VisionIAS PT 365 January 2025 Economy PDF

https://upscpdf.com/ https://upscpdf.com/ AHMEDABAD BENGALURU BHOPAL CHANDIGARH DELHI GUWAHATI HYDERABAD JAIPUR JODHPUR LUCKNOW PRAYAGRAJ PUNE RANCHI https://upscpdf.com/...

https://upscpdf.com/ https://upscpdf.com/ AHMEDABAD BENGALURU BHOPAL CHANDIGARH DELHI GUWAHATI HYDERABAD JAIPUR JODHPUR LUCKNOW PRAYAGRAJ PUNE RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ ECONOMY Table of Contents BRIEF GLANCE AT INDIAN ECONOMY _____ 5 2.6. Other Key Developments ____________ 27 2.6.1. Duty Drawback _____________________ 27 1. BANKING AND MONETORY POLICY ____ 6 2.6.2. Windfall Tax _______________________ 28 1.1. Monetary Policy of RBI ______________ 6 3. PAYMENT SYSTEMS & FINANCIAL MARKET 1.1.1. Variable Repo Rate (VRR) _____________ 7 ___________________________________ 29 1.2. Revised Priority Sector Lending Norms _ 7 3.1. Digital Public Infrastructure (DPI) _____ 29 1.3. Mumbai Interbank Outright Rate (MIBOR)9 3.2. Unified Payments Interface (UPI) _____ 29 1.4. RBI Surplus Transfer ________________ 9 3.2.1. Project Nexus ______________________ 30 1.4.1. Ways and Means Advances Scheme ___ 10 3.3. Securities and Exchange Board of India (SEBI) 1.4.2. Other Key Developments Related to RBI 11 1.4.2.1. Credit-Deposit (CD) Ratio __________ 11 ____________________________________ 31 1.4.2.2. Financial Inclusion Index ___________ 11 3.3.1. Settlement Cycle ____________________ 32 1.4.2.3. Reserve Bank – Integrated Ombudsman 3.4. National Stock Exchange (NSE) _______ 33 Scheme _______________________________ 11 3.4.1. Co-location or Proximity Hosting _______ 33 1.4.2.4. Omnibus Framework for recognising Self- Regulatory Organisations (SROs) for Regulated 3.5. Financialization ____________________ 33 Entities (REs) ___________________________ 12 3.6. Indian Derivative Markets ___________ 34 1.5. Universal Banks ___________________ 12 3.7. Credit Rating Agencies ______________ 35 1.6. Urban Cooperative Banks ___________ 13 3.8. Other Key Developments ____________ 36 1.6.1. Prompt Corrective Action (PCA) framework for 3.8.1. Infrastructure Investment Trusts (InvITs) 36 Primary Urban Co-operative Banks (UCBs) ___ 14 3.8.2. Investor Education and Protection Fund 1.7. 50 years of Indian Microfinance Sector 15 Authority (IEPFA) ________________________ 36 3.8.3. Front Running ______________________ 36 1.8. Non-Banking Financial Companies (NBFCs) 3.8.4. India Volatility Index (VIX) ____________ 36 ___________________________________ 15 3.8.5. Finternet __________________________ 37 3.8.6. Perpetual Bonds ____________________ 37 1.9. Non-Performing Assets (NPAs) _______ 16 3.8.7. Participatory notes (p-notes) __________ 37 1.9.1. Wilful Defaulters ___________________ 17 3.8.8. India International Bullion Exchange (IIBX)37 1.10. Insolvency and Bankruptcy Code, 2016 18 3.8.9. Carry Trade ________________________ 38 1.11. Asset Reconstruction Companies (ARC)19 4. EXTERNAL SECTOR _________________ 39 1.12. Household Savings Rate ___________ 20 4.1. India’s Trade Deficit ________________ 39 2. FINANCE AND TAXATION ___________ 22 4.2. Foreign Direct Investment (FDI) _______ 40 2.1. Goods and Service Tax (GST) ________ 22 4.3. Internationalisation of Indian Rupee___ 41 2.1.1. Inverted Duty Structure (IDS) _________ 23 4.4. Bretton Woods Conference __________ 43 2.2. Long-Term Capital Gains (LTCG) & Indexation 4.4.1. International Monetary Fund (IMF) _____ 43 Benefit _____________________________ 23 4.4.2. World Bank ________________________ 44 2.3. Inheritance Tax ___________________ 24 4.5. WTO ____________________________ 45 4.5.1. Agriculture and Food Security _________ 46 2.4. Advance Pricing Agreements ________ 25 4.5.2. WTO Agreement on Fisheries Subsidies 2.4.1. Double Taxation Avoidance Agreement (Geneva Package) ________________________ 47 (DTAA) ________________________________ 26 4.5.3. TRIPS Agreement ___________________ 48 2.5. UN Global Tax Treaty ______________ 26 5. GROWTH AND DEVELOPMENT _______ 49 1 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 5.1. Gross Fixed Capital Formation (GFCF) _ 49 7.2. Gig Economy ______________________ 71 5.2. Human Development Report (HDR) 2023- 7.3. Living Wage_______________________ 72 2024 _______________________________ 50 7.4. Insurance Regulatory and Development 5.3. Global Multidimensional Poverty Index Authority of India _____________________ 73 (MPI) _______________________________ 51 8. BUSINESS, INNOVATION AND 5.4. Middle Income Trap _______________ 52 ENTREPRENEURSHIP _________________ 74 5.4.1. Preston Curve _____________________ 52 8.1. B Ready Index _____________________ 74 5.5. Nobel Prize in Economic Sciences _____ 53 8.2. India's Startup Ecosystem ___________ 75 6. AGRICULTURE & ALLIED SECTOR _____ 54 8.2.1. Angel Tax __________________________ 76 6.1. Agriculture Sector _________________ 54 8.3. Patents (Amendment) Rules, 2024 ____ 76 6.1.1. Horticulture Sector in India___________ 54 6.1.2. Krishi Vigyan Kendra ________________ 55 8.4. Global Innovation Index 2024 and Social 6.1.3. Digital Agriculture Mission ___________ 56 Entrepreneurship______________________ 78 6.1.4. Livestock Sector in India _____________ 56 8.5. Treaty on Intellectual Property, Genetic 6.2. White Revolution 2.0 ______________ 58 Resources and Associated Traditional Knowledge ____________________________________ 79 6.3. Agriculture Infrastructure Fund ______ 59 9. INFRASTRUCTURE __________________ 81 6.4. Agri-Tech ________________________ 59 9.1. PM Gati Shakti National Master Plan __ 81 6.5. Minimum Support Price (MSP) _______ 60 9.2. Public-Private Partnership (PPP) Framework 6.6. India’s Agriculture Export Policy ______ 60 in India ______________________________ 81 6.7. World's Largest Grain Storage Plan in 9.3. Asset Monetization ________________ 82 Cooperative Sector ____________________ 61 9.4. Industrial Parks ____________________ 82 6.8. National Mission on Edible Oils – Oilseeds (NMEO-Oilseeds) _____________________ 62 9.5. Logistics Sector of India _____________ 83 6.9. Millet ___________________________ 63 9.6. India’s Port Sector _________________ 84 9.6.1. Other Key Developments Related to Port 6.10. SPICED Scheme __________________ 64 Sector _________________________________ 85 6.11. Pulses __________________________ 65 9.7. Indian Railways Safety ______________ 86 6.12. Jute ___________________________ 66 9.8. National Bank for Financing Infrastructure 6.13. NABARD All India Rural Financial Inclusion and Development (NaBFID) _____________ 87 Survey (NAFIS) 2021-22 ________________ 66 10. SERVICES ________________________ 88 6.14. Primary Agriculture Credit Socities (PACS) 10.1. E-commerce _____________________ 88 ___________________________________ 67 10.1.1. Open Network for Digital Commerce (ONDC) 6.15. Fisheries Sector __________________ 68 _______________________________________ 88 6.15.1. Seaweed Farming _________________ 69 10.1.2. Antitrust Laws _____________________ 89 6.16. Other Key Developments __________ 69 11. MINING, ENERGY & INDUSTRY ______ 90 6.16.1. Central Silk Board _________________ 69 11.1. Coal Sector in India ________________ 90 6.16.2. Indian Council of Agricultural Research (ICAR)-National Institute of Secondary Agriculture 11.2. Offshore Minerals in India __________ 91 (NISA) _________________________________ 70 11.3. Steel Sector ______________________ 92 7. LABOUR And EMPLOYMENT _________ 71 11.4. Bio-Economy _____________________ 93 7.1. Periodic Labour Force Survey ________ 71 11.5. Space Economy ___________________ 94 2 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 11.6. Voluntary Vehicle Modernization Program 12. MISCELLANEOUS_________________ 100 ___________________________________ 95 12.1. Nidhi Companies ________________ 100 11.7. National Electricity Plan (Transmission)96 12.2. ISI Mark ________________________ 100 11.8. Textiles Sector ___________________ 96 11.8.1. Technical Textiles _________________ 97 12.3. Green Shoots ___________________ 100 11.9. Other Key Developments __________ 98 12.4. Enhanced Integrated Framework (EIF)101 11.9.1. Index of Eight Core Industries________ 98 12.5. Telecommunications (Administration of 11.9.2. Navratna Status ___________________ 98 Digital Bharat Nidhi) Rules, 2024 ________ 101 11.9.3. Expert Committee on Developing GIFT IFSC ______________________________________ 98 12.6. NCoE for Animation, Visual Effects, Gaming, 11.9.4. World Gold Council (WGC) __________ 99 Comics, and Extended Reality ___________ 101 Copyright © by Vision IAS All rights are reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of Vision IAS. 3 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 4 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ BRIEF GLANCE AT INDIAN ECONOMY Copyright © by Vision IAS All rights are reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of Vision IAS. 5 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 1. BANKING AND MONETORY POLICY 1.1. MONETARY POLICY OF RBI Why in the news? Reserve Bank of India (RBI) released study on Monetary Policy Transmission. What is Monetary Policy? Monetary Policy: It is a set of actions available to a nation's central bank (RBI in India) to achieve sustainable economic growth & Maintaining price stability by adjusting money supply. Monetary Policy Transmission: It is process through which monetary policy decisions i.e., policy rate changes by RBI's monetary committee, impact economic variables, price level, & overall economy. Statutory Basis: RBI, Act, 1934 (amended in 2016). Monetary Policy Framework: Central Government, in consultation with RBI, determines inflation target in terms of Consumer Price Index (CPI) every 5 years. o Flexible Inflation Targeting: Currently, it is 4% (with a tolerance of +/- 2%) till March, 2026. (Note: RBI's sterilizations involve managing excess liquidity in the economy to stabilize inflation & currency fluctuations. It uses tools like OMOs, CRR, Market Stabilization Scheme etc.) Types of Monetary Policy Expansionary Monetary Policy Contractionary Monetary Policy The central bank lowers interest rates, Central Bank increases interest rates; Banks also and banks also reduce interest rates, charge a higher interest rate, making loans more making loans cheaper. Businesses and expensive. Individuals borrow more. Leads to a decline in liquidity, money supply, aggregate It increases market liquidity, boosts consumption, inflation, investment, output, capital demand, and stimulates economic stock, etc. growth. Leads to a decrease in borrowing by businesses and RBI Action: individuals, accompanied by rise in unemployment rates. o RBI Buys G-securities from Market RBI Action: under Open Market Operations. o RBI sells G-securities from Market under Open o Reduces CRR, SLR, Repo Rate, Market Operations. Reverse Repo Rate and Bank Rate o Increases CRR, SLR, Repo Rate, Reverse Repo Rate and Bank Rate 6 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 1.1.1. VARIABLE REPO RATE (VRR) Why in the news? The RBI injected ₹25,000 crore via Variable Rate Repo to address liquidity deficit in the banking system. About Variable Rate Repo (VRR) VRR is a market-determined rate is generally lower than the Repo Rate (but not below the Reverse Repo Rate) and applies to loans with durations exceeding one day usually up to 14 days. When the RBI wants to infuse liquidity but banks are reluctant to borrow at the Repo Rate due to lower market interest rates, it allows banks to borrow at the Variable Rate Repo (VRR). o Repo Rate is the rate at which Banks borrow money from RBI which is fixed by Monetary Policy Committee. It is a tool to inject short-term liquidity into the banking system. Similarly Variable Rate Reverse Repo (VRRR) is conducted to absorb the excess liquidity from the system. 1.2. REVISED PRIORITY SECTOR LENDING NORMS Why in the news? Recently, RBI revised Priority Sector Lending (PSL) guidelines to promote small loan in economically disadvantaged districts with low average loan sizes. Revised Priority Sector Lending Norms Incentive framework: It establishes an incentive framework for districts with lower credit flow starting from FY25. o More weight (125%) will be given to fresh priority sector loans in districts where loan availability is low (less than Rs 9,000 per person). Disincentive framework: In districts with high loan availability (more than Rs 42,000 per person), the loans will have a weight of 90%. Other districts: With exception of outlier districts with low credit availability and those with high loan sizes, all other districts will continue to have the current importance level of 100%. MSME loans: All bank loans to MSMEs shall qualify for classification under PSL. What is Priority Sector Lending (PSL)? Definition: Priority Sector means those sectors which Government and RBI consider important for development of the country and are to be given priority over other sectors. 7 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Objective: To ensure that vulnerable sections of society and underdeveloped areas get access to credit. PSL was formalized in 1972. Committees associated with PSL: Gadgil Committee (1969), Ghosh Committee (1982). PSL Certificates (PSLCs): PSLCs are tradable certificates issued against priority sector loans of banks. o PSLCs aim to enable banks to achieve the priority sector lending target by purchase of these instruments in the event of shortfall and incentivize surplus banks. 8 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 1.3. MUMBAI INTERBANK OUTRIGHT RATE (MIBOR) Why in the news? Recently, the RBI recommended changes in the methodology for computing MIBOR and proposed transitioning to a new secured money market benchmark for popular product derivatives. India’s Transition from London Interbank Offered Rate (LIBOR) Last year, the RBI had issued an advisory to banks and other RBI-regulated entities asking them to take steps to ensure a complete transition away from the LIBOR. o LIBOR is a global benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.  Call Money Market is a financial market where financial institutions and banks lend and borrow funds for short-term needs. The RBI has established a system of Alternative Reference Rates (ARRs) that allows banks to choose rates from a basket of currencies rather than the British pound international for financial transactions. Alternatives to London Interbank Offered Rate (LIBOR) Secured Overnight Financing rate (SOFR), USA, Mumbai Modified Interbank Forward Overnight Rate (MIFOR), India, Shanghai Interbank Offered Rate (SHIBOR) in China, Tokyo Interbank Offered Rate (TIBOR), Japan. Financial Benchmarks India Pvt Ltd (FBIL) Genesis: It was formed in 2014 as a private limited company under the Companies Act, 2013. o It is jointly owned by Fixed Income Money Market and Derivatives Association of India (FIMMDA), Foreign Exchange Dealers Association of India (FEDA) and Indian bank Association (IBA). Objective: Its aim is to develop and administer benchmarks relating to money market, government securities and foreign exchange in India. Regulation: FBIL is regulated by the Reserve bank of India. 1.4. RBI SURPLUS TRANSFER Why in the news? Reserve Bank of India (RBI) approved highest-ever surplus transfer of Rs 2.11 lakh crore to government for FY24 which is more than double the previous year’s ₹86,416 crore. About RBI Surplus Surplus implies excess of income over expenditure. RBI’s total expenditure is only about 1/7th of its total net interest income, thereby generating surplus. 9 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Provisions regarding RBI transfer surplus to the government RBI Act, 1934: Section 47 mandates RBI to transfer its profits to the Centre. Committees’ recommendations: Following the Malegam Committee (2013), surplus transfers increased. Economic Capital Framework (ECF): As per the Bimal Jalan Committee, surplus transfer depends on: o Realized equity: Maintained between 5.5% and 6.5% of the balance sheet; excess transferred to the government. o Economic capital (CGRA): Kept between 20.8% and 25.4% of the balance sheet; excess transferred to the government.  Currency & Gold Revaluation Account (CGRA) includes capital, reserves, and unrealized gains or losses. 1.4.1. WAYS AND MEANS ADVANCES SCHEME Why in the news? Recently, Reserve Bank of India (RBI) has increased the Ways and Means Advance (WMA) limit of States/UT to Rs 60,118 crore from existing Rs 47,010 crore. About Ways and Means Advance (WMA) Definition: Advances to States/UTs provided by RBI to meet temporary mismatches in the cash flows of receipts and payments are known as Ways and Means Advance (WMA). o Facility is also available for the Union Government. Types: Normal WMA and Special WMA (now known as Special Drawing Facility (SDF)). o First, a state/UT is provided with a special WMA and after its exhaustion, it gets a normal WMA. o Special WMA has lower interest rate than Normal WMA Interest Rates: linked to Repo rate. Apart from WMA, Special Drawing Facility (SDF), and Overdraft (OD) facility are important financial accommodation instruments availed by States/UTs. o These instruments are governed by under the RBI Act, 1934. 10 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Special Drawing Facility (SDF) Overdraft Facility Availed by State against the collateral of Facility is provided whenever financial Consolidated Sinking Fund (CSF), Guarantee accommodation to a State exceeds its SDF and Redemption Fund (GRF), Auction Treasury Bills WMA limits. (ATBs), etc. Generally, State Governments/UTs can avail o CSF and GRF are reserve funds maintained overdraft on 14 consecutive days (relaxation can by some State with the RBI. be provided by RBI). 1.4.2. OTHER KEY DEVELOPMENTS RELATED TO RBI 1.4.2.1. CREDIT-DEPOSIT (CD) RATIO The Reserve Bank of India (RBI) raised concerns over bank’s high CD Ratio and asked them to reduce it. What is CD Ratio? CD Ratio is a financial metric representing the percentage of loans a bank has issued relative to its total deposits. o It is the ratio of how much a bank lends out of the deposits it has mobilised. o A higher CD Ratio suggests that a significant portion of the bank's resources are allocated to loans.  It could potentially stimulate economic growth but also implies higher risk. According to the RBI’s Financial Stability Report: CD ratio peaked at 78.8% (highest since 2005) in December 2023 and Over 75% of the banks with CD ratios above 75% are private sector banks. Key Reasons for high CD ratio Higher credit growth: Rising retail credit & increasing loans to businesses and MSMEs. Slower deposit growth: Customers are transitioning from savers to investors and diverting funds to capital markets, slowing deposit growth. Impact of High CD Ratio on Banks Pressure on Net Interest Margins (NIM): NIM is a measure of the net return on the bank’s earning assets like investment securities, loans, etc. Liquidity risk: Banks' may be unable to timely meet payment obligations. Credit risk: Borrowers could default on their contractual obligations. 1.4.2.2. FINANCIAL INCLUSION INDEX The Reserve Bank of India (RBI) has announced that the Financial Inclusion Index (FI-Index) has risen to 64.2 in March 2024, up from 60.1 in March 2023. About Financial Inclusion Index: It is a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector. It captures the extent of financial inclusion across the country. Single value index (0 to 100), where 0 is complete exclusion and 100 is full inclusion. It includes three broad parameters viz., Access (35%), Usage (45%), and Quality (20%). It is published annually in July. 1.4.2.3. RESERVE BANK – INTEGRATED OMBUDSMAN SCHEME RBI released the Annual Report of the Ombudsman Scheme 2022-23, the first stand-alone report under the Reserve Bank – Integrated Ombudsman Scheme (RB-IOS), 2021. 11 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Reserve Bank – Integrated Ombudsman Scheme (RB-IOS), 2021 About: Launched in 2021 as part of the Alternate Grievance Redress (AGR) Framework of RBI for resolving customer grievances in relation to services provided by the Regulated Entities of RBI. Formation: Under Banking Regulation Act, 1949, RBI Act, 1934, and Payment and Settlement Systems Act, 2007. Objective: To provide cost-free redress of customer complaints. Coverage: Scheme covers the following Regulated Entities: o All commercial banks, Regional Rural Banks, Scheduled Primary (Urban) Co-operative Banks and Non- Scheduled Primary (Urban) Co-operative Banks with deposits size of ₹50 crore and above. o All Non-Banking Financial Companies (except Housing Finance Companies), authorized to accept deposits or have customer interface, with an assets size of ₹100 crore and above. o All Payment System Participants and Credit Information Companies (CICs). Appointment of Ombudsman: RBI may appoint one or more of its officers as Ombudsman and Deputy Ombudsman for a tenure not exceeding three years at a time. Handling of complaints: Redressal/adjudication of complaints is presently handled by 24 Offices of the RBI Ombudsman (ORBIOs) and Centralized Receipt and Processing Centre (CRPC). 1.4.2.4. OMNIBUS FRAMEWORK FOR RECOGNISING SELF-REGULATORY ORGANISATIONS (SROS) FOR REGULATED ENTITIES (RES) Reserve Bank of India (RBI) finalised the Omnibus Framework for recognising Self-Regulatory Organisations (SROs) for Regulated Entities (REs). About SROs Objectives of SROs include promoting compliance culture, support to smaller entities, act as collective voice of members, collect sectoral information, and encourage R&D culture. Eligibility: An SRO shall be setup as a not-for-profit company registered under Section 8 of the Companies Act, 2013. o It should have adequate net worth, sufficiently diversified shareholding and must represent the sector. Characteristics: SRO shall have sufficient authority derived from membership agreements along with strong governance mechanisms. o It shall develop standards for improving compliance culture and surveillance methods for sector monitoring. Governance framework: o Articles of Association (AoA)/ bye-laws shall provide for manner of functioning of Governing Body and specify the functions of SRO. o At least one-third of members in Board of Directors including Chairperson shall be independent. o Compliance with relevant Acts, regulations, guidelines, directions or circulars issued by RBI. 1.5. UNIVERSAL BANKS Why in the news? RBI sets Eligibility Criteria for Small Finance Banks (SFB) to transit into Universal banking under on-tap licensing. About Universal banks ‘Universal banks (UBs) are banks that offer a wide range of financial services, beyond commercial banking and investment banking, such as insurance. o Until now, SFBs were allowed to primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections On-tap licensing: It was introduced in 2016 for allowing banks to apply for banking licenses with the RBI throughout the year. 12 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ o Prior to this, banking licenses were granted upon invitation of applications by RBI to prospective players. Eligibility for SFBs to transitioning into UBs Net Worth: SFBs must have a minimum net worth of Rs 1,000 crore. Status: SFBs must be scheduled banks with a satisfactory track record of performance for a minimum of 5 years. Financial Health: o Profitability: Should have net profits in the last two Financial Years. o Asset Quality: Gross non-performing assets (G-NPA) and net NPA (N-NPA) must be less than or equal to 3% and 1%, respectively, over the last two FYs. Stock Listing: Shares must be listed on a recognized stock exchange. Promoter Requirements: No addition of new promoters or changes to existing promoters is permitted during the transition. o No changes are allowed to the promoter shareholding dilution plan previously approved by the RBI. Preference: SFBs with a diversified loan portfolio will be preferred. 1.6. URBAN COOPERATIVE BANKS Why in the news? The RBI asked Urban Cooperative Banks (UCBs) to stop the practice of setting up a Dividend Equalisation Fund (DEF). About DEF DEF are set up by UCBs through appropriation of profits to pay dividends in future years, when profits are insufficient or where the bank has posted a net loss. o However, current rules distinctly prohibit making such payments from previously accumulated profits or reserves. As a one-time measure, RBI also permitted UCBs to transfer the money in the DEF to general reserves/free reserves to provide better treatment of these balances for regulatory capital purposes. About Urban Cooperative Banks (UCBs) Legal status: Registered as cooperative societies either under the State Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, of 2002. Dual Regulation: o RBI regulates and supervises banking functions under the Banking Regulation Act, of 1949. o State/ Central Registrar of Cooperative Societies supervises managerial, administrative, and, other matters. 13 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Lending: Mandated to achieve priority sector lending target 75% by March 2026 and are allowed to lend money for agricultural purposes. RBI’s regulatory framework categorizes UCBs into 4 tiers (See Infographic). Initiatives taken to strengthen UCBs Banking Regulation (Amendment) Act, 2020: Gives RBI powers to supersede boards of the Cooperative banks. o It brought management, governance, winding up, etc. under RBI’s purview. Ease of expansion: Some UCBs are allowed to open new branches up to 10% (maximum 5 branches) of the existing number of branches in the previous financial year without prior approval from RBI. NUCFDC: National Urban Cooperative Finance and Development Corporation Limited (NUCFDC) is an umbrella organisation for the UCBs. About NUCFDC NUCFDC is an Umbrella Organisation (UO) registered with RBI as a Type II Non-Banking Financial Company (NBFC-ND). o Type II NBFC-ND accepts public funds or has a customer interface. o It will operate as a Self-Regulatory Organization (SRO) for the sector. The need for a UO for India’s UCB sector was first highlighted by an RBI Working Group chaired by Shri N.S. Viswanathan in 2006, & model was recommended in 2009 by working group led by Shri V.S. Das. Major functions: o Liquidity and capital support: Raise capital (target Rs. 300 crores) and offer fund management and consultancy services to UCBs. o Regulatory compliance: Prepare UCBs for compliance with the Banking Regulation Act (BRA), 1949, and facilitate communication with regulators. o Technology platform: Develop a shared platform to help UCBs expand services at lower costs. 1.6.1. PROMPT CORRECTIVE ACTION (PCA) FRAMEWORK FOR PRIMARY URBAN CO - OPERATIVE BANKS (UCBS) Why in the news? RBI issued Prompt Corrective Action (PCA) framework for Primary Urban Co-operative Banks (UCBs). Key features of the new PCA framework Objective: To address the financial health of UCBs with greater precision and flexibility. Implementation: It will be effective from April 1, 2025, replacing existing Supervisory Action Framework (SAF). Application: To all UCBs in tier 2, tier 3, and tier 4 categories, with the exception of those under All Inclusive Directions (AID). Capital, Asset Quality and Profitability of UCBs will be the key areas for monitoring. A financially unsound and ill-managed UCB can be brought under PCA if it breaches the risk thresholds. 14 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ The exit from PCA and withdrawal of Restrictions: if no breaches in risk thresholds in any parameters are observed as per four successive quarterly financial statements. 1.7. 50 YEARS OF INDIAN MICROFINANCE SECTOR Why in the news? India’s first Microfinance Institution (MFI), Self Employed Women’s Association (SEWA) Bank established in 1974, completed 50 years. What is Microfinance (Microcredit)? About: It offers financial services like small value loans to marginalized and poor individuals who lack access to formal banking services. o All collateral-free loans to individual/s belonging to low-income households, i.e., households having annual income up to ₹3, 00,000 are treated as microfinance loans (RBI). o Microfinance Institutions usually charges higher Interest rates compared to those charged by commercial banks. Background: Nobel Laureate Muhammad Yunus laid the foundation of modern MFIs with establishment of Grameen Bank in Bangladesh in 1976. Regulation in India: RBI is regulatory body for MFIs operating in country. o RBI’s Malegam Committee (2010) recommended for framework to regulate NBFC –MFI. Initiatives taken by Government for Microfinance in India Pradhan Mantri Mudra Yojana (PMMY): Providing loans up to 10 lakh to non-corporate, non-farm small/micro enterprises through commercial banks, NBFCs, etc. o Loans under MUDRA are categorized as Shishu, Kishore and Tarun. o 2024 Union Budget enhanced limit to ₹20 lakh (Tarun Plus) from current ₹10 lakh for those who have availed and successfully repaid loans previously taken under Tarun category. Recognition of Self-Regulatory Organizations (SROs): In 2014, the RBI recognised the Microfinance Institutions Network (MFIN) and Sa-Dhan as SROs. Harmonised Regulations: In 2022, RBI introduced harmonised regulations for all regulated entities (REs) engaged in microfinance. SHG-Bank Linkage Program: Initiated by NABARD in 1992, is one of the largest microfinance programs in the world to provide financial services to the unreached and underserved poor households. o In an SHG, all members of a group take responsibility for a loan that an individual member takes. o The Regional Rural Banks and Scheduled Commercial Banks support SHGs. 1.8. NON-BANKING FINANCIAL COMPANIES (NBFCS) Why in the news? Recently, the Reserve Bank of India (RBI) banned four NBFCs from Granting Loans exercising its powers under Section 45 L (1)(b) of the Reserve Bank of India Act, 1934. What is Non-Banking Financial Company (NBFC)? It is a company registered under the Companies Act, 1956/2013, primarily engaged in lending activities, but excludes institutions mainly involved in agriculture, industrial activity, trading goods (except securities), and providing any services and sale/purchase/construction of immovable property. Regulation: o National Housing Bank: Regulates Housing Finance Companies. o SEBI: Regulates Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub- brokers. o Insurance Regulatory and Development Authority: Regulates Insurance companies. o State Governments: Regulates Chit Fund Companies. o Ministry of Corporate Affairs: Nidhi Companies are regulated by Ministry of Corporate Affairs. 15 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ What is difference between banks & NBFCs? NBFCs cannot accept demand deposits. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself. The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of NBFCs. o Established under DICGC act, 1961, DICGC covers all commercial banks including branches of foreign banks functioning in India, local area banks, and regional rural banks.  DICGC insures all bank deposits upto a maximum amount of Rs. 5 lakhs. What is Scale-based Regulation (SBR) for NBFCs? Segregation of NBFCs: NBFCs are segregated into four layers based on their size, activity, and perceived level of riskiness. (Refer to Infographic). Differential regulations: Each tier is subject to different regulatory requirements, tailored to its size and risk profile. Related News NBFC-P2P lending regulation – master circular by RBI P2P lending involves individual lending and borrowing money directly through digital platforms, without the involvement of traditional financial institutions like banks. Key Regulation o NBFC—P2P lending platforms are supposed to act as an intermediary for P2P lending participants. o Limiting exposure of a lender across all P2P platforms to Rs.50,00,000. o Prohibits P2P platforms from promoting P2P lending as an investment product and cross-selling any insurance product. 1.9. NON-PERFORMING ASSETS (NPAS) Why in the News? RBI’s biannual Financial Stability Report (FSR) highlights achievements in Non- Performing Assets (NPA). About Financial Stability Report It is based on assessment of Sub-Committee of Financial Stability and Development Council (FSDC). It highlights that Scheduled commercial banks Gross NPAs (GNPAs) and Net NPA ratios fell to multi-year lows of 2.8% and 0.6% respectively at March-end 2024. 16 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ What is NPA? Financial Stability and Development Council (FSDC) A Non- Performing Assets About: FSDC was setup as apex level forum in 2010 to strengthen (NPA) is a loan or advance and institutionalise the mechanism for maintaining financial that is overdue for more than stability, enhancing inter-regulatory coordination & promoting 90 days. financial sector development. Gross Non- Performing Composition: Chairman of FSDC is the Finance Minister. Assets (GNPA) refers to the o Its members include heads of financial sector regulators (RBI, sum of all loan assets that are SEBI, PFRDA, and IRDAI), Finance Secretary and/or Secretary, classified as NPAs. Department of Economic Affairs, Secretary, Department of Financial Services, and Chief Economic Adviser. Steps Taken to Reduce NPAs SARFAESI Act, 2002: Allows secured creditors to take possession of collateral upon a default in repayment. Insolvency and Bankruptcy Code (IBC), 2016: For reorganization and insolvency resolution of corporate, partnership firms and individuals. National Asset Reconstruction Company Limited: To resolve stressed assets above Rs. 500 crore. PRAVAAH portal (Platform for Regulatory Application, Validation, and Authorisation): Secure and centralized web-based portal to seek authorisation, license, or regulatory approval. RBI revised NPA Provision Norms for Co-operative Banks: These new norms (applicable to Urban, state and central co-operative banks). o Provisions for Bad & Doubtful Debt Reserve (BDDR) under Income Recognition, Asset Classification, and Provisioning (IRACP) norms must be charged as an expense to the Profit and Loss Account. o After complying with IRACP norms and other regulations, co-operative banks may allocate net profits to BDDR.  Provisioning means that the bank sets aside a prescribed amount from profits to cover probable losses Co-Lending The Finance Ministry has asked the State Bank of India to form a committee to tackle co-lending issues. About Co-lending/Co-origination o It is an arrangement where multiple lenders partner to provide loans to borrowers.  This helps increase lending capacity and reduces risk for individual lenders. o As per RBI, banks and NBFCs can co-lend loans to priority sectors, with a minimum 20% credit risk on NBFCs, and the rest on banks. o Banks are not allowed to enter into co-lending arrangement with an NBFC belonging to the promoter Group. 1.9.1. WILFUL DEFAULTERS Why in the news? RBI issues direction on Treatment of Wilful Defaulters (WD) and Large Defaulters under Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and Credit Information Companies (Regulation) Act, 2005. 17 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Key Provisions of the Direction Wilful Defaulter: Wilful default with outstanding amount of ₹25 lakh and above. o Wilful default occurs when borrower defaults in meeting payment/ repayment obligations to the lender and any one or more features are noticed  borrower has the capacity to pay,  diversion of funds and siphoned off the funds,  disposal of immovable or movable assets provided for securing credit, or  failure to infuse equity despite having the ability to do so. Large defaulter: Default with an outstanding amount of ₹1 crore and above, and where suit has been filed or whose account has been classified as doubtful or loss. Identification: Lenders have to establish Identification Committee to examine the evidence of wilful default. Related News Inter Creditor Agreement (ICA) Default by Government-owned Rashtriya Ispat Nigam (RINL) forced lenders to seek cover through an Inter Creditor Agreement (ICA). About ICA o It describes terms and allocation of collateral between common lenders in the event of a default by borrower. o It establishes borrower’s rights and positions concerning collateral, payment, and payment priority, as well as the hierarchy between various creditors. o According to Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, any decision agreed by lenders representing 75% by value of total outstanding credit facilities and 60% of lenders by number shall be binding on all lenders. 1.10. INSOLVENCY AND BANKRUPTCY CODE, 2016 Why in the news? Recently, The IBBI issued new guidelines to streamline the process of appointing Insolvency Professionals (IPs) as resolution professionals. What is Insolvency and Bankruptcy Code, 2016? About: It is India's bankruptcy law that consolidated the existing framework for insolvency and bankruptcy into a single law. o Insolvency refers to a financial state where an individual or entity is unable to pay its debts when due, or their liabilities exceed their assets. o Bankruptcy is the legal process that follows insolvency, wherein the court or a tribunal declares an individual or business legally unable to pay off their debts. Objective: To promote a time-bound resolution process for distressed businesses, improve recovery rates for creditors, and provide an exit mechanism for companies facing financial distress. Pillars of IBC Code: Insolvency Professionals (IPs): An IP is appointed to conduct the insolvency resolution process for all categories of persons. They Manage insolvency, liquidation and bankruptcy process. o Corporate Insolvency Resolution Process (CIRP) or withdrawal of CIRP or liquidation process is largely executed through IPs. o IPs are regulated through Insolvency Professional Agencies (IPAs). Information Utilities (IUs): They collect, authenticate, and disseminate financial information of companies to facilitate the insolvency resolution process. 18 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Adjudicating Authority (AA): NCLT and Debt Recovery Tribunal. o National Company Law Tribunal (NCLT): For CIRP and liquidation of corporate persons, including corporate debtors (CDs) and their personal guarantors.  IBC mandates completion of the CIRP within 180 days, extendable to a maximum of 330 days. o Debt Recovery Tribunal (DRT): For individual or partnership insolvency and bankruptcy.  For DRT, the timeline to resolve a debt recovery case is 180 days. Appellate Tribunal: o National Company Law Appellate Tribunal (NCLAT): For hearing appeals against the orders passed by NCLT’s and IBBI. NCLAT’s decisions can be further appealed in the Supreme Court. o Debt Recovery Appellate Tribunal: Appeals from DRTs are filed before the Debt Recovery Appellate Tribunal. It can be further appealed in SC within 45 days. About Pre-Packaged Insolvency Resolution Process (PPIRP) It was introduced in the IBC, 2016 through an amendment in 2021. It provides for the resolution of stress of corporate MSMEs. It is initiated voluntarily by the debtor and is available for defaults of at least ₹ 10 lakh. PPIRP envisages a hybrid process, where pre-initiation phase is largely informal and post-initiation stage is formal. PPIRP is required to be completed within a period of 120 days. 1.11. ASSET RECONSTRUCTION COMPANIES (ARC) Why in the news? Reserve Bank of India (RBI) has issued master Direction – RBI (Asset Reconstruction Companies) Directions, 2024 under (SARFAESI) Act, 2002. About ARCs Definition: It is a financial institution that buys Non-Performing Assets (NPAs) from banks & financial institutions so that the latter can clean up their balance sheets. E.g., National Asset Reconstruction Company Limited. o ARCs are required to resolve the assets within a maximum of 8 years of acquisition of financial assets and redeem the security receipts representing the assets. 19 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Genesis: SARFAESI Act in 2002 envisaged that ARCs would be registered and regulated by RBI. o Narasimham Committee – II (1998) proposed asset reconstruction companies, on the similar lines of asset management companies’ prevalent globally. Significance: Free up stressed assets & help banks to focus on their core lending function by removing bad loans from their books, facilitate asset recovery & revive businesses by restructuring their loans etc. Key Provisions Net Own Fund (NOF): To commence the business, an ARC is required to have a minimum NOF of Rs 300 crore. Registration: Before commencing business, ARC shall obtain a certificate of registration (CoR) from the RBI. Leadership Positions: It set age limit of 70 for MD/CEO or Whole-time Director & tenure of 5 years at a time, with a maximum tenure of 15 years continuously. ARCs shall report to IBA: Details of CAs, advocates & valuers (who committed serious irregularities) for including in Indian Banks’ Association (IBA) database. Internal audit: ARCs shall put in place a system for periodical checks and review of the asset acquisition procedures and asset reconstruction measures. Other Provisions: ARCs are prohibited from raising money by way of deposit. o Mandated to maintain a capital adequacy ratio of a minimum of 15% of its total risk-weighted assets. Other Recent Changes by RBI Strengthened corporate governance of ARCs: RBI mandated that the chair of the board and at least half the directors in a board meeting must be independent directors. Member of CIC: Every ARC shall become a member of at least one Credit Information Company (CIC) having certificate of registration from the RBI. o CICs collect public data, credit transactions and payment histories of individuals and companies regarding loans, credit cards, among others. E.g. TransUnion CIBIL Limited etc. ✓ RBI increases the frequency of reporting of credit information by lenders to CICs from monthly intervals to fortnightly basis or shorter intervals to boost transparency in system. o CICs are licensed by RBI and regulated by CIC Regulation Act, 2005 along with RBI guidelines. 1.12. HOUSEHOLD SAVINGS RATE Why in the News? RBI Deputy Governor said that Household savings will remain top net lenders to the economy in the coming decades. Household Savings Household savings are categorized into: o Financial savings: currency, deposits, life insurance funds, etc. 20 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/  Decline in financial savings poses challenges for banking sector in maintaining liquidity and managing credit risk. o Physical savings: physical assets along with savings made in gold and silver. About Household Savings Rate Household savings rate is expressed as ratio of household savings to GDP. A share of the household financial savings goes towards government borrowings. In India, household sector typically generates surplus savings relative to its investments, lending the excess to other sectors. 21 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 2. FINANCE AND TAXATION 2.1. GOODS AND SERVICE TAX (GST) Why in the news? Goods and Services Tax (GST) Council has set up a Group of Ministers (GoM) to decide on the taxation of luxury, sin and demerit goods once the compensation cess ends in March 2026. About GST Compensation Cess Luxury, Sin and Demerit Goods Luxury Goods: Goods which non-essential but GST (Compensation to States) Act, 2017 deemed as highly desirable within a culture/society. was enacted to levy Compensation Cess for Ex. Sports Utility Vehicles (SUVs). providing compensation to the States for the Sin Goods: Goods which are considered harmful/ loss of revenue arising on account of undesirable for society & considered ethically implementation of the GST. questionable by society Ex. Gambling, alcohol etc. Compensation cess at varied rates is levied Demerit Goods: Goods that consumer like but are on luxury, sin and demerit goods over and actually harmful & therefore their consumption is above the 28% tax. discouraged. Ex. Tobacco, Cigarettes etc. What is GST? GST is a comprehensive indirect tax levied on the supply of goods and services. o It is a value-added tax (VAT). 101st Constitutional Amendment Act introduced the GST in 2017. About GST Council Constitutional body established under Article 279A of Constitution through 101st Constitutional Amendment Act, 2016. Constituted by President with Union Finance Minister as Chairperson. Objective: Responsible for setting tax rates, making policy decisions related to GST and making recommendations to center and states. Decision Making: A decision requires a three-fourths majority of the weighted votes. The states collectively have 2/3rd voting weight while Centre have 1/3rd. About GST Appellate Tribunal It is a Second Appellate Authority established under Central GST (CGST) Act, 2017 for hearing appeals against orders passed by Appellate Authority under CGST Act, 2017 and State GST Acts. It consists of a Principal Bench (New Delhi) and various State Benches. 22 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Principal Bench shall be presided over by President and shall consist of two Technical Members (one each from Centre and State). o GSTAT President is appointed by the Government after consultation with the Chief Justice of India or his/her nominee for a tenure of 3 yrs or until the age of 70 years, whichever is earlier, and shall be eligible for reappointment. About Excise Duty Excise Duty is a type of indirect tax which is applicable on the goods manufactured in India and used for consumption within India. (Opposed to customs duties, charged on goods from outside the country). o The Central Board of Excise and Customs (CBEC) is responsible for collecting the excise duty. At the central level, excise duty earlier used to be levied as Central Excise Duty. However, GST subsumed many types of excise duty. Today, excise duty applies only on petroleum and liquor. Excise duty on alcohol, alcoholic preparations, and narcotic substances is now collected by the State Government and is called "State Excise" duty. 2.1.1. INVERTED DUTY STRUCTURE (IDS) Why in the news? Ministry of Commerce and Industry shared certain items to Ministry of Finance to address Inverted Duty Structure (IDS). About Inverted Duty Structure Refers to situation where import duties on input goods are higher than on finished goods. o In other words, the GST rate paid on purchases is more than the GST rate payable on sales. Impact of IDS: o Expensive inputs make products costly. o Affects domestic industry, makes difficult to compete in the export market. o Taxpayers who face an inverted duty structure will always have Input Tax Credit (ITC) in their GST electronic credit ledger. o Creates working capital issues for the taxpayers as their resources remain blocked in the form of Input Tax Credit (ITC) due to high input tax. Also, IDS leads to refund-related issues under the GST regime. 2.2. LONG-TERM CAPITAL GAINS (LTCG) & INDEXATION BENEFIT Why in the News? Lok Sabha cleared the Finance Bill, 2024 amending Long Term Capital Gain (LTCG) tax provision on immovable properties. 23 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Key Provisions of Amendment Act Abolishment of Indexation Benefits: The amendment continues the abolishment of indexation benefits (announced in Budget 2024-25) but allows grandfathering for properties acquired before 23rd July 2024. o Grandfather Clause allows properties purchased before the cutoff date to still benefit from indexation, despite the new rules for future acquisitions. Choices for Taxpayers o The amendment provides taxpayers with a choice to pay the lower tax amount:  Old Scheme: Pay 20% LTCG tax with indexation on properties acquired before July 23, 2024.  New Scheme: Pay 12.5% LTCG tax without indexation (reduced from the earlier 20%). o For properties purchased after July 23, 2024, only the new scheme applies. o Indexation benefits apply only to gains, and they will not apply to any losses incurred. Enhanced Exemption: The exemption limit for LTCG on listed equity, equity-oriented mutual funds, and business trust units has increased from 1 lakh to 1.25 lakh. o The LTCG Tax for these assets has increased from 10% to 12.5%. What is indexation and how is it calculated? Indexation: It refers to adjusting the purchase price of an asset for inflation while computing the capital gain. Cost Inflation Index (CII) is used in the calculation of Inflation adjusted price of an asset which estimates the increase in an asset's price as a result of inflation. o It’s notified each year by the Income Tax department and is defined under Section 48 of the Income Tax Act, 1961. Benefits of indexation Allows a taxpayer to neutralize the impact of inflation while lowering the tax liability. Ensures that taxpayers are taxed on real gains than gains at prevailing prices, which are a result of general increase in prices, and not economic growth. 2.3. INHERITANCE TAX Why in the news? Paper titled ‘Towards Tax Justice & Wealth Redistribution in India’ released by World Inequality Lab proposes wealth tax and inheritance tax on rich to address inequality in India. What is Inheritance Tax? Inheritance tax is levied on property/asset inherited upon an individual's death. It differs from estate tax, which is levied on the total value of a deceased person's estate. It is levied in Japan, South Korea, and USA etc. Potential Benefits: Increased Revenue, Reducing Wealth Inequality, Intergenerational Equity, Promoting Meritocracy etc. Implications: Potential Tax Evasion, Discourage savings & investment, Double Taxation Concerns etc. History of Inheritance Tax in India In India, currently there is no inheritance tax. Earlier, estate duty was imposed in 1953. The high tax rate up to 85% made it unpopular, leading to abolition in 1985. Similar to Estate duty, gift tax and wealth tax were imposed in India. o These were abolished in 1998 and 2015 respectively. However, gift tax was re-introduced in 2004. 24 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/  Under Gift Tax, any gifts received exceeding Rs 50,000 in a financial year is added to the person's “income from other sources” and taxed according to the income tax slab.  Exceptions include donations, inheritance, and gifts from close relative, gifts during weddings etc. Wealth & Income Inequality in India According to ‘Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj’ study of World Inequality Lab, o Top 1% control over 40% of total wealth while bottom 50% holds only 6.4% of total wealth. o Inequality in India declined post-independence, began rising in the 1980s, and has skyrocketed since the 2000s. Commitment to Reducing Inequality (CRI) Index 2024: India ranked 127th out of 164 countries in the index released by Oxfam and Development Finance International. o Nepal (115) and Sri Lanka (118) have performed better than India. 2.4. ADVANCE PRICING AGREEMENTS Why in the news? Central Board of Direct Taxes (CBDT) has signed highest ever record 125 APAs (including Unilateral and Bilateral APAs) in FY 2023-24 with Indian taxpayers. About Advance Pricing Agreements (APAs) Definition: APAs are an agreement between a taxpayer and tax authority. They endeavor to provide certainty to taxpayers in domain of transfer pricing by specifying methods of pricing. o Transfer Pricing is the price of goods and services exchanged between companies that are under common ownership or control. Significance: APA helps determine arm’s length price (ALP) of international transactions in advance for a maximum of 5 future years. o Arm's Length Principle of Pricing states that price agreed in a transaction between 2 related parties must be same as price agreed in a comparable transaction between 2 unrelated parties. Taxpayer has option to roll back APA for 4 preceding years, as a result of which, tax certainty is provided for 9 years. Indian Advance Pricing Agreement Regime: Ministry of Finance (MoF) notified APA Scheme in 2012 through insertion of sections 92CC & 92CD in Income-tax Act, 1961. Signed between Central Board of Direct Taxes (CBDT) and any person to determine ALP for international transaction. Nature of Scheme: It’s voluntary & supplements appeal & other Double Taxation Avoidance Agreement (DTAA) mechanism for resolving transfer pricing dispute. Term of APA: Maximum five years. Rollback provisions: Allows agreed ALP to be rolled back to a period prior to the commencement of the APA. 25 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ Central Board of Direct Taxes (CBDT) Genesis: A statutory body, under the Central Board of Revenue Act, 1963. Responsible for administration of direct tax laws through the Income Tax Department. Ministry: Works under the Department of Revenue, Ministry of Finance. Functions: Responsible for administration of direct tax laws through the Income Tax Department 2.4.1. DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) Why in the news? India & Mauritius signed (not yet ratified) a protocol amending the Double Taxation Avoidance Agreement (DTAA). About BEPS Key Changes Introduced by Amendment BEPS refers to tax planning strategies Amendment included Principal Purpose Test (PPT) to used by Multinational Enterprises (MNEs) avail tax benefits under the DTAA to plug the abuse of that exploit gaps and mismatches in tax treaty for tax evasion and avoidance. rules to avoid paying tax. o PPT lays out the condition that tax benefits under o This is done by artificially shifting treaty will not be applicable if obtaining that duty profits from higher tax to lower or no- benefit was the principal purpose of any tax locations where there is little or no transaction or arrangement. economic activity or by eroding tax o Amendment to DTAA made it compliant with Base bases through deductible payments Erosion and Profit Shifting (BEPS) Minimum such as interest or royalties. Standards. About DTAA Definition: DTAA is an agreement between two countries/territories with an objective to avoid double taxation on same declared asset in two different countries/territories. o DTAA between India and Mauritius was first signed in 1982 and amended in 2016. Significance of DTAA: Promotes cross-border investment by reducing tax burden on foreign investors and ensures equitable allocation of right to tax between the ‘source’ and ‘residence’ countries. Mutual Agreement Procedure (MAP) MAP is an alternative available to taxpayers for resolving double taxation disputes whether juridical or economic in nature. MAP is a mechanism laid down in tax treaties (E.g. DTAA) to ensure that taxation is in accordance with the tax treaty. o A tax treaty is a bilateral (two-party) agreement made by two countries to resolve issues involving double taxation of passive and active income of each of their respective citizens. Difference between MAP and APAs: o MAP resolves transfer pricing disputes while APAs prevents transfer pricing disputes. o Tax payers file MAP for pending disputes while they opt for APA for same transactions for future years as an effective dispute resolution/ avoidance strategy. 2.5. UN GLOBAL TAX TREATY Why in the news? UN’s Ad Hoc Committee, to Draft Terms of Reference for a United Nations Framework Convention on International Tax Cooperation, approved a package of guidance for UN Global Tax Convention. 26 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ More on the news It aims at establishing a UN Global Tax Treaty for legitimate, fair, stable, inclusive and effective international tax system. Developing countries (including India) largely voted in favour of treaty’s terms of reference while industrialized nations such as Australia, Israel, Japan, UK and USA voted against it. Other Global Initiatives for Global Tax or Preventing Tax Avoidance OECD Global Minimum Tax: Based on the Global Anti-Base Erosion Model Rules, it mandates MNCs to pay a minimum tax rate in each jurisdiction where they operate, reducing profit shifting incentives. o It imposes a minimum effective rate of 15% on corporate profits. OECD/G20 Inclusive Framework on BEPS: It is a global initiative that brings together 147 countries and jurisdictions (including India) to fight tax avoidance and ensure fair tax practices. o Established in 2016, it later adopted Two-pillar approach:  Pillar One: Reallocation of part of largest and most profitable MNEs to countries where their consumers are present.  Pillar Two: Global Minimum Corporate Tax (GMCT) of 15% for MNEs. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS: It aims to update international tax rules and lessen opportunity for tax avoidance by multinational enterprises. o India signed the convention in 2017. 2.6. OTHER KEY DEVELOPMENTS 2.6.1. DUTY DRAWBACK Central Board of Indirect Taxes and Customs (CBIC) will electronically disburse duty drawback amounts directly to exporters' bank accounts using the Public Finance Management System. Duty Drawback Duty Drawback under section 75 of the Customs Act, 1962 rebates customs duty chargeable on any imported materials or excisable materials used in the manufacture of export goods. It helps exporters offset some of the costs accrued during the export process, particularly in the supply or value chain. About CBIC CBIC is part of Department of Revenue under the Union Ministry of Finance. It deals with the tasks of formulation of policy and administration of matters concerning levy and collection of Customs, Central Excise duties, Central GST and IGST, and prevention of smuggling. 27 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 2.6.2. WINDFALL TAX The Centre has reduced the windfall tax on domestically produced crude oil. About Windfall Tax A windfall tax is a tax imposed by governments on certain industries that experience significantly above- average profits due to favorable economic conditions. The purpose is to redistribute excess profits in one area to raise funds for the greater social good. Governments justify the tax by asserting that these profits are not solely due to the taxed entity's efforts but also due to external factors. 28 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ 3. PAYMENT SYSTEMS & FINANCIAL MARKET 3.1. DIGITAL PUBLIC INFRASTRUCTURE (DPI) Why in the news? The ‘Report of India’s G20 Task Force on DPI’ was released by ‘India’s G20 Task Force on Digital Public Infrastructure for Economic Transformation, Financial Inclusion and Development’. Key Highlights of Report The report defines DPI and outlines a three-part framework for global DPI advancement. What is DPI? What is 'Not' DPI? It is a set of shared digital systems that- Interventions which are Should be secure and interoperable, complementary to DPI: E.g., can be built on open standards and specifications to connectivity infrastructure that deliver and provide equitable access to public and / or improves individuals' access to mobile & private services at societal scale. internet via physical infrastructure. are governed by applicable legal frameworks & Digital processes that may not enable enabling rules to drive development, inclusion, private innovation: E.g., digitizing innovation, trust, & competition and respect human existing physical processes or workflows rights and fundamental freedoms. to create a government portal. India’s DPI India Stack is India's own foundational DPI, consists of 3 interconnected layers: o Identity Layer – (e.g, Aadhar), o Payment layer (e.g., UPI) o Data governance layer (e.g, DigiLocker.) Initiatives for Global Advancement of DPI: One Future Alliance: It’s a voluntary initiative proposed by G20 India Presidency, aimed to build capacity, and provide technical assistance and adequate funding support for implementing DPI in Low and Middle- Income Countries. Global DPI Repository (GDPIR): Announced the launch at the G20 virtual leaders' summit in 2023 to establish a focused institution working on DPI. o Social Impact Fund (SIF) was also announced for accelerating DPI implementation across global south nations. EU Trade and Technology Council (TTC): India and the European Union agreed to take steps to accelerate the development and deployment of DPI in other countries. 3.2. UNIFIED PAYMENTS INTERFACE (UPI) Why in the news? NPCI International Payments Limited (NIPL) has partnered with Trinidad and Tobago to develop a Unified Payments Interface (UPI) like payments system, to advance the internationalization of UPI. More on the news Other countries that support UPI payments include Sri Lanka, Mauritius, France, UAE, Singapore, Bhutan, and Nepal. About Unified Payments Interface (UPI) UPI, launched in 2016, is an instant real-time payment system developed by National Payments Corporation of India (NPCI). o NPCI was incorporated in 2008 by RBI and Indian Banks’ Association (IBA) under provisions of Payment and Settlement Systems Act, 2007. 29 AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI ©Vision IAS https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ o NPCI is an umbrella organization for operating retail payments and settlement systems in India. UPI powers multiple bank accounts into a single mobile application (of any participating bank) merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience. RBI increased UPI limit from ₹1 lakh to ₹5 lakh per transaction. Variants of UPI UPI123Pay o Started in March 2022 to enable feature-phone users to use UPI. o It is available in 12 languages. o Technology alternatives include IVR number, app functionality, missed-call and proximity sound- based payments. o RBI enhanced the per-transaction limit from ₹5000 to ₹10,000. UPI Lite o It allows users to make low-value transactions without entering a UPI PIN. o RBI enhanced per-transaction limit to ₹1,000 from ₹500 and overall wallet limit to ₹5,000 from ₹2000. Initiatives for Internationalisation of UPI Setting up of NPCI International Payments Limited (NIPL): It was setup in 2020 by NPCI. UPI Global Acceptance (International Merchant Payments): It enables users to make QR code-based payments at selected international merchant locations directly from their Indian bank accounts. Foreign Inward Remittance (FIR): Enables UPI users to receive remittances directly into their UPI-linked bank accounts at participating banks. Inclusion of Non-Resident Indians (NRIs): UPI has been extended to include NRIs with Non-Resident (External) Account, and NRO stands for Non-Resident (Ordinary) accounts. UPI One World: Travellers visiting India can seamlessly transact with merchants & vendors across India that accept UPI Payments. 3.2.1. PROJECT NEXUS Why in the news? Reserve Bank of India (RBI) joins Project Nexus. 30 © Vision IAS AHMEDABAD | BENGALURU | BHOPAL | CHANDIGARH | DELHI | GUWAHATI | HYDERABAD | JAIPUR | JODHPUR | LUCKNOW | PRAYAGRAJ | PUNE | RANCHI https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ https://upscpdf.com/ About Project Nexus Project Nexus is a