Author: Urmila Singh

Dear Aspirants,

This Spotlight is a part of our Mission Nikaalo Prelims-2023.

You can check the broad timetable of Nikaalo Prelims here

Session Details

YouTube LIVE with Parth sir – 1 PM  – Prelims Spotlight Session

Evening 04 PM  – Daily Mini Tests

Telegram LIVE with Sukanya ma’am – 06 PM  – Current Affairs Session

Join our Official telegram channel for Study material and Daily Sessions Here

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15th Mar 2023

External Sectors of India 

All economic activities of an economy which take place in foreign currency fall in the external sector such as balanced of payment, export, import, foreign investment, external debt, current account, capital account, exchange rates etc.

FOREX RESERVES

Foreign exchange reserves are assets denominated in a foreign currency that are held on reserve by a central bank. These may include foreign currencies, bonds, treasury bills and other government securities.

 

Forex Reserves Consist of:	• Bank deposits • Gold • Special drawing rights (SDRS) • Reserve tranche position (RTP) • Foreign currency assets (FCA) • Government securities
SDR	• SDR is an international reserve asset, created by the IMF in 1969. • Value of the SDR is based on a basket of five currencies- Dollar, Euro, Renminbi, Yen, and Pound Sterling. • It is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.

EXCHANGE RATE

Exchange rate is Price at which one currency is converted into or exchanged for another currency.

Various Exchange rates mechanism:

 

FIXED EXCHANGE RATE	FLOATING EXCHANGE RATE	MANAGED FLOATING RATE
Complete intervention of Authority (government or central bank) in determination of the currency exchange rate.	Market forces(demand and supply) determine the value of currency No role of authority	Exchange rate is largely determined by market forces. In crisis, central banks may intervene to stabilize the exchange rate

NEER vs REER

 

Nominal Effective Exchange Rate (NEER)	Real Effective Exchange Rate (REER)
Weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies	Weighted average of nominal exchange rates, adjusted for inflation.
It is the exchange rate of one currency against a basket of currencies, weighted according to trade with each country (not adjusted for inflation).	Is calculated on the basis of NEER. Captures inflation differentials between country and its major trading partners and reflects the degree of external competitiveness

CURRENCY CONVERTIBILITY

Currency convertibility is the ease with which the currency of a country can be freely converted into any other foreign currency or gold at market determined exchange rate.

 

Partial Convertibility:	• Portion allowed by the government which can be converted into foreign currency with least restrictions. • Union Budget for 1992-93, introduced it on current account under Liberalized Exchange Rate Management System (LERMS) • Also known as Dual exchange system. • Presently partial convertibility still operational on capital account.
Full Convertibility:	• Freedom to convert domestic currency into any foreign currency and vice versa without any regulatory intervention. • Dual exchange rate system got automatically abolished and LERMS was now based upon the open market exchange. • In 1994, the Government of India declared full convertibility of Rupee on Current account.
Tarapore Committee I (1997) and II (2006):	• Constituted by the RBI for suggesting a roadmap on full convertibility of Rupee on Capital Account.

Advantages of capital account convertibility:

• Availability of large funds
• Reduction in cost of capital.
• Greater financial competitiveness.
• Increase in FII/FPI flow.

BALANCE OF PAYMENT

A systematic record of all economic transactions between the residents of one country with the residents of the other country in a financial year.

It consists of balance of trade, balance of current account and capital account.

Balance of trade: Difference between the monetary value of a nation’s exports and imports over a certain time period.

Balance of payments divides transactions in two accounts:

Current account

Capital account

 

Current Account Invisible Visible Goods(+) Services [+) Income 1. Dividend 2. Interest 3. Profit Transfer [+] 1. Gift 2. Donation 3. Remittance

Capital account [+] Investment [+] 1.Sovereign 2.Commercial NRI account [+] 1. Gift 2.Donation 3.Remittance Loan (+) 1 FDI 2. FII/FPI

	CURRENT ACCOUNT	CAPITAL ACCOUNT
Meaning	• Records imports and exports of visible and invisibles • Short term implication transactions • Covers only earnings and spending. • Excludes any borrowings and lending.	• Shows capital expenditure and income for country • Long term implication transactions • Only includes borrowings and lending by a country
Components	• Visible trade(Export and Import of goods-Merchandise transactions ) • Invisible trade(Export and Import of services) • Unilateral transactions	• Direct Investment (FDI) • Portfolio Investment (FPI) • Loans / External commercial borrowing (ECB) • Non-resident’s investment in Bank, Insurance, Pension schemes. • RBI’s foreign exchange reserve
Deficit (CAD)	• If the value of the goods and services imported exceeds the value of those exported. • Current Account deficit = Trade gap(export – import) + Net current transfers (foreign aid) + Net factor income (Interest, Dividend)	• When more money is flowing out of a country to acquire assets and rights abroad
Surplus	• If the value of the goods and services exported exceeds the value of those imported.	• Money is flowing into the country, but these inflows reflect changes in the ownership of national assets by way of sale or borrowing.
Convertibility	• Current account convertibility relates to the removal of restrictions on payments relating to the international exchange of goals, services and factor incomes.	• Capital account convertibility refers to a liberalization of a country’s capital transactions such as loans and investment.
Current status	• Allowed Full convertibility	• Only Partial convertibility

EXTERNAL DEBT

Part of a country s debt which has been borrowed from foreign creditors which includes private commercial banks, international financial institutions such as the World Bank, International Monetary Fund (IMF), and sovereign governments.

Types of external debts:

Short term debt: Maturity period 1 year or less

Long term debt: Maturity period more than 1 year

Sovereign debt : Bonds issued by the national government in any foreign currency to generate funds to meet its financial expenses.

 

Dear Aspirants,

This Spotlight is a part of our Mission Nikaalo Prelims-2023.

You can check the broad timetable of Nikaalo Prelims here

Session Details

YouTube LIVE with Parth sir – 1 PM  – Prelims Spotlight Session

Evening 04 PM  – Daily Mini Tests

Telegram LIVE with Sukanya ma’am – 06 PM  – Current Affairs Session

Join our Official telegram channel for Study material and Daily Sessions Here

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14th Mar 2023

Financial Markets

FINANCIAL MARKETS

• Financial Markets refers to the system consisting of financial institutions, financial instruments, regulatory bodies and organisations
•  It facilitates flow of debt and equity capital.
• Financial Institutions (Banks), Development financial Institutions (NABARD, SIDBI, IDBI etc.) and Non-Banking Financial Institutions form Financial Institutions. Ø Financial Instruments are shares, bonds, debentures etc.

Financial markets consist of two major segments:

(l) Money Market: the market for short term funds;

(2) Capital Market: the market for long and medium term funds.

MONEY MARKET

According to the RBI, “The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders.

It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government.

Functions of Money Market

• To maintain monetary equilibrium: It means to keep a balance between the demand for and supply of money for short term monetary transactions.
• To promote economic growth: Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc.
• To provide help to Trade and Industry: Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry.
• To help in implementing Monetary Policy: It provides a mechanism for an effective implementation of the monetary policy.
• To help in Capital Formation: Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy.
• Money market provides non-inflationary sources of finance to government.

Instruments of money market

Treasury Bills: They are promissory notes issued by the RBI on behalf of the government as a short term liability and sold to banks and to the public. The maturity period ranges from 14 to 364 days. They are the negotiable instruments, i.e. they are freely transferable. No interest is paid on such bills but they are issued at a discount on their face value.

Commercial Bills: They are also called Trade Bills or Bills of Exchange. Commercial bills are drawn by one business firm to another in lieu of credit transaction. It is a written acknowledgement of debt by the maker directing to pay a specified sum of money to a particular person. They are short-term instruments generally issued for a period of 90 days. These are freely marketable. Banks provide working capital finance to firms by purchasing the commercial bills at a discount; this is called ‘discounting of bills’.

Commercial Paper (CP): The CP was introduced in 1990 on the recommendation of the Vaghul Committee. A commercial paper is an unsecured promissory note issued by corporate with net worth of atleast Rs 5 crore to the banks for short term loans. These are issued at discount on face value for a period of 14 days to 12 months. These are issued in multiples of Rs 1 lakh subject to a minimum of Rs 25 lakh.

Certificate of Deposit (CD): The CD was introduced in 1989 on the recommendation of the Vaghul Committee. These are issued by banks against deposits kept by individuals and institutions for a period of 15 days to 3 years. These are similar to Fixed Deposits but are negotiable and tradable. These are issued in multiples of Rs. 1 lakh subject to a minimum of Rs25 lakh.

CAPITAL MARKET

The capital market is the market, for medium and long term funds. It consists of all the financial institutions, organizations and instruments which deal in lending and borrowing transaction of over one year maturity.

It is of following two types:

Primary Market	Secondary Market
It issues security for the first time. Example- Initial public offer and follow on public offer.	Existing securities are bought and sold.
Firms issue shares to public.	One investor sells it to another investor.
Price is fixed by the firms.	Price is fixed on the basis of demand and supply.
Firms raise money for long-term investment.	Companies benefit from the secondary markets.
There is no specific geographical location.	There is no specific geographical location.
SEBI is the regulator for this market.	SEBI is the regulator for this market as well.

GILT-EDGED MARKET

 The Gilt-edged market refers to the market for government and semi government securities, backed by the RBI.

It is known so because the government securities do not suffer from the risk of default and are highly liquid.

The RBI is the sole supplier of such securities. These are demanded by commercial banks, insurance companies, provident funds and mutual funds.

The gilt-edged market may be divided into two parts- the Treasury bill market and the government bond market. Treasury bills are issued to meet short-term needs for funds of the government, while government bonds are issued to finance long-term developmental expenditure. 

 

Dear Aspirants,

This Spotlight is a part of our Mission Nikaalo Prelims-2023.

You can check the broad timetable of Nikaalo Prelims here

Session Details

YouTube LIVE with Parth sir – 1 PM  – Prelims Spotlight Session

Evening 04 PM  – Daily Mini Tests

Telegram LIVE with Sukanya ma’am – 06 PM  – Current Affairs Session

Join our Official telegram channel for Study material and Daily Sessions Here

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13th Mar 2023

Important keywords in Budget, Fiscal Policy and Taxation 

Annual financial statement:

The Union Budget is the annual financial statement that contains the government’s revenue and expenditure for a fiscal year.

It may also include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.

The statement details the revenues from all sources, and expenditure on all activities that the government will undertake for the fiscal year. The fiscal year is calculated from 1 April-31 March.

Under Article 112 of the Constitution, the government has to present a statement of estimated revenue and expenditure for every fiscal. This statement is called the annual financial statement. This document is divided into three sections: For each of these funds, the central government is required to present a statement of revenue and expenditure.

1. Consolidated Fund:

The Consolidated Fund of India, created under Article 266 of the Indian Constitution, includes the revenues received by the government and expenses made by it.

All the revenue that the government receives through direct (income tax, corporation tax etc.) or indirect tax (Goods and Services Tax or GST) go into the Consolidated Fund of India.

Revenue from non-tax sources like dividends, profits from the PSUs, and income from general services also contribute to the fund. Recoveries of loans, earnings from disinvestment and repayment of debts issued by the Centre also contribute to the fund.

However, no money can be withdrawn for meeting expenses until the government gets the approval of the Parliament. Examples of expenditure include wages, salaries and pension of government employees, and other fixed costs. The repayment of debts incurred by the government is also done through the Consolidated Fund of India.

The Consolidated Fund of India is divided into five parts:

• Revenue account – receipts,
• Revenue account – disbursements,
• Capital account – receipts,
• Capital account – disbursements, and
• Disbursements ‘charged’ on the Consolidated Fund of India.

Disbursements ‘charged’ on the Consolidated Fund of India is a special category within the Consolidated Fund of India which is not put to vote in the Parliament.

This means whatever comes under this category need to be paid, whether the Budget is passed or not.

The salary and allowances of the President, speaker and deputy speaker of the Lok Sabha, chairman and deputy chairman of the Rajya Sabha, salaries and allowances of Supreme Court judges, pensions of Supreme Court and High Court judges come under this category.

2.Contingency fund:

Like the Consolidated Fund of India, the Contingency Fund of India constitutes a part of the annual financial statement.

Established under Article 267(1) of the Indian Constitution, the fund is maintained by the ministry of finance on behalf of the President of India.

As the name suggests, the Contingency Fund of India is an account maintained for meeting expenses during any unforeseen emergencies.

Parliamentary approval for such unforeseen expenditure is obtained, ex- post-facto, and an equivalent amount is drawn from the Consolidated Fund of India to recoup the Contingency Fund after such ex-post-facto approval.

3. Public account.

Article 266 of the Constitution defines the Public Account as being those funds that are received on behalf of the Government of India.

Money held by the government in a trust — such as in the case of Provident Funds, Small Savings collections, income of government set apart for expenditure on specific objects like road development, primary education, reserve/special Funds, etc — are kept in the Public Account.

Public Account funds do not belong to the government and have to be finally paid back to the persons and authorities that deposited them.

Parliamentary authorisation for such payments is not required.

However, when money is withdrawn from the Consolidated Fund with the approval of Parliament and kept in the Public Account for expenditure for a specific purpose, it is submitted for a vote in Parliament.

Appropriation bill

Appropriation Bill is a money bill that allows the government to withdraw funds from the Consolidated Fund of India to meet its expenses during the course of a financial year.

As per Article 114 of the Constitution, the government can withdraw money from the Consolidated Fund only after receiving approval from Parliament.

To put it simply, the Finance Bill contains provisions on financing the expenditure of the government, and Appropriation Bill specifies the quantum and purpose for withdrawing money.

Vote-on-account

The Constitution says that no money can be withdrawn by the government from the Consolidated Fund of India except under appropriation made by law.

For that, an appropriation bill is passed during the Budget process.

However, the appropriation bill may take time to pass through the Parliament and become a law. Meanwhile, the government would need permission to spend even a single penny from April 1 when the new financial year starts.

Vote on the account is the permission to withdraw money from the Consolidated Fund of India in that period, usually two months.

Vote on the account is a formality and requires no debate. When elections are scheduled a few months into the new financial year, the government seeks vote on account for four months. Essentially, vote on account is the interim permission of the parliament to the government to spend money.

Corporation tax:

Corporation tax is a direct tax imposed on the net income or profit that enterprises make from their businesses. Companies, both public and privately registered in India under the Companies Act 1956, are liable to pay corporation tax. This tax is levied at a specific rate according to the provisions of the Income Tax Act, 1961.

Fringe benefits tax (FBT):
The taxation of perquisites – or fringe benefits – provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefits tax. It was introduced in Budget 2005-06. The government felt many companies were disguising perquisites such as club facilities as ordinary business expenses, which escaped taxation altogether. Employers have to now pay FBT on a percentage of the expense incurred on such perquisites.

Direct Tax:

A direct tax is paid directly by an individual or organization to the imposing entity. A taxpayer, for example, pays direct taxes to the government for different purposes, including real property tax, personal property tax, income tax, or taxes on assets. Direct taxes are based on the ability-to-pay principle. This economic principle states that those who have more resources or earn a higher income should pay more taxes.

Indirect Tax
In the case of indirect taxes, the incidence of tax is usually not on the person who pays the tax. These are largely taxes on expenditure and include Customs, excise and service tax.

Indirect taxes are considered regressive, the burden on the rich and the poor is alike. That is why governments strive to raise a higher proportion of taxes through direct taxes. Moving on, we come to the next important receipt item in the revenue account, non-tax revenue.

Non-tax revenue:

Other than taxation being a primary source of income, the government also earns a recurring income, which is called non-tax revenue. While sources of tax revenue are few, the sources of non-tax revenue are many, with the number of collections per source. Although there are many sources of non-tax revenue, the amount per source is much less than that for tax revenue.

For example, when citizens use services offered by the government, they pay bills, which are categorised as non-tax revenue, as the government provides infrastructure support to implement the services. Non-tax revenue also includes the interest collected by the government on the loans or funds offered to states.

Grants-in-aid and contributions
The third receipt item in the revenue account is relatively small grants-in-aid and contributions. These are in the nature of pure transfers to the government without any repayment obligation.
These include expense incurred on organs of state such as Parliament, judiciary and elections. A substantial amount goes into administering fiscal services such as tax collection. The biggest item is the interest payment on loans taken by the government. Defence and other services like police also get a sizeable share. Having looked at receipts and expenditure on revenue account we come to an important item, the difference between the two, the revenue deficit.

Revenue deficit:

Revenue deficit arises when the government’s revenue expenditure exceeds the total revenue receipts.

Revenue deficit includes those transactions that have a direct impact on a government’s current income and expenditure. This represents that the government’s own earnings are not sufficient to meet the day-to-day operations of its departments. Revenue deficit turns into borrowings when the government spends more than what it earns and has to resort to the external borrowings.

               Revenue Deficit= Total revenue receipts – Total revenue expenditure.

Revenue Deficit deals only with the government’s revenue receipts and revenue expenditures.

Note that revenue receipts are receipts which neither create liability nor lead to a reduction in assets.

It is further divided into two heads:

• Receipt from Tax (Direct Tax,  Indirect Tax)
• Receipts from Non-Tax Revenue

Revenue Expenditure is referred to as the expenditure that does not result in the creation of assets reduction of liabilities. It is further divided into two types

• Plan revenue expenditure
• Non-plan revenue expenditure

Fiscal Deficit:
The fiscal deficit is defined as an excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. In simple words, it is the amount of borrowing the government has to resort to meet its expenses. A large deficit means a large amount of borrowing. The fiscal deficit is a measure of how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate.

Primary deficit:

Primary deficit is defined as a fiscal deficit of current year minus interest payments on previous borrowings.

         Primary deficit= Fiscal deficit – Interest payment on the previous borrowing

In other words, whereas fiscal deficit indicates borrowing requirement inclusive of interest payment, the primary deficit indicates borrowing requirement exclusive of interest payment (i.e., amount of loan).

We have seen that borrowing requirement of the government includes not only accumulated debt, but also interest payment on the debt. If we deduct ‘interest payment on debt’ from borrowing, the balance is called the primary deficit.

Public debt:

Public debt receipts and public debt disbursals are borrowings and repayments during the year, respectively. The difference is the net accretion to the public debt. Public debt can be split into internal (money borrowed within the country) and external (funds borrowed from non-Indian sources). Internal debt comprises treasury bills, market stabilisation schemes, ways and means advance, and securities against small savings.

Ways and means advance (WMA):

One of RBI’s roles is to serve as banker to both central and state governments. In this capacity, RBI provides temporary support to tide over mismatches in their receipts and payments in the form of ways and means advances.

CESS:
This is an additional levy on the basic tax liability. Governments resort to cess for meeting specific expenditure.

Dividend distribution tax:

A dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year. Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax.

However, the income tax laws in India provided for an exemption of the dividend income received from Indian companies by the investors by levying a tax called the Dividend Distribution Tax (DDT) on the company paying the dividend. This tax has been abolished in the 2020-21 budget.

FRBM Act 2003:

The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce the fiscal deficit.

What are the objectives of the FRBM Act?

The FRBM Act aims to introduce transparency in India’s fiscal management systems. The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India. The FRBM Act was enacted to introduce a more equitable distribution of India’s debt over the years.

Key features of the FRBM Act

The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

1. Medium Term Fiscal Policy Statement

2. Macroeconomic Framework Statement

3. Fiscal Policy Strategy Statement

The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy statement.

Fiscal Performance Index (FPI)

• The composite FPI developed by CII is an innovative tool using multiple indicators to examine the quality of Budgets at the Central and State levels.
• The index has been constructed using UNDP’s Human Development Index methodology which comprises six components for holistic assessment of the quality of government budgets, subsidies, pensions and defence in GDP
• Quality of capital expenditure: measured by the share of capital expenditure (other than defence) in GDP
• Quality of revenue: the ratio of net tax revenue to GDP (own tax revenue in case of States)
• Degree of fiscal prudence I: fiscal deficit to GDP
• Degree of fiscal prudence II: revenue deficit to GDP and
• Debt index: Change in debt and guarantees to GDP

Other measures of FPI

• As per the new index, expenditure on infrastructure, education, healthcare and other social sectors can be considered beneficial for economic growth.

Sabka Vishwas-Legacy Dispute Resolution Scheme

• This Scheme is introduced to resolve and settle legacy cases of the Central Excise and Service Tax.
• The proposed scheme would cover all the past disputes of taxes which may have got subsumed in GST; namely Central Excise, Service Tax and Cesses.
• The Government expects the Scheme to be availed by a large number of taxpayers for closing their pending disputes relating to legacy Service Tax and Central Excise cases that are now subsumed under GST so they can focus on GST.
• The Scheme is, especially, tailored to free a large number of small taxpayers of their pending disputes with the tax administration.

Components of the Scheme

• The two main components of the Scheme are dispute resolution and amnesty.
• The dispute resolution component is aimed at liquidating the legacy cases of Central Excise and Service Tax that are subsumed in GST and are pending in litigation at various forums.
• The amnesty component of the Scheme offers an oppor­tunity to the taxpayers to pay the outstanding tax and be free of any other consequence under the law.
• The most attractive aspect of the Scheme is that it provides substantial relief in the tax dues for all categories of cases as well as full waiver of interest, fine, penalty,
• In all these cases, there would be no other liability of interest, fine or penalty. There is also a complete amnesty from prosecution.

Direct Tax Code:

• The Direct Tax Code (DTC) is an attempt by the Govern­ment of India to simplify the direct tax laws in India.
• It will revise, consolidate and simplify the structure of direct tax laws in India into a single legislation.
• When implemented, it will replace the Income-tax Act, 1961 (ITA), and other direct tax legislation like the Wealth Tax Act, 1957.
• The task force was constituted by the government to frame draft legislation for this proposed DTC in November 2017 and review the existing Income Tax Act.

Direct Tax:

• These are the taxes, paid directly to the government by the taxpayer. Under the direct tax system, the incidence and impact of taxation fall on the same entity, which cannot be transferred to another person.
• It is termed as a progressive tax because the proportion of tax liability rises as an individual or entity’s income increases.
• Examples- Income tax, corporate tax, Dividend Distri­bution Tax, Capital Gain Tax, Security Transaction Tax.
• The system of Direct taxation is governed by the Cen­tral Board of Direct Taxes (CBDT). It is a part of the Department of Revenue in the Ministry of Finance.

Corporate Tax

• A corporate tax also popularly known as the company tax or the corporation tax is the tax levied on the capital or income of corporations or analogous legal entities.
• In most countries, such taxes are levied at the national level, and a tax that is similar to that imposed at the na­tional level could be imposed at the local or state levels.
• The taxes could also be termed as capital tax or income tax.
• Generally, Partnership firms are not taxed at the entity level.
• In most of nations, the corporations functioning in a country are taxed for the income from that country.
• Many countries tax all income of corporations incorpo­rated in the country or those deemed to be resident for tax purposes in the country.
• The income of the company that is to be taxed is computed similarly to the taxable income for individuals.
• Tax is generally imposed on net profits.
• In India, companies, both private and public which are registered in India under the Companies Act 1956, are liable to pay corporate tax.

Securities transaction tax (STT)

• Sale of any asset (shares, property) results in loss or profit. Depending on the time the asset is held, such profits and losses are categorised as long-term or short-term capital gain/loss.
• In Budget 2004-05, the government abolished long-term capital gains tax on shares (tax on profits made on the sale of shares held for more than a year) and replaced it with STT.
• It is a kind of turnover tax where the investor has to pay a small tax on the total consideration paid/received in a share transaction.

Banking cash transaction tax (BCTT)

• Introduced in Budget 2005-06, BCTT is a small tax on cash withdrawal from bank exceeding a particular amount in a single day.
• The basic idea is to curb the black economy and generate a record of big cash transactions

Cess

• This is an additional levy on the basic tax liability Governments resort to cess for meeting specific expenditure. For instance, both corporate and individual income is at present subject to an education cess of 2%.
• In the last Budget, the government had imposed another 1% cess – secondary and higher education cess on income tax – to finance secondary and higher education.

Countervailing Duties (CVD)

• Countervailing duty is a tax imposed on imports, over and above the basic import duty CVD is at par with the excise duty paid by the domestic manufacturers of similar goods
• This ensures a level playing field between imported goods and locally-produced ones.
• An exemption from CVD places the domestic industry at the disadvantage and over long run discourages investments in affected sectors.

Export Duty

• This is a tax levied on exports. In most instances, the object is not revenue, but to discourage exports of certain items.
• In the last Budget, for instance, the government imposed an export duty of Rs 300 per metric tonne on the export of iron ores and concentrates and Rs 2,000 per metric tonne on the export of chrome ores and concentrates.

Pass-through Status

• A pass-through status helps avoid double taxation. Mutual funds, for instance, enjoy pass-through status.
• The income earned by the funds is tax-free. Since mutual funds’ income is distributed to the unit-holders, who are in turn taxed on their income from such investments any taxation of mutual funds would amount to double taxation.
• Essentially, it means the income is merely passing through the mutual funds and, therefore, should not be taxed.
• The government allows venture funds in some sectors pass-through status to encourage investments in start-ups.