Question of the Day

Which of the following will make Foreign Direct Investment (FDI) inflow attractive in a country:

1. If that country's Real Effective Exchange Rate (REER) depreciates

2. If that country's Nominal Effective Exchange Rate (NEER) depreciates (because of higher inflation)

The answer to the above question is (a) i.e. only 1 statement is correct

Explanation:
If a foreign investor is coming to India for making investment that means he is going to purchase Land and machinery and other materials in India to set up business/factory.

Now if rupee is depreciating (in nominal terms without increase in inflation) then the foreign investor will get more rupees per dollar and he will be able to purchase more land/machinery/material in the same dollar, so he will get attracted to invest in India. But if rupee depreciates in nominal terms because of higher inflation then the gain from the rupee depreciation (for the investor) will cancel out because of the higher inflation as the price of land/machinery/materials will also increase.

Now if rupee is depreciating in real terms that means our goods (land/machinery/materials) are becoming relatively cheaper so it will attract foreign investors for investment in India.
If rupee is depreciating in real terms that means after taking into account the effect of inflation, rupee is actually depreciating which makes our goods relatively cheaper and attracts investment in India.

If rupee depreciates in nominal terms let us say by 10% and inflation also is higher in India proportionately then both will cancel out and rupee will not depreciate in real terms. But if rupee depreciates in nominal terms by 10% and inflation is higher in India just by 2% then rupee will depreciate in real terms which makes our products competitive i.e. investment in India will be attractive.

https://bit.ly/3SdghTR

The dependence of an economy on another economy is calculated as the ratio of their bilateral trade over the total trade of the dependent economy.

For example if we want to calculate the dependence of India on China then it can be calculated as:

Bilateral trade of India with China/India's total trade

= $136 billion/$1660 billion = 0.08 = 8%

Source: Indian Express
A good Comparison of Indian and Chinese Economy.
https://bit.ly/3SdghTR

The issue of Kerala Govt. Borrowing

[As per article 293 of the Constitution: A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India]

Kerala in its 'Fiscal Responsibility Act 2003' has put a limit of fiscal deficit of 3% (of GSDP) and in some cases it can go to 3.5%. The fact is, Kerala Govt. has already borrowed from Centre (there are certain pending dues which Kerala owe to Centre).

Now, Kerala wants to borrow more from the market (in which case its fiscal deficit will increase beyond 3% or 3.5% which Kerala may do by amending its Fiscal Responsibility Act) for expenditure on social sectors. But since Kerala has already (pending) debt from Centre, So centre is not giving permission to Kerala for further borrowing because centre wants Kerala to keep its fiscal deficit limit to 3% of GSDP.

The above issue is being debated in Supreme Court. Now, Supreme Court on Monday referred the case to a Constitution Bench.

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Question of the Day:

Consider the following statements:

1. Under the Old Pension Scheme (OPS), the monthly pension is exempt from tax

2. Under the New Pension Scheme (NPS), the lump sum amount that some one gets at maturity (60 years) is taxable

The answer to the above question is (d)

1. Under the OPS, monthly pension is taxable as per the income tax slab rate.

2. Under the NPS, whatever is the fund value at the time of maturity (60 years or above), you can withdraw 60% one time (lump sum) and for rest 40% you need to purchase annuity. The 60% lump sum amount is exempt from tax.

The 40% fund (is also exempt from tax) but it should be invested in purchase of annuity (annual receipts of payments). This annuity income which you get yearly is taxable as per the income tax slab rate.
https://bit.ly/3SdghTR

Source: Indian Express

No need to read the full above article. You just need to understand few things.

Double Taxation Avoidance Agreement (DTAA) between India and Mauritius has been amended to include Principal Purpose Test (PPT). PPT means the tax benefits under the treaty will not be applicable if it is established that obtaining that duty benefit was the principal purpose of any transaction or arrangement.

Let us understand with an example.

Suppose an Foreign Portfolio Investor (FPI) registered in Mauritius purchased shares of an Indian listed company. Now when the FPI receives dividend (or if it sells shares then it may realize capital gain) then India may also impose tax on dividend (or capital gain tax) and when the FPI receives that income in Mauritius then Mauritius Govt. may also impose tax which results in Double Taxation. Now to avoid such double taxes (referred as tax benefits), India and Mauritius has signed Double Taxation Avoidance Agreement (DTAA).

But the Principal Purpose Test (PPT) says that if this transaction was done only to obtain duty benefit (tax avoidance) then the tax benefits will not be applicable to the investors. And this is in line with the global Base Erosion Profit Shifting (BEPS) framework.

Withholding tax is nothing but Tax Deducted at Source (TDS) in case of international transactions.

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Source: RBI

The Public Tech Platform (for frictionless credit) would enable delivery of frictionless credit by facilitating seamless flow of required digital information to lenders. The end-to-end digital platform will have an open architecture, open Application Programming Interfaces (APIs) and standards, to which all financial sector players can connect.

https://bit.ly/3SdghTR

Source: Indian Express
IRDAI removed age limit on buying health insurance. Now anyone regardless of age is eligible to buy health insurance.

Tax Collection in FY 2023-24
(major Central taxes on a net basis)

Personal Income Tax = Rs. 10.44 lakh crore
Corporate Income Tax = Rs. 9.11 lakh crore
GST Collection = Rs. 9.01 lakh crore

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Source: Indian Express

No need to read the entire article... just have a look at the highlighted text.

In India, the present status of the above taxes is:

1. Estate Duty (Inheritance tax or death tax) abolished in 1985.
It was a tax levied on the total value of money and property of a deceased person before it is distributed to their legal heirs.

2. Wealth tax abolished in 2015
A tax levied on the net wealth owned by a person

3. Gift tax abolished in 1998
(But is was reintroduced in other form. Gifts from unrelated persons is included in 'income from other sources' and is taxed as per income tax slab. Gifts from blood relations are exempted)

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Question of the Day

Which of the following indicators is/are used to observe the monetary transmission mechanism in the economy?

1. Weighted average lending rate
2. Weighted average domestic term deposit rate
3. 1-year median MCLR
4. MSF rate