Economy

[Economy] Calculating Income Tax, Tax Exemption vs Tax Deduction, Rajiv
Gandhi Equity Saving Scheme

HOME >> Economy || Published 2 years ago || 23 Comments so far.

1. What are the Income tax slabs in Budget 2012?
2. How to Calculate income tax?
3. 3% educational cess
4. What is the difference between Tax exemption and tax deduction?
#1: Tax exemption
#2: tax deduction
5. Union budget 2012: provisions of Tax Deduction and Tax Exemption
What is Tax Planning?
Who is Tax-Consultant?
Black Money and Agro-Income
6. How does RGESS save Rs.5000 In Tax?
Case #1: dont invest in RGESS
Case #2: investment maximum in RGESS
7. The important questions : Food for Thought
You may have read this statement in newspaper, tv-channels.
Rajiv Gandhi Equity Saving Scheme (RGESS) will give maximum benefit of Rs. 5,000
in tax-saving.
What does it mean? Before we can talk about that, lets see the basics of Income Tax
calculation, Exemption and Tax Deduction.
What are the Income tax slabs in Budget 2012?
You know about this already:
Income tax slab (in Rs.) Tax
0 to 2,00,000 No tax
2,00,001 to 5,00,000 10%
5,00,001 to 10,00,000 20%
Above 10,00,000 30%
(We are skipping senior citizen provisions)
Time for a very simple question:
if your income is Rs.15 lakhs, how much income tax do you have to pay?
15 lakhs is above Rs.10 lakhs, so you fall in 30% income tax slab.
30% of 15 lakhs equals to 4.5 lakhs income tax.
Sorry 4.5 lakhs is Incorrect Answer. Infact youre income tax will be quite less than
Rs.4.5 lakhs.
Why?
Because income tax is not calculated like that.
Then how to calculate income tax?
Suitcase approach
Imagine there are four suitcases labeled one, two, three, four.
You have to fill up each suitcase with your cash.
But there are some conditions
you have to fill these suitcases in serial order: 1,2,3 then 4
First suitcase can contain maximum two lakh rupees only. Once it is fully packed,
you move to the next suitcase.
Second suitcase can hold maximum three lakh rupees
Third suitcase can contain maximum five lakh rupees
Fourth suitcase can contain any amount of money. No maximum limit.
Step #1: Distribute money in suitcases
Now start distributing your 15 lakh rupees into these four suitcases
suitcase number Money packed
One 2,00,000
Two 3,00,000
Three 5,00,000
Four 5,00,000
Total 15 lakhs
Step #2: Make a new column and apply those four tax slabs
suitcase number Money packed Tax slab
One 2,00,000 0%
Two 3,00,000 10%
Three 5,00,000 20%
Four 5,00,000 30%
Total 15 lakhs
Step #3: Calculate the income tax to be paid for each suitcase
suitcase number Money packed Tax slab Tax to be paid
One 2,00,000 0% Zero
Two 3,00,000 10% 30,000
Three 5,00,000 20% 1,00,000
Four 5,00,000 30% 1,50,000
Total 15 lakhs 2,80,000
The total sum of income tax on all four suitcases =2,80,000 lakhs
So, if your income is 15 lakhs, you have to pay 2.8 lakhs as income tax.
But we forgot some important things: educational cess, tax exemption, tax deduction.
3% educational cess
Cess means tax on the tax.
Union budget 2012, has provision of 3% educational cess.
Meaning 3% of 2.8 lakhs, equal to Rs.8400
Hence the total income-tax that you to pay = 2.8 lakhs +8400= Rs.2,88,400
Now time for two most important parts in the income tax calculation.
What is the difference between Tax exemption and tax
deduction?
#1: Tax exemption
Income tax= the tax on your income, but you dont have to pay income tax on
certain type of income. For example
Policemen and Army jawans get uniform maintenance allowance: Suppose Rs.1000 to
wash and iron their uniforms and to polish their boots every month.
Rs.1000 every month multiplied with 12 months equals to Rs.12,000 every year, apart
from the regular salary.
But Budget-2012 says this Uniform Allowance income is exempted from taxation.
So, If an army jawan earns Rs. 2,12,000, then his taxable income is
2 lakhs minus Rs. 12000 exempted= Rs. 2,00,000.
Now calculate his income tax on Rs. 200,000 based on our suitcase approach. (ans.
Zero tax, because Cash finished at first suitcase.)
Crux: Tax exemption is given on INCOME.
#2: tax deduction
If you spend your income on certain activities, you wont have to pay income tax on
that much amount of your income.
E.g.50% deduction, if you invest in Rajiv Gandhi Equity Savings Scheme. (RGESS)
Suppose you earn nine lakh rupees a year and invest Rs.20,000 in RGESS,
Thus , your taxable income
= nine lakh rupees minus 50% of Rs.20,000 (invested in RGESS)
= 9 lakhs-10,000
= Rs. 8,90,000
Now calculate the income tax on Rs.8,90,000 using our suitcase approach.
Crux: Tax Deduction is given on SPENDING
Union budget 2012: provisions of Tax Deduction and Tax
Exemption
Here are a few examples.
Note: Im not filling up the minute details and you dont have to mug this list.
Tax Exemption (on INCOME / Salary) Tax Deduction (on SPENDING)
Transport / Conveyance Allowence
Child education allowence
Leave travel allowance (LTA)
Medical Allowance
Uniform / Dress allowance
Gift from relatives
Agricultural income
House Rent income
Rajiv Gandhi Equity Saving scheme.
Tax saving mutual funds (ELSS)
Five year tax-saver bank Fixed deposits
Public provident fund (PPF)
National Savings Certificate (NSC) or
National Service Scheme (NSS)
Employer contribution into New Pension Scheme (NPS)
Life insurance/Unit Linked Insurance Plan (ULIP) premium
Employees contribution towards Employee provident fund (EPF)
Home loan principal amount payment.
Post office tax saving deposit or tax saving bonds
Pension scheme/Retirement plans (Secion 80CCC)
Tuition fees paid for children education
Medical Treatment of family (upto Rs.40k)
What is Tax-Planning?
It means use of Tax-Exemption and Tax-Deduction provisions in such a way that you
can save maximum amount of tax.
Who is Tax-Adviser / Tax-Consultant?
These are extremely knowledgeable and experienced Chartered Accountants,
MBA and Tax Lawyers.
They make customized tax-saving plans according to your requirements.
Big players in Tax Consulting = Ernst & Young, KPMG, Price waterhouse
Coopers (PwC).
Recall that Vodafone Essar deal: Saving Capital Gains tax in Caymens Island. These
Big Players help in such huge tax-saving deals.
Black Money and Agro-Income
In above table, you can see that Agriculture income is exempted from income-
tax.
Lot of film stars forge documents and show they own farm-lands and theyre
farmers.
Game is simple. They take 5 crores from film producers or 50 lakhs to dance in
Dubai.
But on paper they show only few lakhs as legit payment received and pay
income tax on that part only.
Remaining money is shown as income from that agricultural land and thus
totally exempted from income-tax.
So this is also one type of Tax-Planning, just illegal.
Black money = income on which tax is not paid.
Coming back to the opening sentence of this article:
How does RGESS save Rs.5000 In Tax?
You already know the main provisions of Rajiv Gandhi Equity saving scheme
Only first-time investors, with annual income less than Rs.10 lakh can invest in
the scheme.
One person can invest maximum Rs.50,000 only
Ya but still how is Rs.5000/- saved? Youve to compare two cases to find that out.
Case #1: dont invest in RGESS
Your income is Rs.9 lakhs, and you dont invest in RGESS and dont get any other tax
deduction or tax exemptions.
The total taxable income is Rs. 9 lakhs.
One 2,00,000 0% Zero
Two 3,00,000 10% 30,000
Three 4,00,000 20% 80,000
Four 0 30% 0
Total 9 lakhs 1,10,000
Thus, in case#1: youre paying Rs. 1.1 lakh as income tax
Case #2: investment maximum in RGESS
Your income is Rs.9 lakhs, and you invest to the maximum limit (Rs.50,000/-).
Thus, the taxable income is
= Rs. 9 lakhs minus 50% of Rs.50,000 ;because RGESS gives 50% Deduction.
=9 lakhs 25,000
=Rs. 8,75,000
Now calculate income tax for Rs.8,75,000 using same suitcase approach
One 200000 0 0
Two 300000 10 30000
Three 375000 20 75000
Four 0 30 0
Total 875000

105000
Thus, in case#2, you pay 1,05,000 as income tax.
Difference between Case #1 minus Case #2
=1,10,000 minus 1,05,000
= Rs. 5,000
Therefore all the newspapers, magazines and TV channels shout all the time that
youll save Rs.5,000 by investing in RGESS. But here is a fine-print.
This Rs.5000-magic works only if you fall under the 20% tax slab.
If your income is rupees two lakhs and you invest Rs.50,000 in RGESS, you will not
save any tax. Why? Because you fall in zero% tax slab. Your annual are not taxable in
the first place!
Similarly, if you are in the 10% tax slab, you will get different answers.
Homework:
(No, theyll not ask this in your exam, this is only for brain exercise)
Calculate the maximum possible tax saving with RGESS, if your annual income is
Rs.4 lakhs.
Shortcut tip:
You can get max deduction of 25,000 (that is 50% Deduction of Rs.50000 invested in
RGESS)
And your given income 4 lakhs fall under 10%.
So, 10% of 25,000=Rs.2500 saved in tax.
Why does this shortcut method work? Think about it.
Anyways, whether you can save 5000 or 7000 that is not the important question for
UPSC, IBPS (Bank PO) or MBA admission interviews.
The important questions are following
Why did Pranab come up with Rajiv Gandhi Equity saving scheme?
Why are only first-time investors allowed to save money in the scheme?
Why is Pranab not allowing people with annual income of Rs.10 lakh or above, to
invest in this scheme?
Why did Pranab say this move will improve the depth of domestic capital
market?
What is No-Frills demat account and why is Pranab talking about it?
If you were in place of Pranab, How will you design the Tax Exemptions and Tax
Deductions for the Aam-Aadmi and how will you help the Indian Economy?
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23
1. naveen lohar
01/09/2012 at 11:27
give answer please
Reply
2. Mahendra
05/12/2012 at 00:10
Really Nice one to understand the income tax
Reply
3. Mahendra
05/12/2012 at 00:11
Thanks for info!
Reply
4. kaushal jha
05/12/2012 at 03:21
hi mrunal sir,rajiv gandhi equity savings scheme.max benefit is 50000rs??????????
Reply
5. ashok
24/12/2012 at 11:02
sir kindly give the explanation of the above question also
Reply
6. ashok
04/02/2013 at 19:42
sir kindly give the explanation for abve also
Reply
7. s.k.t
04/03/2013 at 16:37
GUYS IMPORTANT DO NOTE DOWN THE CHANGES IN THE RGESS IMPORTANT
FOR THE UPSC EXAM
*1)THE INCOME LEVEL OF AN INVESTOR HAS BEEN RAISED FROM 10 TO 12 LAKH
PER ANNUM AND THE TAX BENEFIT WHICH WAS 50% FOR INITIAL MIN
INVESTMENT OF 50,000 HAS BEEN INCREASED FOR 3 YRS FROM 1 YR(EARLIER)
*=ANY DOUBT IN THE EARLIER PROVISION OF THE SCHEME REFER TO OUR
BRILLIANTS(MRUNAL) ART AND THEN COMPARE IT
Reply
8. komal
20/04/2013 at 18:39
how to calculate for 6 lakhs
Reply
o Neetu
23/12/2013 at 22:04
2,00,000 = zero
3,00,000 = 10% = 30,000
1,00,000 = 20% = 20,000
Total = 50,000
Reply
o Neetu
23/12/2013 at 22:07
With investment in RGESS,
Net Taxable income will be 5,75,000(if invested 50,000 in RGESS)
2,00,000 = 00
3,00,000 = 30,000
75,000 = 15,000
Total = 45,000
Reply
9. JASPAL
27/06/2013 at 11:35
Sir..for RGESS, now the max limit is 12 lakhs (for earlier 10L) and this 12L is gross total
income (and not net notal income , hence no role of deductions play in RGESS) , am i right?
Correct me if i am wrong..
Reply
10. JASPAL
27/06/2013 at 11:43
And also as the max limit is now 12L, then the max possible tax saving from RGESS would now
be more than rs 5000? Am i right sir?
Reply
11. Teja
08/10/2013 at 22:27
DOUBT in the difference between Tax exemption and tax deduction.
Interest on Savings Bank deposit is allowable as DEDUCTION upto Rs.10000 under section
80TTA of the Income Tax Act,1961.Interest on savings deposit is an income and not
spending,then why is that called/termed as DEDUCTION and NOT as EXEMPTION.
Reply
12. shyam kishore
09/12/2013 at 19:59
how much money is to be invested to save 7000 income tax for the calender year 2013-14
Reply
13. sheetal
13/12/2013 at 21:37
hi,
my salary is 500001 and monthly tax is deducting incometax 800 and 200 other tax.
i want to save this money.pleaes guide me what procedure needs to be follow.
and already i have done ING insurance policy of rs 1,35,000. and per year need to pay 55,000.
Reply
o Harish
23/12/2013 at 19:47
Check out PPF or VPF..
Reply
14. bankexamtrainee
23/12/2013 at 18:30
please provide answers
Reply
15. M.PRITHVI RAJ
25/12/2013 at 17:11
Why is Pranab not allowing people with annual income of Rs.10 lakh or above, to invest in this
scheme?
Ans:because above 10 lakhs the profit a person gains is only 7500/-(u can check a person getting
11 lakhs and 15 lakhs where they get the same profit by investing in RGESS ==7500/-)
Reply
16. PRITHVI RAJ
25/12/2013 at 17:13
Why is Pranab not allowing people with annual income of Rs.10 lakh or above, to invest in this
scheme?
Ans:because above 10 lakhs the profit a person gains is only 7500/-(u can check a person getting
11 lakhs and 15 lakhs where they get the same profit by investing in RGESS ==7500/-)
Reply
17. ramesh
06/01/2014 at 10:25
thank u sir plrase post the answers for the above questions also
Reply
18. Venkatesh
04/02/2014 at 15:52
The income tax is calculated on the Qualifying Amount after all your savings, exemptions and
deductions. NOT on your whole gross annual salary. Say for example, your CTC is Rs.1000000
p.a and you have shown investment declarations for tax exemptions upto Rs.500000, then the tax
will be calculated on the balance qualifying amount which is Rs.500000.
Reply
o Prabhat
01/03/2014 at 01:26
But you can tax deduction is allowed only up to 100000 savings
Reply
19. HBL meena
13/02/2014 at 13:59
I have been paid Rs.50000 for getting coaching for IAS main examination whether the amount
will give rebate for income tax or not
[Economy] Fiscal Consolidation, Fiscal Deficit : Meaning, Implications,
Explained Why Vijay Kelkar Committee was formed?

1. Parts of Budget= Revenue + Expenditure
2. Types of Budget= Deficit/Surplus/Balanced
3. Why printing more money=Bad idea?
4. When fiscal deficit NOT BAD?
5. When & Why is fiscal deficit BAD?
1. Creates inflation
2. Black Money
3. Bond Yield increased
4. Crowding out investment
5. Twin deficit hypothesis
6. Current Account Deficit
7. Subsidy Burden = fiscal deficit increased
8. Interest Payment
9. Vicious circle: Trade to Fiscal deficit
6. Fiscal Consolidation: What is it?
7. Mock Questions
Continuing episodes of technical incorrect economy.
Set Location: Prime Ministers Office (PMO), New Delhi.
Mohan is busy uploading (un)funny photos in his facebook album and tagging random
friends in them to get more likes. Vijay Kelkar makes an entry in his office.
Kelkar Sir, the expert reports suggest that fiscal deficit will be around 6 percent for 2012-13. This is very dangerous; you need do fiscal consolidation immediately!
Mohan Ya but what is fiscal deficit and why is it dangerous?
Kelkar What? youre an economist and yet you dont know what is fiscal deficit?
Mohan
Well I was an economist. But I didnt maintain notes and I did not revise the standard reference books either, so Im unable to recall the concepts right
now, just like a no0b player of UPSC.
Kelkar Well fiscal deficit (FD) = Budgetary Deficit + Market borrowing + other liabilities of Government
Mohan Please Explain in English, from the very beginning.
Kelkar
Ok then let us start from the
beginning.Every year, the Government puts out a plan for its income and expenditure for the coming year. This is, called annual Union Budget and you
need to get it approved by the parliament.
Mohan Side question: why do I need to get it approved by the parliament?
Kelkar For the answer Click ME
Mohan Ok back to the topic
Parts of Budget: Revenue and Expenditure
Kelkar: In every budget, there is incoming money (Revenue) and out going money
(Expenditure).
Incoming money Outgoing Money
Incoming money is divided into two parts. Tax and Non Tax
And outgoing money is divided into Plan and Non plan Expenditure.
Incoming Outgoing
Tax Non Tax Plan Non Plan
Kelkar: We can further refine this classification into Revenue/capital receipts and
Expenditure.
But let us not complicate the matter for the time being.
Mohan: Now What is this incoming money from tax and non tax sources?
Kelkar: see the table yourself for the examples.
Incoming money Outgoing
Tax Revenue
Non Tax Revenue Plan Non Plan
Direct Tax Indirect Tax
1. income tax
2. Corporate tax;
3. Wealth tax
4. Capital gain tax (Vodafone case)
1. custom duty,
2. excise duty,
3. service tax.
4. VAT
1. Fees Collected (Driving license, RTI, Passport)
2. Fines and Penalties (Traffic violation etc)
3. Income from PSU (e.g. profit from Airindia (lolz)
4. Gifts. (discussed in 2
nd
ARC article)
5. Grants (Foreign Aid from UN, Japan etc)
6.

Mohan: and what is this outgoing money? Plan and non-plan?
Kelkar: Outgoing money = the area where Government spends the money
(Expenditure).
Plan-Expenditure means spending money on the activities related to the national five
year plan. (FYP)
Non-plan Expenditure, obviously means spending money on activities that are not
related with national five year plan. Check the table for examples.
Incoming Outgoing
Tax Revenue
Non Tax Revenue Plan Expenditure Non Plan
Direct Tax Indirect Tax
1. income tax
2. Corporate tax;
3. Wealth tax
4. Capital gain tax
(Vodafone case)
1. custom
duty,
2. excise duty,
3. service tax.
4. VAT
1. Fees Collected (Driving license, RTI,
Passport)
2. Fines and Penalties (Traffic violation
etc)
3. Income from PSU (e.g. profit from
Airindia (lolz)
4. Gifts. (discussed in 2
nd
ARC article)
5. Grants (Foreign Aid from UN, Japan
etc)
1. MNGREA
2. Janani Suraksha
Yojana
3. JNNURM
4. Indira Awas Yojana
1. Salary of judges, bureaucrats and
armymen
2. Buying new tanks and missiles
3. Subsidies: Petrol, Kerosene etc.
4. Light bills of Government offices.
5. Luxury Travel bills of Pratibha.
Mohan: ok so now what?
Kelkar: Now we classify the budget according to the balance between incoming and
outgoing money.
Types of Budget=Deficit,Surplus,Balanced
When It is called a
outgoing money > incoming money deficit budget.
outgoing money < incoming money surplus budget.
outgoing money = incoming money balanced budget.
In reality, Government always has deficit budget. Because
as long as there is Pakistan and China in the neighborhood, well have to maintain a
huge army, keep buying new tanks and missiles.
As long as there are poor people, well have to keep running various Government
schemes.
Mohan: come to the point.
Kelkar: The point is,
When Government spends beyond its aukaat, it creates a big pothole in the highway.
This pothole can be called a Revenue deficit, budget deficit, fiscal deficit or primary
deficit according to the formula you use to measure the depth of this pothole.
This pothole cannot be filled with cement, asphalt or dirt. It can only be filled with
cash.

In the 1980s, Sukhmoy Chrokroborthy Committee came up with the fiscal deficit
formula
Fiscal deficit=
1. Budgetary deficit (=total Expenditure minus total income)
2. + market borrowings (=through Government securities (G-Sec)/Bond)
3. + other liabilities (e.g. pension and provident to be given in future)
Mohan: but why should we calculate this fiscal deficit?
Kelkar: This fiscal deficit number tells you the depth of the hole and gives you the
idea how much money do you need to borrow from the sources
within India (internal borrowing from RBI, Other banks etc)
and from abroad (external borrowing- World Bank, IMF etc.)
Bigger the pothole, more cash you need to fill it up.
Here is some food for thought. Incoming Outgoing Breakup for USA budget 2011.
Click on Image to Enlarge.

Mohan then simply borrow money and fill up the pothole! What is the problem?
Kelkar
problem is Paisaa Ped pe toh nahi lagtaa (Money doesnt grow on trees). When you borrow money, youve to pay interest () to the party, every
year.To pay this interest in the future, youve three options.first option =Increase the current taxes or create new taxes.
Mohan Not a good idea sir-ji.
Kelkar
alright, Second option =Create policies to help stimulate economic growth so that tax collection automatically increases with it, like FDI in aviation, power
sector, retail, insurance and so on.
Mohan But thats Easier said than done :(
Kelkar Then Third option : Print more currency and use it to fill up the pothole. This is called debt monetization.
Mohan Now this third option sounds great :D
Kelkar Actually thats the stupidest of all three solutions. Let me explain with the usual example.
Why Printing more money= Not good idea?
Suppose, Government orders RBI to print lots of cash to solve poverty.
Then Government launches Rajiv Gandhi Suitcase yojana (RGSY) under which
every BPL family is given a suitcase containing Rs.10 lakh.
What will happen then?
Theyll all go and buy lots of onion,milk,mobile, cars, houses everything.
=Demand of product will increase, but the supply will remain almost the same as
earlier.
So, there will be one customer offering Rs.400 per kilo of onion, then another guy
would offer Rs.500 per kilo of onion=inflation =not good.
On the other hand, Suppose your boss pays you 10 lakh per year, but that means he
definitely extracts work worth more than 10 lakhs from you and sells some
goods/services to a third client. Thats why giving you 10 lakhs doesnt increase
inflation. (because some other client is buying the services you had produced).
but giving 10 lakh to a poor without making him economically productive = increases
inflation.
Hence printing money to solve problems= not good idea.

Here is another example: Suppose that there is only
one commodity that everyone needs to buy in order to live a good life say
wheat.
Also, assume that our country produces 10,000 quintals of wheat every year.
There are a total of 25,000 people in the country who spend Rs. 400 each per
year to buy wheat.
Since this Rs. 1 crore is spent to purchase ten thousand quintals of wheat, the cost
of wheat is Rs. 1,000 per quintal.
Now suppose that to repay some of its debt, the Government decides to print
some new currency notes. Say the Government prints new notes worth
Rs. 10 lacs.
This means the amount of money available to spend increases from
Rs. 1 crore to Rs. 1.1 crores.
Since the amount of wheat produced hasnt increased, each tonne of wheat
now costs Rs. 1,100, a 10% increase! (1.1 crores paid for ten thousand
quintals = Rs. 1,100 per quintal).
So we have just seen that the effect of debt monetization is inflation.
Inflation acts like an invisible tax on all the people of a country. (recall the first
option increasing tax was not a good option.)
Mohan : Does that mean fiscal deficit =bad?
Kelkar: not always bad. It depends on the situation.
When fiscal deficit = NOT BAD?
If the money that the Government had borrowed was used to increase the amount
of wheat production, then the inflation could have been avoided. (for example
borrowing money to create new canal or irrigation project)
If Such irrigation project led to an increase in wheat production from 10,000
quintals to 11,000 quintals.
In that case, even with an increase of money to 1.1 crores, the cost of
wheat would remain steady at Rs. 1,000 per quintal.
Thus wed have economic growth and also avoid inflation
Clearly then, it was a good thing that the Government borrowed money to
implement this program.
Thus, fiscal deficit is not necessarily a bad thing, always.
When and why is fiscal deficit= BAD?
Creates inflation
A large and persistent fiscal deficit =something is wrong in the economy.
It can mean that the Government is spending money on unproductive
programmes which do not increase economic productivity. (For example
MNREGA, most of the money is eaten midway by the Sarpanch and Local
officers.) =Bad
Now these rich Sarpanch and Local officers buy more gold, land and cars=
demand increased but other normal people dont have that much money =
inflation. (demand pull type).
Black Money
Fiscal deficit= crudely speaking when incoming money is less and outgoing
money is more. So, incoming money is less = tax collection machinery is not
effective = perhaps lot of people are evading the taxes = black money =inflation
(demand pull type) = Very bad.
In extreme conditions, inflation can give way to hyperinflation that can
completely destroy a country. =very bad.
Bond Yield increased
From Eurozone Greece Exit article, You already know what is bond yield. If not click
me
When Government keeps borrowing and borrowing to fill up the fiscal deficit pothole,
then bond yield will increase = not good because more and more of taxpayers money
(i.e. Government s incoming money) will go in repaying that bond interest rate rather
than going into education or healthcare.
Crowding out investment
We already saw that, Fiscal deficit pothole can only be filled with cash. This cash has
to be borrowed from RBI, other banks, FII etc. who buy the Government bonds.
So, that much money (Credit/loan) is not available for other needy businessman.
thus fiscal deficit Crowds outinvestment from private sector. Now that needy
businessman will have to borrow money at higher interest from another party (this is
how fiscal deficit increases interest rates)= input cost of product increased = he will
increase the MRP of his product or service to maintain the same profit margin =
inflation. (cost-push type)

Twin deficit hypothesis
This hypothesis says that as the fiscal deficit of the country goes up its trade
deficit (i.e. the difference between exports and imports) also goes up.
Hence, when a government of a country spends more than what it earns, the
country also ends up importing more than exporting.
In India, the trade deficit story is basically about oil and gold two commodities
that the country does not produce much but imports a hell of a lot.
Current Account Deficit (CAD)
When India imports more than it exports = leads to Current Account Deficit. (we
already discussed it earlier, click ME)
CAD is another pothole but it can be filled only with foreign currency (mostly
dollars!)
This increases the demand of dollars in Forex Market = rupee weakens against
dollar= price of petrol will increase= again inflation= bad.
Subsidy Burden = fiscal deficit increased
the government of India does not pass on a major part of the increase in the price
of oil to the end consumer and thus subsidises diesel, LPG and kerosene .
So oil companies sell at a loss, and the government compensates these companies
for the loss (by giving them bonds).
This increases government expenditure, which, in turn, increases the fiscal deficit.
Interest Payment
In this financial year alone (2012-13), the government will pay more than 4 lakh crore
just as interest payment on debt taken earlier! = more imbalance between incoming
and outgoing money.
The vicious circle: Trade to Fiscal deficit
Thus, in Indias case, a greater trade deficit also leads to a greater fiscal deficit. So the
causality in Indias case is both ways.
A high fiscal deficit leads to higher trade deficit.
And high trade deficit leads to higher fiscal deficit.
And this, in turn, also leads to a weaker rupee, which, in turn, pushes up the cost
of oil in rupee terms leading to a higher fiscal deficit.
Now in the opening lines, Kelkar said Fiscal deficit would be around 6%. What does
that mean?
There are two ways to express Fiscal Deficit.
1. Absolute Value: Rs. 521,980 crores on March 31, 2012 .
2. Percentage: 5.9% of GDP.
In newspapers and economic discussions, the Fiscal is usually expressed in second
form (percentage).
You might think 5 or 6% is such a trivial amount, why Kelkar is so worried?
Well, to understand the gravity of the situation, youve to compare the percentage
with other percentages.
1. Around 3.8% of Indias GDP goes in Education. (2012)
2. Around 6% of Indias GDP goes in Fiscal Deficit. (2012)
3. Greeces Fiscal deficit was more than 10% of its GDP and look how much trouble
it is facing. (recall Eurozone Article)
Therefore, we must not only pay attention to the fiscal deficit, we must also try
and understand the different areas of Government spending.
Is the Government borrowing money to spend on programmes that lead
to increased economic productivity or is it spending on unproductive programs?
Remember, even directly giving money (or amenities) to BPL, without making
them more economically productive = dangerous because of the various reasons
seen above.
Fiscal Consolidation: What is it?
Mohan
ok so far I understood
1. What is fiscal deficit.
2. Why and when fiscal deficit is bad.
But what is this fiscal consolidation?
Kelkar
Fiscal consolidation means doing everything to fix the fiscal deficit problem in its root and preventing heavy fiscal deficits situation from occurring in
future.
Mohan But How can we do that?
Kelkar Just try to reduce the outgoing money and increase the incoming money. (Look at that plan-non plan table again.)That means
1. Cut down subsidies.
2. Stop leakages in subsidies.
3. Reform the tax structure (implement GST).
4. Improve the performance of PSUs.
5. Recover blackmoney
6. stop ministers from using Business class airtickets and other wasteful Government expenditures. (= take austerity measures)
+ Policy reforms such as FDI (to create environment conductive for economy = that will automatically increase productivity and tax collection. Recall the
second option.)

Mohan
hmm that itself sounds like a problem. I think I should make another Committee (so that I dont have to implement its recommendations). Let me check my
phonebook for retired judges.
Kelkar Sir this is the matter of economy not railway accidents. It requires an expert on economy.
Mohan Then make a Committee headed by Montek Singh
Kelkar but Media wont like his recommendations. (Everyone who earns more than Rs.20 is not a BPL and he should pay 10% income tax.)
Mohan Then make a Committee headed by some columnist from The H*****!
Kelkar But Madam-ji wouldnt like his recommendations. (hand over Finance Ministry to Fidel Castro)
Mohan Then whom should I appoint?
Kelkar The expert is sitting in front of you.
Mohan Alright, tomorrow morning you goto the finance Minister along with your class 10,12,college marksheets, extra-curricular activity certificates and job
experience certificates (if any) and get the appointment letter from him.
Kelkar
What???
I served as the finance Secretary of India (despite not being an IAS).
I served as an executive director in IMF.
Hell I even served as the chairman of 13
th
Finance Commission of India!
and now youre asking the Vijay Kelkar to submit his class 10-12 marksheets and extra curricular activity certificates?
Mohan Chillx. I was joking. You may go now. If I need any more help, Ill give you a miss call.
Kelkar PM and miss-call? Another joke?
Mohan No, Im serious! Miss call= Government expenditure on phone bills reduced= fiscal consolidation.
Kelkar Whaat an idea sir-ji.
Then Vijay Kelkar set out for a journey to prepare a roadmap for fiscal
consolidation.
In September 2012, He submitted his report to the Government.
Well see the recommendations of Kelkar Committee in future article. (To Be
continued.)
Mock Questions
Which of the following statements are correct?
1. Salaries paid to Constitutional bodies is an example of Planned Expenditure
2. Fiscal deficit is always higher than budgetary deficit.
3. Fiscal deficit cannot be financed through external borrowing.
4. Kelkar Committee was created to suggest the roadmap for implementation of
Direct Tax Code.
5. High and persistent Fiscal Deficit is a sign of healthy and growing economy.
6. To achieve Fiscal consolidation, Government should increase the non-plan
expenditure.
7. Fiscal consolidation means the steps taken by Government to increase its
shareholding in PSUs.
8. Vijay Kelkar is the chairman of 14th Finance Commission.
Descriptive 15 marks (150 words)
1. What is fiscal deficit. Whatre the salient features of FRBM Act?
2. Major recommendations of Kelkar Committee on Fiscal consolidation.
All of my articles on Economy are Archived on this link: mrunal.org/economy
Ref
1. Wheat example from Parijat Gargs article on governindia.org
2. Kelkars Character is portrayed according to his bio
on http://www.rediff.com/business/1998/sep/11kelkar.htm
3. US budget from www.sankey-diagrams.com
4. Twin deficit etc from http://www.dnaindia.com/money/column_of-deficits-falling-
rupee-good-economics-and-mindless-austerity_1690732
5. Education GDP http://www.sunpost.in/2012/05/17/india-spends-3-85-gdp-on-
education/
explained
247
1. dhanjit choudhury
05/01/2014 at 10:33
plz explain how state can be a producer and or supplier of the private goods and services..
Reply
2. Anil Hasani
26/01/2014 at 21:35
killer sense of humour sir
Reply
3. mayankmishra
28/01/2014 at 19:51
very good articleand hilarious too
Reply
4. mayankmishra
31/01/2014 at 18:26
why cant we print money secretly and give that money to world bank,imf loans ?
Reply
o E.P.SANTHANAKUMAR
31/01/2014 at 19:14
hi frnds me too having same doubt why cant we print money secretly and use it for transactions
Reply
ABCD
31/01/2014 at 19:28
IMF , WB make use of Dollar as transaction . Even if we still wish to convert domestic
currency to Dollar , the result could cause stag-flation .
Reply
o Nikhil Jain
06/03/2014 at 21:17
We can print money only against our bullion reserve. We cant print more money as it will
carash the economy and also decrease bullion reseve.
Reply
5. Deepali
14/02/2014 at 20:42
Hi Mrunal,
Very well explained. Appreciate the effort.
The new layout seems a little distorted. Certain texts are not clearly aligned and the whole thing
is justified to the right. I suppose its work in progress.
Reply
6. saurabh verma
14/02/2014 at 21:53
i am a follower of ur site since beigining,i truly enjoyed ur sense to simplfy the hard topic thank
you for this .but this new layout version is not comfortable as previous version
Reply
7. sandipan
11/03/2014 at 18:35
I think the correct formula is:
Fiscal deficit = Budgetary deficit (Borrowings + Other liabilities)
Reply
8. bhanu singh
31/03/2014 at 12:50
sorry to say but..anywhere if i am wrong then correct me..please .why not discussed
about capital recieved and capital expenditureand this is a question of upsc 2010how
to fiscal consolidate1-praise to fdi.2-privatisation of higher educational istitutions 3-
downsizing of officers..4-offloading/sale shares of PSUsoptions area-
1,2,and 3.b-2,3,and 4..c-1,2,and 4.d-only 3 and 4
Reply
9. srikanth
12/04/2014 at 18:16
how to calculate gdp article in iyor site not open sir showing error please reslove this problem
Reply
10. srikanth
12/04/2014 at 18:26
money/bitcoins:In this section 4,5,6,7 articles was not open please slove the problem
Reply
11. Neeranshu
30/04/2014 at 11:41
Sir, some of your articles are showing page error.please help to resolve them
Thanq
Reply
o Vivek Sahu
07/05/2014 at 01:05
we are not able to check out many old articles, Manu should appoint a committee of retd. judges
before going out of govt. on this
Reply
12. Rohit
11/05/2014 at 12:29
aarey yaar..many of the LINKS in this page as well as other pages arent working :(..
Reply
13. nidhimail.com
25/05/2014 at 13:24
thank you, Mrunal sir
Reply
14. Naseeruddin
28/05/2014 at 16:47
Thank you so much sir i was bit afraid of economy subject but as i started reading your articles i
am feeling myself as economics graduate :P
My intention of posting message here is i am trying to know MORE about current account deficit
but the link which you had provided in this article is NOT working Please resolve the problem
(TO Friends ..Please help me with current account defict topic mail(naseer.ips@gmail.com) me
if you have previous article of mrunal sir or else other)
Reply
1 3 4 5
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[Economy] Recommendations of Vijay Kelkar Committee on Fiscal
Consolidation Roadmap

1. Observations of Kelkar
2. How to increase incoming money?
3. How to increase collection of Direct Taxes?
Review DTC bill
Data Mining
PAN/UID Card Mandatory
Create fake Orkut profiles
Charge interest rate on tax defaulters
4. How to increase collection of Indirect Taxes?
Increase the coverage of service tax
Implement Goods and Services Tax (GST)
6% Excise duty on Merit goods only
Whats the difference between Custom and Excise duty?
What is Externality?
Negative externality
Positive externality
E-Governance in CBEC
5. Disinvest from PSUs
6. Dividend from PSUs
7. How to Decrease Outgoing Money?
Reduce Subsidies
Change focus of Government schemes
8. Mock questions for CSE, RBI Grade B etc.
Let us recap what we saw in previous episode starring Vijay Kelkar:
1. Fiscal deficit =When outgoing money is more than incoming money, a pothole is
created. This pothole is known as Fiscal deficit and it is not good for the
economy.
2. Fiscal consolidation = steps to be taken for preventing (or reducing) fiscal deficit
pothole.
Now the moving on:
Observations of Kelkar
1. High fiscal deficits tend to
1. heighten inflation.
2. reduce room for monetary policy stimulus (=steps taken by RBI to direct
economy)
3. dampen private investment, growth and employment.
4. millions of young, both skilled and unskilled, enter the labour force each year,
hence inflation and unemployment can be politically destabilizing for the
Government.
If Government takes no step, then with a do-nothing approach, the fiscal deficit
will be more than 6 per cent of GDP in the current year 2012-13, and such
situation could lead the country to a 1991-like crisis.
Therefore, Fiscal consolidation is necessary.
So obviously, for fiscal consolidation, well need to increase the incoming money
and reduce the outgoing money. Now, let us check some of the important
recommendations of this Kelkar Committee.

How to increase incoming money?
Increase Tax Collection
In 2007-08, the tax to GDP ratio was almost 12%
(but) in 2012-13 this ratio is estimated around 10%.
It means tax collection has fallen down.
Recall that fiscal deficit = Governments incoming money is less than its outgoing
money.
Thefore Government should take some measures to increase tax collection.
There are two types of taxes: Direct and Indirect. Kelkar has given recommendations
to increase the collection of both Direct and indirect taxes, in following manner.
How to increase collection of Direct Taxes?
Review DTC bill
If Direct Taxes Code Bill, 2010 is implemented in its present form then there will
be considerable tax losses to the Income Tax department.
Hence it (DTC bill) should be comprehensively reviewed.
Data Mining
Since 2004, the Income Tax Department has been electronically obtaining a large
volume of information from third-parties through the Tax Information
Network (TIN).
This is done to check tax evasion and black money.
(but) there is a growing perception that the Income Tax Department is unable to
harness this large volume of information, because it lacks data mining skills.
(Therefore) Taxpayers have found new methods and avenues for parking their
undisclosed income to escape detection by Income Tax dept.
Thats why Income tax department should provide training in data-mining for all
directly recruited inspectors and Assistant Commissioners, with the help of Big IT
companies.
PAN/UID Card Mandatory
What is PAN, why is It used- all discussed in earlier articles. But still here is the
brief recap:
PAN is an all India, unique ten-digit alphanumeric number.
PAN card is issued by the Income Tax Department. It does not change with
changes in address or place.

This an example but dont be surprized, anyone can get PAN card. (=You dont have to be Indian Citizen)
UID (Aadhar) is also similar- a unique 12 digit number, issued by Unique
Identification Authority of India (UIDAI) to all the residents of India. Please note:
there is difference between resident and citizen. Some people oppose Aadhar
on this ground. (That illegal Bangladesis might also get it, if theyve the proof of
residence).
Please check this chart uploaded on official UID site. Extremely important for
MCQs.

An Example of Aadhar Card.
It also doesnot change with address or place. So if you got your PAN/UID while
you were in college of Delhi but then shifted to Banglore, your PAN/UID
numbers wouldnot change. This helps in tracking down tax evaders.
Kelkar says amend the laws so that Irrespective of amount of money transected,
PAN / UID number must be quoted in bank accounts, fixed deposits with banks,
all salary payments and sale of immoveable property.
This will also help detecting tax frauds and reduce black money.
Create fake Orkut profiles
Income Tax dept should create a 360 degree orkut profile of all taxpayers.
This will help decreasing tax evasion and tax fraud.
Online verification of PAN could be made mandatory for all high value
transactions, in order to reduce black money transactions.
Thus, if Government takes above steps then direct tax collection would increase.
Charge interest rate on tax defaulters

Hasan Ali is Indias largest tax defaulter with dues allegedly over Rs 50,000 crore (Rs 500 billion)
If a company or individual doesnt pay his taxes on time, then Government should
charge 22-24% interest rate on his pending tax payments.
Now second part:
How to increase collection of Indirect Taxes?
Kelkar says Mohan should reform Union Excise Duties (UED) and Service Tax
(ST) so that they can be smoothly intergrated into upcoming Goods and Services
Tax.
Increase the coverage of service tax
At present, many activities are outside the service tax regime, for example
Department of Post, renting houses, Funeral services etc.etc.etc.
Negative list= It is a list prepared by Government. It contains the names of
services, which are exempted from Service tax. You can download the entire list
by clicking me
Kelkar says, this Negative list should be pruned (=trimmed, cut-down,
shortened, condensed). That means, give exemption to very few activities.
For example:
Non-profit organizations should pay Service Tax.
Government had given exemption to the Railways from service tax payment for
transportation of goods and passengers (of higher class) upto 30.09.2012
Kelkar says, the Railways should no longer be exempted from service tax after
that date.
Implement Goods and Services Tax (GST)
Kelkar agrees that it is difficult to implement GST from from 1st April, 2013
(because many states are opposed to it)
But Government should atleast try to pass the Constitutional Amendment relating
to introduction of GST, in the Winter Session of the Parliament.
This would send out very strong signal to trade and industry about Governments
serious intent to move forward on this issue.
Once the GST is implemented, it will automatically increase the industrial output,
exports and (thus) the tax revenues.
6% Excise duty on Merit goods only
Excise duty = a type of indirect tax.
Excise duty is collected by Union Government, on the goods manufactured or
produced in India.
Whats the difference between Custom and Excise duty?
Excise duty = charged on goods produced (or manufactured) in india
Customs duty= charged on goods imported into India as well as on goods
exported from India.
Please note: Excise on alcoholic liquors, opium and narcotics falls under the
domain of State Government. Why? Because Seventh Schedule of the
Constitution says so.

Anyways back to business. We were talking about Kelkars recommendations on
Excise duties.
Government of India charges excise duties on various goods produced in India.
For example
12% small cars
6% on Iodine and LED Lamps.
Kelkar says review the list of goods under 6% excise duty. Only Merit Goods
should have Union Excise Duty of 6%. And for the other items, collect 8% excise
duty.
What are merit goods?
Merit goods are products, such as education, library, museum, vaccination which
consumers may undervalue but which the government believes are good for
consumers as they exhibit positive externalities.
ok now what is Positive externalities? I think we discussed that in earlier articles,
but again
What is Externality?
Externality = When two party do some business, externality is experienced by
the unrelated third parties that are not involved in that business.
Negative externality
I take admission in some pharmacy college. (ME and college are buyer and seller
of education). But the college is bogus and doesnt teach anything meaningful.
Then third party (Pharma industry) also suffers negatively, because the drug-
company that gives me job in future will run less efficiently because Im not very
skilled pharmacist! (this is an example of Negative Externality)
Positive externality
IF all kids are given policy vaccine by Government, then then Indias future
workforce will be healthier and fitter =third party (Industries) will also benefit.
E-Governance in CBEC
Kelkar observed that under the Kerala VAT regime, the dealer must electronically
provide invoice-wise details of all sales to, and purchases from, registered dealers.
Central Board of Excise and Customs (CBEC) should also develop a similar
computerized system for comprehensive cross-verifications.
This will help in detecting the tax-evaders.
These are (not all but) main recommendations of Kelkar on how to increase collection
of direct and indirect taxes = incoming money will increase.
He also suggested some more ways to increase incoming money.
Disinvest from PSUs
First of all, what is PSU? Answer Click ME
You already know about Debt vs Equity, Shares vs Bonds If not click me
Disinvestment (in crude terms) = when Government sells its shares from a PSU.
The Budget 2012 wants Government to collect Rs.30,000 crores via
Disinvestment. (This money would go in National Investment Fund under
Ministry of Finace. And later on this money would be used to finance bogus
Government schemes and to revise other PSUs, if theyre capable of making
profits)
Kelkar says, Government should sell minority stakes in entities such as SUUTI ,
Hindustan Zinc and Balco etc. This way, it can easily get the required 30k crores.
But Kelkar has different views about what to do with this money! He says, The
money thus collected, through the disinvestment process should be deployed in
infrastructure= growth and employment.
Using this money, Government could move into the sectors where private players
would be hesitant to play a role. These include areas such as garbage clearing,
public health, cleaning of rivers, recharging of groundwater, urban mobility and
so on.
Dividend from PSUs
You already know about shares and dividend. If not, then go through the same
debt vs equity article.
Ok let us review what we learned so far
1. Fiscal deficit = outgoing money > incoming money.
2. Fiscal consolidation = steps aimed at reducing fiscal deficit.
3. To reduce fiscal deficit, we need to increase incoming money and decrease
outgoing money.
4. We saw how to increase the incoming money (direct+indirect tax, PSU dividend
and sell land)
Now let us move to the second part:
How to Decrease the Outgoing Money?
Kelkar has plain and simple solution for this.
Reduce Subsidies
Kelkar says increase the prices of diesel, petrol, keroscene, LPG and Urea etc.
(Actually he says Government should reduce the subsidies on each of them, in
phased manner = price will increase automatically!)
Kelkar also clarifies that he doesnt want complete elimination of subsidies. He
says we shouldnt eliminate subsidies. Food subsidy is defensible. For
undernourished children or lactating mothers food subsidy is not only defensible,
it is ethically right and morally correct
Subsidy must be continued for kerosene as long as it is affordable (for the
government)
But the subsidies should be reduced as and where possible.
For example, LPG subsidies do not go to our people who fall in the low income
bracket, therefore LPG subsidies should be removed.
With a drastic cut in subsidies, a bigger part of the resultant savings should be
channelized towards programmes that lead to creating new job opportunities.
Kelkar agrees that Yes, reduction in (petrol, diesel, kerosene, urea) subsidies
could lead to some short-term pain (=inflation ) but the government should spend
more on employment generation, which would lead to higher growth and benefit
everyone.
If Kelkar report is implemented then Diesel price will increase by around Rs.6/lit
and LPG price by Rs 87 per cylinder.
Change focus of Government schemes
Kelkar suggess that all Government schemes/Programmes for the poor should be
centred around employment generation.(rather than populist schemes aimed at free
electricity, TV Fridge etc.)
These are the major recommendations of Kelkar Committee. This is what Kelkar
said
Now let us check what Government said on his report?
Chindu: Im going to hold consolations with various stockholders and then decide the
future course of action (about whether should we implement his report or throw it in
dustbin). And In a developing country where a significant proportion of the
population is poor, a certain level of subsidies is necessary.
Mock questions for CSE, RBI etc.
MCQs
Which of the following, is/are not recommend by Kelkar Committee on fiscal
consolidation
1. Government should sell unused land owned by various ministries, if it is not
generating any Revenue.
2. Government should increase the subsidies on Urea.
3. Government should increase the excise duty on merit goods.
4. Government should exempt railways and non-profit organizations from service
tax.
5. Government should not implement Direct Tax Code in its present form.
6. Government should not implement GST in its present form.
Which of the following statements are correct?
1. Fiscal deficit stimulates the private investment, growth and employment.
2. All Excise duties fall under the domain of Union Government.
3. Customs duty is charged on imported items only.
4. Funeral services are exempted from service tax.
5. Property tax is an example of Direct tax.
6. Service Tax is collected by Income Tax Department.
7. PAN is a 12 digit alphanumeric code.
8. Only a person above 18 years, can get PAN card.
9. Only an Indian Citizen can get PAN card.
10. Aadhar is issued by Ministry of Home Affairs.
11. A person below the age of 18 years, is not eligible for Aadhar.
12. Only a Citizen of India can get Aadhar Card.
Descriptive
150 words
1. What are the major recommendations of Kelkar Committee on fiscal
consolidation?
2. Salient features of DTC Bill.
3. Salient features of proposed Goods and Services Tax.
Interview
1. What is fiscal consolidation?
2. Why is it necessary to have low fiscal deficit?
3. The presidential debate between Obama and Mitt Romney revolved around
healthcare cuts, tax cuts and fiscal deficits. How are they related with each other?
explained
33
1. Dr. Pooja
06/10/2012 at 03:11
MCQ ANS.
I. statements NOT recommended by Kelkar Committee: 2, 3, 6.
II. correct statements: 4, 5.
Reply
o Mrunal
08/10/2012 at 00:09
please recheck first answer.
Reply
o shailesh
30/04/2013 at 13:59
I 234
II 45
Reply
2. subhash
06/10/2012 at 08:25
Again a very well written article
Reply
3. Manju G
06/10/2012 at 09:46
good article !! Property tax by nature is direct right ? but collected by Local bodies,, so can it be
named under Direct Taxes ?
Reply
4. sameer
06/10/2012 at 10:15
great article the obama pic on pan card is really funny hope MOHAN gets it
Reply
5. Jay
06/10/2012 at 11:18
2,3,4,6 are not recommended by Kelkar Committee
4 and 5 are correct statements
Reply
6. abhishek singh
06/10/2012 at 13:49
great article sir, you have made article very interesting by taking examples of Agneepath 2 and
Barack Obama . nice efforts thanks very much.
Reply
7. Lamrin
06/10/2012 at 16:41
GREAT ARTICLE!!!!!!!!!!!!!!
Reply
8. vijaya pandi.p
06/10/2012 at 18:54
i am really like, your presentation strategy
Reply
9. atul
06/10/2012 at 20:31
great work
thank you
statements I Ans: all are not recommend by Kelkar except 5
statements II Ans: only 4 & 5 are correct
Reply
10. arp
07/10/2012 at 13:11
QUERY:
For example, LPG subsidies do not go to our people who fall in the *low income bracket*,
therefore LPG subsidies should be removed??
low or high?
I > 2,3,4,6 are not recommended by Kelkar Committee
II> 4 and 5 are correct statements
Reply
o Mrunal
08/10/2012 at 00:08
Your both answers are correct.
Regarding your query: LPG subsidies are not reaching to low income bracket group people.
because subsidized cylinders are bought in black market by restaurants etc. so the targeted
beneficiaries (lower-middle class) are not getting sufficient supply and have to pay extra money
to the LPG-dealer to get steady and regular supply for cylinders at home.
Reply
11. mueenudheen
07/10/2012 at 17:48
thank u sir may god bless u. be vth us throughout our preparation
Reply
12. prakash
07/10/2012 at 21:27
thank u sir for ur pretty simple presentation.plz tell me one online coaching which is good for
preparations
Reply
13. monu
08/10/2012 at 12:31
Mrunal.. with refer to your above mentioned line Once the GST is implemented, it will
automatically increase the industrial output, exports and (thus) the tax revenues
How GST will increase the industrial output, and exports..? unable to understand. may your
clarify it please.
Reply
o Sankha Moulik
16/10/2012 at 17:22
When taxation structure for Industries becomes simple and they have to pay only one tax
i.e.GST irrespective of location,product etc., obviously it will lead to the companies pumping
more money into building capacities leading to higher productivity and employment
generation.as now they do not bother about what types of taxes to pay for their products or
places of saleslike whether its ED exempted,how much CST to payor its VAT applicable
or CENVAT has to be paid.
Reply
14. Akilan
08/10/2012 at 19:27
I have read most of your Economics article and i am irresistable to post this. Adam Smith may be
the father of Economics but you (Mrunal Patel) is the father of Economics for us who are poor in
Economics.
Reply
15. SIDHARTHA
09/10/2012 at 11:50
Mrunal sir i have some doubts
oct 1 hindu the article by crl narsimhan i.e. throwing good money after bad money,i m unable to
understand.please through some light on it..
and on oct 8 playing brinkmanship to promote infrastructure
he has mentioned that multibrand retail thing does not need legislative approval.how come
sir?but i think the insurance and pension needs to be passed in parliament.
please clarify
thank you
Reply
16. SIDHARTHA
09/10/2012 at 11:52
halo friends does any one have any idea when will the upsc epfo results be declared and when
will the rbi grade b advertisement be published
Reply
17. rakesh
09/10/2012 at 12:23
thanks sir
Reply
18. prakash
10/10/2012 at 21:10
sir kindly plz suggest one good online coaching class or dvd s containing classes
Reply
19. sridhar
30/10/2012 at 23:17
Nice Article. Thank you very much.
Reply
20. AJAY
20/11/2012 at 02:55
thank u.
Reply
21. Siddartha
11/12/2012 at 15:00
Mrunal sir can you say in detail dpt vaccine
Reply
22. surya kant
26/12/2012 at 07:56
all option of first question is not recommended by kelkar
and in second question all option are wrong
Reply
23. b kumar
30/12/2012 at 10:51
you are really very funny great work sir i feel happy when i read ur article.
Reply
24. Payal
30/01/2013 at 01:13
Sir can u pls tel me which ministry issues the aadhar card??
Reply
25. karan
02/03/2013 at 01:57
aadhar- plg commission
Reply
26. RAHUL GIRREDDY
19/12/2013 at 10:20
EXCELLENTYOU ARE BETTER THAN COLLEGES.
Reply
27. JASPAL
11/02/2014 at 11:24
Sir in the article there is no point on kelkars recommendations on PSU dividend and land use?
(there is a heading on PSU dividend,but no explanation on that)
Reply
28. dimple
28/03/2014 at 17:35
NICE ARTICLE MRUNAL
Reply
29. Dr G.k.jha
25/04/2014 at 20:55
Very nice article
[Economy] Capital Goods and Capital Gains: Meaning, Difference Explained
HOME >> Economy || Published 1 year ago || 63 Comments so far.

1. What is Capital Goods?
2. Examples of Capital goods?
3. Why is Capital Goods important?
4. What is capital gains?
Question from a reader: What is the difference between Capital Goods and Capital
Gains?
What is Capital Goods?
Capital goods are the tools and machinaries used for producing consumer
products.
Theyre (usually) expensive, and theyre purchased for long-term use.
Raw materials are also needed for producing consumer goods (Biscuits, bread etc)
but they are not capital goods.
Capital goods are also known as producer goods.
Examples of Capital goods?
Heavy equipment (such as excavators, forklifts, generators, metal-forming or
metal-working machines, vehicles).
boilers, storage tanks, evaporators Chemical factory
Mixer, grinders, refidgerators Ice-cream factory
Dumpsters, bulldozers etc big vehicles Construction, mining industry.
In short, factory equipment are capital goods because theyre used to produce
customer goods.
But the equipment used in an office= not capital goods for example stapler, paper
shredder, pen-holder, water-cooler table, chair etc.
Similarly, specialized air-conditioners installed in drug/ ice-cream factories to
maintain uniform temperature during production= capital goods.
But air-conditioners installed in that factory owners cabin=not capitals goods.
Why is Capital Goods important?
If Capital goods are expensive, then companies cannot buy them=low
production= low GDP.
If they buy expensive capital goods, theyll keep final products MRP high to
keep the profit margin same.
Hence, Government gives tax reliefs on purchase/import of Capital goods by
businessmen.
When you want to import Capital goods from a foreign country (e.g. USA ),
youll need pay them in their own currency (dollars)?
So where to arrange for the dollars? Recall the FCNR account article Click ME
What is capital gains?
Capital gains= profit made by selling your capital assets.
When you make profit by selling your capital assets, youve to pay tax to the
Government on that profit. That is known as Capital Gains Tax. (CGT)
Examples of Capital Assets are
1. Land (but not the agricultural land)
2. Building Factory Plant and machinery. (except raw-material, or finished products)
So when you sell capital goods discussed above, and make profit, then youll have
to pay capital gains tax (CGT).
3. Shares, debentures, mutual funds etc.
4. jewelry, paintings, sculptures and other Archaeological collections. (from
2008 onward)
Capital gains tax are of two types: short term and long term. (depending on how
long you kept the asset before selling it.)
Capital gains tax is a direct tax. (because direct tax=charged on your income and
property).
For more on Capital Gains tax, check Vodafone Case article click me).
Mock Qs
Q1. Which of the following is correct
1. Capital Gains tax, Custom duty are examples of Direct tax
2. Agricultural land is exempted from Capital Gains tax.
1. Only 1
2. Only 2
3. Both
4. none
Q2. Which of the following are not Capital goods?
1. Wheat stored in a granary
2. Boiler in a chemical factory
3. Air-conditioner in a corporate executives office
1. Only 2
2. Only 1 and 2
3. Only 1 and 3
4. Only 2 and 3
explained
63
1. Virjeet
20/12/2012 at 14:37
1-C
2-B
Correct me if i am wrong
Reply
o Pranav
20/12/2012 at 14:40
You are correct..!!!
All the best for future answers :)..!!!!
Reply
Pranav
20/12/2012 at 14:42
COrrecting you:
1.B
2.C
Reply
suresh mannepula
21/12/2012 at 21:21
HI Pranav 1st question answer is both just check it
Reply
Sailesh
08/04/2014 at 01:47
Capital gains tax = Direct tax but Custom duty = Indirect tax
Virjeet
20/12/2012 at 14:43
Sorry my mistake, here it is NOT CAPITAL GOODS.
Answers would be: 1-B and 2-C
Reply
o vinod
27/02/2014 at 00:33
why c ..aggriculture is not asset so why considering ingoods
Reply
2. Jayanth
20/12/2012 at 14:52
thank you mrunal ji for the article.
Reply
3. Krishna Kumar Saurabh
20/12/2012 at 14:57
answering in simple and very effective way.
Thanx
Reply
4. Majhar
20/12/2012 at 15:18
Beautiful, thank you Mrunal..
1.c
2.c
Reply
5. dee...
20/12/2012 at 15:50
1-c,2-c
Reply
6. Sunit
20/12/2012 at 17:37
Sir, please throw light on the political scene in Nepal.
Thanku
Reply
7. Vineeth V
20/12/2012 at 18:02
Hi Mrunal,
Can you please elaborate about Direct cash Transfer scheme. Many arguments are there for
and against this scheme. Also, please explain about Multiplier effect, since I am from
engineering background. Thanks.
Reply
8. gaurav
20/12/2012 at 18:48
@mrunal=Hey plz answer the ques. That came in csat 2012 bout capital gain..it includes
painting as capital gain
Reply
9. Sexy Radha
20/12/2012 at 20:51
1 B
2 C
Reply
10. gopal
20/12/2012 at 21:03
IT IS GOOD SITE FOR GS
Reply
11. Shiva Ram
20/12/2012 at 21:57
Hey Mrunal,
I have a doubt. So if I am selling my stock over a short term or long term then I am gaining from
the transaction. But I dont have to pay for the gain I made in making the buck as I am selling it?
But I have to pay tax on the stocks I bought(be it short term or long term)?
Reply
o Manish
21/12/2012 at 06:29
Friend, I suppose Income Tax Department can only keep a check on the stocks bought to levy
tax on, the profits you made out of them, are not in direct vigilancemrunal sir please correct
me and clarify..
Reply
Shiva Ram
25/12/2012 at 18:59
But the profit gained can be tracked through our bank account and PAN card right. Mrunal
sir??
Reply
12. Rajvinder
20/12/2012 at 22:09
I think ans should be
1:b
2:a
Reply
13. vivekanand
20/12/2012 at 22:23
sir, pls.put light on FDI in retail.
Reply
14. vivekanand
20/12/2012 at 22:31
SIR,
WHAT IS DIFFERENT BETWEEN CPF AND PF/GPF,AS I M A GOVT.SERVENT THERE
IS NO ANY DEDUCTION FOR GPF/PF.PLS.CLEAR THIS IN YOUR OWN STYLE.
Reply
o Shekhar Mishra
21/12/2012 at 00:40
PPPin Post Office . PF( may call it CPF ) -for private and PSUs ( PSUs and some large
private companies may run their own PF after getting approval from Income Tax dept. and CPF
commissioner ) . GPF for government employees ( for State government employees to State
government ). Actually they do cut your GPF you never get your pay slip !
Reply
15. Yashpal
20/12/2012 at 22:40
Q. What is the difference between Capital Goods and Capital Gains?
Capital gain is a profit that results from selling/disposition of a capital assets/goods. While
capital goods are goods used as means of production. Capital goods are generally man-made.
[Wiki]
Reply
16. D.K.Gupta
21/12/2012 at 07:54
C
C
Reply
o Mrunal
21/12/2012 at 19:16
Please recheck.
Correct answers are: 1B and 2C.
Reply
kris
01/08/2013 at 19:28
sir,
actually wheat also useful for making another product (like bread)
so,we not consider it as a capital good?
Reply
17. prabhat patel
21/12/2012 at 08:26
sir, please tell me about GST.
Reply
18. Anurag Dixit
21/12/2012 at 11:04
The Goods and Services Tax (GST) is a value added tax to be implemented in India, [1] the
decision on which is pending.[2] 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.[3] Exports will be zero-
rated and imports will be levied the same taxes as domestic goods and services adhering to the
destination principle.
Reply
19. Dinesh Jaan
21/12/2012 at 12:05
From April 2000 to Aug 2012. INdias FDI INFLOWS STATEMENT:
COUNTRY IN CRORES PERCENT
1.MAURITIUS 303,261 37.26%
2.SINGAPORE 82,866 10.12%
3.U.K 77,693 9.52%
4.JAPAN 64,297 7.53%
5.U.S.A 49,126 6.03%
Etc. Mrunal. Can you make this clear with an article?
This may help in GS -2 for all UPSC ASPIRANTS
Reply
o Mrunal
21/12/2012 at 18:54
most of that FDI coming from Mauritius (37%) money is round tripping. (Indians bringing their
own money back via fake companies to evade tax.)
Reply
20. GOPAL GUPTA
21/12/2012 at 12:25
would you please suggest me?, how can i prepare for upsc efficiently while working with govt.
organisation?
Reply
21. Niraj Kumar
21/12/2012 at 12:29
1. B
2. C
Reply
o Mrunal
21/12/2012 at 18:51
your answer is right.
Reply
22. Mayank
21/12/2012 at 13:09
Thanks a lot mrunal bhai for this article.
Customs duty is an indirect tax. Hence answer to 1 is b
Boiler in a chemical factory falls under the capital goods, answer is c.
by the way, APFC ka result kab aa raha hai ??
Reply
o Mrunal
21/12/2012 at 18:52
your answers are correct.
Reply
23. Hafsa
21/12/2012 at 15:42
Hello Sir,
Thank you for the article.
Kindly write on Banking Amendment bill..Its benefits and losses in the market and to the
common people.
What actions need to be taken by Government to implement this bill successfully?
Thank you once again
Reply
24. vaishali
21/12/2012 at 18:05
1.b
2.c
Reply
25. vaishali
21/12/2012 at 18:09
sir how can i prepare for civil while doing job?
Reply
o Mrunal
21/12/2012 at 18:34
read forth article:
1. (Part 1 of 5): UPSC Exam Trends and Changes
2. (Part 2 of 5) : Importance of Notes, Newspapers and Books
3. (Part 3 of 5): How to approach General Studies for CSAT prelims, Mains and Interview
4. (Part 4 of 5): Time Management, Coaching etc.
5. (Part 5 of 5) Career Backup Plans: How to prepare for State PSC etc
Reply
26. Dhruv
21/12/2012 at 18:26
how are shares, debentures, MFs capital goods?
Reply
o Rubina
21/12/2012 at 18:29
they r not capital goods they r capital assets
Reply
Dhruv
21/12/2012 at 18:34
whats the difference?
Reply
27. SOVA
21/12/2012 at 19:48
THANKS GURUJI
Reply
28. Ravi
21/12/2012 at 19:55
in the recommendation of narasimha rao committee for banking reforms in 1991..
one of the recommendation was the public sector bank should attain CAPITAL ADEQUACY
RATIO of 8% by 1998. so what is the capital adequacy ratio?? n also what is Asset
reconstruction company??
please if you can tell me..
Reply
o MAHARAJA RANJEET SINGH
21/12/2012 at 20:29
mr ravi ye narsimham committee hai bhai,narsimha rao was the then prime minister
Reply
29. Mohita Agrawal
21/12/2012 at 21:33
Q.1 (b)
Q.2 (c)
Your articles are indeed a boon for all aspirants. Especially for those who are looking for concept
clarity. Excellent and lucid explanations. Thank you Sir.
Reply
30. ANKUSH
21/12/2012 at 22:13
easy explanation
Reply
31. naveen lohar
21/12/2012 at 22:18
c
c
Reply
32. prabhat patel
21/12/2012 at 22:58
sir,what is GST?
Reply
33. Pi-ace
22/12/2012 at 11:42
Ans1. B
[Economy] Infrastructure Debt Funds (IDF), Withholding Tax, EPFO Angle:
Meaning, Concept, Explained
HOME >> Economy || Published 1 year ago || 49 Comments so far.

1. What is Infrastructure?
2. Why is Infrastructure important?
3. What is the problem with Infrastructure?
4. What is problem with Banks?
5. Mechanism of Infrastructure Debt Fund
6. Attracting investors
7. What is withholding Tax?
8. First IDF
9. Why EPFO interested in Infra-Debt Funds?
What is Infrastructure?
Things that are essential for functioning of economy: roads, sea-ports, airports,
railways, metro rail, electricity-generation etc.
Why is Infrastructure important?
GDP=Money value of all goods and services produced in a country within a year.
If there is shortage of electricity, factory owners cannot produce lot of mobilesets,
TVs, refrigerators. = Production of goods decreases.
If there is shortage of electricity, hospitals cannot carryout X-ray, CAT-scan etc.
= Production of services decreases.
Therefore, good quality Infrastructure is essential for achieving high GDP growth
(9%).
What is the problem with Infrastructure?
Government estimates that one trillion dollars will be required in next 5 years to
finance all the important infrastructure projects.
But Government cannot finance all those projects by itself. Because theyre
already spending lot of money on Food-Fertilizer subsidies, MNREGA, Air-India
etc.
Government cannot merely print more suitcases full of money to finance these
infrastructure projects, else itll create inflation. click me to know why
If Government borrows money from public, to finance these infrastructure
projects, itll severe the problem of fiscal deficit.
So, Government wants 50% of that required money to come from private sector
(banks, domestic and foreign investors.)
What is problem with Banks?
Such infrastructure projects require long-term funding for 20-25 years, but banks
are already exposed to too much risk (loans given to 2G players, Vijay Mallya
etc.) In the present situation, banks are unable to finance infrastructure projects
for more than 5-7 years time-frame.
Hence, there is need to channel money from the hands of investors into
infrastructure projects. (+ also need to reduce investment in Gold, because it
increases current-account-deficit.)
To achieve this, Government has come up with new idea = Infrastructure Debt
Funds.
Mechanism of Infrastructure Debt Fund
You already know about Debt Vs Equity, Shares vs Bonds, if not click ME
In technically-not-so-correct term, Infrastructure Debt Fund (IDF) essentially means
that
1. You invest money in an IDF company.
2. IDF company lends your money in some Infrastructure project company (as
Debt).
3. That infrastructure project company pays interest rate to IDF Company.
4. IDF company gives that interest money to you. (after cutting its commission).
Thus you make profit on your investment.
Tax Policy to Attracting investors
By merely allowing creation Infra Debt Funds, Government cannot bring in the
investment in infrastructure projects.
Government also needed to give some benefit (carrots) to lure the investors.
Finance Minister has given two carrots
1. Withholding Tax reduced from 20% to 5% (for foreign investors)
2. Money earned from IDF is exempt from income tax. (for desi investors)
What is withholding Tax?
Suppose a non-resident (foreigner), lends money to an Indian company and earns
Rs.100 interest per year.
Earlier he was supposed to pay Rs.20 to the Government, but from now onwards
only Rs.5
It is called withholding tax, because he (foreigner) doesnt need to pay the tax
himself, but the company who borrowed money, is required to withhold it and
give money to Government.
Example you (foreigner) loaned me (Indian company) some money. On
1
st
December, Im supposed to pay you Rs.100 as interest, but Ill give you only
Rs.95, and put aside Rs.5 and send it to Government as withholding tax.
Since Government reduced withholding tax from 20% to 5%, that mean you
(foreign investor) can earn more money, so this way Government has tried to
seduce the foreign investors, into investing in Infra-Debt Fund in India.
First Infra-Debt Fund of India
The first IDF-fund of India, was setup by a consortium (gang) of ICICI, BoB, Citi
bank and LIC.
This entity will work as a Non-Banking Finance Company (IDF-NBFC), and
hence theyll come under the jurisdiction of RBI.
They could have set it up as a mutual fund company, but then theyd have come
under the jurisdiction of SEBI.
Anyways, shareholding pattern is
Member %
ICICI 31
Bank of Baroda 30
Citi Bank 29
LIC 10
Total 100%
^there is no need to mugup, this is just for information.
We can speculate that near future, SBI will also come up with something like this, to
counter ICICI.
Why EPFO interested in Infra-Debt Funds?
Problem with EPFO
Employees Provident Fund Organization (EPFO) takes money from people,
invests it shares and bonds, earns money and pays it to the EPFO subscribers.
(After cutting its commission).
Central Board of Trustees= the decision making body of EPFO. It is headed by
Labour minister.
Theyve made rule : EPFO must invest in Government-securities (G-sec) and
companies AAA credit rating only.
Problem: Most companies dont have AAA-rating, so EPFO is forced to park
majority of its money in Government-securities (G-sec).
Recall the concept of Gilt-edged securities (click me). Government/ treasury bonds
are more reliable, hence, they pay less interest. (because they dont need to
seduce investors by offering higher interest rate, unlike some junk bond company
with C or D credit rating.)
So, ultimately problem for EPFO managers= G-sec doesnt pay much interest.
(Around 8% only).
While New Pension Scheme (NPS) managers, invests in many other places,
including risky bonds, and make around 12% profit.
If things go on as usual, then in long term, people might switch from EPFO to
NPS and other various pension-provident-retirement policies offered by private
firms like Max Life insurance, Bajaj Alliance, Kotak Mahindra etc. to get better
deals.
Solution
Therefore, EPFO wants to invest money in Infrastructure Debt Funds (IDF) to
earn more profit to give better return-on-investment to its subscriber. It is
looking forward to invest about 5 lakh crores in IDF funds.
But newly formed Infrastructure Debt Funds (IDF) companies will not get AAA
credit rating immediately. So EPFO needs approval from Central Board of
trustees to modify the investment rules. And since Central Board of Trustees, is
headed by labour minister so essentially EPFO needs approval of Labour
Ministry.
Mock Questions
Q1. Regarding Infrastructure Debt Funds (IDF) in India
1. The first IDF fund was setup by State Bank of India (SBI)
2. IDF is exempted from Withholding tax.
Which of above is/are correct?
1. Only 1
2. Only 2
3. Both
4. None
Q2. Find Incorrect Statement
1. The apex decision making authority for EPFO rests with the Finance Minister of
India.
2. Withholding tax is an example of Indirect Tax
1. Only 1
2. Only 2
3. Both
4. None
Q3. Which of the following fund receives the proceeds from disinvestment?
1. Infrastructure Debt Fund
2. Consolidated fund of India
3. National Investment Fund
1. Only 1
2. Only 2 and 3
3. Only 1 and 2
4. Only 3
explained
49
1. Nitish Pathode
07/12/2012 at 11:46
Can you please upload a schematic showing different ministries n under them different boards n
schemes. Its confusing n often asked.
Reply
2. D arya
07/12/2012 at 12:23
d a c
Reply
3. Ram
07/12/2012 at 12:30
Ans:
1. B
2. B
3. D
Guys.Correct me if am wrong
Reply
o kaushal jha
08/12/2012 at 04:04
read above news,he askd ? 4m there only1-d ,2-a ,3-d
Reply
Suman
10/12/2012 at 16:00
1-d
2-c
3-d
Reply
kaushal jha
16/12/2012 at 03:37
2-c
Reply
o Suman
10/12/2012 at 16:00
Q-2: Which is incorrect
A:- Both (c)
Reply
4. Jazz & Liquor = Jazzy L
07/12/2012 at 12:50
Funtasktisch
Reply
5. parmod
07/12/2012 at 13:21
thanks
Reply
6. arvind
07/12/2012 at 13:27
@ram u r rite bro
Reply
7. Partho
07/12/2012 at 13:38
D Not exempted but reduced to 5 %.
D Is a direct tax.
D NIF
Reply
o rahul
02/01/2013 at 20:40
Withholding tax is indirect tax.
Reply
Amrinder
09/01/2013 at 12:02
Withholding tax is direct tax.
Reply
8. Neeraj kumar
07/12/2012 at 14:02
i think answer is D,C,D
Reply
9. Partho
07/12/2012 at 14:10
EPFO is headed by Labour Minister. @Neeraj you might want to check your answer.
Reply
10. Bhupender Singh
07/12/2012 at 16:45
D
D
D
Reply
11. Shakta
07/12/2012 at 17:03
1-D
2-C
(@Partho
in Q.N.2 we have to choose the incorrect statement and both are incorrect.)

Pls clarify the Q.N.3
Reply
o Partho
07/12/2012 at 18:31
Yes you are right.
it is C as both the statements are wrong. I dont know why i am making mistakes in reading
questions these days!!
Reply
o upscaspirant
07/12/2012 at 19:10
Question no.3 D
Reply
12. asheesh
07/12/2012 at 18:07
so lucid and easy way to clear content.thanks
Reply
13. ASHUTOSH MISHRA
07/12/2012 at 18:07
1-b
2-b
3-b
Reply
14. AK
07/12/2012 at 18:13
Acc to me answers should be DAD.
Reply
o sanjeev
07/12/2012 at 18:39
u r rt
Reply
15. arvind
07/12/2012 at 18:27
@shakta all the money which gov get from all sources goes into the consolidated fund but this
disinvestment money goes into the NIF which is used by two ways..first in Investment in social
sector projects which promote education, health care and employment; and other is Capital
investment in selected profitable and revivable Public Sector Enterprises that yield adequate
returns in order to enlarge their capital base to finance expansion/ diversification.
Reply
16. sanjeev
07/12/2012 at 18:30
d a d nice article
Reply
17. upscaspirant
07/12/2012 at 19:15
answers
1. d
2. c
3. d
mrunal please clarify
Reply
18. Shakta
07/12/2012 at 23:18
@Arvind yup got it bro :) Thanks a lot :)

@Mrunal Sir
pls clarify if
D
C
D
is correct ?
Reply
19. Arjun
08/12/2012 at 01:39
Answers
1) d
2)c
3)d explanation : Salient features of NIF:
(I)The proceeds from disinvestment of CPSEs will be channelised into the National Investment
Fund which is to be maintained outside the Consolidated Fund of India
Reply
20. shalinee
08/12/2012 at 08:29
Hi,
the above questions aregood
Answers are
D,A ,C
Reply
21. Umar
08/12/2012 at 09:44
AWESOME SIRJI
Reply
22. suresh
08/12/2012 at 09:54
1.d
2.b
3.d
Reply
23. Mrunal
08/12/2012 at 12:27
To all, here is the official Answerkey
1-D
2-C
3-D
Explanation
Q1. The first IDF of India was not setup by SBI. and if there is foreign investor, he is liable to
withholding tax in IDF investment. So both statements are false. Hence Answer choice (D) none
of them is correct.
Q2. EPFO Decision Making = Central Board of Trustees headed by Labour Minister. so first
statement is false.
Direct Tax is levied in the income or property of a person.
On that line, Withholding tax is also a direct tax, because it is levied on the income of a foreign
investor (interest rate earned by him).
Hence Both statements are false, and question is asking about find incorrect statements.
Therefore Answer is (C) both are incorrect.
Q3. Proceeds from disinvestment goto NIF (National investment fund). Answer is (D) only 3.
Reply
o rahul
02/01/2013 at 20:44
Withholding tax is indirect tax. Since it is paid by one and submitted by someone else.
Like service tax ,custom,excise duty etc.
Reply
Siri
13/05/2013 at 11:57
Indirect tax is that where burden of taxation shifts to someone else from the point of taxation
Here the burden of taxation is still on the foreign investor, though its being deducted by IDF,
his income is reduced as a result( SO burden on the investor )
Reply
24. ANKIT
08/12/2012 at 19:01
Great articles! very interesting way of teaching. Clears the concept to a very large extent.
Most helpful . thanks
Reply
25. shilpa
08/12/2012 at 20:35
Very much right Ankit :)
Thank u so much Mrunal Sir.
It is because of your guidance that I do not find the necessity of joining some coaching centre !! I
never find myself directionless or confused (like how to study/ what to study etc) even without
coaching. All credits to u Sir.
Reply
o kaushal jha
09/12/2012 at 03:22
optionals????????????????
Reply
26. Shyam
09/12/2012 at 06:29
Nice One Well Explained Mrunalji :)
Reply
27. bedivicky
09/12/2012 at 20:48
hello sir,
i want to know about how to prepare for csat paper 2. i want to appear in CSE-2013, pls provide
any simple strategy to prepare in that much short period, pls help, CSE-paper-2 is very much
difficult for me. pls help.
Reply
28. prasoon
10/12/2012 at 00:10
thankyou sir
Reply
29. Manoj Kumar Dhaka
10/12/2012 at 16:41
Sir,
Thanx for your efforts . You are helping
Us for a great extent . A very important article explained very simply . Thanx again .
MANOJ
Reply
30. pachiyappan
11/12/2012 at 17:52
plz explain , national offset policy?
Reply
31. Krishna Kishore
18/12/2012 at 12:12
Thank you very much for your effort to make economy easier to every one(aspirants)
Reply
32. Abirami
24/02/2013 at 13:51
Why do they need Infrastructure Debt Funds (IDF) when they already have Infrastructure
Financing company (IFC) established 3 years back to support infrastructure financing in India ?
Reply
33. Shashank Shekhar Roy
08/03/2013 at 21:18
Respected Sir,
plz write an article on arsenic contamination, as i came across it while going through the union
budget. Govt has taken some steps for arsenic contaminated areas of west West Bengal.
regards
shashank shekhar roy
Reply
34. Shashank
29/03/2013 at 00:39
Sir id like to make a correction
income from idfs is taxable, one can DEDUCT upto 20,000 from taxable income by investing in
idfs
Check this out
http://content.icicidirect.com/mailimages/Infrastructure%20Bonds.html
Reply
35. Santhakumar
03/04/2013 at 19:43
thanks sir.Great explanation
Reply
36. Gaurav
25/04/2013 at 12:45
1. D
2. C
3. D
Reply
37. Indian87
20/12/2013 at 10:33
1. IDF were raised by GoI only..means fiscal deficit only na
But it was mentioned indirectly..itz not fiscal deficit.
2. who will own IDF..? is it board of directors ? appointed by govt ..?
3. diffrence between IDF and govt sec
Pls . clarify any1
[Economy] High GDP and High Corruption: Cause or Consequence?

Not really an article, just some fodder/food for thought.
1. High GDP= High Corruption= Bright Future!
2. Land Grabbing = Universal phenomenon
3. High GDP => High corruption
4. The Incentive structure
5. High level corruption
6. High corruption => High GDP!
High GDP= High Corruption= Bright Future
Mark Twain coined a term Americas Gilded Age. It has been used to describe,
roughly, the last four decades of the 19th century. During that time situation in
America was as grim as Indias current political and economic situation.
1. During that time, majority of American population was involved in agriculture
and allied activities (just like Indian population right now)
2. During that time, USAs GDP growth rate was 7% per year (similar case in India
right now.)
3. And during that time, USA too had high-level of political corruption and
scandals. (Just like India)
4. By the end of this Gilded Age, USA became an urban majority society And went
on to become the superpower, supercop, judge, jury, executioner,
leader, financer and top innovator of the world.
So one can be optimistic that the situation in India today, is just normal and expected-
sign of good things to come, just like the labor pain before a child delivery.
Land Grabbing = Universal phenomenon
Today, India has four times as many people as the US, but only a third as much
land.
It means Land in India, is very scarce.
Therefore, Indias politicians and businessmen end up buying land wherever they
can, however they can and then bribe get the government to convert its use from
agricultural to commercial.
Such transformation of land-use raises the value of land by 10 to 20 times.
China and S.Korea
A roughly similar process of land-grabbing and political corruption is under way
in a high-growth China.
But because of strict internet and media censorship, we dont see/hear about anti-
corruption protests (dharnaa-pradarshan) in Beijing, like we hear in Jantar Mantar
of Delhi.
Similarly, during South Koreas rapid transformation in the 1970s and 80s it also
faced the same situation like we are facing right now.
In short, the corruption problem is universal and not related with Indian morality or
lack of it. Rather, high economic growth brings with it a set of virtues and vices. But
How?
High GDP => High corruption
If GDP of a country is growing at an average of 8% per year then some sectors
are likely to grow at 15-18 per cent. (service sector, telecom, mining, industries
for example)
Rapid GDP growth makes overnight millionaires, even overnight billionaires,
possible in those sectors.
So, if government regulations and permissions are required in such sectors, then a
government-business nexus is very likely to emerge. (as it did, in 2G and coal
mining)
Thus, high growth creates enormous opportunities for corruption.
Does it means High GDP growth itself is responsible for corruption? No, not the GDP
but the incentive structure.
The Incentive structure
If Government of India makes a new policy that every Government Primary school
teachers salary will be directly proportional to number of students passing from his
class. Sounds good? Well think of the consequences.
1. Now the teacher has incentive to personally look after every student and see
that he/she is learning every lesson.
2. Now the teacher has incentive to setup very easy question paper so that every
student passes in the exam.
3. Now the teacher has incentive to evaluate the answersheets in very liberal manner
so that every student passes in the exam.
4. Hell, now the teacher has incentive to leak the damn question paper one week
before the actual exam or simply dictate answers in the examhall!
Yes, there will be some good teachers, opting for option (a) and there will be some
good students who will study seriously, irrespective of the cheap tricks used by their
teacher to up the passing rate. But by and large, most teachers would opt for the
option b, c or d.
Then Government makes excuse Our policy is good but implementation is bad, we
send money from Delhi but State Governments are not doing enough!
But can a policy be good if it has not taken precautions to prevent bad things
@implementation level, in States and Districts?
An Economy/country/society works because people respond to incentives.
Therefore job of the Government is to create laws and policies in such manner
that good people have incentives to do good things and bad people have
incentives not to do bad things.
If Raja and Kalmadi can walk out jail and walk into parliament again- Then
something is wrong with this incentive structure.
At the same time, Society too has a role to play in it. If we keep attending and
admiring the lavish wedding reception parties held by corrupt people -our
neighbor and relatives, then we too are creating incentives for them to accept
bribes to finance their expensive wedding.
Mr. Vijay Kharadi (IAS, Gujarat cadre), recently got married. Ofcourse, wed expect
this ought to be an expensive wedding ceremony.
But it wasnt. He married in a simple mass-wedding ceremony.
His words, Spending on extravagant weddings is a complete waste. I am a tribal, and
I know my community lives on the fringes. We need to spend on health and education,
not weddings. I want to set an example by getting married in the simplest way.

Vijay Kharadi marriage
In 2011, Erode (TN) District Collector Mr.R. Anandakumar admitted his daughter
in Government primary school. His decision has surprised many parents in the
district, which has a number of well-known private schools.
Now The Collector will be making sure that Government schools are working
nicely, they has sufficient funds, teachers and infrastructure. It will encourage
more parents to admit their children in government schools and feel safe about
their future.

Dr. R. Anandakumar, IAS
Ofcourse the cynics can brush off both Vijay Kharadi and Anandakumar that you cannot change the mindsets of
thousands by doing such acts of symbolism. But for them Andrew Jackson had said, One man with courage makes a
majority.
In TV Debates, politicians often cite these one man with courage, as a good excuse to suggest that by and large
majority of our ministers and bureaucrats are honest, only a few bad fishes. Otherwise aal ij well.
But aal ij not well, otherwise we wouldnt be hearing about a new scam every week- India as a nation, has not
done enough thinking about what kind of laws and policies are necessary to change the incentive structures,
reducing temptations for bribes and making politics and bureaucracy much more cleaner.
High level corruption: Solutions?
the Use of technology like Aadhaar-UID will reduce lower-level corruption,
@district, tehsil, PDS ration shops, but what about the upper-level, high level,
white collar corruption?
How about a debate on the reform of election and party financing?
Can we really clean up the businessmen-politician nexus without reforming how
political parties are funded in India during election campaigns?
Anyways upto this point, the argument was corruption follows High GDP .
Now how about the reverse Argument? High GDP follows corruption!
High corruption => High GDP!
The bribe money in India either goes to tax heavens abroad (Switzerland etc) or
gets invested in gold and real-estate (buildings, farm houses, properties)
So, if bribe money does not go into tax heavens abroad, it creates employment in
India and improves our GDP!
Around 2 crore people are employed directly or indirectly in real estate &
construction sector = employment = more demand (because theyre employed so
theyll buy more stuff)= more production =higher GDP!
If the corrupt person hosts a lavish wedding reception party = more employment
for cooks and catering wallas.
if he decides to spend vacation in any tourist resort of India = again GDP boosted.
Is/Can/should GDP alone be the criteria to measure the Aukaat of a Country? And
Can end-goal justify the means used to achieve it?
If yes, then
How about cut down all trees, make furniture and export it to USA?
How about kill all tigers, sell their hides and bones to China and Thailand?
How about legalizing gambling and cricket betting?
Ref
1. Ashutosh Varshney, http://www.indianexpress.com/news/growth-and-graft/1022031/0
2. Navendu Mahodaya, http://rivr.sulekha.com/carry-on-tamasha-
28_594824_blog?c=2263181
3. http://www.indianexpress.com/news/gujarat-ias-officer-to-tie-knot-in-mass-
wedding/940786
4. http://www.thehindu.com/news/cities/Coimbatore/article2109347.ece
explained
35
1. vijayravisrikanth
30/10/2012 at 01:59
corruption and gdp r closely linked. thats why GOI shared DTAA with Marishus and other tax
hevens.
the same s responsible for not leaking the known names of swiss black money holders list out.
but it doesnt mean that growth is more dependent on corruption. it s possible despite no
corruption. otherwise on longrun it leads to the creation of large amount of parallel economy
with monopolies under corruptive criminals. then the govts can not tackle with both the criminals
and economy. the first because of criminalization of politics(corruption on with high gdp with
inefficient control encourages it). and the second as a result of ever growing size of parallel
economy (money earned via corruption s to b spent on illegal purpose, it means it s self
propagative. as govts regulating policies can control legal econy only(commonly). so though the
corruption accelerates the growth of our gdp wr have to curb it with proper institutions like
lokpal and others with comprehensive strategy.
Reply
o Mrunal
30/10/2012 at 09:35
. on longrun it leads to the creation of large amount of parallel economy with monopolies
under corrupt criminals
Absolutely.
Reply
o gaurav
31/10/2012 at 19:16
couldnt be explained in a better way. Thanks
Reply
vijay ravi srikanth
01/11/2012 at 12:31
we know that many of the tax heavens do not have any natural resources to offer. they are not
technologically advanced. they do not have any other special features. take the case of one of
our highest fdi investors. Mauritius. it has nothing to offer(in economic terms) to us. but
again its tax laws are not transparent with very less corporate taxes. it does not want to offer
its tax information with any other country. so any one can easily expect the source of such a
huge amounts of investment. our government is also aware that many of Indians are running
many shell companies there. if our government does not want to allow any illegal activities it
can easily take action on those indirect Indian investors. but instead of doing that it has shared
Double TAX AVOIDANCE agreement. if every thing goes legally then that agreement with
Mauritius will be a loss making one. but we have made that agreement.we have many
international agreements of such kinds. take the case of black money account
holders.though the names are known to the govt it couldnt leak the names out despite the
supreme courts directions. and chidambaram had explained to the Court that it would impact
adversely. in response to that event our Supreme Court has constituted a SIT on black money
issue, midst heavy criticism. take the case of havala incident, only the mediator(hussain ali
khan) is arrested but not even a single name of money holders are released. we have many
more examples to mention..
all this secrecy is maintained just to not to let our GDP to fall any further a midst high amount
of CAD and Fiscal deficit.(please note, along with these, we are aware of the nexus between
politicians and business men). so what i conclude is even our Government is also accepting the
practical implications of weeding out of the corruption as it knows that corruption is aiding the
growth of our GDP. thats why sudden weeding out of corruption is more dangerous. but its
phasing out is a mandatory for long term welfare of any society.
Reply
Govardhan km
11/03/2014 at 20:00
Mr vijay , foremostly i must tq 4 above information and effective interaction. but 1 thing i
want 2 differ with u dat as u said corruption is indirection helps in gdp hike . it may help but
its neglegible .as u said bribed money has to be invested in ileegal markets only, its
absolutely ri8 (reference gali janardhan (coal illegal mining)). so the amount got through the
corruption and investment of those are distinguishable. more money vested in foreign banks
and stocks. so we can not say corruption gonna help in gdp rise. so mi8 be 30 % of total
corruption may not left indian boarders. ne way dont mind . i juz wanted 2 exhibit my point
of view t. after all tnx for sharing ur views :)
Reply
2. pratishtha
30/10/2012 at 02:15
nice Mrunalalwaz read ur articles,,highly impressedGod bless :)
Reply
3. Abhishek Singh
30/10/2012 at 06:30
nice article sir, written in simple and easy manner all the best sir :) .. may God bless u with lot
of success :) ..
Reply
4. Varadha
30/10/2012 at 08:54
Not one of his best finished articles, but it does have ample points to learn from, like the history
of corruption in the US, and the comparison between India and China, Korea etc. Thank you.
The last point from Lets strech this argument further- wasnt an appropriate example.
Reply
5. karthik
30/10/2012 at 10:26
Sir can you please provide this link [Economy] LIST of All Articles published by me to clear
the basic concepts of Economy for any recruitment exam or interview Mrunal as I am unable
to access it
Reply
o Binoy
30/10/2012 at 10:32
@karthik, this is the link: http://mrunal.org/economy
Reply
6. chandu
30/10/2012 at 12:01
Very nice article.Thought provoking.
Reply
7. Divya Prakash
30/10/2012 at 12:04
Very good article. You might have mentioned social justice as an
indicator of the well being of the society and country.
Reply
8. IITBHU_Anand
30/10/2012 at 12:53
http://in.jagran.yahoo.com/news/national/general/DGP-ask-bribe-postings_5_1_9801173.html
,
-

, ,

11
- ,

-

, ,

Reply
9. manoj
30/10/2012 at 12:56
we keep blaming everyone except ourselves for the countrys ills.This is what keeping us
down,we are our officials our rulers and our leaders,we can not shift blame to others while we
are doing nothing against, it in that sense we are corrupt also.this is true for any society
Reply
10. Tannu Dua
30/10/2012 at 13:08
Thanks a lot Mrunal Sir. I am very grateful to you for so much cooperation in my studies.
Reply
11. Ashok
30/10/2012 at 13:17
Sir one request..Please Put some question in the last of every artice if it is possible..i know it will
take 5 min for you make it but will helps a lot so that We can think and discuss on that..I liked
that you put some question on Fiscal Deficit Article.But i request Pls put question in every
Article.love to read Your Article.Thanks
Reply
12. Saiteja
30/10/2012 at 13:35
And thats why many intellectuals(dont ask me names, see some articles) are shouting that India
developement does not only depends high GDP, but also through optimum GDP + improving
quality of lives (especially of BPLs)( eg: proper MGNREGA).
Reply
13. Priyanka
30/10/2012 at 14:12
Very nice article..mrunal
Reply
14. Ganesh Trivedi
30/10/2012 at 14:54
Mrunal please discuss: Cess v/s Surcharge and Business Cycles with implications.
Reply
15. sameer
30/10/2012 at 14:58
the problem so called parallel economy or in Indian sense a corruption based economy does that
it widens the gaps between haves and have nots.. true some jobs are created mostly in the
unorganised sector.. but they are usuallly seasonal & those resources which belong to everyone
in general & Nation in particular are cornered by few wealthy.. thus creating an Oligarchic State
and Economy. Mrunal sir, not only does India have similarities with psst in US but also
present socio-economic conditions with high levels of Inflation and ever raising unemployment
rater If we are simply gona dilute state machinery in names of Liberalisation(Reforms) we will
soon be doomed
Reply
16. Mohammad Arshad Raza
30/10/2012 at 14:58
Sir,
you have a unique talent to discern a number of different points in the topic.
Reply
17. nikhil
30/10/2012 at 15:24
mrunal you are gifted with the art of making difficult things simpler,really enjoy ur articles..
one question:petrol/diesel prices have a strong dependence on tax,instead of funding these bogus
schemes can common people be directly benefitted by lowering tax..
Reply
18. Abhimanyu
30/10/2012 at 16:23
The bribe money in India either goes to tax heavens abroad (Switzerland etc) or gets invested in
gold and real-estate (buildings, farm houses, properties)
Well this Black Money ( Money not accounted for) is the sole reason for Irrational prices of Real
estate properties .
& although the unaccounted money is invested or spent it is a major contributor towards general
price rise or INFLATION.
So it is not necessary that the people who are employed can actually be able to buy the food
items whose prices had increased owing to this increased money supply .( More Black Money =
More INFLATION= More mIsery).
So More Corruption = More GDP ..Im not finding this argument very convincing
Although im sure that
More Corruption= More Inflation= More Economic Disparities & social Injustice = More
MISERY= More DISCONTENT= MORE Naxalism & riots = More state & central expenditure=
More Fiscal Deficit= Less Growth= Less GDP= Less Jobs
Reply
o Occam
31/10/2012 at 15:03
Growth is not about economic disparities, social justice, misery or discontent among people.
Growth is only about increased output. Wo kaise bhi ho! Growth does not take into account the
inequality in the economy. So if billionaires become zillionaires and poor become poorer, we
might still be growing.
More corruption may lead to a higher growth in the form of increased investments. Inflation
will take place, as it always does with higher growth (hence the growth-inflation dilemma for
the RBI).
Some economists argue that, existence of the parallel economy acted as a cushion for the
country against the 2008 global crisis, since the corporates etc. used their hidden stashes.
Reply
19. XY
30/10/2012 at 18:41
I like to put some of my argument In your comparison of India and USA, Korea or else
with India projects vague figure as India is highly complex in diversity say culture, costume,
etc.So corrupt politians will hardly think for other racial groups, high discrimination etc..and
so it is doubtful that these politicians will spent it optimally means probably most of the corrupts
will think why give? someone..if my own people are self sufficient(Remember Drain of
Wealth during British ruleeven copied by politicians of India today)..so Black money creation
ormoney goes to savingno product generationlow GDP growth while in Country like
US even if money is siphoned away it is likely to be utilised for the well being of the people
because of racial closeness. while US becoming super power cannot be matched with India
conditions as time factors and opportunity at those time.Thanks
.@Mrunal Im little confuse with your standI think you wrote as it happen..very optimistic
viewlike itBut nice reading your article.
Reply
o Amruth
13/02/2013 at 17:15
HI XY, u r wrong i guess.. how abt US they got different races, ethinicity, native americans,
whites, blacks and asians.. so how can you say that racial closeness just think mate.. no
offence just giving clearity let me know if i am wrong
Reply
20. pradeep
30/10/2012 at 19:18
The article is too good.. Very simple to understand common man Thanks for the good work..:)
God bless You
Reply
21. ABC
30/10/2012 at 23:20
Hello Sir,
I started reading your articles today, found really interesting, knowledgeable, simple.
I want to know your thoughts on Marxist Philosophy of Economics and do you think that it is a
failed philosophy. Or it is an alternate option at which most of them are not looking at.
Reply
22. DIPAK
31/10/2012 at 19:25
The best part of all articles is Extreme Common Language.
Reply
23. deepak n gowda
03/11/2012 at 12:20
sir your website too good .can u provide articles about basic physical geography and public
administration thinkers .it will help rural side students like me .
Reply
24. Pramod
06/11/2012 at 10:00
hi mrunal,
l am new to your blog & i have a question in todays newspaper jaipal reddy has said that
anyone who holds oil min will be frustrated because india imports 75% of the oil and not even
god can explain why and who is increasing oil prices when there is no disconnect between
demand and supply
please help on this though i l know that when dollar becomes expensive oil pices go up but still i
need a thorough details on this topic.
Thanks
Reply
25. Jazz & Liquor
27/11/2012 at 08:25
two comments from the original article(copy-paste)
It is the other way round
Reply | Forward
Vivek | 26-Oct-2012
Dear Varshney, I think you are putting the cart before the horse. It is the other way round.
Corruption and loot provides a chance for greedy rapacious businessmen to grab resources and
public funds and generate easy unproductive non-innovative income which results in fast growth.
So public loot results in fast growth and not the other way round. But this is not the sort of
growth which one should be aiming for in which enormous multi-generational wealth gets
robbed in weeks and months. Accounting-wise on paper this shows up as huge income growth
for the robber business barons but in actual non-accounting terms this leaves the public that
much poorer.
Exactly
Reply | Forward
Shankar | 26-Oct-2012
Exactly. The problem with Varshney and such analysts is that they ignore everything except a
numerical quantity GDP growth. But this is just a statistic. What matters is how that growth is
generated. In practice, Indias growth has been driven by expropriation, profiteering and
corruption, and hence it is not surprising that it has not achieved any of the goals of poverty
reduction etc. that Varshney holds out as its supposed necessary consequences. Such upside
down analyses fill our media today.

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