies.

While the Budget announcements aim to bring clarity on the tax treatment of crypto apprehensions and conjectures prevail. Following a consultative process would have been a better approach. The thrust of this post is the adoption of a participative approach in designing the crypto tax and highlights some of the apprehensions that arise from the proposed taxation scheme.

Why is public consultation necessary?

Public consultation is the cornerstone of sound and transparent rulemaking. It avoids the surprise element and brings clarity confidence and legitimacy. Consultations are not uniformly adopted in state interventions in India. At present the rationale behind the proposed scheme of crypto taxation can be found in the Budget speech which states that owing to a phenomenal increase in transactions in virtual digital assets a specific tax regime is being introduced.

In countries like the US UK and Australia there is a statutory duty of the government to conduct public consultations before implementing an intervention. For instance when the UK government decided to tax crypto assets the HM Revenue and Customs released a policy paper for consultation. While most statutory regulators in India have a legal obligation of public consultation it is not clear whether there is a similar mandate for the government. In February 2014 the Ministry of Law and Justice issued a circular necessitating that all departments and ministries put out draft legislation along with the rationale for it in public for minimum 30 days and take steps to ensure that it reached a wider public. In practice the situation is not followed uniformly. Moreover this pre-legislative consultation policy allows ministries to opt out if they think the exercise is not feasible or desirable.

Past experience shows a mixed track record of deliberation with the stakeholders. When the Supreme Court ruled against the income tax department in the Vodafone judgement in the Union Budget of 2012 the government introduced several retrospective amendments to the IT Act [Sections 2(14) 2(47) and Section 9] to levy a capital gains tax on transactions done outside India’s borders but for assets that were situated in India. No consultation process was followed. Little did the government realise that such a decision could have repercussions in the future. After suffering two consecutive setbacks in international arbitration proceedings initiated by Vodafone Plc and Cairns Plc in August 2021 the government amended the law [The Taxation Laws (Amendment) Act 2021] to withdraw the retrospective nature of the indirect transfer tax amendment.

Impact assessment
An essential component of public consultation is doing impact assessment of a decision. Conducting this exercise helps to determine the possible costs and benefits associated with a decision and identify benchmarks for its future evaluation. While the cryptocurrency market is still evolving in India it has a wide range of stakeholders including many retail investors. Did the proposal undertake an assessment of the possible impact (like cost of doing business investment) both on the supply and demand side? Did we contemplate its impact on retail investors? Can the steep rates nudge them towards traditional modes of investment?

The Finance Bill says that the person paying the consideration to the resident seller for transfer of VDAs will be responsible to deduct 1 percent tax at source (TDS). Usually the intra-day traders and market makers engage in low mark-up and high volume transactions. Can the proposed 1 percent TDS reduce their profitability and impact the volume of transactions on the Indian exchanges? Can this affect the price competitiveness of the exchanges in the international market?

Moreover what could be the rationale of a tax proposal when there is an absence of clarity on the legal status of VDAs? Is the proposed tax scheme an interim arrangement where the government first wants to garner revenue by tracking the volume of transactions and then decide on the ban or regulate debate? At present we are constrained to make only surmises.

Unanswered questions

Tax experts have already flagged several concerns with the proposed scheme. Some of these are listed here.

First the proposed scheme aims to tax the event of a transfer of VDAs. At present it is not clear whether the tax will be applicable when a cryptocurrency comes into existence through processes like mining or airdrop.

Second since the new regime kicks in from 1 April 2022 what would be the tax treatment of gains earned from crypto till 31 March 2022? Questions like whether deductions can be claimed or set-offs to be allowed in the transition period can arise.

Third crypto exchanges/platforms facilitate matchmaking where the buyer does not know the identity of the seller. In such a scenario will the crypto exchange be liable to discharge the TDS liability?

Fourth TDS obligation is applicable when consideration is paid in kind or in exchange of VDAs. Does it mean when A and B exchange cryptocurrencies as consideration both would have to discharge the TDS liability? Further the valuation of the cryptocurrency is not uniform and fluctuates between exchanges as a result calculating the TDS amount could be complicated.

Fifth TDS obligation is applicable to peer-to-peer VDA transactions. When such a transaction happens outside the exchanges as per the proposed law the buyer will be required to discharge the burden of TDS compliance. Whether buyers would meet this obligation and how would the government enforce the TDS compliance remains a question. Also there is no clarity on TDS obligation for trades carried out on international exchanges.

Sixth the Finance Bill exempts ‘specified persons’ (individual or HUFs) having turnover/gross receipts within a specified threshold from the obligation of TDS. Looking at past evidence of benami transactions this exemption might be abused if ‘specified persons’ are used as a facade for the transfer of VDAs.

Seventh so far there is no announcement on the treatment of VDAs under the GST laws. Will it be subject to GST? If yes will it be classified as a ‘sin item’ and subject to the highest rate of tax?

Lastly the fundamental question remains whether taxation classifies crypto as a legal asset?Global experience suggests that consultation has played a constructive role in shaping the tax policy of cryptocurrencies which has developed because of the evolving nature of the underlying technology. Despite the grey areas the recent Budget announcements are laudable as they attempt to provide clarity on the tax treatment of VDAs. However to put the prevailing apprehensions at rest the government should engage in meaningful deliberations with the stakeholders both on the taxability of VDAs and their future legal position in India.

The writer is a public policy consultant at NCAER a Delhi-based think tank. Views expressed are personal.

While many observers had expected it to be an ‘election budget’ it turns out that it has skirted populism. It provides continuity in terms of adhering to the policy pathway this government has laid out in the last few years.

Budget 2022-23 is a comprehensive and transparent budget reflecting confidence in economic recovery. Set against the backdrop of the third wave of Covid it is a rightly balanced budget. It balances the need to revive the economy against the prevalent fiscal constraints primarily by focusing on the quality of spending.

Its skilful navigation of fiscal constraints is mirrored in a modest increase in nominal expenditure – a proposed increase of 4.5% in 2022-23 over the revised estimate (RE) for 2021-22; a flat revenue expenditure; and a sharp increase in capital expenditure reflecting an increase of 24% over the RE for 2021-22. Politically tricky subsidies are slated to decline while the revenue projections seem highly conservative that is a 9.5% increase in tax revenue and a 14% decline in non-tax revenue. As such these budgetary estimates should be eminently achievable and could even offset any over-shooting of expenditure.

While many observers had expected it to be an ‘election budget’ it turns out that it has skirted populism. It provides continuity in terms of adhering to the policy pathway this government has laid out in the last few years. This pathway consists of an accelerated build-up of infrastructure improvement in logistics to ensure competitiveness in Indian manufacturing and leapfrogging development by leveraging digital opportunities.

The overarching ambition seems to be to set India on a virtuous path of enhanced competitiveness and the public sector facilitating growth in the private sector through the provision of public goods such as infrastructure as well as an enabling framework leading to higher real and nominal GDP growth and buoyant tax revenues. 

Particularly creative is the use of fiscal tools to ‘manage’ the risks that individuals are assuming through their investments in crypto assets. These risks may eventually have deeper implications for the stability of the financial sector. While developing a full regulatory framework for crypto assets may take some time the fiscal measures announced could prove to be a critical regulatory tool. Equally heartening is the announcement of the roll-out of a digital currency.

Yet there are three things on which further articulation would be needed. First even though most people would not recommend a sharp fiscal consolidation at this time it would be useful to articulate the fiscal roadmap that GoI envisages in the medium term.

Second to foster growth at rates much higher than in the past we need a vision to integrate India into global value chains. We account for only 1.5% of the goods and 3.5% of the services supplied to the global market. The aim should be to double these market shares.

The third missing item was an acknowledgment of and accounting for the potential headwinds from the global economy. Currently the global outlook is mixed. The buoyancy in global trade is being offset by high level of inflation and the impending tightening of liquidity. It would be worth asking whether the global outlook poses a risk to implementation of the Budget proposals.

Overall one can laud it as a very constructive Budget released in a highly complex and challenging economic environment.

The writer is Director General NCAER. Views are personal.