Bugets-Basics & Terminologies-Ankur Sachan.pdf

8/11/2019 Bugets-Basics & Terminologies-Ankur Sachan.pdf

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Union Budget In The Making

The budget process in India, like in most other countries, comprises of----

Four Phases

1) Budget Formulation- Preparation of estimates of expenditure and receipts for the ensuing

financial year;

2) Budget Enactment- Approval of the proposed Budget by the Legislature through the

enactment of Finance Bill and Appropriation Bill;

3)Budget Execution- Enforcement of the provisions in the Finance Act and Appropriation

Act by the governmentcollection of receipts and making disbursements for various services

as approved by the Legislature;

4)Legislative Review of Budget Implementation- Audits of governments financial

operations on behalf of the Legislature;

Drafting commences in August- September

By convention, the Union Budget for next financial year is presented in Lok Sabha by the

Finance Minister on the last working day of February. However, the process of budget

formulation starts in the last week of August or the first fortnight of September. To get the

process started, the Budget Division in the Department of Economic Affairsunder the

Ministry of Financeissues the annual budget circular to all the Union government

ministries/departments around August- September. The Circular contains detailedinstructions for these ministries/ departments on the form and content of the statement of

budget estimates to be prepared by them.

Three kinds of figures in a Budget

The ministries are required to provide three different kinds of figures relating to their

expenditures and receipts during this process of budget preparation.

These are:

Budget Estimates (BE) Revised Estimates (RE)

Actual

Lets have a look on the whole mechanism in the context of Union budget 2013-14, which

was presented, as usual, on 28th of February 2013by the Finance Minister, P Chidambaram

within the arena of LokSabha. However, the process of its formulation would have got started

in August 2012 through issuance of Budget Circular of the Budget Division and this process

would have continued till February 2013.

The approval of Parliament is sought for the estimated receipts/expenditures for 2013-14,

which would be called Budget Estimates (BE).


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At the same time, the Union government, in its budget for 2013-14, would also present

Revised Estimates (RE)for the ongoing financial year 2012-13.

The government would not seek approval from Parliament of revised estimates of 2012-13;

but, these revised estimates allow the government to reallocateits funds among various

ministries based on theimplementation of the budget for 2012-13 during the first six monthsof financial year 2012-13.

Finally, ministries also report their Actual receipts and Expendituresfor the previous

financial year 2011-12.

Hence, the Union budget for 2013-14 consists of------

Budget Estimates for 2013-14

Revised estimates for 2012-13

Actual Expenditures and Receipts of 2011-12.

Role of Planning Commission

The ministries would provide budget estimates for plan expenditure for budget estimates for

the next financialyear, only after they have discussed their respective plan schemes with the

Planning Commission.

The Planning Commission depends on the Finance Ministry to first arrive at the size of the

Gross BudgetarySupport, which would be provided in the budget for the next annual plan of

the Union government.

Inprinciple, the size of each annual plan should be derived from the approved size ofthe overall Five-YearPlan (12th Five-Year Plan, 2012-13 to 2016-17, in the present

instance).

However, the size ofthe gross budgetary support for an annual plan also depends on

the expected availability of funds with thefinance ministry for the next financial year.

Reducing Deficit is on Priority

In the past few years, the Finance Ministry has been vociferously arguing for reduction of

Fiscal Deficit and Revenue Deficitof the Union government, citing the targets set by theFiscal Responsibility and Budget Management Act and its rules.

Hence, presently, the aspirations of the Planning Commission and Uniongovernment

ministries with regard to spending face the legal hurdle of this Act, which has made it

mandatoryfor the Union government to show----

Revenue deficit as Nil (total Revenue Expenditure not exceeding totalRevenue

Receipts by even a single rupee);

Fiscal deficit as less than 3 per cent of GDP by 2016-17.This meansnew borrowing of

the government in a financial year cannot exceed 3 per cent of the countrys GDP

forthat year.


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Final stages of Budget Formation

During the final stage of budget formation, the revenue-earning ministries of the Uniongovernment providethe estimates for their revenue receipts in the current fiscal year (Revised

Estimates) and next fiscal year(Budget Estimates) to the Finance Ministry.

Subsequently, usually in the month of January, more attentionis paid to finalisation of the

estimated receipts. With an idea about the total requirement of resources tomeet expenditures

in the next fiscal year, the finance ministry focuses on the revenue receipts for the nextfiscal.

At this stage of budget preparation, the Finance Minister examines the Budget Proposals

prepared by theministry and makes subsequent changes in them, if required. The Finance

Minister consults the Prime Minister, and alsobriefs the Union Cabinet, about the Budget at

this stage. If there is any conflict between any ministry and theFinance Ministry with regard

to the budget, the matter is supposed to be resolved by the Cabinet.

Consultations with various stakeholders is crucial

In the run-up to Union Budget each year, the Finance Minister holds Pre-Budget

Consultations with relevantstakeholders. The Finance Minister also holds consultations with

Finance Ministers of States/Union Territories as wellas Trade and Industry representatives.

This has great significance for the process of Budget formulation asit helps the FinanceMinister takes decisions on suitable fiscal policy changes to be announced during the budget.

For this years budget, representatives from the agriculture sector, various trade unions,

economists, bankingand financial institutions and also social sector groups participated in

these consultations in January 2013.

Among others, a delegation of Peoples Budget Initiativealso met Finance Ministry officials

and shared thePeoples Charter of Demandsin the month of January 2013. But this year too,

like in previous years, theprocess started late. Desired changes in expenditure programmes

and policies can be influenced only if theconsultations are begun earlier, preferably in

October.

Consolidation of Budget data

At the final step, the Budget Division in the Finance Ministry consolidates all figures to be

presented in thebudget and prepares the final budget documents. The National Informatics

Centre (NIC)helps the budgetdivision in the process of consolidation of the budget data,

which has been fully computerised. At the endof this process, the Finance Minister takes the

permission of the President of India for presenting the UnionBudget to Parliament.

It would be useful to point out that while the second and the third stage in the budget cycle of

our countryare reasonably transparent, the First stage of actual budget preparation cannot be

said to be open. The processis rather carried out behind closed channels.


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Understanding the Budget: Concept And Terminologies

Union Budget is a comprehensive statement of government finances relating to a particular

financial year.

Every Budget broadly consists of two parts-

(a) Expenditure Budget;

(b) Receipts Budget;

Expenditure Budget

The amounts of intended expenditure by the Government in the next financial year are

expressed in the Expenditure Budget.

The entire Expenditure Budgetcan be divided into two distinct categories, viz.

(a) Capital Expenditure:

Those expenditures by the government that lead to anIncrease in the assetsor a

Reduction in the liabilitiesof the government. It is however not necessary that the

assets created should be productive or they should even be revenue generating. Only

the charges towards the construction of the asset are counted as Capital expenditure.

The subsequent charges for its maintenance are considered as Revenue expenditure.

Most capital expenditure isNon Recurring.

Examples of Capital Expenditure causing Increase in Assets:

Construction of a new Flyover;

Union Govt. giving a Loan to a State Govt.

Examples of Capital Expenditure causing Reduction of a Liability:

Union Govt. repays the principal amountof a loan it had taken in thepast.

(b) Revenue Expenditure:

Those expenditures by the government that do not affect its asset-liability position.

Most kinds of revenue expenditures are seen as Recurring Expenditures.

Theentire amount of Grants given by the Union Government to States is reported in

theUnion Budget as Revenue Expenditure, even though a part of those Grants

getutilized by States for buildingSchools, Hospitals etc. Thisis so because the

ownershipof the schools or hospitals built from the Central grantswould not be with

the UnionGovernment.

Examples of Revenue Expenditure are:

Expenditure on Food Subsidy;


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Salary of staff;

Procurement of medicines;

Procurement of text books;

Payment ofinterest, etc.

Total government expenditure can also be divided into another set of categories, viz.

(A) Plan Expenditure:

Plan expenditure refers to government expenditure, which is meant for financing

the programmes/schemes formulated under the ongoing/ previous five year Plan.

(B) Non-Plan Expenditure:

Those Expenditures of the government, which are not included under the

PlanExpenditure are called as Non Plan Expenditure.

It includessome of the important types ofgovernment expenditure, like:

interest payments; pension, defence expenditure, disbursement on law and order,

disbursement on legislature, subsidies, and salary of regular cadre teachers, doctors

and other government officials.

The Receipts Budget

It presents the information on how much the Government intends to collect asits

financial resources for meeting its expenditure requirements and from which sources,

in the next fiscal year.

This can also be dividedinto two categories:

(a) Capital Receipts:

Those receipts that lead to a reduction in the assets or an increase in the liabilities of

the government.

Capital Receipts that lead to a reduction in assets:

Recoveries of Loans given by the government and Earnings from Disinvestment;

Capital Receipts that lead toan increase in liabilities:

Debt;

(b) Revenue Receipts:

Thosereceipts that dont affect theasset-liability position of the government.

RevenueReceipts comprise proceeds of Taxes (like, Income Tax, Corporation Tax,

Customs, Excise, Service Tax, etc.)

Non-tax revenue of the government (like, Interest receipts, Fees/ User Charges, andDividend & Profits from PSUs).


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Government Revenue through Taxation:

It can be divided into Direct Taxes and Indirect Taxes.

Direct Taxes:

Those taxes forwhich the tax-burden cannot beshifted are called Direct Taxes.

Examples of Direct Taxesare:

(A)Corporation Tax:

This is a tax levied on the income of registered companies in thecountry, whether

national or foreign, under the Income Tax Act, 1961.

(B) Personal Income tax:

This is a tax on the income of individuals, firms etc. Other than Companies, under

theIncome Tax Act, 1961. This head also includes other Taxes, mainly the

SecuritiesTransaction Tax, which is levied on transaction in listed securities

undertaken on stock exchanges and in units of mutual funds.

(C) Wealth Tax- This is a tax leviedon the benefits derived fromthe ownership of property,

under the Wealth Tax Act,1957. Wealth tax has virtuallybeen abolished in India.

Indirect Taxes:

Those taxes for which the tax-burden can be shifted are called Indirect Taxes. Any

person, who directly pays this kind of a tax to the Government, need not bear the

burden of that particular tax; he/she can ultimately shift the tax burden to other

persons laterthrough business transactions of goods/ services.

Indirect tax on any good or service affects the rich and the poor alike!

Unlike indirect taxes, direct taxes are linked to the tax-payees ability to pay and

hence are considered to be progressive.

Examples of Indirect Taxesare:

Customs Duties:

In this,the taxable component isimport into or export from thecountry.

Excise Duties:

It is a typeof tax levied on those goods,which are manufactured in the country and are

meant for domestic consumption. It is a tax on manufacturing, which is paid by the

manufacturer, but he passes this burden on to the consumers.

Sales Tax:It is levied onthe sale of a commodity,which is produced/importand being

sold for the first time. If the product is soldsubsequently without beingprocessed

further, it is exempt from sales tax.


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Before theintroduction of VAT (Value Added Tax), salestax used to be levied under

the authority of both CentralLegislation (Central SalesTax) and State Governments

Legislation (Sales Tax).

Service Tax:It is a tax leviedon services provided by aperson and the responsibilityof payment of

the tax iscast on the service provider.However this tax can berecovered by the

serviceprovider from the servicereceiver in course of his/herbusiness transactions.

Value Added Tax (VAT):

VATis a multi-stage tax, intendedto tax every stage of sale ofa good where some

valuehas been added to the rawmaterials; but taxpayers doreceive credit for tax

alreadypaid on the raw materials inearlier stages.

Debt and Deficit:

Debtis a kind of receipt that necessarily leads to an increase of the governments

liabilities.

The government incurs a Debt only for meeting the gap created by excess of its

expenditure over its receipts for that year, which is called Deficit.

Fiscal Deficit:

It is the gap between thegovernments total Expenditure(including loans net of

repayments)and its Total Receipts (excludingnew debt to be taken). Thus

FiscalDeficit for a year indicates the borrowing to be made by thegovernment that

year.

Revenue Deficit:

The gap between Total RevenueExpenditure of the Governmentand its Total Revenue

Receipts iscalled the Revenue Deficit.

Distribution of financial resources between the Centre and the States:

A Finance Commission is setup every five years to recommend measures for sharing

of resources between the Centre and the States, mainly pertaining to the Tax Revenuecollected by the Central Government.

Presently the recommendations made by the 13th Finance Commission are in effect

(from 2010-11 to 2014-15), whereby 32 percent of the shareable/divisible pool of

Central tax revenue is transferred to States every year and the Centre retains the

remaining amount for the Union Budget.

Tax-GDP Ratio:

Gross Domestic Product (GDP) is an indicator of the size of a countrys economy. In

order to assess the extent of governments policy interventions in the economy, some


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of the important fiscal parameters, like, total expenditure by the government, tax

revenue, deficit etc. are expressed as a proportion of the GDP.

Accordingly, a countrys Tax to GDP ratio helps us understand how much tax revenue

is being collected by the government as compared to the overall size of the economy.

A higher tax to GDP ratio in a country is a positive sign meaning that the governmentis collecting a decent amount of tax revenue as compared to the size of its economy.

Ankur Sachan

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Bugets-Basics & Terminologies-Ankur Sachan.pdf