194C V/S 194 I of Income Tax Act 1961

Since the amendment of section 194I w.e.f. 13.7.2006 the
most common query nowadays is 'Should the TDS be
deducted u/s 194C @2% or u/s 194I @10%?' Naturally,
this dilemma arises due to the overlapping nature of the
provisions appearing in these sections. The confusion has
been created with the amendment of section 194I in 2006
whereby the rent on machinery, plant, furniture,
equipment or fittings has also been brought in its purview.
Earlier only the rent on land and building was liable to TDS
u/s 194I.
The recent Circular no. 1/2008 dated 10th Jan 2008 issued
by the I.T. Deptt. on the issue of applicability of
sec.194I to cooling charges paid to cold storage
owners is a welcome measure. The circular says that it
has been represented to the deptt. that:
• Cold storage owners provide a composite service,
which involves preservation of essential food items
including perishable goods at various temperatures
suitable for specific food items for required periods
and that storage of goods is only incidental to the
activity of preservation.
• The cooling of goods is controlled through mechanical
process. The customer brings its packages for
preservation for a required period and takes away its
packages after paying cooling charges.
• The customer does not hire the building, plant/
machinery etc. in any manner and does not become
tenant.
Deptt. has examined the matter and it is clarified that:
• The main function of the cold storage is to preserve
perishable goods by means of a mechanical process,
and storage of such goods is only incidental in nature.
• The customer is also not given any right to use any
demarcated space/place or the machinery of cold
store and thus does not become a tenant.
• Therefore the provisions of sec. 194I are not applicable
to the cooling charges paid by the customers.
• However since the arrangement between the cold
storage owners and the customers is of contractual
nature, the provisions of section 194C will be applicable.
This is a very clear cut clarification issued by the Deptt.
This will be a great relief to the cold storage owners as
after this circular a TDS of only 2% instead of 10% will be
deducted from their bills.
Other confusing cases of 194I v/s 194C
Car Rental
• If there is an arrangement with the taxi/car operator to
do a particular assignment or job involving car then it
will be treated as a contractual arrangement and
therefore covered under section 194C. But if the car
supplier only provides the car without specification of
the job then TDS is to deducted u/s 194I.
• For example, if there is an agreement to carry the
employee from one place to another i.e. let us say
from home to factory and back, such agreement is
giving a job to the car supplier company and the car
company will get payment only when the work
assigned to it was completed. If he supplies only the
car, the company will not pay the amount because the
contract was for the work of transport of employees.
This type of job is covered u/s 194C.
• However if the company hires the car without any
assignment of job, the car supplier completes the job,
the moment he sends the car. How that car is used is of
no importance for him. He will get paid for car hire.
This type of car hire will suffer TDS u/s 194I.
Hiring Audio Visual equipments
• Whether a particular payment made towards hire of
audio visual equipment will be subject to TDS u/s
194C or 194I will depend upon the facts of the case.
• If the equipment is hired from the hotel for a particular
event like conference or exhibition etc. being held in
the hotel itself for few hours or days, then payment for
such hiring will be covered u/s 194C being a
contractual arrangement to provide the equipments
for a particular purpose or event.
• However if the audio visual equipments are hired by
the company for a particular period say one month,
quarter or year to be used for different purposes
whatever it deems fit, payment for such hire charges
will be subject to TDS under section 194I as this will be
treated as rent of the equipment. Here hiring charges
for a 'period' becomes the key element for bringing it
under the definition of rent.
Shifting of material
• In one case a contract was given for shifting of material
in plant from one place to another by loaders, Trucks,
Bulldozers, Dumpers and Tipplers etc. on rate contract
basis i.e. Rs. /hour, Rs./trip or Rs./ton of material.
• The main condition of the contract were:
o That the party would deploy so & so number of
equipments for a particular work.
o In some cases diesel is provided to party i.e. rate is
excluding diesel.
o There is penalty clause in the contract for nonavailability
of the equipment.
• Despite above conditions in the contract, such type of
contract will certainly come under section 194C only.
• Section 194I is definitely not applicable in this case
because even if there is a written agreement for
employing certain types of equipments and vehicles,
the work is to be done by the contractor. This is not a
simple case of taking machinery on rent. The stringent
conditions have been put regarding use of specified
machines, only to maintain quality of work.
Conclusion
From the discussion of above cases, following two broad
criteria (but not conclusive) emerge. We have to check
the facts of a case and analyse:
a. If there is any kind of 'work contract', section
194C is applicable; if the payment is for the 'use
for a certain period' of the things specified in
section 194I then section 194I will be applicable.
b. Section 194I is applicable when the possession of
an asset in question is given to the hirer so that he
may use it the way he wants. In case the possession
is not given but retained by the person letting it on
hire, provision of section 194C shall apply.

2 Forgotten Rules of Investing

here are two rules we should already know and should never forget again:

The rule of 72 -- double your money, double your funThis is my favorite rule of finance because it forces you to look at what you have -- right now, today -- and then focus on what you can reasonably achieve given your return expectations.The Rule of 72 will tell you how long it takes for an investment to double in value, assuming interest is paid annually and reinvested in the same account. To get your result, simply divide the number 72 by the interest rate you expect to earn on your investment.For example, if you put your money in an investment earning 8%, dividing 72 by eight will tell you that your money will double in nine years. Consequently, if you earn 9% on your money, it will take eight years to double, and 10% will get you there in 7.2 years. If you're expecting a more modest 6%, 12 years will pass before you see double dough.This rule itself is not a prediction, but a simple mathematic fact. Of course, the predicting part comes in when you assume what you'll earn on your investment. (If it's Treasury securities, you probably know, but if it's stocks, you're making an educated guess).For that reason, you had better err on the side of caution. Though stocks -- as measured by the S&P 500 -- have returned just north of 10% since 1926, there have been 10-year periods where returns were substantially lower or virtually nonexistent. So, be conservative but realistic, depending on your time horizon.The great power of this rule may be that it has a tendency to get folks excited about investing -- especially teenagers who have such long periods of time in which their money can grow. Given that, you'll be doing them a real favor if you teach it to your children and grandchildren.If that's still not powerful enough to make them lenders instead of borrowers, teach them the oft-forgotten flip side of this rule, as it will also tell them how long it will take for their debts to double in size at a given interest rate. With consumer debt at an all-time high, this side of the coin may prove the better lesson for your college-aged kindred.For example, if you have $10,000 in debt and you're paying 7% interest on that balance, you'll owe $20,000 in just over 10 years. Of course, this assumes that no payments are required, but many student loans work this way (i.e., the interest simply accrues and is capitalized, so the debt builds until you begin making payments).Even if we're talking about credit card debt -- where you're required to make minimum monthly payments -- the rule still suggests how quickly debts can become burdensome. Indeed, today's minimum payment requirements often have little more impact than zero payments, though, the balance is at least going in the right direction in this case.

In any event, this rule can teach a powerful lesson about how quickly one can grow their bank balance, or their debt balance, as they choose.The rule of asset allocationFolks in the financial realm are often pressed to come up with simple tools to help investors weigh their financial decisions. Many are simplistic, and therefore, often worthless.

Now, this next forgotten rule is about as simple as they come, but despite that, it's actually uncanny how often this rule finds the mark for investors. At the highest level, it can be used to determine how much of your money should be invested in stocks, and how much should be invested in bonds.The rule says that you need only consider your age as a percentage, and then use that percentage to loosely represent your bond allocation. For example, a 40-year-old investor using this rule would have about 40% of their portfolio invested in bonds (i.e., 40/100). The remaining 60% would be allocated to stocks.As far as the rule is concerned, it's as simple as that. However, here I would offer a little more guidance, and toss in a requirement of my own. This rule has been around for quite some time, and a few things have changed since it was put forward. For one thing, we're living longer, and that means we need to invest aggressively enough to outpace inflation and keep our earnings intact.After all, what good is it to walk down the aisle at Wal-Mart (NYSE: WMT) with $1,000 in our pockets if a gallon of milk costs $1,001? Therefore, when using this rule, I would lump cash and other short-term investments into the resultant bond allocation. If you don't do that, you run the risk of being too conservative and being outpaced by the inflation bogeyman.
T

Agriculture needs an accounting standard

As biological assets are subject to droughts, floods and diseases the unrealised gains arising from changes in fair value can give a distorted picture of the financial results of the agricultural enterprise.

In India, there is no accounting standard on biological assets and agricultural produce. Accounting Standard on agriculture is the need of the hour as many Indian companies are venturing into these businesses in big way, thanks to the thrust on retail, dairy, horticulture, etc.

IAS 41 requirement
International Accounting Standard 41 (IAS 41) prescribes the accounting treatment for agriculture, which includes biological transformation of living animals or plants for sale into agricultural produce or additional biological assets. IAS 41 requires measurement at fair value less estimated point-of-sale costs from initial recognition of biological assets up to the point of harvest, except in rare cases.
IAS 41 requires that a change in fair value less estimated point-of-sale costs of a biological asset be included in profit or loss for the period in which it arises. Under a historical cost accounting model, a plantation forestry enterprise might report no income until first harvest and sale, perhaps 30 years after planting.
On the other hand, the International Accounting Standard Board (IASB) believes an accounting model that recognises and measures biological growth using current fair values reports changes in fair value throughout the period between planting and harvest.
Where market-determined prices or values are not available for a biological asset in its present condition, IAS 41 requires use of the present value of expected net cash flows from the asset discounted at a current market-determined pre-tax rate in determining fair value.

Fair value challenge
When IAS 41 was issued it met with severe criticism because many agricultural assets are simply not subject to reliable estimates of fair value. For instance, a colt which is kept as a potential breeding stock, grows into a fine stallion. The stallion starts winning race events. The stallion earns substantial amount for its owner from breeding services. The stallion gets older, his utility decreases. Eventually the stallion dies of old age and the carcass used as pet food.
At each stage in the life of the horse, the fair values would change significantly, but estimating the fair values can be extremely subjective and difficult. In many ways, the stallion reminds one of fixed assets. Changes in fair value of fixed assets are not recognised in the income statement, then why should the treatment be different in the case of agricultural non-financial assets?
Vineyards, coffee and tea plantations have similar measurement issues. The relationship between the vines and coffee or tea plants and the land that they occupy is unique and integrated. The vine or plant itself has relatively little value. However, in conjunction with the land, they do have value.
Determining the fair value for a vineyard, coffee or tea plantation involves estimating the production along with sales prices and costs for a number of years in the future, together with estimating a terminal value and the application of a discount rate to calculate the net present value — an enormously complex and subjective task.
The value of the vines and plants would then have to be determined as a residual because it would be calculated by deducting the value of the unimproved land and the value of the infrastructure from the aggregate value. It is clear that the valuation, as a result of the estimates and subjectivity, is open to substantial variability.
Because biological assets are subject to droughts, floods and diseases the unrealised gains arising from changes in fair value, can give a distorted picture of the financial results of the agricultural enterprise. It could be misunderstood and may lead to inappropriate decision making, such as dividend declaration from unrealised profits.

Homogeneity of assets
Another question about the reliability of measurements relates to the homogeneity of the assets. During the transformation process, it could be very difficult to determine the likely quality.
Even if the quality is known, estimating the price and the market where the produce would be ultimately sold could become a challenge.
Although the recognition of unrealised gains and losses on financial assets is achieving wider acceptance, the IASB has not yet put forward any convincing arguments in favour of a fair value model for non-financial assets.
IAS 38, on intangible assets, allows such assets to be carried at re-valued amounts. However, for intangible assets to be carried at re-valued amounts IAS 38 imposes a strict criteria — an active market is necessary, which requires items traded to be homogeneous, with willing buyers and sellers normally being found at any time and prices being available to the public.
However, IAS 41 does not impose the same hurdles for agricultural assets and requires them to be fair valued except in rare cases. The IAS 41 approach, therefore, is inconsistent with other international standards.
Given the criticisms on fair valuation and the fact that commercial farming enterprises in India operate as private companies and surely don’t need the additional cost burden that may not produce reliably results, the ICAI should develop a standard based on the historical cost model.

New interpretations on construction contracts

Recently, the International Accounting Standards Board (IASB) issued two IFRIC (International Financial Reporting Interpretations Committee) interpretations that seek to clarify accounting treatments for two critical areas of accounting — construction contracts and net investment in a foreign operation with effect from January 1, 2009.
IFRIC 15
IFRIC 15 standardises accounting practice across jurisdictions for the recognition of revenue by real-estate developers for sales of units, such as apartments or houses, ‘off plan’ — that is, before construction is complete.
The fundamental issue is whether the developer is selling a product (goods) — the completed apartment or house — or a service — a construction service as a contractor engaged by the buyer.
The revenue from selling products is normally recognised at delivery. And the revenue from selling services is normally recognised on a percentage-of-completion basis as construction progresses.
IFRIC 15 provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’ and, accordingly, when revenue from the construction should be recognised:
An agreement for the construction of real estate is a construction contract within the scope of IAS 11 only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not).
If the buyer has that ability, IAS 11 applies.
If the buyer does not have that ability, IAS 18 applies.
If IAS 11 applies, the revenue is recognised on a percentage-of-completion basis provided that reliable estimates of construction progress and future costs can be made.
Even if IAS 18 applies, the agreement may be to provide construction services rather than goods.
This would likely be the case, for instance, if the entity is not required to acquire and supply construction materials.
If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver real estate to the buyer, the agreement for the sale of goods falls under IAS 18.
IFRIC 16
IFRIC 16 clarifies that the presentation currency does not create an exposure to which an entity may apply hedge accounting.
Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.
IFRIC 16 concludes that the hedging instrument(s) may be held by any entity or entities within the group.
IFRIC 16 concludes that while IAS 39 must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 must be applied in respect of the hedged item.
Construction contracts have always proved tricky to both accountants as well as the taxman.
In a recent judgment in the Magus Construction Pvt. Ltd vs Union of India (2008-TIOL-321-HC-GUW-ST) case, the Guwahati High Court held that the activity of construction of flats by a builder for their subsequent sale was not chargeable to service tax under construction of complex services.
Although the POC (percentage of completion) method is popular and acceptable to the realtor, auditor as well as the taxman, the agreement entered into by the parties to a transaction assumes importance and could alter accounting and tax treatments.

RBI may squeeze money supply to curb inflation

The Reserve Bank may go in for further tightening of money supply as there is no likelihood of inflation coming to single digit in the next six months, according to indications given by the RBI governor to a parliamentary panel. Some more mon etary measures may be taken to contain the aggregate demand to counter inflation, said Mr Reddy to the members of the Parliamentary Standing Committee.
Mr Reddy admitted that there will be no easing of inflation in the next six months and it may go over 12 per cent. When some members asked why is inflation inching towards 12 per cent mark, while in countries like Britain it is below four per cent, Redd y replied that different countries have different yardsticks for measuring inflation.
Last month, the central bank has raised short-term lending rates for banks -- repo-- by 0.75 per cent in two instalments, while also increasing mandatory cash deposits of banks by 0.50 per cent in two phases to suck out excess liquidity. RBI is now slat ed to announce quarterly review of credit policy on 29th July, when it may announce further measures to absorb money supply.
For the week ended June 28, inflation rose to 11.89 per cent.

ICAI struggles with forged certificates

Publication:Economic Times Delhi;
Date:Jul 17, 2008;
Section:Career & Business;
Page Number:5
The Institute of Chartered Accountants of India (ICAI), is struggling with people issuing forged certificates. Currently, ICAI with a membership base of over 1.45 lakh CAs is dealing with at least 250 cases of forged use of signature seal of CAs. The matter is sub judice in 105 cases of impersonation and alleged forged use of signature and seal of CAs following the cases filed by ICAI and aggrieved parties. There are many more cases filed by either ICAI or aggrieved parties that are at different level

Checks on inter-co loans

In a bid to check fund manipulation by companies, the government may introduce greater safeguard provisions to govern inter-corporate loans. The proposed changes, likely to be introduced as part of the new company law amendments, would require companies to be more transparent in their efforts to avail such finance options. While the government’s efforts would not be directed to cap companies’ rights to raise funds through the route, the ministry of corporate affairs wants them to be totally transparent about loans and reasons for any deviation from standard procedure. Officials say the government was not in favour of curbing the rights of companies for easier access to financing. The proposed steps would ensure that corporates are made to follow greater standards of compliance before availing such loans. To check fund manipulation, it is proposed that the capacity of the corporate houses to invest or lend surplus funds should be established transparently. It is believed that detailed disclosures in the annual report of the lending company on the end-use of the loans and advances by the recipient entity for the intended purpose will usher greater transparency to such operations. While the new provisions are unlikely to put in place regulatory hurdles for corporates to comply before reaching such an arrangement, the idea is to ensure that companies do not misuse their rights. The rights of corporates to enter into inter-corporate loans are covered under Section 372A of the company law. The proposed regulatory changes are in consonance with the J J Irani committee’s recommendations stating that provisions of the company law on such loans should be strengthened to prevent misuse of the exemptions by corporates. Officials, however, say the proposed legislative changes would not affect the interests of the corporates. The expert committee had also recommended that regulatory changes should not reintroduce a regime of government approvals. It is believed that India Inc should not be placed at a disadvantage compared to the companies incorporated in other jurisdictions in any international competitive bidding for acquisition

VAT E-FILING COMPULSORY

E-filing returns compulsory from this quarter, last date July 20

Ludhiana, July 16 If you are among those who claim VAT refunds from the State Excise and Taxation department, you will have to e-file your returns from this quarter onwards. The last date to file e-return is July 20.
Nearly 3,000 industrialists all across the state will come under the net from this quarter onwards, said A Venuprasad, Excise and Taxation Commissioner, Punjab.
“The process will only benefit the industrialists and once e-filing is over, there will be no mismatch of data and hence VAT refunds will be issued swiftly,” he added.
Industrialists have been complaining of the delay in VAT refunds since long. Venuprasad said, “In the last financial year, we had issued Rs 325 crore VAT refunds.”
The public notice for compulsory e-filing was issued two days ago and a number of industrialists have started taking the passwords as well. The project was on the cards for long and is finally being implemented, said Venuprasad.
Advocates, however, have a different point of view. Jatinder Khurana, president of district young lawyers association, said: “The timeframe given to the industry is too less and a number of industrialists are not even ready for e-filing. At least six months time should have been given to start the process.” Rajiv Johar, president of district sales tax bar association, supported Khurana’s views.
Venuprasad, however, says the process will not be much of a hassle and would rather help the industry.

Service tax rules leave India Inc vexed

Many taxation issues pertaining to inter-state delivery of services are being envisaged when states are given the power to tax a set of services. Two principal questions that seem to arise are — whether revenue will go to the jurisdiction of production or that of consumption; and how to identify the place of supply and that of actual use of the services in the case of inter-state delivery of services. Tax authorities are mulling solution to the first question taking cue from the destination principle followed by most countries to tax international transactions with VAT imposed on imports and rebated on exports. The second question is much more complex, and its solution involves greater efficiency of administration. The state governments are making their demand for the power for levy of service tax more vociferous. Tax policy managers at the centre would, however, do well to put the necessary administrative systems in place before the states’ demand is met. Another vexed issue in regard to taxation of services is linked to how export of services is defined. The Export of Service Rules notified by the government are ambiguous and increasingly disputatious. The matter is relevant as exports are meant to be tax-neutral while consumption of specified services locally is taxable. Let us pore over a few niceties. Currently, only if the services rendered from India are ‘fully used’ outside India, the process qualifies as exports. In the BPO industry, there are different possibilities of partial use of some composite services rendered by an Indian entity within the territory of India and while part of the services is used outside India. If you go strictly by the wording in the Export of Services Rules, it would seem that even if 99% of the services rendered by an Indian entity in a particular transaction is used outside India and the balance 1% used by local entities, the transaction cannot be treated as exports. That means the relevant entity will not be eligible for refund of input taxes. There is already a spate of litigation over this question which is fundamental.

Another possibility— which is also real given the flurry of court cases that have come up of late— is certain cases where the service is rendered from or performed “outside” Indian territory as defined in the tax rules but by an India-based entity subject to Indian tax laws. For example, certain offshore oil and gas production could be construed to be performed outside Indian territory and there could therefore be a claim for refund/credit of input taxes. It is open to interpretation whether this claim is valid. Also, with the government adding more services to the service tax net, the scope of definition issues in relation to taxability of certain services have anyway become much larger in the recent years. (With Budget 2008-09, 106 services are under the tax net and scores of other services which are not taxable now are proposed to be taxed under the state list). There are also cases of the tax authorities failing to understand the subtleties of commercial world and as a result amplifying the scope of the tax to proportions that the industry would find onerous. Double taxation issues also come up before the adjudicatory and judicial bodies and this is sometimes harmful to even the well-meaning industry. The revenue department has already issued a master circular to address the growing incidence of service tax disputes, but the circular has still left some points unexplained. The scuffle between the authorities and assessees over service tax issues is increasingly recurrent. This is obviously because the stakes are huge and assessee base has considerably widened to the current number of 5 lakh-plus. No longer is service tax a marginal factor in the government’s revenue estimates. Service tax collections grew 33.6% to Rs 9,774 crore in the first quarter of this fiscal, while the growth required to reach the target of Rs 64,460 crore is 26.1%. The last four years have seen phenomenal growth in service tax collections. With this kind of growth, in the next few years, service tax could emerge as the largest component of the central government’s indirect tax revenue. It is imperative, therefore, that the room for interpretation of service tax rules is minimised. When the taxman is not too intrusive, compliance level would only move up.

Professional tax may rise by Rs 5,000

Doctors, lawyers and other professionals, both salaried and self-employed, may now have to pay a higher professional tax. Acceding a long-pending demand of the state governments, the Centre has decided to raise the ceiling on professional tax from Rs 2,500 to Rs 7,500 per annum. The Union Cabinet is expected to take up the proposal on Thursday. Professional tax is levied by state governments or local bodies on professions, trades, callings and employment. The power to levy the tax flows from Article 276 of the Constitution that also caps the tax amount. The Centre will amend Article 276 to raise the limit. Although Delhi does not impose the tax, states such as Karnataka, Maharashtra, West Bengal, Andhra Pradesh, Tamil Nadu and Gujarat do so. The limit was fixed in 1998 at Rs 2,500 per annum. Increase in tax has been a long-pending demand of the states, pointing at rise in income levels in the past few years. The Centre’s reluctance to state governments’ demand for a hike in the limit is borne out of the fact that taxpayers who pay professional tax are eligible for a deduction under the Income-Tax Act. So, while the state governments’ revenues grow, the Centre loses tax on this count. However, with the direct tax collections witnessing stupendous growth, state governments had intensified pressure on the Centre. Their argument is that the tax does not have a substantial impact on Centre’s total kitty as the collection under this head by states was only Rs 3,500 crore. Some state governments wanted the limit to be increased to Rs 10,000 per annum, but the Centre has agreed to raise it to Rs 7,500.

INFLATION

...............CONTINUED FROM YESTARDAY
Causes of inflation
In the long run inflation is generally believed to be a monetary phenomenon while in the short and medium term it is influenced by the relative elasticity of wages, prices and interest rates.[6] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian schools. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trendline. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy.
A great deal of economic literature concerns the question of what causes inflation and what effect it has. There are different schools of thought as to what causes inflation. Most can be divided into two broad areas: quality theories of inflation, and quantity theories of inflation. Many theories of inflation combine the two. The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the equation of the money supply, its velocity, and exchanges. Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production.
Keynesian economic theory proposes that money is transparent to real forces in the economy, and that visible inflation is the result of pressures in the economy expressing themselves in prices.
There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model":
Demand-pull inflation: inflation caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. The failing value of money, however, may encourage spending rather than saving and so reduce the funds available for investment.
Cost-push inflation: presently termed "supply shock inflation," caused by drops in aggregate supply due to increased prices of inputs, for example. Take for instance a sudden decrease in the supply of oil, which would increase oil prices. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.
Built-in inflation: induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up (gross wages have to increase above the CPI rate to net to CPI after-tax) with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle." Built-in inflation reflects events in the past, and so might be seen as hangover inflation.
A major demand-pull theory centers on the supply of money: inflation may be caused by an increase in the quantity of money in circulation relative to the ability of the economy to supply (its potential output). This is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively, often leading to hyperinflation, a condition where prices can double in a month or less. Another cause can be a rapid decline in the demand for money, as happened in Europe during the Black Plague.
The money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is. For example, Monetarist economists believe that the link is very strong; Keynesian economics, by contrast, typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians the money supply is only one determinant of aggregate demand. Some economists consider this a 'hocus pocus' approach: They disagree with the notion that central banks control the money supply, arguing that central banks have little control because the money supply adapts to the demand for bank credit issued by commercial banks. This is the theory of endogenous money. Advocated strongly by post-Keynesians as far back as the 1960s, it has today become a central focus of Taylor rule advocates. But this position is not universally accepted. Banks create money by making loans. But the aggregate volume of these loans diminishes as real interest rates increase. Thus, it is quite likely that central banks influence the money supply by making money cheaper or more expensive, and thus increasing or decreasing its production
TO BE CONTINUED TOMORROW..........................

Golden Quotes

“The movement you think of giving up ,think of the reason you Held so long ……..Do or Die is an old saying ,Do it before you die is the latest ….”