The Budget Glossary.On the way to the Budget which is expected to one of the biggest in Indian History, let us take a look at what some of the terms and jargons means.
BALANCE SHEET - The lines and figures that reveal the receipts and expenditure of the year
ANNUAL FINANCIAL STATEMENT This is the last word on the state’s receipts and expenditure for the financial year, presented to the Parliament by the government. Divided into three parts — Consolidated Fund, Contingency Fund and Public Account — it has a statement of receipts and expenditure of each. Expenditure from the Consolidated Fund and Contingency Fund requires the mandatory nod of the Parliament.
CONSOLIDATED FUND - The government’s lifeline: it is a consortium of all revenues, money borrowed and receipts from loans it has given. All state expenditure is made from this fund.
CONTINGENCY FUND - As the name suggests, any urgent or unforeseen expenditure is met from this Rs 500-crore fund, which is at the disposal of the President. The amount withdrawn is returned from the Consolidated Fund.
PUBLIC ACCOUNT - When it comes to this account, the government’s nothing more than a banker, as this fund is a collection of deposits, like public provident fund. REVENUE VS CAPITAL The budget has to distinguish between revenue receipts/expenditure from others. So all receipts in, say, the consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure.
REVENUE RECEIPT/EXPENDITURE - All receipts like taxes and expenditure like salaries, subsidies and interest payments that in general do not entail sale or creation of assets fall under the revenue account.
CAPITAL RECEIPT/EXPENDITURE - Capital account shows all receipts from liquidating (eg. selling shares in a public sector company) assets and spending to create assets (lending to receive interest).
REVENUE/CAPITAL BUDGET - The government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a Capital Budget (capital receipts and capital expenditure).
CREATING A HOLE IN THE POCKET
Taxes come in various shapes and sizes, but primarily fit into two little slots:
DIRECT TAX - This is the tax that you, I (and India Inc) directly pay the government for our income and wealth. So income tax, FBT, STT and BCTT are all direct taxes.
INDIRECT TAX - This one’s a double whammy: It’s essentially a tax on our expenditure, and includes customs, excise and service tax. It’s not just you who thinks this isn’t fair - governments too consider this tax "re-gressive", as it doesn’t check whether you’re rich or poor. You spend, you pay. That’s precisely why most governments aim to raise more through direct taxes. MAKING YOU PAY The various taxes that the government has to levy
CORPORATION (CORPORATE) TAX - It’s the tax that India Inc pays on its profits.
TAXES ON INCOME OTHER THAN CORPORATION TAX - It’s income-tax paid by ‘non-corporate assessees’ — people like us.
FRINGE BENEFIT TAX (FBT) - No free lunches here. If you want the jam with the bread and butter, you’d better pay for it. In the 2005-06 Budget, the government decided to tax all perks — what is calls the ‘fringe benefit’ — given to employees. No longer could companies get away with saying ‘ordinary business expenses’ and escape tax when they actually gave out club memberships to their employees. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites.
SECURITIES TRANSACTION TAX (STT) - If you’re dealing in shares or mutual funds , you have to loosen those purse strings a wee bit too. STT is a small tax you need to pay on the total amount you pay or receive in a share deal. In the 2004-05 Budget, the government did away with the tax on profits earned on the sale of shares held for over a year (known as long-term capital gains tax) and replaced it with STT.
CUSTOMS - Anything you bring home from across the seas comes with a price. By levying a tax on imports, the government’s firing on two fronts: it’s filling its coffers and protecting Indian industry.
UNION EXCISE DUTY - Made in India? Either way, there’s no escape. In other words, this is a duty imposed on goods manufactured in the country.
SERVICE TAX - If you text your friend a hundred times a day, or can’t do with-out the coiffeured look at the neighbourhood salon, your monthly bill will show up a little charge for the services you use. It is a tax on services rendered.
MINIMUM ALTERNATE TAX (MAT) - It’s known that a company pays tax on profits as per the Income-Tax Act. That just may not always be enough. If its tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 10% of the book profits.
SURCHARGE - This is an extra bit of 10% individuals pays for earning more than Rs 10 lakh. Companies with a revenue of up to Rs 1 crore is spared this rod.
VAT AND GST - After a lot of discussion and brainstorming, the government levies what is called a ‘value-added tax’: a more transparent form of taxation. The tax is based on the difference between the value of the output and the value of the inputs used to produce it. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition. A GST, or goods and services tax, on the other hand, contains the entire element of tax borne by a good — including a Central and a state-level tax. MORE REVENUE Of course, tax isn’t the only way governments make money. There’s also ‘nontax revenue’
NON-TAX REVENUE - Any loan given to state governments, public institutions, PSUs come with a price (interests) and forms the most important receipts under this head apart from dividends and profits received from PSUs. The government also earns from the various services including public services it provides. Of this only the Railways is a separate department, though all its receipts and expenditure are routed through the consolidated fund.
CAPITAL RECEIPTS - RECEIPTS in the capital account of the consolidated fund are grouped under three broad heads — public debt, recoveries of loans and advances, and miscellaneous receipts
PUBLIC DEBT - Don’t mistake the phrase. Public debt is not something incurred by the public. In Budget parlance the difference between borrowings (public debt receipts) and repayments (public debt disbursals) during the year is the net accretion to the public debt. Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources). The internal debt comprises of treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings.
TREASURY BILL (T-BILLS) - These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure. Bonds of longer maturity are called dated securities.
MARKET STABILISATION SCHEME (MSS) - The scheme was launched in April 2004 to strengthen Reserve Bank of India’s (RBI) ability to conduct exchange rate and monetary manage-ment. These securities are issued not to meet the government’s expenditure but to provide the RBI with a stock of securities with which to intervene in the market to manage liquidity.
WAYS AND MEANS ADVANCE (WMA) - RBI is the big daddy of banks being the banker for both the Central and State governments. Therefore, the RBI provides a breather to manage mismatches in their receipts and payments in the form of ways and means advances.
SECURITIES AGAINST SMALL SAVINGS - The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund.
MISCELLANEOUS CAPITAL RECEIPTS: These are primarily receipts from disinvestment in public sector undertakings. The capital account receipts of the consolidated fund — public debt, recoveries of loans and advances, and miscellaneous receipts — and revenue receipts make up the total receipts of the consolidated fund.
EXPENDITURE Before we begin to examine the nitty gritty of where and how the government spends its money, we need to understand what’s called the Central Plan. This is what every child in the country learns about in school; only, we all know it better as the Five-Year Plan. A Central Plan is the government’s annual expenditure sheet, with a five-year roadmap. Here’s where the government gets the money for the grand five-year exercise: The funding of the Central Plan is split almost evenly between government support (from the Budget) and internal and extra-budgetary resources of state owned enterprises. The government’s support to the Central Plan is called the Budget support.
PLAN EXPENDITURE - This is essentially the Budget support to the Central Plan. It also comprises the amount the Centre sets aside for plans of states and Union Territories. Like all Budget heads, this is also split into revenue and capital components.
NON-PLAN EXPENDITURE - All those bills the government has to pay, under the ‘revenue expenditure’ head are bunched up here: interest payments, subsidies, salaries, defence and pension. The ‘capital’ component, in comparison, is small; the largest chunk of this goes to defence. FISCAL When government’s expenditure exceeds its receipts it has to borrow to meet the shortfall. This deficit has material implication for the economy.
FISCAL DEFICIT - This is where the government feels the pinch. It often lives beyond its means, a lot like the situation mere mortals find themselves in. And then, the vicious circle is complete: it goes right back to the people for more money. Here’s how that works out: The government’s ‘non-borrowed receipts’ — revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds — fall short of its expenditure. The excess of total expenditure over total nonborrowed receipts is called ‘fiscal deficit’. The government then has to borrow money from the people to meet the shortfall.
REVENUE DEFICIT - It’s not just because it’s a deficit, but that it’s a revenue deficit makes it an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero, else the government will be in debt.
PRIMARY DEFICIT - This is one ‘primary’ indicator everyone likes to watch: when it shrinks, it indicates we’re not doing too badly on fiscal health. The primary deficit is the fiscal deficit less interest payments the government makes on its earlier borrowings. It’s the basic deficit figure, if you will.
DEFICIT AND THE GDP - It’s important to see where all this fits, in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then it’s not such a bad thing after all. Prudent fiscal management requires that government does not borrow to consume, in the normal course.
Fiscal Responsibility and Budget Management Act (FRBM) ACT - Enacted in 2003, the Fiscal Responsibility and Budget Management Act required the elimination of revenue deficit by 2008-09. This means that from 2008-09, the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure — that is, repayment of loans, lending and fresh investment. The Act also mandates a 3% limit on the fiscal deficit after 2008-09 —one that allows the government to build capacities in the economy without compromising on fiscal stability. The financial crisis and the subsequent slowdown has forced the government to abandon the path of fiscal consolidation.
...AND THE REST
Some of the other important terms that figure in the Budget
BHARAT NIRMAN: Bharat Nirman is UPA’s unfulfilled dream of Build India, Build: irrigation, roads, water supply, housing, rural electrification and rural tele-com connectivity. Though it couldn’t meet the target of 2009, the government is still at it.
FINANCE BILL: This, all important sheaf of papers, is all about taxes and is presented in time before the levy breaks.
FINANCIAL INCLUSION: This is to ensure that everyone has a bank account and financial institutions are accountable. It sees to it the common denizen is not denied of timely and cheap credit and, more importantly, not intimidated by the facade of a modern bank. However, it has not fully got past the counter.
PASS-THROUGH STATUS: Nothing can be more dreadful than having to pay twice for the same thing. This position is accorded to those investments which stands the danger of being taxed twice like mutual funds. SUBVENTION: This is how a government bears the loss that financial institutions incur when asked to give farmers loans below the market rates.
RESOURCES TRANSFERRED TO THE STATES As we saw earlier, the Centre gives states a helping hand in two ways — a part of its gross tax collections goes to state governments. In the Budget 2007-08, for instance, the states were to receive nearly Rs 3.3 lakh crore of gross tax collections. The Centre also transfers funds to states to support their plans. These are largely in the nature of grants, and include those given to states for managing Centrally-sponsored schemes.
Source: The Economic Times, Kolkata Edition, 3-July-2009
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