Chapter 15

Fiscal Policy, Union Budget

& Taxation

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 Learning Objectives
• Explain the mechanism of fiscal policy
implementation

• Describe the structure of union budget

• Illustrate the procedure for calculating the fiscal

deficit

• Assess the taxation system and the reforms

undertaken

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 FISCAL POLICY AND BUDGET
● Revenue Account and Capital Account

● Revenue Account (Revenue Receipts and

Revenue Expenditure): Revenue Account
transaction involve no disposal of assets or
incurring of liabilities (ex: Receipts from Tax and
Non-Tax sources).

● Revenue Expenditure: Salaries of Govt.

employees, purchase of statutory etc.

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 FISCAL POLICY AND BUDGET contd.

 Capital Account

 Receipts: Govt’s market borrowings through bonds,

treasury bills, provident fund, small savings etc.

 Expenditure: Govt. investment in railways, roads,

bridge, power projects etc. (long-term)

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 HIGHLIGHTS OF BUDGET - 2006

1. Revenue deficit for 2005-06 to be 2.6% of GDP

2. Fiscal Deficit for 2005-06 to be 4.1% of GDP
3. Service Tax raised from 10% to 12% and spread to 15 new services
such as international business class air travel, internet telephony,
sale of space/time (not print media), auctioneering etc. and
proposal to rationalise excise duty with service tax with the
introduction of national goods and services tax by 2010.
4. Countervailing duty of 4% to be imposed on all imports and peak
(mode) rate of customs duty on non-agricultural goods reduced to
12.5% from 15%.
5. Abolishment of 1/6 scheme.

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 HIGHLIGHTS contd.

5. Investment in fixed deposits in scheduled banks for 5 years and

above included in Section 80 C of Income Tax Act and limit of
Rs.10,000/- in respect of contribution to certain pension funds
removed in Section 80 CCC subject to overall ceiling of Rs.100,000.
6. Hike in Securities Transaction Tax (STT) by 25% (Ex. From 0.1% to
0.125%). Securities that come under STT include shares, equity-
oriented mutual funds, debentures and derivatives. Tax is charged
at different rates for different instruments (Delivery trades in
stocks on Stock exchanges from 0.1% to 0.125% & intra-day sale of
stocks from 0.02% to 0.025%).

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 HIGHLIGHTS contd.

7. Ceiling on aggregate investment by mutual funds in overseas

instruments raised from $1 billion to $2 billion. Also, the
requirement of 10% reciprocal share holding has been removed
[Under existing norms, fund houses can only invest in foreign
companies that directly hold atleast 10% stake in a listed Indian
company.

Impact: You may soon get an opportunity to buy stocks from

U.S., Chinese or Singapore Stock markets through mutual funds.
MF Houses to launch a range of products that invest outside
India.

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 CUSTOM DUTY RATES

 Reduction on alloy steel and non-ferrous metals from 10% to 7.5%

 Reduction on Ores and concentrates to 2% from 5%
 Reduction on basic Inorganic chemicals from 15% to 10%
 Reduction on basic hydrocarbons and their derivatives to 5%
 Reduction on Catalysts to 7.5% from 10%
 Reduction on bulk plastics like PVC to 5% from 10%
 (Domestic Computer Hardware industry did not grow in India because of
reduction in customs duty during 1990s. Similarly, chemical industries:
Argument)

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 CUSTOM DUTY RATES contd.

 Reduction on naphtha for plastics to nil

 Reduction on 10 Anti-Aids, 14 Anti-Cancer and life-saving drugs
and equipments to 5%
 (These drugs also exempt from excise duty and CVD)
 Reduction on all man-made fibres and yarns from 15% to 10%
and reduction of excise duty on the same form 16% to 8%
 Increase of customs duty on vanaspati to 80%

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 EXCISE DUTY

 Duty on small cars cut from 24% to 16%

8% duty to be imposed on packaged software sold over the counter. DVD
drives, Flash Drives etc. to be fully exempted from excise duty.
 Duty on ready-to eat packaged foods and instant food mixes like dosa and
idli mixes to be reduced from 16% to 8%.
 Condensed milk, ice cream, preparations of meat, fish and yeast to be
fully exempted.
 Fluorescent lamps to 8% from 16%.
 Specified printing, writing and packing paper to be 12% from 16%.
 Increase in excise duty on cigarettes by 5%
 Exemption for SSI Sector will remain.

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 FRINGE BENEFIT TAX
(Tax on perks to employees, levied on employers)

 Only 5% of tour and travel expenses are to be

considered for valuation of fringe benefits.
 Exemption for contribution made by an
employer to an approved superannuation
fund up to a contribution of Rs. 1 lakh.

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 FDI and FII

FDI: Hike in FDI Cap from 26 to 49% on insurance

companies

FII: Limit for FII Investment in government securities up

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 FOCUS ON EDUCATION, HEALTH AND
AGRICULTURE

• Outlay to Sarva Siksha Abhiyan to increase from

Rs.7156 crores to Rs.10,041 crores. 5 lakhs additional
classrooms and 1.5 lakhs more teachers to be
appointed.

• Short-term credit for farmers at 7% from the banks.

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 SECTORAL IMPACT

Banking: Positive

Capital Goods: Positive (companies will benefits from increased outlay

for power, irrigation, infrastructure building projects): L & T, Nagarjuna
Constructions, Thermax etc. Stock price to increase.

Small Cars and Utility Vehicles: Positive – Final prices to reduce by

Rs.15,000/- to 22,000/- because of abolition of special excise duty on
vehicles with a length less than 4000 mm and engine capacity of 1200
cc (petrol), 1500 cc (diesel).

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 SECTORAL IMPACT contd.

Automobiles: Auto Ancillaries  Neutral

Cement: Positive – Players like Grasim, Shree Cements will

benefit because of government focus on infrastructure etc.

Polyester: Positive – Excise duty on polyester staple fibre

and poly filament yarn has been reduced from 16 to 8%.
This make polyester yarns more competitive.

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 SECTORAL IMPACT contd.

Hotels: Marginally positive – Because of focus on 15 tourist

destinations and reduction in FBT.

IT enabled services: Negative – Service tax exemption for

call centres, medical transportation centres etc. have been
withdrawn.

Man made Fibres: Positive - Excise duty decreased from

16% to 8%.

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 FM like a Bee

 FM is trying to collect money from people like a

Bee who zips honey from a flower.

 Bee gets its essence & the flower does not loose
its beauti. FM gets its essence and people
remain as people.

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