Bitcoin trade may come under SEBI

Image showing Bitcoin

The government is considering the introduction of a regulatory regime for virtual or crypto currencies, such as Bitcoin, that could enable the levy of GST on their sale.

The new regime may possibly bring their trading under the oversight of the stock market regulator, Securities and Exchange Board of India (SEBI).

The idea is to treat such currency in a manner similar to gold sold digitally, so that it can be traded on registered exchanges in a bid to “promote” a formal tax base, while keeping a tab on their use for illegal activities such as money laundering, terror funding and drug trafficking.

What are crypto currencies?

Read in detail about what is cryptocurreny and how does it works?

A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of currency. A cryptocurrency is difficult to counterfeit because of this security feature.

It allows transacting parties to remain anonymous while confirming that the transaction is a valid one.

It is not owned or controlled by any institution – governments or private.

Bitcoin became the first decentralised cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created like Ethereum, Ripple, etc.

What are the advantages and disadvantages of cryptocurrency?

Advantages:

  • Cryptocurrencies make it easier to transfer funds b/w two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes.
  • These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
  • It is difficult to counterfeit cryptocurrencies.
  • Due to the fact that Bitcoin transactions cannot be reversed, do not carry with them personal information, and are secure, merchants are protected from potential losses that might occur from fraud.

Disadvantages:

  • As cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if the backup copy of the holdings doesn’t exist.
  • Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.
  • Cryptocurrencies are not immune to the threat of hacking. In Bitcoin’s short history, the company has been subject to over 40 thefts, including a few that exceeded S1 million in value

Why is government considering a regulatory regime for cryptocurrency and not banning it altogether as it is used for various nefarious activities?

The discussion whether crypto currencies should be banned or regulated has been on for some time. In a recent meeting chaired by Finance Minister Arun Jaitley, the pros and cons for both aspects were put forward. A proposal to ban such currency altogether was also considered at the meeting.

On banning it, officials attending the meeting were of the view that banning will give a clear message that all related activities are illegal and disincentivise those interested in taking speculative risks, but it was pointed out that any such move will impede tax collection on gains made in such activities and that regulating the currency instead would give a boost to blockchain technology, encourage the development of supervision ecosystem and promote a formal tax base.

 

References:

An article from The Hindu titled “Bitcoin trade may come under SEBI”

Investopedia

What is crypto-currency and how does it works?

 

Image: Cryptocurrency
Image Source: CalvinAyre.com

What is cryptography?

A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of currency.

It allows transacting parties to remain anonymous while confirming that the transaction is a valid one.

It is not owned or controlled by any institution – governments or private.

Bitcoin became the first decentralised cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created like Ethereum, Ripple, etc.

How does cryptocurrency works?

Image Explaning of how Bitcoin works

Here I’ll explain, by using Bitcoin as an example, how cryptocurrency works but before that let’s understand some of the basic concepts:

Public Ledgers: Ledger, in laymen terms, is a book or other collection of financial accounts. Similarly, in cryptocurrency world, a public ledger is a space where all confirmed transactions from the start of a cryptocurrencies creation are stored. The identities of the coin owners are encrypted, and the system uses other cryptographic techniques to ensure the legitimacy of record keeping. The ledger ensures that corresponding “digital wallets” can calculate an accurate spendable balance. Bitcoin call this public ledger a “transaction block chain

Transaction: Transaction in cryptocurrencies means same as in conventional fiat money; transfer of funds b/w two digital wallets. That transaction gets submitted to a public ledger and awaits confirmation. When a transaction is made, wallets use an encrypted electronic signature (an encrypted piece of data called a cryptographic signature) to provide a mathematical proof that the transaction is coming from the owner of the wallet. The confirmation takes a bit of time (ten minutes for bitcoin) while “miners” mine (i.e. confirm transactions and add them to the public ledger)

Mining: In simple terms, mining is the process of confirming transactions and adding them to a public ledger. In order to add a transaction to the ledger, the “miner” must solve an increasingly complex computational problem. Mining is an open-source so anyone can confirm the transaction. The first miner to solve the puzzle adds a “block” of transaction to the ledger. The way in which transactions, blocks, and the public blockchain ledger work together ensures that no one individual can easily add or change a block at will. Once a block is added to the ledger, all correlating transactions are permanent and a small transaction fee is added to the miner’s wallet (along with newly created coins). The mining process is what gives value to the coins and is known as a proof-of-work system.

Address: A Bitcoin address, or simply address, is an identifier of 26-35 alphanumeric characters that represents a possible destination for a bitcoin payment. Like e-mail addresses, you can send bitcoins to a person by sending bitcoins to one of their addresses. However, unlike e-mail addresses, people may have different Bitcoin addresses and a unique address should be used for each transaction. Most Bitcoin software and websites will help with this by generating a brand new address each time you create an invoice or payment request.

Wallet: A Bitcoin wallet is a collection of private keys but may also refer to client software like Bitcoin Core used to manage those keys and to make transactions on the Bitcoin network.

Now let’s trying to consider a fictitious example. Suppose you are an aspirant of civil services examination. You follow GKVarsity ardently and it’s helping a lot in your preparation. One fine morning, you thought of donating some money to GKVarsity (don’t worry this is just an example) for their social service which they are doing by helping aspirants in their preparation. Among the payment options, paying through bitcoin is also available. You choose to pay through Bitcoin mode. When you’ll do the same an address (defined above) will be created automatically or GKVarsity can make one offline using some tools and send you the address. This address is where you have to send the money.

How will you send it?

You must be using some client software like Bitcoin Core or some e-wallet to send the amount to the address created by GKVarsity. Remember, your wallet contains several private keys for each of your address. When you’ll request your client software to send GKVarsity the donation amount, your client software will use one of your private key to transfer fund from.

After this is done, miners (term defined above) will use the public key to verify that the transaction is coming from the legitimate account owner. Miner has to solve a complex computation problem to verify a transaction after which he/she adds a block of transaction to the ledger (explained above what is ledger? What is miner? Read them properly)

Once a miner confirms the legitimacy of the sender by solve the complex problem, the transaction gets successfully done.

I hope it’s clear. If there is any question or doubt, do comment in comment section below and I promise that I’ll revert back with the solution as soon as possible.

 

References:

https://visual.ly/community/infographic/technology/bitcoin-infographic

http://www.investopedia.com/terms/c/cryptocurrency.asp

An article from The Hindu newspaper titled “Bitcoin trade may come under SEBI”

http://cryptocurrencyfacts.com/how-does-cryptocurrency-work-2/

ECBs and their Advantages

Do you know what is External Commercial Borrowings (ECBs)? What are the advantages of External Commercial Borrowings? What has been India’s policy towards External Commercial Borrowings?

Image: External Commercial Borrowings (ECBs)

In a laymen parlance, External Commercial Borrowings (ECBs) are the loans availed by Indian entity from a non-resident lender. The Indian government permits ECBs as a source of finance for Indian corporates, PSUs, startups and others.

ECBs includes:

  • Commercial Bank loans;
  • Buyers’ credit & Suppliers’ credit;
  • Securitised Instruments such as Floating Rate Notes and Fixed Rate Bonds, etc
  • Credit from official export credit agencies; and
  • Commercial borrowings from multilateral financial institutions such as International Finance Corporation, Asian Development Banks, etc.

What are the advantages of ECBs?

It has several advantages including:

  1. ECBs provide opportunity to borrow large volume of funds;
  2. The funds are available for relatively long terms;
  3. Interest rates are also lower compared to domestic funds;
  4. ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries, equipments, etc

What has been Indian government ECB policy?

India has always promoted capital inflows as part of the development policy. Lack of domestic capital and deficit in the current a/c compelled the government historically to go after foreign capital.

In the post-reform period, ECBs have emerged as a major form of foreign capital like FDI and FII.

ECB policy was last liberalised by the RBI in November, 2015. For details visit, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10153&Mode=0

Recently, in G-20 summit in 2017, the group recognised India’s efforts to facilitate ECBs by startups to encourage innovation.

 

National Income Accounting: Definitions Explained

Here is an easy explanation of crucial definitions related to National Income Accounting, viz. Gross Domestic Product (GDP), Gross National Product (GNP), Net Domestic Product (NDP), Net National Product (NNP).

Image: National Incomes Concepts Explained

Before dwelling on various definitions related to National Income Accounting, let’s try to understand what economics is??

In a laymen terms, economics is a discipline that studies how to bridge the gap b/w the resources that a society has and the demand of that society. As the wants are interminable (unlimited), economics studies how to manage the limited resources in the most efficient way. Simple!!!!

Economics is studied under two sub-heads – Microeconomics and Macroeconomics. We will talk about these two sections some other day and let’s move on to discuss a very important concept of Macroeconomics, viz. National Income Accounting. In this article, I’ll be specifically dealing with the definitions related to National Income Accounting, i.e. Gross Domestic Product (GDP), Gross National Product (GNP), Net Domestic Product (NDP), and Net National Product (NNP) in a comprehensive way.

So what is Gross Domestic Product?

In a laymen terms, GDP is the total market value of country’s output. Let’s break it to get a better grasp of the definition:

GDP is the total market value of all final goods and services:

  • produced within a financial year
  • by factors of production (land, labour, capital, and entrepreneurship)
  • located within a country
  • irrespective of ownership.

In the above definition, a phrase “final goods and services” has been used. So what is final goods (goods here means goods and services both) and how is it different from intermediate goods? Let’s briefly look into that:

Final goods/services are produced for absolute final use. They don’t pass through any further stage of production or transformation. Unlike them, intermediate goods are produced by one firm for use by other firm to produce some other product. Example: Buttons, clothes, threads produced are used by the apparel making company and hence they (buttons, clothes, threads) are intermediate goods and not final goods. Simple!!!

I hope that you have understood the concept of GDP and the difference b/w final goods and intermediate goods. Now let’s discuss what is Gross National Product (GNP)?

GNP is the total market value of all final goods and services:

  • produced within a financial year
  • by factors of production (land, labour, capital, and entrepreneurship)
  • owned by a country’s citizens (if a foreigner is earning in geographical boundary of India then his income won’t be included in India’s GNP)
  • irrespective of where the output is being produced.

Have you noticed the difference b/w GDP and GNP?

While GDP takes into account all the final goods produced within a domestic territory irrespective of the person producing, GNP takes into account only those final goods that are produced by the nationals irrespective of where they are produced in the world.

Image: Difference b/w GDP and GNP

I hope the definitions of GDP and GNP are clear. Now, let’s discuss Net Domestic Product (NDP) and Net National Product (NNP).

The Net Domestic Product (NDP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation, calculated by subtracting depreciation from the Gross Domestic Product (GDP).

NDP=GDP-Depreciation

Similarly, Net National Product (NNP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation, calculated by subtracting depreciation from the Gross National Product (GNP).

NNP=GNP-Depreciation

You might be thinking what is this depreciation? So let’s have a look into that as well.

Depreciation is the regular wear and tear of capital that takes place while producing new goods and services in an economy. It is to be noted that it doesn’t takes place into account unexpected or sudden destruction or disuse of capital as can happen with accidents, natural calamities or such extraneous circumstances.

Note: Depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for.

 

I hope I have covered the concepts extensively. Feel free to comment, ask questions and suggest improvement; we welcome all!!!

 

References:

National Income Course on Unacademy by Ayush Sanghi

NCERT

 

This post has been contributed by Shrishti Agarwal, 1st year student in Delhi College of Arts and Commerce (DCAC), pursuing B.A. Economics (hons.)

 

 

All you need to know about GST

This article covers what is GST, what is the difference b/w GST regime and the previous tax regime, and highlights of The Constitution (One Hundred and First Amendment) Act, 2016.

 

Image: All you need to know about GST
Image Source: ProfitBooks

GST is the biggest tax reform that has taken place in the country. By virtue of The Constitution (One Hundred and First Amendment) Act, 2016, a new tax regime has commenced in the country replacing the old one.

It is meant to be a unified indirect tax across the country on products and services. In the current system in India, tax is levied at each stage separately, by the Centre and States, at varying rates, on the full value of the goods. But in the GST system, tax will be levied only on the VALUE ADDED at each stage.

Do you know: J&K passes bill to implement GST in the State

So let’s try to understand, through an illustration, how GST will work:

Image: How GST Framework will work

Stage 1

Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs 100, a sum that includes a tax of Rs 10. With these raw materials, he manufactures a shirt.
In the process of creating the shirt, the manufacturer adds value to the materials he started out with. Let us take this value added by him to be Rs 30. The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
At a tax rate of 10%, the tax on output (this shirt) will then be Rs 13. But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs (Rs 10). Therefore, the effective GST incidence on the manufacturer is only Rs 3 (13 – 10).

Stage 2

The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs 20. The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.
A 10% tax on this amount will be Rs 15. But again, under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from the manufacturer (Rs 13). Thus, the effective GST incidence on the wholesaler is only Rs 2 (15 – 13).

Stage 3

In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10. The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160. The tax on this, at 10%, will be Rs 16. But by setting off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the retailer brings down the effective GST incidence on himself to Re 1 (16 –15).
Thus, the total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they haven’t purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.

HENCE, GOODS AND SERVICES TAX (GST) WOULD BE LEVIED AND COLLECTED AT EACH STAGE OF SALE OR PURCHASE OF GOODS OR SERVICE BASED ON INPUT TAX CREDIT SYSTEM.

HOW THINGS WORKED IN A NON-GST REGIME?

In a full non-GST system, there is a cascading burden of “tax on tax”, as there were no set-offs for taxes paid on inputs or on previous purchases (set-offs were only available in very limited no. of cases). Thus, if we consider the same example as above:

The manufacturer buys raw materials/inputs at Rs. 100 after paying tax of Rs. 10. The gross value of the shirt (good) he manufactures would be Rs. 130, on which he pays a tax of Rs. 13. But since there is no set-off against the Rs. 10 he has already paid as tax on raw materials/inputs, the good is sold to wholesaler at Rs. 143 (130+13).

With the wholesaler adding value of Rs.20, the gross value of goods sold by him is, then, Rs. 163. On this, the tax of Rs. 16.30 (at 10%) takes the sale value of the good to Rs. 179.30. The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchases from the manufacturer.

The retailer, thus, buys the good at Rs. 179.30, and sells it at a gross value of Rs. 208.23, which includes his value addition of Rs. 10 and a tax of 18.93 (at 10% of Rs. 189.30). Again, there is no mechanism for setting off the tax on the retailer’s sale against the tax paid on his previous purchase.

The total tax on the chain from the raw material/input suppliers to the final retailer in this full non-GST regime will, thus, work out to Rs. 10 + 13 + 16.30 + 18.93 = Rs.58.23. For the final consumer the price would be Rs. 208.23 which is way higher than the final prices under GST.

From the above illustration, it is evident that the credits of input taxes paid at each stage is available in the subsequent stage of value addition, which makes GST essentially a tax only on the value addition at each stage. The final consumer will thus only bear the GST charged by the last dealer in the supply chain, with setoff stages at all the previous stages.

Thus, GST is another name of VAT. Then, what is the difference b/w the both the tax regimes?

In the previous tax regime, along with VAT (with limited set-offs on inputs or on previous purchases), there were multiple indirect taxes levied by the Centre, States as well as the Local Bodies. Collectively, all these taxes made (applied at varied rates) the compliance (by business) complex, inhibited smooth trade across the country, and was a heavy burden on consumers.

In the GST regime, all these taxes like Value Added Tax (VAT), Central Sales Tax (CST), Central Excise Duty, Additional Customs Duty (CVD), Service Tax, Octroi of Local Self Governing Bodies (eg; Municipal Corporation), Luxury Tax, Entertainment Tax, etc will be subsumed into it.

SALIENT FEATURES OF THE ACT

  • It provide for a dual GST with the Centre and the States simultaneously levying it on a common base. The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the States [including Union territories with legislature] would be called State GST (SGST). Union territories without legislature would levy Union territory GST (UTGST).
  • CGST, SGST /UTGST& IGST would be levied at rates to be mutually agreed upon by the Centre and the States under the aegis of the GSTC
  • Both the Centre and States now have “concurrent” powers to make laws with respect to goods and services tax.
  • Parliament has the exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
  • Goods and Services Tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned b/w the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
  • Import of goods, or services, or both would be treated as inter-State supplies and would be subject to IGST in addition to the applicable custom duties.
  • The amount apportioned to State out of IGST shall not form part of the Consolidated Fund of India.
  • The article provides for constitution of a GST council by the President within sixty days from this act coming into force. The GST council will constitute the following members:
  1. Union Finance Minister as Chairman of the council;
  2. Union Minister of State (MoS) in charge of Revenue or Finance;
  3. One nominated member from each state who is incharge of finance or taxation.
  • GST would replace the following taxes currently levied and collected by the Centre:
  1. a) Central Excise Duty;
  2. b) Duties of Excise (Medicinal and Toilet Preparations);
  3. c) Additional Duties of Excise (Goods of Special Importance);
  4. d) Additional Duties of Excise (Textiles and Textile Products);
  5. e) Additional Duties of Customs (commonly known as CVD);
  6. f) Special Additional Duty of Customs (SAD);
  7. g) Service Tax;
  8. h) Cesses and surcharges insofar as they relate to supply of goods or services.
  • State taxes that would be subsumed within the GST are:
  1. a) State VAT;
  2. b) Sales Tax;
  3. c) Purchase Tax;
  4. d) Luxury Tax;
  5. e) Entry Tax (All forms);
  6. f) Entertainment Tax (except those levied by the local bodies);
  7. g) Taxes on advertisements;
  8. h) Taxes on lotteries, betting and gambling;
  9. i) State cesses and surcharges insofar as they relate to supply of goods or services
  • GST would apply to all goods and services except Alcohol for human consumption.
  • GST on five specified petroleum products (Crude, Petrol, Diesel, ATF & Natural gas) would be applicable from a date to be recommended by the GSTC.
  • Tobacco and tobacco products would be subject to GST. In addition, the Centre would continue to levy Central Excise duty on them.

 

References:

http://indianexpress.com/article/explained/gst-bill-parliament-what-is-goods-services-tax-economy-explained-2950335/

http://www.cbec.gov.in/resources//htdocs-cbec/gst/gst-concept-status-ason-03062017.pdf;jsessionid=2E9BF4C19D2338E0ADBAE79CF63F8578

http://lawmin.nic.in/ld/The%20Constitution%20(One%20Hundred%20and%20First%20Amendment)%20Act,%202016.pdf

 

 

J&K passes bill to implement GST in the State

Now, as the 101st Constitutional Amendment has been passed by J&K as well, GST has become a pan-India tax.

Goods and Services Tax
Image Source: The Economic Times

On Wednesday, both the Houses of Jammu and Kashmir (legislative assembly and legislative council) passed a resolution adopting the Goods and Services Tax (GST) through a president order.

It is to be noted that GST is a constitutional amendment and no such amendment made to the Constitution of India extends to the state of J&K unless it is extended by a presidential order. Therefore, a presidential order was made to the State to adopt GST.

Read more: All you need to know about GST

Opposition party politicians and separatist leaders claim that GST would be a menace to the special status granted to J&K by the provisions of Article 370 of the constitution and taxation powers granted by Section 5 of the J&K Constitution. However, Finance Minister of J&K rejected their claim and said he would ensure that both Article 370 of the Constitution of India and Section 5 of the J&K Constitution remain unhurt.

Now, as the 101st Constitutional Amendment has been passed by J&K as well, GST has become a pan-India tax.

References:

Indian Polity for Civil Services Examination by M Laxmikanth

http://www.thehindu.com/news/national/other-states/jk-houses-adopt-gst-resolution/article19217220.ece

http://economictimes.indiatimes.com/news/politics-and-nation/jammu-and-kashmir-passes-bill-to-implement-gst-in-the-state/articleshow/59463766.cms

 

National Stock Exchange’s Co-location Case

Recently, watchdog SEBI’s chairman called the NSE co-location case as “serious”. So what is the NSE co-location case all about? Below is the explanation of the same:

National Stock Exchange Image

Source: LiveMint

What is co-location?

Co-location refers to the facility where brokerages can house their servers inside the exchange to get better speed for trade execution. Since, the broker’s server is placed closed to that of exchange, the latency is reduced.

NSE started offering this facility in February 2010.

What is the case?

In 2015, SEBI received three complaints against the exchange alleging that certain brokers with co-location servers were getting access to market data before the other who also had such facilities within NSE. The complaint also alleged that the employees of NSE were also involved in the irregularities.

How did the SEBI and NSE reacted to the complaints?

Following complaints about co-location facility of the exchange, a SEBI-appointed technical advisory committee (TAC) had initiated an examination and found instances of breach of fair access rules by the exchange.

In September 2016, after the findings made by SEBI’s advisory committee, the regulator asked the NSE board to initiate an independent examination of its systems and process. The exchange’s board then appointed Deloitte India to conduct a forensic investigation.

Deloitte in its report highlighted that there were some lapses related to procedures and processes and it could have been that an NSE employee was also involved. It also stated that the technology used by the NSE earlier to offer co-location service was prone to manipulation in terms of lags in information dissemination.

Based on the Deloitte report, NSE decided to look at every single aspect of co-location to ensure everything is transparent and nothing is left to unstated practices.

What is the current status?

Currently, the NSE is strengthening its policies and procedures related to co-location facilities. SEBI, at the same time, is looking into the allegations of selective brokerages getting preferential access at the exchange.

The National Stock Exchange (NSE) may have to refile papers for its ₹10,000- crore IPO (Initial Public Offering) after addressing issues related to alleged preferential access given to some brokers, watchdog SEBI’s Chairman Ajay Tyagi said, terming the co-location case as “a serious matter”. The exchange had, in December, filed its draft papers with SEBI for a Rs. 10,000 IPO and was awaiting SEBI’s approval.

 

References:

http://www.thehindu.com/todays-paper/tp-business/SEBI-stung-NSE-to-reset-co-location-code/article17316206.ece

http://www.thehindu.com/business/Industry/nse-co-location-case-serious-says-sebi/article19205038.ece