On the Budget day, the finance
minister tables 10-12 documents. Of these, the main and most important document
is the Annual Financial Statement.
Annual Financial Statement
Article 112 of the Constitution requires the government to present to Parliament a statement of estimated receipts and expenditure in respect of every financial year - April 1 to March 31. This statement is the annual financial statement.
The annual financial statement is usually a white 10-page document. It is divided into three parts, consolidated fund, contingency fund and public account. For each of these funds, the government has to present a statement of receipts and expenditure.
Article 112 of the Constitution requires the government to present to Parliament a statement of estimated receipts and expenditure in respect of every financial year - April 1 to March 31. This statement is the annual financial statement.
The annual financial statement is usually a white 10-page document. It is divided into three parts, consolidated fund, contingency fund and public account. For each of these funds, the government has to present a statement of receipts and expenditure.
Consolidated Fund
This is the most important of all government funds. All revenues raised by the government, money borrowed and receipts from loans given by the government flow into the consolidated fund of India. All government expenditure is made from this fund, except for exceptional items met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn from this fund without the Parliament's approval.
This is the most important of all government funds. All revenues raised by the government, money borrowed and receipts from loans given by the government flow into the consolidated fund of India. All government expenditure is made from this fund, except for exceptional items met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn from this fund without the Parliament's approval.
Contingency Fund
As the name suggests, any urgent or unforeseen expenditure is met from this fund. The Rs 500-crore fund is at the disposal of the President. Any expenditure incurred from this fund requires a subsequent approval from Parliament and the amount withdrawn is returned to the fund from the consolidated fund.
As the name suggests, any urgent or unforeseen expenditure is met from this fund. The Rs 500-crore fund is at the disposal of the President. Any expenditure incurred from this fund requires a subsequent approval from Parliament and the amount withdrawn is returned to the fund from the consolidated fund.
Public Account
This fund is to account for flows for those transactions where the government is merely acting as a banker. For instance, provident funds, small savings and so on. These funds do not belong to the government. They have to be paid back at some time to their rightful owners. Because of this nature of the fund, expenditure from it are not required to be approved by the Parliament.
This fund is to account for flows for those transactions where the government is merely acting as a banker. For instance, provident funds, small savings and so on. These funds do not belong to the government. They have to be paid back at some time to their rightful owners. Because of this nature of the fund, expenditure from it are not required to be approved by the Parliament.
For each of these funds the
government has to present a statement of receipts and expenditure. It is
important to note that all money flowing into these funds is called receipts,
the funds received, and not revenue. Revenue in budget context has a specific
meaning.
Revenue receipt/Expenditure
All receipts and expenditure that in general do not entail sale or creation of assets are included under the revenue account. On the receipts side, taxes would be the most important revenue receipt. On the expenditure side, anything that does not result in creation of assets is treated as revenue expenditure. Salaries, subsidies and interest payments are good examples of revenue expenditure.
All receipts and expenditure that in general do not entail sale or creation of assets are included under the revenue account. On the receipts side, taxes would be the most important revenue receipt. On the expenditure side, anything that does not result in creation of assets is treated as revenue expenditure. Salaries, subsidies and interest payments are good examples of revenue expenditure.
Capital receipt/Expenditure
All receipts and expenditure that liquidate or create an asset would in general be under capital account. For instance, if the government sells shares (disinvests) in public sector companies, like it did in the case of Maruti, it is in effect selling an asset. The receipts from the sale would go under capital account. On the other hand, if the government gives someone a loan from which it expects to receive interest, that expenditure would go under the capital account.
All receipts and expenditure that liquidate or create an asset would in general be under capital account. For instance, if the government sells shares (disinvests) in public sector companies, like it did in the case of Maruti, it is in effect selling an asset. The receipts from the sale would go under capital account. On the other hand, if the government gives someone a loan from which it expects to receive interest, that expenditure would go under the capital account.
In respect of all the funds the
government has to prepare a revenue budget (detailing revenue receipts and
revenue expenditure) and a capital budget (capital receipts and capital
expenditure). The consolidated fund is the key to the budget.
The revenue account of the
consolidated fund is split into two parts, receipts and disbursements - simply,
income and expenditure. Receipts are broadly tax revenue, non-tax revenue and
grants-in-aid and contributions. The important tax revenue items are listed
below.
Corporation Tax: Tax on profits of companies.
Taxes on Income other than corporation tax: Income tax paid by non-corporate assesses, individuals, for instance.
Taxes on Income other than corporation tax: Income tax paid by non-corporate assesses, individuals, for instance.
Fringe benefit tax (FBT):
The taxation of perquisites - or fringe benefits - provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax. It was introduced in Budget 2005-06.
The taxation of perquisites - or fringe benefits - provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax. It was introduced in Budget 2005-06.
Securities transaction tax (STT):
Sale of any asset (shares, property) results in loss or profit. Depending on the time the asset is held, such profits and losses are categorised as long-term or short-term capital gain/loss. In Budget 2004-05, the government abolished long-term capital gains tax on shares (tax on profits made on sale of shares held for more than a year) and replaced it with STT. It is a kind of turnover tax where the investor has to pay a small tax on the total consideration paid / received in a share transaction.
Sale of any asset (shares, property) results in loss or profit. Depending on the time the asset is held, such profits and losses are categorised as long-term or short-term capital gain/loss. In Budget 2004-05, the government abolished long-term capital gains tax on shares (tax on profits made on sale of shares held for more than a year) and replaced it with STT. It is a kind of turnover tax where the investor has to pay a small tax on the total consideration paid / received in a share transaction.
Banking cash transaction tax (BCTT):
Introduced in Budget 2005-06, BCTT
is a small tax on cash withdrawal from bank exceeding a particular amount in a
single day. The basic idea is to curb the black economy and generate a record
of big cash transactions.
Customs:
Taxes imposed on imports. While revenue is an important consideration, Customs duties may also be levied to protect the domestic industry or sector .
Taxes imposed on imports. While revenue is an important consideration, Customs duties may also be levied to protect the domestic industry or sector .
Union Excise Duty:
Duties imposed on goods made in
India.
Service Tax:
It
is a tax on services rendered. Telephone bill, for instance, attracts a service
tax.
Direct Tax
Traditionally, these are taxes where the burden of tax falls on the person on whom it is levied. These are largely taxes on income or wealth. Income tax (on corporates and individuals), FBT, STT and BCTT are direct taxes.
Traditionally, these are taxes where the burden of tax falls on the person on whom it is levied. These are largely taxes on income or wealth. Income tax (on corporates and individuals), FBT, STT and BCTT are direct taxes.
Indirect Tax
In case of indirect taxes, the incidence of tax is usually not on the person who pays the tax. These are largely taxes on expenditure and include Customs, excise and service tax.
In case of indirect taxes, the incidence of tax is usually not on the person who pays the tax. These are largely taxes on expenditure and include Customs, excise and service tax.
Non-tax revenue
The most important receipts under this head are interest payments (received on loans given by the government to states, railways and others) and dividends and profits received from public sector companies.
The most important receipts under this head are interest payments (received on loans given by the government to states, railways and others) and dividends and profits received from public sector companies.
Grants-in-aid and contributions
The third receipt item in the revenue account is relatively small grants-in-aid and contributions. These are in the nature of pure transfers to the government without any repayment obligation.
The third receipt item in the revenue account is relatively small grants-in-aid and contributions. These are in the nature of pure transfers to the government without any repayment obligation.
Revenue Deficit
The excess of disbursements over
receipts on revenue account is called revenue deficit. This is an important
control indicator. All expenditure on revenue account should ideally be met
from receipts on revenue account; the revenue deficit should be zero.
When revenue disbursement exceeds receipts, the government would have to borrow. Such borrowing is considered regressive as it is for consumption and not for creating assets. It results in a greater proportion of revenue receipts going towards interest payment and eventually, a debt trap.
When revenue disbursement exceeds receipts, the government would have to borrow. Such borrowing is considered regressive as it is for consumption and not for creating assets. It results in a greater proportion of revenue receipts going towards interest payment and eventually, a debt trap.
Receipts in the capital account of
the consolidated fund are grouped under three broad heads - public debt,
recoveries of loans and advances, and miscellaneous receipts.
Public debt:
Public
debt receipts and public debt disbursals are borrowings and repayments during
the year, respectively.
Public debt can be split into internal (money borrowed within the country) and external (funds borrowed from non-Indian sources). Internal debt comprises treasury bills, market stabilisation schemes, ways and means advance, and securities against small savings.
Public debt can be split into internal (money borrowed within the country) and external (funds borrowed from non-Indian sources). Internal debt comprises treasury bills, market stabilisation schemes, ways and means advance, and securities against small savings.
Treasury bills (T-bills):
These are bonds (debt securities)
with maturity of less than a year. These are issued to meet short-term mismatches
in receipts and expenditure. Bonds of longer maturity are called dated
securities.
Market stabilisation scheme:
The scheme was launched in April
2004 to strengthen RBI's ability to conduct exchange rate and monetary
management. These securities are issued not to meet the government's
expenditure but to provide RBI with a stock of securities with which it can
intervene in the market for managing liquidity.
Ways and means advance (WMA):
One of RBI's roles is to serve as
banker to both central and state governments. In this capacity, RBI provides
temporary support to tide over mismatches in their receipts and payments in the
form of ways and means advances.
Securities against small savings:
The government meets a small part of
its loan requirement by appropriating small savings collection by issuing
securities to the fund.
Miscellaneous receipts: These are receipts from disinvestment in public sector
undertakings. Capital account receipts of the consolidated fund - public debt,
recoveries of loans and advances, etc.
Central plan:
Central or annual plans are
essentially Five Year Plans broken down into annual instalments. Through these
plans, the government achieves the objectives of the Five Year Plans. The
central plan's funding is split almost evenly between government support (from
the budget) and internal and extra budgetary resources of public enterprises.
The government's support to the central plan is called budget support.
Plan expenditure: This is essentially the budget
support to the central plan and the central assistance to state and union
territory plans. Like all budget heads, this is also split into revenue and
capital components.
Non-plan expenditure: This is largely the revenue expenditure of the government. The biggest items of expenditure are interest payments, subsidies, salaries, defence and pension. The capital component of the non-plan expenditure is relatively small with the largest allocation going to defence. Defence expenditure is non-plan expenditure.
Non-plan expenditure: This is largely the revenue expenditure of the government. The biggest items of expenditure are interest payments, subsidies, salaries, defence and pension. The capital component of the non-plan expenditure is relatively small with the largest allocation going to defence. Defence expenditure is non-plan expenditure.
Fiscal Deficit:
When the government's non-borrowed receipts fall short of its entire expenditure, it has to borrow money from the public to meet the shortfall. The excess of total expenditure over total non-borrowed receipts is called the fiscal deficit.
When the government's non-borrowed receipts fall short of its entire expenditure, it has to borrow money from the public to meet the shortfall. The excess of total expenditure over total non-borrowed receipts is called the fiscal deficit.
Primary deficit:
The revenue expenditure includes interest payments on government's earlier borrowings. The primary deficit is the fiscal deficit less interest payments. A shrinking primary deficit indicates progress towards fiscal health.
The revenue expenditure includes interest payments on government's earlier borrowings. The primary deficit is the fiscal deficit less interest payments. A shrinking primary deficit indicates progress towards fiscal health.
FRBM Act:
Enacted in 2003, Fiscal Responsibility and Budget Management Act require the elimination of revenue deficit by 2008-09. Hence, from 2008-09, the government will have to meet all its revenue expenditure from its revenue receipts. Any borrowing would only be to meet capital expenditure. The Act mandates a 3% limit on the fiscal deficit after 2008-09.
Enacted in 2003, Fiscal Responsibility and Budget Management Act require the elimination of revenue deficit by 2008-09. Hence, from 2008-09, the government will have to meet all its revenue expenditure from its revenue receipts. Any borrowing would only be to meet capital expenditure. The Act mandates a 3% limit on the fiscal deficit after 2008-09.
Value-Added Tax (VAT) and GST:
VAT helps avoid cascading of taxes as a product passes through different stages of production/value addition. The tax is based on the difference between the value of the output and inputs used to produce it. The aim is to tax a firm only for the value added by it to the inputs it is using for manufacturing its output and not the entire input cost. VAT brings in transparency to commodity taxation.
VAT helps avoid cascading of taxes as a product passes through different stages of production/value addition. The tax is based on the difference between the value of the output and inputs used to produce it. The aim is to tax a firm only for the value added by it to the inputs it is using for manufacturing its output and not the entire input cost. VAT brings in transparency to commodity taxation.
CESS:
This is an additional levy on the basic tax liability. Governments resort to cess for meeting specific expenditure. For instance, both corporate and individual income is at present subject to an education cess of 2% to finance secondary and higher education.
This is an additional levy on the basic tax liability. Governments resort to cess for meeting specific expenditure. For instance, both corporate and individual income is at present subject to an education cess of 2% to finance secondary and higher education.
EXPORT DUTY:
This is a tax levied on exports. In most instances, the object is not revenue , but to discourage exports of certain items.
This is a tax levied on exports. In most instances, the object is not revenue , but to discourage exports of certain items.
FINANCE BILL:
The proposals of government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted to Parliament through this bill.
The proposals of government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted to Parliament through this bill.
FINANCIAL INCLUSION:
Financial inclusion is universalising access to basic financial services (to have a bank account , timely and adequate credit) at an affordable cost.
Financial inclusion is universalising access to basic financial services (to have a bank account , timely and adequate credit) at an affordable cost.
MINIMUM ALTERNATE TAX (MAT):
This tax on corporate profits was introduced in 1996-97 and has been modified since. If the tax payable by a company is less than 10% of its book profits, after availing of all eligible deductions , then 10% of book profits is the minimum tax payable.
This tax on corporate profits was introduced in 1996-97 and has been modified since. If the tax payable by a company is less than 10% of its book profits, after availing of all eligible deductions , then 10% of book profits is the minimum tax payable.
PASS-THROUGH STATUS:
A pass-through status helps avoid double taxation. Mutual funds, for instance , enjoy pass-through status. The income earned by the funds is tax free. Since mutual funds' income is distributed to unitholders, who are in turn taxed on their income from such investments , any taxation of mutual funds would amount to double taxation.
A pass-through status helps avoid double taxation. Mutual funds, for instance , enjoy pass-through status. The income earned by the funds is tax free. Since mutual funds' income is distributed to unitholders, who are in turn taxed on their income from such investments , any taxation of mutual funds would amount to double taxation.
SUBVENTION:
It refers to a grant of money in aid
or support, mostly by the government. In the Indian context, for instance, the
government sometimes asks institutions to provide loans to farmers at below
market rates. The loss is usually made good through subventions.
SURCHARGE:
As the name suggests, this is an additional charge or tax. A surcharge of 10% on a tax rate of 30% effectively raises the combined tax burden to 33%. In the case of individuals earning a taxable salary of more than Rs 10 lakh a surcharge of 10% is levied on income in excess of Rs 10 lakh. Corporate income is levied a flat surcharge of 10% in the case of domestic companies and 2.5% for foreign companies. Companies with revenue less than Rs 1 crore do not have ..
As the name suggests, this is an additional charge or tax. A surcharge of 10% on a tax rate of 30% effectively raises the combined tax burden to 33%. In the case of individuals earning a taxable salary of more than Rs 10 lakh a surcharge of 10% is levied on income in excess of Rs 10 lakh. Corporate income is levied a flat surcharge of 10% in the case of domestic companies and 2.5% for foreign companies. Companies with revenue less than Rs 1 crore do not have ..
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