Friday, March 6, 2015

Application Supported by Blocked Amount (ASBA)

Investment on Shares
The traditional process of applying in Initial Public Offers (IPO), Follow-on Public Offers (FPO), Right Issues, etc. (i.e., investing in shares) is to use cheque as a mode of payment and submitting applications.

It has some problems associated -
  • Investors have to pay the entire fee upfront (at the time of bidding for shares)
  • Refunds (in case bidding failed) through cheques usually take up to 45 days.

Applications Supported by Blocked Amount (ASBA)
SEBI (capital market regulator) introduced ASBA in September, 2008 in Indian Capital market to facilitate the application process for shares to benefit the investors, by removing the above problems.

ASBA is an application to buy shares, where investors authorize the bank (mediates the process) to block the application money in his bank account. Investors cannot withdraw the blocked amount, until the whole process is over.

  • If the investor is selected for share (means he is allotted shares / bidding successful), then his blocked amount will be automatically debited from his account, and an equivalent share will be credited in his Demat Account.
  • If the investor is not selected for share (means his bidding is unsuccessful), then the blocked amount will be unblocked, and he can withdraw that amount as per his wish.
Note that ASBA solved the above two problems.

Interests in the Blocked Amount
Under ASBA, the blocked amount will continue to earn interest during the application processing period, if held in an interest bearing account (like savings account, etc.). Bank will mark a lien on the deposit, which will be removed immediately after the allotment process is completed.

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Thursday, March 5, 2015

Inflation Targeting

Inflation Targeting
Inflation is a key concern for every economy. Governments or central banks always try to keep inflation in a manageable level (low), because, the impact of inflation falls directly on the daily life of the citizens (like, high price of goods, etc.).

Some central banks explicitly declare a target to keep inflation within the limit. This explicit declaration is known as Inflation targeting. However, whether it is explicitly declared or not, every central bank tries to keep inflation in a manageable level.

Inflation targeting adopted by RBI
Recently, RBI and Union Government signed an agreement on Monetary Policy Framework to focus on flexible inflation targeting.

As per the agreement, RBI will have to maintain Consumer Price Index (CPI)-based inflation targets below 6 % by January 2016, and 4 % (+/- 2 %) from 2016-17 financial year (onwards).

With this inflation targeting, RBI will be more accountable, because if it fails to meet the inflation target set by it, then RBI will have to explain reasons to the government.

Recommended by Urjit Patel Committee
The transition from Monetary Targeting suggested by Chakravarty Committee (1988) to Inflation Targeting suggested by Dr. Urjit Patel Committee (2015) is similar to the practice adopted by central banks in developed countries.

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Wednesday, March 4, 2015

Taxation in India - Part II (All about taxes, Budget 2015-16)

A.  Direct Taxes

1.  Income Tax - Every individual whose total income exceeds taxable limit is liable to pay income tax, according to income tax slabs and rates (no change in this year Budget 2015-16

E.g., Currently, general individuals with total income up to 2.5 lakh need not pay any income tax, whereas, if income exceeds 2.5 lakh limit then they need to pay income tax with rates according to slab. 

For example, if someone's income is Rs. 3.5 lakh, he needs to pay income tax of Rs. 3,50,000 x 10 % = Rs. 35,000 that year (10 % rate, because income falls in that tax slab)

Note that income tax is paid annually (financial year).

Tax rate
General (including women)
Senior citizens (60 to less than 80 years)
Senior citizens (80 years and above)
No tax
0 – 2.5 lakh
0 – 3 lakh
0 – 5 lakh
10 %
> 2.5 lakh – 5 lakh
> 3 lakh – 5 lakh
20 %
> 5 lakh – 10 lakh
> 5 lakh – 10 lakh
> 5 lakh – 10 lakh
30 %
> 10 lakh
> 10 lakh
> 10 lakh

2.  Corporate Tax - It is generally levied on the income of registered companies and corporations. In General Budget 2015-16, this tax is reduced by 5 % from previous 30 % to 25 %, to improve the investment environment and ease of doing business in India.

For example, if in a year company X makes total income of Rs. 5 crore, then it needs to pay corporate tax of Rs. 5,00,00,000 x 25 % (new rate) = Rs. 1.25 crore to the government.

3.  Wealth Tax - It was imposed on property or wealth of an individual, after assessing the value of it. In General Budget 2015-16, this tax is abolished.

4. Gift Tax - It is paid to the government by the recipient of a valuable gift, after assessing the value of the gift.

There are several other Direct Taxes (Estate Duty, Fringe Benefit Tax / Perquisite Tax, Expenditure Tax, etc.), which are directly levied from the taxpayer by the government

(Now try to justify the reason, why these are Direct taxes)

B.  Indirect Taxes

1.  Sales Tax - This tax is charged on the sales of movable goods or commodities. It is charged by both central and state governments as follows -
  • Inter-state sale of goods - Central government
  • Intra-state (within state) sale of goods - respective State governments
Currently, sales tax is only levied by central government, and is known as Central Sales Tax (CST), whereas, state-level sales tax is levied as Value Added Tax (VAT).

2.  Value Added Tax - VAT is almost similar to Sales Tax (except that tax is added in different stages of goods from producer to customer, for more information on calculation refer a Class X Maths book). It is imposed on purchase of goods and services, and is an Indirect Tax.

3.  Service Tax - This tax is levied on the customers who avail services provided by service providers. Over the past few years, service tax has been expanded to cover new services.

Following are some example on which service tax is levied - telephone, advertisement, beauty parlor, restaurant, health center, banking, maintenance services, consultancy services, etc. 

Note that the customer indirectly pays the service tax to the government (customer pays to the service provider, who in turn pays to the government) (as it is an indirect tax)

Government has increased the service tax in this years Budget to 14 % from earlier 12.36 %.

4.  Excise Duty - Excise Duty is levied on goods produced inside IndiaProducers or manufacturers of goods are liable to pay excise duty to the government. The rate is different for different type of goods.

5.  Customs Duty and Octroi - Customs Duty is levied on goods imported in India from foreign countries. The rate depends on the nature of goods. This duty is often payable at port of entry, like ports, airports, etc. 

Octroi is the entry tax which is levied on goods (for consumption, sale or use) entering a particular jurisdiction, generally a municipality.

6.  Entertainment Tax - It is charged from cinema owners, which in turn is charged to the viewers.

There are several other Indirect Taxes (Anti-Dumping Duty, Toll Tax etc.), which are not directly levied to the customer (taxpayer) by the government, but ultimately the customers bear the burden of tax (after availing the goods or services)

(Now try to justify the reason, why these are Indirect taxes)

Goods and Services Tax (GST) - 
In Union Budget 2015-16, government has planned to implement GST by April 2016It will simplify the current indirect tax structure by replacing multiplicity of taxes with a single tax for all goods and services. There will be a common GST compliance which will be done by all kinds of businesses including manufacturers, service providers, traders, etc.

For more information on GST, refer this post.

Cess and Surcharge
Some other taxes, you often hear about -

Education Cess - Most taxes (like Income tax, excise duty, service tax, etc) in India are subject to an education cess, which is generally 2 - 3 % of the total tax payable. Education cess is deducted and used for education of poor people in India.

Surcharge - It is an extra tax that may be added to the existing tax calculation. Note that surcharge is applied on the total tax amount.

Swacch Bharat cess - extra 2 % cess is proposed to be introduced on the value of services in General Budget 2015-16, which will effectively make the service tax as 14 % + 2 % = 16 %

Hope these posts on Taxation have helped you learn the concepts. If you have any query, feel free to comment or mail at

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Tuesday, March 3, 2015

Taxation in India - Part I (Direct and Indirect Taxes)

Paying tax to the government is duty of the citizens. This collected tax is used for building the nation in terms of infrastructure or other developments, paying salary to public servants, and provide uncountable services to the general public. In other words, it is the taxpayer's money which is utilized to benefit them, where the government merely works as the manager of the fund.

Constitutional point of view on Taxes
According to Indian Constitutioncentral or state governments can impose taxation and make laws regarding it. There are total 3 lists -

  1. List Ispecific areas where only the central government (by Parliament) can make laws
    E.g., Income tax (except agricultural income), Customs duty, Corporation tax, etc.
  2. List IIspecific areas where only the state governments (by State Legislature) can make laws
    E.g., Agricultural income tax, Land revenue, Stamp duty, etc.
  3. List IIIsome common areas, where both central and state governments can make laws, known as concurrent list.

Classification of Taxes
Taxes are classified into broad categories depending on the ultimate bearer and transferability of the tax -

1.  Direct Taxes
If the liability to pay a tax and the burden of the tax falls on the same personthen it is known as Direct Tax. Now try to understand it with the example of Income tax -

Income tax is imposed on you, it means that you are liable to pay the tax (you will directly pay the tax to the government) and you cannot shift the burden to others.

2.  Indirect Taxes
If the liability to pay a tax is imposed on one person and the burden of the tax falls on some other personthen it is known as Indirect Tax. Now try to understand it with the example of Sales tax -

In case of Sales tax, the liability to pay the tax to the government is on shopkeeper, who in turn shifts the tax amount to the customer by including it in the price of the commodity. (He pays the tax to the government, but recovers the amount from the customer, thus shifting the burden to the customer)

So, in case of Indirect Tax, the liability is on someone (here, shopkeeper), but the burden is actually shifted to another person (here, customer).

to be continued.. 
(example of direct and indirect taxes with explanation)

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Demat account

Demat Account
Earlier, shares and securities were issued to investors in physical form (like certificates etc.). Physical possession of certificates had several risks - like fear of theft, management problem for individuals who used to invest in several shares or securities at several times, or wear and tear of those certificates (If you lose any certificate, you lose your valuable investment return!)

Then dematerialized account (in short Demat account) was invented to reduce those risks. In this account, all type of shares and securities are being stored in dematerialized / digital form (meaning material form is converted to digital form). 

Operating a Demat account is as simple as operating an online bank account. After opening a Demat account, you will be quoted a demat account number. You will use this account number to all type of electronic settlements of trade in shares or other securities.

Demat Conversion - Rematerialization
Converting physical records of investments into digital form is known as "dematerialization" of securities. The reverse is also possible if someone wants to use physical records instead of demat account, and the process is known as "rematerialization".
In that case, one has to fill in a Remat Request Form (RRF) to convert the digital certificates into equivalent physical certificates.

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Sunday, March 1, 2015

National Income - Part III (new GDP method)

Gross Domestic Product (GDP)
The value of all the finished goods and services produced within a country's border in a year is the GDP of that country. (read previous post - National Income - Part II)

It generally includes - public and private consumption, government spending, investments, and net exports (i.e., total exports - total imports).

GDP = consumption + government spending + investments + (exports - imports)

GDP is commonly used as an indicator to determine the economic health of a country.

GDP of India
Nominal GDP of India (October 2014, by IMF) is approx. USD 2.047 trillion, which makes India 10th largest economy of the world (in terms of nominal GDP).

GDP Growth
While discussing about economic health of a country, the actual GDP (in terms of monetary value) is not considered. Instead, GDP growth reflects how healthy an economy is (you often hear about GDP growth of India is say 5.5 %, but not say, USD 2 trillion)

Note that, if we talk about GDP growth, then there should be some standard GDP, with respect to which, current GDP growth will be measured. That standard is determined by economists, and the year is referred to as base year for calculating GDP growth of current year.

New GDP base year
Earlier 2004-05 financial year was used to determine the GDP growth of current financial year. On that basis, GDP growth of India for 2013-14 was 4.7 %.
It means, that if GDP in 2004-05 were say Rs. 100, then the total GDP of India in 2013-14 became Rs. 104.7.

Central Statistical Office (CSO) under Ministry of Statistics & Programme Implementation (MOSPI) has changed the base year to 2011-12 (from that 2004-05). And with respect to the GDP of 2011-12, Indian economy grew by 6.9 % in 2013-14.

Role of Inflation/Deflation
GDP is calculated with the market prices of finished goods and services of an economy (read previous post on methods of measurement). Therefore it is influenced with the inflation (or, deflation) of the economy.

Therefore, it is required to correct the GDP by removing the influence of Inflation or Deflation. Depending on this, GDP is of 2 types -

  1. Nominal GDP - GDP without adjusting the inflation or deflation influences. Therefore, it can be misleading, because inflation can make GDP look higher, while deflation can make it look lower than the actual GDP.
  2. Real GDP - GDP with adjusted (removed) inflation or deflation. It depicts the actual GDP of an economy.
Note that, in the new base year methodology, government has adopted Consumer Price Index (CPI), instead of Wholesale Price Index (WPI), to adjust the GDP.

Latest comment of Chief Economic Adviser (CEA) on "puzzling" new GDP method
Government's new GDP methodology is "puzzling" mentioned by the Chief Economic Adviser (CEA) - Arvind Subramanian (PTI - Feb 27, 2015)

He said, "I am puzzled as I said because the fact that ... especially what happened in 2013-14, that number is puzzling because that is kind of bad year, yet growth accelerated".

Hope these posts on National Income have helped you learn the concepts. If you have any query, feel free to comment or mail at

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National Income - Part II (GDP, GNP, NNP, NI)

1. Gross Domestic Product (GDP)
GDP is generally calculated in territorial (note Domesticbasis, meaning all (note Grossfinished products within the border of a country is considered.
Therefore, all domestic products including international companies operating in India and excluding Indian workers/companies operating in foreign countries, accounts for GDP of India.

GDP = domestic products + foreign income in India - Indian income in foreign countries

2. Gross National Product (GNP)
GNP is generally calculated in national basis, meaning finished products of a nation is considered, whether it is within the country or abroad.
Therefore, to determine GNP, deduct foreign income in India and add Indian income in foreign countries with GDP.

GNP = GDP - foreign income in India + Indian income in foreign countries

3. Net National Income (NNP)
Value of a product gets depreciated after consumption due to wear and tear. Depreciation does not become part of anybody's income.
Therefore, to determine NNP, deduct the depreciation from the GNP.

NNP = GNP - depreciation

4. National Income (NI)
Note that all of the above variables are evaluated at market prices. It includes indirect taxes (imposed on goods and services), which need to pay to government, making the market price high. Also, there may be government subsidies on the prices of some commodities (like, LPG, etc.), making the market price low.
Therefore, to determine NI, deduct the indirect taxes from NNP and add the subsidies with the NNP.

NI = NNP - indirect taxes + subsidies

to be continued.. 
(GDP of India with the new base year)

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