Intellectual Property Rights (IPR)

National Mission on Oilseeds and Oil Palm (NMOOP)

• India’s vegetable oil economy is world’s fourth largest after USA, China & Brazil.
• The oilseed accounts for 13% of the Gross Cropped Area, 3% of the Gross National Product and 10% value of all agricultural commodities.
• This sector has recorded annual growth rate of area, production and yield @ 2.44%, 5.47% and 2.96% respectively during last decade (1999-2009).
• The diverse agro-ecological conditions in the country are favourable for growing 9 annual oilseed crops, which include 7 edible oilseeds (groundnut, rapeseed & mustard, soybean, sunflower, sesame, safflower and niger) and two non-edible oilseeds (castor and linseed).
• Oilseeds cultivation is undertaken across the country in about 27 million hectares mainly on marginal lands, of which 72% in confined to rainfed farming. India is one of the major oilseeds grower and importer of edible oils.
• A substantial portion of our requirement of edible oil is met through import of palm oil from Indonesia and Malaysia.
• Tree Borne Oilseeds (TBOs), like sal, mahua, simarouba, kokum, olive, karanja, jatropha, neem, jojoba, cheura, wild apricot, walnut, tung etc. are cultivated/grow in the country under different agro-climatic conditions in a scattered form in forest and non-forest areas as well as in waste land /deserts/hilly areas.

National Mission on Oilseeds and Oil Palm (NMOOP)

National Mission on Oilseeds and Oil Palm (NMOOP) envisages increase in production of vegetable oils sourced from oilseeds, oil palm and TBOs from 7.06 million tonnes (average of 2007-08 to 2011-12) to 9.51 million tonnes by the end of Twelfth Plan (2016-17).

The Mission is proposed to be implemented through three Mini Missions with specific target - Mini Mission on Oil Seeds,Mini Mission on Oil Palm,Mini Mission on Tree Borne Oil seeds.

The strategy to implement the proposed Mission will include increasing Seed Replacement Ratio (SRR).

Aims : - Increasing irrigation coverage under oil seeds from 26% to 36%.

- Diversification of area from low yielding cereals crops to oil seeds crops

- Inter-cropping of oil seeds with cereals/ pulses/ sugarcane

- Use of fallow land after paddy /potato cultivation

- Expansion of cultivation of Oil Palm & TBOs in watersheds and wastelands

- Enhancing procurement of oil seeds and collection & processing of TBOs

- Cost of the interventions proposed under the Mission will be in the ratio of 75:25 between the Central and the State Government

The oilseeds and oil palm development programme of  ISOPOM along with liability of ISOPOM and tree borne oilseeds development programme for the approved programme will be subsumed under the Mission.

MISSION STRUCTURE:

Executive Committee (EC): At the apex level, the Mission will be monitored by a high level Executive Committee (EC) Chaired by the Union Minister of Agriculture.EC will be the policy making body providing suitable directives and guidance to the Mission and reviewing the overall progress and development of the Mission. EC will lay down and also amend the operational guidelines regarding day to day operation of the Mission.

Standing Committee (SC): A Standing Committee will be constituted under the Chairmanship of Secretary (A&C) to oversee activities of the Mission and to approve the Annual Action Plans (AAP) of the states and implementing agencies under the Mission.

Mission Monitoring Committee (MMC): A Mission Monitoring Committee will be constituted under the Chairmanship of Joint Secretary (Oilseeds) DAC who will also be the Ex-Officio Mission Director of NMOOP, to oversee the monitoring activities of the three Mini Missions

A State Level Standing Committee will be constituted by the State Government under the Chairmanship of Agriculture Production Commissioner/Principal Secretary/Secretary (Agriculture)

The State Governments may have in place a sound mechanism for involvement of PRIs in the formulation, prioritization of activities & identification of beneficiaries at grass root level.

Development as Freedom

Poverty As Capability Deprivation

Women's Agency and Social Change

Financial Stability and Development Council

Union Budget 2013-14 : Highlights

Union Finance Minister P. Chidambaram presented his much anticipated budget proposals for the year 2013-14, bringing a partial relief for the lower income groups as no changes were made in Income Tax rates or slabs. His budget could be lauded for certain proposals like set up of a first women’s bank, Rs 1 lakh deduction for home loans and more focus on health, education, HRD and rural development.

However, most of the commodities and articles get costlier in the budget proposals. Smartphones, Cigarettes, watching movies and eating out in AC restaurants will be more expensive in the coming days. Even though, Chidambaram called “higher growth leading to inclusive, sustainable development” as his government’s mantra, he failed to satisfy middle class society presenting the budget today. The government expected to get Rs 13,300 crore from change in direct tax and indirect tax proposal to yield Rs 4,700 crore.

The Fiscal deficit was marginally lower(5.2) than Economic Survey deficit figure of 5.3%, but it is enough to stop market decline for time being, as the minister expected.

Chidambaram looked more energetic while announcing the proposals for the fiscal 2013-14, which is the last budget before the general elections. He looked forward to change the fortunes of India, Asia’s third largest economy, after years of policy paralysis and global economic turmoil. He admitted that Indian export has been hit and global economy has slowed in the current fiscal. He said that Indian economy has slowed after 2010.

However, he defended the government for Food inflation and price hike that put pressure on common men in India. The slow economy has affected all the nations, only China and Indonesia are growing faster than India. Hence, there was no reason for gloom or pessimism. He stressed on the encouragement of foreign investment, which should be the economic objective for a developing nation. He claimed that the government is committed to work towards development of the nation. He talked about the proposed National Food Security Bill, which is the promise of the UPA government.

Proposals:

1. Rs 1630825 crore total expenditure, Rs 555322 crore plan expenditure, non-plan Rs 1199074 crore
2. Rs 41000 crore for Scheduled Caste and Rs 28500 crore for tribal welfare.
3. Rs 3,511 crore allocated to Minority Affairs Ministry which is 60% of the revised estimates.
4. Health and education for all remain priorities. Over Rs 33000 crore to health
5. Rs 4727 crore for medical research. Rs 1069 cr for the development in the ayurveda, allopathy and Homeopathy medical science
6. Rs 21,000 crore allocation for health sector
7. Allocation of Rs 65,000 crore for education sector
8. Rs 65000 crore to ministry of education, Rs 27257 crore to Sarva Shiksha Avijan
9. Rs 3983 for Rashtriya Madhyamik siksha abhiyan
10. Rs 13215 crore for mid-day meal scheme
11. Rs 17700 crore for ministry of children
12. Rs 110 crore to dept of disability affairs under specific scheme
13. Rs 1400 crore for water purification
14. Rs 65,867 cr allocated to ministry of human resources, 17% increase in budgetary support.
15. Rs 33000 crore for MNREGA
16. Rs 3400 crore for agricultural research
17. Rs 700000 crore for agricultural credit schemes.
18. Rs 1000 crore to support increased rice production in Eastern Indian states.
19. Rs 9954 crore and Rs 2250 crore for crop diversification under different schemes.
20. Rs 500 crore for crop diversification
21. Rs 15269 crore for water and sanitation
22. Rs 14,800 crore under JNNURM. Positive for Ashok Leyland, Tata Motors
23. National Livestock Mission launched with Rs 307 crore
24. Rs 10000 crore set apart for National Food Security Bill (if passed)
25. Rs 1650 crore for six more AIIMS-like medical institutes, which will start functioning this year.
26. All flagship programmes fully funded
27. Indian Institute of BioTechnology to be set up at Ranchi
28. Flagship Education scheme, Sarva Shiksha Abhiyan will receive 27,258 crore
29. Rs 5000 crore to NABARD to build cold storages and godowns
30. Rs 25000 crore to be raised from four infrastructure bonds
31. Rs 100 crore in machinery investment can avail an extra 15 per cent exemption over and above existing relaxations
32. Infra debt fund to be encouraged
33. First home loan up to Rs 25 lakh during 2013-14 will get an additional Rs 1 lakh interest deduction.
34. Income level for Rajiv Gandhi Equity Scheme raised by Rs 2 lakh
35. Zero custom duty for electrical machinery
36. Foodgrain production in 2013-14 will be over 250 million tonnes
37. RGESS to be liberalised to enable first time investor, income limit to be raised to Rs 10 lakh
38. Inflation indexed bonds and NSCs to be introduced
39. Coal imports to rise to 185 million tonnes from 100 million in four years.
40. A PPP project with Coal India in the pipeline to stem the outflow of forex.
41. New regulatory authority for road sector
42. Technology Upgrade scheme for textile sector to get Rs 2400 crore
43. Cabinet Committee on Investment formed to look into investments in various sectors
44. Work has started on the Bengaluru-Mumbai industrial corridor
45. RG Equity Saving Scheme to be liberalised to enable first time investor, income limit to be raised to Rs 12 lakh
46. Handloom sector to get an additional Rs 96 crore
47. Rs 80194 crore for rural development projects
48. To Introduce Inflation Indexed Bonds for two new ports in West Bengal and Andhra Pradesh.
49. 13 Public Sector Banks to get Rs 14000 crore
50. All Public Sector bank branches to have ATMs by end of 2014.
51. Proposal to set up first women’s public sector bank with Rs 1,000 crore by October 2013.
52. Rural housing to get Rs 6000 crore, urban housing Rs 2000 crore
53. NHB to set up Urban Housing bank
54. Banks permitted to act as insurance brokers; public sector banks can now set up ‘adalats’ and settle disputes over claims
55. Domestic workers, Anganwadi workers, etc to get group insurance
56. to review natural gas pricing policy
57. Comprehensive social security package for the most down-trodden and poor in the anvil
58. KYC of banks enough to get insurance
59. 17 per cent hike in education, 22 per cent in agriculture, 46 per cent for rural development
60. All towns of India with a population of over 10000 to have an LIC office
61. Rs 11500 crore for backward areas
62. National Skill Development Corporation to train 5 crore people in current plan period.
63. Rs 11,500 cr allocated as Backward Regions Grant Fund for Bihar, Bundelkhand and KBK region of Odisha
64. Defence gets Rs 2,20,000 crore (additional funds to be provided if needed), 86721 crore for capital expenditure.
65. Rs 5400 crore to department of space and Rs 5600 crore to department of atomic energy.
66. National Institute of Sports Coaching to be set up in Patiala at a cost of Rs 253 crore
67. Rashtriya Swasthya Bima Yojana to include rickshaw pullers, taxi drivers and ragpickers.
68. Rs 5,80,000 crore to states and Union Territories
69. Rs 1,000 crore for Nirbhaya Fund proposed for safety of women
70. Women, youth and poor are priority for the Government

Tax Proposals:

1. No changes in Income Tax rates or slabs
2. Relief for Rs 2-5 lakh income group. Rs 2000 tax credit for those earning up to Rs 5 lakh per annum.
3. Surcharge of 10% on income above Rs 1 crore per annum. Additional surcharge is only for a year
4. Surcharge on corporate taxes increased.
5. Slabs of 30%, 20% and 10% will continue.
6. DDT surcharge raised to 10% for 1 Year.
7. The educational cess for all taxpayers shall continue for one year
8. Education cess to continue at 3 per cent
9. 10 pc tax deduction for donations to National Children’s fund
10. TDS at 1 per cent on value of transfer of immovable property of over Rs 50 lakh
11. Introduces commodity transaction tax
12. proposes cut in STT rate
13. Agricultural commodity exempt from CTT
14. No change in basic rates in customs and excise duty
15. 1 per cent TDS on sale of immovable property over Rs. 50 lakh, not applicable to agricultural land.
16. Lower securities transaction tax on mutual fund payouts
17. Cigarettes and SUVs get costlier. 100 per cent Customs Duty on luxury cars. Specific excise duty on cigarettes increased by 18 per cent
18. Import duty on raw silk hiked to 15%
19. Six per cent duty on mobiles worth more than Rs 2,000.
20. Tax on motor vehicles up from 75 per cent to 100 per cent. Excise duty on certain SUVs hiked to 30 per cent
21. Set Top box import duty raised
22. Gold duty free limit raised to Rs 50,000 for men and to Rs 1 lakh for women travellers
23. Service tax to now apply on all A/C restaurants. All AC restaurants will have to pay service tax whether or not they serve alcohol.

Where does the government get its revenue from? - click here

Tax Structure in India

Taxes in India are levied by the Central Government and the state governments. Some minor taxes are also levied by the local authorities such the Municipality or the Local Council .

The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Centre and the State. An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law." Therefore each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature. In 2010-11, the gross tax collection amounted to 7.92 trillion, with direct tax and indirect tax contributing 56% and 44% respectively.

The power to levy taxes and duties is distributed among the three tiers of Government, in accordance with the provisions of the Indian Constitution.

The main taxes/duties that the Union Government is empowered to levy are:-
Income Tax (except tax on agricultural income, which the State Governments can levy)
Customs duties
Central Excise and Sales Tax
Service Tax.

The principal taxes levied by the State Governments are:- 

Sales Tax (tax on intra-State sale of goods)

Stamp Duty (duty on transfer of property)

State Excise (duty on manufacture of alcohol)

Land Revenue (levy on land used for agricultural/non-agricultural purposes)

Duty on Entertainment and Tax on Professions & Callings. 

The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc. 

Financial Relations between Centre and States

• India possesses a federal structure in which a clear distinction is made between the Union and the State functions and sources of revenue. Our constitution provides residual powers to the Centre. Article 264 and 293 explain the financial relations between the Union and State Government.
• Although the States have been assigned certain taxes which are levied and collected by them, they also have a share in the revenue of certain union taxes and there are certain other taxes which are levied and collected by the Central Government but whole proceeds are transferred to the States.
• The Constitution provides residuary powers to the Centre. It makes a clear division of fiscal powers between the Centre and the State Governments.

(A) List – I of Seventh Schedule of the Constitution enlists the Union Taxes which are :

• Taxes on income other than agriculture income.
• Corporation tax.
• Custom Duties.
• Excise Duties except on alcoholic liquors and narcotics not contained in medice preparations.
• Estate and succession duties other than on agricultural land.
• Taxes on the capital value of assets except agricultural land of individuals and companies.
• Rates of stamp duties – on financial documents.
• Taxes other than stamp duties on transactions in stock exchanges and future markets.
• Taxes on sales or purchases of newspapers and on advertisements therein.
• Taxes on railway freight and fares.
• Terminal taxes on goods or passengers carried by Railways Sea or air.
• Taxes on the sale or purchase of goods in the course of interstate trade.

(B) List – II of Seventh schedule enlists the taxes which are within the jurisdiction of the States:

• Land revenue.
• Taxes on the sale and purchase of goods, except newspapers.
• Taxes on Agricultural Income.
• Taxes on land and buildings.
• Succession and estate duties on agricultural land.
• Excise on Alcoholic Liquors and Narcotics.
• Taxes on the entry of goods into a local area.
• Taxes on the consumption and sale of electricity.
• Taxes on mineral rights (subject to any limitations imposed by the Parliament).
• Taxes on vehicles, animals and boats.
• Stamp duties except those on financial documents.
• Taxes on goods and passengers carried by board or inland water – ways.
• Taxes on luxuries including entertainments, betting and gambling.
• Tolls.
• Taxes on professions, trades, callings and employment.
• Capitation taxation.
• Taxes on advertisements other than those contained in newspapers.

(C) Apart from taxes levied and collected by the States, the Constitution has provided for the revenues for certain taxes on the Union List to be allotted, partly or wholly to the States. These provisions fall into various categories:

• Duties which are levied by the Union Government but are collected and appropriated by the States. These include stamp duties, excise duties on medical preparations containing alcohol or narcotics.
• Taxes which are levied and collected by the Union, but the entire proceeds of which are assigned to the states, in proportion determined by the Parliament.These taxes include:
  • Succession and Estate duty.
  • Terminal Taxes on goods and passengers.
  • Taxes on railway freight and fares.
  • Taxes on transactions in stock exchanges and future markets.
  • Taxes on sale and purchase of newspapers and advertisements therein.

• Central Taxes on income and union excise duties are levied and collected by the Union but are shared by it with the States in a prescribed manner.
• Proceeds of additional excise duty on mill – made textiles, sugar and tobacco which are levied by the Union since 1957 in replacement of State sales taxes on these commodities are wholly distributed among the States in a manner as to guarantee their former incomes from the displaced sales taxes.

In 1991, the government set up a special committee, the Raja Chelliah Committee on Tax Reforms, to review the country's tax system. Its mandate was to make recommendations to make the tax system more elastic and broad based, and to suggest means required for simplifying existing laws and regulations to facilitate better enforcement and compliance. The recommendations made by this committee envisaged simplified procedures and a rationalised rate structure.

The table below gives a list of the major direct and indirect tax laws and authorities responsible for administering these laws.

List of Taxes : 

Direct Taxes 

•  Income tax (Personal) 
• Corporate tax 
• Banking Cash Transaction Tax (BCTT) - Banking Cash Transaction Tax (BCTT) has been withdrawn with effect from April 1, 2009.
• Securities Transaction Tax (STT) - levied on every purchase or sale of securities that are listed on the Indian Stock Exchange.
• Wealth Tax - Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income. Wealth tax is not levied on productive assets, hence investments in shares, debentures, UTI, mutual funds, etc are exempt from it. The assets chargeable to wealth tax are Guest house, residential house, commercial building, Motor car, Jewellery, bullion, utensils of gold, silver, Yachts, boats and aircrafts, Urban land and Cash in hand (in excess of Rs 50,000 for Individual & HUF only). 
• Capital Gains Tax -A capital gain is income derived from the sale of an investment. A capital investment can be a home, a farm, a ranch, a family business, work of art etc.

 Different kinds of taxes relating to a company/corporation

• Minimum Alternative Tax (MAT) -  its a tax that has to be paid by the companies that are enjoying tax benefits or tax exemption under various schemes.The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but not paying tax to the Govt by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax.
• Fringe Benefit Tax (FBT)-Fringe Benefit Tax (FBT) is fundamentally a tax that an employer has to pay in lieu of the benefits that are given to his/her employees.A new tax was imposed on employers by India's Finance Act 2005 was introduced for the financial year commencing April 1, 2005.

        The following items were covered under FBT:

1. Employer's expenses on entertainment, travel, employee welfare and accommodation. The definition of fringe benefits that have become taxable has been significantly extended. The law provides an exact list of taxable items.
2. Employer's provision of employee transportation to work or a cash allowances for this purpose.
3. Employer's contributions to an approved retirement plan (called a superannuation fund).

• Dividend Distribution Tax (DDT) - Dividend distribution tax is the tax levied by the Indian Government on companies according to the dividend paid to a company's investors.

 Direct Tax Code

 The direct tax code seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. Another objective is to reduce the scope for disputes and minimize litigation. 

It will eventually pave the way for a single unified taxpayer reporting system.The salient features of the code are: Single code for direct taxes ,use of simple language,reduced scope for litigation,flexibility and stability.

 Indirect Taxes 

•  Sales tax 
• Central Sales Tax (CST)-Central Sales tax is generally payable on the sale of all goods by a dealer in the course of inter-state trade or commerce or, outside a state or, in the course of import into or, export from India. 
• Value Added Tax (VAT)-VAT is a multi-stage tax on goods that is levied across various stages of production and supply with credit given for tax paid at each stage of Value addition. Introduction of state level VAT is the most significant tax reform measure at state level. The state level VAT has replaced the existing State Sales Tax.      
• Excise Duty-Central Excise duty is an indirect tax levied on goods manufactured in India.
• Customs Duty-Custom or import duties are levied by the Central Government of India on the goods imported into India. 
• Service Tax -Service tax was introduced in India way back in 1994 and started with mere 3 basic services viz. general insurance, stock broking and telephone.  
  

Roadmap towards GST

The Empowered Committee of State Finance Ministers has been entrusted with the task of preparing a roadmap for the introduction of national level goods and services tax with effect from 01 April 2007.The move is towards the reduction of CST to 2 per cent in 2008, 1 per cent in 2009 and 0 per cent in 2010 to pave way for the introduction of GST (Goods and Services Tax).

What is GST?

It is an indirect tax that will lead to the abolition of all other taxes such as octroi,central sales tax,excise duty, service tax ,state-level sales tax,and value-added tax (VAT). Both the state and the central governments will impose GST on almost all goods and services produced in India or imported into the country.It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services with few tax exemption.

India is a federal republic, and the GST will thus be implemented concurrently by the central and state governments as the Central GST and the State GST respectively.

What categories are exempt from GST?

Exports will not be subject to GST. Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected.

How will GST benefit the economy?

It will simplify India's tax structure, broaden the tax base, and create a common market across states. This will lead to increased compliance and increase India's tax-to-gross domestic product ratio. According to a report by the National Council of Applied Economic Research, GST is expected to increase economic growth by between 0.9 per cent and 1.7 per cent. Exports are expected to increase by between 3.2 per cent and 6.3 per cent, while imports will likely rise 2.4-4.7 per cent, the study found.

How will GST benefit corporates?

It will be beneficial for India Inc. as the average tax burden on companies will fall. Reducing production costs will make exporters more competitive.  

Will goods and services become costly? 

The highest rate of taxation under GST will be around 15 per cent in the first year, and eventually come down to 12 per cent in the second year. By comparison, the current rate of the various indirect taxes levied in India amounts to roughly 20 per cent. Goods deemed necessary or of basic importance will be taxed at a lower rate.

Will state governments lose out?

 Some states fear that a uniform tax rate, if lower than their existing rates, will dent collections. The central government is likely to compensate states for the potential revenue loss. Also, instead of an earlier proposal for a uniform GST rates across the country, the Union Government has agreed to have a floor rate of taxation with a narrow band.

Can states decide to opt out of GST?

 In a deviation from its earlier stand, the government has agreed for a phased roll-out of GST. States will also have the flexibility to opt out of GST.

What's the latest on GST? 

Three sub-committees have been formed to resolve all outstanding differences and submit their reports in three months. i) One will look at the issue of integrated GST for inter-state movement of goods and VAT on imports. ii) The second will decide on a revenue neutral rate on GST - one that is not too high for the traders and not too low for states. iii) The third will look for a mechanism so that traders have to coordinate only with one agency - centre or state. This committee will also decide on a common exemption list and threshold for levying GST.

How will it become a reality? 

The GST can be implemented only through a Constitutional Amendment Bill, which means it needs to be approved by not less than two-thirds of the members present and voting in each House of Parliament. The GST must also be ratified by the legislatures of at least one-half of the states.

The GST is expected to foster increased efficiencies in the economic system thereby lowering the cost of supply of goods and services. Further, in the Indian context, there is an expectation that the aggregate incidence of the dual GST will be lower than the present incidence of the multiple indirect taxes in force.  Consequently, the implementation of the GST is expected to bring about, if not in the near term but in the medium to long term, a reduction in the prices of goods and services. The expectation is that the dealers would start passing on the benefit of the reduced tax incidence to the customers by way of reduced prices. As regards services, it could be that their short term prices would go up given the expectation of an increase in the tax rate from the present 10% to approximately 14% to 16%.

The 13th Finance Commission headed by Dr. Vijay Kelkar constituted the Task Force of Goods and Services Tax (GST), which has released its Report on 15.12.2009 and suggested the total GST rate of 12% – 5% at the Centre and 7% at the State levy .

Advantages of GST

The merits of GST are well-known.

(i) It will re-distribute the burden of taxation equitably between manufacturing and services bringing about a qualitative change in the tax system.
(ii)With the minimisation of exemptions, it will broaden the tax base and lower the tax rates.
(iii)By switching to the destination principle, the distortions will be reduced fostering a common market across the country.
(iv)The compliance cost will come down and our trade and industry will become more competitive leading to an increase in exports and lower prices for domestic consumers.

 Finance Commission of India

Finance Commission is constituted to define financial relations between the Centre and the States. Under the provision of Article 280 of the Constitution, the President appoints a Finance Commission for the specific purpose of devolution of non – plan revenue resources. The functions of the Commission are to make recommendations to the President in respect of :   

1.  The distribution of net proceeds of taxes to be shared between the Union and the States and the allocation of share of such proceeds among the States.
2. The principles which should govern the payment of grants – in – aid by the Centre to the States.
3. Any other matter concerning financial relations between the Centre and the States.

 Imp. Info : Click Here & Here  

Taxes

What is Tax ?

A tax (from the Latin taxo; "I estimate") is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions. A tax is a "pecuniary burden laid upon individuals or property owners to support the government,it is a payment exacted by legislative authority." It "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.

Simple definition is , tax is a fee charged ("levied") by a government on a product, income, or activity.

• tax is ‘compulsory.’
• a tax is a ‘contribution’
• all taxation is imposed on ‘persons.’ Taxation of commodities falls on the consumers or other persons connected with the taxed articles, and a similar analysis will apply to other forms of taxation. The truth, though often forgotten, yet always holds good that a tax must ultimately be paid by some one.
• taxation is levied for ‘service’ or ‘benefit.’
• taxation is for the ‘public powers,’ i.e. it has to meet the wants of both central and local governments.

In Montesquieu's opinion, ‘the revenues of the State are the portion of his property that each citizen gives in order to have security for the remainder, or to enjoy it in comfort.’

‘Taxation is an exchange in which the State gives services and the contributor money.’ Hardly distinguishable is the belief that taxation is the insurance premium against the risks of social disorder set forth

In Mirabeau's proposition that ‘Taxation is only an advance to obtain protection for social order.’ 

Types of Taxes :

One of the most widely known and frequently used divisions of taxation is, ‘direct’ and ‘indirect’.Taxes are either direct or indirect. A direct tax is one, which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another.

A natural result has been that practical financiers have adopted a different basis of distinction, and regard those taxes as direct which are levied on permanent and recurring occasions, while charges on occasional and particular events are placed under the category of indirect taxation. On either method the income tax would be ‘direct,’ and the excise and customs ‘indirect’

Another division is that into ‘taxes on revenue’ and ‘taxes on capital,’ or, perhaps better, on ‘property.’ The former are paid out of the annual national production; the latter encroach on the accumulated wealth of the society.

Taxes are often said to be either ‘real’ or ‘personal,’ and attempts have been made to distribute them into two classes on this basis. Personal taxes are those in which the person is taken note of in assessment. They require lists of the tax-payers. Real taxes are assessed on objects other than persons, and without direct reference to the owners or possessors. Capitation and income taxes are ‘personal’; taxes on land,houses, or goods are ‘real.’

In respect to the mode of assessment taxes may be either ‘rated’ or ‘apportioned.’ In the former class the charge per unit is fixed, but the total yield is always uncertain, depending as it does on the number of units that pay. An apportioned tax is one the total amount of which is fixed the shares being apportioned among the objects that are charged.

Further classification of taxes :

A. Taxes on Income

It is a tax on the money people earn or on the profits companies make.Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive.A personal or individual income tax is levied as a percentage of a person's wages and salaries When the tax is levied on the income of companies, it is often called a corporate tax.A capital gains tax is levied on profits from the sale of capital assets (e.g., real estate, machinery, stocks, bonds, art, commodities). 

B.Taxes on Property

(a) imposed on property, real or personal
(b) in proportion to its value or other reasonable method of apportionment Ex. Real estate tax
Many jurisdictions impose estate tax, gift tax or other inheritance taxes on property at death or gift transfer. Some jurisdictions impose taxes on financial or capital transactions.

A property tax (or millage tax) is an ad valorem tax levy on the value of property that the owner of the property is required to pay to a government in which the property is situated.Vehicle and boat registration fees are subsets of this kind of tax.

Wealth tax is a direct tax, which is charged on the net wealth of the assessee. It is a tax on the benefits derived from ownership of property. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income.wealth(net worth) tax is generally conceived of as a levy based on the aggregate value of all household assets, including owner-occupied housing; cash, bank deposits, money funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts.A wealth tax is a tax on the accumulated stock of purchasing power, in contrast to income taxes which is a tax on the flow of assets (a change in stock).

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C.Taxes on goods and services

Value added tax - A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale.

Sales tax - A tax imposed by the government at the point of sale on retail goods and services . It is collected by the retailer and passed on to the state.

Difference between VAT and Sales Tax - Click Here

1.VAT is levied on both the producer and consumer while a sales tax is levied on only the end consumer.

2.VAT involves tricky accounting while sales tax involves simpler accounting.

3.VAT is applied at the various stages of production while sales tax is applied on the total value of the purchase.

4.VAT efficiently avoids evasion of taxes while a sales tax is unable to deal with this.

Excises - Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased.Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption. The taxable event is 'manufacture' and the liability of central excise duty arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers.It is different from customs which is a tax that a buyer pays when he imports goods from other countries. As such, excise duty is an inland tax. This is an indirect tax which implies that the manufacturer sells it at a higher price than was incurred on production thereby recovering the tax paid on its manufacture. Excise is always in addition to VAT which is paid by the end consumer.

If the manufacturer does not sell and uses the good himself, he does not have to pay any excise duty. But since he sells it as a higher price, he has to pay the excise tax. VAT is not paid by the vendor who purchases the goods from the manufacturer but by the end consumer in the chain. The vendor has already paid excise duty to the manufacturer who deposits it to the government.

Customs duty - Customs Duty is a type of indirect tax levied on goods imported into India as well as on goods exported from India. Taxable event is import into or export from India. Import of goods  means bringing into India of goods from a place outside India. India includes the territorial waters of India which extend upto 12 nautical miles into the sea to the coast of India. Export of goods means taking goods out of India to a place outside India. 

Duty is levied upon goods only, whereas tax is levied on both goods and individuals.Duty is generally a tax levied on good going out or coming inside a country. Duties are sometimes referred to as border taxes.

Excise is a tax levied by the government on goods manufactured inside the country while customs duty is a tax levied by the government on goods produced outside the country and upon arrival in to the country.Excise tax is payable by the manufacturers while custom duty is payable by the importers of goods which means they are just buyers

D. Classification based on-who bears the burden

1) Direct -the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate tax,corporate tax,securities transaction tax,etc.
2) Indirect- imposed on the taxpayer who shifts the burden of the tax to another Ex. VAT, specific tax, percentage tax, customs duties.

E. Classification of taxes based on - purpose of taxation

1) General, fiscal or revenue - imposed for the general purpose of supporting the government
Ex. Income tax, percentage tax
2) Special or regulatory - imposed for a special purpose, to achieve some social or economic objectives
Ex. Protective tariffs or customs duties on imported goods intended to protect local industries

F. Classification based on method of taxation :

1) Specific tax imposed and based on a physical unit of measurement, as by head, number, weight, length or volume Ex. Tax on distilled spirits, fermented liquors, cigars
2) Ad Valorem - tax of a fixed proportion of the value of property with respect to which the
tax is assessed; requires intervention of assessor. Ex. Real estate tax, excise tax on cars, nonessential
goods

G. Classification of taxes - based on authority imposing the tax

1) National - imposed by the national government Ex. National internal revenue taxes, custom duties
2) Municipal or local - imposed by the municipal corporations or local governments Ex. Real estate tax, occupation tax

H. Classification based on - graduation of rate (Three systems of taxation)

1) Proportional - based on a fixed percentage of the amount of the property, income or other basis to be taxed Ex. Real estate tax, VAT, percentage tax
2) Progressive or graduated - tax rate increases as the tax base or bracket increases
Ex. Income tax, estate tax, donor's tax
3) Regressive - tax rate decreases as the tax base increases
4) Degressive - increase of rate is not proportionate to the increase of tax base

Progressive taxes

A progressive tax is a tax imposed so that the tax rate increases as the amount subject to taxation increases. In simple terms, it imposes a greater burden (relative to resources) on the rich than on the poor. It  can be applied to individual taxes or to a tax system as a whole. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence disproportionately to those with a higher ability-to-pay. People with higher incomes pay a larger percentage of their incomes in taxes, while people with lower incomes pay a lower percentage in taxes. The result is people with more disposable income pay a higher percentage of that income in tax than do those with less income.Some people argue that progressive taxation is fair, because low-income people cannot afford to pay taxes as much as high-income people can. Others argue that progressive taxation discourages a strong work ethic because people do not want to work hard to become wealthy if they have to give more money away in taxes.

Regressive Taxation

Regressive taxation takes a higher percentage of taxes from low-income people and a lower percentage of taxes from high-income people, according to the IRS. Although it seems intuitively unfair to tax people more when they make less, some people feel that regressive taxation is fair because the actual amount of taxation will be closer to equal across all income levels. It may also encourage people to work harder and move up to higher income brackets. Many people, however, do not think it makes sense or is morally right to tax poor people more.

Proportional Tax

A proportional tax is one that imposes the same relative burden on all taxpayers—i.e., where tax liability and income grow in equal proportion. In simple terms, it imposes an equal burden (relative to resources) on the rich and poor. Proportional taxes maintain equal tax incidence regardless of the ability-to-pay and do not shift the incidence disproportionately to those with a higher or lower economic well-being.

List of taxes

Ad valorem
Capital gains tax
Carbon tax
Carucage
Consumption tax
Corporate tax (including the Excess profits tax, Windfall profits tax)
Corvée
Custom
Danegeld
Development Impact Tax
Direct tax
Duty
Excise (e.g. fuel excise, use tax, blank media tax, natural resources consumption tax)
FairTax
FICA tax
Franchise tax
Gabel
Impost
Income Tax
Indirect tax
Inflation tax
Inheritance tax (cf Allodial, Pigovian tax, Estate tax (United States), Inheritance Tax (United Kingdom).)
Land value tax
Payment in lieu of taxes
Payroll tax
Poll tax
Property tax
Sales tax
Scutage
Seigniorage
Sin tax
Stamp Duty
Subsidy
Tallage
Tariff
Tax Farming
Tithe
Tobin tax
Toll bridge
Toll road
Toll tunnel
Transfer tax
Tribute
Value added tax
Vehicle excise duty
Wealth tax

Indian Railways

The Indian Railways (IR) is the world's largest railway system under single management .Indian Railways is a department owned and controlled by the Government of India, via the Ministry of Railways.It is administered by the Railway Board, which has a financial commissioner, five members and a chairman. Its headquarters are in New Delhi. It is divided into zones, which are further sub-divided into divisions. The number of zones in Indian Railways increased from six to eight in 1951, nine in 1952, and finally 16 in 2003. The Kolkata Metro is owned and operated by Indian Railways, but is not a part of any of the zones. It is administratively considered to have the status of a zonal railway. The State Governments have no authority on Indian Railways.In 2011-2012 Indian Railways earned 104,278.79 crore (US$18.98 billion) which consists of 69,675.97 crore (US$12.68 billion) from freight and 28,645.52 crore (US$5.21 billion) from passengers tickets.

History

A plan for a rail system in India was first put forward in 1832. The first rail line of the Indian sub-continent came up near Chintadripet Bridge (presently in Chennai) in Madras Presidency in 1836 as an experimental line.In 1844, the Governor-General of India Lord Hardinge allowed private entrepreneurs to set up a rail system in India. The East India Company (and later the British Government) encouraged new railway companies backed by private investors under a scheme that would provide land and guarantee an annual return of up to five percent during the initial years of operation.The first train in India had become operational on 22 December 1851 for localised hauling of canal construction material in Roorkee. A year and a half later, on 16 April 1853, the first passenger train service was inaugurated between Bori Bunder in Bombay and Thane.Covering a distance of 34 kilometres (21 mi), it was hauled by three locomotives, Sahib, Sindh, and Sultan.

The idea of a railway to connect Bombay with Thane, Kalyan and with the Thai and Bhore Ghats inclines first occurred to George Clark, the Chief Engineer of the Bombay Government, during a visit to Bhandup in 1843.

In 1854 Lord Dalhousie, the then Governor-General of India, formulated a plan to construct a network of trunk lines connecting the principal regions of India. Encouraged by the government guarantees, investment flowed in and a series of new rail companies were established, leading to rapid expansion of the rail system in India. The next passenger train steamed out of Howrah station destined for Hooghly, a distance of 24 miles, on 15 August 1854. Thus the first section of the East Indian Railway was opened to public traffic, inaugurating the beginning of railway transport on the Eastern side of the sub-continent. In South, the first line was opened on 1 July 1856 by the Madras Railway Company. It ran between Veyasarpandy and Walajah Road (Arcot), a distance of 63 miles. In the North, a length of 119 miles of line was laid from Allahabad to Kanpur on 3 March 1859.

The first section from Hathras Road to Mathura Cantonment was opened to traffic on 19 October 1875. These small beginnings in due course developed into a network of railway lines all over the country. By 1880, the Indian Railway system had a route mileage of about 9000 miles. When India became independent in 1947, there were forty-two rail systems. In 1951, the systems were nationalized as one unit, becoming one of the largest networks in the world. Thus Indian Railways (IR) was born.

Present :

In 2003, the Indian Railways celebrated 150 years of its existence. Various zones of the railways celebrated the event by running heritage trains on routes similar to the ones on which the first trains in the zones ran. The Ministry of Railways commemorated the event by launching a special logo celebrating the completion of 150 years of service.Also launched was a new mascot for the 150th year celebrations, named "Bholu the guard elephant".

Before Independence the railways in India were a group of privately owned companies.Today, Indian Railways has one of the largest and busiest rail networks in the world. It transports 20 million passengers and more than 2 million tonnes of freight daily.Indian Railways operates about 9,000 passenger trains and transports 20 million passengers daily and also provides limited international services to Nepal, Bangladesh and Pakistan. A standard passenger train consists of eighteen coaches, but popular trains can have up to 24 coaches. Coaches are designed to accommodate anywhere from 18 to 108 passengers, but during the holiday seasons and/or on busy routes, more passengers may travel in unreserved coaches. Most regular trains have coaches connected through vestibules. However, 'unreserved coaches' are not connected with the rest of the train via any vestibule.

Indian Railways is one of the world's largest commercial employers, with more than 1.6 million employees.Indian Railways is the country's single largest employer. Staff are classified into gazetted (Group A and B) and non-gazetted (Group C and D) employees. While the recruitment of Group A gazetted employees is carried out by the Union Public Service Commission through exams conducted by it, the recruitment to Group 'C' and 'D' employees is done through 19 Railway Recruitment Boards which are controlled by the Railway Recruitment Control Board (RRCB). The training of all cadres is entrusted and shared between six centralized training institutes.

The railways traverse the length and breadth of the country.It is one of the world's largest railway networks comprising 115,000 km (71,000 mi) of track over a route of 65,000 km (40,000 mi) and 7,500 stations. In terms of rolling stock, IR owns over 200,000 (freight) wagons, 50,000 coaches and over 8,000 locomotives.As of 31 March 2010, Indian Railways had 5,022 diesel locomotives (increased from 17 on 31 March 1951), 3,825 electric locomotives (increased from 72 on 31 March 1951) and 42 steam locomotives (decreased from 8,120 on 31 March 1951)

Indian Railways operates both long distance and suburban rail systems on three gauges: broad gauge (1.676 m), meter gauge (1.000 m) and narrow gauge (0.762 m and 0.610 m).Broad gauge is the predominant gauge used by Indian Railways. Indian broad gauge—1,676 mm (5 ft 6 in)—is the most widely used gauge in India with 105,000 km (65,000 mi) of track length (91% of entire track length of all the gauges) and 56,000 km (35,000 mi) of route-kilometre (86% of entire route-kilometre of all the gauges). Unigauge project is in progress to convert all tracks to broad gauge.However, the total route-kilometre has increased by only 21% (by just 11,500 km from 53,596 route-km in 1951) in the last sixty years or about 200 km per year. This compares very poorly with Chinese railways, which increased from about 27,000 route-km at the end of second world war to about 100,000 route-km in 2011, an increase of more than threefold. More than 28,000 route-km (34% of the total route-km) of Chinese railway is electrified compared to only about 21,500 route-km of Indian railways.

The Narrow gauges are present on a few routes, lying in hilly terrains and in some erstwhile private railways (on cost considerations), which are usually difficult to convert to broad gauge. Narrow gauges have 2,000 route-kilometre. The Kalka-Shimla Railway, the Kangra Valley Railway and the Darjeeling Himalayan Railway are three notable hill lines that use narrow gauge, but the Nilgiri Mountain Railway is a metre gauge track. These four rail lines will not be converted under the Unigauge project.

Railway Zones in India 

IR owns locomotive and coach production facilities

Indian Railways -- Types of  Passenger Services 




Notable trains and achievements

• There are two UNESCO World Heritage Sites on IR – the Chatrapati Shivaji Terminus and the Mountain Railways of India. The latter consists of three separate railway lines located in different parts of India : -

1. Darjeeling Himalayan Railway, a narrow gauge railway in West Bengal.
2. Nilgiri Mountain Railway, a metre gauge railway in the Nilgiri Hills in Tamil Nadu
3. Kalka-Shimla Railway, a narrow gauge railway in the Shivalik mountains in Himachal Pradesh.In 2003 the railway was featured in the Guinness Book of World Records for offering the steepest rise in altitude in the space of 96 kilometre.

• Maharaja Railways (Gwalior Light Railway), a narrow gauge line of just 610mm width from Gwalior to Sheopur of 198 km. in length is world's longest narrow gauge railway line is in the UNESCO world heritage tentative list.
• Neral-Matheran Railway, a narrow gauge railway connecting Matheran is also a historic line.
• Palace on Wheels is a specially designed train, frequently hauled by a steam locomotive, for promoting tourism in Rajasthan. On the same lines, the Maharashtra government introduced the Deccan Odyssey covering various tourist destinations in Maharashtra and Goa, and was followed by the Government of Karnataka which introduced the Golden Chariot train connecting popular tourist destinations in Karnataka and Goa. However, neither of them has been able to enjoy the popular success of the Palace on Wheels.
• Samjhauta Express is a train that runs between India and Pakistan. However, hostilities between the two nations in 2001 saw the line being closed. It was reopened when the hostilities subsided in 2004.
• Another train connecting Khokhrapar (Pakistan) and Munabao (India) is the Thar Express that restarted operations on 18 February 2006; it was earlier closed down after the 1965 Indo-Pak war.
• Lifeline Express is a special train popularly known as the "Hospital-on-Wheels" which provides healthcare to the rural areas. This train has a carriage that serves as an operating room, a second one which serves as a storeroom and an additional two that serve as a patient ward. The train travels around the country, staying at a location for about two months before moving elsewhere.
• Among the famous locomotives, the Fairy Queen is the oldest operating locomotive in the world today, though it is operated only for specials between Delhi and Alwar. John Bull, a locomotive older than Fairy Queen, operated in 1981 commemorating its 150th anniversary. Kharagpur railway station also has the distinction of being the world's longest railway platform at 1,072 m (3,517 ft). The Ghum station along the Darjeeling Toy Train route is the second highest railway station in the world to be reached by a steam locomotive. The Mumbai–Pune Deccan Queen has the oldest running dining car in IR.
• Vivek Express, between Dibrugarh and Kanyakumari, has the longest run in terms of distance and time on Indian Railways network. It covers 4,286 km (2,663 mi) in about 82 hours and 30 minutes.
• Himsagar Express, between Kanyakumari and Jammu Tawi, has the second longest run in terms of distance and time on Indian Railways network. It covers 3,715 km (2,308 mi) in about 69 hours and 30 minutes.
• The Bhopal Shatabdi Express is the fastest train in India today having a maximum speed of 150 km/h (93 mph) on the Faridabad–Agra section. The fastest speed attained by any train is 184 km/h (114 mph) in 2000 during test runs.
• The third longest train in terms of distance on Indian Railways network is Navyug express between Jammu tawi to Mangalore covering a distance of 3609 km.
• Trivandrum Rajdhani is the longest non stop train in on Indian Railways network covering 528 km.
• Double-decker AC trains have been introduced in India. The first double decker train was Pune-Mumbai Sinhagad express plying between Pune and Mumbai while the first double-decker AC train in the Indian Railways was introduced in November 2010, running between the Dhanbad and Howrah stations having 10 coaches and 2 power cars.

Railway links to adjacent countries

Existing rail links:

1. Nepal – Break-of-gauge – Gauge conversion under uni-gauge project
2. Pakistan – same Broad Gauge. Thar Express to Karachi and the more famous Samjhauta Express international train from Lahore, Pakistan to Amritsar (Attari).
3. Bangladesh – Same Broad Gauge. The Maitri Express between Dhaka and Kolkata started in April 2008 using the Gede-Darsana route, in addition to a Freight Train service from Singhabad and Petrapole in India to Rohanpur and Benapole in Bangladesh A second passenger link between Agartala, India and Akhaura Upazila, Bangladesh was approved by the Government of Bangladesh & India in September 2011.

Under construction / Proposed links:

Bhutan – railways under construction – Same gauge
Myanmar – Manipur to Myanmar (under construction)
Vietnam – On 9 April 2010, Former Union Minister of India, Shashi Tharoor announced that the central government is considering a rail link from Manipur to Vietnam via Myanmar.
Thailand - possible if Burma Railway is rebuilt.

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Some Facts : 

India's longest scheduled single continous train journey can be experienced on the weekly Vivek Express, connecting Kanyakumari (southern tip of India) with Dibrugarh in Assam. The route distance of 4,286 kms covered in 82 hours as per schedule.

It runs about 14,300 trains daily.The total distance covered by the 14,300 trains on the Indian Railways everyday, equals three & half times the distance to moon

Railway Station with all the Three Gauges is Siliguri Railway Station

The longest platform in the world is at Kharagpur and is 2,733 ft. in length

Nehru Setu on Sone River is the longest Railway bridge

42 Railway companies operated in the country before independence

Microfinance in India

What is Microfinance ?

Microfinance is the provision of savings accounts, loans, insurance, money transfers and other banking services to customers that lack access to traditional financial services, usually because of poverty.

Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.

What is Microcredit ?

Microcredit is one component of microfinance, which also includes other financial services such as savings accounts, insurance and money transfers.Microcredit is the extension of very small loans (micro loans) to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history. It is designed not only to support entrepreneurship and alleviate poverty, but also in many cases to empower women and uplift entire communities by extension.Microcredit is a variation on traditional credit service that involves providing small loans to people who would otherwise be unable to secure credit, typically because of poverty. Related barriers may include unemployment or underemployment and a lack of collateral and credit history.Microcredit is sometimes provided to fund a business initiative by the recipient. The entrepreneurs involved are sometimes referred to as “micro-entrepreneurs” because the scope of their projects and the sums required to fund them are very modest.

Microfinance is a much broader concept than microcredit and refers to loans, savings, insurance, money transfers, and other financial products targeted at poor and low-income people. Microcredit refers more specifically to making small loans available to poor people, especially those traditionally excluded from financial services, through programmes designed specifically to meet their particular needs and circumstances. 

Loans under micro credit are usually relatively short term, less than twelve months in most instances and often even six months or less, and generally for working capital with immediate regular weekly or  monthly repayments – they are also disbursed quickly after approval. Loans are usually quite small to begin with. As borrowers regularly repay their loans and demonstrate their creditworthiness, they become eligible for larger loans. The traditional lender’s requirements for physical collateral such as property are usually replaced by a system of collective guarantee (or solidarity) groups whose members are mutually responsible for ensuring that their individual loans are repaid. Alternatively, borrowers may be requested to find one or two personal guarantors – often these are respected local community leaders.Loan application and disbursement procedures are designed to be helpful to low income borrowers – they are simple to understand, locally provided and quickly accessible with minimal paperwork.

Microfinance is not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like credit, savings, insurance, remittance and also non-financial services like training, counseling etc.

Salient Features of Microfinance :

• Borrowers are from the low income group
• Loans are of small amount – micro loans
• Short duration loans
• Loans are offered without collaterals
• High frequency of repayment
• Loans are generally taken for income generation purpose

What are Microfinance institutions ?

 A number of organizations with varied size and legal forms offer microfinance service.Those institutions which have microfinance as their main operation are known as micro finance institutions.MFIs are an extremely heterogenous group comprising NBFCs, societies,trusts and cooperatives. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery.These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an informal group comprising of 5 to 10 individual members who come together for the purpose of availing bank loans either individually or through the group mechanism against a mutual guarantee. 

Definition given by Malegam Committee :

MFI is a company (other than a company licensed under Section 25 of the Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf.

The reason for existence of separate institutions i.e. MFIs for offering microfinance are as follows:

• High transaction cost – generally micro credits fall below the break-even point of providing loans by banks
• Absence of collaterals – the poor usually are not in a state to offer collaterals to secure the credit
• Loans are generally taken for very short duration periods
• Higher frequency of repayment of installments and higher rate of default

History of Microfinance in India :

The first thing to remember is that in India the history of rural credit, poverty alleviation and microFinance are inextricably interwoven. Any effort to understand one without reference to the others, can  only lead to a fragmented understanding.The policy response of the then British Government to this problem of rural indebtedness was to initiate the process of organization of cooperative societies as alternative institutions for providing credit to the farmers as also to ensure settled conditions in the rural areas, so necessary for a colonial power to sustain itself.

In the development strategy adopted by independent India, institutional credit was perceived as a powerful instrument for enhancing production and productivity and for alleviating poverty. The formal view was that lending to the poor should be a part of the normal business of banks.

To achieve the objectives of production, productivity and poverty alleviation, the stance of policy on rural credit was to ensure that sufficient and timely credit was reached as expeditiously as possible to as large a segment of the rural population at reasonable rates of interest.

The strategy devised for this purpose comprised :

· Expansion of the institutional structure,
· Directed lending to disadvantaged borrowers and sectors and
· Interest rates supported by subsidies.

The institutional vehicles chosen for this were cooperatives, commercial banks and Regional Rural Banks (RRBs).

Between 1950 & 1969, the emphasis was on the promoting of cooperatives. The nationalization of the major commercial banks in 1969 marks a watershed inasmuch as from this time onwards the focus shifted from the cooperatives as the sole providers of rural credit to the multi agency approach. This also marks the beginning of the phenomenal expansion of the institutional structure in terms of commercial bank branch expansion in the rural and semi-urban areas. For the next decade and half, the Indian banking scene was dominated by this expansion. However, even as this expansion was taking place, doubts were being raised about the systemic capability to reach the poor. Regional Rural Banks were set up in 1976 as low cost institutions mandated to reach the poorest in the credit-deficient areas of the country. In hindsight it may not be wrong to say that RRBs are perhaps the only institutions in the Indian context which were created with a specific poverty alleviation - microfinance – mandate.

During this period, intervention of the Central Bank (Reserve Bank of India) was essential to enable the system to overcome factors which were perceived as discouraging the flow of credit to the rural  sector such as absence of collateral among the poor, high cost of servicing geographically dispersed customers, lack of trained and motivated rural bankers, etc.The policy response was multi dimensional and included special credit programmes for channeling subsidized credit to the rural sector and operationalising the concept of “priority sector”. The latter was evolved in the late sixties to focus attention on the credit needs of neglected sectors and under-privileged borrowers.inadequate attention was paid to the qualitative aspects of lending leading to loan defaults and erosion of repayment ethics by all categories of borrowers. The end result was a disturbing growth in overdues, which not only hampered the recycling of scarce resources of banks, but also affected profitability and viability of financial institutions. This not only blunted the desire of banks to lend to the poor but also the development impact of rural finance.

The financial sector reforms motivated policy planners to search for products and strategies for delivering financial services to the poor – microfinance - in a sustainable manner consistent with high  repayment rates.The search for these alternatives started with internal introspection regarding the arrangements which the poor had been traditionally making to meet their financial services needs. It was found that the poor tended to – and could be induced to - come together in a variety of informal ways for pooling their savings and dispensing small and unsecured loans at varying costs to group members on the basis of need.This is the beginning of the story of the Bank-SHG Linkage Programme.

Models of Microfinance in India

1. Self Help Group (SHG) Bank Linkage Model:

The microfinance movement started in India with the introduction of the SHG-Bank Linkage Programme in the 1980s by NGOs that was later formalized by the Government of India in the early 1990s. Pursuant to the programme, banks, which are primarily public sector regional rural banks, are encouraged to partner with SHGs to provide them with funding support, which is often subsidized.A self help group, or SHG, is a group of 10 to 20 poor women in a village who come together to contribute regular savings to a common fund to deposit with a bank as collateral for future loans. The group has collective decision making power and obtains loans from the partner bank. The SHG then loans these funds to its members at terms decided by the group. Members of the group meet on a monthly basis to conduct transactions and group leaders are responsible for maintaining their own records, often with the help of NGOs or government agency staff.

NABARD is presently operating three models of linkage of banks with SHGs and NGOs.

2. Micro Finance Institution (MFI) Model:

The MFI model has gained significant momentum in India in recent years and continues to grow as the viable alternative to SHGs. In contrast to an SHG, an MFI is a separate legal organization that  provides financial services directly to borrowers.MFIs have their own employees, record keeping and accounting systems and are often subject to regulatory oversight. MFIs require borrowers from a village to organize themselves in small groups, typically of five women, that have joint decision making responsibility for the approval of member loans. The groups meet weekly to conduct transactions.MFI staff travel to the villages to attend the weekly group meetings to disburse loans and collect repayments. Unlike SHGs, loans are issued by MFIs without collateral or prior savings.MFIs now exist in a variety of legal forms, including trusts, societies, cooperatives, non-profit NBFCs registered under Section 25 of the Companies Act, 1956, or Section 25 Companies, and NBFCs registered with the RBI. Trusts, cooperatives and Section 25 companies are regulated by the specific act under which they are registered and not by the RBI.

Problems & Need for Regulation 

With financial inclusion emerging as a major policy objective in the country,  the concept of MFI has grown over the past two decades. Microfinance has occupied centre stage as a promising conduit for extending financial services to unbanked sections of  population. At the same time, practices followed by certain lenders have subjected the sector to greater scrutiny and need for stricter regulation.Although the microfinance sector is having a healthy growth rate, there have been a number of concerns related to the sector, like grey areas in regulation, transparent pricing, low financial literacy etc. In addition to these concerns there are a few emerging concerns like cluster formation, insufficient funds, multiple lending and over-indebtedness which are arising because of the increasing competition among the MFIs. 

Over the years, major commercial banks and multinational corporations have decided to sponsor it.However, this type of financing has a darker  side too. Most of studies are qualitative which tell that more than 90 per cent of the people who receive micro credit are poor and most of them succeed in businesses started with these loans.But the suicides committed by Indian farmers after being harassed by the microfinance institutions (MFIs) for their inability to repay the debt have raised serious moral and ethical issues against the institutions.The aggressive debt-collection tactics of these MFIs have left us wondering if the government has been playing ignorant to the modus operandi of MFIs.Moreover, the interest rates charged by micro financing institutions are usurious.Today, MFIs pay little attention to the core concerns of the poor. For them the critical concern is to sustain services against emerging odds.We’ve seen a major mission drift in micro finance, from being a social agency first, to being primarily a lending agency that wants to maximise its profit.Thus, there is a great need to set out rules limiting interest rates and stipulating legal consequences for the MFIs who badger/ harass borrowers for payments.

Malegam Committee recommends regulation of MFIs for following reasons : 

1.All NBFCs are currently regulated by Reserve Bank under Chapters III-B, III-C and V of the Reserve Bank of India Act. There is, however, no separate category created for NBFCs operating in the Microfinance sector.
2. First, the borrowers in the Microfinance sector represent a particularly vulnerable section of society. They lack individual bargaining power, have inadequate financial literacy and live in an environment which is fragile and exposed to external shocks which they are ill-equipped to absorb. They can, therefore, be easily exploited.
3. Second, NBFCs operating in the Microfinance sector not only compete amongst themselves but also directly compete with the SHG-Bank Linkage Programme. The practices they adopt could have an adverse impact on the programme. In a representation made to the Sub-Committee by the Government of Andhra Pradesh,it has been argued, that the MFIs are riding “piggy-back” on the SHG infrastructure created by the programme and that JLGs are being formed by poaching members from existing SHGs. About 30% of MFI loans are purportedly in Andhra Pradesh.The Microfinance in India- A State of Sector Report 2010 also says that there are many reports of SHGs splitting and becoming JLGs to avail of loans from MFIs.The A.P. Government has also stated that as the loans given by MFIs are of shorter duration than the loans given under the programme, recoveries by SHGs are adversely affected and loans given by the SHGs are being used to repay loans given by MFIs.
4. Fourth, over 75% of the finance obtained by NBFCs operating in this sector is provided by banks and financial institutions including SIDBI. As at 31stMarch 2010,the aggregate amount outstanding in respect of loans granted by banks and SIDBI to NBFCs operating in the Microfinance sector amounted to 13,800 crores. In addition, banks were holding securitized paper issued by NBFCs for an amount of 4200 crores. Banks and Financial Institutions including SBIDBI also had made investments in the equity of such NBFCs. Though this exposure may not be significant in the context of the total assets of the banking system, it is increasing rapidly.
5. Finally, given the need to encourage the growth of the Microfinance sector and the vulnerable nature of the borrowers in the sector, there may be a need to give special facilities or dispensation to NBFCs operating in this sector, alongside an appropriate regulatory framework. This will be facilitated if a separate category of NBFCs is created for this purpose. 

Major recommendations of Malegam Committe :

The Malegam committee has said that NBFCs with microfinance operations should be classified as an NBFC-MFI, and said that bank loans to these NBFC-MFI should be included in the priority sector. An  NBFC-MFI will be a company that provides loans largely to low-income borrowers and gives small amount, short-term loans on unsecured basis. The report says that an NBFC MFIs cannot give more than Rs 25,000 as loan to single borrower and can provide loans only to families with income less than Rs 50,000.The Malegam Committee recommends a interest rate cap of 24% on individual loans and a margin cap of 10-12% depending on the size of the MFI. The report also attempts to address concerns about multiple-borrowing by placing restrictions on the number of MFIs an individual may borrow from (maximum of 2) and maximum number of groups to which an individual may belong(The report has recommended to disallow more than two microfinance companies to lend to one borrower.).It recommended setting up of a microfinance credit information bureau .The committee proposed to set up an ombudsman for the MFI sector. It also called for the Reserve Bank of India to draft a customer protection code for MFIs. 

More Info :

The Microfinance Institutions (Development and Regulation) Bill details  - Click Here