GOVERNMENT BUDGETING GS PAPER 3
The budget process in India, like in most other countries, comprises four distinct phases:
i) Budget formulation- preparation of estimates of expenditure and receipts for the ensuing financial year;
ii) Budget enactment- approval of the proposed Budget by the Legislature through the enactment of Finance Bill and Appropriation Bill;
iii) Budget execution- enforcement of the provisions in the Finance Act and Appropriation Act by the government—collection of receipts and making disbursements for various services as approved by the Legislature;
iv) Legislative review of budget implementation- audits of government’s financial operations on behalf of the Legislature.(CAG)
Process commences in August- September
• By convention, the Union Budget for next financial year is presented in Lok Sabha by the finance minister on the last working day of February.
• However, the process of budget formulation starts in the last week of August or the first fortnight of September.
• To get the process started, the Budget Division in the Department of Economic Affairs under the Ministry of Finance issues the annual budget circular to all the Union government ministries/departments around August- September.
• The Circular contains detailed instructions for these ministries/ departments on the form and content of the statement of budget estimates to be prepared by them.
Three kinds of figures in a Budget
1. Budget Estimates,
2. Revised Estimates
3. Actuals.
• Let’s understand this in the context of Union budget 2013-14, which was presented, as usual, on 28th of February 2013 by the Finance Minister, on the floor of LokSabha.
• The process of its formulation would have got started in August 2012 through issuance of budget circular of the Budget Division and this process would have continued till February 2013
• The approval of Parliament is sought for the estimated receipts/expenditures for 2013-14, which would be called budget estimates.
• At the same time, the Union government, in its budget for 2013-14, would also present revised estimates for the ongoing financial year 2012-13.
• The government would not seek approval from Parliament of revised estimates of 2012-13; but, these revised estimates allow the government to reallocate its funds among various ministries based on the implementation of the budget for 2012-13 during the first six months of financial year 2012-13.
• Finally, ministries also report their actual receipts and expenditures for the previous financial year 2011-12. Hence, the Union budget for 2013-14 consists of budget estimates for 2013-14, revised estimates for 2012-13, and actual expenditures and receipts of 2011-12.
Planning Commission comes in
• The ministries would provide budget estimates for plan expenditure for budget estimates for the next financial year, only after they have discussed their respective plan schemes with the Central Planning Commission.
• The Planning Commission depends on the finance ministry to first arrive at the size of the gross budgetary support, which would be provided in the budget for the next annual plan of the Union government.
• In principle, the size of each annual plan should be derived from the approved size of the overall Five-Year Plan (12th Five-Year Plan, 2012-13 to 2016-17, in the present instance).
• However, in practice, the size of the gross budgetary support for an annual plan also depends on the expected availability of funds with the finance ministry for the next financial year.
Reducing deficit, a priority
(Please Read the concept of deficit budgeting and related prolems, and FRBMA, have been asked in pre and mains already, since the new syllabus specifically mentions Government Budgeting these are now hot topics.)
• In the past few years, the finance ministry has been vociferously arguing for reduction of fiscal deficit and revenue deficit of the Union government, citing the targets set by the Fiscal Responsibility and Budget Management Act and its rules.
• Hence, presently, the aspirations of the Planning Commission and Union government ministries with regard to spending face the legal hurdle of this Act, which has made it mandatory for the Union government to show the revenue deficit as nil and the fiscal deficit as less than 3 per cent of GDP.
• This means new borrowing of the government in a financial year cannot exceed 3 per cent of the country’s GDP for that year.
Final stages of budget preparation
• During the final stage of budget preparation, the revenue-earning ministries of the Union government providethe estimates for their revenue receipts in the current fiscal year (revised estimates) and next fiscal year(budget estimates) to the finance ministry.
• Subsequently, usually in the month of January, more attentionis paid to finalisation of the estimated receipts.
• With an idea about the total requirement of resources tomeet expenditures in the next fiscal year, the finance ministry focuses on the revenue receipts for the nextfiscal.
• At this stage of budget preparation, the finance minister examines the budget proposals prepared by theministry and makes changes in them, if required.
• The finance minister consults the prime minister, and alsobriefs the Union Cabinet, about the budget at this stage.
• If there is any conflict between any ministry and thefinance ministry with regard to the budget, the matter is supposed to be resolved by the Cabinet.
Consultations with various stakeholders crucial
• In the run-up to Union Budget each year, the Finance Minister holds pre-budget consultations with relevantstakeholders.
• The FM also holds consultations with Finance Ministers of States/Union Territories as wellas Trade and Industry representatives.
• This has great significance for the process of budget formulation asit helps the FM take decisions on suitable fiscal policy changes to be announced during the budget.
• For this year’s budget, representatives from the agriculture sector, various trade unions, economists, bankingand financial institutions and also social sector groups participated in these consultations in January 2013.
• Among others, a delegation of People’s Budget Initiative also met Finance Ministry officials and shared thePeople’s Charter of Demands in the month of January 2013. But this year too, like in previous years, theprocess started late.
• Desired changes in expenditure programmes and policies can be influenced only if theconsultations are begun earlier, preferably in October.
Consolidation of budget data
• As the last steps, the budget division in the finance ministry consolidates all figures to be presented in thebudget and prepares the final budget documents.
• The National Informatics Centre (NIC) helps the budgetdivision in the process of consolidation of the budget data, which has been fully computerised.
• At the endof this process, the finance minister takes the permission of the president of India for presenting the Unionbudget to Parliament.
• It would be useful to point out that while the second and the third stage in the budget cycle of our countryare reasonably transparent, the first stage of actual budget preparation cannot be said to be open. The processis rather carried out behind closed doors.
BUDGET IN PARLIAMENT
With the emergence of Welfare State, Governments have come to look after virtuallyeverysphere of human life. They have to perform manifold functions from maintaining law and order, protecting their territories to implementation of plans for economic and social betterment. Besides, they provide a variety of social services like education, health, employment and housing to the people. Needless to say, Government require adequate resources to discharge these functions effectively. Where is this money to come from and who is to sanction the funds? The necessary funds are mobilised from the country’s resources by way of taxes both direct and indirect, loans both long-term and short-term, to meet the Governmental expenditure. In India, the principal sources of revenue are customs and excise duties and Income-tax on individuals and companies.
Need for Budget
It is not as if the Government can tax, borrow and spend money the way it likes. Since there is a limit to the resources, the need for proper budgeting arises to allocate scarce resources to various Governmental activities. Everyitem of expenditure has to be well thought out and total outlay worked out for a specific period. Prudent spending is essential for the stability of a Government and proper earnings are a pre-requisite to wise spending. Hence, planned expenditure and accurate foresight of earnings are sine-qua-non of sound Governmental finance.
Parliamentary Control over Finance
Ours is a Parliamentary system of Government based on Westminster model. The Constitution has, therefore, vested the power over the purse in the hands of chosen representatives of the people thus sanctifying the principle ‘no taxation without representation’. Preparation of Budget for the approval of the Legislature is a Constitutional obligation of the Government both at the Centre and the State levels. Legislative prerogative over taxation, legislative control over expenditure and executive initiative in financial matters are some of the fundamental principles of the system of Parliamentary financial control.
There are specific provisions in the Constitution of India incorporating these tenets. For example, article 265 providesthat ‘no tax shall be levied or collected except by authority of law’; no expenditure can be incurred except with the authorisation of the Legislature (article 266); and President shall, in respect of every financial year, cause to be laid before Parliament, Annual Financial Statement (article 112). These provisions of our Constitution make the Government accountable to Parliament.
The Budget
The ‘Annual Financial Statement’, laid before both the Houses of Parliament constitutes the Budget of the Union Government. This statement takes into account a period of one financial year. The financial year commences in India on 1st April each year. The statement embodies the estimated receipts and expenditure of the Government of India for the financial year.
Demands for Grants
The estimates of expenditure included in the Budget and required to be voted by Lok Sabha are in the form of Demands for Grants. These Demands are arranged Ministry-wise and a separate Demand for each of the major services is presented. Each Demand contains first a statement of the total grant and then a statement of the detailed estimate divided into items.
Railway Budget
The Budget of the Indian Railways is presented separately to Parliament and dealt with separately, although the receipts and expenditure of the Railways form part of the Consolidated Fund of India and the figures relating to them are included in the ‘Annual Financial Statement’.
Presentation
• In India, the Budget is presented to Parliament on such date as is fixed by the President.
• The Budget speech of the Finance Minister is usually in two parts.
• Part A deals with general economic survey of the country while
• Part B relates to taxation proposals.
• General Budget was earlier being presented at 5 P.M. on the last working day of February, but since 1999 the General Budget is being presented at 11 A.M. on the last working day of February, i.e. about a month before the commencement of the Financial year except in the year when General Elections to Lok Sabha are held.
• In an election year, Budget may be presented twice—first to secure Vote on Account for a few months and later in full.
• The General Budget is presented in Lok Sabha by the Minister of Finance. He makes a speech introducing the Budget and it is only in the concluding part of his speech that the proposals for fresh taxation or for variations in the existing taxes are disclosed by him.
• The ‘Annual Financial Statement’ is laid on the Table of Rajya Sabha at the conclusion of the speech of the Finance Minister in Lok Sabha.
Budget Documents
• Alongwith the ‘Annual Financial Statement’ Government presents the following documents:
• an Explanatory Memorandum briefly explaining the nature of receipts and expenditure during the current year and the next year and the reasons for variations in the estimates for the two years,
• the Books of Demands showing the provisions Ministry-wise and a separate Demand for each Department and service of the Ministry.
• The Finance Bill which deals with the taxation measures proposed by Government is introduced immediately after the presentation of Budget. It is accompanied by a memorandum explaining the provisions of the Bill and their effect on the finances of the country.
Vote on Account
• The discussion on the Budget begins a few days after its presentation. In a democratic set-up, Government is anxious to give Parliament full opportunity to discuss the budgetary provisions and the various proposals for taxation.
• Since Parliament is not able to vote the entire budget beforethe commencement of the new financial year, the necessity to keep enough finance at the disposal of Government in order to allow it to run the administration of the country remains.
• A special provision is, therefore, made for "Vote on Account" by which Government obtains the Vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year.
• Normally, the Vote on Account is taken for two months only. But during election year or when it is anticipated that the main Demands and Appropriation Bill will take longer time than two months, the Vote on Account may be for a period exceeding two months.
Discussion
• The Budget is discussed in two stages in Lok Sabha. First, there is the General Discussion on the Budget as a whole. This lasts for about 4 to 5 days. Only the broad outlines of the Budget and the principles and policies underlying it are discussed at this stage.
• Consideration of the Demands by Standing Committees of Parliament: After the first stage of General Discussion on both Railway as well as General Budget is over, the House is adjourned for a fixed period.
• During this period, the Demands for Grants of various Ministries/Departments including Railways are considered by concerned Standing Committees (Rule 331G).
• These Committees are required to make their reports to the House within specified period without asking for more time.
• The system of consideration of Demands for Grants by the Standing Committees was introduced from the Budget for the year 1993-94.
• The Standing Committee consists of 45 Members, 30 from Lok Sabha and 15 from Rajya Sabha. The reports of the Standing Committees are of persuasive nature (Rule 331N).
• The report shall not suggest anything of the nature of cut motions.
• After the reports of the Standing Committees are presented to the House, the House proceeds to the discussion and Voting on Demands for Grants, Ministry-wise.
• The time for discussion and Voting of Demands for Grants is allocated by the Speaker in consultation with the Leader of the House. On the last day of the allotted days, the Speaker puts all the outstanding Demands to the Vote of the House. This device is popularly known as ‘guillotine’.
• Lok Sabha has the power to assent to or refuse to give assent to any Demand or even to reduce the amount of Grant sought by Government.
• In Rajya Sabha there is only a General Discussion on the Budget. It does not vote on the Demands for Grants.
• Only so much of the amount is subject to the vote of Lok Sabha as is not a "charged" expenditure on the Consolidated Fund of India.
• The "charged" expenditure includes the emoluments of the President and the salaries and allowances of the Chairman and Deputy Chairman of Rajya Sabha and the Speaker and Deputy Speaker of Lok Sabha, Judges of Supreme Court, Comptroller and Auditor General of India and certain other items specified in the Constitution of India.
• Discussion in Lok Sabha on ‘charged’ expenditure is permissible but such expenditure is not voted by the House. Members have full opportunity to criticise the budgetary provisions during the course of discussion as also to make suggestions for improving the financial position of thecountry.
Cut Motions
• Motions for reduction to various Demands for Grants are made in the form of Cut Motions seeking to reduce the sums sought by Government on grounds of economy or difference of opinion on matters of policy or just in order to voice a grievance.
Appropriation Bill
• After the General Discussion on the Budget proposals and Voting on Demands for Grants have been completed, Government introduces the Appropriation Bill. The Appropriation Bill is intended to give authority to Government to incur expenditure from and out of the Consolidated Fund of India. The procedure for passing this Bill is the same as in the case of other money Bills.
Finance Bill
• The Finance Bill seeking to give effect to the Government’s taxation proposals which is introduced in Lok Sabha immediately after the presentation of the General Budget, is taken up for consideration and passing after the Appropriation Bill is passed. However, certain provisions in the Bill relating to levy and collection of fresh duties or variations in the existing duties come into effect immediately on the expiry of the day on which the Bill is introduced by virtue of a declaration under the Provisional Collection of Taxes Act.
• Parliament has to pass the Finance Bill within 75 days of its introduction.
Supplementary/Excess Grants
• No expenditure in excess of the sums authorised by Parliament can be incurred without the sanction of Parliament. Whenever a need arises to incur extra expenditure, a Supplementary estimate is laid before Parliament.
• If any money has been spent on any service during a financial year in excess of the amounts granted for that service and for that year, the Minister of Finance/ Railways presents a Demand for Excess Grant. The procedure followed in Parliament in regard to Supplementary/Excess Grants is more or less the same as is adopted in the case of estimates included in the General Budget.
Budget of a State/Union Territory under President’s Rule
• Budget of a State under President’s rule is presented to Lok Sabha. The procedure followed in regard to the Budget of the Union Government is followed in the case of State Budget also with such variations or modifications, as the Speaker may make.
Budget : Concepts and Terminologies
Budget of a government is a comprehensivestatement ofgovernment finances relating to a particular year. Every Budget broadly consists of two parts-
1. Expenditure Budget
The amounts of intended expenditure by the Government in the next financial year are expressed in the Expenditure Budget. The entire Expenditure Budget can be divided into two distinctcategories, viz.
i) Capital Expenditure - those expenditures by the government that lead to an increase in the assets or a reduction in the liabilities of the government. It is however not necessary that the assets created should be productive or they should even be revenue generating. Only the charges towards the construction of the asset are counted as Capital expenditure, while the subsequent charges for its maintenance are considered as Revenue expenditure. Most capital expenditure is nonrecurring.- Examples of Capital Expenditure causing ‘increase in assets’: construction of a new Flyover, Union Govt. giving a Loan to a State Govt. - Examples o f Ca pital Expenditure causing ‘reduction of a liability’: Union Govt. repays the principal amountof a loan it had taken in the past
.ii) Revenue Expenditurethoseexpenditures by thegovernment that do not affectits asset-liability position.Most kinds of revenueexpenditures are seen asrecurring expenditures. Theentire amount of Grants givenby the Union Government to States is reported in theUnion Budget as Revenue Expenditure, even thougha part of those Grants get utilized by States for buildingSchools, Hospitals etc. This is so because the ownershipof the schools or hospitals built from the Central grantswould not be with the UnionGovernment.- Examples of RevenueExpenditure are: expenditureon Food Subsidy, Salaryof staff, procurement ofmedicines, procurementof text books, payment ofinterest, etc
Total government expenditurecan also be divided into anotherset of categories, viz
1. Plan ExpenditurePlan expenditure refers to government expenditure,which is meant for financingthe programmes/schemesformulated under the ongoing/previous five year Plan
2. Non-Plan ExpenditureExpenditures of thegovernment, which are notincluded under the PlanExpenditure are called NonPlan Expenditure. It includessome of the important types ofgovernment expenditure, eg:interest payments, pension,defence expenditure, spendingon law and order, spendingon legislature, subsidies,and salary of regular cadreteachers, doctors and other government officials.
2. Receipts Budget.
The Receipts Budget presents the information on how much theGovernment intends to collect asits financial resources for meetingits expenditure requirements andfrom which sources, in the nextfiscal year. This can also be divided into two categories
:i) Capital Receipts- those receipts that lead to a reduction in the assets or an increase in the liabilities of the government.- Capital Receipts that leadto a ‘reduction in assets’: Recoveries of Loans given bythe government and Earnings from Disinvestment;- Capital Receipts that lead toan ‘increase in liabilities’:Debt
.ii) Revenue Receipts- thosereceipts that don’t affect theasset-liability position ofthe government. RevenueReceipts comprise proceeds of Taxes (like, Income Tax,Corporation Tax, Customs, Excise, Service Tax, etc.)and Non-tax revenue of the government (like, Interestreceipts, Fees/ User Charges, and Dividend & Profits fromPSUs).
Government revenue through taxation can be divided into DirectTaxes and Indirect Taxes.
Direct Taxes: Those taxes forwhich the tax-burden cannot beshifted are called Direct Taxes.Examples of Direct Taxes are:
i) Corporation Tax This is atax levied on the income ofregistered companies in thecountry, whether national orforeign, under the Income TaxAct, 1961.
ii) Personal Income tax- Thisis a tax on the income ofindividuals, firms etc. otherthan Companies, under theIncome Tax Act, 1961. Thishead also includes otherTaxes, mainly the ‘SecuritiesTransaction Tax’, which islevied on transaction in listsecurities undertaken on stockexchanges and in units ofmutual funds
iii) Wealth Tax- This is a tax levied on the benefits derived from the ownership of property, under the Wealth Tax Act,1957. Wealth tax has virtuallybeen abolished in India.
Indirect Taxes: Those taxesfor which the tax-burden canbe shifted are called IndirectTaxes. Any person, who directlypays this kind of a tax to theGovernment, need not bear theburden of that particular tax; he/she can ultimately shift the taxburdento other persons laterthrough business transactions ofgoods/ services. Indirect tax onany good or service affects therich and the poor alike!
Unlikeindirect taxes, direct taxes arelinked to the tax-payee’s ability topay and hence are considered to beprogressive. Examples of IndirectTaxes are:
i) Customs Duties-In this,the taxable component isimport into or export from thecountry.
ii) Excise Duties: It is a typeof tax levied on those goods,which are manufactured inthe country and are meant fordomestic consumption. It is atax on manufacturing, whichis paid by the manufacturer,but he passes this burden onto the consumers.
iii) Sales Tax: It is levied onthe sale of a commodity,which is produced/importedand being sold for the firsttime. If the product is soldsubsequently without beingprocessed further, it is exemptfrom sales tax. Before theintroduction of VAT, salestax used to be levied underthe authority of both CentralLegislation (Central SalesTax) and State Government’sLegislation (Sales Tax)
iv) Service Tax: It is a tax leviedon services provided by aperson and the responsibilityof payment of the tax iscast on the service provider.However this tax can berecovered by the serviceprovider from the servicereceiver in course of his/herbusiness transactions
.v) Value Added Tax (VAT): VATis a multi-stage tax, intendedto tax every stage of sale ofa good where some valuehas been added to the rawmaterials; but taxpayers doreceive credit for tax alreadypaid on the raw materials inearlier stages.
Debt and DeficitA Debt is a kind of receipt thatnecessarily leads to an increaseof the government’s liabilities.The government incurs a Debtonly for meeting the gap createdby excess of its expenditure overits receipts for that year, which iscalled Deficit.
Fiscal DeficitIt is the gap between thegovernment’s total Expenditure(including loans net of repayments)and its Total Receipts (excluding new debt to be taken). Thus Fiscal Deficit for a year indicates the borrowing to be made by the government that year.
Revenue Deficit The gap between Total RevenueExpenditure of the Governmentand its Total Revenue Receipts iscalled the Revenue Deficit
Distriution of financial resources between the Centreand the StatesA Finance Commission is setup every five years to recommendmeasures for sharing o resourcesbetween the Centre and theStates, mainly pertaining to theTax Revenue collected by theCentral Government. Presently the recommendations made by the 13th Finance Commission are in effect (from 2010-11 to 2014-15), whereby 32 percent of the shareable /divisible pool of Central tax revenue is transferred to States every year and the Centre retains the remaining amount for the Union Budget.
Tax-GDP Ratio Gross Domestic Product (GDP) is an indicator of the size of a country’s economy. In order to assess the extent of government’s policy interventions in the economy, some of the important fiscal parameters, like, total expenditure by the government, tax revenue, deficit etc. are expressed as a proportion of the GDP. Accordingly, a country’s tax-GDP ratio helps us understand how much tax revenue is being collected by the government as compared to the overall size of the economy. A higher tax to GDP ratio in a country is a positive sign meaning that the government is collecting a decent amount of tax revenue as compared to the size of its economy.
What is Fiscal Responsibility and Budget Management Act ?
• The Fiscal Responsibility and Budget Management (FRBM) Act was enacted by the Parliament in 2003.
• Its objective is to institutionalize fiscal discipline,reduce fiscal deficit and improvemacro economic management.
• This law aims at promotingfiscal stability for the country ona long-term basis.
• It emphasizes a transparent fiscal managementsystem and a more equitabledistribution of debts over the years.
• This law also gives flexibility tothe Reserve Bank of India toundertake monetary policy tocontrol inflation.
• Government needs resourcesfor funding various kinds ofdevelopmental schemes androutine expenditures.
• Resourcesare raised through taxes andborrowing.
• The governmentcan raise funds by borrowingfrom the Reserve Bank of India,financial institutions or from thepublic by floating bonds.
• Fiscaldeficit is the total expenditureminus the revenue receipt, loan recoveries and receipts fromdisinvestment etc.
• It is a measureof the government borrowing ina year.
• However, uncontrolled fiscaldeficit is considered harmful forthe health of economy.
• FRBM Actwas notified in 2004 in responseto the need felt to curb largefiscal deficit.
• The FRBM rulesspecify annual reduction targetsfor fiscal indicators.
• Originally,the act envisaged revenue deficitto be reduced to nil in five yearsbeginning 2004-05.
• Fiscal deficitwas required to be reduced to3 percent of GDP by 2008-09.
• The Act also provides exceptionto the government in case ofnatural calamity and for nationalsecurity.
• The implantation of the act wasput on hold in 2007-08 due to globalfinancial crisis and the need forfiscal stimulus.
• There was a need forincreased government expenditureto create demand to fight off thefinancial downturn and hence thegovernment moved away fromthe path of fiscal consolidation forthis period.
• This law also prohibitsborrowing by government fromthe Reserve Bank of India andpurchase of primary issues ofcentral government securities after2006.
• The act asked the Centralgovernment to lay in Parliamentthree statements in one financialyear about the fiscal policy.
• Toenforce fiscal discipline at thestate level, the Twelfth financecommission provided for incentivesto states through conditional debtrestructuring and interest raterelief.
• In 2012, the FRBM was amendedand it was decided that the FRBMwould target effective revenuedeficit in place of revenue deficit.Effective revenue deficit excludescapital expenditure from revenuedeficit and thus gives space to thegovernment to spend on creation ofcapital assets.The critics of this law feel,it would curb the government’ssocial sector spending but there isno denying the fact that the needfor fiscal sustainability cannot beignored.
• The original document ofFRBM Act can be seen on: http://finmin.nic.in/law/frbmact2003.pdf.
What is GST?
• The Goods & Services Tax(GST) is an indirect tax reformmeasure which will replace all of theindirect taxes such as Central SalesTax, Octroi, excise duty, ServiceTax and Value Added Tax (VAT) atthe central and state levels.
• Indiawill have a 'dual GST' system wherestates and the centre both wouldhave power to levy taxes on goodsand services.
• Exports would bean exception and GST will not beimposed on them.
• Under the GST,no distinction is made betweengoods and services for purpose oflevying tax.
• GST is a value addedtax where the person paying taxon his output is also entitled to getinput tax credit on the tax paid onits inputs.
• The idea of GST was firstproposed in the budget speechof 2006-07 which had set outthe deadline of 2010 for itsintroduction in the country.
• Toimplement such a tax regime aconstitutional amendment wouldbe needed as the Centre as wellthe States are involved in thisissue.
• The government expectsthat the legislative process for theenactment of the GST would bestarted in the next few months.
• TheFinance Minister has expressed thehope that the two tax reforms – theGST and Direct Tax Code (DTC)will be implemented soon.
• The objective of GST is tomake the taxation simple and tobroaden the tax base.
• It will alsohelp create a common marketthroughout the length and breadthof the country.
• The GST has theadvantage of redistributing theburden of taxation equitablybetween manufacturing andservices.
• The rate of taxation isalso likely to come down with theintroduction of GST.
• Goods ofbasic importance will have lowertax rates.
• Better compliance andincreased tax collection will boostthe tax to GDP ratio.
• Economicgrowth is also likely to get animpetus through GST.
• A reportof National Council of AppliedEconomic Research has estimatedan increase of 0.9 percent to 1.7percent in the economic growthwith the implementation ofGST.
• Exports will also increaseaccording to this study.
The Direct Taxes Code (DTC)
The Direct Taxes Code (DTC)is said to replace the existing Indian Income Tax Act, 1961. However this bill has never been considered.
Highlights of the Direct Taxes Code bill
• Common threshold Income Tax limits and women proposed at 200,000 Rupees per annum (proposed), up from 180,000
• 10 per cent tax on annual income between 200,000-500,000; 20 per cent up to 1 million, 30 per cent above 1 million rupees
• Tax burden at highest level will come down by Rs. 41,040 annually
• Proposal to raise tax exemption for senior citizens to Rs. 250,000 from 240,000 lakh currently.(NOTE:- Union budget 2011-12 already has proposed it.)
• Corporate Tax to remain at 30 per cent but without surcharge and cess.
• MAT to be 20 per cent of book profit, up from 18.5 per cent.
• Proposal to levy dividend distribution tax at 15 per cent.
• Exemption for investment in approved funds and insurance schemes proposed at Rs. 150,000 annually, against 120,000 currently
• Proposed bill has 319 sections and 22 schedules against 298 sections and 14 schedules in existing IT Act.
• Once enacted, DTC will replace archaic Income Tax Act.
• However, many provisions in Income Tax Act will be a part of DTC as well.
• Mutual Funds/ULIP dropped from 80C deductions : Income from equity-oriented mutual funds or ULIP shall be subject to tax @ 5%
• Fringe benefits tax will be charged to the employee rather than the employer.
•
Submitted By :Neeraj Gaur
References
1. Yojna March 2013
2. Our Parliament by Subhash Kashyap
3. Direct Tax Codes Copied From Wikipedia and image from EconomicTimes.com
The budget process in India, like in most other countries, comprises four distinct phases:
i) Budget formulation- preparation of estimates of expenditure and receipts for the ensuing financial year;
ii) Budget enactment- approval of the proposed Budget by the Legislature through the enactment of Finance Bill and Appropriation Bill;
iii) Budget execution- enforcement of the provisions in the Finance Act and Appropriation Act by the government—collection of receipts and making disbursements for various services as approved by the Legislature;
iv) Legislative review of budget implementation- audits of government’s financial operations on behalf of the Legislature.(CAG)
Process commences in August- September
• By convention, the Union Budget for next financial year is presented in Lok Sabha by the finance minister on the last working day of February.
• However, the process of budget formulation starts in the last week of August or the first fortnight of September.
• To get the process started, the Budget Division in the Department of Economic Affairs under the Ministry of Finance issues the annual budget circular to all the Union government ministries/departments around August- September.
• The Circular contains detailed instructions for these ministries/ departments on the form and content of the statement of budget estimates to be prepared by them.
Three kinds of figures in a Budget
1. Budget Estimates,
2. Revised Estimates
3. Actuals.
• Let’s understand this in the context of Union budget 2013-14, which was presented, as usual, on 28th of February 2013 by the Finance Minister, on the floor of LokSabha.
• The process of its formulation would have got started in August 2012 through issuance of budget circular of the Budget Division and this process would have continued till February 2013
• The approval of Parliament is sought for the estimated receipts/expenditures for 2013-14, which would be called budget estimates.
• At the same time, the Union government, in its budget for 2013-14, would also present revised estimates for the ongoing financial year 2012-13.
• The government would not seek approval from Parliament of revised estimates of 2012-13; but, these revised estimates allow the government to reallocate its funds among various ministries based on the implementation of the budget for 2012-13 during the first six months of financial year 2012-13.
• Finally, ministries also report their actual receipts and expenditures for the previous financial year 2011-12. Hence, the Union budget for 2013-14 consists of budget estimates for 2013-14, revised estimates for 2012-13, and actual expenditures and receipts of 2011-12.
Planning Commission comes in
• The ministries would provide budget estimates for plan expenditure for budget estimates for the next financial year, only after they have discussed their respective plan schemes with the Central Planning Commission.
• The Planning Commission depends on the finance ministry to first arrive at the size of the gross budgetary support, which would be provided in the budget for the next annual plan of the Union government.
• In principle, the size of each annual plan should be derived from the approved size of the overall Five-Year Plan (12th Five-Year Plan, 2012-13 to 2016-17, in the present instance).
• However, in practice, the size of the gross budgetary support for an annual plan also depends on the expected availability of funds with the finance ministry for the next financial year.
Reducing deficit, a priority
(Please Read the concept of deficit budgeting and related prolems, and FRBMA, have been asked in pre and mains already, since the new syllabus specifically mentions Government Budgeting these are now hot topics.)
• In the past few years, the finance ministry has been vociferously arguing for reduction of fiscal deficit and revenue deficit of the Union government, citing the targets set by the Fiscal Responsibility and Budget Management Act and its rules.
• Hence, presently, the aspirations of the Planning Commission and Union government ministries with regard to spending face the legal hurdle of this Act, which has made it mandatory for the Union government to show the revenue deficit as nil and the fiscal deficit as less than 3 per cent of GDP.
• This means new borrowing of the government in a financial year cannot exceed 3 per cent of the country’s GDP for that year.
Final stages of budget preparation
• During the final stage of budget preparation, the revenue-earning ministries of the Union government providethe estimates for their revenue receipts in the current fiscal year (revised estimates) and next fiscal year(budget estimates) to the finance ministry.
• Subsequently, usually in the month of January, more attentionis paid to finalisation of the estimated receipts.
• With an idea about the total requirement of resources tomeet expenditures in the next fiscal year, the finance ministry focuses on the revenue receipts for the nextfiscal.
• At this stage of budget preparation, the finance minister examines the budget proposals prepared by theministry and makes changes in them, if required.
• The finance minister consults the prime minister, and alsobriefs the Union Cabinet, about the budget at this stage.
• If there is any conflict between any ministry and thefinance ministry with regard to the budget, the matter is supposed to be resolved by the Cabinet.
Consultations with various stakeholders crucial
• In the run-up to Union Budget each year, the Finance Minister holds pre-budget consultations with relevantstakeholders.
• The FM also holds consultations with Finance Ministers of States/Union Territories as wellas Trade and Industry representatives.
• This has great significance for the process of budget formulation asit helps the FM take decisions on suitable fiscal policy changes to be announced during the budget.
• For this year’s budget, representatives from the agriculture sector, various trade unions, economists, bankingand financial institutions and also social sector groups participated in these consultations in January 2013.
• Among others, a delegation of People’s Budget Initiative also met Finance Ministry officials and shared thePeople’s Charter of Demands in the month of January 2013. But this year too, like in previous years, theprocess started late.
• Desired changes in expenditure programmes and policies can be influenced only if theconsultations are begun earlier, preferably in October.
Consolidation of budget data
• As the last steps, the budget division in the finance ministry consolidates all figures to be presented in thebudget and prepares the final budget documents.
• The National Informatics Centre (NIC) helps the budgetdivision in the process of consolidation of the budget data, which has been fully computerised.
• At the endof this process, the finance minister takes the permission of the president of India for presenting the Unionbudget to Parliament.
• It would be useful to point out that while the second and the third stage in the budget cycle of our countryare reasonably transparent, the first stage of actual budget preparation cannot be said to be open. The processis rather carried out behind closed doors.
BUDGET IN PARLIAMENT
With the emergence of Welfare State, Governments have come to look after virtuallyeverysphere of human life. They have to perform manifold functions from maintaining law and order, protecting their territories to implementation of plans for economic and social betterment. Besides, they provide a variety of social services like education, health, employment and housing to the people. Needless to say, Government require adequate resources to discharge these functions effectively. Where is this money to come from and who is to sanction the funds? The necessary funds are mobilised from the country’s resources by way of taxes both direct and indirect, loans both long-term and short-term, to meet the Governmental expenditure. In India, the principal sources of revenue are customs and excise duties and Income-tax on individuals and companies.
Need for Budget
It is not as if the Government can tax, borrow and spend money the way it likes. Since there is a limit to the resources, the need for proper budgeting arises to allocate scarce resources to various Governmental activities. Everyitem of expenditure has to be well thought out and total outlay worked out for a specific period. Prudent spending is essential for the stability of a Government and proper earnings are a pre-requisite to wise spending. Hence, planned expenditure and accurate foresight of earnings are sine-qua-non of sound Governmental finance.
Parliamentary Control over Finance
Ours is a Parliamentary system of Government based on Westminster model. The Constitution has, therefore, vested the power over the purse in the hands of chosen representatives of the people thus sanctifying the principle ‘no taxation without representation’. Preparation of Budget for the approval of the Legislature is a Constitutional obligation of the Government both at the Centre and the State levels. Legislative prerogative over taxation, legislative control over expenditure and executive initiative in financial matters are some of the fundamental principles of the system of Parliamentary financial control.
There are specific provisions in the Constitution of India incorporating these tenets. For example, article 265 providesthat ‘no tax shall be levied or collected except by authority of law’; no expenditure can be incurred except with the authorisation of the Legislature (article 266); and President shall, in respect of every financial year, cause to be laid before Parliament, Annual Financial Statement (article 112). These provisions of our Constitution make the Government accountable to Parliament.
The Budget
The ‘Annual Financial Statement’, laid before both the Houses of Parliament constitutes the Budget of the Union Government. This statement takes into account a period of one financial year. The financial year commences in India on 1st April each year. The statement embodies the estimated receipts and expenditure of the Government of India for the financial year.
Demands for Grants
The estimates of expenditure included in the Budget and required to be voted by Lok Sabha are in the form of Demands for Grants. These Demands are arranged Ministry-wise and a separate Demand for each of the major services is presented. Each Demand contains first a statement of the total grant and then a statement of the detailed estimate divided into items.
Railway Budget
The Budget of the Indian Railways is presented separately to Parliament and dealt with separately, although the receipts and expenditure of the Railways form part of the Consolidated Fund of India and the figures relating to them are included in the ‘Annual Financial Statement’.
Presentation
• In India, the Budget is presented to Parliament on such date as is fixed by the President.
• The Budget speech of the Finance Minister is usually in two parts.
• Part A deals with general economic survey of the country while
• Part B relates to taxation proposals.
• General Budget was earlier being presented at 5 P.M. on the last working day of February, but since 1999 the General Budget is being presented at 11 A.M. on the last working day of February, i.e. about a month before the commencement of the Financial year except in the year when General Elections to Lok Sabha are held.
• In an election year, Budget may be presented twice—first to secure Vote on Account for a few months and later in full.
• The General Budget is presented in Lok Sabha by the Minister of Finance. He makes a speech introducing the Budget and it is only in the concluding part of his speech that the proposals for fresh taxation or for variations in the existing taxes are disclosed by him.
• The ‘Annual Financial Statement’ is laid on the Table of Rajya Sabha at the conclusion of the speech of the Finance Minister in Lok Sabha.
Budget Documents
• Alongwith the ‘Annual Financial Statement’ Government presents the following documents:
• an Explanatory Memorandum briefly explaining the nature of receipts and expenditure during the current year and the next year and the reasons for variations in the estimates for the two years,
• the Books of Demands showing the provisions Ministry-wise and a separate Demand for each Department and service of the Ministry.
• The Finance Bill which deals with the taxation measures proposed by Government is introduced immediately after the presentation of Budget. It is accompanied by a memorandum explaining the provisions of the Bill and their effect on the finances of the country.
Vote on Account
• The discussion on the Budget begins a few days after its presentation. In a democratic set-up, Government is anxious to give Parliament full opportunity to discuss the budgetary provisions and the various proposals for taxation.
• Since Parliament is not able to vote the entire budget beforethe commencement of the new financial year, the necessity to keep enough finance at the disposal of Government in order to allow it to run the administration of the country remains.
• A special provision is, therefore, made for "Vote on Account" by which Government obtains the Vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year.
• Normally, the Vote on Account is taken for two months only. But during election year or when it is anticipated that the main Demands and Appropriation Bill will take longer time than two months, the Vote on Account may be for a period exceeding two months.
Discussion
• The Budget is discussed in two stages in Lok Sabha. First, there is the General Discussion on the Budget as a whole. This lasts for about 4 to 5 days. Only the broad outlines of the Budget and the principles and policies underlying it are discussed at this stage.
• Consideration of the Demands by Standing Committees of Parliament: After the first stage of General Discussion on both Railway as well as General Budget is over, the House is adjourned for a fixed period.
• During this period, the Demands for Grants of various Ministries/Departments including Railways are considered by concerned Standing Committees (Rule 331G).
• These Committees are required to make their reports to the House within specified period without asking for more time.
• The system of consideration of Demands for Grants by the Standing Committees was introduced from the Budget for the year 1993-94.
• The Standing Committee consists of 45 Members, 30 from Lok Sabha and 15 from Rajya Sabha. The reports of the Standing Committees are of persuasive nature (Rule 331N).
• The report shall not suggest anything of the nature of cut motions.
• After the reports of the Standing Committees are presented to the House, the House proceeds to the discussion and Voting on Demands for Grants, Ministry-wise.
• The time for discussion and Voting of Demands for Grants is allocated by the Speaker in consultation with the Leader of the House. On the last day of the allotted days, the Speaker puts all the outstanding Demands to the Vote of the House. This device is popularly known as ‘guillotine’.
• Lok Sabha has the power to assent to or refuse to give assent to any Demand or even to reduce the amount of Grant sought by Government.
• In Rajya Sabha there is only a General Discussion on the Budget. It does not vote on the Demands for Grants.
• Only so much of the amount is subject to the vote of Lok Sabha as is not a "charged" expenditure on the Consolidated Fund of India.
• The "charged" expenditure includes the emoluments of the President and the salaries and allowances of the Chairman and Deputy Chairman of Rajya Sabha and the Speaker and Deputy Speaker of Lok Sabha, Judges of Supreme Court, Comptroller and Auditor General of India and certain other items specified in the Constitution of India.
• Discussion in Lok Sabha on ‘charged’ expenditure is permissible but such expenditure is not voted by the House. Members have full opportunity to criticise the budgetary provisions during the course of discussion as also to make suggestions for improving the financial position of thecountry.
Cut Motions
• Motions for reduction to various Demands for Grants are made in the form of Cut Motions seeking to reduce the sums sought by Government on grounds of economy or difference of opinion on matters of policy or just in order to voice a grievance.
Appropriation Bill
• After the General Discussion on the Budget proposals and Voting on Demands for Grants have been completed, Government introduces the Appropriation Bill. The Appropriation Bill is intended to give authority to Government to incur expenditure from and out of the Consolidated Fund of India. The procedure for passing this Bill is the same as in the case of other money Bills.
Finance Bill
• The Finance Bill seeking to give effect to the Government’s taxation proposals which is introduced in Lok Sabha immediately after the presentation of the General Budget, is taken up for consideration and passing after the Appropriation Bill is passed. However, certain provisions in the Bill relating to levy and collection of fresh duties or variations in the existing duties come into effect immediately on the expiry of the day on which the Bill is introduced by virtue of a declaration under the Provisional Collection of Taxes Act.
• Parliament has to pass the Finance Bill within 75 days of its introduction.
Supplementary/Excess Grants
• No expenditure in excess of the sums authorised by Parliament can be incurred without the sanction of Parliament. Whenever a need arises to incur extra expenditure, a Supplementary estimate is laid before Parliament.
• If any money has been spent on any service during a financial year in excess of the amounts granted for that service and for that year, the Minister of Finance/ Railways presents a Demand for Excess Grant. The procedure followed in Parliament in regard to Supplementary/Excess Grants is more or less the same as is adopted in the case of estimates included in the General Budget.
Budget of a State/Union Territory under President’s Rule
• Budget of a State under President’s rule is presented to Lok Sabha. The procedure followed in regard to the Budget of the Union Government is followed in the case of State Budget also with such variations or modifications, as the Speaker may make.
Budget : Concepts and Terminologies
Budget of a government is a comprehensivestatement ofgovernment finances relating to a particular year. Every Budget broadly consists of two parts-
1. Expenditure Budget
The amounts of intended expenditure by the Government in the next financial year are expressed in the Expenditure Budget. The entire Expenditure Budget can be divided into two distinctcategories, viz.
i) Capital Expenditure - those expenditures by the government that lead to an increase in the assets or a reduction in the liabilities of the government. It is however not necessary that the assets created should be productive or they should even be revenue generating. Only the charges towards the construction of the asset are counted as Capital expenditure, while the subsequent charges for its maintenance are considered as Revenue expenditure. Most capital expenditure is nonrecurring.- Examples of Capital Expenditure causing ‘increase in assets’: construction of a new Flyover, Union Govt. giving a Loan to a State Govt. - Examples o f Ca pital Expenditure causing ‘reduction of a liability’: Union Govt. repays the principal amountof a loan it had taken in the past
.ii) Revenue Expenditurethoseexpenditures by thegovernment that do not affectits asset-liability position.Most kinds of revenueexpenditures are seen asrecurring expenditures. Theentire amount of Grants givenby the Union Government to States is reported in theUnion Budget as Revenue Expenditure, even thougha part of those Grants get utilized by States for buildingSchools, Hospitals etc. This is so because the ownershipof the schools or hospitals built from the Central grantswould not be with the UnionGovernment.- Examples of RevenueExpenditure are: expenditureon Food Subsidy, Salaryof staff, procurement ofmedicines, procurementof text books, payment ofinterest, etc
Total government expenditurecan also be divided into anotherset of categories, viz
1. Plan ExpenditurePlan expenditure refers to government expenditure,which is meant for financingthe programmes/schemesformulated under the ongoing/previous five year Plan
2. Non-Plan ExpenditureExpenditures of thegovernment, which are notincluded under the PlanExpenditure are called NonPlan Expenditure. It includessome of the important types ofgovernment expenditure, eg:interest payments, pension,defence expenditure, spendingon law and order, spendingon legislature, subsidies,and salary of regular cadreteachers, doctors and other government officials.
2. Receipts Budget.
The Receipts Budget presents the information on how much theGovernment intends to collect asits financial resources for meetingits expenditure requirements andfrom which sources, in the nextfiscal year. This can also be divided into two categories
:i) Capital Receipts- those receipts that lead to a reduction in the assets or an increase in the liabilities of the government.- Capital Receipts that leadto a ‘reduction in assets’: Recoveries of Loans given bythe government and Earnings from Disinvestment;- Capital Receipts that lead toan ‘increase in liabilities’:Debt
.ii) Revenue Receipts- thosereceipts that don’t affect theasset-liability position ofthe government. RevenueReceipts comprise proceeds of Taxes (like, Income Tax,Corporation Tax, Customs, Excise, Service Tax, etc.)and Non-tax revenue of the government (like, Interestreceipts, Fees/ User Charges, and Dividend & Profits fromPSUs).
Government revenue through taxation can be divided into DirectTaxes and Indirect Taxes.
Direct Taxes: Those taxes forwhich the tax-burden cannot beshifted are called Direct Taxes.Examples of Direct Taxes are:
i) Corporation Tax This is atax levied on the income ofregistered companies in thecountry, whether national orforeign, under the Income TaxAct, 1961.
ii) Personal Income tax- Thisis a tax on the income ofindividuals, firms etc. otherthan Companies, under theIncome Tax Act, 1961. Thishead also includes otherTaxes, mainly the ‘SecuritiesTransaction Tax’, which islevied on transaction in listsecurities undertaken on stockexchanges and in units ofmutual funds
iii) Wealth Tax- This is a tax levied on the benefits derived from the ownership of property, under the Wealth Tax Act,1957. Wealth tax has virtuallybeen abolished in India.
Indirect Taxes: Those taxesfor which the tax-burden canbe shifted are called IndirectTaxes. Any person, who directlypays this kind of a tax to theGovernment, need not bear theburden of that particular tax; he/she can ultimately shift the taxburdento other persons laterthrough business transactions ofgoods/ services. Indirect tax onany good or service affects therich and the poor alike!
Unlikeindirect taxes, direct taxes arelinked to the tax-payee’s ability topay and hence are considered to beprogressive. Examples of IndirectTaxes are:
i) Customs Duties-In this,the taxable component isimport into or export from thecountry.
ii) Excise Duties: It is a typeof tax levied on those goods,which are manufactured inthe country and are meant fordomestic consumption. It is atax on manufacturing, whichis paid by the manufacturer,but he passes this burden onto the consumers.
iii) Sales Tax: It is levied onthe sale of a commodity,which is produced/importedand being sold for the firsttime. If the product is soldsubsequently without beingprocessed further, it is exemptfrom sales tax. Before theintroduction of VAT, salestax used to be levied underthe authority of both CentralLegislation (Central SalesTax) and State Government’sLegislation (Sales Tax)
iv) Service Tax: It is a tax leviedon services provided by aperson and the responsibilityof payment of the tax iscast on the service provider.However this tax can berecovered by the serviceprovider from the servicereceiver in course of his/herbusiness transactions
.v) Value Added Tax (VAT): VATis a multi-stage tax, intendedto tax every stage of sale ofa good where some valuehas been added to the rawmaterials; but taxpayers doreceive credit for tax alreadypaid on the raw materials inearlier stages.
Debt and DeficitA Debt is a kind of receipt thatnecessarily leads to an increaseof the government’s liabilities.The government incurs a Debtonly for meeting the gap createdby excess of its expenditure overits receipts for that year, which iscalled Deficit.
Fiscal DeficitIt is the gap between thegovernment’s total Expenditure(including loans net of repayments)and its Total Receipts (excluding new debt to be taken). Thus Fiscal Deficit for a year indicates the borrowing to be made by the government that year.
Revenue Deficit The gap between Total RevenueExpenditure of the Governmentand its Total Revenue Receipts iscalled the Revenue Deficit
Distriution of financial resources between the Centreand the StatesA Finance Commission is setup every five years to recommendmeasures for sharing o resourcesbetween the Centre and theStates, mainly pertaining to theTax Revenue collected by theCentral Government. Presently the recommendations made by the 13th Finance Commission are in effect (from 2010-11 to 2014-15), whereby 32 percent of the shareable /divisible pool of Central tax revenue is transferred to States every year and the Centre retains the remaining amount for the Union Budget.
Tax-GDP Ratio Gross Domestic Product (GDP) is an indicator of the size of a country’s economy. In order to assess the extent of government’s policy interventions in the economy, some of the important fiscal parameters, like, total expenditure by the government, tax revenue, deficit etc. are expressed as a proportion of the GDP. Accordingly, a country’s tax-GDP ratio helps us understand how much tax revenue is being collected by the government as compared to the overall size of the economy. A higher tax to GDP ratio in a country is a positive sign meaning that the government is collecting a decent amount of tax revenue as compared to the size of its economy.
What is Fiscal Responsibility and Budget Management Act ?
• The Fiscal Responsibility and Budget Management (FRBM) Act was enacted by the Parliament in 2003.
• Its objective is to institutionalize fiscal discipline,reduce fiscal deficit and improvemacro economic management.
• This law aims at promotingfiscal stability for the country ona long-term basis.
• It emphasizes a transparent fiscal managementsystem and a more equitabledistribution of debts over the years.
• This law also gives flexibility tothe Reserve Bank of India toundertake monetary policy tocontrol inflation.
• Government needs resourcesfor funding various kinds ofdevelopmental schemes androutine expenditures.
• Resourcesare raised through taxes andborrowing.
• The governmentcan raise funds by borrowingfrom the Reserve Bank of India,financial institutions or from thepublic by floating bonds.
• Fiscaldeficit is the total expenditureminus the revenue receipt, loan recoveries and receipts fromdisinvestment etc.
• It is a measureof the government borrowing ina year.
• However, uncontrolled fiscaldeficit is considered harmful forthe health of economy.
• FRBM Actwas notified in 2004 in responseto the need felt to curb largefiscal deficit.
• The FRBM rulesspecify annual reduction targetsfor fiscal indicators.
• Originally,the act envisaged revenue deficitto be reduced to nil in five yearsbeginning 2004-05.
• Fiscal deficitwas required to be reduced to3 percent of GDP by 2008-09.
• The Act also provides exceptionto the government in case ofnatural calamity and for nationalsecurity.
• The implantation of the act wasput on hold in 2007-08 due to globalfinancial crisis and the need forfiscal stimulus.
• There was a need forincreased government expenditureto create demand to fight off thefinancial downturn and hence thegovernment moved away fromthe path of fiscal consolidation forthis period.
• This law also prohibitsborrowing by government fromthe Reserve Bank of India andpurchase of primary issues ofcentral government securities after2006.
• The act asked the Centralgovernment to lay in Parliamentthree statements in one financialyear about the fiscal policy.
• Toenforce fiscal discipline at thestate level, the Twelfth financecommission provided for incentivesto states through conditional debtrestructuring and interest raterelief.
• In 2012, the FRBM was amendedand it was decided that the FRBMwould target effective revenuedeficit in place of revenue deficit.Effective revenue deficit excludescapital expenditure from revenuedeficit and thus gives space to thegovernment to spend on creation ofcapital assets.The critics of this law feel,it would curb the government’ssocial sector spending but there isno denying the fact that the needfor fiscal sustainability cannot beignored.
• The original document ofFRBM Act can be seen on: http://finmin.nic.in/law/frbmact2003.pdf.
What is GST?
• The Goods & Services Tax(GST) is an indirect tax reformmeasure which will replace all of theindirect taxes such as Central SalesTax, Octroi, excise duty, ServiceTax and Value Added Tax (VAT) atthe central and state levels.
• Indiawill have a 'dual GST' system wherestates and the centre both wouldhave power to levy taxes on goodsand services.
• Exports would bean exception and GST will not beimposed on them.
• Under the GST,no distinction is made betweengoods and services for purpose oflevying tax.
• GST is a value addedtax where the person paying taxon his output is also entitled to getinput tax credit on the tax paid onits inputs.
• The idea of GST was firstproposed in the budget speechof 2006-07 which had set outthe deadline of 2010 for itsintroduction in the country.
• Toimplement such a tax regime aconstitutional amendment wouldbe needed as the Centre as wellthe States are involved in thisissue.
• The government expectsthat the legislative process for theenactment of the GST would bestarted in the next few months.
• TheFinance Minister has expressed thehope that the two tax reforms – theGST and Direct Tax Code (DTC)will be implemented soon.
• The objective of GST is tomake the taxation simple and tobroaden the tax base.
• It will alsohelp create a common marketthroughout the length and breadthof the country.
• The GST has theadvantage of redistributing theburden of taxation equitablybetween manufacturing andservices.
• The rate of taxation isalso likely to come down with theintroduction of GST.
• Goods ofbasic importance will have lowertax rates.
• Better compliance andincreased tax collection will boostthe tax to GDP ratio.
• Economicgrowth is also likely to get animpetus through GST.
• A reportof National Council of AppliedEconomic Research has estimatedan increase of 0.9 percent to 1.7percent in the economic growthwith the implementation ofGST.
• Exports will also increaseaccording to this study.
The Direct Taxes Code (DTC)
The Direct Taxes Code (DTC)is said to replace the existing Indian Income Tax Act, 1961. However this bill has never been considered.
Highlights of the Direct Taxes Code bill
• Common threshold Income Tax limits and women proposed at 200,000 Rupees per annum (proposed), up from 180,000
• 10 per cent tax on annual income between 200,000-500,000; 20 per cent up to 1 million, 30 per cent above 1 million rupees
• Tax burden at highest level will come down by Rs. 41,040 annually
• Proposal to raise tax exemption for senior citizens to Rs. 250,000 from 240,000 lakh currently.(NOTE:- Union budget 2011-12 already has proposed it.)
• Corporate Tax to remain at 30 per cent but without surcharge and cess.
• MAT to be 20 per cent of book profit, up from 18.5 per cent.
• Proposal to levy dividend distribution tax at 15 per cent.
• Exemption for investment in approved funds and insurance schemes proposed at Rs. 150,000 annually, against 120,000 currently
• Proposed bill has 319 sections and 22 schedules against 298 sections and 14 schedules in existing IT Act.
• Once enacted, DTC will replace archaic Income Tax Act.
• However, many provisions in Income Tax Act will be a part of DTC as well.
• Mutual Funds/ULIP dropped from 80C deductions : Income from equity-oriented mutual funds or ULIP shall be subject to tax @ 5%
• Fringe benefits tax will be charged to the employee rather than the employer.
•
Submitted By :Neeraj Gaur
References
1. Yojna March 2013
2. Our Parliament by Subhash Kashyap
3. Direct Tax Codes Copied From Wikipedia and image from EconomicTimes.com
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