MONEY MATTERS: Budget Fundas For The Uninitiated
On Mar 12, 2012
The presentation of the Union Budget is a highly hyped event in India. We have converted a mere statement of accounts into an imagined grandstand for financial policy. The stock market participants hold their breath, even though history has proved otherwise, for the budget to provide the foundation for the next secular bull-run.
The presentation is usually done on the last day of February. This year there has been a break from the norm and the Budget will be presented on 16th March.
I am giving a primer on some of the terms in the Union Budget so that this year instead of being a silent spectator you can reel off some of the terms with élan.
Economic Survey: The Economic survey is presented in parliament a day before the budget, something like an appetizer before the budget. It is prepared by the Department of Economic Affairs. It gives the Finance Ministry’s view of the macro economic situation, problems, future direction and priorities.
Monetary policy: All central banks (In India, The Reserve Bank of India) around the world control money supply in the economy. The central theme of the monetary policy is control of inflation or revival of economic growth by controlling the cost of money. When too much money is in the system inflation shoots up. The Central bank tries to contract the money supply by increasing interest rates thereby making borrowing more expensive. This is what the RBI has been trying to do in the past one year. That is the reason your home loans and vehicle loans are so expensive today. On the other hand if economic growth grinds to a halt or a country is hit by recession then the central banks will follow an expansionary monetary policy. They reduce interest rates as much as possible so that entrepreneurial drive/consumption is ignited and companies and people borrow cheap money. This is what is happening in Europe and US now as they desperately need to invigorate consumption, employment and corporate investments.
Fiscal deficit: When the planned government expenditure exceeds its planned revenue receipts (excluding borrowings), the government runs a fiscal deficit. This is the cash the government needs and needs to borrow to service the additional expenditure. They can borrow from the RBI, in other words, deficit financing or from the money market through treasury bonds which are subscribed by banks and institutions. The target for fiscal deficit is usually set as a percentage of GDP. For 2011-12 it is 4.6 % of GDP and the government is going to miss it by a large margin.
Plan Expenditure and Non Plan Expenditure: Please note “plan” has to be viewed in the context of 5 year plans. Plan Expenditure includes all expenditure which has been planned based on discussion with various ministries and states by the planning commission as part of the 5 year plan. Non Plan expenditure includes defense expenditure, Interest payments and debt servicing, subsidies, social service, pensions, salaries, cost of running and maintaining the government departments, non-plan grants to states etc. This antiquated subdivision may soon be junked as per recommendation of the Rangarajan committee.
Budget Estimates/Revised Estimates: These are assessment of expenditure by the government for the next financial year. In November-December all the ministries have to review the plan and non plan expenditure against the original budget estimate and report any changes. If there is a change then the revised estimate [RE] has to be reported to the planning commission.
GST: Goods and Service Tax: India may be a single country but as a market it is divided with each state having different tax policies in addition to Central Sales tax. One would be appalled by the amount of inefficiency, corruption and overlapping the whole system creates. GST proposes to completely revamp the system with a single centralized tax structure across the country. It is a tax on the value addition at each stage of the supply chain. A “ passing the parcel” which ends with the consumer. Central Excise Duty, VAT, Sales tax, Service Tax, Octroi, Entertainment tax, Central sales tax, surcharges, etc will vanish. But all is not well that ends well. The original deadline of 1st April 2010 was missed and it is certain that the extended deadline of April 2012 will be missed as many state governments do not want to implement it. A single country without a single unified market even after 65 years, it is a shame and an excuse for continuing a sham.
Direct Tax Code [DTC]: The direct tax code [DTC] started off with the lofty ambition of pruning the existing archaic, draconian and longwinded Income tax Act 1961. Instead it ended up as an eye wash, a totally watered down version of the original proposal. The DTC was supposed to kick in from 1st April 2012. In all likelihood this will go the GST way, deferred year after year.
Direct taxes: If an individual or an organisation is paying the tax that is being levied, directly to the government it is direct tax. Income tax, TDS, Property tax, Wealth Tax and Gift Tax come under direct taxes. The responsibility of paying cannot be shifted.
Indirect taxes: These taxes are levied on goods and services. The service provider passes on the tax down the supply chain and the consumer indirectly pays this by way of increase in price. Sales Tax, Service Tax, VAT, Customs duty, Central Excise etc are indirect taxes. As far as taxation goes, here too consumer is the kingpin.
Minimum Alternate Tax [MAT]: There are many deductions and exemptions available for companies that allow them to avoid paying corporate taxes even when they are showing book profits. In order to bring them into the tax net the government has introduced Minimum Alternate Tax [MAT]. In layman’s terms it essentially means that you have to pay a fixed percentage of the book profit as tax if tax payable is less than the prescribed limit. For 2011-12 MAT is 18 %. This is the rate of tax the company has to pay if the income-tax payable on the taxable income [after deductions and exemptions] is less than 18 percent of the adjusted book profits.
I have tried to cover some of the oft repeated budget terms and I hope that this year you can see the budget in a new light.
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Country Head for AGEM India Branch