GOVERNMENT BUDGETING
The
budget process in India, like in most other countries, comprises four distinct
phases:
i)
Budget formulation- preparation of estimates of expenditure and receipts for
the ensuing financial year;
ii)
Budget enactment- approval of the proposed Budget by the Legislature through
the enactment of Finance Bill and Appropriation Bill;
iii)
Budget execution- enforcement of the provisions in the Finance Act and
Appropriation Act by the government—collection of receipts and making
disbursements for various services as approved by the Legislature;
iv)
Legislative review of budget implementation- audits of government’s financial
operations on behalf of the
Legislature.(CAG)
Process
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 Affairs under the Ministry of Finance issues the annual budget
circular to all the Union government ministries/departments around August-
September.
·
The Circular contains detailed instructions 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
1. Budget
Estimates,
2. Revised
Estimates
3. Actuals.
·
Let’s understand this in the context of Union budget 2013-14,
which was presented, as usual, on 28th of February 2013 by the Finance
Minister, on the floor of LokSabha.
·
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.
·
At the same time, the Union government, in its budget for 2013-14,
would also present revised estimates 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
reallocate its funds among various ministries based on the implementation of
the budget for 2012-13 during the first six months of financial year 2012-13.
·
Finally, ministries also report their actual receipts and
expenditures for 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, and actual expenditures and receipts of 2011-12.
Planning
Commission comes in
·
The ministries would provide budget estimates for plan expenditure
for budget estimates for the next financial year, only after they have
discussed their respective plan schemes with the Central Planning Commission.
·
The Planning Commission depends on the finance ministry to first arrive
at the size of the gross budgetary support, which would be provided in the
budget for the next annual plan of the Union government.
·
In principle, the size of each annual plan should be derived from
the approved size of the overall Five-Year Plan (12th Five-Year Plan, 2012-13
to 2016-17, in the present instance).
·
However, in practice, the size of the gross budgetary support for
an annual plan also depends on the expected availability of funds with the
finance ministry for the next financial year.
Reducing
deficit, a priority
(Please Read the concept of deficit
budgeting and related prolems, and FRBMA, have been asked in pre and mains
already, since the new syllabus specifically mentions Government Budgeting
these are now hot topics.)
·
In the past few years, the finance ministry has been vociferously
arguing for reduction of fiscal deficit and revenue deficit of the Union
government, citing the targets set by the Fiscal Responsibility and Budget
Management Act and its rules.
·
Hence, presently, the aspirations of the Planning Commission and
Union government ministries with regard to spending face the legal hurdle of
this Act, which has made it mandatory for the Union government to show the
revenue deficit as nil and the fiscal
deficit as less than 3 per cent of GDP.
·
This means new borrowing of the government in a financial year
cannot exceed 3 per cent of the country’s GDP for that year.
Final stages of budget preparation
·
During the final stage of budget preparation, the revenue-earning
ministries of the Union government 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 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 crucial
·
In the run-up to Union Budget each year, the Finance Minister
holds pre-budget consultations with relevantstakeholders.
·
The FM 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 FM take decisions on suitable fiscal policy changes to be
announced during the budget.
·
For this year’s 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 People’s Budget Initiative also met
Finance Ministry officials and shared thePeople’s Charter of Demands in 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
·
As the last steps, 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 doors.
BUDGET IN PARLIAMENT
With the emergence of Welfare State,
Governments have come to look after virtuallyeverysphere of human life. They
have to perform manifold functions from maintaining law and order, protecting
their territories to implementation of plans for economic and social
betterment. Besides, they provide a variety of social services like education,
health, employment and housing to the people. Needless to say, Government
require adequate resources to discharge these functions effectively. Where is
this money to come from and who is to sanction the funds? The necessary funds
are mobilised from the country’s resources by way of taxes both direct and
indirect, loans both long-term and short-term, to meet the Governmental
expenditure. In India, the principal sources of revenue are customs and excise
duties and Income-tax on individuals and companies.
Need for Budget
It is not as if the Government can tax, borrow
and spend money the way it likes. Since there is a limit to the resources, the
need for proper budgeting arises to allocate scarce resources to various
Governmental activities. Everyitem of expenditure has to be well thought out
and total outlay worked out for a specific period. Prudent spending is
essential for the stability of a Government and proper earnings are a
pre-requisite to wise spending. Hence, planned expenditure and accurate foresight
of earnings are sine-qua-non of sound Governmental finance.
Parliamentary Control over Finance
Ours is a Parliamentary system of Government
based on Westminster model. The Constitution has, therefore, vested the power
over the purse in the hands of chosen representatives of the people thus
sanctifying the principle ‘no taxation without representation’. Preparation of
Budget for the approval of the Legislature is a Constitutional obligation of
the Government both at the Centre and the State levels. Legislative prerogative
over taxation, legislative control over expenditure and executive initiative in
financial matters are some of the fundamental principles of the system of
Parliamentary financial control.
There are specific provisions in the
Constitution of India incorporating these tenets. For example, article 265
providesthat ‘no tax shall be levied or collected except by authority of law’;
no expenditure can be incurred except with the authorisation of the Legislature
(article 266); and President shall, in respect of every financial year, cause
to be laid before Parliament, Annual Financial Statement (article 112). These
provisions of our Constitution make the Government accountable to Parliament.
The Budget
The ‘Annual Financial Statement’, laid before both
the Houses of Parliament constitutes the Budget of the Union Government. This
statement takes into account a period of one financial year. The financial year
commences in India on 1st April each year. The statement embodies the estimated
receipts and expenditure of the Government of India for the financial year.
Demands for Grants
The estimates of expenditure included in the
Budget and required to be voted by Lok Sabha are in the form of Demands for
Grants. These Demands are arranged Ministry-wise and a separate Demand for each
of the major services is presented. Each Demand contains first a statement of
the total grant and then a statement of the detailed estimate divided into
items.
Railway Budget
The Budget of the Indian Railways is presented
separately to Parliament and dealt with separately, although the receipts and
expenditure of the Railways form part of the Consolidated Fund of India and the
figures relating to them are included in the ‘Annual Financial Statement’.
Presentation
·
In India, the Budget
is presented to Parliament on such date as is fixed by the President.
·
The Budget speech of
the Finance Minister is usually in two parts.
·
Part
A deals with general
economic survey of the country while
·
Part
B relates to taxation
proposals.
·
General Budget was
earlier being presented at 5 P.M. on the last working day of February, but
since 1999 the General Budget is being presented at 11 A.M. on the last
working day of February, i.e. about a month before the commencement of the
Financial year except in the year when General Elections to Lok Sabha are held.
·
In an election year,
Budget may be presented twice—first to secure Vote on Account for a few months
and later in full.
·
The General Budget is
presented in Lok Sabha by the Minister of Finance. He makes a speech
introducing the Budget and it is only in the concluding part of his
speech that the proposals for fresh taxation or for variations in the existing
taxes are disclosed by him.
·
The ‘Annual Financial
Statement’ is laid on the Table of Rajya Sabha at the conclusion of the speech
of the Finance Minister in Lok Sabha.
Budget Documents
·
Alongwith the ‘Annual
Financial Statement’ Government presents the following documents:
·
an Explanatory
Memorandum briefly explaining the nature of receipts and expenditure during the
current year and the next year and the reasons for variations in the estimates
for the two years,
·
the Books of Demands
showing the provisions Ministry-wise and a separate Demand for each Department
and service of the Ministry.
·
The Finance Bill which
deals with the taxation measures proposed by Government is introduced
immediately after the presentation of Budget. It is accompanied by a memorandum
explaining the provisions of the Bill and their effect on the finances of the
country.
Vote on Account
·
The discussion on the
Budget begins a few days after its presentation. In a democratic set-up,
Government is anxious to give Parliament full opportunity to discuss the budgetary
provisions and the various proposals for taxation.
·
Since Parliament is
not able to vote the entire budget beforethe commencement of the new financial
year, the necessity to keep enough finance at the disposal of Government in
order to allow it to run the administration of the country remains.
·
A special provision
is, therefore, made for "Vote on Account" by which Government obtains
the Vote of Parliament for a sum sufficient to incur expenditure on
various items for a part of the year.
·
Normally, the Vote on
Account is taken for two months only. But during election year or when it is
anticipated that the main Demands and Appropriation Bill will take longer time
than two months, the Vote on Account may be for a period exceeding two months.
Discussion
·
The Budget is
discussed in two stages in Lok Sabha. First, there is the General Discussion on
the Budget as a whole. This lasts for about 4 to 5 days. Only the broad
outlines of the Budget and the principles and policies underlying it are
discussed at this stage.
·
Consideration
of the Demands by Standing Committees of Parliament: After the first stage of General Discussion on
both Railway as well as General Budget is over, the House is adjourned for a
fixed period.
·
During this period,
the Demands for Grants of various Ministries/Departments including Railways are
considered by concerned Standing Committees (Rule 331G).
·
These Committees are
required to make their reports to the House within specified period without asking
for more time.
·
The system of
consideration of Demands for Grants by the Standing Committees was introduced
from the Budget for the year 1993-94.
·
The Standing Committee
consists of 45 Members, 30 from Lok Sabha and 15 from Rajya Sabha. The reports
of the Standing Committees are of persuasive nature (Rule 331N).
·
The report shall not
suggest anything of the nature of cut motions.
·
After the reports of
the Standing Committees are presented to the House, the House proceeds to the
discussion and Voting on Demands for Grants, Ministry-wise.
·
The time for discussion and Voting of Demands
for Grants is allocated by the Speaker in consultation with the Leader of the
House. On the last day of the allotted days, the Speaker puts all the
outstanding Demands to the Vote of the House. This device is popularly known as
‘guillotine’.
·
Lok Sabha has the
power to assent to or refuse to give assent to any Demand or even to reduce the
amount of Grant sought by Government.
·
In Rajya Sabha there
is only a General Discussion on the Budget. It does not vote on the Demands for Grants.
·
Only so much of the amount is subject to the
vote of Lok Sabha as is not a "charged" expenditure on the
Consolidated Fund of India.
·
The
"charged" expenditure includes the emoluments of the President and
the salaries and allowances of the Chairman and Deputy Chairman of Rajya Sabha
and the Speaker and Deputy Speaker of Lok Sabha, Judges of Supreme Court,
Comptroller and Auditor General of India and certain other items specified in
the Constitution of India.
·
Discussion in Lok
Sabha on ‘charged’ expenditure is permissible but such expenditure is not voted
by the House. Members have full opportunity to criticise the budgetary
provisions during the course of discussion as also to make suggestions for improving
the financial position of thecountry.
Cut Motions
·
Motions for reduction
to various Demands for Grants are made in the form of Cut Motions seeking to
reduce the sums sought by Government on grounds of economy or difference of
opinion on matters of policy or just in order to voice a grievance.
Appropriation Bill
·
After the General
Discussion on the Budget proposals and Voting on Demands for Grants have been
completed, Government introduces the Appropriation Bill. The Appropriation Bill
is intended to give authority to Government to incur expenditure from and
out of the Consolidated Fund of India. The procedure for passing this Bill is
the same as in the case of other money Bills.
Finance Bill
·
The Finance Bill
seeking to give effect to the Government’s taxation proposals which is
introduced in Lok Sabha immediately after the presentation of the General
Budget, is taken up for consideration and passing after the Appropriation Bill
is passed. However, certain provisions in the Bill relating to levy and
collection of fresh duties or variations in the existing duties come into
effect immediately on the expiry of the day on which the Bill is introduced by
virtue of a declaration under the Provisional Collection of Taxes Act.
·
Parliament has to pass
the Finance Bill within 75 days of its introduction.
Supplementary/Excess Grants
·
No expenditure in
excess of the sums authorised by Parliament can be incurred without the
sanction of Parliament. Whenever a need arises to incur extra expenditure, a
Supplementary estimate is laid before Parliament.
·
If any money has been
spent on any service during a financial year in excess of the amounts granted
for that service and for that year, the Minister of Finance/ Railways presents
a Demand for Excess Grant. The procedure followed in Parliament in regard to
Supplementary/Excess Grants is more or less the same as is adopted in the case
of estimates included in the General Budget.
Budget
of a State/Union Territory under President’s Rule
·
Budget of a State
under President’s rule is presented to Lok Sabha. The procedure followed in
regard to the Budget of the Union Government is followed in the case of State
Budget also with such variations or modifications, as the Speaker may make.
Budget : Concepts and Terminologies
Budget of a
government is a comprehensivestatement ofgovernment finances relating to a
particular year. Every Budget broadly consists of two parts-
1.
Expenditure
Budget
The
amounts of intended expenditure by the Government in the next financial year
are expressed in the Expenditure Budget. The entire Expenditure Budget can be
divided into two distinctcategories, viz.
i)
Capital
Expenditure
- those expenditures by the government that lead to an increase in the assets
or a reduction in the liabilities of 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, while the subsequent charges for its
maintenance are considered as Revenue expenditure. Most capital expenditure is
nonrecurring.- Examples of Capital Expenditure causing ‘increase in assets’:
construction of a new Flyover, Union Govt. giving a Loan to a State Govt. -
Examples o f Ca pital Expenditure causing ‘reduction of a liability’: Union Govt.
repays the principal amountof a loan it had taken in the past
.ii) Revenue Expenditurethoseexpenditures by thegovernment that do not
affectits asset-liability position.Most kinds of revenueexpenditures are seen
asrecurring expenditures. Theentire amount of Grants givenby the Union
Government to States is reported in theUnion Budget as Revenue Expenditure,
even thougha part of those Grants get utilized by States for buildingSchools,
Hospitals etc. This is so because the ownershipof the schools or hospitals built from the Central grantswould not be
with the UnionGovernment.- Examples of RevenueExpenditure are: expenditureon
Food Subsidy, Salaryof staff, procurement ofmedicines, procurementof text
books, payment ofinterest, etc
Total government expenditurecan also be
divided into anotherset of categories, viz
1.
Plan ExpenditurePlan expenditure
refers to government expenditure,which is meant for financingthe
programmes/schemesformulated under the ongoing/previous five year Plan
2.
Non-Plan
ExpenditureExpenditures
of thegovernment, which are notincluded under the PlanExpenditure are called
NonPlan Expenditure. It includessome of the important types ofgovernment
expenditure, eg:interest payments, pension,defence expenditure, spendingon law
and order, spendingon legislature, subsidies,and salary of regular
cadreteachers, doctors and other government officials.
2.
Receipts Budget.
The Receipts
Budget presents the information on how much theGovernment intends to collect
asits financial resources for meetingits expenditure requirements andfrom which
sources, in the nextfiscal year. This can also be divided into two categories
:i)
Capital Receipts- those receipts that lead to a reduction in the assets or
an increase in the liabilities of the government.- Capital Receipts that leadto
a ‘reduction in assets’: Recoveries of Loans given bythe government and
Earnings from Disinvestment;- Capital Receipts that lead toan ‘increase in
liabilities’:Debt
.ii) Revenue Receipts- thosereceipts that don’t affect theasset-liability
position ofthe government. RevenueReceipts comprise proceeds of Taxes (like,
Income Tax,Corporation Tax, Customs, Excise, Service Tax, etc.)and Non-tax
revenue of the government (like, Interestreceipts, Fees/ User Charges, and
Dividend & Profits fromPSUs).
Government
revenue through taxation can be divided into DirectTaxes and Indirect Taxes.
Direct Taxes: Those taxes forwhich the tax-burden
cannot beshifted are called Direct Taxes.Examples of Direct Taxes are:
i)
Corporation Tax This is atax
levied on the income ofregistered companies in thecountry, whether national
orforeign, under the Income TaxAct, 1961.
ii)
Personal Income
tax-
Thisis a tax on the income ofindividuals, firms etc. otherthan Companies, under
theIncome Tax Act, 1961. Thishead also includes otherTaxes, mainly the
‘SecuritiesTransaction Tax’, which islevied on transaction in listsecurities
undertaken on stockexchanges and in units ofmutual funds
iii)
Wealth Tax- This is a tax levied
on the benefits derived from the ownership of property, under the Wealth Tax
Act,1957. Wealth tax has virtuallybeen abolished in India.
Indirect Taxes: Those taxesfor which the
tax-burden canbe shifted are called IndirectTaxes. Any person, who directlypays
this kind of a tax to theGovernment, need not bear theburden of that particular
tax; he/she can ultimately shift the taxburdento other persons laterthrough
business transactions ofgoods/ services. Indirect tax onany good or service
affects therich and the poor alike!
Unlikeindirect
taxes, direct taxes arelinked to the tax-payee’s ability topay and hence are
considered to beprogressive. Examples of IndirectTaxes are:
i) Customs Duties-In this,the taxable
component isimport into or export from thecountry.
ii) Excise Duties: It is a typeof tax
levied on those goods,which are manufactured inthe country and are meant
fordomestic consumption. It is atax on manufacturing, whichis paid by the
manufacturer,but he passes this burden onto the consumers.
iii) Sales Tax: It is levied onthe sale of a
commodity,which is produced/importedand being sold for the firsttime. If the
product is soldsubsequently without beingprocessed further, it is exemptfrom
sales tax. Before theintroduction of VAT, salestax used to be levied underthe
authority of both CentralLegislation (Central SalesTax) and State
Government’sLegislation (Sales Tax)
iv) 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
.v) 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 DeficitA Debt is a kind of receipt
thatnecessarily leads to an increaseof the government’s liabilities.The
government incurs a Debtonly for meeting the gap createdby excess of its
expenditure overits receipts for that year, which iscalled Deficit.
Fiscal DeficitIt is the gap between
thegovernment’s total Expenditure(including loans net of repayments)and its
Total Receipts (excluding new debt to be taken). Thus Fiscal Deficit for a year
indicates the borrowing to be made by the government that year.
Revenue Deficit The gap between Total
RevenueExpenditure of the Governmentand its Total Revenue Receipts iscalled the
Revenue Deficit
Distriution of financial resources between the
Centreand the StatesA
Finance Commission is setup every five years to recommendmeasures for sharing o
resourcesbetween the Centre and theStates, mainly pertaining to theTax Revenue
collected by theCentral 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 country’s economy. In order to assess the extent
of government’s policy interventions in the economy, some 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 country’s
tax-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 government is
collecting a decent amount of tax revenue as compared to the size of its
economy.
What is Fiscal Responsibility and Budget Management Act ?
·
The
Fiscal Responsibility and Budget Management (FRBM) Act was enacted by the
Parliament in 2003.
·
Its
objective is to institutionalize fiscal discipline,reduce fiscal deficit and
improvemacro economic management.
·
This
law aims at promotingfiscal stability for the country ona long-term basis.
·
It emphasizes a transparent fiscal
managementsystem and a more equitabledistribution of debts over the years.
·
This
law also gives flexibility tothe Reserve Bank of India toundertake monetary
policy tocontrol inflation.
·
Government
needs resourcesfor funding various kinds ofdevelopmental schemes androutine
expenditures.
·
Resourcesare raised through taxes
andborrowing.
·
The
governmentcan raise funds by borrowingfrom the Reserve Bank of India,financial
institutions or from thepublic by floating bonds.
·
Fiscaldeficit
is the total expenditureminus the revenue receipt, loan recoveries and receipts fromdisinvestment
etc.
·
It
is a measureof the government borrowing ina year.
·
However,
uncontrolled fiscaldeficit is considered harmful forthe health of economy.
·
FRBM
Actwas notified in 2004 in responseto the need felt to curb largefiscal
deficit.
·
The
FRBM rulesspecify annual reduction targetsfor fiscal indicators.
·
Originally,the
act envisaged revenue deficitto be reduced to nil in five yearsbeginning
2004-05.
·
Fiscal
deficitwas required to be reduced to3 percent of GDP by 2008-09.
·
The
Act also provides exceptionto the government in case ofnatural calamity and for
nationalsecurity.
·
The
implantation of the act wasput on hold in 2007-08 due to globalfinancial crisis
and the need forfiscal stimulus.
·
There
was a need forincreased government expenditureto create demand to fight off
thefinancial downturn and hence thegovernment moved away fromthe path of fiscal
consolidation forthis period.
·
This
law also prohibitsborrowing by government fromthe Reserve Bank of India
andpurchase of primary issues ofcentral government securities after2006.
·
The
act asked the Centralgovernment to lay in Parliamentthree statements in one
financialyear about the fiscal policy.
·
Toenforce
fiscal discipline at thestate level, the Twelfth financecommission provided for
incentivesto states through conditional debtrestructuring and interest
raterelief.
·
In
2012, the FRBM was amendedand it was decided that the FRBMwould target effective revenuedeficit in place of
revenue deficit.Effective revenue deficit excludescapital expenditure from
revenuedeficit and thus gives space to thegovernment to spend on creation
ofcapital assets.The critics of this law feel,it would curb the
government’ssocial sector spending but there isno denying the fact that the
needfor fiscal sustainability cannot beignored.
·
The
original document ofFRBM Act can be seen on:
http://finmin.nic.in/law/frbmact2003.pdf.
What is GST?
·
The
Goods & Services Tax(GST) is an indirect tax reformmeasure which will
replace all of theindirect taxes such as Central SalesTax, Octroi, excise duty,
ServiceTax and Value Added Tax (VAT) atthe central and state levels.
·
Indiawill
have a 'dual GST' system wherestates and the centre both wouldhave power to
levy taxes on goodsand services.
·
Exports
would bean exception and GST will not beimposed on them.
·
Under
the GST,no distinction is made betweengoods and services for purpose oflevying
tax.
·
GST
is a value addedtax where the person paying taxon his output is also entitled
to getinput tax credit on the tax paid onits inputs.
·
The
idea of GST was firstproposed in the budget speechof 2006-07 which had set
outthe deadline of 2010 for itsintroduction in the country.
·
Toimplement
such a tax regime aconstitutional amendment wouldbe needed as the Centre as
wellthe States are involved in thisissue.
·
The
government expectsthat the legislative process for theenactment of the GST
would bestarted in the next few months.
·
TheFinance
Minister has expressed thehope that the two tax reforms – theGST and Direct Tax
Code (DTC)will be implemented soon.
·
The
objective of GST is tomake the taxation simple and tobroaden the tax base.
·
It
will alsohelp create a common marketthroughout the length and breadthof the
country.
·
The
GST has theadvantage of redistributing theburden of taxation equitablybetween
manufacturing andservices.
·
The
rate of taxation isalso likely to come down with theintroduction of GST.
·
Goods ofbasic importance will have lowertax
rates.
·
Better
compliance andincreased tax collection will boostthe tax to GDP ratio.
·
Economicgrowth
is also likely to get animpetus through GST.
·
A
reportof National Council of AppliedEconomic Research has estimatedan increase
of 0.9 percent to 1.7percent in the economic growthwith the implementation
ofGST.
·
Exports
will also increaseaccording to this study.
The Direct Taxes Code (DTC)
The Direct Taxes Code (DTC)is said to replace
the existing Indian Income Tax Act, 1961.
However this bill has never been considered.
Highlights of the Direct Taxes Code
bill
·
Common threshold Income Tax limits and
women proposed at 200,000 Rupees per annum (proposed), up from 180,000
·
10 per cent tax on annual income between
200,000-500,000; 20 per cent up to 1 million, 30 per cent above 1 million
rupees
·
Tax burden at highest level will come
down by Rs. 41,040 annually
·
Proposal to raise tax exemption for
senior citizens to Rs. 250,000 from 240,000 lakh currently.(NOTE:- Union budget
2011-12 already has proposed it.)
·
Corporate Tax to remain at 30 per cent
but without surcharge and cess.
·
MAT to be 20 per cent of book profit, up
from 18.5 per cent.
·
Proposal to levy dividend distribution
tax at 15 per cent.
·
Exemption for investment in approved
funds and insurance schemes proposed at Rs. 150,000 annually, against 120,000
currently
·
Proposed bill has 319 sections and 22
schedules against 298 sections and 14 schedules in existing IT Act.
·
Once enacted, DTC will replace archaic
Income Tax Act.
·
However, many provisions in Income Tax
Act will be a part of DTC as well.
·
Mutual Funds/ULIP dropped from 80C
deductions : Income from equity-oriented mutual funds or ULIP shall be
subject to tax @ 5%
WRITTEN BY - NEERAJ GAUR
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