Unit - 6

Taxation and financial regulatory bodies

6.1 Introduction to direct and indirect tax

Direct tax

Direct taxes are one type of taxes an individual pays that are paid straight or directly to the government, such as income tax, poll tax, land tax, and personal property tax. Such direct taxes are computed based on the ability of the taxpayer to pay, which means that the higher their capability of paying is, the higher their taxes are.

Types of Direct Taxes

1. Income tax

It is based on one’s income. A certain percentage is taken from a worker’s salary, depending on how much he or she earns. The good thing is that the government is also keen on listing credits and deductions that help lower one’s tax liabilities.

2. Transfer taxes

The most common form of transfer taxes is the estate tax. Such a tax is levied on the taxable portion of the property of a deceased individual, including trusts and financial accounts. A gift tax is also another form wherein a certain amount is collected from people who are transferring properties to another individual.

3. Entitlement tax

This type of direct tax is the reason why people enjoy social programs like Medicare, Medicaid, and Social Security. The entitlement tax is collected through payroll deductions and is collectively grouped as the Federal Insurance Contributions Act.

4. Property tax

Property tax is charged on properties such as land and buildings and is used for maintaining public services such as the police and fire departments, schools and libraries, as well as roads.

5. Capital gains tax

This tax is charged when an individual sells asset such as stocks, real estate, or a business. The tax is computed by determining the difference between the acquisition amount and the selling amount.

Advantages

1. Promotes equality

Since direct taxes are based on the ability of a person to pay, it promotes equality among payers and citizens. Every person is charged a different amount, depending on how much they make.

2. Promotes certainty

The good thing about direct taxes is that they are determined and made final before they are even paid. In the case of income tax, the annual tax is the same every year as long as the salary does not change.

3. Promotes elasticity

Taxes are the earnings of the government, and when they fluctuate, the earnings also change. They can go higher or lower.

4. Saves time and money

The government does not need to spend on the collection of taxes because they are already taken right at the source of the income. Some companies use automatic payroll deduction systems, which help save time and money.

Indirect taxes

Indirect taxes are basically taxes that can be passed on to another entity or individual. They are usually imposed on a manufacturer or supplier who then passes on the tax to the consumer. The most common example of an indirect tax is the excise tax on cigarettes and alcohol. Value Added Taxes (VAT) are also an example of an indirect tax.

Types of indirect taxes

1. Sales tax

Whenever people go to the malls or department stores to shop, they are already about to pay indirect taxes. Goods such as household items, clothing, and other basic commodities are subject to such types of taxes. Upon payment at the counter, the final sale price is padded with a sales tax that the store collects and pays to the government.

2. Excise tax

Excise tax is also very common. When a manufacturer buys the raw materials for the company’s products, for example, tobacco for cigarette companies, they already need to pay indirect taxes on the items. Through a part of the normal course of business, the manufacturer can pass on the burden to the consumers by selling the cigarettes at a higher price.

3. Customs tax

Ever wonder why imported products are expensive? It is because of customs tax. When a container filled with bananas from another country enters the US, the importer pays a tax (customs tax), which is then passed on to consumers.

4. Gas tax

Yes, buying gasoline for vehicles contains an indirect tax.

Advantages

1. The poor can do their share

Unlike direct taxes that usually exempt the poor, indirect taxes allow them to actually contribute their part in collecting funds for a country or state.

2. They aren’t very obvious

Indirect taxes, as they are incorporated in the sale price of an item, are not very obvious. People don’t feel they are being taxed simply because the tax comes in small values. Plus, add the fact that they are not indicated in the price tag, but can only be seen on the purchase receipt. Also, they can be avoided by not buying the goods.

3. Collection is easy

Unlike direct taxes where documents need to be accomplished and filing is required, indirect taxes are paid the moment a consumer buys a product. The tax is collected by the supplier and paid to the government.

4. Discourages consumption of harmful products

Alcohol and cigarettes are heavily taxed. By taxing such products, people are discouraged by their price, thereby saving them from consuming harmful items.

Key takeaways

Direct taxes are one type of taxes an individual pays that are paid straight or directly to the government, such as income tax, poll tax, land tax, and personal property tax.

Indirect taxes are basically taxes that can be passed on to another entity or individual

6.2 GST, impact of GST on construction industry, tax exemption for contractors

GST

The Goods and Services Tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.

Main Features of GST

• Applicable On supply side: GST is applicable on ‘supply’ of goods or services as against the old concept on the manufacture of goods or on sale of goods or on provision of services.
• Destination based Taxation: GST is based on the principle of destination-based consumption taxation as against the present principle of origin-based taxation.
• Dual GST: It is a dual GST with the Centre and the States simultaneously levying tax on a common base. GST to be levied by the Centre is called Central GST (CGST) and that to be levied by the States is called State GST (SGST).
• Import of goods or services would be treated as inter-state supplies and would be subject to Integrated Goods & Services Tax (IGST) in addition to the applicable customs duties.
• GST rates to be mutually decided: CGST, SGST & IGST are levied at rates to be mutually agreed upon by the Centre and the States. The rates are notified on the recommendation of the GST Council.
• Multiple Rates: Initially GST was levied at four rates viz. 5%, 12%, 16% and 28%. The schedule or list of items that would fall under these multiple slabs are worked out by the GST council.

Advantages of GST

For the Government

• Create a unified common market: Will help to create a unified common national market for India. It will also give a boost to foreign investment and “Make in India” campaign.
• Streamline Taxation: Through harmonization of laws, procedures and rates of tax between Centre and States and across States.
• Increase tax Compliance: Improved environment for compliance as all returns are to be filed online, input credits to be verified online, encouraging more paper trail of transactions at each level of supply chain;
• Discourage Tax evasion: Uniform SGST and IGST rates will reduce the incentive for evasion by eliminating rate arbitrage between neighbouring States and that between intra and inter-state sales.

For Overall Economy

• Bring about certainty: Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax return, common tax base, common system of classification of goods and services will lend greater certainty to taxation system;
• Reduce corruption: Greater use of IT will reduce human interface between the taxpayer and the tax administration, which will go a long way in reducing corruption;
• Boost secondary sector: It will boost export and manufacturing activity, generate more employment and thus increase GDP with gainful employment leading to substantive economic growth;
• Ultimately it will help in poverty eradication by generating more employment and more financial resources.

For the Trade and Industry

• Simpler tax regime with fewer exemptions.
• Increased ease of doing business.
• Reduction in multiplicity of taxes.
• Elimination of double taxation on certain sectors.
• More efficient neutralization of taxes especially for exports
• Making our products more competitive in the international market.
• Simplified and automated procedures for registration, returns, refunds and tax payments.
• Decrease in average tax burden on supply of goods or services.

For Consumers

• Transparent prices: Final price of goods is expected to be transparent due to seamless flow of input tax credit between the manufacturer, retailer and service supplier.
• Price reduction: Reduction in prices of commodities and goods in long run due to reduction in cascading impact of taxation;
• Poverty eradication: By generating more employment and more financial resources.

For the States

• Expansion of the tax base: As states will be able to tax the entire supply chain from manufacturing to retail.
• More economical empowerment: Power to tax services, which was hitherto with the Central Government only, will boost revenue and give States access to the fastest growing sector of the economy.
• Enhancing Investments: GST being destination based consumption tax will favour consuming States. Improve the overall investment climate in the country which will naturally benefit the development in the States.
• Increase Compliance: Largely uniform SGST and IGST rates will reduce the incentive for evasion by eliminating rate arbitrage between neighbouring States and that between intra and inter-state sales

Exemptions under GST

• Custom duty will be still collected along with the levy of IGST on imported goods.
• Petroleum and tobacco products are currently exempted.
• Excise duty on liquor, stamp duty and electricity taxes are also exempted.

Impact of GST on a construction industry

Works contract means a service contract involving supply of goods to execute the contract. Hence, works contracts are a mixture of service and transfer of goods. Examples of works contracts are the construction of a new building, erection, installation of plant and machinery.

Works contract under pre-GST regime

Works contracts consisted of three kinds of taxable activities as per the previous law. It involved supply of goods as well as supply of services. If a new product was created during the works contract, then such manufacture became a taxable event. Previously, the supply of goods was taxable in the form of VAT and the service was taxable under service tax.

If a new product appeared in the process of completing a works contract, Central Excise duty was levied. So, different aspects of one single activity were taxed by different laws. This caused a lot of confusion regarding treatment and taxability which is why there were so many legal disputes related to works contracts. GST aims to put an end to the uncertainty for the legislature.

Taxability of Works Contract under GST

Unlike the previous VAT and Service Tax regulations, the term “Works Contract” has been limited to any work performed for a “Immovable Property” under GST. Whereas, erstwhile laws considered contracts for movable property into account.

As per GST, A contract for the construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property in which the transfer of property in goods (whether as goods or in another form) is involved in the execution of such contract is referred to as a “works contract”.

Any such composite supply on products, such as a fabrication or paint job in an automotive body shop, will not fall under the GST definition of term works contract per se. Such contracts would continue to be composite supply, but they would not be considered a Works Contract for GST purposes.

GST Schedule II clearly mentions that the following are supply of service–

• Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly,
• Works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract

Thus, GST has removed the confusion regarding the tax treatment. This means works contract will be treated as service and tax would be charged accordingly (not as goods or part goods/part services).

This treatment of works contracts as service and not as supply of goods will bring in much needed clarification to the works contracts. Under the previous regime, different states had different schemes for VAT. There were different composition schemes with different VAT rates. Service tax too was complex with 60% abatement on new works and 30% abatement on repair contracts. GST solves such with a much simpler straightforward calculation.

Input Tax Credit not available on some works contract

GST Law mentions that input tax credit is not available for-

• Works contracts services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service.
• Goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business.

Input tax credit is available to both a builder and a taxable person while constructing plant and machinery. But input tax credit is not available to any taxable person who constructs on his own account even if it is for business use.

Abatement is not provided under GST

No abatement had been prescribed for works contract service under GST. Previously, VAT was payable on the works contract. Service tax was paid @15% on either 40% (on new work) or 70% (on repair, maintenance work).

Due to no abatement/ composition is provided, it has led to significant increase in tax burden, especially the works contract is taxed at standard GST rate (which is 18%) and even though subjected to lower tax rate (12%).

GST Rate on Works Contract

The GST rates applicable for various class of works contracts are as follows:

Value of Supply of Works Contracts

The value of a works contract service is determined by whether the contract includes a land transfer as part of the works contract. In the case of a service supply involving the transfer of property in land or an undivided share of land, the value of the service and commodities element of the supply shall be equal to the entire amount charged for the supply less the value of the land or undivided share of land, as the case may be.

One third of the entire price paid for such supply will be deemed to constitute the value of land or an undivided share of land, as the case may be.

Place of Supply of Works Contracts

Immovable property would be required for a GST works contract. As a result, where both the supplier and the recipient are located in India, Section 12(3) of the IGST Act, 2017 governs the location of supply. The location of the immovable property would be the source of supply.

If the immovable property is located outside of India but both the supplier and the recipient are in India, the place of supply will be determined by the proviso to Section 12(3) of the IGST Act, 2017.

When either the Supplier or the Recipient is located outside India, the place of supply is the place where the immovable property is located or planned to be located, according to Section 13(4) of the IGST Act, 2017.

Availability of Composition Scheme to Works Contractors

Composition scheme is available to works contractors from April 2019 provided turnover is up to Rs.50 lakhs. Earlier, the composition scheme was not available to service providers and was open to only available to suppliers of goods. This was a big blow to the small sub-contractors who cannot opt for the composition scheme. They were forced to register for the normal taxation scheme increasing their compliances and costs. With the composition scheme extended to service providers, small service providers can benefit.

Key takeaways

Works contract means a service contract involving supply of goods to execute the contract. Hence, works contracts are a mixture of service and transfer of goods.

6.3 Property tax: types, methods of calculation & numerical on computation of property tax, tax deductions against income from property, corporate tax planning

Taxes are the primary source of income for a government, with the taxes earned dictating the resources available to citizens. Every property is a taxable asset, and the property tax is an annual amount paid by a property/landowner to the government. This tax could be paid either to the local state government or Municipal Corporation, depending on government policies.

The word “property” in this context refers to all tangible real estate under the ownership of an individual and includes houses, office buildings and premises rented to third parties. Property tax, as a concept has been around for centuries and is acknowledged across the globe, with records of farmers and peasants paying tax on their properties even in the Middle Ages.

Types of Property

Property in India is classified into four categories, which help the government estimate tax based on certain criteria. The different property divisions in the country are mentioned below.

• Land – in its most basic form, without any construction or improvement.
• Improvements made to land - this includes immovable manmade creations like buildings and godowns.
• Personal property – This includes movable man-made objects like cranes, cars or buses.
• Intangible property

Present State of Property Tax

Property tax in India is to be paid on “real property”, which includes land and improvements on the land, with the government appraising the monetary value of each such property and assessing the tax in proportion to its value. The municipality of a particular area has to do this assessment and determine the property tax, which can be paid either on an annual or semi-annual basis. This tax amount is used to develop local amenities including road repairs, maintenance of parks and public schools, etc. Property tax varies from location to location and can be different in different cities and municipalities.

Calculation of Property Tax

The formula used for calculating property tax is given below:

Property tax = base value × built-up area × Age factor × type of building × category of use × floor factor.

Different Methods of Calculating Property Tax

In general, the municipal authorities use one of the following 3 methods for the purpose of calculation of property tax:

1. Capital Value System (CVS): Under the Capital Value System (CVS), the property tax is calculated as a percentage of the market value of the property. The market value of the property is decided by the government on the basis of the locality of the property. This valuation system is followed in the city of Mumbai.
2. Unit Area Value System (UAS): The tax valuation as per the Unit Area Value System or UAS is calculated on the basis of the per unit price of the built-up area of the property. This price is decided on the basis of the expected returns of the property as per its location, usage, and land price. This value is further multiplied with the built-up area of the property to derive the tax valuation. A number of municipal authorities such as Patna, Bengaluru, Delhi, Hyderabad, and Kolkata follow this method.
3. Annual Rental Value System or Ratable Value System (RVS): As per the RVS or the Annual Rental Value System, the tax is calculated on the rental value which is derived from the property in a year. This need not be the actual rent amount which is collected from the property. However, it is the valuation of the rent which is determined by the municipal authority and is derived on the basis of the location, size, and condition of the property. The proximity of the property to landmarks and other relevant amenities is also taken under consideration at the time of valuation. Chennai and parts of Hyderabad follow this method of tax calculation.

Tax Deductions against Income from Property

Section 24 is titled as “Deductions from income from house property”. ‘Income from house property’ is applicable in the following cases:

If you are renting out your house(s), then the rent received will be considered as part of your income

If you have more than 1 house, then the Net Annual Value of the houses, except the house you are living in, will be considered as your income.

If you own only 1 house and you are living in it, the income from house property will be considered as NIL. Any income derived from rent and annual value of additional houses, will be subject to tax after deductions made under Section 24.

Deductions under Section 24

There are 2 types of deductions under Section 24 of the Income Tax Act:

Standard deduction: This is an exemption allowed to every taxpayer, where a sum equal to 30% of the net annual value does not come under the tax limit. This is not applicable if you are occupying the only house you own.

Interest on loan: If you have taken a home loan for purchase, construction or renovation of the house, whatever interest you pay on the principal amount of the loan is exempted from tax payment. The sub-clauses in this category are:

If the loan has been taken for a self-occupied property, then you can claim exemptions of up to Rs.2 lakh.

If you took a loan for purchase or construction (not renovation) of a property before actually buying or completing its construction, you can still claim the interest. You can seek deductions on the interest paid before the construction or purchase is completed, in 5 equal instalments, from the year in which the house is bought or the construction is completed.

If the loan is taken for renovation or reconstruction of a house, you cannot claim tax exemption until the renovation is completed.

To avail this deduction, you need to compute the interest amount you have to pay to the bank or financial institution that you took the loan from, separate from the principal repayment. It does not matter whether you have actually paid the amount to the financier – you can get exemption for the complete annual interest amount.

Exceptions under Section 24

If the house is not occupied by you, you can claim exemption for the whole interest amount that you are paying, without any upper limit.

If the house is not occupied by you because you live in another town due to your employment or business, or you live in another property or rented property in the city of your employment, then you can claim tax exemption on interest payment only up to Rs.2 lakh.

There is no deduction for any brokerage or commission for arranging the loan or tenant.

You have to buy or complete construction of the house within 3 years of taking the loan for you to be able to claim maximum deduction on the loan interest amount. If the construction or purchase is not complete within 3 years, you will be able to claim only Rs.30,000 instead of Rs.2 lakh.

You must have an interest certificate for the loan that you are taking.

Deduction under Section 80C

Individuals who purchase a new house can claim deductions under section 80c of the Income Tax Act. Under this clause, deductions can be claimed for stamp duty and registration charges, which could add up to around 10% of the total cost of a house. Deductions claimed under this section are subject to the condition that they do not exceed Rs 1.5 lakh.

Individuals can also claim a deduction towards any other expense during the process of transfer of property. Homeowners should keep in mind that this is applicable only for new residential properties.

Capital Gains Tax on Property:

Capital gains tax refers to the tax levied on the profit which is the outcome of a property sale. Capital gains tax can be a major source of wealth drain if not handled smartly. A simple way to handle this is to purchase a new house from the proceeds of a property sale, keeping in mind that such property should be purchased within two years of sale. Proceeds from a property sale can also be used to construct a house, ensuring that capital gains tax on property doesn’t become too taxing.

Corporate tax planning

Corporate tax planning is a means of reducing tax liabilities on a registered company. The common ways to do this includes taking deductions on business transport, health insurance of employees, office expenses, retirement planning, child care, charitable contributions etc. Through the various tax deductions and exemptions provided under the Income Tax Act, a company can substantially reduce its tax burden in a legal way. Once again, tax planning should not be confused with tax avoidance and all the planning should be done within the framework of law.

Increasing profits for a company results in higher tax liabilities. As such, it becomes imperative for them to devote enough time on tax planning to reduce the liabilities. With proper tax planning, the direct tax and indirect tax burden is reduced at times of inflation. It also assists in proper planning of expenses, capital budget and sales and marketing costs, among others. A good tax planning results out of:

• Disclosing correct information to relevant IT departments.
• Not being ignorant of applicable tax laws as well as court judgements regarding the same.
• Legal tax planning should be done which is under the purview of law.
• Planning must be done with business objectives in mind and should be flexible enough to incorporate possible changes in the future.

Key takeaways

The Goods and Services Tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.

6.4 Financial regulatory bodies: role & functions, ICRA (Information and Credit Rating Agency of India), SEBI (Security and Exchange Board of India), IRDA (Insurance Regulatory & Development Authority) and RBI (Reserve Bank of India)

ICRA

ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange

A credit rating agency (CRA, also called a rating service) is a company that assigns credit ratings, which rate a debtor’s ability to pay back debt by making timely principal and interest payments and the likelihood of default. In this article, we discuss about various credit rating agencies in India

Role of the Credit Rating Agency

The credit rating agencies rate the creditworthiness of issuers of debt obligations, of debt instruments, and in some cases, of the services of the underlying debt. The debt instruments rated by CRAs include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, and collateralized securities, such as mortgage-backed securities and collateralized debt obligations.

A credit rating is an evaluation of the credit risk of a prospective debtor. Also, predicting their ability to pay back the debt, along with this, makes a forecast of the chances for the debtor defaulting. The credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency’s analysts. Credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.

Functions

The CRA collects information about financial flexibility, turnover values, analyzes the same to reach a conclusion. And, it is transformed into an easy and understandable manner to the public. Moreover, it makes investors confident by giving data about risk and returns in a particular business. Evaluates risks and finds measures to overcome these risks consequently gives implicit information regarding the same and enhances the corporate image.

1. It provides unbiased opinion to investors - Opinion of good credit rating agency is unbiased because it has no vested interest in the rated company.

2. Provide quality and dependable information- Credit rating agencies employ highly qualified, trained and experienced staff to assess risks and they have access to vital and important information and therefore can provide accurate information about creditworthiness of the borrowing company.

3. Provide information in easy to understand language- Credit rating agencies gather information, analyze and interpret it and present their findings in easy to understand language that is in symbols like AAA, BB, C and not in technical language or in the form of lengthy reports.

4. Provide information free of cost or at nominal cost- Credit ratings of instruments are published in financial newspapers and advertisements of the rated companies. The public has not to pay for them. Even otherwise, anybody can get them from credit rating agency on payment of nominal fee. It is beyond the capacity of individual investors to gather such information at their own cost.

5. Helps investors in taking investment decisions- Credit ratings help investors in assessing risks and taking investment decision.

6. Disciplines corporate borrowers - When a borrower gets higher credit rating, it increases its goodwill and other companies also do not want to lag behind in ratings and inculcate financial discipline in their working and follow ethical practice to become eligible for good ratings, this tendency promotes healthy discipline among companies.

7. Formation of public policy on investment- When the debt instruments have been rated by credit rating agencies, policies can be laid down by regulatory authorities (SEBI, RBI) about eligibility of securities in which funds can be invested by various institutions like mutual funds, provident funds trust etc. For example, it can be prescribed that a mutual fund cannot invest in debentures of a company unless it has got the rating of AAA.

SEBI

The Securities and Exchange Board of India (SEBI) was officially appointed as the authority for regulating the financial markets in India on 12th April 1988. It was initially established as a non-statutory body, i.e., it had no control over anything but later in 1992, it was declared an autonomous body with statutory powers. SEBI plays an important role in regulating the securities market of India. Thereby it is important to know the purpose and objective of SEBI.

Role of SEBI

SEBI acts as a watchdog for all the capital market participants and its main purpose is to provide such an environment for the financial market enthusiasts that facilitate efficient and smooth working of the securities market.

To make this happen, it ensures that the three main participants of the financial market are taken care of, i.e., issuers of securities, investor, and financial intermediaries.

Issuers of securities

These are entities in the corporate field that raise funds from various sources in the market. SEBI makes sure that they get a healthy and transparent environment for their needs.

Investor

Investors are the ones who keep the markets active. SEBI is responsible for maintaining an environment that is free from malpractices to restore the confidence of general public who invest their hard earned money in the markets.

Financial Intermediaries

These are the people who act as middlemen between the issuers and investors. They make the financial transactions smooth and safe.

Functions of SEBI:

SEBI primarily has three functions-

1. Protective Functions

As the name suggests, these functions are performed by SEBI to protect the interest of investors and other financial participants.

It includes-

• Checking price rigging
• Prevent insider trading
• Promote fair practices
• Create awareness among investors
• Prohibit fraudulent and unfair trade practices

2. Regulatory Functions

These functions are basically performed to keep a check on the functioning of the business in the financial markets.

These functions include-

• Designing guidelines and code of conduct for the proper functioning of financial intermediaries and corporate.
• Regulation of takeover of companies
• Conducting inquiries and audit of exchanges
• Registration of brokers, sub-brokers, merchant bankers etc.
• Levying of fees
• Performing and exercising powers
• Register and regulate credit rating agency

3. Development Functions

SEBI performs certain development functions also that include but they are not limited to-

• Imparting training to intermediaries
• Promotion of fair trading and reduction of malpractices
• Carry out research work
• Encouraging self-regulating organizations
• Buy-sell mutual funds directly from AMC through a broker

IRDA

IRDA or Insurance Regulatory and Development Authority of India is the apex body that supervises and regulates the insurance sector in India. The primary purpose of IRDA is to safeguard the interest of the policyholders and ensure the growth of insurance in the country. When it comes to regulating the insurance industry, IRDA not only looks over the life insurance, but also general insurance companies operating within the country.

Role

India began to witness the concept of insurance through a formal channel back in the 1800s and has seen a positive improvement ever since. This was further supported by the regulatory body that streamlined various laws and brought about the necessary amendment in the interest of the policyholders. Below mentioned are the important roles of IRDA -

• First and foremost is safeguarding the policyholder’s interest.
• Improve the rate at which the insurance industry is growing in an organized manner to benefit the common man.
• To ensure the dealing are carried on in a fair, integral manner along with financial soundness keeping in mind the competence of the insurance company.
• To ensure faster and a hassle-free settlement of genuine insurance claims.
• To address the grievances of the policyholder through a proper channel.
• To avoid malpractices and prevent fraud.
• To promote fairness, transparency and oversee the conduct of insurance companies in the financial markets.

Functions

Section 14 of IRDA Act,1999 lays down the duties and functions of IRDA:

• It issues the registration certificates to insurance companies and regulates them.
• It protects the interest of policy holders.
• It provides license to insurance intermediaries such as agents and brokers after specifying the required qualifications and set norms/code of conduct for them.
• It promotes and regulates the professional organizations related with insurance business to promote efficiency in insurance sector.
• It regulates and supervise the premium rates and terms of insurance covers.
• It specifies the conditions and manners, according to which the insurance companies and other intermediaries have to make their financial reports.
• It regulates the investment of policyholder's funds by insurance companies.
• It also ensures the maintenance of solvency margin (company's ability to pay out claims) by insurance companies.

• To form a reliable management system with high standards of financial stability.

RBI

The Reserve Bank of India was established in 1935 under the provisions of the Reserve Bank of India Act, 1934 in Calcutta, eventually moved permanently to Mumbai. Though originally privately owned, was nationalized in 1949.

As per the Preamble of Reserve Bank of India, the role and functions of RBI are described as

To regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.

Main Role and Functions of RBI

• Monetary Authority: Formulates, implements and monitors the monetary policy for A) maintaining price stability, keeping inflation in check; B) ensuring adequate flow of credit to productive sectors.
• Regulator and supervisor of the financial system: lays out parameters of banking operations within which the country’s banking and financial system functions for- A) maintaining public confidence in the system, B) protecting depositors’ interest; C) providing cost-effective banking services to the general public.
• Regulator and supervisor of the payment systems: A) Authorizes setting up of payment systems; B) Lays down standards for working of the payment system; C) lays down policies for encouraging the movement from paper-based payment systems to electronic modes of payments. D) Setting up of the regulatory framework of newer payment methods. E) Enhancement of customer convenience in payment systems. F) Improving security and efficiency in modes of payment.
• Manager of Foreign Exchange: RBI manages forex under the FEMA- Foreign Exchange Management Act, 1999.  in order to A) facilitate external trade and payment B) promote the development of foreign exchange market in India.
• Issuer of currency: RBI issues and exchanges currency as well as destroys currency & coins not fit for circulation to ensure that the public has an adequate quantity of supplies of currency notes and in good quality.
• Developmental role: RBI performs a wide range of promotional functions to support national objectives. Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc.
• Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
• Banker to banks: An important role and function of RBI is to maintain the banking accounts of all scheduled banks and acts as the banker of last resort.
• An agent of Government of India in the IMF.

References:

1. Engineering Economics Management, Dr. Vilas Kulkarni and Hardik Bavishi, S. Chand Publication
2. Laws for Engineers, Vandana Bhatt and Pinky Vyas, Pro Care Publisher
3. Indian Economy, Gaurav Datt and Ashwani Mahajan, S. Chand Publication
4. Industrial Organization & Engineering Economics, T. R. Banga and S. C. Sharma, Khanna Publisher