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Indian Express Explained 01/07/2020

Explained: US says Huawei, ZTE are ‘national security threats’: How will this impact India?

  • The US Federal Communications Commission (FCC) on June 30 formally designated Chinese telecom vendors Huawei Technologies Company and ZTE Corporation, all their parent and subsidiaries, as well as affiliate firms, as “national security threats”.
  • The move is expected to put additional pressure on Huawei and ZTE, which have been accused of being close to the Chinese government and spying for them by sharing data of US citizens.

Why has the US banned Huawei and ZTE?

  • The US-Huawei-ZTE tussle is nearly a decade old now. The first official action on the Chinese telecom equipment maker was taken as early as 2012, when the House Intelligence Committee released a report saying both the companies posed a risk to national security and that US businesses should avoid buying equipment from them.
  • In 2018, however, US President Donald Trump had said that of the two vendors, ZTE would be able to remain in business in US after paying a fine of $1.3 billion, and providing “high-level security guarantees.”
  • Trump’s predecessor Barack Obama’s administration had blacklisted ZTE for seven years for violating economic sanction norms imposed on Iran.
  • The FCC’s June 30 move to re-classify ZTE also as “national security threats” effectively reverses the decision by Trump which allowed the company to continue working in the US.

Why is the ban on Huawei and ZTE important?

  • Huawei is the world’s largest maker of telecom equipment and the second largest maker of mobile phone parts. The company has been at the forefront of innovation that has allowed many companies in developing and as well as developed economies to build large telecom infrastructure at very low costs.
  • On the other hand, ZTE, another Chinese vendor, has tied up with several big corporations to manufacture their patented equipment in China at very low costs.
  • A ban on both Huawei and ZTE could mean an increase of up to 30 per cent in cost of telecom equipment across the board, especially when countries all over the world are gearing up to launch 5G services, according to experts.
  • Apart from hardware, Huawei has also been trying to make inroads into the software and operating systems (OS) industry. In May this year, the company launched a mobile OS called Harmony OS, which it said could rival Google and Apple’s OS.

Does the Huawei ban impact India?

  • The US FCC’s decision to classify Huawei and ZTE as “national security threats” could put pressure on friendly allies, such as India, to take similar, if not the same action.
  • With the reserve price for 8,300 MHz spectrum, including the 5G band kept unchanged at Rs 5.22 lakh crore, low cost equipment from Huawei or ZTE could have provided some relief to domestic telcos.
  • The Chinese vendor was a major equipment suppliers to companies like Vodafone Idea and Bharti Airtel during the initial roll-out of the 4G services in India.
  • Over the years, Huawei has made inroads into nearly 25 per cent of the total telecom equipment market in India. While Bharti Airtel uses up to 30 per cent Chinese telecom equipment, including Huawei’s for its networks, Vodafone Idea uses as much as 40 per cent.
  • In December last year, the company had some reprieve when telecom minister Ravi Shankar Prasad said all players, including Huawei, were permitted to participate in 5G trials in the country.
  • To allay security fears, Huawei India’s Chief Executive Officer had in June 2019 said the company was ready to sign a “no backdoor” agreement with the government. Under the agreement, Huawei would vouch that it did not gain access to any Indian customer’s equipment under any circumstance.
  • So far, private telecom operators have neither been officially told nor unofficially nudged to discontinue using Chinese telecom equipment. They have, however, warned of huge economic costs if such a ban is put in place.
  • One of the most important implications, they said, could be the loss of their cost arbitrage, as barring Huawei and ZTE from even bidding in the 5G auctions could mean equipment as much as 30 per cent costlier.
  • “Overall, the prices of Chinese gear are up to 30 per cent lower compared to their European competition. That gives us buyers a point to negotiate. With them (Chinese companies) gone, our power to negotiate also goes.
  • Reliance Jio, which uses equipment manufactured by Samsung, was recently praised by US Secretary of State Mike Pompeo and FCC Chairperson Ajit Pai as a “clean telco”.

Explained: How stamp duty on mutual fund purchases will impact investors?

  • Beginning July 1, all shares and mutual fund purchases will attract a stamp duty of 0.005 per cent and any transfer of security (MF units) will attract a stamp duty of 0.015 per cent.
  • The government had introduced changes to the Stamp duty Act last year by introducing a uniform rate of stamp duty on trading of shares and commodities.
  • While all categories of mutual funds (except for ETFs) will attract stamp duty for the first time, shares purchased by individuals at stock exchanges were charged stamp duty at different rates by respective states.
  • While the execution of the same was earlier set for January 9, 2020, it was extended to April 1, 2020 and then again extended to July 1, 2020.

Where all will it be applicable?

  • The stamp duty will be applicable on all transactions, including shares, debt instruments, commodities and all categories of mutual fund schemes.
  • As for mutual funds, it will be applicable on all fresh purchases, including the fresh monthly purchases in previously registered Systematic Investment Plans.
  • It will also be applicable if investors switch from one scheme to another and also in case of dividend reinvestment transactions.
  • Transfer of units from one demat account to another, including market/off-market transfers, will also attract stamp duty.

How does it impact the investor?

  • The impact on long-term investments by retail investor is nominal. Since the stamp duty will be charged as one-time charge, if an investor invests Rs 1 lakh in a mutual fund scheme or in a stock and holds it for two years, he will have to pay a duty of only Rs 5.
  • However, the impact is higher for investors with short-term investment horizon such as banks and corporates who invest in liquid and overnight schemes of mutual funds.
  • It will also impact share purchase by individuals in several states where the rates earlier were lower than the new uniform rate of 0.005 per cent.

How much revenue can it generate for the government?

  • In the financial year 2019-20, the mutual fund industry mobilised aggregate funds of over Rs 188 lakh crore. A high portion of that was in overnight funds or liquid funds.
  • A 0.005 per cent stamp duty on this amount works out to Rs 940 crore.
  • If the industry continues to mobilise funds to the tune of Rs 190 lakh crore or higher, it will generate revenues of nearly Rs 1,000 crore for the government from mutual fund transactions itself.

What should investors do?

  • Retail MF investors should not worry too much about it as the fee is nominal. However, they should be careful in selection of the right investment category.
  • If they pick a wrong category and then keep switching from one scheme to another, then they will end up paying stamp duty repeatedly on the same investment amount.
  • Also, since a longer investment horizon reduces the stamp duty impact cost, investors should invest in a scheme for the long term.

Chinese apps banned: A look at the most popular ones, their business and reach in India

  • On Monday, the Centre announced an interim ban on 59 apps with Chinese links, citing “emergent threats” to the country’s sovereignty and national security.
  • These included popular mobile apps such as TikTok, CamScanner and UCBrowser, which together command several hundred million users in the country.
  • Some of the larger ones like TikTok, UCBrowser and ShareIt also have a significant presence in the country in terms of revenue and number of employees on their payrolls.

A look at some of the more widely used apps among the 59 banned:

TikTok & Helo

  • The two social media apps, which are operated by an entity called Bytedance (India) Technology Pvt Ltd, together command more than 170 million active users across the country.
  • Notably, India is the largest market for TikTok with more than 611 million downloads, representing nearly a third of the video-platform’s base, followed by China (where it operates under a different brand) and the US.
  • However, India is not among the top revenue-generating geographies for the app.
  • Bytedance India, however, is not owned by a Chinese entity. According to corporate structure available on Bytedance’s website, the parent entity — Bytedance Ltd — is registered in the Cayman Islands. This parent company has five subsidiaries, one of which is TikTok Ltd — also registered in Cayman Islands.

UC Browser and UCNews

The Alibaba Group platforms are run by an entity called UC Web Mobile Pvt Ltd, which has more than 130 million active users. UC Browser, in fact, is the second most used mobile Internet browser in the country only behind Google Chrome, with a market share of around 22%, compared with Chrome’s 70%.

ShareIt

ShareIt is one of the most popular file-sharing tools, with more than 400 million active users in India. The app, which was almost entirely marketed on the basis of word of mouth, has more than 1.8 billion users worldwide. However, the company has not been able to monetise its platform beyond a point, making only Rs 14.73 crore during 2018-19 from its India entity ShareIt Technology India Pvt Ltd.

Club Factory

The online marketplace, which claims to be India’s third-largest e-commerce company, has managed to onboard 30,000 sellers on its platform.

Shein

  • Shein is another e-commerce platform focused on fashion and lifestyle products. In India, its operations were being run by XIYIN India Pvt Ltd, based in Gurgaon.
  • The company, which targeted smaller tier-II and tier-III towns in India, has around 50 employees in the country.
  • The company had crossed more than 1 million active users in India but last year partially shut down its operations after the Customs department cracked down on the company over alleged import duty evasion.

CamScanner

CamScanner, which is the most widely used mobile scanning app in the world, has more than 100 million users in India. The app, which is run by INTSIG Information Co Ltd registered in Shanghai, China, does not have an entity registered in India.

Explained Ideas: How GST can be tweaked to prevent states slipping into a serious financial crisis

  • Faced with an unusually high benchmark of 14 per cent compound annual growth rate (or CAGR), GST was very productive in the first two years. But with the economy slowing down in 2019, notes Modi, GST could not remain insulated.
  • “Barring April 2019, no other month witnessed double-digit growth over the last year, with September, October and March clocking negative figure.
  • As we head into 2020-21, the toughest challenge for the GST Council would be to devise ways to compensate the states.
  • The usual compensation cycle got delayed and the situation is not likely to improve anytime soon with the collection for the first two months of the current fiscal at just 46 per cent of 2019-20 levels

Clearly, it is time to take measures to prevent the states from slipping into a serious financial crisis.

Ideas to be considered

Possibility of borrowing- Many complex issues crop up in the context of borrowings. For instance, how and when will it be paid back… It would simply be deferring the crisis instead of really solving it

Centre may borrow long-term to finance the compensation- This idea too is not worth pursuing since there are borrowing limits and the Centre is as much bound by fiscal responsibility. Another variant suggests that the Council may borrow on the Centre’s guarantee. In my view, the Council is probably not an entity that can undertake any such venture

Tweaking GST rates- GST was introduced with rates about 20 per cent lower than the effective tax burden (all existing central and state levies and the cascading effect). this is not the time to tinker with the rates. But the idea must be debated when the worst is behind us.

Re-arranging the GST rate structure wherein 60 per cent or 65 per cent of the total tax on a commodity is the state component and the remaining is the central component. For instance, the 18 per cent GST rate could be 11 per cent SGST and 7 per cent CGST or some such combination

with the major cascading built into the states’ VAT rates, the states’ tax rates were higher than of the Centre. These adjustments in the GST rates would yield additional revenue to the states, thereby bringing down the compensation burden.

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