• Non-Banking Financial Companies (NBFCs) are financial institutions that provide banking services but do not hold a banking license.
• They are crucial to the financial system as they cater to the financial needs of sectors where traditional banks may not reach or provide services.
• NBFCs offer various financial services such as loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority, leasing, hire-purchase, insurance business, chit business, etc.
• They differ from traditional banks because they cannot accept demand deposits and do not form part of the payment and settlement system like banks do.
• However, they play a significant role in providing credit to individuals, small businesses, and the unorganised sector, thereby contributing to financial inclusion and economic growth. Examples of NBFCs include companies engaged in equipment leasing, hire-purchase finance, vehicle finance, and microfinance

3. Classification of NBFCs

NBFCs can be classified into various categories based on their activities, ownership structure, and regulatory requirements.

Here are some common classifications:

• Asset Financing NBFCs: These NBFCs primarily provide financing for the purchase of assets such as vehicles, machinery, equipment, etc.

• Investment and Credit NBFCs: These NBFCs primarily make investments in securities or extend credit facilities.

• Infrastructure Finance Companies (IFCs): These NBFCs focus on financing infrastructure projects such as roads, ports, power, telecommunications, etc.

• Housing Finance Companies (HFCs): These NBFCs specialize in providing finance for housing and related activities.

• Microfinance Institutions (MFIs): These NBFCs provide financial services, including small loans, savings, and insurance, to low-income individuals and microenterprises.

• Non-Deposit Taking NBFCs: These NBFCs do not accept deposits from the public. They rely on other sources of funding such as borrowings from banks, financial institutions, and capital markets.

• Deposit Taking NBFCs: These NBFCs accept deposits from the public and are regulated more closely, similar to banks, to ensure the safety of depositor funds.

• Systemically Important NBFCs (SI-NBFCs): These are NBFCs whose failure could potentially disrupt the financial system. They are subject to additional regulatory requirements to mitigate systemic risks.

• Core Investment Companies (CICs): These NBFCs are primarily engaged in the business of acquisition of shares and securities and hold not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, bonds, debentures, debt, or loans in group companies.

• Infrastructure Debt Funds (IDFs): These NBFCs are set up to facilitate the flow of long-term debt into infrastructure projects.

• NBFCs need to obtain a Certificate of Registration (CoR) from the RBI to commence or carry on the business of non-banking financial institution.
• RBI imposes prudential regulations on NBFCs to ensure the safety and soundness of their operations. These norms cover aspects such as capital adequacy, income recognition, asset classification, provisioning, liquidity management, and exposure limits.
• NBFCs are required to adhere to a Fair Practices Code (FPC) prescribed by the RBI, which outlines the principles of transparency, fairness, and responsible lending practices.
• NBFCs are mandated to follow KYC norms while onboarding customers, including verification of identity, address, and other relevant information, to prevent money laundering and terrorist financing activities
• NBFCs are required to implement effective AML/CFT measures, including customer due diligence, transaction monitoring, and reporting of suspicious transactions, to mitigate the risks of money laundering and terrorist financing.
• RBI mandates NBFCs to adhere to good corporate governance practices, including the composition of the board of directors, risk management framework, internal controls, and disclosure requirements
•  NBFCs are required to have robust risk management systems in place to identify, assess, monitor, and mitigate various risks such as credit risk, market risk, liquidity risk, and operational risk.
• NBFCs need to submit various regulatory returns and reports to the RBI periodically, providing details of their financial performance, capital adequacy, asset quality, and compliance with regulatory requirements.
• RBI conducts regular inspections and supervisory reviews of NBFCs to assess their financial health, compliance with regulations, and adherence to best practices.
• RBI has the authority to issue directions, impose restrictions, and take corrective actions against NBFCs that fail to comply with regulatory requirements or pose risks to the financial system.

For Prelims: Economy For Mains: GS-III: Indian Economy and issues relating to planning, mobilisation, of resources, growth, development, and employment.

 

 

Previous Year Questions 1.The RBI acts as a bankers’ bank. This would imply which of the following? (UPSC CSE 2012) 1. Other banks retain their deposits with the RBI. 2. The RBI lends funds to the commercial banks in times of need. 3. The RBI advises the commercial banks on monetary matters. Select the correct answer using the codes given below : (a) 2 and 3 only (b) 1 and 2 only (c) 1 and 3 only (d) 1, 2 and 3 Answer (d) The central bank, also known as the apex bank, has overarching control over a nation's banking system. It holds the exclusive authority for issuing currency and regulates the money supply within the economy. As outlined in the Reserve Bank of India Act, 1934, the central bank fulfills several key functions: Banking functions: Acting as the banker, agent, and advisor to both the central and state governments, the Reserve Bank handles all banking operations for these entities. It extends advisory services to the government on economic and monetary policy matters and manages the public debt. Furthermore, it functions similarly to a commercial bank for other banks, including providing loans to all commercial banks nationwide. Supervisory functions: The central bank supervises and monitors other banks and governmental entities, guiding them through various economic conditions, especially during periods of inflation or deflation. Promotional functions: In addition to its regulatory role, the central bank undertakes promotional activities such as fostering connections with global economies and managing foreign reserves. These efforts contribute to representing the country's economy on the international stage. Advisory functions: Offering guidance on monetary issues to commercial banks is another essential role of the central bank, ensuring effective monetary policy implementation. 2.With reference to the Non-banking Financial Companies (NBFCs) in India, consider the following statements: (UPSC CSE 2010) They cannot engage in the acquisition of securities issued by the government. They cannot accept demand deposits like Savings Account. Which of the statements given above is/are correct? (a) 1 only (b) 2 only  (c) Both 1 and 2  (d) Neither 1 nor 2 Answer: (b) Statement 1: They cannot engage in the acquisition of securities issued by the government. This statement is False. NBFCs can invest in government securities like bonds. Statement 2: They cannot accept demand deposits like Savings Account. This statement is True. NBFCs are unlike banks and cannot accept demand deposits that are withdrawable on demand. They can only accept fixed deposits with a predetermined maturity period

Source: Indianexpress

 

FACT-CHECKING UNIT (FCU)

 

 

1. Context

 

On September 20, the Bombay High Court struck down as “unconstitutional” and “vague” the amended Information Technology (IT) Rules, 2021, which empowered the Centre to establish a “Fact Check Unit” (FCU) to identify “fake or false or misleading” online content about the government and its establishments

 

2. Background

• According to the Government of India (Allocation of Business) Rules, 1961, the Ministry of Information and Broadcasting (MIB) is responsible for disseminating information regarding government policies, schemes, and programs through various communication channels.
• In executing this duty, the Ministry promotes Government of India policies, initiatives, schemes, and programs via press releases, press conferences, webinars, publication of books, etc. To fulfill this essential role, the Ministry operates several attached and subordinate offices, including the Press Information Bureau (PIB).
• A crucial aspect of the Ministry's responsibility in providing public information about the Government of India's operations is combating the spread of fake, false, and misleading information. The PIB has long been engaged in this task by widely distributing accurate and reliable information and issuing rebuttals, among other measures.
• In the era of social media where information dissemination occurs rapidly, the proliferation of fake and manipulated information, particularly regarding the operations of a democratically elected government, poses significant risks to society.
• Such misinformation has the potential to escalate social, economic, and political tensions, erode public trust in democratic institutions, and even jeopardize the safety of citizens

3. What is a Fact Checking Unit?

• The Press Information Bureau has been proactive in addressing the issue of fake news concerning the Government of India.
• In November 2019, the PIB established a Fact Check Unit (FCU) specifically aimed at tackling fake news related to the Government of India, its ministries, departments, public sector undertakings, and other central government organizations.
• This unit is responsible for verifying claims regarding government policies, regulations, announcements, and measures. Utilizing a robust fact-checking process, the PIB Fact Check Unit works to dispel myths, rumours, and false claims, providing the public with accurate and reliable information.
• The unit is led by a senior officer at the DG/ADG level of the Indian Information Service (IIS), with day-to-day operations managed by IIS officers at various levels.
• The Unit reports to the Principal Director General of the PIB, who serves as the Principal Spokesperson for the Government of India

4. Fact Checking Mechanism

 

Users submit requests through WhatsApp, email, or a web portal. Each request received is treated as a 'Query.' These queries are categorized by the Unit based on their relevance to matters concerning the Government of India. Only queries related to the Government of India are considered actionable, while others are deemed irrelevant for action. The information in question undergoes rigorous verification through multiple layers of cross-checking, utilizing government open-source information, technological tools, and verification from the relevant Government of India organization.

If the Unit encounters information that it determines should be publicly debunked for the benefit of the Indian people, it publishes a 'Fact Check' on its social media platforms after thorough investigation and verification from official and authoritative sources. Often, a single fact check may stem from multiple queries.

Fact-checked content can be categorized into the following three groups:

• Fake: Any factually incorrect news, content, or information related to the Government of India, deliberately or inadvertently spread, that may deceive or manipulate the audience, with or without the intention to potentially cause harm, is labeled as fake.

• Misleading: Any information presented, whether partially true, with selective facts or figures, or distorted facts or figures, with the intention to deceive or mislead the recipient, is categorized as misleading.

• True: Any information found to be factually correct after investigation is classified as true

5.Way Forward

 

The Ministry of Electronics and IT notified amendments to the Information Technology Rules, 2021, which allows the Ministry to appoint a fact-check body which will take a call on whether online information related to the Central Government is accurate. The final rules come months after the Ministry, in January, had first proposed that any piece of news that has been identified as “fake” by the fact-checking unit of the Press Information Bureau (PIB) – the Centre’s nodal agency to share news updates – will not be allowed on online intermediaries. However, the final draft has removed the reference to PIB

 

 

 

For Prelims: Current events of national and international importance. For Mains: General Studies II: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. General Studies III: Awareness in the fields of IT

Previous Year Questions 1.Democracy's superior virtue lies in the fact that it calls into activity (UPSC 2017)   A.the intelligence and character of ordinary men and women. B.the methods for strengthening executive leadership. C.a superior individual with dynamism and vision. D.a band of dedicated party workers. Answer (A)

 

Source: Indianexpress

 

GOODS AND SERVICE TAX (GST)

 

 

1. Context

 

A majority of show-cause notices issued to taxpayers under the Goods and Services Tax (GST) last year related to ‘data discrepancies’ in tax returns, and efforts were underway to use technology to resolve mismatches and mitigate the resultant disputes as well as ‘pain points for taxpayers'

 

2. What is the Goods and Services Tax (GST)?

• The Goods and Services Tax (GST) is a value-added tax levied on the supply of goods and services at each stage of the production and distribution chain. It is a comprehensive indirect tax that aims to replace multiple indirect taxes imposed by the central and state governments in India.
• GST is designed to simplify the tax structure, eliminate the cascading effect of taxes, and create a unified national market. Under the GST system, both goods and services are taxed at multiple rates based on the nature of the product or service. The tax is collected at each stage of the supply chain, and businesses are allowed to claim a credit for the taxes paid on their inputs.
• The GST system in India came into effect on July 1, 2017, replacing a complex tax structure that included central excise duty, service tax, and state-level taxes like VAT (Value Added Tax), among others. The GST Council, consisting of representatives from the central and state governments, is responsible for making decisions on various aspects of GST, including tax rates and rules.
• GST is intended to create a more transparent and efficient tax system, reduce tax evasion, and promote economic growth by fostering a seamless flow of goods and services across the country. It has a significant impact on businesses, as they need to comply with the new tax regulations and maintain detailed records of their transactions for GST filing

3.Goods and Services Tax (GST) and 101st Amendment Act, 2016

The Goods and Services Tax (GST) in India was introduced through the 101st Amendment Act of 2016. This constitutional amendment was a crucial step in the implementation of GST, which aimed to create a unified and comprehensive indirect tax system across the country.

Here are some key points related to the 101st Amendment Act and GST:

 

• The 101st Amendment Act was enacted to amend the Constitution of India to pave the way for the introduction of the Goods and Services Tax.
• It added a new article, Article 246A, which confers concurrent powers to both the central and state governments to levy and collect GST
• The amendment led to the creation of the GST Council, a constitutional body consisting of representatives from the central and state governments. The council is responsible for making recommendations on GST rates, exemptions, and other related issues
• The amendment introduced a dual GST structure, where both the central government and the state governments have the power to levy and collect GST on the supply of goods and services
• For inter-state transactions, the 101st Amendment Act provides that the central government would levy and collect the Integrated Goods and Services Tax (IGST), which would be a sum total of the central and state GST
• The amendment also included a provision for compensating states for any revenue loss they might incur due to the implementation of GST for a period of five years

The 101st Amendment Act was a critical legislative step that provided the constitutional framework for the implementation of GST in India. It addressed the need for a unified tax system, simplifying the tax structure and promoting a common market across the country. The subsequent establishment of the GST Council has played a pivotal role in the ongoing management and evolution of the GST system in India

 

4. What are the different types of Goods and Services Tax (GST)?

In India, the Goods and Services Tax (GST) is structured into different tax rates based on the nature of the goods and services. As of my last knowledge update in January 2022, the GST rates are divided into multiple slabs. It's important to note that tax rates may be subject to changes, and new amendments could have been introduced since then. As of my last update, the GST rates are as follows:

• Nil Rate:

  • Some goods and services are categorized under the nil rate, meaning they attract a 0% GST. This implies that no tax is levied on the supply of these goods or services.

• 5% Rate:

  • This is a lower rate, applicable to essential goods such as certain food items, medical supplies, and other basic necessities.

• 12% Rate:

  • Goods and services falling in this category attract a 12% GST rate. Items such as mobile phones, processed foods, and certain services fall under this slab.

• 18% Rate:

  • A higher rate of 18% is applicable to goods and services such as electronic items, capital goods, and various services.

• 28% Rate:

  • The highest GST rate of 28% is applied to luxury items, automobiles, and certain goods and services that are considered non-essential or fall into the luxury category.

• Compensation Cess:

  • In addition to the above rates, some specific goods attract a compensation cess, which is levied to compensate the states for any revenue loss during the transition to GST. This is often applied to items like tobacco and luxury cars.

• Zero Rate:

  • Certain categories of goods and services may be specified as "zero-rated," which means they are effectively taxed at 0%. This is different from the nil rate, as it allows businesses to claim input tax credit on inputs, capital goods, and input services.

• Exempt Supplies:

  • Some goods and services may be exempt from GST altogether. This means that they are not subject to any GST, and businesses cannot claim input tax credit on related inputs

 

5.Central GST (CGST), State GST (SGST), Union territory GST (UTGST) and Integrated GST (IGST)

 

 

Subject	Central GST (CGST)	State GST (SGST)	Union Territory GST (UTGST)	Integrated GST (IGST)
Levied by	Central Government	Respective State Governments	Union Territory Administrations	Central Government (on inter-state transactions)
Applicability	On intra-state supplies (within the same state)	On intra-state supplies (within the same state)	On intra-union territory supplies (within the same union territory)	On inter-state supplies (across states or union territories)
Rate Determination	Determined by the Central Government	Determined by the Respective State Government	Determined by the Union Territory Administration	IGST rate is a sum of CGST and SGST rates
Revenue Collection	Collected by the Central Government	Collected by the Respective State Government	Collected by the Union Territory Administration	Collected by the Central Government (on inter-state transactions)
Utilization of Revenue	Shared between Central and State Governments	Retained by the Respective State Government	Retained by the Union Territory Administration	Shared between Central and State Governments
Purpose	Part of the dual GST structure, meant to cover central taxes	Part of the dual GST structure, meant to cover state taxes	Applicable in union territories for intra-territory supplies	Applied to regulate and tax inter-state supplies
Input Tax Credit (ITC)	ITC available for CGST paid on inputs and services	ITC available for SGST paid on inputs and services	ITC available for UTGST paid on inputs and services	ITC available for both CGST and SGST paid on inputs
Tax Jurisdiction	Applies within a particular state	Applies within a particular state	Applies within a particular union territory	Applies to transactions across states and union territories
GSTN Portal for Filing Returns	Central GSTN portal	State-specific GSTN portals	UTGSTN portal	Integrated GSTN portal

 

 

6.What are the benefits of Goods and Services Tax (GST) in India?

 

The Goods and Services Tax (GST) in India was implemented with the aim of bringing about significant reforms in the indirect tax structure. Several benefits have been associated with the introduction of GST.

 

Here are some key advantages:

 

• GST replaced multiple indirect taxes levied by the central and state governments, simplifying the tax structure. This streamlined system reduces the complexity of compliance for businesses
• GST eliminates the cascading effect of taxes, where taxes are levied on top of other taxes. With a seamless credit mechanism, businesses can claim input tax credit on the taxes paid on their purchases, leading to a more transparent and efficient system
• GST has facilitated the creation of a common national market by harmonizing tax rates and regulations across states. This has reduced trade barriers and promoted the free flow of goods and services throughout the country
• The GST system has incorporated technology-driven processes, including electronic filing and real-time reporting, making it harder for businesses to evade taxes. This has contributed to increased tax compliance
• The input tax credit mechanism under GST benefits manufacturers, as they can claim credits for taxes paid on raw materials and input services. This has a positive impact on the cost of production and enhances the competitiveness of Indian goods in the international market
• GST brings transparency to the taxation system. The online filing of returns and the availability of transaction-level data make it easier for tax authorities to monitor and track transactions, reducing the scope for corruption
• GST has replaced a complex system of filing multiple tax returns with a more straightforward mechanism. Businesses now need to file fewer returns, reducing the compliance burden
• The implementation of GST has contributed to an improvement in the ease of doing business in India. The unified tax system has made it simpler for businesses to operate across states and has reduced the paperwork and bureaucratic hurdles associated with tax compliance
• GST has led to the harmonization of tax rates across states and union territories, minimizing the tax rate disparities that existed earlier. This creates a more predictable tax environment for businesses

7.Goods and Services Tax (GST)-Issues and Challenge

 

• Despite the intention to simplify the tax structure, the multi-tiered rate system (0%, 5%, 12%, 18%, and 28%) and the inclusion of cess on certain goods have introduced complexity. The classification of goods and services under different tax slabs can be challenging, leading to disputes and confusion
• The successful implementation of GST relies heavily on technology. Issues such as technical glitches on the GSTN (Goods and Services Tax Network) portal, especially during the initial phases, have caused difficulties for businesses in filing returns and complying with regulations
• The compliance requirements for businesses under GST, including multiple returns filing, have been perceived as burdensome. Smaller businesses, in particular, may find it challenging to adapt to the new system and comply with the various provisions
• The transition from the previous tax regime to GST posed challenges, especially for businesses in terms of understanding the new tax structure, reconfiguring accounting systems, and ensuring a smooth transition of credits from the old tax system to the GST system
• The classification of certain goods and services into specific tax slabs has been a source of contention. Ambiguities in classification have led to disputes and litigations, with businesses seeking clarity on the applicable tax rates
• The implementation of GST has increased compliance costs for businesses due to the need for sophisticated IT infrastructure, the hiring of tax professionals, and efforts to ensure accurate reporting and filing
• Challenges related to availing and matching input tax credits have been reported. Timely matching of credits and resolving discrepancies can be cumbersome, leading to concerns about the seamless flow of credit across the supply chain
• The anti-profiteering provisions were introduced to ensure that businesses pass on the benefits of reduced tax rates to consumers. However, the implementation of anti-profiteering measures has been criticized for its complexity and potential for disputes
• The periodic changes in the GST return filing system have created challenges for businesses in adapting their processes. Delays and complexities in return filing can affect working capital management

8.Goods and Services Tax Council (GST Council)

 

The Goods and Services Tax Council (GST Council) is a constitutional body in India that makes recommendations on the Goods and Services Tax (GST). It was established under the Constitution (122nd Amendment) Act, 2016, which introduced the GST in India

The GST Council consists of the following members:

• The Union Finance Minister, who is the Chairperson of the Council.
• The Union Minister of State in charge of revenue or any other Minister of State nominated by the Union Government.
• One Minister from each state, nominated by the Governor of that state.
• The Chief Secretary of each state, ex-officio.
• If the President, on the recommendation of the Council, so directs, one representative of each Union territory which has a legislature, to be nominated by the Lieutenant Governor of that Union territory.
• Three to seven members (other than Ministers) to be nominated by the Union Government, of whom at least one member shall be from the field of economics and another from the field of chartered accountancy, legal affairs or public finance

9. Way forward

 

It's important to note that the composition and structure of the GST Council may evolve over time, and there might have been changes since my last update in January 2022. To obtain the latest and most accurate information about the GST Council and its members, it is recommended to refer to official government sources or recent announcements by the relevant authorities

 

For Prelims: Economic and Social Development and Indian Polity and Governance For Mains: General Studies II: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein General Studies III: Inclusive growth and issues arising from it

 

 

Previous Year Questions   1.Which of the following are true of the Goods and Services Tax (GST) introduced in India in recent times? (UGC Paper II 2020) A. It is a destination tax B. It benefits producing states more C. It benefits consuming states more D. It is a progressive taxation E. It is an umbrella tax to improve ease of doing business Choose the most appropriate answer from the options given below: A.B, D and E only B.A, C and D only C.A, D and E only D.A, C and E only Answer (D)

 

Source: Indianexpress