What is Bank Rate, Repo Rate and Reverse Repo Rate?

What is Bank Rate?

The bank rate is the rate at which the central bank gives credit to the commercial banks. The market rate of interest is directly proportional to the bank rate. Market rate of interest refers to the rate of interest which a commercial bank charges from customers (who take loans). During inflation, the cost of capital is increased by increasing bank rate. This reduces the amount of money in the market because it becomes expensive to take loans and people refrain from it. During deflation, cost of capital is reduced so as to encourage people to take loans and this increases the flow of credit.

What is Repo rate?

Repo rate refers to the bank rate at which central bank of the country (Reserve Bank of India in India) offers loans to the commercial banks.

What is Reverse Repo rate?

Reverse Repo rate refers to the rate of interest which central bank of country pays to the commercial banks when commercial banks keep their money with the central bank.

Both Repo rate and Reverse Repo rate are decided by central banks and revised from time to time depending on the market and economic scenario of the country.

Bank Rate, Cash reserve ratio, and Statutory Liquidity Ratio are referred to as quantitative instruments of credit control because these instruments decide the amount of cash flowing in the market.

What is Indirect Tax?

An Indirect Tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). In simpler words, it can be defined as the charge that is paid by one individual at the beginning, but the burden of which will be passed over to some other individual, who eventually holds the burden.

Let us understand it by an example. Suppose you go to Pizza Hut. You had pizza. When the bill is made there are different types of taxes imposed over the total price of the food you had. One such tax is VAT (Value Added Tax). Now, Pizza Hut takes this tax from you and gives it to the government of India. So Pizza Hut is acting as intermediary between you and government to levy tax. This type of tax is known as Indirect tax.

The some important indirect taxes imposed in India are as under:

·        Customs Duty: The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.

·         Excise Tax: It is an indirect tax levied on the sale of a specific good. It is a vital source of revenue for the Government of India.

·         Service Tax: The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax.

·         Sales Tax: Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country.

·         VAT: The practice of VAT executed by State Governments is applied on each stage of Sale. VAT in India classified under the tax slabs are 0% for essential commodities, 1% on gold ingots and expensive stones, 4% on industrial inputs, capital merchandise and commodities of mass consumption, and 12.5% on other items.

·         Securities Transaction Tax (STT): STT is a tax being levied on all transactions done on the stock exchanges. 

·         Stamp duty: This is an additional charge levied on documents, like promissory notes, bills of exchange, insurance policies and debentures

·         Expenditure tax: The hotels in India collect expenditure tax from their customers and eventually deposit to the Central Government

Advantages and Disadvantages of Indirect Taxes:

·         Advantages:

1.    They are convenient,

2.    Difficult to invade and have a wide coverage

·         Disadvantages:

1.    High cost of collection,

2.    Increasing income inequalities (both rich and poor pay the same amount of tax)

3.    Affecting consumption of certain products

The scope of raising revenue through direct taxes is limited, so indirect taxes are important parts and parcels of the financial system.

What is Direct Tax?

The term Direct Tax refers to the tax paid directly to the government by the person on whom it is imposed. It cannot be shifted to another individual or entity. The individual or organization upon which the tax is levied is responsible for the fulfillment of the tax payment. Alternatively, it can be said that it is a kind of tax that is taken away from one's salary or wages. Some of the examples of direct taxes include capital gains tax, personal income tax, tax on corporate income, and tax incentives.

It can be defined from two different prospective:

a) From colloquial point of view

b) From U.S Constitutional law point of view

Ø  In the former case, Direct tax is defined as a charge levied directly to the taxpayer by the government. Examples include corporate taxes, income taxes and transfer taxes. The transfer taxes include estate tax and gift tax.

Ø  While the latter defines it as the charge on property by reason of its ownership.

In other words we can say a direct tax is a tax that is levied upon an individual person or on property. Certain taxes may fall under indirect tax categories in the constitutional sense, but fall under direct tax category in the colloquial sense

In India, all the direct tax related matters are taken care by the Central Board of Direct Taxes (CBDT), which is a significant division of the Department of Revenue, Ministry of Finance, Government of India.

Any person who is an Indian resident or a non resident but has an Indian source of income is taxable. However if a person has a foreign source of income but is an ordinary resident of India, the person is taxable (Income tax) too.

Advantages and Disadvantages of Direct Taxes:

·         Advantages:

1.    Control of inflation,

2.    Social equality (as it is based on the ability to pay) and certainty

·         Disadvantages:

1.    Tax evasion and less coverage but these disadvantages are due to administrative inefficiencies and difficulties.

2.    Direct taxation is important aspect of modern financial system.

What is CRR & SLR?

What is Cash Reserve Ratio (CRR)?

Every commercial bank (SBI, ICICI, HDFC, etc. in India) has to keep a percentage of its total deposit with central bank (Reserve Bank of India ) as a reserve which is known as Cash Reserve Ratio. If the central bank wants to increase the credit to commercial banks, CRR is reduced and if central bank wants to decrease the flow of credit, it increases the credit.

In other words, CRR is the minimum percentage of a bank’s total deposits which are to be kept with the central bank. At present, CRR is 4.75%.

What is Statutory Liquidity Ratio (SLR)?

Every commercial bank has to maintain a certain percentage of its assets in the form of cash or other liquid assets, called Statutory Liquidity Ratio. This is also fixed by central bank. This is done so as to control the liquidity of money in the market because increase in the liquidity causes increase in inflation. When the flow of credit is to be increased, SLR is reduced and it is increased if flow of credit is to be decreased. At present, SLR is 24%.