money supply, banking & financial institutions section 1 MCQ Questions & Answers Detailed Explanation

Answer: (c)

Answer: (d)

One of the disputed issues in taxation related to MNCs in the area of intra (group) company transactions. The pricing of goods and services between two related companies (companies belonging to the same owner or subsidiaries) is called transfer pricing.

Here, a parent company say in Japan may charge a convenient price from its subsidiary in India to minimise its tax payment in India. For example, suppose that Maruti Suzuki India has higher profit and has to pay higher tax to the Government of India. In this case, if Suzuki Japan charges a high price for a component it sold to Maruti, the profit of Maruti will come down and the tax payment of the company to GoI will also come down. On the other hand, the revenue of Suzuki Japan will go up. Altogether, the Suzuki Motor Corporation (SMC) group improves its position; but GoI’s tax revenue gets affected.

To avoid such manipulation, the tax department of India pre-sets the price charged for different components between Maruti Suzuki India and Suzuki Japan. But this price should follow the “arms-length principle” i.e. market-based. An arm's length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other. These types of sales assert that both parties act in their own self-interest and are not subject to pressure from the other party; furthermore, it assures others that there is no collusion between the buyer and seller.

At the beginning of the year, the price charged for intracompany transactions will be determined in advance and will be kept for the coming five years or so. This price arrangement between Maruti and India’s tax department is called an advance pricing agreement.

An APA is a contract, usually for multiple years, between a taxpayer and at least one tax authority specifying the pricing method that the taxpayer will apply to its related company transactions. These programmes are designed to help taxpayers voluntarily resolve actual or potential transfer pricing disputes in a proactive, cooperative manner, as an alternative to the traditional examination process.

APAs gives certainty to taxpayers, reduce disputes, enhance tax revenues and make the country an attractive destination for foreign investments. These agreements would be binding both on the taxpayer as well as the government. Similarly, they lower complaints and litigation costs.

Answer: (a)

As per the RBI Act 1934, Section 26, rupee notes (and coins) are legal tenders. It means that notes and coins cannot be refused by any person of the country for payment/discharge of debt.

(For example: Is an autowallah obliged to accept your currency note for a ride? Not necessarily! If you are yet to get into the auto, the autowallah can turn you down despite it being a legal tender. But once you make the trip, and you have incurred a debt, he cannot refuse to take your currency note.)

Answer: (a)

Inflation will necessarily occur in case there is effective demand in the economy. If there is increase in aggregate demand, there may not be inflation if the supply also increases. If output decreases and demand also decreases then it may not result in inflation.

Govt borrowing and spending increases aggregate demand rather than effective demand.

Answer: (c)

Money supply = (Money multiplier) X (Monetary base)

When RBI does open market operations, then monetary base changes (RBI buys/sells govt. securities in lieu of cash), due to which money supply also changes. But it does not change money multiplier, which depends on two things:

People’s tendency of depositing money in banks (currency deposit ratio)

Statutory reserve requirement of the banks, and; (reserve deposit ratio)

Answer: (b)

In terms of Section 20 of the RBI Act 1934, RBI has the obligation to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Central Govt. Further, as per Section 21 of the said Act, RBI has the right to transact Government business of the Union in India.

State Government transactions are carried out by RBI in terms of the agreement entered into with the State Governments in terms of section 21 A of the RBI Act. As of now, such agreements exist between RBI and all the State Governments except the Government of Sikkim.

Thus, the legal provisions vest the Reserve Bank of India with both the right and obligation to function as a banker to the government.