Budget Related Glossary


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Fiscal Policy
Fiscal policy is a change in government spending or taxing designed to influence economic activity. These changes are designed to control the level of aggregate demand in the economy. Governments usually bring about changes in taxation, volume of spending, and size of the budget deficit or surplus to affect public expenditure.
Union Budget
The Union Budget is the annual report of India as a country. It contains the government of India's revenue and expenditure for the end of a particular fiscal year, which runs from April 1 to March 31. The Union Budget is the most extensive account of the government's finances, in which revenues from all sources and expenses of all activities undertaken are aggregated. It comprises the revenue budget and the capital budget. It also contains estimates for the next fiscal year.
The Budget impacts the economy, the interest rate and the stock markets. How the finance minister spends and invests money affects the fiscal deficit. The extent of the deficit and the means of financing it influence the money supply and the interest rate in the economy. High interest rates mean higher cost of capital for the industry, lower profits and hence lower stock prices.
The fiscal measures undertaken by the government affect public expenditure. For instance, an increase in direct taxes would decrease disposable income, thus reducing demand for goods. This decrease in demand will translate into a decrease in production, therefore affecting economic growth.
Similarly, an increase in indirect taxes would also decrease demand. This is because indirect taxes are often partially or completely passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this in turn would reduce profit margins of companies, thus slowing down production and growth.
Non-plan expenditure like subsidies and defence also affect the economy as limited government resources are used for non-productive purposes.


Revenue Budget



 The revenue budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure. Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies.
In non-tax revenue, the government's sources are interest on loans and dividend on investments like PSUs, fees, and other receipts for services that it renders. Revenue expenditure is the payment incurred for the normal day-to-day running of government departments and various services that it offers to its citizens. The government also has other expenditure like servicing interest on its borrowings, subsidies, etc.
Usually, expenditure that does not result in the creation of assets, and grants given to state governments and other parties are revenue expenditures. The difference between revenue receipts and revenue expenditure is usually negative. This means that the government spends more than it earns. This difference is called the revenue deficit.



Capital Budget



 The capital budget is different from the revenue budget as its components are of a long-term nature. The capital budget consists of capital receipts and payments.
Capital receipts are government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity holding in public sector enterprises, securities against small savings, state provident funds, and special deposits.
Capital payments are capital expenditure on acquisition of assets like land, buildings, machinery, and equipment. Investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties.


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.
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.
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.
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). Contingency fund is clearly not that important. Public account is important in that it gives a view of select savings and how they are being used, but not that relevant from a budget perspective. The consolidated fund is the key to the budget. We will take that up in the next part.
As mentioned in the first part, the government has to present a revenue budget (revenue account) and capital budget (capital account) for all the three funds. 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.
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 government felt  many companies were disguising perquisites such as club facilities as ordinary  business expenses, which escaped taxation altogether. Employers have to now pay FBT on a percentage of the expense incurred on such perquisite.
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.
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 (agriculture, for one), in retaliation against measures by other countries.
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.
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. Indirect taxes
are considered regressive, the burden on the rich and the poor is alike. That is why governments strive to raise a higher proportion of taxes through direct taxes.
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. Various services provided by the government - police and  defence, social and community services such as medical services, and economic  services such as power and railways - also yield revenue for the government.  Though Railways are a separate department, all its receipts and expenditure are  routed through the consolidated fund.
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.
Public debt:
Public debt receipts and public debt disbursals are borrowings and repayments during the year, respectively. The difference is the net accretion to the public debt. 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  
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.
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.
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 Budget document also mentions deficit as a percentage of GDP. This is to facilitate comparison and also get a proper perspective. Prudent
fiscal management requires that government does not borrow to consume in the normal course.
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.
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%. In the last Budget, the government had imposed another 1% cess - secondary and higher education cess on income tax - to finance secondary and higher education.
COUNTERVAILING DUTIES (CVD):
Countervailing duty is a tax imposed on imports, over and above the basic import duty. CVD is at par with the excise duty paid by the domestic manufacturers of similar goods. This ensures a levelplaying field between imported goods and locally-produced ones. An exemption from CVD places the domestic industry at disadvantage and over long run discourages investments in affected sectors.
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. Book profits are profits calculated as per the Companies Act, while profits as per the Income-Tax Act could be significantly lower, thanks to various exemptions and depreciation.


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. Essentially , it means the income is merely passing through the mutual funds and, therefore, should not be taxed. The government allows venture funds in some sectors pass-through status to encourage investments in start-ups .



SUBVENTION:



The term subvention finds a mention in almost every Budget. 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 subvention.



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 to pay this surcharge.


                                                                                 Source: Economic Times

Sunday, 28th Dec 2014, 07:52:46 PM

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