BUDGET GLOSSARY

The government's annual budget exercise is no different from the way

we all manage our household budgets. The only difference: the
former's intimidating jargon. Team ET simplifies the important
budget items for its readers in a five-part series. We have,
however, departed from the usual way glossaries are presented,
in alphabetical order, to a flow-type format wherein terms are
explained as the reader would encounter them in 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.

ANNUAL FINANCIAL STATEMENT:

Article 112 of the constitution requires the government to present to the Parliament a
statement of estimated receipts and expenditure in respect of every financial year,
April 1 to March 31. This statement is the annual financial statement.
The annual financial statement is usually a white 10-page document. It is divided into
three parts, Consolidated Fund, Contingency Fund and Public Account. For each of
these funds the government has to present a statement of receipts and expenditure.

CONSOLIDATED FUND:
This is the most important of all the government funds. All revenues raised by the
government, money borrowed and receipts from loans given by the government flow
into the consolidated fund of India. All government expenditure is made from this
fund, except for exceptional items met from the Contingency Fund or the Public
Account. Importantly, no money can be withdrawn from this fund without
Parliament's approval.

CONTINGENCY FUND:
As the name suggests, any urgent or unforeseen expenditure is met from this fund.
The Rs 500-crore fund is at the disposal of the President. Any expenditure incurred
from this fund requires a subsequent approval from Parliament and the amount
withdrawn is returned to the fund from the consolidated fund.

PUBLIC ACCOUNT:
This fund is to account for flows for those transactions where the government is
merely acting as a banker. For instance, provident funds, small savings and so on.
These funds do not belong to the government. They have to be paid back at some time
to their rightful owners. Because of this nature of the fund, expenditure from it are not
required to be approved by Parliament.

For each of these funds the government has to present a statement of receipts and
expenditure. It is important to note that all money flowing into these funds is called
receipts, the funds received, and not revenue. Revenue in budget context has a
specific meaning. The Constitution requires that the budget has to distinguish between
receipts and expenditure on revenue account from other expenditure. So all receipts
in, say consolidated fund, are split into Revenue Budget (revenue account) and
Capital Budget (capital account), which includes nonrevenue receipts and
expenditure. For understanding these budgets - Revenue and Capital - it is important
to understand revenue receipts, revenue expenditure, capital receipts and capital
expenditure.

REVENUE RECEIPT/EXPENDITURE:
All receipts and expenditure that in general do not entail sale or creation of assets are
included under the revenue account. On the receipts side, taxes would be the most
important revenue receipt. On the expenditure side, anything that does not result in
creation of assets is treated as revenue expenditure. Salaries, subsidies and interest
payments are good examples of revenue expenditure.

CAPITAL RECEIPT/EXPENDITURE:
All receipts and expenditure that liquidate or create an asset would in general be under
capital account. For instance, if the government sells shares (disinvests) in public
sector companies, like it did in the case of Maruti, it is in effect selling an asset. The
receipts from the sale would go under capital account. On the other hand, if the
government gives someone a loan from which it expects to receive interest, that
expenditure would go under the capital account. In respect of all the funds the
government has to prepare a Revenue Budget (detailing revenue receipts and revenue
expenditure) and a capital budget (capital receipts and capital expenditure).
Contingency Fund is clearly not that important. Public Account is important in that it
gives a view of select savings and how they are being used, but not that relevant from
a budget perspective. The consolidated fund is the key to the budget. We will take that
up in the next part.

CORPORATION TAX:
Tax on profits of companies.

TAXES ON INCOME OTHER THAN CORPORATION TAX:

Income tax paid by non-corporate assesses, individuals, for instance.

FRINGE BENEFIT TAX (FBT):

The taxation of perquisites — or fringe benefits — provided by an employer to his
employees, in addition to the cash salary or wages paid, is fringe benefit tax. It was
introduced in the 2005-06 budget. The government felt that many companies were
disguising perquisites such as club facilities as ordinary business expenses, which
escaped taxation altogether. Employers have to now pay a tax (FBT) on a percentage
of the expense incurred on such perquisites.

SECURITIES TRANSACTION TAX (STT):

Sale of any asset (shares, property etc) results in loss or profit. Depending on the time
the asset is held, such profits and losses are categorised as long term or short term
capital gain/loss. In the 2004-05 budget, the government abolished long-term capital
gains tax on shares (tax on profits made on sale of shares held for more than a year)
and replaced it STT. It is a kind of turnover tax where the investor has to pay a small
tax on the total consideration paid/received in a share transaction.

BANKING CASH TRANSACTION TAX (BCTT):

Introduced in the 2005-06 budget, BCTT is a small tax on cash withdrawal from bank
exceeding a particular amount in a single day. The basic idea is to curb the black
economy and generate a record of big cash transactions.

CUSTOMS:
Taxes imposed on imports. While revenue is an important consideration, customs
duties may also be levied to protect the domestic industry or sector (agriculture, for
one), in retaliation against measures by other countries etc.

UNION EXCISE DUTY:

Duties imposed on goods manufactured in the country.

SERVICE TAX:
It is a tax on services rendered. Telephone bill, for instance, attracts a service tax.
While on taxes, let us take a look at an important classification: direct tax and indirect
tax, which finds wide mention in the budget.

DIRECT TAX:
Traditionally, these are taxes where the burden of tax falls on the person on whom it
is levied. These are largely taxes on income or wealth. Income tax (on corporates and
individuals), FBT, STT and BCTT are direct taxes.

INDIRECT TAX:
In the case of indirect taxes the incidence of tax is usually not on the person who pays
the tax. These are largely taxes on expenditure and include Customs, excise and
service tax.

Indirect taxes are considered regressive, the burden on the rich and the poor is alike.
That is why governments strive to raise a higher proportion of taxes through direct
taxes. Moving on, we come to the next important receipt item in the revenue account,
non-tax revenue.

NON-TAX REVENUE:
The most important receipts under this head are interest payments (received on loans
given by the government to states, railways and others) and dividends and profits
received from public sector companies.

Various services provided by the government — general services such as police and
defence, social and community services such as medical services, and economic
services such as power and railways — also yield revenue for the government.
Though Railways are a separate department, all its receipts and expenditure are routed
through the consolidated fund.

GRANTS-IN-AID AND CONTRIBUTIONS:

The third receipt item in the revenue account is relatively small grants-in-aid and
contributions. These are in the nature of pure transfers to the government without any
repayment obligation.

We now look at the disbursements section of the Revenue Account of the

consolidated fund. It lists all the revenue expenditures of the government. These
include expense incurred on organs of state such as Parliament, judiciary and
elections. A substantial amount goes into administering fiscal services such as tax
collection. The biggest item is interest payment on loans taken by the government.
Defence and other services such as police also get a sizeable share. Having looked at
receipts and expenditure on revenue account we come to an important item, the
difference between the two, the revenue deficit.

REVENUE DEFICIT:
The excess of disbursements over receipts on revenue account is called revenue
deficit. This is an important control indicator. All expenditure on revenue account
should ideally be met from receipts on revenue account; the revenue deficit should be
zero. When revenue disbursement exceeds receipts, the government would have to
borrow. Such borrowing is considered regressive as it is for consumption and not for
creating assets. It results in a greater proportion of revenue receipts going towards
interest payment and eventually, a debt trap. The FRBM Act, which we will take up
later, requires the government to reduce fiscal deficit to zero by 2008-09.

RECEIPTS in the capital account of the consolidated fund are grouped under three
broad heads — public debt, recoveries of loans and advances, and miscellaneous
receipts.

PUBLIC DEBT:
In normal accounting, debt is a stock, to be measured at a point of time, while
borrowing and repayment during a year are flows, to be measured over a period of
time. In Budget parlance, however, you'll find public debt receipts and public debt
disbursals. These are respectively borrowings and repayments during the year. The
difference between the two is the net accretion to the public debt.

Public debt can be split into two heads, internal debt (money borrowed within the
country) and external debt (funds borrowed from non-Indian sources).

The internal debt comprises of treasury Bills, market stabilisation scheme, ways and
means advance, and securities against small savings.

TREASURY BILL (T-BILLS):

These are bonds (debt securities) with maturity of less than a year. These are issued to
meet short-term mismatches in receipts and expenditure. Bonds of longer maturity are
called dated securities.

MARKET STABILISATION SCHEME (MSS):

The scheme was launched in April 2004 to strengthen Reserve Bank of India's (RBI)
ability to conduct exchange rate and monetary management. The RBI mops up excess
liquidity, created, for instance when the central bank buys up huge quantities of dollar
inflows to prevent undesirably fast appreciation of the rupee, by selling its stock of
government securities to banks. When the RBI began to run short of of government
securities that had been issued to meet the government's borrowing requirement, the
MSS was launched. These securities are issued not to meet the government's
expenditure but to provide the RBI with a stock of securities with which to intervene
in the market for managing liquidity.

WAYS AND MEANS ADVANCE (WMA):

One of the many roles of the RBI is to serve as banker for both the Central and State
governments. In this capacity, the RBI provides temporary support to tide over
mismatches in their receipts and payments in the form of ways and means advances.

SECURITIES AGAINST SMALL SAVINGS:

The government meets a small part of its loan requirement by appropriating small
savings collection by issuing securities to the fund.

MISCELLANEOUS RECEIPTS:
These are primarily receipts from disinvesment in public sector undertakings.
The capital account receipts of the consolidated fund — public debt, recoveries of
loans and advances, and miscellaneous receipts — and revenue receipts make up the
total receipts of the consolidated fund.

We now take up the disbursements on capital account from the consolidated fund. The
first part deals with capital expenditure incurred on the various services — general
services, social services and, economic services. Some of the biggest expenditure
items under these heads are defence services, investment in agricultural financial
institutions and capital to railways. The second part takes up the public debt
(repayments of loans) and various loans made by the government.

The consolidated fund has certain disbursements "charged" to the fund. These are
obligations that have to be met in any case and, therefore, do not have to be voted by
the Lok Sabha. These include interest payments and certain expenditure such as
emoluments of the President, salary and allowances of speaker, deputy chairman of
the Rajya Sabha, and allowances and pensions of Supreme Court judges. Parliament
and so on. This concludes the discussion on consolidated fund. We now move on to
the other budget documents, which give a more detailed presentation of the
consolidated fund.

BUDGET AT A GLANCE:
This is obviously a snap shot of the budget, for an easy understanding. Nonetheless, it
introduces some new concepts. While receipts are broken down into revenue and
capital, unlike the consolidated fund, it shows the centre's net tax revenues. This is
because a decent part of the gross tax revenue, as decided by the relevant Finance
Commission, flows to the state governments.

Budget at a glance also segments expenditure into plan and non-plan expenditure,
instead of splitting into revenue and capital. Each of these is then split into revenue
account and capital account. Before discussing plan and non-plan expenditure it is
important to discuss the concept of the central plan.

CENTRAL PLAN:
Central or annual plans are essentially the five year plans broken down into five
annual instalments. Through these annual plans the government achieves the
objectives of the Five-Year Plans. The funding of the central plan is split almost
evenly between government support (from the budget) and internal and extra
budgetary resources of public enterprises. The government's support to the central
plan is called the budget support.

PLAN EXPENDITURE:
This is essentially the Budget support to the central plan and the central assistance to
state and Union territory plans. Like all Budget heads, this is also split into revenue
and capital components.

NON-PLAN EXPENDITURE:
This is largely the revenue expenditure of the government. The biggest item of
expenditure are interest payments, subsidies, salaries, defence and pension. The
capital component of the non-plan expenditure is relatively small with the largest
allocation going to defence.

It is important to note that the entire defence expenditure is non-plan expenditure. We

will now take up the various deficits and the components of plan and non-plan
expenditure. In the Budget at a Glance, the plan and the non-plan expenditure make
up the total government expenditure. This brings us to the concept of deficit.

FISCAL DEFICIT:
When the government's non-borrowed receipts (revenue receipts plus loan repayments
received by the government plus miscellaneous capital receipts, primarily
disinvestment proceeds) fall short of its entire expenditure, it has to borrow money
from the public to meet the shortfall. The excess of total expenditure over total
nonborrowed receipts is called the fiscal deficit.

PRIMARY DEFICIT:
The revenue expenditure includes interest payments on government's earlier
borrowings. The primary deficit is the fiscal deficit less interest payments. A
shrinking primary deficit would indicate progress towards fiscal health.

We had already discussed revenue deficit earlier. The Budget document also mentions
the deficit as a percentage of the GDP. This is to facilitate comparison and also get a
proper perspective. In ab- SALAM solute terms, the fiscal deficit may be
large, but if it is small compared to the size of the economy then it is not such a bad
thing. Prudent fiscal management requires that government does not borrow to
consume, in the normal course. That brings us to the FRBM Act.

FRBM ACT:
Enacted in 2003, the Fiscal Responsibility and Budget Management Act requires the
elimination of revenue deficit by 2008-09. This means that from 2008-09, the
government will have to meet all its revenue expenditure from its revenue receipts.
Any borrowing would then only be to meet capital expenditure — repayment of loans,
lending and fresh investment. The Act also mandates a 3% limit on the fiscal deficit
after 2008-09. This is a reasonable limit that allows significant-cant leverage to the
government to build capacities in the economy without compromising fiscal stability.
It is important to note that since the entire Budget is at current market prices the
deficits are also calculated with reference to GDP at current market prices.

RESOURCES TRANSFERRED TO THE STATES

We now look at the resources transferred to the states. As mentioned earlier, a part of
the central government's gross tax collections goes to state governments. In the
Budget 2007-08 the states were to receive nearly 27% of the gross tax collections.

The Centre also transfers substantial funds to states by way of support to their plans.
These are largely in the nature of grants. Centre also gives large grants to states for
managing centrally sponsored schemes. Interestingly, the government counts small
savings transfers to state governments, which are in the nature of borrowings, as
resources transferred to states. Before March 31, 1999, the Centre used to borrow net
accretions to small savings (public provident fund, national saving scheme, etc) and
lend them to the states. From April 1, 1999, states started receiving 75% of net small
savings collections directly; the balance was invested in special Central Government
securities during 1999-2000 to 2001-2002. The sums received in the National Small
Savings Fund on redemption of special securities are being reinvested in special
central government securities. From April 2002, the entire net collections under small
saving schemes in each State & UT (with legislature) are advanced to the concerned
State/UT government as investment in its special securities.

It seems many states are actually not keen on small savings funds as the cost of these
borrowings works out higher than what they can get from the market. We now find
the Centre is being forced to mop-up some small savings mobilisation (Rs 5750 crore
Budgeted in 2007-08) through special securities as state governments are not taking
the entire mobilisation.

This completes the discussion on Budget at a Glance. The expenditure and receipts
Budget take up the respective heads in greater detail. We will now take up terms that
require some discussion for a clearer understanding of the Budget.

VALUE-ADDED TAX (VAT) AND GST:

VAT helps avoid cascading of taxes (tax being levied upon a price that includes one
or more elements of tax) as a product passes through different stages of
production/value addition. The tax is based on the difference between the value of the
output and the value of the inputs used to produce it. The aim is to tax a firm only for
the value added by it to the inputs it is using for manufacturing its output and not the
entire input cost. VAT brings in transparency to commodity taxation: right now, only
the final tax paid by the consumer is apparent to her, while with value added tax
generalised to a goods and services tax (GST) that subsumes both central and state
level taxation, the entire element of tax borne by a good (or a service) would be
represented by the GST paid on it. A GST of 20% might seem high, but it would be
about half the actual incidence of tax in most goods at present.

BHARAT NIRMAN:
Bharat Nirman is the current UPA government’s ambitious programme for building
infrastructure, especially in rural India. It has six components - irrigation, roads, water
supply, housing, rural electrification and rural telecom connectivity. In each of these
areas, the government has set targets that are to be achieved by the year 2009, within
four years of its launch.

CESS:
This is an additional levy on the basic tax liability. Governments resort to cesses for
meeting specific expenditure. For instance, both corporate and individual income is at
present subject to an education cess of 2%. In the last Budget the government had
imposed an another 1% cess ‘Secondary and higher education cess on income tax’ to
finance secondary and higher education.

COUNTERVAILING DUTIES (CVD) :

Countervailing duty is a tax imposed on imports, over and above the basic import
duty. CVD is at par with the excise duty paid by the domestic manufacturers of
similar goods. This ensures a level playing field between imported goods and locally
produced ones. An exemption from CVD places domestic industry at disadvantage
and over long run discourages investments in affected sectors.

EXPORT DUTY:
This is a tax levied on exports. In most instances the object is not revenue but to
discourage exports of certain items. In the last Budget, for instance, the government
imposed an export duty of Rs 300 per metric tonne on export of iron ores and
concentrates and Rs 2,000 per metric tonne on export of chrome ores and
concentrates.

FINANCE BILL:
The proposals of government for levy of new taxes, modification of the existing tax
structure or continuance of the existing tax structure beyond the period approved by
Parliament are submitted to Parliament through this bill. It is the key document as far
as taxes are concerned.

FINANCIAL INCLUSION:
Financial inclusion is universalising access to basic financial services (to have a bank
account, timely and adequate credit) at an affordable cost. Exclusion from financial
services imposes costs on those excluded; these are typically the disadvantaged and
low income group. Exclusion forces them into informal arrangements such as
borrowing from local money lenders, etc at high rates. Financial inclusion remain a
serious issue in India. The government has proposed a no-frills account to provide
cheap banking.

MINIMUM ALTERNATE TAX (MAT):

This tax on corporate profits was introduced in 1996-97 and has been modified since.
If the tax payable by a company is less than 10% of its book profits, after availing of
all eligible deductions, then 10% of book profits is the minimum tax payable. Book
profits are profits calculated as per the Companies Act, while profits as per the
Income Tax Act could be significantly lower, thanks to various exemptions and
depreciation.

PASS-THROUGH STATUS:
A pass through status helps avoid double taxation. Mutual funds, for instance, enjoy
pass through status. The income earned by the funds is tax-free. Since mutual funds’
income is distributed to unit holders, who are in turn taxed on their income from such
investments, any taxation of mutual funds would amount to double taxation.
Essentially, it means that the income is merely passing through the MFs and,
therefore, should not be taxed. The government allows VC funds in some sectors
pass-through status to encourage investments in start-ups.

SUBVENTION:
The term subvention finds a mention in almost every Budget. It refers to a grant of
money in aid or support, mostly by the government. In the Indian context, for
instance, the government sometimes asks institutions to provide loans to farmers at
below market rates. The loss is usually made good through subventions.

SURCHARGE:
As the name suggests, this is an additional charge or tax. A surcharge of 10% on a tax
rate of 30% effectively raises the combined tax burden to 33%. In the case of
individuals earning a taxable salary of more than Rs 10 lakh a surcharge of 10% is
levied on income in excess of Rs 10 lakh. Corporate income is levied a flat surcharge
of 10% in the case of domestic companies and 2.5% for foreign companies.
Companies with revenue less than Rs 1 crore do not have to pay this surcharge.