Budget Glossary I

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 Importantly, no money can be withdrawn from this fund without Parliament's approval.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 Any expenditure incurred from this fund requires a subsequent approval from Parliament and the amount withdrawn is returned to the fund from the consolidated fund.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.