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http://mrunal.org/2014/02/budget-interim-budget...
[Budget] Interim Budget 2014 (Part 1of4): Revenue reciepts, Direct taxes, Indirect taxes, Gross vs Net taxes, shortfalls in collection
1. Prologue 2. Why Budget? 1. #1: Contingency fund of India (Art.267) 2. #2: Public Accounts of India (Art.266) 3. #3: Consolidated fund of India (Art.266) 4. Then what is Vote on Account? 5. Ok then whats interim budget? 6. Vote on Account vs Interim budget 7. Interim budgets in the past 3. Parts of Budget 4. #1: Direct Taxes 1. Direct taxes under Interim Budget 2014 2. Income Tax 3. Shortfall in Direct tax collection = #EPICFAIL 4. But Why shortfall in Direct tax collection? 5. #2: Indirect taxes 1. Indirect Taxes in Interim Budget 2014 1. #I1: Service Tax 2. #I2: Excise Duty: Automobiles 3. #I3: Excise: Mobile handsets 4. #I4: Custom Duty: soap industry 5. #I5: Custom Duty: Bank note Mill 6. #I6: Counter Veiling Duty (CVD): Road machines 2. Indirect Tax collection = #EPICFAIL shortfall 3. Why shortfall in indirect tax collection? 6. MCQ Data for Tax collection: Ascending descending 1. Table1: Direct vs indirect 2. Table2: Ranking Among all taxes (2013-14) 3. Table3: Ranking Among all taxes (2014-15) 4. Table3: Tax collection highest to Lowest 7. Gross vs net Tax revenue 8. Appendix 1. #1: Direct taxes can be levied on Expenditure also
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Prologue
Total four parts in this [Budget] Article series. Part 1: Interim Budget => Revenue Part=> Tax revenue (Direct vs indirect taxes): provisions and issues related to them. Part 2: Interim Budget => Revenue Part=> Non-tax revenue: sources, issues. [+ Capital part] Part 3: Interim Budget => Plan and non-plan Expenditure, subsides and decits. Part 4: remaining ller points: funds, schemes, policies mentioned in Chindus budget speech.
Why Budget?
typical sight of a middleclass household: Daddy earns monthly salary, stores some of it in the bank, gives the rest to mommy. Afterwards, whenever daddy needs money, he has two options 1. Take out from bank account, without informing mommy. No questions asked. (Unless mommy checks the passbook/bank statement!) 2. Ask mommy to give the ca$h from bedroom cupboard. In this case 11/10 times hell have to Explain to mommy why he needs money. Same is the case governments money. Government stores its money in three places: consolidate fund of India need parliament approval
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Economic survey, and order the UPSC aspirant, religiously mug up this data.
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army-navy-airforce! No. Because its components have specic function. e.g. the cash from National Calamity & contingency fund (NCCF) is meant only for disaster relief type work. hell no. If Chindu withdraws money from here, to run the government => this Robinhood-giri will defeat the whole purpose of doing scams and taking bribes in the rst place!
So, ultimately, we are back to square one: the consolidated fund of India. He must arrange cash from here. FM (to Lok Sabha) maai baap, please allow me to spend money from consolidated fund of India, until the budget is passed.
^that is vote on account. Feb 2013: Chindu presents the (full) budget March 2013: Chindu puts the demand under Vote on account. Under Vote on account, the government usually demands 1/6th of the total (Expected) expenditure for the given year. Example lakh crore money sought under Vote on account 10,71,797 total expenditure 58,78,455 This is nearly 10 lakh cr. / 59 lakh crore = ~1/6th of the expenditure. Duration: two months. (from 1st April 2013 to 31st May 2013) Vote on account is passed by Lok Sabha (and not Rajya Sabha) because only lok sabha has the power to grant such money under Article 116(A)
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parliaments permission to collect taxes) 266: have to put appropriation bill (to get parliaments permission to spend money from consolidated fund of India) Only Lok Sabha has Decision Making power here. Because art 116(2) specically says House of people can grant such money. Asks parliament to grant 1/6th of the total estimated expenditure Both houses involved. Because Art 112: Annual nancial statement has to be laid in both houses Lok Sabha and Rajya Sabha.although Rajya Sabha doesnt really have any Decision Making power here either, but they could stall it for 14 days. Asks parliament to grant entire money for total estimated expenditure. If the new Government doesnt give new (full) budget after election, then Interim budgets provision remain valid for the whole nancial year i.e. 1st April 2014 to 31st March 2015. done in non-election years and election years. only during election years/extreme situation. interim budget contains vote on account. (Because here also, budget presented in Feb, while passed somewhere in late April/May.) so government needs money in between. However, the vote on account will be of longer duration e.g. 3-4 months. (than during normal full budget years.)
Validity: 2 months
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Pranab09
Did not announce any new taxes or schemes. No changes in direct tax. Few concessions in indirect tax Few schemes/provisions related soldier pension, education loans, skill development, Nirbhya fund etc.
18 page
Chindu14
14 pages
Enough theory, lets try a mock question from 2011s CSAT paper Q. What is the dierence 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 Statement B is correct. That eliminates option D. Now the nal answer (B or C) depends on whether A is right or not? Observe the statement A The provision of a vote on account is used by a regular government, while an interim budget is a provision used a caretaker government. Focus on the word Caretaker government. What do we understand by Caretaker government? Until new PM/CM takes charge, the earlier government continues to be in oce, as in caretaker position. This happens when: Term has expired after PM/CM has resigned In this case how can FM present the (interim/full) budget? In this case, entire council of minister is automatically gone. So, how can Finance minister Exist
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and present the (interim) budget No-condence motion In this case, even if FM presents passed (interim) budget, itll be defeated. Parliament/assembly is Then where will FM place the dissolved. interim budget? On 17/2/2014, Chindu presented interim budget for UPA-II. So, is UPA-II a caretaker government? Nope. Not yet. its term (5 years) has not expired yet. Theyve still got ~90 days to misrule the country. Therefore statement A is wrong. Interim budget is not used by a caretaker government. Eliminate choices accordingly: 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 Thus we are left with answer B. so far we learned: Why does government need to pass a budget? What is vote on account, what is interim budget and whats the dierence between them two? Remaining topics related to polity: money bill vs nance bill, Committees of parliament, CAG , vote on grant etc. you prepare from (the great) M.Laxmikanth. Now lets start the technical/nancial aspects of budget.
Parts of Budget
budget revenue part tax and non tax Budget two parts. revenue part (Current) capital part within that, make two columns each, for incoming money (receipt) and outgoing money (Expenditure).
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REVENUE PART CAPITAL PART Receipt Expenditure Receipt Expenditure Ya, but whats the need of this labour? Why cant we just have a simple income vs expense type of thing? Well come to that in third article. For now, lets focus on Budget => Revenue part Revenue column has two sub-columns: incoming money (Receipt) vs. Outgoing Money (Expenditure). The Incoming money (Revenue receipt) can come from two sources: from tax and non-tax sources. REVENUE PART CAPITAL PART Receipt Expenditure Receipt Expenditure Tax Non Tax 1. Direct taxes 2. Indirect Tax Thus, weve come to the main topics of todays article= direct and indirect taxes and provisions of interim budget 2014 (related to these taxes).
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Taxes marked in (*) have been abolished long time ago. Ive mentioned them here, only in case the nostalgic UPSC professor wants to ask classication type MCQs. We should also know the direct taxes of state government. DIRECT TAXES OF UNION Taxes on Income Income tax Corporation Tax (and MAT) Taxes on assets Wealth Tax STT DIRECT TAXES STATE Taxes on income Agriculture income tax Professional tax Taxes on properties Land Revenue Stamp duty/registration duty Property tax in urban areas
Income Tax
Taxable Income 2 to 5 lakh 5 to 10 >10 Income Tax 10% 20% 30%
Other direct taxes Corporate tax (desi company) Corporate tax (foreign company) MAT Minimum alternative tax Wealth tax (for wealth >30 lakh rupees) STT Securities Transactions tax
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*Depending on nature of securities future, option, equity etc. However, FM has done a slight tweaking in the tax deduction for corporates. until now In interim budget Chindu proposed to setup a new organization called Research Funding Organisation. This org. will fund fund research projects selected through a competitive process. If company gives cash to this organization, itll be deducted from taxable income.
if company spent money on in-house Research development = they can claim tax benets.
Did not implement 1. GAAR 2. Direct tax code (DTC) 3. Goods and services tax (GST)
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(interim budget) so lets label it (BE)2014. Thus total weve three estimates: Direct tax BE 2013 Wealth Tax 950 Securities Transaction Tax 6720 Income Tax 240919 Corporation Tax 419520 Total from Direct tax 668109 RE 2013 950 5497 236194 393677 636318 BE 2014 950 5992 300474 451005 758421
Absolute numbers are not important but interpretation is. Lets try a clichd MCQ. Which of the following direct tax, fetches maximum revenue to government of India A. B. C. D. Wealth Tax Securities Transaction Tax Income Tax Corporation Tax
For all three columns, you can see: Corp>>IT>>STT>>Wealth tax. Anyways, lets enter into a deeper analysis. Observe the total collection from direct Tax (in above table). In Feb 2013, Chindu estimated ~6.68 lakh crore rupees would come from direct taxes alone! (BE2013) But he revised the data yesterday, we see barely 6.36 lakh crore have come from direct taxes (RE2013). So, whats the shortfall in direct tax collection here? 6.68-6.36= 32,000 cores
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i. Sales Tax/ VAT ii. Excise duty on DESI liquor and Narcotics iii. Motor vehicle tax, Taxes on boats Custom Duty and animals. (Import, Export) iv. Toll tax (opposed by MNS/Shiv Excise Duty Sena) (CENVAT v. Electricity tax. system) vi. Luxury tax (on restaurant, spa etc.) Service Tax Central sales tax vii. Taxes on Betting and gambling (on whether Modi will become PM or (CST)* not) viii. Advertisement tax (other than TV, Radio, Newspaper)
*Note: CST-Central sales tax- it belongs to Union but ca$h entirely given to States. So in budget estimates, its collection is listed as or 00. But for MCQ purpose, know that it is the Indirect tax of the Union.
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1% Senior & Higher Education Cess= 1% of 12% Eective service tax Then what is new in interim budget?
+0.12 =12.36%
Following items have been exempted from service tax payment 1. Rice: services related to loading, unloading, packing, storage and warehousing (Because) a. Tamilandu CM Jayalalitha has wrote letter to Mohan, demanding the same. b. putting service tax on rice related services=raises the cost of implementing Food security act. 2. Cord Blood bank (they store umbilical cord for future stemcell therapy) Make no mistake: theyre exempted, but not put in negative list. Service tax negative list Govt. cannot levy Service tax on the names included in this list (total 17 items.) Exempted list Theoretically, these services are taxable under service tax, BUT for the time being, FM gave them exemption.
To modify this list, FM needs FM can modify this list by a parliament approval (because simple notication. He doesnt he needs to amend the need parliaments approval. Finance Act.). Examples a. Services by the Reserve bank of India; b. Betting and gambling. (because they fall under State list.) c. Funeral, burial Examples a. Rice loading-unloading b. Cord blood bank
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items 2. High interest rates (because to combat ination, RBI did not reduce monetary policy rate i.e. repo rate) 3. High Fuel prices. Therefore, to go a boost to automobile sector, FM has reduced the excise duty on Automobile: SUV, Small cars, motor cycles, scooters and commercial vehicle (rickshaw, bus etc) This will be applicable only upto 30 June 2014. Result: cheaper vehicles, (hopefully) more people will buy more, and automobile sector will see boost in sales.
Result? Price wise: Desi mobile cheaper than Foreign mobile. = more sales. Import of foreign mobiles declined=> less CAD. (just like the gold logic.) By the way, why did not FM raise the custom duty of Foreign mobiles instead -afterall, thatd also make desi phones cheaper! Reasons: 1. US/China may drag us to WTO 2. Higher custom duty doesnt decrease consumption. It only increases smuggling. (lesson learned from gold!) So it is better to reduce excise on desi phones, than raise custom on foreign phones.
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soap industry and oleo-chemicals industry (e.g. glycerin) Results? Soaps will become cheap. (because that was the matter of life and death!)
Interim budget & CVD Import of Road construction machinery will be subjected to CVD. (= itll help desi manufactures, because now foreign machines will no longer be very cheap compared to desi. So road contractors/companies are more likely to be buy desi items.)
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Just like Direct tax collection, here also, Chindu failed to meet targets Indirect Tax Excise Duties Customs Service Tax Total from Indirect Tax BE 2013 196804 187308 180141 5.65 lakh cr. RE 2013 178787 175056 164927 5.19 lakh cr. BE 2014 199831 201314 215478 616623
Observe the columns of (original) budget estimate BE2013 VS Revised estimate RE2013. Every duty collection is less than original target. What is the shortfall in the collection of indirect taxes? 5.65 MINUS 5.19 =~45000 Crore rupees.
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collection would be lower than target, hence they had been running ads of Voluntary Compliance Encouragement Scheme (VCES) for service tax. From July 2013 onwards. But still, barely ~6000 crore recovered from people who had been evading service tax payment so far.
ya but Whats the wisdom here for MCQs? =that DIRECT tax brings MORE revenue to government that INDIRECT tax. So far, weve data for Direct taxes and indirect taxes. Now for MCQs, we need the overall ranking (of which tax brings highest/lowest revenue.) Since weve revised estimates (RE 2013), so we can now ignore the ORIGINAL estimates of BE 2013. Tax collection ranking revised 2013-14
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Taxes BE 2014 Wealth Tax 950 Securities Transaction Tax 5992 Excise 199831 Customs 201314 Service Tax 215478 Income Tax 300474 Corporation Tax 451005
Observe the rank of top two (Corpo, IT) and bottom two (STT, wealth) are same for each year. only dierence is in the rank 3-4-5 because Chindu hopes Service tax will bring highest collection among all indirect taxes in the year 2014-15. (will it? well, that remains to be seen!) From exam point of view, At the moment, Tax Ranking of 2013 is more important. (Because it is near to reality based on actual data gathered from April 2013 to almost upto Feb 2014. this ranking is unlikely to change.) While tax ranking of 2014 is just projected revenue from interim budget. Itll change when new government makes new (full) budget (=tax rates changed= collection ranking will be changed). Then youll have to mugup the new updated ranking accordingly. (well see when full budget comes after election).
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#2: NCCF
National Calamity Contingency Fund (NCCF) Under Home ministry Part of Public account (hence parliament approval not necessary.) Now coming to the main point:
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A.(Gross) Tax Revenue [=direct + indirect + UT w/o legislature] B.MINUS tax revenue shared with States/UT C.MINUS money transferred to calamity fund (NCCF) NET Tax revenue=A-(B+C)
Ok, but why do we need to nd Net tax revenue? Because, from gross tax revenue, union has to give some money to States/UT and calamity fund=> remaining money is the actual money left in the hands of Union government (that they can spend as per their own wishes). Lets try a very cheap MCQ Which of the following statements is/are correct a. In union budget, gross tax revenue is always lower than net tax revenue b. In the union budget, net tax revenue is calculated as the sum of [Gross tax revenue + taxes shared by States + money unspent in calamity fund] c. Both A and B d. Neither A nor B Approach: When in doubt about gross vs. net, just count the number of alphabets in their spelling. Gross (5) and Net (3). So any formula that seems to go the other way = wrong. (e.g. observe statement B, if it were true, then NET would be higher than GROSS. Because everyhing is ++) hence, B is denitely wrong. Same way, statement A is wrong because 5 > 3. Side note: Net GDP = Gross GDP MINUS depreciation. Here also, Net (3 letters) is lower than Gross (5 letters). So far, REVENUE PART Receipt CAPITAL PART Expenditure Receipt Expenditure
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Non Tax
budget revenue part tax and non tax Remaining columns and topics, in next articles, one by one.
Appendix
some allied topics thatd have broken the ow of the article, hence putting @bottom appendix.
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1. A Direct tax can be levied only on the income OR property of a person 2. Fringe Benet tax is an example of Indirect tax. 3. Both A & B 4. Neither A nor B
+ Misc. principles: transparency, simplicity, elasticity (to economic uctuation) etc. ya but where is it relevant? Recall that government abolished certain direct taxes (estate duty, gift tax etc.) in past. Why? Because, they were not following some of these canons. for example
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Estate duty was charged during the inheritance of estate. (although this was a Union tax- entirely cash was given to states.) Problem: most people evaded, Estate duty Barely fetched ~15 crores = Again 4th canon missed.
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revenue for union government!) Mock Questions After the article series is complete. Visit Mrunal.org/Economy For more on Money, Banking, Finance, Budget, Taxation and Economy.
URL to article: http://mrunal.org/2014/02/budget-interimbudget-2014-part-1of4-revenue-reciepts-direct-taxesindirect-taxes-gross-vs-net-taxes-shortfalls-collection.html Posted By Mrunal On 19/02/2014 @ 10:19 In the category Economy
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