BUDGET GLOSSARY

The government's annual budget exerc se s no d !!erent !rom the "a# "e all manage our household budgets$ The onl# d !!erence% the !ormer's nt m dat ng &argon$ Team ET s m'l ! es the m'ortant budget tems !or ts readers n a ! ve('art ser es$ )e have* ho"ever* de'arted !rom the usual "a# glossar es are 'resented* n al'habet cal order* to a !lo"(t#'e !ormat "here n terms are ex'la ned as the reader "ould encounter them n the budget$ Read on

ON the budget day, the finance minister tables 10-12 documents. Of these, the main and most important document is the Annual Financial Statement. A++UAL ,-+A+.-AL STATE/E+T% Article 112 of the constitution re uires the go!ernment to present to the "arliament a statement of estimated receipts and e#penditure in respect of e!ery financial year, April 1 to $arch %1. &his statement is the annual financial statement. &he annual financial statement is usually a 'hite 10-page document. (t is di!ided into three parts, )onsolidated Fund, )ontingency Fund and "ublic Account. For each of these funds the go!ernment has to present a statement of receipts and e#penditure. .O+SOL-DATED ,U+D% &his is the most important of all the go!ernment funds. All re!enues raised by the go!ernment, money borro'ed and receipts from loans gi!en by the go!ernment flo' into the consolidated fund of (ndia. All go!ernment e#penditure is made from this fund, e#cept for e#ceptional items met from the )ontingency Fund or the "ublic Account. (mportantly, no money can be 'ithdra'n from this fund 'ithout "arliament*s appro!al. .O+T-+GE+.Y ,U+D% As the name suggests, any urgent or unforeseen e#penditure is met from this fund. &he +s ,00-crore fund is at the disposal of the "resident. Any e#penditure incurred from this fund re uires a subse uent appro!al from "arliament and the amount 'ithdra'n is returned to the fund from the consolidated fund. 0UBL-. A..OU+T% &his fund is to account for flo's for those transactions 'here the go!ernment is merely acting as a ban-er. For instance, pro!ident funds, small sa!ings and so on. &hese funds do not belong to the go!ernment. &hey ha!e to be paid bac- at some time to their rightful o'ners. .ecause of this nature of the fund, e#penditure from it are not re uired to be appro!ed by "arliament. For each of these funds the go!ernment has to present a statement of receipts and

e#penditure. (t is important to note that all money flo'ing into these funds is called receipts, the funds recei!ed, and not re!enue. +e!enue in budget conte#t has a specific meaning. &he )onstitution re uires that the budget has to distinguish bet'een receipts and e#penditure on re!enue account from other e#penditure. So all receipts in, say consolidated fund, are split into +e!enue .udget /re!enue account0 and )apital .udget /capital account0, 'hich includes nonre!enue receipts and e#penditure. For understanding these budgets - +e!enue and )apital - it is important to understand re!enue receipts, re!enue e#penditure, capital receipts and capital e#penditure. RE1E+UE RE.E-0T2E30E+D-TURE% All receipts and e#penditure that in general do not entail sale or creation of assets are included under the re!enue account. On the receipts side, ta#es 'ould be the most important re!enue receipt. On the e#penditure side, anything that does not result in creation of assets is treated as re!enue e#penditure. Salaries, subsidies and interest payments are good e#amples of re!enue e#penditure. .A0-TAL RE.E-0T2E30E+D-TURE% All receipts and e#penditure that li uidate or create an asset 'ould in general be under capital account. For instance, if the go!ernment sells shares /disin!ests0 in public sector companies, li-e it did in the case of $aruti, it is in effect selling an asset. &he receipts from the sale 'ould go under capital account. On the other hand, if the go!ernment gi!es someone a loan from 'hich it e#pects to recei!e interest, that e#penditure 'ould go under the capital account. (n respect of all the funds the go!ernment has to prepare a +e!enue .udget /detailing re!enue receipts and re!enue e#penditure0 and a capital budget /capital receipts and capital e#penditure0. )ontingency Fund is clearly not that important. "ublic Account is important in that it gi!es a !ie' of select sa!ings and ho' they are being used, but not that rele!ant from a budget perspecti!e. &he consolidated fund is the -ey to the budget. 1e 'ill ta-e that up in the ne#t part. .OR0ORAT-O+ TA3% &a# on profits of companies. TA3ES O+ -+.O/E OT4ER T4A+ .OR0ORAT-O+ TA3% (ncome ta# paid by non-corporate assesses, indi!iduals, for instance. ,R-+GE BE+E,-T TA3 5,BT6% &he ta#ation of per uisites 2 or fringe benefits 2 pro!ided by an employer to his employees, in addition to the cash salary or 'ages paid, is fringe benefit ta#. (t 'as introduced in the 200,-03 budget. &he go!ernment felt that many companies 'ere disguising per uisites such as club facilities as ordinary business e#penses, 'hich escaped ta#ation altogether. 4mployers ha!e to no' pay a ta# /F.&0 on a percentage of the e#pense incurred on such per uisites. SE.UR-T-ES TRA+SA.T-O+ TA3 5STT6% Sale of any asset /shares, property etc0 results in loss or profit. 5epending on the time the asset is held, such profits and losses are categorised as long term or short term capital gain6loss. (n the 2007-0, budget, the go!ernment abolished long-term capital gains ta# on shares /ta# on profits made on sale of shares held for more than a year0

and replaced it S&&. (t is a -ind of turno!er ta# 'here the in!estor has to pay a small ta# on the total consideration paid6recei!ed in a share transaction. BA+7-+G .AS4 TRA+SA.T-O+ TA3 5B.TT6% (ntroduced in the 200,-03 budget, .)&& is a small ta# on cash 'ithdra'al from bane#ceeding a particular amount in a single day. &he basic idea is to curb the blaceconomy and generate a record of big cash transactions. .USTO/S% &a#es imposed on imports. 1hile re!enue is an important consideration, customs duties may also be le!ied to protect the domestic industry or sector /agriculture, for one0, in retaliation against measures by other countries etc. U+-O+ E3.-SE DUTY% 5uties imposed on goods manufactured in the country. SER1-.E TA3% (t is a ta# on ser!ices rendered. &elephone bill, for instance, attracts a ser!ice ta#. 1hile on ta#es, let us ta-e a loo- at an important classification8 direct ta# and indirect ta#, 'hich finds 'ide mention in the budget. D-RE.T TA3% &raditionally, these are ta#es 'here the burden of ta# falls on the person on 'hom it is le!ied. &hese are largely ta#es on income or 'ealth. (ncome ta# /on corporates and indi!iduals0, F.&, S&& and .)&& are direct ta#es. -+D-RE.T TA3% (n the case of indirect ta#es the incidence of ta# is usually not on the person 'ho pays the ta#. &hese are largely ta#es on e#penditure and include )ustoms, e#cise and ser!ice ta#. (ndirect ta#es are considered regressi!e, the burden on the rich and the poor is ali-e. &hat is 'hy go!ernments stri!e to raise a higher proportion of ta#es through direct ta#es. $o!ing on, 'e come to the ne#t important receipt item in the re!enue account, non-ta# re!enue. +O+(TA3 RE1E+UE% &he most important receipts under this head are interest payments /recei!ed on loans gi!en by the go!ernment to states, rail'ays and others0 and di!idends and profits recei!ed from public sector companies. 9arious ser!ices pro!ided by the go!ernment 2 general ser!ices such as police and defence, social and community ser!ices such as medical ser!ices, and economic ser!ices such as po'er and rail'ays 2 also yield re!enue for the go!ernment. &hough +ail'ays are a separate department, all its receipts and e#penditure are routed through the consolidated fund. GRA+TS(-+(A-D A+D .O+TR-BUT-O+S% &he third receipt item in the re!enue account is relati!ely small grants-in-aid and

contributions. &hese are in the nature of pure transfers to the go!ernment 'ithout any repayment obligation. 1e no' loo- at the disbursements section of the +e!enue Account of the consolidated fund. (t lists all the re!enue e#penditures of the go!ernment. &hese include e#pense incurred on organs of state such as "arliament, :udiciary and elections. A substantial amount goes into administering fiscal ser!ices such as ta# collection. &he biggest item is interest payment on loans ta-en by the go!ernment. 5efence and other ser!ices such as police also get a si;eable share. <a!ing loo-ed at receipts and e#penditure on re!enue account 'e come to an important item, the difference bet'een the t'o, the re!enue deficit. RE1E+UE DE,-.-T% &he e#cess of disbursements o!er receipts on re!enue account is called re!enue deficit. &his is an important control indicator. All e#penditure on re!enue account should ideally be met from receipts on re!enue account= the re!enue deficit should be ;ero. 1hen re!enue disbursement e#ceeds receipts, the go!ernment 'ould ha!e to borro'. Such borro'ing is considered regressi!e as it is for consumption and not for creating assets. (t results in a greater proportion of re!enue receipts going to'ards interest payment and e!entually, a debt trap. &he F+.$ Act, 'hich 'e 'ill ta-e up later, re uires the go!ernment to reduce fiscal deficit to ;ero by 200>-0?. RE.E-0TS in the capital account of the consolidated fund are grouped under three broad heads 2 public debt, reco!eries of loans and ad!ances, and miscellaneous receipts. 0UBL-. DEBT% (n normal accounting, debt is a stoc-, to be measured at a point of time, 'hile borro'ing and repayment during a year are flo's, to be measured o!er a period of time. (n .udget parlance, ho'e!er, you*ll find public debt receipts and public debt disbursals. &hese are respecti!ely borro'ings and repayments during the year. &he difference bet'een the t'o is the net accretion to the public debt. "ublic debt can be split into t'o heads, internal debt /money borro'ed 'ithin the country0 and e#ternal debt /funds borro'ed from non-(ndian sources0. &he internal debt comprises of treasury .ills, mar-et stabilisation scheme, 'ays and means ad!ance, and securities against small sa!ings. TREASURY B-LL 5T(B-LLS6% &hese are bonds /debt securities0 'ith maturity of less than a year. &hese are issued to meet short-term mismatches in receipts and e#penditure. .onds of longer maturity are called dated securities. /AR7ET STAB-L-SAT-O+ S.4E/E 5/SS6% &he scheme 'as launched in April 2007 to strengthen +eser!e .an- of (ndia*s /+.(0 ability to conduct e#change rate and monetary management. &he +.( mops up e#cess li uidity, created, for instance 'hen the central ban- buys up huge uantities of dollar inflo's to pre!ent undesirably fast appreciation of the rupee, by selling its stoc- of go!ernment securities to ban-s. 1hen the +.( began to run short of of go!ernment

securities that had been issued to meet the go!ernment*s borro'ing re uirement, the $SS 'as launched. &hese securities are issued not to meet the go!ernment*s e#penditure but to pro!ide the +.( 'ith a stoc- of securities 'ith 'hich to inter!ene in the mar-et for managing li uidity. )AYS A+D /EA+S AD1A+.E 5)/A6% One of the many roles of the +.( is to ser!e as ban-er for both the )entral and State go!ernments. (n this capacity, the +.( pro!ides temporary support to tide o!er mismatches in their receipts and payments in the form of 'ays and means ad!ances. SE.UR-T-ES AGA-+ST S/ALL SA1-+GS% &he go!ernment meets a small part of its loan re uirement by appropriating small sa!ings collection by issuing securities to the fund. /-S.ELLA+EOUS RE.E-0TS% &hese are primarily receipts from disin!esment in public sector underta-ings. &he capital account receipts of the consolidated fund 2 public debt, reco!eries of loans and ad!ances, and miscellaneous receipts 2 and re!enue receipts ma-e up the total receipts of the consolidated fund. 1e no' ta-e up the disbursements on capital account from the consolidated fund. &he first part deals 'ith capital e#penditure incurred on the !arious ser!ices 2 general ser!ices, social ser!ices and, economic ser!ices. Some of the biggest e#penditure items under these heads are defence ser!ices, in!estment in agricultural financial institutions and capital to rail'ays. &he second part ta-es up the public debt /repayments of loans0 and !arious loans made by the go!ernment. &he consolidated fund has certain disbursements @charged@ to the fund. &hese are obligations that ha!e to be met in any case and, therefore, do not ha!e to be !oted by the Ao- Sabha. &hese include interest payments and certain e#penditure such as emoluments of the "resident, salary and allo'ances of spea-er, deputy chairman of the +a:ya Sabha, and allo'ances and pensions of Supreme )ourt :udges. "arliament and so on. &his concludes the discussion on consolidated fund. 1e no' mo!e on to the other budget documents, 'hich gi!e a more detailed presentation of the consolidated fund. BUDGET AT A GLA+.E% &his is ob!iously a snap shot of the budget, for an easy understanding. Nonetheless, it introduces some ne' concepts. 1hile receipts are bro-en do'n into re!enue and capital, unli-e the consolidated fund, it sho's the centre*s net ta# re!enues. &his is because a decent part of the gross ta# re!enue, as decided by the rele!ant Finance )ommission, flo's to the state go!ernments. .udget at a glance also segments e#penditure into plan and non-plan e#penditure, instead of splitting into re!enue and capital. 4ach of these is then split into re!enue account and capital account. .efore discussing plan and non-plan e#penditure it is important to discuss the concept of the central plan. .E+TRAL 0LA+% )entral or annual plans are essentially the fi!e year plans bro-en do'n into fi!e

annual instalments. &hrough these annual plans the go!ernment achie!es the ob:ecti!es of the Fi!e-Bear "lans. &he funding of the central plan is split almost e!enly bet'een go!ernment support /from the budget0 and internal and e#tra budgetary resources of public enterprises. &he go!ernment*s support to the central plan is called the budget support. 0LA+ E30E+D-TURE% &his is essentially the .udget support to the central plan and the central assistance to state and Cnion territory plans. Ai-e all .udget heads, this is also split into re!enue and capital components. +O+(0LA+ E30E+D-TURE% &his is largely the re!enue e#penditure of the go!ernment. &he biggest item of e#penditure are interest payments, subsidies, salaries, defence and pension. &he capital component of the non-plan e#penditure is relati!ely small 'ith the largest allocation going to defence. (t is important to note that the entire defence e#penditure is non-plan e#penditure. 1e 'ill no' ta-e up the !arious deficits and the components of plan and non-plan e#penditure. (n the .udget at a Dlance, the plan and the non-plan e#penditure ma-e up the total go!ernment e#penditure. &his brings us to the concept of deficit. ,-S.AL DE,-.-T% 1hen the go!ernment*s non-borro'ed receipts /re!enue receipts plus loan repayments recei!ed by the go!ernment plus miscellaneous capital receipts, primarily disin!estment proceeds0 fall short of its entire e#penditure, it has to borro' money from the public to meet the shortfall. &he e#cess of total e#penditure o!er total nonborro'ed receipts is called the fiscal deficit. 0R-/ARY DE,-.-T% &he re!enue e#penditure includes interest payments on go!ernment*s earlier borro'ings. &he primary deficit is the fiscal deficit less interest payments. A shrin-ing primary deficit 'ould indicate progress to'ards fiscal health. 1e had already discussed re!enue deficit earlier. &he .udget document also mentions the deficit as a percentage of the D5". &his is to facilitate comparison and also get a proper perspecti!e. (n ab- SAAA$ solute terms, the fiscal deficit may be large, but if it is small compared to the si;e of the economy then it is not such a bad thing. "rudent fiscal management re uires that go!ernment does not borro' to consume, in the normal course. &hat brings us to the F+.$ Act. ,RB/ A.T% 4nacted in 200%, the Fiscal +esponsibility and .udget $anagement Act re uires the elimination of re!enue deficit by 200>-0?. &his means that from 200>-0?, the go!ernment 'ill ha!e to meet all its re!enue e#penditure from its re!enue receipts. Any borro'ing 'ould then only be to meet capital e#penditure 2 repayment of loans, lending and fresh in!estment. &he Act also mandates a %E limit on the fiscal deficit after 200>-0?. &his is a reasonable limit that allo's significant-cant le!erage to the go!ernment to build capacities in the economy 'ithout compromising fiscal stability.

(t is important to note that since the entire .udget is at current mar-et prices the deficits are also calculated 'ith reference to D5" at current mar-et prices. RESOUR.ES TRA+S,ERRED TO T4E STATES 1e no' loo- at the resources transferred to the states. As mentioned earlier, a part of the central go!ernment*s gross ta# collections goes to state go!ernments. (n the .udget 200F-0> the states 'ere to recei!e nearly 2FE of the gross ta# collections. &he )entre also transfers substantial funds to states by 'ay of support to their plans. &hese are largely in the nature of grants. )entre also gi!es large grants to states for managing centrally sponsored schemes. (nterestingly, the go!ernment counts small sa!ings transfers to state go!ernments, 'hich are in the nature of borro'ings, as resources transferred to states. .efore $arch %1, 1???, the )entre used to borro' net accretions to small sa!ings /public pro!ident fund, national sa!ing scheme, etc0 and lend them to the states. From April 1, 1???, states started recei!ing F,E of net small sa!ings collections directly= the balance 'as in!ested in special )entral Do!ernment securities during 1???-2000 to 2001-2002. &he sums recei!ed in the National Small Sa!ings Fund on redemption of special securities are being rein!ested in special central go!ernment securities. From April 2002, the entire net collections under small sa!ing schemes in each State G C& /'ith legislature0 are ad!anced to the concerned State6C& go!ernment as in!estment in its special securities. (t seems many states are actually not -een on small sa!ings funds as the cost of these borro'ings 'or-s out higher than 'hat they can get from the mar-et. 1e no' find the )entre is being forced to mop-up some small sa!ings mobilisation /+s ,F,0 crore .udgeted in 200F-0>0 through special securities as state go!ernments are not ta-ing the entire mobilisation. &his completes the discussion on .udget at a Dlance. &he e#penditure and receipts .udget ta-e up the respecti!e heads in greater detail. 1e 'ill no' ta-e up terms that re uire some discussion for a clearer understanding of the .udget. 1ALUE(ADDED TA3 51AT6 A+D GST% 9A& helps a!oid cascading of ta#es /ta# being le!ied upon a price that includes one or more elements of ta#0 as a product passes through different stages of production6!alue addition. &he ta# is based on the difference bet'een the !alue of the output and the !alue of the inputs used to produce it. &he aim is to ta# a firm only for the !alue added by it to the inputs it is using for manufacturing its output and not the entire input cost. 9A& brings in transparency to commodity ta#ation8 right no', only the final ta# paid by the consumer is apparent to her, 'hile 'ith !alue added ta# generalised to a goods and ser!ices ta# /DS&0 that subsumes both central and state le!el ta#ation, the entire element of ta# borne by a good /or a ser!ice0 'ould be represented by the DS& paid on it. A DS& of 20E might seem high, but it 'ould be about half the actual incidence of ta# in most goods at present. B4ARAT +-R/A+% .harat Nirman is the current C"A go!ernmentHs ambitious programme for building infrastructure, especially in rural (ndia. (t has si# components - irrigation, roads, 'ater supply, housing, rural electrification and rural telecom connecti!ity. (n each of these

areas, the go!ernment has set targets that are to be achie!ed by the year 200?, 'ithin four years of its launch. .ESS% &his is an additional le!y on the basic ta# liability. Do!ernments resort to cesses for meeting specific e#penditure. For instance, both corporate and indi!idual income is at present sub:ect to an education cess of 2E. (n the last .udget the go!ernment had imposed an another 1E cess ISecondary and higher education cess on income ta#H to finance secondary and higher education. .OU+TER1A-L-+G DUT-ES 5.1D6 % )ounter!ailing duty is a ta# imposed on imports, o!er and abo!e the basic import duty. )95 is at par 'ith the e#cise duty paid by the domestic manufacturers of similar goods. &his ensures a le!el playing field bet'een imported goods and locally produced ones. An e#emption from )95 places domestic industry at disad!antage and o!er long run discourages in!estments in affected sectors. E30ORT DUTY% &his is a ta# le!ied on e#ports. (n most instances the ob:ect is not re!enue but to discourage e#ports of certain items. (n the last .udget, for instance, the go!ernment imposed an e#port duty of +s %00 per metric tonne on e#port of iron ores and concentrates and +s 2,000 per metric tonne on e#port of chrome ores and concentrates. ,-+A+.E B-LL% &he proposals of go!ernment for le!y of ne' ta#es, modification of the e#isting ta# structure or continuance of the e#isting ta# structure beyond the period appro!ed by "arliament are submitted to "arliament through this bill. (t is the -ey document as far as ta#es are concerned. ,-+A+.-AL -+.LUS-O+% Financial inclusion is uni!ersalising access to basic financial ser!ices /to ha!e a banaccount, timely and ade uate credit0 at an affordable cost. 4#clusion from financial ser!ices imposes costs on those e#cluded= these are typically the disad!antaged and lo' income group. 4#clusion forces them into informal arrangements such as borro'ing from local money lenders, etc at high rates. Financial inclusion remain a serious issue in (ndia. &he go!ernment has proposed a no-frills account to pro!ide cheap ban-ing. /-+-/U/ ALTER+ATE TA3 5/AT6% &his ta# on corporate profits 'as introduced in 1??3-?F and has been modified since. (f the ta# payable by a company is less than 10E of its boo- profits, after a!ailing of all eligible deductions, then 10E of boo- profits is the minimum ta# payable. .ooprofits are profits calculated as per the )ompanies Act, 'hile profits as per the (ncome &a# Act could be significantly lo'er, than-s to !arious e#emptions and depreciation. 0ASS(T4ROUG4 STATUS% A pass through status helps a!oid double ta#ation. $utual funds, for instance, en:oy pass through status. &he income earned by the funds is ta#-free. Since mutual fundsH

income is distributed to unit holders, 'ho are in turn ta#ed on their income from such in!estments, any ta#ation of mutual funds 'ould amount to double ta#ation. 4ssentially, it means that the income is merely passing through the $Fs and, therefore, should not be ta#ed. &he go!ernment allo's 9) funds in some sectors pass-through status to encourage in!estments in start-ups. SUB1E+T-O+% &he term sub!ention finds a mention in almost e!ery .udget. (t refers to a grant of money in aid or support, mostly by the go!ernment. (n the (ndian conte#t, for instance, the go!ernment sometimes as-s institutions to pro!ide loans to farmers at belo' mar-et rates. &he loss is usually made good through sub!entions. SUR.4ARGE% As the name suggests, this is an additional charge or ta#. A surcharge of 10E on a ta# rate of %0E effecti!ely raises the combined ta# burden to %%E. (n the case of indi!iduals earning a ta#able salary of more than +s 10 la-h a surcharge of 10E is le!ied on income in e#cess of +s 10 la-h. )orporate income is le!ied a flat surcharge of 10E in the case of domestic companies and 2.,E for foreign companies. )ompanies 'ith re!enue less than +s 1 crore do not ha!e to pay this surcharge.