Trade Wrap March 2018 issue

Trade Wrap

US-Tax Reform

‘Tax’ing days?

Being touted by the Trump Administration as a much-needed lifeline for the American economy, in December 2017, the highly-debated Trump Tax Bill was passed by the US Senate. It is expected to come into effect in the coming days. The Trump Administration has hailed this move as revolutionary. They say it will increase the spending power of the average American. Economists, statisticians and pretty much anyone with a calculator say otherwise. Middle-class Americans will be paying more taxes than ever by 2027. The $1.5-trillion tax overhaul is expected to expand the US economy by 0.8% over the next decade, according to a report by the Joint Tax Committee. Trump also hopes to realise his oft-stated intention of bringing jobs back to America by lowering the corporate tax rate as a part of his far-reaching tax policy, a move which is expected to make outsourced units in countries like India uncompetitive. The US Administration has reduced corporate tax rate in US to 21% from the previous 35%, much lower than the Indian rate of 30%. While most experts across the globe believe that it is unlikely that these reforms can deliver the growth that Trump has predicted, it has set off a global race to cut corporate taxes. China and Japan have already announced tax cuts and Australia too is expected to follow suit. In 2017 alone seven OECD countries have cut tax rates. Will Mr. Jaitley keep the trend going?


Turning over a new leaf

In a move that is expected to help increase revenues for the country, United Arab Emirates (UAE) has introduced a 5% value-added tax (VAT) from January 1, 2018 on most goods and services that were previously tax-free. The suggestion was made by the International Monetary Fund (IMF) for oil-exporting countries as a means to increase non-oil revenue. In early 2017, UAE had announced 100% tax on energy drinks, tobacco as well as 50% tax on soft drinks. The latest 5% tax is levied on almost all products and services barring a few essential needs such as transportation, rent, schooling (excluding higher education) and healthcare. While UAE is the first middle-eastern country to introduce a VAT, several other countries are also expected to introduce similar taxes in the coming days.

India, for which UAE is a popular export destination, might see some choppy weather in the coming days. Foreign companies with units in UAE are also expected to see an increase in their overall expenses. Most reports though predict a minimal impact of the tax on UAE’s overall economy. Experts believe that the 5% VAT will not cause any problems as it is far lower than the average 20% in European countries. Living costs though are expected to rise by 2.5%.

Planning a win-win

During a recent meeting of the India-Russia Inter-Governmental Commission on Trade, Economic, Technological and Cultural Cooperation (IRGC-TEC), India and Russia reviewed areas of economic cooperation, including investments, energy and trade. As a part of the meeting, working groups were set up for removing barriers for trade and increasing investments. In FY2017, bilateral trade reached $7.4 billion. During Prime Minister Narendra Modi’s visit to Russia, the two nations further spoke about advancing discussions on an Indo-Eurasia FTA which is expected to provide India with a trade potential of as high as $62 billion.


Back on track?

According to the Nikkei Purchasing Manager’s Index (PMI) for December 2017, Indian manufacturing rose to a five-year high of 54.7 from 52.6 in November 2017. The index measures the strength of a country’s “economic health”. A reading above 50 on the index hints at economic expansion while one below 50 indicates contraction. In July 2017 the PMI saw a decline to 47.9 from 50.9 in June 2017. The introduction of GST and the demonetisation initiative, which resulted in a slowdown in factory outputs, were factored to be the main reason. The report findings indicate that India is recovering from the recent economic reforms and is getting back on track to being one of the fastest growing economies in the world.

New Year cheer

After concerns about the long-term impact of the government reforms and policies on India’s foreign trade, good news came in the form of trade data. In November 2017, India’s exports grew by 30.55% to $26.19 billion against $20.06 billion in November 2016. Exports rose by 13.4% from October 2017. A y-o-y decline was seen in October 2017, when exports fell to $23.09 billion from $23.36 billion in October 2016. The growth in exports, according to reports, has been due to the increase in global demand and a simplification in taxation with the introduction of GST. Some sectors that have shown improvements include engineering, gems and jewellery, petroleum, pharmaceuticals, chemicals, etc. For the period from April to November 2017, the cumulative exports increased by 12% y-o-y to $196.64 billion. Despite the growth in exports, the country’s trade deficit continued to rise as imports saw a y-o-y increase of 19.61% to $40 billion in November 2017. With the government having announced higher incentives for exporters in the midterm FTP review, will the trade deficit now narrow down? Only time will tell.


Saving the Environment

In a move to help reduce India’s dependency on crude oil imports, NITI Aayog is working on a ‘methanol policy’. By promoting methanol as an eco-friendly alternative to carbon fuels, by 2030 the policy aims to reduce imports of crude oil by $100 billion. The government is reportedly planning to set up a methanol economy fund worth Rs.4,000-5,000 crore in order to promote domestic methanol production. Under the plan, Coal India is expected to set up facilities to convert high ash coal into fuel.

Mixing methanol with petroleum reduces the cost of fuel by 10%. This will go a long way in making transportation cheaper in the country as Indian railways and ports are highly dependent on petroleum. Speaking during a Parliament session, Union Minister for Transport Nitin Gadkari said that around 50 ports and vessels will be refitted to use methanol in the coming days. Methanol use can also help reduce fuel costs for railways which currently spends Rs.15,000 crore per annum on diesel. It is worth noting that India is currently the third-largest importer of petroleum in the world.

Welcome to powerplay!

After years of trading in US dollars, Pakistan and China have decided to make the Chinese Yuan the official currency for bilateral trade. The decision comes at a time when the two nations are working towards strengthening their economic and political ties. China’s major investments in Pakistan is in the China-Pakistan Economic Corridor (CPEC), which includes the much hyped and controversial Gwadar Port Complex.

China is Pakistan’s largest source for imports and its second-largest export destination. In the past decade, bilateral trade between the two countries has increased from $2.2 billion to $13.8 billion. However, imports from China and not Pakistani exports has driven this growth. China is expected to invest $57 billion in Pakistan as a part of CPEC. This skewed power dynamics is expected to help China gain a major leverage in south Asia.

Not so sweet…

Taking the fizz out of sugar-based drinks in South Africa is a newly introduced tax. The tax on sugar-based drinks, including sodas, is expected to reduce consumption of these beverages. This tax is part of South Africa’s plan to fight the growing epidemic of obesity and diabetes in the country. Beverage giants such as Coca-Cola and PepsiCo have spent considerable resources lobbying against taxes like these. Their efforts came to nought as the South African Revenue Service announced that the Sugary Beverages Levy would be collected from April 2018. The levy has been fixed at 2.1 cents per gram of sugar on drinks with sugar content above 4 grams per 100 ml. No levy will be charged on 100% fruit juices. The increased costs of these beverages is expected to further reduce the already declining consumption in South Africa. In the past, similar taxes have been introduced in Thailand and Mexico to encourage people to adopt more nutritious food habits.

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