Budget Glossary

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. ead on... !n the Budget day, the finance minister tables "#-"$ documents. !f these, the main and most important document is the %nnual &inancial 'tatement. Annual Financial Statement %rticle ""$ of the (onstitution re)uires the government to present to *arliament a statement of estimated receipts and expenditure in respect of every financial year + %pril " to ,arch -". This statement is the annual financial statement. The annual financial statement is usually a white "#-page document. .t is divided into three parts, consolidated fund, contingency fund and public account. &or each of these funds, the government has to present a statement of receipts and expenditure. Consolidated Fund: This is the most important of all government funds. %ll revenues raised by the government, money borrowed and receipts from loans given by the government flow into the consolidated fund of .ndia. %ll government expenditure is made from this fund, except for exceptional items met from the (ontingency &und or the *ublic %ccount. .mportantly, no money can be withdrawn from this fund without the *arliament/s approval. Contingency Fund: %s the name suggests, any urgent or unforeseen expenditure is met from this fund. The s 0##-crore fund is at the disposal of the *resident. %ny expenditure incurred from this fund re)uires a subse)uent approval from *arliament and the amount withdrawn is returned to the fund from the consolidated fund.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 ban1er. &or instance, provident funds, small savings and so on. These funds do not belong to the government. They have to be paid bac1 at some time to their rightful owners. Because of this nature of the fund, expenditure from it are not re)uired to be approved by the *arliament. &or each of these funds the government has to present a statement of receipts and expenditure. .t is important to note that all money flowing into these funds is called receipts, the funds received, and not revenue. evenue in budget context has a specific meaning. The (onstitution re)uires that the budget has to distinguish between receipts and expenditure on revenue account from other expenditure. 'o all receipts in, say consolidated fund, are split into evenue Budget 2revenue account3 and (apital Budget 2capital account3, which includes non-revenue receipts and expenditure. &or understanding these budgets + evenue and (apital + it is important to understand revenue receipts, revenue expenditure, capital receipts and capital expenditure.

Revenue receipt/Expenditure: %ll receipts and expenditure that in general do not entail sale or creation of assets are included under the revenue account. !n the receipts side, taxes would be the most important revenue receipt. !n the expenditure side, anything that does not result in creation of assets is treated as revenue expenditure. 'alaries, subsidies and interest payments are good examples of revenue expenditure. Capital receipt/Expenditure: %ll receipts and expenditure that li)uidate or create an asset would in general be under capital account. &or instance, if the government sells shares 2disinvests3 in public sector companies, li1e it did in the case of ,aruti, it is in effect selling an asset. The receipts from the sale would go under capital account. !n 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. .n respect of all the funds the government has to prepare a revenue budget 2detailing revenue receipts and revenue expenditure3 and a capital budget 2capital receipts and capital expenditure3. (ontingency fund is clearly not that important. *ublic 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 1ey to the budget. We will ta1e that up in the next part. %s mentioned in the first part, the government has to present a revenue budget 2revenue account3 and capital budget 2capital account3 for all the three funds. The revenue account of the consolidated fund is split into two parts, receipts and disbursements + simply, income and expenditure. eceipts are broadly tax revenue, non-tax revenue and grants-in-aid and contributions. The important tax revenue items are listed below. Corporation Tax: Tax on profits of companies Taxes on !ncome ot"er t"an corporation tax: .ncome tax paid by non-corporate assesses, individuals, for instance. Fringe benefit tax #F$T%: The taxation of per)uisites + or fringe benefits + provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax. .t was introduced in Budget $##0-#4. The government felt many companies were disguising per)uisites such as club facilities as ordinary business expenses, which escaped taxation altogether. Employers have to now pay &BT on a percentage of the expense incurred on such per)uisites. Securities transaction tax #STT%: 'ale of any asset 2shares, property3 results in loss or profit. 5epending on the time the asset is held, such profits and losses are categorised as long-term or short-term capital gain6loss. .n Budget $##7-#0, the government abolished long-term capital gains tax on shares 2tax on profits made on sale of shares held for more than a year3 and replaced it with 'TT. .t is a 1ind of turnover tax where the investor has to pay a small tax on the total consideration paid 6 received in a share transaction. $an&ing cas" transaction tax #$CTT%:

.ntroduced in Budget $##0-#4, B(TT is a small tax on cash withdrawal from ban1 exceeding a particular amount in a single day. The basic idea is to curb the blac1 economy and generate a record of big cash transactions. Customs: Taxes imposed on imports. While revenue is an important consideration, (ustoms duties may also be levied to protect the domestic industry or sector 2agriculture, for one3, in retaliation against measures by other countries. 'nion Excise (uty: 5uties imposed on goods made in .ndia. Service Tax: .t is a tax on services rendered. Telephone bill, for instance, attracts a service tax. While on taxes, let us ta1e a loo1 at an important classification8 direct tax and indirect tax. (irect 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. .ncome tax 2on corporates and individuals3, &BT, 'TT and B(TT are direct taxes. !ndirect Tax: .n 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 (ustoms, excise and service tax. .ndirect taxes are considered regressive, the burden on the rich and the poor is ali1e. That is why governments strive to raise a higher proportion of taxes through direct taxes. ,oving on, we come to the next important receipt item in the revenue account, non-tax revenue. )on*tax revenue: The most important receipts under this head are interest payments 2received on loans given by the government to states, railways and others3 and dividends and profits received from public sector companies. 9arious services provided by the government + 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 ailways are a separate department, all its receipts and expenditure are routed through the consolidated fund. +rants*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 loo1 at the disbursements section of the revenue account of the consolidated fund. .t lists all the revenue expenditures of the government. These include expense incurred on organs of state such as *arliament, :udiciary and elections. % substantial amount goes into administering fiscal services such as tax collection. The biggest item is interest payment on loans ta1en by the government. 5efence and other

services li1e police also get a si;eable share. <aving loo1ed at receipts and expenditure on revenue account we come to an important item, the difference between the two, the revenue deficit. Revenue (eficit: The excess of disbursements over receipts on revenue account is called revenue deficit. This is an important control indicator. %ll expenditure on revenue account should ideally be met from receipts on revenue account= the revenue deficit should be ;ero. When revenue disbursement exceeds receipts, the government would have to borrow. 'uch borrowing is considered regressive as it is for consumption and not for creating assets. .t results in a greater proportion of revenue receipts going towards interest payment and eventually, a debt trap. The & B, %ct, which we will ta1e up later, re)uires the government to reduce fiscal deficit to ;ero by $##>#?. eceipts 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: *ublic debt receipts and public debt disbursals are borrowings and repayments during the year, respectively. The difference is the net accretion to the public debt. *ublic debt can be split into internal 2money borrowed within the country3 and external 2funds borrowed from non-.ndian sources3. .nternal debt comprises treasury bills, mar1et stabilisation schemes, ways and means advance, and securities against small savings. Treasury bills #T*bills%: These are bonds 2debt securities3 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. ,ar&et stabilisation sc"eme: The scheme was launched in %pril $##7 to strengthen B./s ability to conduct exchange rate and monetary management. These securities are issued not to meet the government/s expenditure but to provide B. with a stoc1 of securities with which it can intervene in the mar1et for managing li)uidity. -ays and means advance #-,A%: !ne of B./s roles is to serve as ban1er to both central and state governments. .n this capacity, B. 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 re)uirement by appropriating small savings collection by issuing securities to the fund. ,iscellaneous receipts: These are receipts from disinvestment in public sector underta1ings. (apital account receipts of the consolidated fund + public debt, recoveries of loans and advances, and miscellaneous receipts and revenue receipts are receipts of the consolidated fund. We now ta1e up the disbursements on capital account from the consolidated fund. The first part deals with capital expenditure incurred on general, social and economic services. 'ome of the biggest expenditure items under these heads are defence services, investment in agricultural financial institutions and capital to railways. The second part ta1es up the public debt 2repayments of loans3 and various loans 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 Ao1 'abha. These include interest payments and certain expenditure such as emoluments of the *resident, salary and allowances of spea1er,

deputy chairman of the a:ya 'abha, and allowances and pensions of 'upreme (ourt :udges, *arliament and so on. $udget at a glance: This is a snap shot of the budget for easy understanding. Bonetheless, it introduces some new concepts. While receipts are bro1en down into revenue and capital, unli1e the consolidated fund, it shows the centreCs net tax revenues. This is because a decent part of the gross tax revenue, as decided by the relevant &inance (ommission, 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: (entral or annual plans are essentially &ive Dear *lans bro1en down into annual instalments. Through these plans, the government achieves the ob:ectives of the &ive Dear *lans. The central plan/s funding is split almost evenly between government support 2from the budget3 and internal and extra budgetary resources of public enterprises. The government/s support to the central plan is called budget support. We will ta1e up plan and non-plan expenditure in the next part. Plan expenditure: This is essentially the budget support to the central plan and the central assistance to state and union territory plans. Ai1e all budget heads, this is also split into revenue and capital components. )on*plan expenditure: This is largely the revenue expenditure of the government. The biggest items 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. 5efence expenditure is non-plan expenditure.

Fiscal (eficit: When the government/s non-borrowed receipts 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 non-borrowed 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. % shrin1ing primary deficit indicates progress towards fiscal health. The Budget document also mentions deficit as a percentage of G5*. This is to facilitate comparison and also get a proper perspective. *rudent fiscal management re)uires that government does not borrow to consume in the normal course. FR$, Act: Enacted in $##-, &iscal esponsibility and Budget ,anagement %ct re)uire the elimination of revenue deficit by $##>-#?. <ence, from $##>-#?, the government will have to meet all its revenue expenditure from its revenue receipts. %ny borrowing would only be to meet capital expenditure. The %ct mandates a -E limit on the fiscal deficit after $##>-#?. Resources transferred to t"e states: % part of the (entre/s gross tax collection goes to state governments. .n the Budget $##F-#>, the states were to receive nearly $FE of the gross tax collections. The (entre also transfers funds to states by way of support to their plans. .t also gives large grants to manage centrally-sponsored schemes. The government counts small savings transfers to state governments, which are in the nature of borrowings, as resources

transferred to states. Before ,arch -", "???, the (entre used to borrow net accretions to small savings and lend them to the states. &rom %pril ", "???, states started receiving F0E of net small savings directly= the balance was invested in special government securities during "???-$### to $##"-$##$. The sums received in the B'' fund on redemption of special securities are being reinvested in special G-secs. &rom %pril $##$, the entire net collection under small saving schemes in each state and GT are advanced to the concerned state6GT government as investment in its special securities. The expenditure and receipts Budget ta1e up the respective heads in greater detail. .alue*Added Tax #.AT% and +ST: 9%T helps avoid cascading of taxes as a product passes through different stages of production6value addition. The tax is based on the difference between the value of the output and 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. 9%T brings in transparency to commodity taxation. .n this concluding part we ta1e a loo1 at some of the important terms that figure in the Budget $/ARAT )!R,A): Bharat Birman is the current G*% government/s ambitious programme for building infrastructure, especially in rural .ndia. .t has six components + irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity. .n each of these areas, the government has set targets that are to be achieved by the year $##?, within four years of its launch. CESS: This is an additional levy on the basic tax liability. Governments resort to cess for meeting specific expenditure. &or instance, both corporate and individual income is at present sub:ect to an education cess of $E. .n the last Budget, the government had imposed another "E cess + secondary and higher education cess on income tax + to finance secondary and higher education. C0')TER.A!1!)+ ('T!ES #C.(%: (ountervailing duty is a tax imposed on imports, over and above the basic import duty. (95 is at par with the excise duty paid by the domestic manufacturers of similar goods. This ensures a levelplaying field between imported goods and locally-produced ones. %n exemption from (95 places the domestic industry at disadvantage and over long run discourages investments in affected sectors. E2P0RT ('T3: This is a tax levied on exports. .n most instances, the ob:ect is not revenue , but to discourage exports of certain items. .n the last Budget, for instance , the government imposed an export duty of s -## per metric tonne on export of iron ores and concentrates and s $,### per metric tonne on export of chrome ores and concentrates. F!)A)CE $!11: 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 *arliament are submitted to *arliament through this bill. .t is the 1ey document as far as taxes are concerned. F!)A)C!A1 !)C1'S!0):

&inancial inclusion is universalising access to basic financial services 2to have a ban1 account , timely and ade)uate credit3 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 at high rates. &inancial inclusion remains a serious issue in .ndia. The government has proposed a no-frills account to provide cheap ban1ing. ,!)!,', A1TER)ATE TA2 #,AT%: This tax on corporate profits was introduced in "??4-?F and has been modified since. .f the tax payable by a company is less than "#E of its boo1 profits, after availing of all eligible deductions , then "#E of boo1 profits is the minimum tax payable. Boo1 profits are profits calculated as per the (ompanies %ct, while profits as per the .ncome-Tax %ct could be significantly lower, than1s to various exemptions and depreciation. PASS*T/R0'+/ STAT'S: % pass-through status helps avoid double taxation. ,utual funds, for instance , en:oy pass-through status. The income earned by the funds is tax free. 'ince mutual funds/ income is distributed to unitholders, who are in turn taxed on their income from such investments , any taxation of mutual funds would amount to double taxation. Essentially , it means the income is merely passing through the mutual funds and, therefore, should not be taxed. The government allows venture funds in some sectors pass-through status to encourage investments in start-ups . S'$.E)T!0): The term subvention finds a mention in almost every Budget. .t refers to a grant of money in aid or support, mostly by the government. .n the .ndian context, for instance, the government sometimes as1s institutions to provide loans to farmers at below mar1et rates. The loss is usually made good through subventions. S'RC/AR+E: %s the name suggests, this is an additional charge or tax. % surcharge of "#E on a tax rate of -#E effectively raises the combined tax burden to --E. .n the case of individuals earning a taxable salary of more than s "# la1h a surcharge of "#E is levied on income in excess of s "# la1h. (orporate income is levied a flat surcharge of "#E in the case of domestic companies and $.0E for foreign companies. (ompanies with revenue less than s " crore do not have to pay this surcharge.