Indian Economic Service Paper III (General Economics) Solution 2016

IES solution 2016

General Economics:- III, 2016

1. Public investment, investment by the state in particular assets, whether through central or local governments or through publicly owned industries or corporations.

· Public investment has arisen historically from the need to provide certain goods, infrastructure, or services that are deemed to be of vital national interest.

· public investment has been justified on the grounds of both economic theory and political ideology. In economics, public investment has generally been considered necessary for the provision of certain vital goods and services that are either impossible for the private sector to efficiently supply (public goods) or are such that only one supplier could invest in them economically (natural monopolies). Examples of the former kind are police services and military defense, and examples of the latter kind are electricity, clean water, and sewage services.

1. Features of GST
1. DUAL GOODS AND SERVICE TAX

The GST shall have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable.

2. APPLICABILITY OF GST TO ALL TRANSACTIONS

The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. The Central GST and State GST should be levied on common and identical tax base. The tax base should comprehensively extend over all goods and services ( with no distinction being made between treatment of goods and services) up to the final consumer point.

3. DESTINATION BASED MULTI POINT LEVY

It is recommended that the Centre and States should adopt a consumption based GST with no distinction being made between raw materials and capital goods , in avaliment of Input tax credit. GST is based on destination principle, thus tax base will shift from production to consumption of goods. The taxable event is Consumption of goods or services. As a result, revenue will accrue to the state in which consumption takes place or deemed to take place.

4. COMPUTATION OF GST ON THE BASIS OF INVOICE CREDIT METHOD

The liability of CGST and SGST is computed the basis of Invoice Credit method i.e. allow credit for tax paid on all intermediate purchases of goods and services on the basis of invoice issued by the supplier. As a result, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax will effectively stick on final consumption within the taxing jurisdiction. This will facilitate elimination of the cascading effect at various stages of production and distribution. In an Invoice based VAT system, the issue of invoices in the proper form is an essential part of the procedure for imposing and enforcing the VAT. Therefore, it should be mandatory for a supplier making a taxable supply to another taxable entity to provide a VAT invoice.

5. PAYMENT OF GST

The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST (with identification of the State to whom the tax is to be credited).

6. UNIFORM PROCEDURE FOR COLLECTION OF GST

To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST.

7. THRESHOLD LIMIT

The present threshold limits prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is desirable and, therefore, it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT.

8. COMPOSITION SCHEME UNDER GST

The States are also of the view that Composition/ Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. The first discussion paper suggests that there would be a compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for dealers with turnover below the compounding cut-off.

In reference to Composition scheme, the task force has recommended rate of 1% each on account of CGST and SGST for dealers with the turnover between Rs 10 lacs to Rs 40 lacs.No credit for the same will be available if the dealer opts for the compounding scheme.

9. REGISTRATION & TAX PAYER IDENTIFICATION NUMBER

All the taxable entities with turnover above the threshold limit will be required to register and obtain GST registration number. The taxable entities with lower turnover will also have the option to register.

As per First Discussion paper, each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax, facilitating data exchange and taxpayer compliance.

However, the Task force report has recommended that the GST Registration number should be twelve digit alphanumeric numbers. The first ten digits should be the alpha-numeric Permanent Account Number (PAN) followed by a space and two more digits indicating the state code. This number scheme should be publicised widely and should be self-generated after obtaining a PAN . There will be single GST registration number for all branches in a State. Therefore, a dealer having branches across States will have as many GST registration numbers as the number of States in which he operates. The registrant dealer should be required to furnish a form, only by way of information, indicating the registration number for every State in which he operates. He should not be allowed to use the registration number, though self-generated, unless he has furnished the form.

Since the number is PAN based, it is not necessary to have any pre- registration verification. However, the states may, if necessary, undertake post-registration verification to eliminate any potential abuse. To begin with, on the eve of the introduction of GST, the dealer must furnish a consolidated form for all States in which he operates. If, at a later stage, the dealer extends his operation to a new State, he should be required to furnish a form for extension of activities and register the self- generated number for the new State.

10. INPUT TAX CREDIT (ITC) SET OFF

Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. Further, the rules for taking and utilization of credit for the Central GST and the State GST would be aligned.

11. CROSS UTILIZATION OF ITC

Cross utilization of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services under the integrated goods and service tax (IGST) model.

12. CREDIT ACCUMULATION ON ACCOUNT OF REFUND

Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc. where, again refund/adjustment should be completed in a time bound manner.

13. ZERO RATING OF EXPORTS

The first discussion paper has suggested that the exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.

14. GST ON IMPORTS

Imports will be brought under the scope of GST with necessary Constitutional Amendments. They will treated at par with inter-state transactions and Integrated goods and service tax (IGST) will be levied on imports. The incidence of tax will follow the destination principle and the tax revenue will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the IGST paid on import on goods and services.

15. SPECIAL INDUSTRIAL AREA SCHEME

After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives should be converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme on the basis of a continuous chain of set-offs is not disturbed. Regarding Special Industrial Area Schemes, it is clarified that such exemptions, remissions etc. would continue up to legitimate expiry time both for the Centre and the States. Any new exemption, remission etc. would not be allowed. In such cases, the Central and the State Governments could provide reimbursement after collecting GST. The Task force also recommends doing away with any area based exemptions (at present provided in CENVAT) and to provide direct investment linked cash Subsidy, in case it is considered necessary to provide support to industry for balanced regional development.

16. MAINTENANCE OF RECORDS

A taxpayer or exporter would have to maintain separate details in books of account for availment, utilization or refund of Input Tax credit of CGST, SGST and IGST.

17. PERIODICAL RETURNS

The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.

18. ADMINISTRATION OF GST

The administration of the Central GST to the Centre and for State GST to the States would be given. This implies that the Centre and the States will have concurrent jurisdiction on the entire value chain and on all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre.

2. Different kinds of planning in India:- http://www.economicsdiscussion.net/economic-planning/what-are-the-important-types-of-economic-planning/4672

3. Social Discount rate http://simple.werf.org/simple/media/documents/BCT/stepFourLinks/01A.html

Private discount rate:- cost of capita

4. Non-use value as a category may include:

· "option value" – the value placed on individual willingness to pay for maintaining an asset or resource even if there is little or no likelihood of the individual actually ever using it, occurring because of uncertainty about future supply (the continued existence of the asset) and potential future demand (the possibility that it may someday be used).^[1][2][3][4]

· "bequest value" – values placed on individual willingness to pay for maintaining or preserving an asset or resource that has no use now, so that it is available for future generations.^[5][6]

· "Existence value" – an unusual and somewhat controversial class of economic value, reflecting the benefit people receive from knowing that a particular environmental resource, such as Antarctica, the Grand Canyon, endangered species, Sharri Dogs or any other organism or thing exists.

· "altruistic value" – the value placed on individual willingness to pay for maintaining an asset or resource that is not used by the individual, so that others may make use of it. Its value arises from others' use of the asset or resource.

5. The impact of public debt on economic growth has remained a key issue in the academia. Over the past decade and especially after the financial crisis in 2008, the level of public debt is expanding in international, national and sub-national level. Heavy dependence on public debt could retard investment and economic growth. The ‘debt overhang’ hypothesis mentions that if the anticipated external debt of a country is more than it’s repayment ability, then the increased cost of servicing debt can impede investment (Krugman, 1988). If a major chunk of foreign capital is used for interest payments, then a meagre amount will remain to finance for investment that could constrain growth. This is regarded as the crowding-out effect of public debt (Diaz-Alejandro, 1981). However, another school of thought states that, if public debt is used in productive activities, then the economy may expand without creating any macroeconomic instability (Burnside and Dollar, 2000). As far as public debt is concerned, broadly it could be divided into types, one is external debt and the other is domestic debt. The two types of debt may have distinct impact on economic growth. The rationale behind dependence on domestic debt is that it saves the home country from the adverse external shocks and foreign exchange risk, and helps in the progress of domestic financial markets (Barajas and Salazar, 1999, 2000). But, Beaugrand et al. (2002) are of the view that the cost of domestic debt is more than the cost of external debt.

The public debt management in India has clearly traversed from a passive system to a market driven process with developed institutions, varied instruments, intermediaries for market making and well-developed market infrastructure. Market borrowing has emerged as the primary source of financing of GFD of the GoI as well as the sub-national Governments during the recent period. The internal control mechanism has to be strengthened to address the operational risk, legal risk, security breaches, reputational risk, etc., which would otherwise adversely reflect on the debt management structure. Excessive reliance on short-term instruments to take advantage of lower short-term interest rates may lead to increase in rollover risk and possibly increase the debt service costs. Balance sheet risk of the Government should be reduced by issuing debt primarily in long dated, fixed rate and domestic currency securities, which is being reflected in the debt management strategy of India. The holding pattern of government debt shows some reduction in the captive holdings by banks and financial institutions and increase in the relative share of non-banks, reflecting a progressive proliferation of the investor base.

Notwithstanding the above, certain issues and challenges remain in the PDM in India such as limited liquidity across the yield curve, which pose challenge for the development of the secondary market; more diversified instruments that may widen the investors participation; increased participation of mid-segment and retail investors to remove narrow investor base; more transparency through release of indicative calendar for SDLs setting out details of issuances, etc.

1. Uncertainty, Irreversibility, and Option Value in Environmental Economics The basic concepts and results concerning uncertainty, irreversibility, and option value in environmental economics are readily described. Uncertainty, is of course, a well-understood fact of economic life and often plays a role in decisions about the allocation of resources, including those of the natural environment. Economic models usually assume that the decision-maker does the best she can, subject to what is known, or expected, about future costs and benefits of any given course of action. An interesting question arises, however, concerning timing. Clearly, if a decision, say, about whether to go ahead with a development project in a natural environment, has to be made today, it has to be based on the expected values of benefits and costs, perhaps adjusted or discounted to reflect the risk preferences of the decision-maker or of those in whose name the decision is made. But suppose that the decision can be deferred, say, till next year. Why would one want to do this? If additional information about future costs and benefits will be forthcoming, perhaps resolving the uncertainty, presumably a better decision can be made—one that reflects a more accurate view of the advantages and disadvantages of going forward. Of course, deferring the decision comes at a cost: the foregone returns from the project over the time the decision has been deferred, which needs to be balanced against the benefit of the improved decision.

2. The Environmental Kuznets Curve adheres to the same idea of the hypothesized relationship between equality and development. The difference is that it looks at environment equality. The idea is that as economic development growth occurs, the environment will worsen until a certain point where the country reaches a specific average income. Then money is invested back into the environment, and the ecosystem is restored.

Implications:-

1. When an economy is primarily pre-industrial and agrarian, the environment is usually clean and untouched by pollutants from industrial economic activities.

2. As the economy shifts towards development and industrialization, the environment is at a higher risk of being harmed by pollution and depletion of natural resources.

3. The curve then returns to a cleaner environment when economic growth continues, and people choose to spend their incomes on improving the environment by cleaning water and improving air quality. People become more aware of the benefits to the environment.

3. Price discrimination:- http://www.economicsdiscussion.net/monopoly/price-discrimination-under-monopoly-types-degrees-and-other-details/3741

4. Assumptions of the Kinked Demand Curve Model:

This model was developed independently by Prof. Paul M. Sweezy on the one hand and Profs. R. C. Hall and C. J. Hitch on the other hand.

The assumptions of this model are:

(i) There are only a few firms in an oligopolistic market.

(ii) The firms are producing close-substitute products.

(iii) The quality of the products remains constant and the firms do not spend on advertising.

(iv) A set of prices of the product has already been determined and these prices prevail in the market at present.

(v) Each firm believes that if it reduces the price of its product, the rival firms would follow suit, but if it increases the price, then the rivals would not follow it, they would simply keep their prices unchanged. We shall see presently that, because of this asymmetric reaction pattern of the rivals, the demand curve of each firm would have a kink at the prevailing price of its product. http://www.economicsdiscussion.net/oligopoly/kinked-demand-curve-model-of-oligopoly-with-diagram/24162

12. Financial relation between centre and state. http://www.accountingnotes.net/fiscal-federalism/problems-financial-relations-between-the-centre-and-state/10089

13. Different Methods used for environmental valuation http://www.yourarticlelibrary.com/economics/environmental-economics/methods-used-for-the-environmental-valuation-with-diagram/39686

14. Environmental implication of economic growth https://www.economicshelp.org/blog/145989/economics/environmental-impact-of-economic-growth/

15. Panchayati Raj In India https://www.civilsdaily.com/panchayati-raj-institution-evolution-features-composition-powers-functions/

Vivek Sharma

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