l5 p1 Budget Theory v3

8/12/2019 l5 p1 Budget Theory v3

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Lecture: (Interim) Budget 2014

1. Why Interim budget? vs Vote on accoun

2. Taxes: Nature, Types, provisions in (+IB 3. Parts of budget: Revenue, capital, plan-plan (+IB 2014)

4. Deficits, subsidies (+IB 2014)

5. IB Budget speech: Misc. highlights

Polity angle: Refer M.Laxmikanth



To download the PowerPoint slide

1. Mrunal.org/DOWNLOAD2. Mrunal.org/Economy

Lecture: (Interim) Budget 2014



Why Budget?: Where does the incoming money g

Fund Feature

Public Accounts

Of India 266

• National Investment fund (05)

• Nat. Calamity & contingency fund (NCCF)

• National small savings fund, defense fund

• Prarambhik Shiksha Kosh, MNREGA fund

• State provident fund, Postal insurance, Money orders etc.

Contingency Fund

267

• For unforeseen events

• Under President (operate by Fin.Secy.)

Consolidated Fund

of India 266

• Revenue collected

• All the loans raised• Interest/principle received



Vote on Account?As per Constitution, three documents

1. 112: Annual financial statement (est. income, expense)

2. 265: Finance Bill=>Act (for taxation)3. 266: Appropriation Bill (Act): valid for entire year.

1. Budget laid in Feb

2. Appropriation Bill passed ~April

3. In the meantime, Govt. needs money => Vote on account motio

Gen.Discussion. (116A)4. 2 months; 1/6th of total estimate



Interim Budget?• Appropriation Act, finance Act FY14: Introduced in F

Passed ~April.

• But General election 2014: ~April/May• Considered inappropriate for the outgoing governm

pass full budget.

• Therefore Interim budget

• Shorter than full budget (in terms of speech and scheme• No major changes in taxes

• Vote on account for longer duration (4 Months)

• Legally binding to introduce “Interim Budget”?...No



Yashwant Gave quite a few schemes and tax-benefits 12 page

Pranab Did not announce any new taxes or schemes. 18 page

PC

No changes in direct tax.

Few concessions in indirect tax

Few schemes for soldier pension, education loans etc.

14 pages



What’s the difference? Vote on Account Interim Budget

Every year (for ca$h between Feb

and Apr.)

Only during election /ext

situation.Only deals with Expenditure part

*Lok Sabha 116(A)

1. Annual financial statem

2. Finance bill (taxation/r

3. Vote on account.

Vote on account doesn’t include

interim budget

Always includes vote on

Validity: 2 to 4 months Validity: Entire year (1st A

31st March)

But new government can



Mock Question• 2011

1. Skip 2. Attempt 3. Mark n Revie



CSAT 2011 Paper IWhat is the difference between interim budget and vaccount?

1. the provision of a vote on account is used by a reggovernment, while an interim budget is a provisioncaretaker government.

2. a “vote on account” only deals with the expenditugovernment budget, while an “interim budget” incboth expenditure and receipts

3. Both A and B

4. Neither A nor B

1. Skip 2. Attempt 3. Mark n Rev



CSAT 2011 Paper IWhat is the difference between interim budget and voteaccount?

1. the provision of a vote on account is used by a regulargovernment, while an interim budget is a provision uscaretaker government.

Until new PM/CM takes charge, the previous governmentcontinues to be in office.

• After term has expired.

• After PM/CM has resigned. (Kejriwal)

• No-confidence motion passed.

• Parliament/Assembly dissolved. (then where will you p“interim budget?)



CSAT 2011 Paper IWhat is the difference between interim budget and vaccount?

1. the provision of a vote on account is used by a reggovernment, while an interim budget is a provisioncaretaker government.

2. a “vote on account” only deals with the expenditugovernment budget, while an “interim budget” incboth expenditure and receipts (RIGHT)

3. Both A and B

4. Neither A nor B

1. Skip 2. Attempt 3. Mark n Rev



2010

Who among the following is responsible forpreparation of Union Budget?

A. Department of RevenueB. Department of Economic Affairs

C. Department of Financial Services

D. Department of Expenditure




2010

Who among the following is responsible forpreparation of Union Budget?

A. Department of RevenueB. Department of Economic Affairs (RIGHT)

C. Department of Financial Services

D. Department of Expenditure




Parts of budgetSo far

Why Budget?

Vote on account vs Interim Budget



• Art.112: Budget (AFS) shall distinguish Expenditure on revenfrom other Expenditures.

G d



Good tax system

Many principles, Adam Smith 4 canon for MCQ

1. Canon of Equality: Proportionate to income.

2. Canon of Certainty: about deadline and rates

3. Canon of Convenience: to the tax payer.

4. Canon of Economy: collection cost should be

minimum. (i.e. staff salary, DBM)Extra:

- transparency, simplicity, elasticity (to economic fluctuation)

B d t R P t R i t D



On Income/ Expenditure

• Income tax• Corporate Tax (and MAT)

• Interest tax (on banks)

• FBT (Pranab)

•Hotel receipt Tax

• Wealth Tax• Securities transaction T

• Banking cash transact

• Estate duty (VP singh)

•Gift tax (Yashwant)

Budget : Revenue Part => Receipts=>Dtax

on properties/assets/transaction



Direct taxes (Union)

Taxes on Income & Expenditure• Income tax

• Corporation Tax (and MAT)

Taxes on properties/assets

•Wealth Tax

• STT

Taxes on income• Agriculture income tax

• Professional tax

Taxes on properties

•Land Revenue

• Stamp duty/registratio

• Property tax in urban a

Direct Taxes (Sta



Merits

1. Progressive (low onpoors/middle; high on rich)

2. Inequality of income…reduced

3. Certainty (when and how)

4. Elasticity, quick results whenraised / lowered

•Collection expensive (stadatabase Management)Therefore, Narrow base

• High level of direct taxe• less tendency to work;• Discourages capital form• less foreign investment /

workers

• Externality not counted• Tata vs filmstar

• Hardship not counted:• Carpenter vs landlord.

Direct tax: Progressive / Regressive

Demerits

Budget: Revenue Part =>



Direct taxes (Union)

Taxes on Income & Expenditure• Income tax

• Corporation Tax

Taxes on properties/assets

•Wealth Tax

• Securities transaction Tax (STT)

Taxes on income• Agriculture income tax

• Professional tax

Taxes on properties

•Land Revenue

• Stamp duty/registratio

• Property tax in urban a

Budget: Revenue Part =>Receipts=>Direct tax

Direct Taxes (Sta



Direct Taxes in Interim Budget 2014

Taxable Income Tax

2 to 5 lakh 10%

5 to 10 20%

>10 30%

Corporate tax ~34%

MAT ~21%

Corporate tax

(foreign)

~43%

Wealth tax (>30

lakh)

1%

STT 0.001%

+“Research Funding

Organisation“ Did not implemented

1. GAAR

2. Direct tax code (DTC)

3. Goods and services tax (GST)

Direct ta collection



Direct tax collection

Direct tax collection: Shortfall



Direct tax collection: Shortfall

Direct tax BE 2013 RE 2013 AE 2014

Corporation Tax

Income tax

Security Transaction tax

Wealth tax

total Direct tax6.68 lakh

crore

6.36 lakh

crore

7.58 la

crShortfall: 6.68-6.36= 32,000 cores. Why?

1.Inflation=>

2.Policy paralysis=>

Indirect taxes



Indirect taxes

Budget : Revenue Part => Receipts=>In



Indirect taxes (Union)

1. Custom Duty (Import, Export)2. Excise Duty (CENVAT system)

3. Service Tax

4. CST (but entirely given toStates)

1. Sale tax/VAT (newspap2. Excise duty on liquor,

3. Motor vehicle tax, ani

4. Tolls

5. Luxury tax, betting-ga

6. Entertainment tax

7. Electricity tax

8. Advertisement tax(TV/radio/Newspaper.

Budget : Revenue Part => Receipts=>Intax

Indirect Taxes (St



Merits

•Convenient. no additionalpaperwork for the customer.

• Wider base. Everyone covered.

• Less evasion, especially underVAT/GST. (invoicing)

• Elastic. Small increase bringslarge revenue.

• Checks on harmfulconsumption: cigar, alcohol,even GOLD.

• Regressive• Both poor and rich

equally for the sam

• poor people end upmore portion of the

in indirect taxes.• Single point taxes=h

of corruption, evasisales tax.

Indirect taxes

Demerits

Indirect Tax Collection



Indirect Tax Collection

Shortfall?

5.65-5.19

=45000 crore.Why?

1. Food Inflation=>

2. Low demand of consumer goods, Automobile

3. Forced savings into gold, evasion

Indirect taxes in Interim Budget 201



Indirect taxes in Interim Budget 201• No change in income tax slabs.

• But to boost the manufacturing sector, some modifications indirect taxes [Period up to 30.6.2014]

Excise duty reduced for

• Automobile: SUV, Small cars, motor cycles, scooters and comvehicle

• Mobile handsets (to decrease reliance on imports)

Custom duty: • Rationalized the import duty on oils, fatty acids, fatty alcoho

boost to soap industry and oleo-chemicals (glycerin)




Indirect taxes in Interim Budget 201Custom duty:

• Rationalized the import duty on oils, fatty acids, fatty alcohoboost to soap industry and oleo-chemicals (glycerin)

Custom duty

• Bank Note Paper Mill India (Bangalore)

• Machine import @5% custom duty only.



Service tax

Two new services exempted:

• Rice: loading, unloading,packing, storage andwarehousing

• Cord Blood bank (they storeumbilical cord for future

stemcell therapy)

• Negative list: law.

• exempted list: notifica


CVD



CVDWhat is CVD?

1. MFG of Desi machine=Excise

2. Sale of Foreign machine= Custom duty.

To promote consumption of desi machines,

Sale of foreign machine= Custom duty + CVD.

Gross vs Net Tax Revenue



Gross vs Net Tax Revenue

Tax BE 2013 RE 2013 shortfall AE 2014

Direct 6.68 6.36 32k 7.58

Indirect 5.65 5.19 45k 6.2

Gross 12.35 11.58 77k 13.78

Gross vs Net tax Revenue



Gross vs Net tax RevenueCrores BE 2013

A.(Gross) Tax Revenue (Direct + Indirect + UT w/o Legislature) 12.35 lakh

B.MINUS tax revenue shared with States/UT 3.4 lakh

C.MINUS money transferred to calamity fund (NCCF) 4800

NET Tax revenue=A-(B+C) 8.84 lakh

80th amendment 2000:

29% of total taxes of the Union need to be

shared with states

13th FC (Kelkar)

= Share 32% with states

14th FC (YV Reddy)

= share ??% With states

=effective from 1/5/2015

National Calamity

Contingency Fund (NCCF)

1. Under Home ministry2. Public account (parliamen

approval …x)



Budget =>Revenue part=>Non-Tax



By Investment:

1. Interest from loans given to

States/UT/PSU/Railways/foreign countries

2. Dividends and profits fromONGC/LIC/PSUs/SBI etc.

By donation

1. Grants/Aid from Wo

foreign countries. [IFthen CAPITAL receipt

Budget Revenue part Non Tax(receipts)

u ge => evenue par => on- ax( i t )



u ge evenue par on ax(receipts)By selling some goods/service:

1. Railway revenue (part of Rail budget)

2. Police: e.g CISF giving cover to Infosys, State government, 3. Public service commission (exam fees, RTI fees)

4. Printing (Min.Info broadcasting, India 2014)

5. Defense services (canteen, R&D foreign country)

6. Education (Kendriya Vidhayala, Central univ.)

7. Medical, family welfare (AIIMs)

8. Tourism, museum fees

9. R&D (ISRO, CISR etc.)



Budget =>Revenue part=>Expendit



Budget Revenue part Expendit• General services: (Salary/lightbill/telephone bill)

• President, PM,

• parliament, judiciary,

• Bodies: EC, CAG, UPSC, CVC, national commission SC/ST,women

• defense, police (CRPF, BSF)

• Tax collection• Salary, database Management.

• Social services (ministry of women, children, minorities, HRD etc

• Economic services (dairy, agri, mining, telecom,IT)

• Science: atomic, space, ISRO, CSIR• RAILWAY Expenditure (from rail budget)

• Postal Expenditure

• Grant in Aid to State/UT

Interim Budget 2014



e udge 0One Rank one pension:

• UPA had changed pension rules for Defense services first tim2006 (and then in 2010 and 2013)

• Problem: Those retired before 2006 and soldiers retired afte

• They demanded "one rank one pension" (irrespective of retyear.)

• Few days back, Rahulbaba demanded, Now FM accepted.

• =Revenue Expenditure ~500 cr.Modernization of Central Armed Police Forces

• ~11k crore allotted for new equipment and technology.



Re en e receipt R



Revenue receipt

(incoming)

R

1. Tax

2. Non tax

1

2

3

Why Revenue Deficit less in

1. Special dividend from P

2. Cut down Revenue Expe

Why Revenue Deficit increa

1. One rank one pension2. Inflation: Dearness al

3. Moderate increase in

did not increase exist

announce new taxes)

Effective Revenue deficit?



• Revenue deficit meansgovernment spending beyond its

means• Revenue deficit=income minus

expense.

• Effective Revenue deficit

=Revenue deficit MINUS grants for

creation of capital assets.

Revenue receipt

(incoming)

Revenue

(outgoing

1. Tax2. Non tax

1. Salari2. Railw

3. Grant

State/

Effective Revenue deficit?

Target= 1.8% GDP

But 2.2% of GDP (2013-14)

Ideally Revenue deficit should be ZE

Act)

Budget: Capital part



g p p

2013: Union gave loan of Rs.1 lakh to Gujarat @31 year



1 year

Total Expenditure??

Total receipt??

2014: State returned the interest + Principal



Total Expenditure??

Total receipt??

Budget : Capital Part



Incoming (Receipts)

1) Public Debt

1) Internal

2) External

2) Non-Debt

1) Recovery of loan fromState/UT/PSU/ForeignGovernment (principle)

2) Disinvestment proceeds

• Capital Expenditure ondefense, socialsector/schemes/minist

• Railways, postal, shippaviation, highway

• S&T: ISRO, CSIR, atomi

• Loans and Advances fodevelopment work to S

• Repaying Principle on loans.

Budget : Capital Part

Outgoing (Expendi

Interim Budget (disinvestment)

• 2013: Rs 40,000 crore but RE ~16000

• 2014 target: 36000 Crore.

Where is plan/non plan/subsidies?





Parts of Expenditure



NON-Plan Expenditure PLAN Expenditure

Revenue Expenditure Capital Expenditure

1. Salaries and pensions

2. Interest paid (on whatever

loan Union had taken)3. Subsidies, Debt relief to

farmers.

4. Losses in Postal dept

5. services: health, edu,

broadcasting etc.

6. Grants given to

States/UT/Foreign nations.

1. Defense capital Expenditure

(e.g. buying machines, vehicles

etc.)2. Capital Expenditure on railway,

postal, various ministries

3. Loans to

PSUs/States/UT/Foreign

nations.

• Money sp

Five year

Union)

• Money gi

state/UT

Five year



Budget => EXP=>Non Plan =>Subs





MCQ subsidies



Consider the following subsidies

1. Subsidy on urea

2. Subsidies on Fertilizers other than Urea

3. Food subsidies4. Fuel subsidies

Arrange them in ascending order, as per the allocations madeyear 2014-15.

A. 1423

B. 2143

C. 1234

D. 2431

Subsidies: Interim Budget



2014-15

Fuel 65k crore

Fertilizer68k [Desi Urea>>Imported

Urea>>Misc.]

Food 1.15 lakh cr (88k for Foodsecurity Act)

Total 2.5 lakh cr.

g

Ascending orde

• Other than urea

• Urea

• Fuel

• food

MCQ subsidies



Consider the following subsidies

1. Subsidy on urea

2. Subsidies on Fertilizers other than Urea

3. Food subsidies4. Fuel subsidies

Answer: non-urea (2)<< Urea (1)<< Fuel (4) << Food (3)

A. 1423

B. 2143

C. 1234

D. 2431

Budget deficit=total receipt - expend



Fiscal deficit



Budget deficit= Total expenditure – Total receipts

Sukhmoy Chakravarti: 97-98

Fiscal deficit=

• Budget deficit + Borrowing.

• (Total Expenditure – Total Receipts) + Borrowing

• (Total expenditure + borrowing) – [Revenue Receipts + CapitReceipt]

Fiscal deficit



Deficit 2013-14 2014-15

Fiscal Target: 4.8%

But achieved 4.6%

4.1%

Revenue 3.3% 3%GDP 4.9% (CSO) Target:=~6%

Fiscal deficit: 4.8=>4.6? How?



ways to reduce FD:

- More taxes

- Less expenditure / disinvestment

- Manipulate the accounts.

In this case:

1. Ministries failed to spend all the plan Expenditure money

2. Special dividend from coal India (Revenue income)

3. Oil subsidy of Rs.35k crore (from 2013’s year), was Year 20next government)

Why Fiscal deficit lower than target?



Deficit Formulas: MUST REMEMBE



Budget deficit Total expenditure – Total receip

Fiscal deficit Budget deficit + market borrowi

Primary deficit Fiscal deficit – interest payment (on prevRevenue Deficit Revenue Expenditure – Revenue re

Effective Revenue deficit Revenue deficit – grant for creation of ca

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l5 p1 Budget Theory v3