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GS Paper: Indian Economy

  • Bad bank

    The article suggests drawing the lessons from China’s experience with the bad bank as India India gets ready to operationalise a new bad bank.

    Bad bank in China and issues

    • In the aftermath of the Asian financial crisis, China set up dedicated bad banks for each of its big four state-owned commercial banks.
    • These bad banks were meant to acquire non-performing loans (NPLs) from those banks and resolve them within 10 years.
    • In 2009, their tenure was extended indefinitely.
    • Chinese banks can currently transfer NPLs only to the national or local bad banks.
    • One of China’s biggest bad banks is the China Huarong Asset Management Co. Ltd. (Huarong).
    • The Chinese government is its principal shareholder.
    • Recently this bad bank stoked financial stability concerns when it skirted a potential bond default.
    • An incentive to conceal: Recent research at the National University of Singapore and others highlights that Chinese bad banks effectively help conceal Non-Performing Loans.
    • The banks finance over 90 per cent of NPL transactions through direct loans to bad banks or indirect financing vehicles.
    • The bad banks resell over 70 per cent of the NPLs at inflated prices to third parties, who happen to be borrowers of the same banks.
    • The researchers conclude that in the presence of binding financial regulations and opaque market structures bad bank model could create incentives to hide bad loans instead of resolving them.
    • Broadening of tenure: In case of Huarong, the main source of the problem appears to be the gradual broadening of the original mandate and tenure of Chinese bad banks.

    Four lessons for India

    • India is about to operationalise a new bad bank, the National Asset Reconstruction Company Ltd. (NARCL).
    • The Chinese experience holds four important lessons for India.

    1) Finite tenure of bad bank

    • A centralised bad bank like NARCL should ideally have a finite tenure.
    • Such an institution is typically a swift response to an abrupt economic shock (like Covid) when orderly disposal of bad loans via securitisation or direct sales may not be possible.
    • The banks could transfer their crisis-induced NPLs to the bad bank and focus on expanding lending activity.
    • The bad bank in turn can restructure and protect asset value.
    • Over time, it could gradually dispose of the assets to private players.

    2) Narrow mandate

    •  A bad bank must have a specific, narrow mandate with clearly defined goals.
    • Transferring NPLs to a bad bank is not a solution in itself.
    • There must be a clear resolution strategy.
    • Otherwise, allowing a bad bank to exist in perpetuity risks a potential mission creep, which might in the long run threaten financial stability itself.

    3) Diversify the sources of funds for ARC

    • Indian banks remain exposed to these bad loans even after they are transferred to asset reconstruction companies (ARCs).
    • The RBI Bulletin (2021) notes that sources of funds of ARCs have largely been bank-centric.
    • The same banks also continue to hold close to 70 per cent of the total security receipts (SRs).
    • To address this problem, RBI has tightened bank provisioning while liberalising foreign portfolio investment norms.

    4) Resolution of bad loans should be through market mechanism

    • In a steady state, the resolution of bad loans should happen through a market mechanism and not through a multitude of bad banks.
    • In India, the Narasimham Committee (1998) had envisaged a single ARC as a bad bank.
    • Yet, the SARFAESI Act, 2002 ended up creating multiple, privately owned ARCs.
    • As a result, regulations have treated ARCs like bad banks, although functionally they are closer to stressed asset funds registered as Alternative Investment Fund Category II (AIFs).
    • With the setting up of NARCL as a centralised bad bank, the regulatory arbitrage between ARCs and AIFs must end.
    • While AIFs should be allowed to purchase bad loans directly from banks and enjoy enforcement rights under the SARFAESI Act.
    • ARCs should be allowed to purchase stressed assets from mutual funds, insurance companies, bond investors and ECB lenders.
    • ARC trusts should be allowed to infuse fresh equity in distressed companies, within IBC or outside of it.
    • Lastly, the continued interest of the manager/sponsor of ARCs should be at par with AIFs, that is, at least 2.5 per cent in each scheme or Rs 5 crore, whichever is lower.

    Conclusion

    The Chinese experience should nudge Indian policymakers to limit the mandate and tenure of NARCL, while facilitating market-based mechanisms for bad loan resolution in a steady state.

  • National Anti-Profiteering Authority (NAA)

    The National Anti-Profiteering Authority (NAA) has directed GST officials across the country to ensure that the tax rate cuts notified on some COVID-19-related essentials are passed on to consumers.

    What is National Anti-Profiteering Authority (NAA)?

    • The NAA has been constituted under Section 171 of the Central GST Act, 2017 to ensure that the reduction in the rate of tax or the benefit of the input tax credit is passed on to the recipient by way of commensurate reduction in prices.
    • The decision about the formation of the NAA came in the background of a rate reduction of a large number of items by the GST Council in its 22ndmeeting at Guwahati.
    • At the meeting, the Council reduced rates of more than 200 items including goods and services.
    • This has made a tremendous price reduction effect and the consumers will be benefited only if the traders are making the quick reduction of the prices of respective items.
    • There was a concern that traders are reluctant to make price cuts so that they can make a profit.

    Answer this PYQ in the comment box:

    Q. Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

    What is profiteering?

    • Profiteering means unfair profit realized by traders by manipulating prices, tax rate adjustment etc.
    • In the context of the newly launched GST, profiteering means that traders are not reducing the prices of the commodities when the GST Council reduces the tax rates of commodities and services.
    • Conventionally, several traders will have a strong tendency to quickly increase the price of a commodity whose tax rate has been increased.
    • But on the opposite side, they may delay the price reduction of a commodity whose tax rate has been cut by the government.
    • A delayed or postponed price reduction helps business firms to make a higher profits. The losers here are the consumers.

    Functioning of NAA

    • The Authority’s main function is to ensure that traders are not realizing unfair profit by charging high prices from the consumers in the name of GST.
    • Traders may charge high prices from the consumers by naming the GST factor.
    • Similarly, they may not make quick and corresponding price reductions when the GST Council makes a tax cut. All these constitute profiteering.
    • The responsibility of the NAA is to examine and check such profiteering activities and recommend punitive actions including the cancellation of licenses.

    Steps were taken by the NAA to ensure that customers get the full benefit of tax cuts:

    • Holding regular meetings with the Zonal Screening Committees and the Chief Commissioners of Central Tax to stress upon consumer awareness programs;
    • Launching a helpline to resolve the queries of citizens regarding registration of complaints against profiteering.
    • Receiving complaints through email and the NAA portal.
    • Working with consumer welfare organizations in order to facilitate outreach activities.

  • It’s time for RBI to turn its attention to inflation

    Recently, CPI inflation crossed the RBI’s upper limit of 6%. The article explains the implications of this for various stakeholders.

    How inflation benefits government as a borrower

    • Rising inflation hurts lenders and benefits borrowers.
    • To that extent, the government, one of the biggest borrowers, stands to benefit as high inflation will lower the national debt load in relation to the size of the economy.
    • The Union budget 2021-22 assumed a 14.4 per cent growth in nominal GDP, however, actual growth is set to exceed this.
    • The GDP deflator, which measures the difference between nominal and real GDP, is a weighted average of WPI and CPI, with a higher weightage to WPI.
    • And given that nominal GDP is used as a base for computing the fiscal ratios, all of these will get deflated.
    • The value of past debt and debt servicing costs thus gets pared in real terms as inflation rises.
    • Viewed from a debt dynamics perspective, as the gap between growth and interest rates rises, the debt/GDP ratio falls.

    Impact on other stakeholder

    • That inflation reduces purchasing power and hits private consumption is well known.
    • Overall food CPI inflation (5 per cent) was lower than non-food inflation (7.1 per cent) in May.
    • Lower food inflation, coupled with higher non-food inflation means reduced purchasing power for farmers.
    • Inflation trends, specifically input prices (reflected better by WPI), matter for corporate performance as well.
    • While producers seem to be bearing a part of the burden of rising input costs for now, these could get passed on in greater measure to consumers once demand recovers.
    • Rising inflation reduces returns on fixed income instruments, including bank deposits, which account for over 50 per cent of households’ financial savings.
    • This has already induced a shift to riskier asset classes such as equities, which has ramifications for overall financial stability.

    Way forward

    • The RBI will have to closely monitor inflation trends and calibrate its policy response.
    • It has not intervened on high inflation since the onset of the pandemic and, rightly so, in order to support growth.
    • But the current spell of inflation is over a high base and a continuation of recent trends will persuade it to turn the focus back on inflation.
    •  Given the need for monetary policy to stay accommodative, it might be time to consider other supply-side interventions such as cuts in excise rates on petroleum products to soften the inflation blow.

    Consider the question “As a one of the largest borrowers, how rising inflation benefits the government? How high inflation affects the other sections of the economy?”

    Conclusion

    Given the impact rising inflation has for the braoader sections of the economy, it is time for RBI to turn its attention to inflation.

  • Population decline: Bane and Boon for the economy

    Deflation. A recent (2014) study found substantial deflationary pressures from Japan’s ageing populationThe article argues that a decline in population is not always as worrisome as it is made to be.

    Declining fertility rate

    • China’s fertility rate of 1.3 children per woman in 2020 is well below replacement level, but so, too, are fertility rates in every rich country.
    • In all developed economies, fertility rates fell below replacement in the 1970s or 1980s and have stayed there.
    • In India, more prosperous states have fertility rates below replacement level, with only the poorer states of Bihar and Uttar Pradesh still well above.
    • And while the national rate in 2018 was still 2.2, the Indian National Family Health Survey finds that Indian women would like to have, on average, 1.8 children.
    • In all prosperous countries where women are well educated and free to choose whether and when to have children, fertility rates fall significantly below replacement levels.
    • If those conditions spread across the world, the global population will eventually decline.

    Is the declining population good or bad for the economy

    • A pervasive conventional bias assumes that population decline must be a bad thing.
    • But while absolute economic growth is bound to fall as populations stabilise and then decline, it is the income per capita that matters for prosperity and economic opportunity.
    • It is true that when populations no longer grow, there are fewer workers per retiree, and healthcare costs rise as a percent of GDP.
    • But that is offset by the reduced need for infrastructure and housing investment to support a growing population.
    • A stable and eventually falling global population would make it easier to cut greenhouse-gas emissions to avoid climate change, and alleviate the pressure that growing populations inevitably place on biodiversity and fragile ecosystems.
    • And contracting workforces create stronger incentives for businesses to automate while driving up real wages, which, unlike absolute economic growth, are what really matter to ordinary citizen.
    • In a world where technology enables us to automate ever more jobs, the far bigger problem is too many potential workers, not too few.
    • Even when the Indian economy grows rapidly, its highly productive “organised sector” of about 80 million workers, fails to create additional jobs.
    • Growth in the potential workforce simply swells the huge “informal sector” army of unemployed and underemployed people.

    So, when declining populations turns to be a problem?

    •  Fertility rates far below replacement level create significant challenges, and China may well be heading in that direction.
    • At those rates, population decline will be precipitate rather than gradual.
    • If Korea’s (fertility rate 1.09) birth rate does not rise, its population could fall from 51 million today to 27 million by 2100, and the ratio of retirees to workers will reach levels that no amount of automation can offset.

    Conclusion

    The average fertility rates well below replacement level in all developed countries, and, over time, gradually falling populations. The sooner that is true worldwide, the better for everyone.

  • Why counting of poor matters?

    Counting the number of the poor

    • If the state of the Indian economy is to be repaired, we need to meticulously count the number of the poor and to prioritise them.
    • The World Bank $2-a-day poverty line might be inadequate but it would be a start and higher than the last line proposed by the C. Rangarajan committee.
    • A survey in 2013 had said India stood at 99 among 131 countries, and with a median income of $616 per annum, it was the lowest among BRICS and fell in the lower-middle-income country bracket.
    • Since 2013 three important data points have made it clear that the state of India’s poor needs to be acknowledged if India is to be lifted.
    • The first being, the fall in the monthly per capita consumption expenditure of 2017-18 for the first time since 1972-73.
    • Second is the fall of India in the Global Hunger Index to ‘serious hunger’ category.
    • Third,  health census data or the recently concluded National Family Health Survey or NFHS-5, which had worrying markers of increased malnutrition, infant mortality and maternal health.
    • A fourth statistic, Bangladesh bettering India’s average income statistics, must also be a reason for Indians to introspect.

    Increase in number of poor in India

    •  In 2019, the global Multidimensional Poverty Index reported that India lifted 271 million citizens out of poverty between 2006 and 2016. 
    • Since then, the International Monetary Fund, Hunger Watch, SWAN and several other surveys show a decided slide.
    • In March, the Pew Research Center with the World Bank data estimated that ‘the number of poor in India, on the basis of an income of $2 per day or less in purchasing power parity, has more than doubled to 134 million from 60 million in just a year due to the pandemic-induced recession’.
    • In 2020, India contributed 57.3% of the growth of the global poor.
    • This has thrown a spanner in the so far uninterrupted battle against poverty since the 1970s.
    • Urgent solutions are needed within, and the starting point of that would be only when we know how many are poor.

    Debate on the poverty line

    • In 2011, the Suresh Tendulkar Committee report at a ‘line’ of ₹816 per capita per month for rural India and ₹1,000 per capita per month for urban India, calculated the poor at 25.7% of the population.
    • The anger over the 2011 conclusions, led to the setting up of the C. Rangarajan Committee.
    • In 2014, C. Rangarajan Committee estimated that the number of poor were 29.6%, based on persons spending below ₹47 a day in cities and ₹32 in villages.
    • The National Commission for Enterprises in the Unorganised Sector in 2004, had concluded that 836 million Indians still remained marginalised.
    • The Commission’s conclusion was ignored — that 77% of India was marginalised — emphasising that it was a problem of a much bigger magnitude, than the figure of 25.7% conveyed.

    Why counting the poor matters?

    1) Helps in forming public opinion

    • Knowing the numbers and making them public makes it possible to get public opinion to support massive and urgent cash transfers.
    • The world outside India has moved onto propose high fiscal support, as economic rationale and not charity.
    •  In India too, a dramatic reorientation would get support only once numbers are honestly laid out.

    2) It helps in evaluating success of policies

    •  Recording the data helps to evaluate all policies on the basis of whether they meet the needs of the majority.
    • Is a policy such as bank write-offs of loans amounting to ₹1.53-lakh crore last year, which helped corporates overwhelmingly, beneficial to the vast majority?
    • This would be possible to transparently evaluate only when the numbers of the poor are known and established.

    3) Helps in addressing the concerns of real majority

    • If government data were to honestly account for the exact numbers of the poor, it may be more realistic to expect the public debate to be conducted on the concerns of the real majority.
    • Such data would also help in creating a climate that demands accountability from public representatives.

    4) To gauge the rising inequality

    • India has clocked a massive rise in the market capitalisation and the fortunes of the richest Indian corporates, even as millions of Indians have experienced a massive tumble into poverty.
    • To say that the stock market and the Indian economy are ‘not related’ is ingenuous.
    • Indians must have the right to question whether there is a connection and if the massive rise in riches is not coincidental, but at the back of the misery of millions of the poor.
    • If billionaire lists are evaluated in detail and reported upon, the country cannot shy away from counting its poor.

    Conclusion

    The massive slide into poverty in India that is clear in domestic and international surveys and anecdotal evidence must meet with an institutional response.

  • A regulatory hurdles could stifle e-commerce

    The article highlights the risk of stifling the e-commerce sector due to the government’s propensity for its regulation to protect the local traders.

    Efforts to shield local retailers

    • India began to open up its economy three decades ago, but efforts to shield local retailers resulted in a retail sector fraught with a thicket of rules.
    • With the web’s reach expanding rapidly, online retail is expected to grab a fast-widening slice of a pie placed at above $880 billion last year and projected at $1.3 trillion in 2024.
    • Such a huge opportunity has set the stage for a grand e-com confrontation, with our two biggest business houses gearing up to take on a duopoly of US-based Amazon and Walmart-owned Flipkart.
    • The more fiercely e-com is contested, the tighter this sector’s straps seem to get.

    What are the new regulations?

    • The Centre put out proposals to tighten e-com regulations for consumer protection.
    • E-com firms must appoint resident officers to address grievances and monitor rule-compliance, and then be ready to share information sought by authorities within 72 hours.
    • For the sake of “free and fair competition”, they must label all wares on their websites by country-of-origin, offer local alternatives, keep search results unbiased, not sell anything to anyone registered as a ‘seller’ with them, not conduct deep-discount flash sales of cherry-picked products.
    • Restriction on aiding associated enterprises with any helpful data gleaned by their algorithms.
    • As another measure to assure small enterprises an even field, they must also ensure that their logistical systems support all sellers in the same category equally.
    • As it happens, this attempt to straitjacket e-com platforms coincides with an antitrust probe of ‘unfair practices’ ascribed to Amazon and Flipkart.

    Issues with regulations

    • Some of these sound too vague and subjective to adopt.
    • Even if clear criteria are specified for their adoption and they actually serve to curtail brand favouritism, they would leave e-com majors with too little autonomy to devise strategies of service differentiation for a competitive edge.
    • The perception of e-com majors being bullies, however, does not seem very widely shared among their customers, few of whom complain of either insufficient rivalry or choice deprivation online. 

    Conclusion

    What e-com users are now at risk of suffering, though, is a hobbled industry. If all e-com websites are forced into a statist mould meant for generic market platforms, these companies could lose their ability to set themselves apart, outperform rivals and serve the market’s ultimate cause.

  • Corporates need commitment to sustainability and community alongside pursuit of profit

    The article calls the corporates to adopt new capitalism in the aftermath of the pandemic which involves alongside the profit motives the commitment to giving back.

    Capitalism in the aftermath of Covid-19

    • The 2008 crisis was caused by the excesses of global finance, whereas the 2020 economic crisis was caused by a pandemic that spilled over to the economy.
    • While the current pandemic is the first of its kind in nine decades, the dire economic consequences are very similar to that global financial crisis just a decade ago.
    • What is also similar is the policy response that has followed both the 2008 and 2020 crises — the Keynesian prescription of the government stimulating a depressed economy by using monetary and fiscal instruments.
    • Cheap liquidity preserves the wealth of the asset-owning classes even as the real economy stalls.
    •  However, over-stretched governments head towards a debt/fiscal crisis which eventually forces austerity, hitting those dependent on government handouts.
    • It is this inequality in outcomes that is unlikely to happen this time.
    • Already, the G-7 has pledged to maintain a minimum level of corporation tax.
    • There have also been calls for additional taxation, particularly on the assets of the wealthy.

    What corporates can do

    • Instead of waiting for governments to react under popular pressure, corporates must themselves set out on a different path.
    • Covid-19 has brought home the fragility of human life and the deeply interconnected fate of humanity.
    • Outside of the pandemic, there is no better example of this than climate change which, if left uncontrolled, could devastate the world.
    • While governments negotiate, corporates must respond with voluntary commitments to mitigate climate change.
    • Climate change mitigation should be at the core of all business models going forward.
    • In addition, promoters need to come forward to pledge more of their wealth towards philanthropy.
    •  India implemented the concept of corporate social responsibility as part of its legal framework a decade ago.

    Investor pressure for action towards environment

    • The ability of the private sector to work for the greater good seems implausible.
    • But it is already happening — not because of government regulation, but because of investor pressure.
    • Progressive actions towards the environment and society are being rewarded by investors.
    • The absence of such progressive actions is being penalised.
    • Market forces are, after all, embedded in society.
    • They are perfectly capable of moving beyond profit.

    Threat of new-age tech capitalism

    • The real challenge for society, government and capitalists comes from the new-age tech capitalists.
    • They are the new monopolists or oligopolists who don’t exercise their power over society by charging a supernormal price.
    • In fact, a lot of them provide goods and services at hefty discounts.
    • Instead, what they seek is to control information and influence choices.
    • Many of the promoters of such enterprises are philanthropists but society and governments have a different set of concerns on how they exercise power.

    Conclusion

    An imperfect world is passing through a perfect storm. There will be big changes on the other side. Capitalism will survive. It could thrive by choosing its own pathway or it could stumble along under the hammer of big government fuelled by populist backlash.

  • World Competitiveness Ranking 2021

    India’s position has remained unchanged at 43 for the third year in a row in the World Competitiveness Ranking by Switzerland-based Institute for Management Development (IMD).

    World Competitiveness Ranking

    • The IMD World Competitiveness Ranking ranks 64 economies and assesses the extent to which a country promotes the prosperity of its people by measuring economic well-being through hard data and survey responses from executives.
    • The ranking examines four factors — economic performance, government efficiency, business efficiency, and infrastructure.
    • The top-performing economies are characterized by varying degrees of investment in innovation, diversified economic activities, and supportive public policy.

    India’s performance

    • Among the BRICS nations, India is ranked second after China (16), followed by Russia (45th), Brazil (57th) and South Africa (62th).
    • Among the four indices used, India’s ranking in government efficiency increased to 46 from 50 a year ago, while its ranking in other parameters such as economic performance (37), business efficiency (32) and infrastructure (49) remained the same.
    • India has maintained its position for the past three years but this year, it had significant improvements in government efficiency.

  • Recovery takes more than reforms

    The article takes an overview of the impact of the second covid wave and suggests the need for more public spending.

    Impact of reforms in recovery

    • Overlapping State-level lockdowns that started in April have now lasted for almost as long as the nationwide lockdown of 2020, impacting the economy.
    • Output may well have contracted in the beginning of this year.
    • So, though recovery will eventually come, it could be W-shaped rather than V-shaped.
    • It is asserted that the economy will recover due to the reforms planned or already implemented by the government.
    • Since 1991, the term ‘reforms’ has been used to mean both policy changes that remove restrictions on private sector activity in certain areas and those that increase profits in existing lines of production.
    • Recent examples of such reforms include the Atmanirbhar Bharat Abhiyaan launched in 2020 and the significant lowering of corporate tax in 2019, respectively.
    • However, more reforms may be ineffective in spurring recovery.
    • Presently for the private sector is not undertaking investment given their expectation of the state of the economy in the near future, upon which their revenue will depend.

    Public expenditure

    • In February, believing that the peak of the epidemic had been crossed, the government reverted to fiscal consolidation or the paring down of the fiscal deficit.
    •  Accordingly, it raised its budgeted expenditure by less than 1% in the last Budget.
    • But now, with a possible further contraction of the economy, to continue with the frigid fiscal stance would be disastrous.
    • Data from the Centre for Monitoring Indian Economy show that unemployment has risen in May, indicating slack demand for output.
    • With this knowledge, the private sector is unlikely to respond with alacrity to liberalising reforms.

    Way forward

    • The objective is to revive the economy, public spending is the instrument and the funding must be found.
    •  It need not involve money creation.
    • India’s public debt is low by comparison with the OECD countries, and debt financing remains an option. 
    • Even if money financing is adopted, it need not cause accelerating inflation.
    • How the expansion is financed is less relevant for inflation at least in the near term. 

    Consider the question “Are the economic reforms enough to ensure the recovery of the economy? Also, examine the importance of public spending for economic recovery.”

    Conclusion

    Reforms albeit important for the economy in long run, may not be much effective in an economy battered by the pandemic. What we need is public spending and welfare measures.

  • Direct Tax collections surge in 2021-22

    India’s direct tax collections in the first two and a half months of 2021-22 stand at nearly ₹1.86 lakh crore, double the collections over the same period of last year that was affected by the national lockdown.

    Surge in direct tax collections

    • The jump in the direct tax collections reflects healthy exports and a continuation of various industrial and construction activities.
    • This supports our expectation that GDP will record a double-digit expansion.

    What are Direct Taxes?

    • A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax.
    • The tax is paid directly by the organization or an individual to the entity that has imposed the payment.
    • The tax must be paid directly to the government and cannot be paid to anyone else.

    Answer this PYQ in the comment box:

    Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the:

    (a) Contingency Fund of India

    (b) Public Account

    (c) Consolidated Fund of India

    (d) Deposits and Advances Fund

    Types of Direct Taxes

    The various types of direct tax that are imposed in India are mentioned below:

    (1) Income Tax

    • Depending on an individual’s age and earnings, income tax must be paid.
    • Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid.
    • The taxpayer must file Income Tax Returns (ITR) on a yearly basis.
    • Individuals may receive a refund or might have to pay a tax depending on their ITR. Penalties are levied in case individuals do not file ITR.

    (2) Wealth Tax

    • The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property.
    • In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not.
    • Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status.
    • Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.

    (3) Estate Tax

    • It is also called Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.

    (4) Corporate Tax

    • Domestic companies, apart from shareholders, will have to pay corporate tax.
    • Foreign corporations who make an income in India will also have to pay corporate tax.
    • Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India is taxable.
    • The below-mentioned taxes are also included under Corporate Tax:
    1. Securities Transaction Tax (STT): The tax must be paid for any income that is earned via security transactions that are taxable.
    2. Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
    3. Fringe Benefits Tax: For companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
    4. Minimum Alternate Tax (MAT): For zero tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.

    (5) Capital Gains Tax:

    • It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and home come under capital assets.
    • Based on its holding period, tax can be classified into long-term and short-term.
    • Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains.
    • Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

    Advantages of Direct Taxes

    The main advantages of Direct Taxes in India are mentioned below:

    • Economic and Social balance: The Government of India has launched well-balanced tax slabs depending on an individual’s earnings and age. The tax slabs are also determined based on the economic situation of the country. Exemptions are also put in place so that all income inequalities are balanced out.
    • Productivity: As there is a growth in the number of people who work and community, the returns from direct taxes also increases. Therefore, direct taxes are considered to be very productive.
    • Inflation is curbed: Tax is increased by the government during inflation. The increase in taxes reduces the necessity for goods and services, which leads to inflation to compress.
    • Certainty: Due to the presence of direct taxes, there is a sense of certainty from the government and the taxpayer. The amount that must be paid and the amount that must be collected is known by the taxpayer and the government, respectively.
    • Distribution of wealth is equal: Higher taxes are charged by the government to the individuals or organizations that can afford them. This extra money is used to help the poor and lower societies in India.

    What are the disadvantages of direct taxes?

    • Easily evadable: Not all are willing to pay their taxes to the government. Some are willing to submit a false return of income to evade tax. These individuals can easily conceal their incomes, with no accountability to the law of the land.
    • Arbitrary: Taxes, if progressive, are fixed arbitrarily by the Finance Minister. If proportional, it creates a heavy burden on the poor.
    • Disincentive: If there are high taxes, it does not allow an individual to save or invest, leading to the economic suffering of the country. It does not allow businesses/industry to grow, inflicting damage to them.