[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
2. #2: Canons of taxation: why some taxes get abolished?
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 deficits.
Part 4: remaining filler 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$h from bedroom cupboard. In this case 11/10 times hell have
to Explain to mommy why he needs money.
Same is the case governments money. Government stores its money in three places:
#1: Contingency fund of India (Art.267)
Held by the President of India. (doesnt mean Pranab carries the chequebook. This is
operated by finance Secretary).
President can spend ca$h from this fund- for emergency/unforeseen circumstances
Without the authorization of parliament. (mommys permission not needed)
#2: Public Accounts of India (Art.266)
This is made up of:
1. bank savings account of the departments/ministries (for day to day transactions)
2. National Investment fund (money earned from disinvestment, goes here)
3. National Calamity & contingency fund (NCCF) (for disaster Management)
4. National small savings fund, defense fund.
5. Prarambhik Shiksha Kosh, MNREGA fund
6. Provident fund, Postal insurance etc.
7. and so on
Does government need parliaments permission to spend money from here? Nope.
#3: Consolidated fund of India (Art.266)
This fund/basket is filled by
1. all the cash from direct and indirect taxes
2. all the loans taken by government of India
3. Whenever someone returns principle/interest of the loans given by Government of India.
This is the largest of all three funds. And government needs parliaments approval to spend
money from this fund. Why? Because Article 266 say so.
Overall, finance minister must put three files on the table of parliament:
1. Appropriation bill: to get permission of parliament, to take out cash from Consolidated
fund of India. Art 266.
2. Finance Bill: to get permission of parliament to collect taxes from Juntaa. Art 265.
3. Annual financial statement: to show the parliament data about his incoming and
outgoing money. Art 112
4. (+ Although not required by the Constitution) make a budget speech to tell the world, Im
totally awesome and my government is also totally awesome.
5. (+ Although not required by the Constitution) present an Economic survey, and order the
UPSC aspirant, religiously mug up this data.
Then what is Vote on Account?
In an ordinary year,
February: Chindu put these files in parliament, Media Walla go crazy about it
February to April: Parliament and its Committees will study these files, find spelling
grammar mistakes and vote on the demands
April-end, parliament will pass:
Appropriation bill=> Chindu is now legally entitled to take out money from
consolidated fund of India and spend.
Finance bill=>Chindu is now legally entitled to collect taxes from junta.
Now here comes the problem:
Consider budget for 2013:
Feb 2013: FM presents the budget related docs (this will apply from 1
st
April 2013 to
31
st
March 2014)
up to 31
st
March 2013: Chindu is entitled to spend money from consolidated fund of
India (because previous years appropriation Act (2012-13) is valid upto 31
st
March
2013)
But Parliament discussion still on going. Appropriation bill for 2013-14, is yet to be
passed.
so where to arrange money in the meantime?- for staff salary, lightbill, phone bill
everything?
Fund Can FM arrange money from here until budget is passed?
No. this is meant for emergency situation only.
Contingency
Fund of India
This fund barely has 500 crore rupees=not even sufficient to the
monthly salary and lightbill of army-navy-airforce!
Public
accounts of
India
No. Because its components have specific function. e.g. the cash from
National Calamity & contingency fund (NCCF) is meant only for
disaster relief type work.
Congress
partys Swiss
bank account
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 first 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 1/6
th
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 = ~1/6
th
of the expenditure.
Duration: two months. (from 1
st
April 2013 to 31
st
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)
Ok then whats interim budget?
Consider the situation in 2014
Feb 2014: (if) Chindu presents (full) general budget. = its valid from 1
st
April 2014 to
31
st
March 2015.
April/May 2014: General election, new party comes in power. But then theyll have to live
with a budget not formed according to their manifesto/priorities= unhappiness.
Although they can simply frame a new budget to replace such budget by previous party=
but that means policy uncertainty = not conductive for investment and economy.
for example, just before election Chindu abolishes all the excise duty (to please the vote
bank), then suddenly new party comes in power, and re-starts the excise duty = policy
uncertainty, account keeping, saving/Expenditure habits change suddenly. harmful to
economy.
Therefore, political parties have developed an unwritten convention, Ruling party should
NOT to initiate major changes in the tax/expenditure during General election year.
Such Slim version of Budget is called interim budget.
There is no legal/Constitutional obligation on the ruling party to launch an interim budget
during election year. This is only an unwritten convention.
So lets compare/contrast:
Vote on Account vs Interim budget
VOTE ON ACCOUNT INTERIM BUDGET
only presents demand for
Expenditure part. (i.e. allow
government to spend money
from CFI, until budget is
passed)
Deals with both income (taxation) part and Expenditure part. +
annual financial statement showing incoming and outgoing
money of the government.
only one article applicable:
116(2)
many articles applicable
112: have to put annual financial statement
265: have to put finance bill (to get 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)
specifically says House of
people can grant such
money.
Both houses involved. Because Art 112: Annual financial
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
1/6
th
of the total estimated
expenditure
Asks parliament to grant entire money for total estimated
expenditure.
Validity: 2 months
If the new Government doesnt give new (full) budget after
election, then Interim budgets provision remain valid for the
whole financial year i.e. 1
st
April 2014 to 31
st
March 2015.
done in non-election years
and election years.
only during election years/extreme situation.
Vote on account doesnt
contain interim budget.
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.)
Interim budgets in the past
Yashwant04 Gave quite a few schemes and tax-benefits
12
page
Pranab09 Did not announce any new taxes or schemes.
18
page
Chindu14
No changes in direct tax.
Few concessions in indirect tax
Few schemes/provisions related soldier pension, education loans,
skill development, Nirbhya fund etc.
14
pages
Enough theory, lets try a mock question from 2011s CSAT paper
Q. 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
Statement B is correct. That eliminates option D. Now the final 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 office, as in
caretaker position. This happens when:
Term has expired In this case how can FM present the (interim/full) budget?
after PM/CM has
resigned
In this case, entire council of minister is automatically gone. So, how
can Finance minister Exist and present the (interim) budget
No-confidence
motion passed
In this case, even if FM presents (interim) budget, itll be defeated.
Parliament/assembly
is dissolved.
Then where will FM place the 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 difference between them
two?
Remaining topics related to polity: money bill vs finance bill, Committees of parliament,
CAG , vote on grant etc. you prepare from (the great) M.Laxmikanth.
Now lets start the technical/financial aspects of budget.
Parts of Budget
Budget two parts.
revenue part (Current) capital part
within that, make two columns each, for incoming money (receipt) and outgoing money
(Expenditure).
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).
#1: Direct Taxes
Have two subtypes
On Income/ Expenditure on properties/assets/Capital transaction
1. Income tax
2. Corporate Tax (and
MAT)
3. Interest tax (on banks)*
4. Fringe benefits tax *
5. Hotel receipt Tax*
1. Wealth Tax
2. Securities transaction Tax (STT)
3. Banking cash transaction tax*
4. Estate duty*
5. Gift tax*
Taxes marked in (*) have been abolished long time ago. Ive mentioned them here, only in
case the nostalgic UPSC professor wants to ask classification type MCQs.
We should also know the direct taxes of state government.
DIRECT TAXES OF UNION DIRECT TAXES STATE
Taxes on Income
Income tax
Corporation Tax (and MAT)
Taxes on 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
Now lets check the provisions of:
Direct taxes under Interim Budget 2014
FM followed the Ethics(GS4) principles while making the interim budget, he did not make any
changes in the direct taxes. That means, direct tax system remains the same like Budget 2013.
Observe
Income Tax
Taxable Income Income Tax
2 to 5 lakh 10%
5 to 10 20%
>10 30%
Other direct taxes
Corporate tax (desi company) ~34%
Corporate tax (foreign company) ~43%
MAT Minimum alternative tax ~21%
Wealth tax (for wealth >30 lakh rupees) 1%
STT Securities Transactions tax 0.1%-0.001%*
*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
if company spent money on in-house
Chindu proposed to setup a new
organization called Research Funding
Organisation.
This org. will fund fund research projects
Research development = they can claim tax
benefits.
selected through a competitive process.
If company gives cash to this
organization, itll be deducted from
taxable income.
Did not implement
1. GAAR
2. Direct tax code (DTC)
3. Goods and services tax (GST)
Shortfall in Direct tax collection = #EPICFAIL
Observe
Feb 2013: FM proposes taxes for year 2013-14. Along with this, hed give estimate of tax
collection e.g. x crore from income tax, y crore from corporate tax and so on. Lets label
this column as Budget estimate (BE) 2013.
1st April 2013: new tax rates would have become effective, people start paying taxes
accordingly.May, june, july, august, September, October, November, December,
.January 2014 So now FM gets new data. So, hed correct (revise) his previous
estimate. We label this Revised Estimate (RE)2013.
And finally for the year 2014-15 (Starting from 1/4/14 to 31/3/15, FM would again make
budget estimates for next (interim budget) so lets label it (BE)2014.
Thus total weve three estimates:
Direct tax BE 2013 RE 2013 BE 2014
Wealth Tax 950 950 950
Securities Transaction Tax 6720 5497 5992
Income Tax 240919 236194 300474
Corporation Tax 419520 393677 451005
Total from Direct tax 668109 636318 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. Wealth Tax
B. Securities Transaction Tax
C. Income Tax
D. 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
But Why shortfall in Direct tax collection?
A. Because IT officials are lazy and incompetent, hence lot of people managed to evade tax?
NOPE.
B. Because Chindu (Harward Graduate) and his finance Secretary (IAS) are weak in maths and
economics, hence they made wrong estimates in the first place? NOPE.
Then who is the main villain behind this shortfall? Ans. (1) inflation (2) policy paralysis.
Why high Inflation = Low collection of Direct taxes?
1. Corporate tax= paid by Tata, Birla, Reliance, Samsung, LG, Motorola, Videocon etc.
Theyll pay less tax IF their profit is DOWN. Now, High food/fuel inflation=> people
spend less money on consumer durables mobile, TV, fridge etc.=> sales down=>profit
down=> corporate tax goes down.
2. Less profit=> company cuts jobs, doesnt give salary raise to existing staff= people pay
less income tax.
3. Less profit = less dividends to shareholders => mutual fund/sharemarket investment
declines= security transaction tax also goes down.
4. High inflation = real interest rates are negative (recall Urjit Patel) = people invest more in
gold and less in mutual funds/sharemarket etc.=> security transaction tax collection is
lower than expected.
Why Policy paralysis = Low collection of Direct taxes?
Run the same logic and youll see the connection. e.g.
1. Policy paralysis=corporates cannot open new factories=> less profit=>less corporate tax.
2. Since corporates cannot open new factories=> less new jobs=>less people fall in the
income tax bracket (starting from Rs.2 lakh to 5 lakh).
ok enough of direct taxes. lets move on. otherwise our remaining jawaani will be spent in
analyzing the direct tax only.
REVENUE PART CAPITAL PART
Receipt Expenditure Receipt Expenditure
Tax Non Tax
1. Direct taxes (DONE)
2. Indirect Tax (now lets study
this)
#2: Indirect taxes
What are the indirect taxes of Union and States?
Indirect taxes (Union) Indirect Taxes (States)
i. Custom Duty (Import,
Export)
ii. Excise Duty (CENVAT
system)
iii. Service Tax
iv. Central sales tax
(CST)*
i. Sales Tax/ VAT
ii. Excise duty on DESI liquor and Narcotics
iii. Motor vehicle tax, Taxes on boats and animals.
iv. Toll tax (opposed by MNS/Shiv Sena)
v. Electricity tax.
vi. Luxury tax (on restaurant, spa etc.)
vii. Taxes on Betting and gambling (on whether Modi will
become PM or 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.
Indirect Taxes in Interim Budget 2014
We saw that FM has not changed direct taxes. BUT for indirect taxes, he has made slight
reductions/tweaking for certain items, to boost the economy. Lets check them one by one
#I1: Service Tax
The Rate of Service tax is not changed. It is same as last year (2013-14)
Service tax 12.00%
2% educational cess. Meaning tax on tax = 2% of 12% +0.24
1% Senior & Higher Education Cess= 1% of 12% +0.12
Effective service tax =12.36%
Then what is new in interim budget?
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 Exempted list
Govt. cannot levy Service tax on the names
included in this list (total 17 items.)
Theoretically, these services are taxable under
service tax, BUT for the time being, FM gave
them exemption.
To modify this list, FM needs parliament
approval (because he needs to amend the
FM can modify this list by a simple notification.
He doesnt 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
#I2: Excise Duty: Automobiles
For past few months, Automobile sector was facing slowdown because
1. High inflation =people postpone purchase of high value items
2. High interest rates (because to combat inflation, 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.
#I3: Excise: Mobile handsets
To decrease the imports of mobile phones, FM has reduced the excise duty on mobile handsets
as well. How does it help?
Foreign mobile Subjected to custom duty. (But FM did not reduce it)
Desi mobile Subjected to excise duty (FM reduced it)
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.
#I4: Custom Duty: soap industry
Rationalized the import duty on non-edible oils, fatty acids, fatty alcohols.
This will reduce the cost of (imported) raw material used in soap industry and oleo-
chemicals industry (e.g. glycerin)
Results? Soaps will become cheap. (because that was the matter of life and death!)
#I5: Custom Duty: Bank note Mill
Bank Note Paper Mill India ltd. (Bangalore)
They make the special paper for producing currency notes
FM allowed them to import capital good (machines) @a very low duty (5%)
#I6: Counter Veiling Duty (CVD): Road machines
First, What is CVD and how does it affect sales?
Vehicle manufactured by Subjected to
Desi player Excise duty
Foreign company (and imported in India) Custom duty
It may happen that, desi vehicle is expensive because high excise duty on its input (chassis,
engine, wiring, glass etc.)
Result: Foreign vehicle cheaper, juntaa more attracted to buying foreign vehicle than Desi.
Consequence: domestic industry gets less sales. IIP declined, job loss, industrial
sickness.
Possible- Solutions:
1. Give subsidy to desi vehicle makers
2. Reduce excise duty on desi vehicle (and its inputs)
3. Increase custom duty on foreign vehicle.
4. Put additional custom duty on foreign vehicle to such a level that, [taxes on foreign
vehicle] become of same level like [taxes on desi vehicle].. This solution is called
counter veiling duty (CVD).
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.)
Indirect Tax collection = #EPICFAIL shortfall
Just like Direct tax collection, here also, Chindu failed to meet targets
Indirect Tax BE 2013 RE 2013 BE 2014
Excise Duties 196804 178787 199831
Customs 187308 175056 201314
Service Tax 180141 164927 215478
Total from Indirect Tax 5.65 lakh cr. 5.19 lakh cr. 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.
Why shortfall in indirect tax collection?
#1: Excise duty down
In the recent months, IIP has been going down for Consumer durables
Example of consumer durables: TVs, mobiles, cars, bikes, fans, ACs, refrigerators,
ceramic tiles and carpets. (all these subjected to excise duty)
High level of inflation =>people spend less on consumer durables. (because theyve to
spend more on food and fuel.)
#2: Custom duty down
Duty on gold increased => smuggling => tax is evaded.
Policy paralysis => Big projects file pending => businessman wont need to import any
raw material/ machines/construction-vehicles etc. (Even if he wants to!) therefore custom
duty declined.
#3: Service tax
Inflation responsible. High level of food-fuel inflation => people spend less on luxuries
hotels, spa, gym etc.
In fact, government knew in advance that service tax 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.
MCQ Data for Tax collection: Ascending descending
enough of shortfalls in tax collection, we need to worry more about MCQs than about economy.
So lets update tables
Table1: Direct vs indirect
Tax BE 2013 RE 2013 shortfall BE 2014
Direct 6.68 6.36 32k 7.58
Indirect 5.65 5.19 45k 6.2
Total (lakh cr.) 12.35 11.58 77k 13.78
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.
Table2: Ranking Among all taxes (2013-14)
Type Taxes RE 2013
direct Wealth Tax 950
direct Securities Transaction Tax 5497
indirect Service Tax 164927
indirect Customs 175056
indirect Excise 178787
direct Income Tax 236194
direct Corporation Tax 393677
Table3: Ranking Among all taxes (2014-15)
Type Taxes BE 2014
direct Wealth Tax 950
direct Securities Transaction Tax 5992
indirect Excise 199831
indirect Customs 201314
indirect Service Tax 215478
direct Income Tax 300474
direct Corporation Tax 451005
lets make one final table
Table3: Tax collection highest to Lowest
Rank 2013 (Revised Estimate) 2014 (projected)
1 Corporation Tax Corporation Tax
2 Income Tax Income Tax
3 Excise Service Tax
4 Customs Customs
5 Service Tax Excise
6 STT STT
7 Wealth Tax Wealth Tax
Observe the rank of top two (Corpo, IT) and bottom two (STT, wealth) are same for each year.
only difference 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).
Gross vs net Tax revenue
Before going into gross vs net, lets take two quick bites:
#1: Tax sharing
80
th
amendment 2000: 29% of total taxes of the Union need to be shared with states
13
th
FC (Kelkar)= Union to share 32% with states.
14
th
FC (YV Reddy): yet to give recommendation.
#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:
Gross Tax revenue
It includes
1. Total direct taxes of union (we already saw)
2. Total indirect taxes of union (we already saw)
3. +Union territories without legislature (Diu, Daman etc.)=> their direct & indirect taxes
are also counted here.
Net Tax revenue
This equals, Gross tax revenue MINUS [revenue shared with states + money sent to National
calamity contingency fund]
Lets observe the data (numbers not important.)
crores RE 2013 BE 2014
A.(Gross) Tax Revenue [=direct + indirect + UT w/o legislature] 1158906 1379199
B.MINUS tax revenue shared with States/UT 318230 387732
C.MINUS money transferred to calamity fund (NCCF) 4650 5050
NET Tax revenue=A-(B+C) 836026 986417
Ok, but why do we need to find 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 definitely 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 CAPITAL PART
Receipt Expenditure Receipt Expenditure
Tax Non Tax
1. Direct taxes
(DONE)
2. Indirect Tax (DONE)
Remaining columns and topics, in next articles, one by one.
Appendix
some allied topics thatd have broken the flow of the article, hence putting @bottom appendix.
#1: Direct taxes can be levied on Expenditure also
Observe the case of Service tax vs FBT:
SERVICE TAX FBT
service sector= self-explanatory- doctor, spa,
hotel etc.
Fringe benefit=when boss gives some
facility to worker, Apart from his usual
salary.
Salman himself joins a posh Gymnasium,
Annual fees Rs.1 lakh (+12% service tax)
Salman buys membership to a posh gym, for
his bodyguard Shera. = 1 Lakh + 12%
service tax + 30% FBT on.
paid 1,12,000 to Gym Owner. Gym owner pays
Pay Rs. 1,12,000 to Gym owner (fees
+ service tax)
12k to government as service tax. Pay Rs. 30000 to government (FBT)
Hence its called indirect tax, because
Salman paid the tax but government did not
took it from his hand. But from that Gym
owner.
Called direct tax, because Salman directly
had to pay FBT to government (and not to the
Gym owner, not to bodyguard Shera.)
this is a tax on expenditure (on services)
this is also a tax on expenditure (on fringe
benefits)
still levied as of 2014 discontinued from 2009
lets try a very cheap MCQ:
1. A Direct tax can be levied only on the income OR property of a person
2. Fringe Benefit tax is an example of Indirect tax.
3. Both A & B
4. Neither A nor B
#2: Canons of taxation: why some taxes get abolished?
Mind the spelling: canon (rules/principles) and not cannon (used for bombing).
Adam Smith gave four canons of good taxation system.
1. Canon of Equality: taxes should be Proportionate to income.
2. Canon of Certainty: about deadline and rates.
3. Canon of Convenience: to the tax payer.
4. Canon of Economy: tax collection cost should be minimum. (i.e. staff salary, Database
Management)
+ Misc. principles: transparency, simplicity, elasticity (to economic fluctuation) 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
Gift tax (abolished)
Most people managed to evade. Hence Gift tax used to fetch barely ~10 crores in revenue. Thus,
fourth canon missed. (Collection cost very high- staff salary and database Management.)
Finally, in the late 90s, government dropped this tax. Although it doesnt mean there is no tax on
expensive gifts- theyre counted under Taxable income (of the person who receives the gift)
Estate duty (abolished)
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 4
th
canon
missed.
Hotel Receipt Tax (abolished)
In the late 80s, we did not have service tax. But government imposed tax if you spent
money on luxury hotels. (direct tax- because you had to pay this tax to government and not
via hotel owner)
problem: same as above. barely fetched a few crores.
Banking cash transaction tax (Abolished)
introduced in 2005:
0.1% on cash withdrawals of more than Rs 50,000 (individuals) and Rs 1 lakh for others in
a single day from non-savings bank account.
Why? to track unaccounted money and trace its source and destination.
Abolished in 2009, when Chindu felt he had fetched enough information.
Although indirectly the canons were also responsible: #1, #3 and #4.
Fringe Benefit tax (Abolished)
2005 Chindu started FBT
2009 Pranab abolished FBT
Compliance cost was very high (Because company would need to keep record and acount
of every little fringe benefit they gave to employees)
in other words, inconvenience to tax payer (company)=> it was even called nuisance tax.
Therefore, 3
rd
canon missed.
Besides, revenue collection was ~8k crore. and company would pay less salary to
employees in pretext of giving those fringe benefits= employees pay less income tax. so
indirectly, government was axing its own leg. (Recall our MCQ tables: income tax is the
second largest source of 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-interim-budget-2014-part-1of4-revenue-
reciepts-direct-taxes-indirect-taxes-gross-vs-net-taxes-shortfalls-collection.html
Posted By Mrunal On 19/02/2014 @ 10:19 In the category Economy