Budget Glossary II

BUDGET GLOSSARY II

 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.