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Lecture: (Interim) Budget 2014

1. Why Interim budget? vs Vote on account


2. Taxes: Nature, Types, provisions in (+IB 2014)
3. Parts of budget: Revenue, capital, plan-non
plan (+IB 2014)
4. Deficits, subsidies (+IB 2014)
5. IB Budget speech: Misc. highlights
Polity angle: Refer M.Laxmikanth



To download the PowerPoint slide
1. Mrunal.org/DOWNLOAD
2. Mrunal.org/Economy
Lecture: (Interim) Budget 2014
Why Budget?: Where does the incoming money go?
Fund Feature Parliament
approval?
Public Accounts
Of India 266
National Investment fund (05)
Nat. Calamity & contingency fund (NCCF)
National small savings fund, defense fund
Prarambhik Shiksha Kosh, MNREGA fund
State provident fund, Postal insurance, Money orders etc.
No
Contingency Fund
267
For unforeseen events
Under President (operate by Fin.Secy.)
No.
Consolidated Fund
of India 266
Revenue collected
All the loans raised
Interest/principle received
YES. (Art.
114, 266)
Vote on Account?
As per Constitution, three documents
1. 112: Annual financial statement (est. income, expense)
2. 265: Finance Bill=>Act (for taxation)
3. 266: Appropriation Bill (Act): valid for entire year.
1. Budget laid in Feb
2. Appropriation Bill passed ~April
3. In the meantime, Govt. needs money => Vote on account motion. After
Gen.Discussion. (116A)
4. 2 months; 1/6
th
of total estimate
Interim Budget?
Appropriation Act, finance Act FY14: Introduced in Feb,
Passed ~April.
But General election 2014: ~April/May
Considered inappropriate for the outgoing government to
pass full budget.
Therefore Interim budget
Shorter than full budget (in terms of speech and schemes)
No major changes in taxes
Vote on account for longer duration (4 Months)
Legally binding to introduce Interim Budget?...No




Yashwant Gave quite a few schemes and tax-benefits 12 page
Pranab Did not announce any new taxes or schemes. 18 page
PC
No changes in direct tax.
Few concessions in indirect tax
Few schemes for soldier pension, education loans etc.
14 pages
Whats the difference?
Vote on Account Interim Budget
Every year (for ca$h between Feb
and Apr.)
Only during election /extreme
situation.
Only deals with Expenditure part
*Lok Sabha 116(A)
1. Annual financial statement.
2. Finance bill (taxation/revenue).
3. Vote on account.
Vote on account doesnt include
interim budget
Always includes vote on account
Validity: 2 to 4 months Validity: Entire year (1
st
April to
31
st
March)
But new government can amend.
Mock Question
2011
1. Skip 2. Attempt 3. Mark n Review
CSAT 2011 Paper I
What is the difference between interim budget and vote on
account?
1. the provision of a vote on account is used by a regular
government, while an interim budget is a provision used a
caretaker government.
2. a vote on account only deals with the expenditure in
government budget, while an interim budget includes
both expenditure and receipts
3. Both A and B
4. Neither A nor B
1. Skip 2. Attempt 3. Mark n Review
CSAT 2011 Paper I
What is the difference between interim budget and vote on
account?
1. the provision of a vote on account is used by a regular
government, while an interim budget is a provision used a
caretaker government.
Until new PM/CM takes charge, the previous government
continues to be in office.
After term has expired.
After PM/CM has resigned. (Kejriwal)
No-confidence motion passed.
Parliament/Assembly dissolved. (then where will you place
interim budget?)

CSAT 2011 Paper I
What is the difference between interim budget and vote on
account?
1. the provision of a vote on account is used by a regular
government, while an interim budget is a provision used a
caretaker government.
2. a vote on account only deals with the expenditure in
government budget, while an interim budget includes
both expenditure and receipts (RIGHT)
3. Both A and B
4. Neither A nor B
1. Skip 2. Attempt 3. Mark n Review
2010
Who among the following is responsible for
preparation of Union Budget?
A. Department of Revenue
B. Department of Economic Affairs
C. Department of Financial Services
D. Department of Expenditure

1. Skip 2. Attempt 3. Mark n Review
2010
Who among the following is responsible for
preparation of Union Budget?
A. Department of Revenue
B. Department of Economic Affairs (RIGHT)
C. Department of Financial Services
D. Department of Expenditure

1. Skip 2. Attempt 3. Mark n Review
Parts of budget
So far
Why Budget?
Vote on account vs Interim Budget

Art.112: Budget (AFS) shall distinguish Expenditure on revenue part,
from other Expenditures.

Good tax system
Many principles, Adam Smith 4 canon for MCQ
1. Canon of Equality: Proportionate to income.
2. Canon of Certainty: about deadline and rates.
3. Canon of Convenience: to the tax payer.
4. Canon of Economy: collection cost should be
minimum. (i.e. staff salary, DBM)
Extra:
- transparency, simplicity, elasticity (to economic fluctuation) etc.
On Income/ Expenditure
Income tax
Corporate Tax (and MAT)
Interest tax (on banks)
FBT (Pranab)
Hotel receipt Tax


Wealth Tax
Securities transaction Tax (STT)
Banking cash transaction tax
Estate duty (VP singh)
Gift tax (Yashwant)

Budget : Revenue Part => Receipts=>Direct
tax
on properties/assets/Capital
transaction
Direct taxes (Union)
Taxes on Income & Expenditure
Income tax
Corporation Tax (and MAT)
Taxes on properties/assets
Wealth Tax
STT


Taxes on income
Agriculture income tax
Professional tax
Taxes on properties
Land Revenue
Stamp duty/registration duty
Property tax in urban areas

Direct Taxes (State)
Merits
1. Progressive (low on
poors/middle; high on rich)
2. Inequality of income
reduced
3. Certainty (when and how)
4. Elasticity, quick results when
raised / lowered
Collection expensive (staff salary,
database Management).
Therefore, Narrow base.
High level of direct taxes=>
less tendency to work;
Discourages capital formation.
less foreign investment / foreign
workers
Externality not counted
Tata vs filmstar
Hardship not counted:
Carpenter vs landlord.


Direct tax: Progressive / Regressive?
Demerits
Direct taxes (Union)
Taxes on Income & Expenditure
Income tax
Corporation Tax
Taxes on properties/assets
Wealth Tax
Securities transaction Tax (STT)
Taxes on income
Agriculture income tax
Professional tax
Taxes on properties
Land Revenue
Stamp duty/registration duty
Property tax in urban areas

Budget: Revenue Part =>
Receipts=>Direct tax
Direct Taxes (State)
Direct Taxes in Interim Budget 2014
Taxable Income Tax
2 to 5 lakh 10%
5 to 10 20%
>10 30%
Corporate tax ~34%
MAT ~21%
Corporate tax
(foreign)
~43%
Wealth tax (>30
lakh)
1%
STT 0.001%-0.01%
+Research Funding
Organisation
Did not implemented
1. GAAR
2. Direct tax code (DTC)
3. Goods and services tax (GST)

Direct tax collection

Direct tax collection: Shortfall
Direct tax BE 2013 RE 2013 AE 2014
Corporation Tax
Income tax
Security Transaction tax
Wealth tax
total Direct tax
6.68 lakh
crore
6.36 lakh
crore
7.58 lakh
crore
Shortfall: 6.68-6.36= 32,000 cores. Why?
1. Inflation=>
2. Policy paralysis=>
Indirect taxes
Indirect taxes (Union)
1. Custom Duty (Import, Export)
2. Excise Duty (CENVAT system)
3. Service Tax
4. CST (but entirely given to
States)


1. Sale tax/VAT (newspaperX)
2. Excise duty on liquor, narcotics
3. Motor vehicle tax, animal,boats
4. Tolls
5. Luxury tax, betting-gambling
6. Entertainment tax
7. Electricity tax
8. Advertisement tax
(TV/radio/Newspaper..X)

Budget : Revenue Part => Receipts=>Indirect
tax
Indirect Taxes (State)
Merits
Convenient. no additional
paperwork for the customer.
Wider base. Everyone covered.
Less evasion, especially under
VAT/GST. (invoicing)
Elastic. Small increase brings
large revenue.
Checks on harmful
consumption: cigar, alcohol,
even GOLD.

Regressive
Both poor and rich taxed
equally for the same item
poor people end up paying
more portion of their income
in indirect taxes.
Single point taxes=high level
of corruption, evasion. E.g.
sales tax.
Indirect taxes
Demerits
Indirect Tax Collection
Shortfall?
5.65-5.19
=45000 crore.
Why?
1. Food Inflation=>
2. Low demand of consumer goods, Automobile
3. Forced savings into gold, evasion
Indirect taxes in Interim Budget 2014
No change in income tax slabs.
But to boost the manufacturing sector, some modifications in the
indirect taxes [Period up to 30.6.2014]
Excise duty reduced for
Automobile: SUV, Small cars, motor cycles, scooters and commercial
vehicle
Mobile handsets (to decrease reliance on imports)
Custom duty:
Rationalized the import duty on oils, fatty acids, fatty alcohols.=>
boost to soap industry and oleo-chemicals (glycerin)
Indirect taxes in Interim Budget 2014
Custom duty:
Rationalized the import duty on oils, fatty acids, fatty alcohols.=>
boost to soap industry and oleo-chemicals (glycerin)

Custom duty
Bank Note Paper Mill India (Bangalore)
Machine import @5% custom duty only.

Service tax
Two new services exempted:
Rice: loading, unloading,
packing, storage and
warehousing
Cord Blood bank (they store
umbilical cord for future
stemcell therapy)
Negative list: law.
exempted list: notification.


Indirect taxes in Interim Budget 2014
CVD
What is CVD?
1. MFG of Desi machine=Excise
2. Sale of Foreign machine= Custom duty.

To promote consumption of desi machines,
Sale of foreign machine= Custom duty + CVD.

Gross vs Net Tax Revenue
Tax BE 2013 RE 2013 shortfall AE 2014
Direct 6.68 6.36 32k 7.58
Indirect 5.65 5.19 45k 6.2
Gross 12.35 11.58 77k 13.78
Gross vs Net tax Revenue
Crores BE 2013
A.(Gross) Tax Revenue (Direct + Indirect + UT w/o Legislature) 12.35 lakh
B.MINUS tax revenue shared with States/UT 3.4 lakh
C.MINUS money transferred to calamity fund (NCCF) 4800
NET Tax revenue=A-(B+C) 8.84 lakh
80
th
amendment 2000:
29% of total taxes of the Union need to be
shared with states
13
th
FC (Kelkar)
= Share 32% with states
14
th
FC (YV Reddy)
= share ??% With states
=effective from 1/5/2015
National Calamity
Contingency Fund (NCCF)
1. Under Home ministry
2. Public account (parliament
approval x)
By Investment:
1. Interest from loans given to
States/UT/PSU/Railways/foreig
n countries
2. Dividends and profits from
ONGC/LIC/PSUs/SBI etc.

By donation
1. Grants/Aid from World bank,
foreign countries. [IF Loan
then CAPITAL receipt]

Budget =>Revenue part=>Non-Tax
(receipts)
Budget =>Revenue part=>Non-Tax
(receipts)
By selling some goods/service:
1. Railway revenue (part of Rail budget)
2. Police: e.g CISF giving cover to Infosys, State government, airports
3. Public service commission (exam fees, RTI fees)
4. Printing (Min.Info broadcasting, India 2014)
5. Defense services (canteen, R&D foreign country)
6. Education (Kendriya Vidhayala, Central univ.)
7. Medical, family welfare (AIIMs)
8. Tourism, museum fees
9. R&D (ISRO, CISR etc.)








Budget =>Revenue part=>Expenditure
General services: (Salary/lightbill/telephone bill)
President, PM,
parliament, judiciary,
Bodies: EC, CAG, UPSC, CVC, national commission SC/ST,women
defense, police (CRPF, BSF)
Tax collection
Salary, database Management.
Social services (ministry of women, children, minorities, HRD etc.)
Economic services (dairy, agri, mining, telecom,IT)
Science: atomic, space, ISRO, CSIR
RAILWAY Expenditure (from rail budget)
Postal Expenditure
Grant in Aid to State/UT




Interim Budget 2014
One Rank one pension:
UPA had changed pension rules for Defense services first time during
2006 (and then in 2010 and 2013)
Problem: Those retired before 2006 and soldiers retired after 2006.
They demanded "one rank one pension" (irrespective of retirement
year.)
Few days back, Rahulbaba demanded, Now FM accepted.
=Revenue Expenditure ~500 cr.
Modernization of Central Armed Police Forces
~11k crore allotted for new equipment and technology.

Revenue receipt
(incoming)
Revenue Expenditure
1. Tax
2. Non tax
1. Salaries, office
expenditure
2. Railway, postal
3. Grant in aid to
State/UT.
Why Revenue Deficit less in RE2013
1. Special dividend from PSUs
2. Cut down Revenue Expenditure

Why Revenue Deficit increased for 2014?
1. One rank one pension
2. Inflation: Dearness allowance increased
3. Moderate increase in tax collection. (FM
did not increase existing taxes, did not
announce new taxes)
Revenue deficit means
government spending beyond its
means
Revenue deficit=income minus
expense.
Effective Revenue deficit
=Revenue deficit MINUS grants for
creation of capital assets.
Revenue receipt
(incoming)
Revenue Expenditure
(outgoing)

1. Tax
2. Non tax
1. Salaries
2. Railway, postal
3. Grant in aid to
State/UT.
Effective Revenue deficit?
Target= 1.8% GDP
But 2.2% of GDP (2013-14)

Ideally Revenue deficit should be ZERO. (FRBM
Act)

Budget: Capital part
2013: Union gave loan of Rs.1 lakh to Gujarat @36% for
1 year
Total Expenditure??
Total receipt??
2014: State returned the interest + Principal
Total Expenditure??
Total receipt??
Incoming (Receipts)
1) Public Debt
1) Internal
2) External
2) Non-Debt
1) Recovery of loan from
State/UT/PSU/Foreign
Government (principle)
2) Disinvestment proceeds


Capital Expenditure on police,
defense, social
sector/schemes/ministries
Railways, postal, shipping,
aviation, highway
S&T: ISRO, CSIR, atomic research
Loans and Advances for
development work to States/UT
Repaying Principle on previous
loans.







Budget : Capital Part
Outgoing (Expenditure)
Interim Budget (disinvestment)
2013: Rs 40,000 crore but RE ~16000
2014 target: 36000 Crore.
Where is plan/non plan/subsidies?
Parts of Expenditure
NON-Plan Expenditure PLAN Expenditure
Revenue Expenditure Capital Expenditure
1. Salaries and pensions
2. Interest paid (on whatever
loan Union had taken)
3. Subsidies, Debt relief to
farmers.
4. Losses in Postal dept
5. services: health, edu,
broadcasting etc.
6. Grants given to
States/UT/Foreign nations.
1. Defense capital Expenditure
(e.g. buying machines, vehicles
etc.)
2. Capital Expenditure on railway,
postal, various ministries
3. Loans to
PSUs/States/UT/Foreign
nations.
Money spent on
Five year plans (of
Union)
Money given to
state/UT for their
Five year plans
Budget => EXP=>Non Plan =>Subsidies
Subsidies: Interim Budget
Fuel 65k crore
Fertilizer
68k
[Desi Urea>>Imported Urea>>Misc.]
Food
1.15 lakh cr
(88k for Food security Act)
Total 2.5 lakh cr.
MCQ subsidies
Consider the following subsidies
1. Subsidy on urea
2. Subsidies on Fertilizers other than Urea
3. Food subsidies
4. Fuel subsidies
Arrange them in ascending order, as per the allocations made for the
year 2014-15.
A. 1423
B. 2143
C. 1234
D. 2431

2014-15
Fuel 65k crore
Fertilizer
68k [Desi Urea>>Imported
Urea>>Misc.]
Food
1.15 lakh cr (88k for Food
security Act)
Total 2.5 lakh cr.
Subsidies: Interim Budget
Ascending order
Other than urea
Urea
Fuel
food
MCQ subsidies
Consider the following subsidies
1. Subsidy on urea
2. Subsidies on Fertilizers other than Urea
3. Food subsidies
4. Fuel subsidies
Answer: non-urea (2)<< Urea (1)<< Fuel (4) << Food (3)

A. 1423
B. 2143
C. 1234
D. 2431
Budget deficit=total receipt - expenditure
Fiscal deficit
Budget deficit= Total expenditure Total receipts
Sukhmoy Chakravarti: 97-98
Fiscal deficit=
Budget deficit + Borrowing.
(Total Expenditure Total Receipts) + Borrowing
(Total expenditure + borrowing) [Revenue Receipts + Capital
Receipt]
Fiscal deficit
Deficit 2013-14 2014-15
Fiscal Target: 4.8%
But achieved 4.6%
4.1%
Revenue 3.3% 3%
GDP 4.9% (CSO) Target:=~6%
Fiscal deficit: 4.8=>4.6? How?
ways to reduce FD:
- More taxes
- Less expenditure / disinvestment
- Manipulate the accounts.
In this case:
1. Ministries failed to spend all the plan Expenditure money
2. Special dividend from coal India (Revenue income)
3. Oil subsidy of Rs.35k crore (from 2013s year), was Year 2014 (for
next government)

Why Fiscal deficit lower than target?
Deficit Formulas: MUST REMEMBER
Budget deficit
Total expenditure Total receipts
Fiscal deficit
Budget deficit + market borrowing
Primary deficit
Fiscal deficit interest payment (on previous loans)
Revenue Deficit
Revenue Expenditure Revenue receipt
Effective Revenue deficit
Revenue deficit grant for creation of capital assets