Budget & its impact
By Members:? ? ? ? ? Ishan Kelvalkar – 71 Ninad Khanvilkar - 73 Pallavi Konde – 75 Pratik Kothari – 77 Munish Kumar - 79
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Index
Serial No. 1 2 3 5 6 7 9 9
Topic Introduction Revenue of the central government Expenditure of the central government Types of Deficit Union Budget 2013-14 Impacts on India Conclusion Bibliography
Pg. No. 3 5 9 15 19 23 29 31
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Introduction to budget The Union Budget of India, referred to as the Annual Financial Statement in Article 112 of the Constitution of India, is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament. The budget, which is presented by means of the Financial Bill and the Appropriation bill, has to be passed by the House before it can come into effect on April 1, the start of India's financial year. The first Union budget of independent India was presented by R. K. Shanmukham Chetty on November 26, 1947.The Union budgets for the fiscal years 1959-61 to 1963-64, inclusive of the interim budget for 1962-63, were presented by Morarji Desai. Former Finance Minister Morarji Desai presented the budget ten times, the most by any. On February 29 in 1964 and 1968, he became the only finance minister to present the Union budget on his birthday. Vyas presented budgets that included five annual budgets, an interim budget during his first stint and one interim budget and three final budgets in his second tenure when he was both the Finance Minister and Deputy Prime Minister of India. After desai's resignation, Indira Gandhi, the then Prime Minister of India, took over the Ministry of Finance to become the only woman to hold the post of the finance minister. The Union Budget of India for 2012–2013 was presented by Pranab Mukherjee, the Finance Minister of India on 16 March 2012, this was the 7th budget of his career. These budgetary proposals would be applicable from 1 April 2012 to 31 March 2013. Until the year 2000, the Union Budget was announced at 5 pm on the last working day of the month of February. This practice was inherited from the Colonial Era, when the British Parliament would pass the budget in the noon followed by India in the evening of the day. It was Mr.Yashwant Sinha, the then Finance Minister of India in the NDA government (led by BJP) of Atal Bihari Vajpayee, who changed the ritual by announcing the 2001 Union Budget at 11 am. The Union Budget of India for 2013–2014 was presented by P. Chidambaram on 28 February 2013. (Thursday)
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Types of budget A. Current or 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:-Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies. Non-tax revenue:-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. B. 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.
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Revenue of the central government Tax revenue: - Taxation is the income that is gained by governments through taxation. There are different types of tax, the form in which tax revenue is collected also differs; furthermore, the agency that collects the tax may not be part of central government but may be an alternative third-party licensed to collect tax which they themselves will use. Income tax: - Tax levied directly on personal income. Annual charge levied on both earned income (wages, salaries, commission) and unearned income (dividends, interest, rents). In addition to financing a government's operations, progressive income taxation is designed to distribute wealth more evenly in a population, and to serve as automatic fiscal stabilizer to cushion the effects of economic cycles. Its two basic types are Personal income tax, levied on incomes of individuals, households, partnerships, and sole-proprietorships; and Corporation income tax, levied on profits (net earnings) of incorporated firms. However, presence of tax loopholes (whose number increases in direct proportion to the complexity of tax code) may allow some wealthy persons to escape higher taxes with out violating the letter of the tax laws. Income Slabs 1. 2. Where the total Income does not exceed Rs. 200000/Where the total Income exceeds Rs. 200000/- but does not exceed Rs.500000/3. Where the total Income exceeds Rs. 500000/- but does not exceed Rs.1000000/Income Tax Rate NIL 10% of the amount by which the total amount exceeds Rs.200000/Rs. 30000+20% of the amount by which the total amount exceeds Rs.500000/4. Where the total Income exceeds Rs. 1000000/Rs.130000+30% of the amount by which the total amount exceeds Rs.200000/-
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Corporate tax: - Countries impose corporate tax, also called corporation tax or company tax, on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Company income subject to tax is often determined much like taxable income for individuals. Generally, the tax is imposed on net profits. In some jurisdictions, rules for taxing companies may differ significantly from rules for taxing individuals. Certain corporate acts, like reorganizations, may not be taxed. Some types of entities may be exempt from tax. Central tax on property Wealth tax:- A wealth tax is generally conceived of as a levy based on the aggregate value of all household assets, including owner-occupied housing; cash, bank deposits, money funds and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts. A wealth tax is a tax on the accumulated stock of purchasing power, in contrast to income tax, which is a tax on the flow of assets. There are many lines of argument in favor of including a tax based on individual net wealth. Variations in how the details of the particular net wealth tax is implemented, including whether there are exemptions and whether other taxes are lowered or flattened will have an impact. "Income conventionally is defined as the sum of consumption and any change in net worth. This definition highlights three likely bases for a tax: income, consumption, and net worth. Tax rates can be applied to essentially any base (or combination of bases) to raise the revenue that government requires. Estate tax:- An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate (total value of the money and property) of a person who has died. In international tax law, there is a distinction between an estate tax and an inheritance tax: an estate tax is assessed on the assets of the deceased, while an inheritance tax is assessed on the legacies received by the beneficiaries of the estate. However, this distinction is not always respected in the language of tax laws. For example, the "inheritance tax" in the United Kingdom is a tax on the assets of the deceased, and is therefore, strictly speaking, an estate tax. In some jurisdictions the term used is death duty. For historical reasons that term is used colloquially (though not legally) in the United Kingdom and some Commonwealth nations.India had an estate tax from 1953 to 1985.
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Gift Tax: - Gifts are not regarded as Income chargeable to tax. However by virtue of Section 56(2) any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under “other sources” subject to exclusions as below: 1. Receipts on occasion of marriage of the individual 2. Receipts under a will or inheritance 3. Receipts received from a relative.
Gifts that are not taxable at all are those that are received from relatives. Relatives are defined by the following relationships of the individual: 1. Parents 2. Parents siblings and their spouse 3. Siblings 4. Spouse of siblings 5. Daughter and son 6. Spouse of daughter and son 7. Spouse 8. Spouse?s parents 9. Spouse„s siblings and their respective spouse. Even NRI?s are covered as long as they fall in the category of relatives. Therefore an individual Indian resident can receive a tax free gift from an NRI as long as he/she is that individuals relative. Any amount can be received as a gift from a relative. Also the purpose for which the gift is received from a relative is inconsequential as it is completely tax free. Thus a gift received can be used for any purpose ranging from purchasing shares to buying property to even simply keeping it with the bank.
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Tax on commodities and services Commodities taxes have been important sources of revenue for the central government. Central excise duties and custom duties are important taxes of central government. Custom duty:- Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow. A tax levied on imports (and, sometimes, on exports) by the customs authorities of a country to raise state revenue, and/or to protect domestic industries from more efficient or predatory competitors from abroad. Customs duty is based generally on the value of goods or upon the weight, dimensions, or some other criteria of the item (such as the size of the engine, in case of automobiles).It is a kind of indirect tax which is realized on goods of international trade. In economic sense, it is also a kind of consumption tax. Duties levied by the government in relation to imported items is referred to as import duty. In the same vein, duties realized on export consignments is called export duty. Tariff, which is actually a list of commodities along with the leviable rate (amount) of Customs duty, is popularly understood as Customs duty. Central excise :- Central Excise is a Governmental body which is run by the Central Board of Excise and Customs. Central Government under the authority of Entry 84 of the Union List (List 1) under Seventh Schedule read with Articles 268 to 281 of the Constitution of India. Service tax:- Service tax is a part of Central Excise in India. It is a tax levied on services provided in India, except the State of Jammu and Kashmir. The responsibility of collecting the tax lies with the Central Board of Excise and Customs (CBEC). The ex-Finance Minister of India, Pranab Mukherjee in his Budget speech has indicated the government's intent of merging all taxes like Service Tax, Excise and VAT into a common Goods and Service Tax by the year 2011. To achieve this objective, the rate of Central Excise and Service Tax will be progressively altered and brought to a common rate] In budget presented for 2008-2009 It was announced that all Small service providers whose turnover does not exceed 1,000,000 need not pay service tax.
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Expenditure of the central government:Governments today incur expenditure in order to fulfill the following roles in the economy: (a) To correct distortions of market failures. (b) Regulate private activity that might harm society. (c) Provide public goods and services (i.e.economic and social infrastructure). (d) Often engage in production activity. The increased participation of the government in economic activities has brought public spending to the forefront among the fiscal instruments. There are two components of expenditure – Plan and Non-Plan
lan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission.
Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilizers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments.
Non-plan capital expenditure mainly includes defense, loans to public enterprises, loans to States, Union Territories and foreign governments. INDIA’S PUBLIC DEBT India?s public debt is used to finance productive assets such as railway construction, irrigation works. The increase in public debt mainly occurs due to war expenditures including capital expenditure on defense and the creation of rupee counter parts for the repatriated sterling debt. Efforts were made by the government to achieve the target and it could nearly get the
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targeted amounts in all the plans. Borrowing from the market and mobilizing small savings from the people were used since 1951 as a method of financing economic development in India. The planning commission liked ambitious targets to raise large funds from the market and through small savings schemes. This was how public borrowing and public debt came to be used to finance development. Thus the basic reason for expansion of public debt was the need for raising funds for rapid economic development. In the recent years however the government is borrowing to meet its current expenditure. The public debt of government of India is composed of Internal debt and External debt. Internal debt comprises of market loans, compensation bonds, prize bonds and 15 year annuity certificates. It also includes borrowings of temporary nature namely treasury bills issued to RBI, commercial banks etc. and also non negotiable, non interest bearing securities issued to international financial institutions like the IMF, World Bank etc. External debt represents borrowings by central government from external sources and are based upon historical rates of exchange. Public debts & other liabilities of Central Government 1950-51 A. Public debt a. Internal b. External B. Other Liabilities Total Public Debts & other Liabilities 2054 2022 32 511 2565 2002-03 1080300 1020690 59610 478600 1558900 2011-12
Internal debt comprises of market loans compensation bonds, price bonds and 15 year annuity certificates. It also includes borrowings of a temporary nature, viz. treasury bills issued to RBI, commercial banks etc. & also non negotiable instruments , non interest bearing documents issued to international financial organizations. External debts represent borrowings by the government from external sources & are based on historical rates of exchange.
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The above table shows, India?s public debt position from 1950-51. The significant points are covered under. ? Initially the Central Government used to borrow only for financing developmental schemes but today it is forced to borrow even for current revenue expenditure which is alarming. ? The increase in the external rate is explained by the rapid rate at which external assistance has been obtained and utilized in recent years. By far the largest share of India?s debt is provided by United States of America. Dollar loan constitute of 30 % of India?s external debt. The above table shows how public debt of India has increased from-Rs. 2054 crores in1950-51 to Rs. 1080300 crores in 2008-09 & Rs. ? In addition to public loan, the Government has certain other liabilities for instance, the govt. owns money to the general public for funds raised through small saving schemes, provident funds, deposits etc. which are all other liabilities. The govt. has to pay interest on these other liabilities. ? The outstanding liabilities of central government comprising internal and external liabilities as a proportion of GDP were 55 % in 1990-91: It showed a declining trend till 1998-99 when it touched 51 %, since then it is increasing. The increasing has not only raised the interest burden but also raised concerns about the sustainability of growing internal debt, which is a matter of serious concern. ? The burden of servicing of public debt is becoming heavier with every passing year. Same is the case with other liabilities. According to an agreement concluded in December 1947, all public debt of undivided India was taken over by Indian Government. Pakistan was allotted a share estimated at Rs. 300 crore which was to be paid in 50 equal installments starting from 1952 of which Pakistan has not returned even a single installment.
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Debt position of the states Earlier the total debt was classified into public debt and unfunded debt. In the new classification the major heads of debt are: 1. Internal debt This comprises current market loans and bonds issued in connection with the zamindari abolition, ways and means advances and overheads repayable within 7 days from RBI and loans from banks, other institutions such as loans from SBI and other commercial banks, National credit fund of NABARD, employees state insurance corporation, etc. 2. Loans and Advances from Central Government These include loans and advances from the Central Government for plan and non plan purpose. 3. Provident Funds These include state provident funds, insurance and pension funds, trusts and endowments, etc. The aggregate public debt of state governments as ratio of GDP is now around 30% and is increasing at 1% per year. Debt Position of the States` ITEMS Internal Debt Loans & Advances from Central Govt. Provident Funds Total Liabilities 130 2740 540 8750 Mar 1961 590 2020 Mar 1971 1850 6360 Mar 2012
From the above table, following observations can be made:-
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Internal debt of State was around 22 % of all states liabilities in 1960s. It has grown, however, over the years. The share of Central loans and advances in the total debt of State government is steadily declining. The heavy indebtedness was due to diverse factors such as clearing block loans for State Development plans, special accommodation, clearing overdrafts of state with RBI.
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State Government was gradually shifting towards higher cost sources. The interest burden (i.e. ratio of interest payment to revenue receipts) of States had steadily risen. Ways and means advances from RBI which include normal & special ways & means advances & overdraft from RBI repayable within seven working days frequently assumed serious proportions. Often State Government request the Central Government to convert their overdraft into loans.
The Crises of State Public Debt In the last few years, heavy public debt and large interest payments have crippled many states which are unable to undertake socially necessary expenditure. The states have the responsibility to maintain law and order, build and maintain infrastructure, provide health and sanitation, education and other essential services. Many states are unable to incur these necessary types of public expenditure. Many others are in serious financial crises and are literally limping along. On the one hand, public debt is mounting and on the other, states have been forced to pay high rates of interest. There are many reasons for this sad state of affairs. Since 1997-98 the fiscal deficit of these states as a proportion of GDP was around 3% and was under control. Since then, states were forced to run into huge fiscal deficits essentially because of rise in revenue deficit-state expenditure on salaries and salary hikes due to recommendations of the 6th Pay Commission. Secondly the Centre has been directly responsible for the high interest rates of State Public dept. The Centre has the power to determine the extent and terms of borrowing by states. This power has been abused by the Centre by various ways. One way is that the Centre charges high rates of interest on debt which it issues to the states. Further, when the state governments raise debt from World Bank and ADB, they are charged a higher rate by the Centre Government which acts as an
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intermediary. Finally, state governments which have a revenue deficit have to seek special permission from RBI to borrow from commercial banks.
The result of these factors is that the average interest rate of interest which the states have to pay on their debt has remained relatively high – around 10 to 11% as compared to the Centre which is 9 to 6%.
Problems of Public Debt Policy The Union Government is in a position to raise loans at slightly more favorable terms than the States. It is able to offer a lower rate for loans of longer maturity than the states. Further, there is a slight disparity in the terms at which different states can borrow. Since independence, the Central Government has set up a series of banking and financial institutions which indeed constitute a captive market for Government loans. These captive markets is forced to absorb the huge amount of loans raised by the Centre.
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Types of Deficit in India Deficit financing has been used by the government of India for acquiring funds to finance economic development. When the Government cannot raise enough financial resources through taxation, it finances its development expenditure by running down its cash balances with the RBI, borrowing from the market and by borrowing from RBI. In this way, the government acquires necessary finance to secure real resources for economic development. The different kinds of deficit and financing of the deficit is as follows : a) Revenue Deficit Since 1950-51 the Government of India recognized only two types of deficit viz. Revenue Deficit and Overall Budgetary Deficit. Revenue Deficit = Revenue Receipt – Revenue Expenditure The concept of Revenue Deficit is simple and straight. Current Revenue Expenditure of the Central Government is composed of Plan and Non-plan Expenditure of the government, and is met out of current Revenue Receipts which included Net Tax Revenue and Non-tax Revenue of the Central Government. Total Revenue Receipts – 7,89,892 crores Total Revenue Expenditure – 10,97,162 crores Revenue Deficit = Receipts – Revenue Expenditure = -3,07,270 crores It indicates failure of the Government of India to meet its current expenditure from its Current Revenue. Till the middle of 1970s the Central Government enjoyed revenue surplus. But however after 1970s the Revenue Surplus started decreasing because of continued expansion of Current Expenditure, particularly of the Non-Plan category.
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b) Budget Deficit
Budget Deficit sometimes also referred as Overall Budget Deficit, occurs when the total expenditure exceeds total receipts. This is called as deficit financing. The Central Government met its overall budgetary deficit by net sale of treasury bills to RBI. This led to printing of additional currency by RBI. Budget Deficit = Total Receipts – Total Expenditure Here Total Receipts include Total Revenue Receipts and Total Capital Receipts, and Total Expenditure includes Total Revenue Expenditure and Total Capital Expenditure. Capital receipts included recoveries of loans, other receipts and borrowings and other liabilities. Total Receipts – 12,37,728 crores Total Expenditure - 12,57,728 crores Budget Deficit - -20,000 crores There was doubt whether borrowings would form a part of current deficit or not. Therefore the government of India came up with the concept of fiscal deficit.
c) Fiscal deficit Fiscal deficit is a budgetary deficit plus market borrowings and other liabilities of the government of India. It indicates the total borrowing requirement of the government from all sources. Fiscal deficit shows the gap between govt. receipts and govt. expenditure Fiscal Deficit = Revenue receipts + Capital receipts(only recovery of loans and other receipts – Total expenditure 789892 + 8612 – 1257728 = 459224 crs
d) Primary deficit Introduced in the recent years by the finance ministry. Primary deficit =fiscal deficit – interest payments
e) Effective Revenue deficit
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Effective revenue deficit strips out a portion of revenue expenditure that has been reclassified as grants for the creation of capital assets. The concept of the effective revenue deficit is introduced to address the structural imbalances in the revenue account and is being brought in as a fiscal parameter.
Purpose of Deficit financing in India Deficit financing in India was mainly adopted to enable the government of India to obtain the necessary resources for the five year plans. The levels of outlay laid down were of an order which could not only be met by taxation or revenue surplus. The gap in resources is made up partly through external assistance and borrowings. If the resources are inadequate then amount is borrowed from the market and RBI. Deficit financing cannot create real resources it can just help transfer the resources to the government. The real resources required for economic development must exist in the form of raw materials, equipments, skill and labor.
Effects of Deficit Financing 1) Fiscal Deficit and Expansion in public debt and other liabilities In the last decade, Fiscal Deficit was rising very fast and consequently, the public debt and other liabilities of the Government of India were literally multiplying. The total amount of public debt in 1990-91 was 314560 crores whereas in 2011-12 it was 4352389 crores. The volume of public debt has risen significantly over the years. As a result even the interest burden has increased. Nearly 40% of the current tax revenue of the central government goes towards payment of interest burden only.
2) Inflationary rise in prices The most serious disadvantage of deficit financing is the inflationary rise of prices. Deficit financing increases the total volume of money supply in the country and, therefore, rises the aggregate demand of goods and services. In the absence of a corresponding increase in aggregate supply of goods and services, deficit financing
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leads to rise in the price level. If in such conditions prices are not prevented from rising, the cost continue going up and the profitability of investment declines, so that investment stops or decreases. Therefore, price rise due to deficit financing must be prevented from becoming inflationary. 3) Forced Savings When inflation occurs as a result of deficit spending, consumption must decline as a result of rising prices and, therefore, savings become forced. But it is important to remember that inflation reduces compulsorily the consumption of only fixed income earners; the consumption of higher income groups generally increases during the same period. 4) Change in the pattern of investment Investment caused by the inflation may not be of the pattern sort under the plan. There are certain fields of investment which receives strong encouragement from inflation. Three such fields are; inventory holding, luxury, urban construction and foreign assets. Deficit financing leading to inflation may encourage types of investment which are not desirable for a developing economy. 5) Credit creation by banks Inflationary forces created by deficit financing are reinforced by increased credit creation by banks, increase in government spending without a corresponding decrease in private spending raises the bank deposits with the central bank. The commercial banks, therefore, find their liquidity increased and are in a position to make extra advance. The increased bank credit then adds to the inflationary pressure started by deficit financing Deficit financing could be a helpful device and a valuable instrument in promoting economic development in an under-developed country in the initial stages. The increase in the volume of money (because of deficit financing) results in higher demand for labor and other resources. As such, deficit financing is regarded as a good tool to activise a backward and developing economy.
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Union Budget 2013-14 The Union Budget of India, referred to as the Annual Financial Statement is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament. The budget, which is presented by means of the Financial Bill and the Appropriation bill has to be passed by the House before it can come into effect on April 1, the start of India's financial year. The Union Budget of India for 2013–2014 was presented by P. Chidambaram, the Finance Minister of India on 28 February 2013.These budgetary proposals would be applicable from 1 April 2012 to 31 March 2013. Key features ? ? ? ? Fiscal deficit for 2012-13 pegged at 5.2 per cent of GDP and estimated at 4.8 percent for 2013-14. Revenue deficit for the current year at 3.9 per cent and for 2013-14 at 3.3 percent. Fiscal deficit to be brought down to 3 per cent, revenue deficit to 1.5 per cent and effective revenue deficit to zero per cent by 2016-17. Plan expenditure in 2013-14 will be 29.4 per cent more than the Revised Estimate of 2012-13.
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Revenue Expenditure
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DIRECT TAX Tto raise direct tax receipts, finance minister P Chidambaram cast the tax net deeper in the Union Budget 2013-14 to collect an extra R13,300 crore, surpassing the direct tax revenue gains made by his own previous five Budgets. This contrasts starkly with the Budgets presented by his predecessor Pranab Mukherjee. Turning to the “relatively well placed in the society” to raise resources in a difficult year, Chidambaram proposed surcharge on individuals and companies above certain income levels, introduced a transaction tax in non-farm commodities (CTT) and proposed anti-tax evasion steps. The CTT paid, however, will be allowed as a deduction on income from commodity trade. He also raised the tax on payment of royalty or fee for technical services to non-residents from 10% to 25%. While he kept personal and corporate income tax rates steady, surcharge has been increased across the board to mop up extra revenue. Individuals with taxable income above R1 crore will have to pay 10% surcharge, making 42,800 people to pay more taxes in 2013-14. “The maximum effective tax rate for such an individual would be 34%,” said Homi Mistry, partner, Deloitte. Firms and local authorities with similar income too have to pay the same rate of surcharge. INDIRECT TAX The Union Budget 2013 rolled out many provisions for indirect taxes. Here's a look at some of these proposals and their impact:
Proposal Customs duty free allowance threshold in respect of jewellery for an Indian passenger residing abroad for over a year or a person who is transferring his residence to India has been revised from Rs 10,000 to Rs 50,000 for men and from Rs 20,000 to Rs 1,00,000 for women. Services by air conditioned restaurants not having license to serve liquor shall now trigger an effective liability of 3.71%.
Impact Non-Resident Indians (NRIs) residing abroad for over a year or foreigners transferring their residence to India will enjoy hassle-free immigration as they can import more jewellery resulting in customs duty savings of Rs 14,420 and Rs 28,840 for male and female passengers respectively. Dining out for a family of four costing Rs 1,500 will now be costlier by Rs 56.
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Basic excise duty on marble block increased from Rs 30 per sq metre to Rs 60 sq metre. Basic customs as well as excise duty on SUVs increased from 75% to 100% and from 27% to 30% respectively. Basic customs duty on set top boxes increased from 5% to 10%. Basic excise duty on mobile phones priced above Rs 2,000 increased from 1.03% to 6.18%. Service tax on agreement to buy an under construction residential unit priced at Rs 1 crore or above or a unit having carpet area of 2000 sq ft or more has been increased from effective 3.09% to 3.71%.
Households looking to upgrade to marble flooring for a 2-BHK with a carpet area of 1,000 sq ft will have to now pay an additional amount of approximately Rs 4,000. Imported Porche Cayenne with ex-showroom price in the range of Rs 50 lakh could now be costlier by Rs 5 to 7 lacs approximately. Imported HD/DVR set top boxes with market price of Rs 4,000 could now cost higher by Rs 4,175 or Rs 4,200. If you are planning to buy a Samsung Galaxy Grand costing Rs 21,500, you will have to pay at least Rs 700 more
Buying a house costing Rs 3 crore will now be costlier by approximately Rs 1.86 lakh.
Basic excise duty on cigarettes , cigars, cheroots and cigarillos increased by around 18-30 % from existing duty rates.
Injury to health by smoking will now be paralleled by injury to your pocket. One pack of 20 Classic Mild cigarettes costing Rs 120 could get costlier by Rs 8-10. Carpet worth Rs 10,000 could get cheaper by Rs 450-490 . Price of daily use floor coverings made up of coir or jute that costed about Rs 300 could be cost less by Rs 15. Buying the entry level yachts costing in the range of Rs 25 lacs could become expensive by approximately Rs 3.5 lakh. Get set to pay approximately Rs 90,000 extra, if you want to buy new Harley Davidson cruiser costing Rs 12 lacs.
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Handmade carpets have been fully exempted from payment of basic excise duty.
Basic customs duty on yachts and similar vessels increased from 10% to 25%. Basic customs duty on imported motor cycles having engine capacity of more than 800cc is increased from 60% to 75%.
An additional 12.36% burden on parking charges will have to be borne while parking vehicles in Service tax exemption on parking meant for malls, multiplexes, etc. The malls, multiplexes, general public withdrawn. offering parking at Rs 50 a day will now charge Rs 57 approximately. Courses like craftsman training schemes, Vocational courses offered by institutions apprentice program, health and para medicals, approved by State Councils included within gaming and animation, hardware repairing, etc., negative list for service tax ie no tax from approved institutions where the annual fee payable. was previously Rs 55,000-Rs 60,000 could get cheaper by Rs 6,000-Rs 7,500.
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Sectored Impact Assessment
AUTOMOTIVE: Expectation: The budget was expected to maintain status quo or decrease excise duties to support the demand in the auto industry that has been impaired by rising fuel prices and uncertainty in incomes
Budget Proposals: Excise duty and the peak rate of basic customs duty for automobiles are unchanged. on-taxi SUVs will face an excise duty of 30%, up from27%, while imported luxury cars will have a customs duty of 100%, up from 75%.
Impact: With no change in basic customs duty for automobiles, the status quo will be maintained in the auto industry. However, sales of SUVs, which are growing at 16%, will take a hit, affecting the market. Increase in excise duty on imported automobiles will contain the imports.
AVIATION: Expectation: For the loss-ridden Indian carriers that have failed to attract much investment from global carriers, despite the recent opening up of the sector, the big expectation was some relief on the air turbine fuel(ATF) and manufacture, repair and overhaul (MRO) taxes.
Budget Proposals: The budget has proposed toprovide a plan outlay of INR5,000 crore for the debtridden. Air India and duty concessions for the aircraftmanufacture, repair and overhaul (MRO) industry.
Impact: While reduction in MRO taxes is welcome, there is disappointment regarding the high ATF taxes
BANKING AND FINANCE
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Expectations: The budget was expected to propose the recapitalization of state-owned banks for complying with Basel III regulations.
Budget Proposals: In line with expectations, the budget proposes to recapitalize state-owned banks for complying with Basel III regulations with a package ofINR2517 crore. Housing loans have also got a boost with the proposal of income tax benefit for first-time buyers and increase in the budget for the Rural Housing Fund toINR6000 crore.
Impact: The budget has met expectations and given a boost to the rural and housing loan sectors
POWER
Expectations: For the critical power sector that stares fuel availability issues resulting in low plant load factors and delayed projects, the budget was expected to provide measures to revive the industry.
Budget Proposals: The budget has proposed issuing tax-free bonds of INR50,000 crore and a credit enhancement scheme from IIFCL and ADB. It has also sought to extend the sunset clause to avail of the10-year tax holiday by a year and increased the customs duty on imported steal coal to 2%. In addition, it has proposed generation-based incentives worth INR800 crore for wind energy projects. Furthermore, it has proposed that the PPP framework be adopted for coal production.
Impact: Adopting the PPP framework for coal production may solve the coal supply problems at power plants in the long term.
OIL AND GAS
Expectations: The budget was expected to address the issue of under-recoveries in the oil sector.
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Budget Proposals: The budget has proposed a shift from a profit-sharing to a revenue-sharing exploration policy and sought a review of the natural gas policy.
Impact: For the oil & gas industry, plagued by high crude oil prices, the revenue-sharing exploration policy could remove cost ambiguities and approval delays.
INFRASTRUCTURE
Expectations: For a sector that is fraught with delays and slowdown, there were many expectations from the budget on the investment and policy fronts.
Budget Proposals: The budget has proposed an independent regulatory authority for the roads sector and that tax-free infrastructure bonds for up to INR50,000 crore be issued. In the first half of the year, about 3000 km of highways are expected to be awarded. Two new major ports in West Bengal and Andhra Pradesh as well as a new outer harbor in TamilNadu have been proposed to increase port capacities. For the steel industry that faces weak demand and low margins, the budget has proposed zero excise duty, down from 7.5%, on galvanized steel sheets.
Impact: An independent regulatory authority will speed up projects, a primary factor for slow growth and investment. Due to this factor as well as the boost to the infrastructure and housing loan sectors, demand and growth in the cement and steel sectors could increase.
RETAIL
Expectations: The retail sector was looking forward to more clarity on the roadmap for GST implementation, since GST is expected to significantly reduce the indirect tax burden on the sector by removing the cascading taxes.
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Budget Proposals: The budget has proposed zero excise duty on readymade garments and a 6% duty on mobile phones costing more than INR2000. It has appealed for a consensus to facilitate the drafting of bills on constitutional amendment and GST legislation.
Impact: Until there is some clarity on policies, hesitation to invest in the sector will persist.
TEXTILES: Expectations: Following the slowdown in demand in the global and domestic markets, the budget this year was expected to add measures that would increase demand.
Budget Proposals: The budget has proposed to reintroduce zero excise duty on readymade garments, lower the customs duty on textile machinery and parts to 5% from 7.5%, and increase the customs duty on imported raw silk to 15%. It has also increased the budgetary allocation to INR4, 631 crore and extended the Technology Upgradation Funds Scheme (TUFS) with an allocation of INR2400 crore.
Impact: The relaxation in duties on readymade garments and textile machinery coupled with the extended TUFS should benefit the sector.
REAL ESTATE: Expectations: For a sector that is fraught with delays and slowdown, there were many expectations from the budget on the investment and policy fronts.
Budget Proposals: The budget has proposed additional tax benefits for first-time buyers availing home loans of INR25 lakh, an Urban Housing Fund of INR2000crore and increased allocation for the Rural Housing Fund by 50% to INR6000 crore. It has also proposed that service tax be reduced to 70% from 75% for homes and flats having a carpet area of 2,000 square feet or more, or value of INR1 crore or more.
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Impact: The budget will have a positive impact on the affordable homes segment. Demand and construction are expected to increase.
FMCG: Expectations: Despite a slowdown in urban markets, the rural sector has seen an upswing, and the budget was expected to support this growth.
Budget Proposals: The budget has proposed an increase in the allocation of resources for rural development. The excise duty on cigarettes has been increased by 18%.
Impact: The allocation of resources for rural development is expected to aid prosperity and demand in these areas. The increase in the excise duty on cigarettes is expected to affect demand marginally if it is passed on to consumers.
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Bibliography Websites ? www.indiabudget.nic.com ? www.economywatch.com ? www.personalmoney.in ? www.indiainfoline.com ? www.thehindubusinessline.com Magazine and newspapers? Competition success review. ? Economic times. Books ? ? Indian Economy by Ruddar Dutt & Sundharam Indian Economy by Mishra & Puri
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doc_848488887.docx
By Members:? ? ? ? ? Ishan Kelvalkar – 71 Ninad Khanvilkar - 73 Pallavi Konde – 75 Pratik Kothari – 77 Munish Kumar - 79
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Index
Serial No. 1 2 3 5 6 7 9 9
Topic Introduction Revenue of the central government Expenditure of the central government Types of Deficit Union Budget 2013-14 Impacts on India Conclusion Bibliography
Pg. No. 3 5 9 15 19 23 29 31
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Introduction to budget The Union Budget of India, referred to as the Annual Financial Statement in Article 112 of the Constitution of India, is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament. The budget, which is presented by means of the Financial Bill and the Appropriation bill, has to be passed by the House before it can come into effect on April 1, the start of India's financial year. The first Union budget of independent India was presented by R. K. Shanmukham Chetty on November 26, 1947.The Union budgets for the fiscal years 1959-61 to 1963-64, inclusive of the interim budget for 1962-63, were presented by Morarji Desai. Former Finance Minister Morarji Desai presented the budget ten times, the most by any. On February 29 in 1964 and 1968, he became the only finance minister to present the Union budget on his birthday. Vyas presented budgets that included five annual budgets, an interim budget during his first stint and one interim budget and three final budgets in his second tenure when he was both the Finance Minister and Deputy Prime Minister of India. After desai's resignation, Indira Gandhi, the then Prime Minister of India, took over the Ministry of Finance to become the only woman to hold the post of the finance minister. The Union Budget of India for 2012–2013 was presented by Pranab Mukherjee, the Finance Minister of India on 16 March 2012, this was the 7th budget of his career. These budgetary proposals would be applicable from 1 April 2012 to 31 March 2013. Until the year 2000, the Union Budget was announced at 5 pm on the last working day of the month of February. This practice was inherited from the Colonial Era, when the British Parliament would pass the budget in the noon followed by India in the evening of the day. It was Mr.Yashwant Sinha, the then Finance Minister of India in the NDA government (led by BJP) of Atal Bihari Vajpayee, who changed the ritual by announcing the 2001 Union Budget at 11 am. The Union Budget of India for 2013–2014 was presented by P. Chidambaram on 28 February 2013. (Thursday)
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Types of budget A. Current or 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:-Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies. Non-tax revenue:-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. B. 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.
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Revenue of the central government Tax revenue: - Taxation is the income that is gained by governments through taxation. There are different types of tax, the form in which tax revenue is collected also differs; furthermore, the agency that collects the tax may not be part of central government but may be an alternative third-party licensed to collect tax which they themselves will use. Income tax: - Tax levied directly on personal income. Annual charge levied on both earned income (wages, salaries, commission) and unearned income (dividends, interest, rents). In addition to financing a government's operations, progressive income taxation is designed to distribute wealth more evenly in a population, and to serve as automatic fiscal stabilizer to cushion the effects of economic cycles. Its two basic types are Personal income tax, levied on incomes of individuals, households, partnerships, and sole-proprietorships; and Corporation income tax, levied on profits (net earnings) of incorporated firms. However, presence of tax loopholes (whose number increases in direct proportion to the complexity of tax code) may allow some wealthy persons to escape higher taxes with out violating the letter of the tax laws. Income Slabs 1. 2. Where the total Income does not exceed Rs. 200000/Where the total Income exceeds Rs. 200000/- but does not exceed Rs.500000/3. Where the total Income exceeds Rs. 500000/- but does not exceed Rs.1000000/Income Tax Rate NIL 10% of the amount by which the total amount exceeds Rs.200000/Rs. 30000+20% of the amount by which the total amount exceeds Rs.500000/4. Where the total Income exceeds Rs. 1000000/Rs.130000+30% of the amount by which the total amount exceeds Rs.200000/-
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Corporate tax: - Countries impose corporate tax, also called corporation tax or company tax, on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Company income subject to tax is often determined much like taxable income for individuals. Generally, the tax is imposed on net profits. In some jurisdictions, rules for taxing companies may differ significantly from rules for taxing individuals. Certain corporate acts, like reorganizations, may not be taxed. Some types of entities may be exempt from tax. Central tax on property Wealth tax:- A wealth tax is generally conceived of as a levy based on the aggregate value of all household assets, including owner-occupied housing; cash, bank deposits, money funds and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts. A wealth tax is a tax on the accumulated stock of purchasing power, in contrast to income tax, which is a tax on the flow of assets. There are many lines of argument in favor of including a tax based on individual net wealth. Variations in how the details of the particular net wealth tax is implemented, including whether there are exemptions and whether other taxes are lowered or flattened will have an impact. "Income conventionally is defined as the sum of consumption and any change in net worth. This definition highlights three likely bases for a tax: income, consumption, and net worth. Tax rates can be applied to essentially any base (or combination of bases) to raise the revenue that government requires. Estate tax:- An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate (total value of the money and property) of a person who has died. In international tax law, there is a distinction between an estate tax and an inheritance tax: an estate tax is assessed on the assets of the deceased, while an inheritance tax is assessed on the legacies received by the beneficiaries of the estate. However, this distinction is not always respected in the language of tax laws. For example, the "inheritance tax" in the United Kingdom is a tax on the assets of the deceased, and is therefore, strictly speaking, an estate tax. In some jurisdictions the term used is death duty. For historical reasons that term is used colloquially (though not legally) in the United Kingdom and some Commonwealth nations.India had an estate tax from 1953 to 1985.
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Gift Tax: - Gifts are not regarded as Income chargeable to tax. However by virtue of Section 56(2) any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under “other sources” subject to exclusions as below: 1. Receipts on occasion of marriage of the individual 2. Receipts under a will or inheritance 3. Receipts received from a relative.
Gifts that are not taxable at all are those that are received from relatives. Relatives are defined by the following relationships of the individual: 1. Parents 2. Parents siblings and their spouse 3. Siblings 4. Spouse of siblings 5. Daughter and son 6. Spouse of daughter and son 7. Spouse 8. Spouse?s parents 9. Spouse„s siblings and their respective spouse. Even NRI?s are covered as long as they fall in the category of relatives. Therefore an individual Indian resident can receive a tax free gift from an NRI as long as he/she is that individuals relative. Any amount can be received as a gift from a relative. Also the purpose for which the gift is received from a relative is inconsequential as it is completely tax free. Thus a gift received can be used for any purpose ranging from purchasing shares to buying property to even simply keeping it with the bank.
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Tax on commodities and services Commodities taxes have been important sources of revenue for the central government. Central excise duties and custom duties are important taxes of central government. Custom duty:- Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow. A tax levied on imports (and, sometimes, on exports) by the customs authorities of a country to raise state revenue, and/or to protect domestic industries from more efficient or predatory competitors from abroad. Customs duty is based generally on the value of goods or upon the weight, dimensions, or some other criteria of the item (such as the size of the engine, in case of automobiles).It is a kind of indirect tax which is realized on goods of international trade. In economic sense, it is also a kind of consumption tax. Duties levied by the government in relation to imported items is referred to as import duty. In the same vein, duties realized on export consignments is called export duty. Tariff, which is actually a list of commodities along with the leviable rate (amount) of Customs duty, is popularly understood as Customs duty. Central excise :- Central Excise is a Governmental body which is run by the Central Board of Excise and Customs. Central Government under the authority of Entry 84 of the Union List (List 1) under Seventh Schedule read with Articles 268 to 281 of the Constitution of India. Service tax:- Service tax is a part of Central Excise in India. It is a tax levied on services provided in India, except the State of Jammu and Kashmir. The responsibility of collecting the tax lies with the Central Board of Excise and Customs (CBEC). The ex-Finance Minister of India, Pranab Mukherjee in his Budget speech has indicated the government's intent of merging all taxes like Service Tax, Excise and VAT into a common Goods and Service Tax by the year 2011. To achieve this objective, the rate of Central Excise and Service Tax will be progressively altered and brought to a common rate] In budget presented for 2008-2009 It was announced that all Small service providers whose turnover does not exceed 1,000,000 need not pay service tax.
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Expenditure of the central government:Governments today incur expenditure in order to fulfill the following roles in the economy: (a) To correct distortions of market failures. (b) Regulate private activity that might harm society. (c) Provide public goods and services (i.e.economic and social infrastructure). (d) Often engage in production activity. The increased participation of the government in economic activities has brought public spending to the forefront among the fiscal instruments. There are two components of expenditure – Plan and Non-Plan
lan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission.Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilizers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments.
Non-plan capital expenditure mainly includes defense, loans to public enterprises, loans to States, Union Territories and foreign governments. INDIA’S PUBLIC DEBT India?s public debt is used to finance productive assets such as railway construction, irrigation works. The increase in public debt mainly occurs due to war expenditures including capital expenditure on defense and the creation of rupee counter parts for the repatriated sterling debt. Efforts were made by the government to achieve the target and it could nearly get the
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targeted amounts in all the plans. Borrowing from the market and mobilizing small savings from the people were used since 1951 as a method of financing economic development in India. The planning commission liked ambitious targets to raise large funds from the market and through small savings schemes. This was how public borrowing and public debt came to be used to finance development. Thus the basic reason for expansion of public debt was the need for raising funds for rapid economic development. In the recent years however the government is borrowing to meet its current expenditure. The public debt of government of India is composed of Internal debt and External debt. Internal debt comprises of market loans, compensation bonds, prize bonds and 15 year annuity certificates. It also includes borrowings of temporary nature namely treasury bills issued to RBI, commercial banks etc. and also non negotiable, non interest bearing securities issued to international financial institutions like the IMF, World Bank etc. External debt represents borrowings by central government from external sources and are based upon historical rates of exchange. Public debts & other liabilities of Central Government 1950-51 A. Public debt a. Internal b. External B. Other Liabilities Total Public Debts & other Liabilities 2054 2022 32 511 2565 2002-03 1080300 1020690 59610 478600 1558900 2011-12
Internal debt comprises of market loans compensation bonds, price bonds and 15 year annuity certificates. It also includes borrowings of a temporary nature, viz. treasury bills issued to RBI, commercial banks etc. & also non negotiable instruments , non interest bearing documents issued to international financial organizations. External debts represent borrowings by the government from external sources & are based on historical rates of exchange.
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The above table shows, India?s public debt position from 1950-51. The significant points are covered under. ? Initially the Central Government used to borrow only for financing developmental schemes but today it is forced to borrow even for current revenue expenditure which is alarming. ? The increase in the external rate is explained by the rapid rate at which external assistance has been obtained and utilized in recent years. By far the largest share of India?s debt is provided by United States of America. Dollar loan constitute of 30 % of India?s external debt. The above table shows how public debt of India has increased from-Rs. 2054 crores in1950-51 to Rs. 1080300 crores in 2008-09 & Rs. ? In addition to public loan, the Government has certain other liabilities for instance, the govt. owns money to the general public for funds raised through small saving schemes, provident funds, deposits etc. which are all other liabilities. The govt. has to pay interest on these other liabilities. ? The outstanding liabilities of central government comprising internal and external liabilities as a proportion of GDP were 55 % in 1990-91: It showed a declining trend till 1998-99 when it touched 51 %, since then it is increasing. The increasing has not only raised the interest burden but also raised concerns about the sustainability of growing internal debt, which is a matter of serious concern. ? The burden of servicing of public debt is becoming heavier with every passing year. Same is the case with other liabilities. According to an agreement concluded in December 1947, all public debt of undivided India was taken over by Indian Government. Pakistan was allotted a share estimated at Rs. 300 crore which was to be paid in 50 equal installments starting from 1952 of which Pakistan has not returned even a single installment.
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Debt position of the states Earlier the total debt was classified into public debt and unfunded debt. In the new classification the major heads of debt are: 1. Internal debt This comprises current market loans and bonds issued in connection with the zamindari abolition, ways and means advances and overheads repayable within 7 days from RBI and loans from banks, other institutions such as loans from SBI and other commercial banks, National credit fund of NABARD, employees state insurance corporation, etc. 2. Loans and Advances from Central Government These include loans and advances from the Central Government for plan and non plan purpose. 3. Provident Funds These include state provident funds, insurance and pension funds, trusts and endowments, etc. The aggregate public debt of state governments as ratio of GDP is now around 30% and is increasing at 1% per year. Debt Position of the States` ITEMS Internal Debt Loans & Advances from Central Govt. Provident Funds Total Liabilities 130 2740 540 8750 Mar 1961 590 2020 Mar 1971 1850 6360 Mar 2012
From the above table, following observations can be made:-
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? ?
Internal debt of State was around 22 % of all states liabilities in 1960s. It has grown, however, over the years. The share of Central loans and advances in the total debt of State government is steadily declining. The heavy indebtedness was due to diverse factors such as clearing block loans for State Development plans, special accommodation, clearing overdrafts of state with RBI.
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State Government was gradually shifting towards higher cost sources. The interest burden (i.e. ratio of interest payment to revenue receipts) of States had steadily risen. Ways and means advances from RBI which include normal & special ways & means advances & overdraft from RBI repayable within seven working days frequently assumed serious proportions. Often State Government request the Central Government to convert their overdraft into loans.
The Crises of State Public Debt In the last few years, heavy public debt and large interest payments have crippled many states which are unable to undertake socially necessary expenditure. The states have the responsibility to maintain law and order, build and maintain infrastructure, provide health and sanitation, education and other essential services. Many states are unable to incur these necessary types of public expenditure. Many others are in serious financial crises and are literally limping along. On the one hand, public debt is mounting and on the other, states have been forced to pay high rates of interest. There are many reasons for this sad state of affairs. Since 1997-98 the fiscal deficit of these states as a proportion of GDP was around 3% and was under control. Since then, states were forced to run into huge fiscal deficits essentially because of rise in revenue deficit-state expenditure on salaries and salary hikes due to recommendations of the 6th Pay Commission. Secondly the Centre has been directly responsible for the high interest rates of State Public dept. The Centre has the power to determine the extent and terms of borrowing by states. This power has been abused by the Centre by various ways. One way is that the Centre charges high rates of interest on debt which it issues to the states. Further, when the state governments raise debt from World Bank and ADB, they are charged a higher rate by the Centre Government which acts as an
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intermediary. Finally, state governments which have a revenue deficit have to seek special permission from RBI to borrow from commercial banks.
The result of these factors is that the average interest rate of interest which the states have to pay on their debt has remained relatively high – around 10 to 11% as compared to the Centre which is 9 to 6%.
Problems of Public Debt Policy The Union Government is in a position to raise loans at slightly more favorable terms than the States. It is able to offer a lower rate for loans of longer maturity than the states. Further, there is a slight disparity in the terms at which different states can borrow. Since independence, the Central Government has set up a series of banking and financial institutions which indeed constitute a captive market for Government loans. These captive markets is forced to absorb the huge amount of loans raised by the Centre.
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Types of Deficit in India Deficit financing has been used by the government of India for acquiring funds to finance economic development. When the Government cannot raise enough financial resources through taxation, it finances its development expenditure by running down its cash balances with the RBI, borrowing from the market and by borrowing from RBI. In this way, the government acquires necessary finance to secure real resources for economic development. The different kinds of deficit and financing of the deficit is as follows : a) Revenue Deficit Since 1950-51 the Government of India recognized only two types of deficit viz. Revenue Deficit and Overall Budgetary Deficit. Revenue Deficit = Revenue Receipt – Revenue Expenditure The concept of Revenue Deficit is simple and straight. Current Revenue Expenditure of the Central Government is composed of Plan and Non-plan Expenditure of the government, and is met out of current Revenue Receipts which included Net Tax Revenue and Non-tax Revenue of the Central Government. Total Revenue Receipts – 7,89,892 crores Total Revenue Expenditure – 10,97,162 crores Revenue Deficit = Receipts – Revenue Expenditure = -3,07,270 crores It indicates failure of the Government of India to meet its current expenditure from its Current Revenue. Till the middle of 1970s the Central Government enjoyed revenue surplus. But however after 1970s the Revenue Surplus started decreasing because of continued expansion of Current Expenditure, particularly of the Non-Plan category.
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b) Budget Deficit
Budget Deficit sometimes also referred as Overall Budget Deficit, occurs when the total expenditure exceeds total receipts. This is called as deficit financing. The Central Government met its overall budgetary deficit by net sale of treasury bills to RBI. This led to printing of additional currency by RBI. Budget Deficit = Total Receipts – Total Expenditure Here Total Receipts include Total Revenue Receipts and Total Capital Receipts, and Total Expenditure includes Total Revenue Expenditure and Total Capital Expenditure. Capital receipts included recoveries of loans, other receipts and borrowings and other liabilities. Total Receipts – 12,37,728 crores Total Expenditure - 12,57,728 crores Budget Deficit - -20,000 crores There was doubt whether borrowings would form a part of current deficit or not. Therefore the government of India came up with the concept of fiscal deficit.
c) Fiscal deficit Fiscal deficit is a budgetary deficit plus market borrowings and other liabilities of the government of India. It indicates the total borrowing requirement of the government from all sources. Fiscal deficit shows the gap between govt. receipts and govt. expenditure Fiscal Deficit = Revenue receipts + Capital receipts(only recovery of loans and other receipts – Total expenditure 789892 + 8612 – 1257728 = 459224 crs
d) Primary deficit Introduced in the recent years by the finance ministry. Primary deficit =fiscal deficit – interest payments
e) Effective Revenue deficit
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Effective revenue deficit strips out a portion of revenue expenditure that has been reclassified as grants for the creation of capital assets. The concept of the effective revenue deficit is introduced to address the structural imbalances in the revenue account and is being brought in as a fiscal parameter.
Purpose of Deficit financing in India Deficit financing in India was mainly adopted to enable the government of India to obtain the necessary resources for the five year plans. The levels of outlay laid down were of an order which could not only be met by taxation or revenue surplus. The gap in resources is made up partly through external assistance and borrowings. If the resources are inadequate then amount is borrowed from the market and RBI. Deficit financing cannot create real resources it can just help transfer the resources to the government. The real resources required for economic development must exist in the form of raw materials, equipments, skill and labor.
Effects of Deficit Financing 1) Fiscal Deficit and Expansion in public debt and other liabilities In the last decade, Fiscal Deficit was rising very fast and consequently, the public debt and other liabilities of the Government of India were literally multiplying. The total amount of public debt in 1990-91 was 314560 crores whereas in 2011-12 it was 4352389 crores. The volume of public debt has risen significantly over the years. As a result even the interest burden has increased. Nearly 40% of the current tax revenue of the central government goes towards payment of interest burden only.
2) Inflationary rise in prices The most serious disadvantage of deficit financing is the inflationary rise of prices. Deficit financing increases the total volume of money supply in the country and, therefore, rises the aggregate demand of goods and services. In the absence of a corresponding increase in aggregate supply of goods and services, deficit financing
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leads to rise in the price level. If in such conditions prices are not prevented from rising, the cost continue going up and the profitability of investment declines, so that investment stops or decreases. Therefore, price rise due to deficit financing must be prevented from becoming inflationary. 3) Forced Savings When inflation occurs as a result of deficit spending, consumption must decline as a result of rising prices and, therefore, savings become forced. But it is important to remember that inflation reduces compulsorily the consumption of only fixed income earners; the consumption of higher income groups generally increases during the same period. 4) Change in the pattern of investment Investment caused by the inflation may not be of the pattern sort under the plan. There are certain fields of investment which receives strong encouragement from inflation. Three such fields are; inventory holding, luxury, urban construction and foreign assets. Deficit financing leading to inflation may encourage types of investment which are not desirable for a developing economy. 5) Credit creation by banks Inflationary forces created by deficit financing are reinforced by increased credit creation by banks, increase in government spending without a corresponding decrease in private spending raises the bank deposits with the central bank. The commercial banks, therefore, find their liquidity increased and are in a position to make extra advance. The increased bank credit then adds to the inflationary pressure started by deficit financing Deficit financing could be a helpful device and a valuable instrument in promoting economic development in an under-developed country in the initial stages. The increase in the volume of money (because of deficit financing) results in higher demand for labor and other resources. As such, deficit financing is regarded as a good tool to activise a backward and developing economy.
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Union Budget 2013-14 The Union Budget of India, referred to as the Annual Financial Statement is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament. The budget, which is presented by means of the Financial Bill and the Appropriation bill has to be passed by the House before it can come into effect on April 1, the start of India's financial year. The Union Budget of India for 2013–2014 was presented by P. Chidambaram, the Finance Minister of India on 28 February 2013.These budgetary proposals would be applicable from 1 April 2012 to 31 March 2013. Key features ? ? ? ? Fiscal deficit for 2012-13 pegged at 5.2 per cent of GDP and estimated at 4.8 percent for 2013-14. Revenue deficit for the current year at 3.9 per cent and for 2013-14 at 3.3 percent. Fiscal deficit to be brought down to 3 per cent, revenue deficit to 1.5 per cent and effective revenue deficit to zero per cent by 2016-17. Plan expenditure in 2013-14 will be 29.4 per cent more than the Revised Estimate of 2012-13.
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Revenue Expenditure
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DIRECT TAX Tto raise direct tax receipts, finance minister P Chidambaram cast the tax net deeper in the Union Budget 2013-14 to collect an extra R13,300 crore, surpassing the direct tax revenue gains made by his own previous five Budgets. This contrasts starkly with the Budgets presented by his predecessor Pranab Mukherjee. Turning to the “relatively well placed in the society” to raise resources in a difficult year, Chidambaram proposed surcharge on individuals and companies above certain income levels, introduced a transaction tax in non-farm commodities (CTT) and proposed anti-tax evasion steps. The CTT paid, however, will be allowed as a deduction on income from commodity trade. He also raised the tax on payment of royalty or fee for technical services to non-residents from 10% to 25%. While he kept personal and corporate income tax rates steady, surcharge has been increased across the board to mop up extra revenue. Individuals with taxable income above R1 crore will have to pay 10% surcharge, making 42,800 people to pay more taxes in 2013-14. “The maximum effective tax rate for such an individual would be 34%,” said Homi Mistry, partner, Deloitte. Firms and local authorities with similar income too have to pay the same rate of surcharge. INDIRECT TAX The Union Budget 2013 rolled out many provisions for indirect taxes. Here's a look at some of these proposals and their impact:
Proposal Customs duty free allowance threshold in respect of jewellery for an Indian passenger residing abroad for over a year or a person who is transferring his residence to India has been revised from Rs 10,000 to Rs 50,000 for men and from Rs 20,000 to Rs 1,00,000 for women. Services by air conditioned restaurants not having license to serve liquor shall now trigger an effective liability of 3.71%.
Impact Non-Resident Indians (NRIs) residing abroad for over a year or foreigners transferring their residence to India will enjoy hassle-free immigration as they can import more jewellery resulting in customs duty savings of Rs 14,420 and Rs 28,840 for male and female passengers respectively. Dining out for a family of four costing Rs 1,500 will now be costlier by Rs 56.
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Basic excise duty on marble block increased from Rs 30 per sq metre to Rs 60 sq metre. Basic customs as well as excise duty on SUVs increased from 75% to 100% and from 27% to 30% respectively. Basic customs duty on set top boxes increased from 5% to 10%. Basic excise duty on mobile phones priced above Rs 2,000 increased from 1.03% to 6.18%. Service tax on agreement to buy an under construction residential unit priced at Rs 1 crore or above or a unit having carpet area of 2000 sq ft or more has been increased from effective 3.09% to 3.71%.
Households looking to upgrade to marble flooring for a 2-BHK with a carpet area of 1,000 sq ft will have to now pay an additional amount of approximately Rs 4,000. Imported Porche Cayenne with ex-showroom price in the range of Rs 50 lakh could now be costlier by Rs 5 to 7 lacs approximately. Imported HD/DVR set top boxes with market price of Rs 4,000 could now cost higher by Rs 4,175 or Rs 4,200. If you are planning to buy a Samsung Galaxy Grand costing Rs 21,500, you will have to pay at least Rs 700 more
Buying a house costing Rs 3 crore will now be costlier by approximately Rs 1.86 lakh.
Basic excise duty on cigarettes , cigars, cheroots and cigarillos increased by around 18-30 % from existing duty rates.
Injury to health by smoking will now be paralleled by injury to your pocket. One pack of 20 Classic Mild cigarettes costing Rs 120 could get costlier by Rs 8-10. Carpet worth Rs 10,000 could get cheaper by Rs 450-490 . Price of daily use floor coverings made up of coir or jute that costed about Rs 300 could be cost less by Rs 15. Buying the entry level yachts costing in the range of Rs 25 lacs could become expensive by approximately Rs 3.5 lakh. Get set to pay approximately Rs 90,000 extra, if you want to buy new Harley Davidson cruiser costing Rs 12 lacs.
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Handmade carpets have been fully exempted from payment of basic excise duty.
Basic customs duty on yachts and similar vessels increased from 10% to 25%. Basic customs duty on imported motor cycles having engine capacity of more than 800cc is increased from 60% to 75%.
An additional 12.36% burden on parking charges will have to be borne while parking vehicles in Service tax exemption on parking meant for malls, multiplexes, etc. The malls, multiplexes, general public withdrawn. offering parking at Rs 50 a day will now charge Rs 57 approximately. Courses like craftsman training schemes, Vocational courses offered by institutions apprentice program, health and para medicals, approved by State Councils included within gaming and animation, hardware repairing, etc., negative list for service tax ie no tax from approved institutions where the annual fee payable. was previously Rs 55,000-Rs 60,000 could get cheaper by Rs 6,000-Rs 7,500.
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Sectored Impact Assessment
AUTOMOTIVE: Expectation: The budget was expected to maintain status quo or decrease excise duties to support the demand in the auto industry that has been impaired by rising fuel prices and uncertainty in incomes
Budget Proposals: Excise duty and the peak rate of basic customs duty for automobiles are unchanged. on-taxi SUVs will face an excise duty of 30%, up from27%, while imported luxury cars will have a customs duty of 100%, up from 75%.
Impact: With no change in basic customs duty for automobiles, the status quo will be maintained in the auto industry. However, sales of SUVs, which are growing at 16%, will take a hit, affecting the market. Increase in excise duty on imported automobiles will contain the imports.
AVIATION: Expectation: For the loss-ridden Indian carriers that have failed to attract much investment from global carriers, despite the recent opening up of the sector, the big expectation was some relief on the air turbine fuel(ATF) and manufacture, repair and overhaul (MRO) taxes.
Budget Proposals: The budget has proposed toprovide a plan outlay of INR5,000 crore for the debtridden. Air India and duty concessions for the aircraftmanufacture, repair and overhaul (MRO) industry.
Impact: While reduction in MRO taxes is welcome, there is disappointment regarding the high ATF taxes
BANKING AND FINANCE
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Expectations: The budget was expected to propose the recapitalization of state-owned banks for complying with Basel III regulations.
Budget Proposals: In line with expectations, the budget proposes to recapitalize state-owned banks for complying with Basel III regulations with a package ofINR2517 crore. Housing loans have also got a boost with the proposal of income tax benefit for first-time buyers and increase in the budget for the Rural Housing Fund toINR6000 crore.
Impact: The budget has met expectations and given a boost to the rural and housing loan sectors
POWER
Expectations: For the critical power sector that stares fuel availability issues resulting in low plant load factors and delayed projects, the budget was expected to provide measures to revive the industry.
Budget Proposals: The budget has proposed issuing tax-free bonds of INR50,000 crore and a credit enhancement scheme from IIFCL and ADB. It has also sought to extend the sunset clause to avail of the10-year tax holiday by a year and increased the customs duty on imported steal coal to 2%. In addition, it has proposed generation-based incentives worth INR800 crore for wind energy projects. Furthermore, it has proposed that the PPP framework be adopted for coal production.
Impact: Adopting the PPP framework for coal production may solve the coal supply problems at power plants in the long term.
OIL AND GAS
Expectations: The budget was expected to address the issue of under-recoveries in the oil sector.
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Budget Proposals: The budget has proposed a shift from a profit-sharing to a revenue-sharing exploration policy and sought a review of the natural gas policy.
Impact: For the oil & gas industry, plagued by high crude oil prices, the revenue-sharing exploration policy could remove cost ambiguities and approval delays.
INFRASTRUCTURE
Expectations: For a sector that is fraught with delays and slowdown, there were many expectations from the budget on the investment and policy fronts.
Budget Proposals: The budget has proposed an independent regulatory authority for the roads sector and that tax-free infrastructure bonds for up to INR50,000 crore be issued. In the first half of the year, about 3000 km of highways are expected to be awarded. Two new major ports in West Bengal and Andhra Pradesh as well as a new outer harbor in TamilNadu have been proposed to increase port capacities. For the steel industry that faces weak demand and low margins, the budget has proposed zero excise duty, down from 7.5%, on galvanized steel sheets.
Impact: An independent regulatory authority will speed up projects, a primary factor for slow growth and investment. Due to this factor as well as the boost to the infrastructure and housing loan sectors, demand and growth in the cement and steel sectors could increase.
RETAIL
Expectations: The retail sector was looking forward to more clarity on the roadmap for GST implementation, since GST is expected to significantly reduce the indirect tax burden on the sector by removing the cascading taxes.
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Budget Proposals: The budget has proposed zero excise duty on readymade garments and a 6% duty on mobile phones costing more than INR2000. It has appealed for a consensus to facilitate the drafting of bills on constitutional amendment and GST legislation.
Impact: Until there is some clarity on policies, hesitation to invest in the sector will persist.
TEXTILES: Expectations: Following the slowdown in demand in the global and domestic markets, the budget this year was expected to add measures that would increase demand.
Budget Proposals: The budget has proposed to reintroduce zero excise duty on readymade garments, lower the customs duty on textile machinery and parts to 5% from 7.5%, and increase the customs duty on imported raw silk to 15%. It has also increased the budgetary allocation to INR4, 631 crore and extended the Technology Upgradation Funds Scheme (TUFS) with an allocation of INR2400 crore.
Impact: The relaxation in duties on readymade garments and textile machinery coupled with the extended TUFS should benefit the sector.
REAL ESTATE: Expectations: For a sector that is fraught with delays and slowdown, there were many expectations from the budget on the investment and policy fronts.
Budget Proposals: The budget has proposed additional tax benefits for first-time buyers availing home loans of INR25 lakh, an Urban Housing Fund of INR2000crore and increased allocation for the Rural Housing Fund by 50% to INR6000 crore. It has also proposed that service tax be reduced to 70% from 75% for homes and flats having a carpet area of 2,000 square feet or more, or value of INR1 crore or more.
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Impact: The budget will have a positive impact on the affordable homes segment. Demand and construction are expected to increase.
FMCG: Expectations: Despite a slowdown in urban markets, the rural sector has seen an upswing, and the budget was expected to support this growth.
Budget Proposals: The budget has proposed an increase in the allocation of resources for rural development. The excise duty on cigarettes has been increased by 18%.
Impact: The allocation of resources for rural development is expected to aid prosperity and demand in these areas. The increase in the excise duty on cigarettes is expected to affect demand marginally if it is passed on to consumers.
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Bibliography Websites ? www.indiabudget.nic.com ? www.economywatch.com ? www.personalmoney.in ? www.indiainfoline.com ? www.thehindubusinessline.com Magazine and newspapers? Competition success review. ? Economic times. Books ? ? Indian Economy by Ruddar Dutt & Sundharam Indian Economy by Mishra & Puri
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