Union Budget: Prof. M K Sahoo

Union Budget Prof. M K Sahoo

Budget as a Financial Statement •

The Budget of Govt of India, for any year, gives a complete picture of Estimated receipts and expenditures of the Govt for that year on the basis of budget figures of two previous years. • Every Budget gives 3 sets of figures 3. Actual figures for preceding year 4. Budget and Revised figures for current year 5. Budget Estimates for the following year

Contd… •

For example The Budget 2007-8 contains: 2. Actuals for the previous year 2005-6. 3. Budget and Revised Estimates for current year 2006-7. 3. Budget Estimates for coming year 20078.

Budget Accounts 1. Revenue Account 2. Capital Account •

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Revenue Account provides statement on Govt’s Revenue Receipts and Revenue Expenditure Capital Account provides statement on Capital Receipts and Capital Expenditure

Public Receipts •

Govt raises receipts in both Revenue Account and Capital Account • So Govt’s Total Receipts = Rev Receipts + Cap Receipts • Sources of Public Receipts are: 1. Tax Revenue 2. Non-Tax Revenue 3. Internal Debt and Recoveries of Loans 4. External Borrowings • First two are part of Revenue Receipts and Last two are part of Capital Receipts

Components of Public Receipts 1.

Tax Revenue a. Direct Taxes Income Tax Corporate Tax Wealth Tax b. Indirect Taxes Customs Excise Service Tax etc. 10. Non-Tax Revenue • Interest receipts • Dividend • Profits of PSUs

1. • • • • • •

Capital Receipts Recovery of Loans Market Borrowing Disinvestment of PSUs External Assistance External Loans/debts External Grant & Aids

NOTE  Non-Tax Revenue also includes revenue from: PSUs, Social services like education and hospitals, & Loans or debt service (interest receipts).  Capital Receipts mainly consists of : market borrowings from commercial banks, small savings from post offices, deposits of LIC, GIC, provident fund, term loans from financial institutions, divestment of PSUs, and recovery of loans etc.  Bank savings are channelised to govt as borrowings because banks are required to hold a part of their deposits as govt securities to maintain SLR norm.

Note… External Capital Receipts come in the form of 4. Financial Aid through Grants & Aid 5. Commodity Aid 6. Technical Assistance

Public Expenditure Two types: 2. Plan Expenditure 3. Non-Plan Expenditure • Both the expenditures are done on both Revenue and Capital Accounts. • Plan expenditures are mainly for Development Plans approved by Planning Commission for various years. • All other expenditures like administrative, salaries, defence, law & order, relief against calamities etc fall under Non-Plan Expenditure category.

Deficits in the Budget Account • Revenue Deficit = Revenue ExpenditureRevenue Receipts • Fiscal Deficit= Borrowings and Other Liabilities received (Part of capital receipts) • Primary Deficit = Fiscal deficit - Interest payments. • Primary Deficit tells us how much of the government's borrowings are going towards meeting expenses other than interest payments.

Budget 2007-08 Major Highlights

• Making no changes in the personal and corporate income tax rates, the Union Budget for 2007-08 raised the threshold limit of exemption by Rs.10,000 giving a relief of Rs.1000 to all individuals. • The new threshold limit for men in income tax will be Rs. 1.10 lakh , for women Rs.1.45 lakh and for senior citizens Rs.1.95 lakh. • Budget brought down excise duty on petrol and diesel by 2 % as an anti - inflationary measure. • While cigarettes and bidis will cost more. • The peak rate of customs duty for non-agricultural products has been slashed from 12.5 per cent to 10 per cent. • Duty on paan masala not containing tobacco reduced from 66 % to 45 %.

• The Defence allocation has been increased to Rs.96,000 crore including Rs.41,921 crore for capital expenditure. • The fiscal deficit at Rs.1,50,948 crore which is 3.3 per cent of the GDP. • The direct tax proposals is estimated to net an additional Rs.3000 crore while the indirect proposals are revenue neutral. • By removing 2 lakh assessees from the service tax net, the budget will sacrifice Rs.800 crore annually. • Presenting his fourth consecutive budget, Finance Minister P Chidambaram also hiked the maximum limit of deduction for medical insurance premium to Rs.15,000 which will be Rs.20,000 in the case of senior citizens. • He also removed the income tax surcharge on firms and companies with a taxable income of Rs.1 crore or less • And gave a 5-year income tax holiday for construction of new hotels in the National Capital Territory to meet the shortfall of 20,000 rooms for the 2010 Commonwealth Games in Delhi.

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The rate of dividend distribution tax has been increased from 12.5 % to 15 % on dividends distributed by companies and to 25 % on dividends paid by money market mutual funds and liquid mutual funds (redeemable at any time). A money market mutual fund is a kind of mutual fund which invests only in money markets (short term debt markets). These funds invest in short term (one day to one year) debt obligations such as Treasury bills, certificates of deposit, and commercial paper. A money market is a financial market for short-term borrowing and lending, typically up to thirteen months. This contrasts with the capital market for longer-term funds. In the money markets, banks lend to and borrow from each other, short-term financial instruments such as certificates of deposit (CDs) or enter into agreements such as repurchase agreements (repos). The Finance Minister raised the withdrawals limit from Rs.25,000 to Rs.50,000 from current account by individuals and Hindu Undivided Families (HUF) in the banking cash transaction tax (BCTT) and withdrew it for Centre and State governments. Central sales Tax (CST) rate has been reduced from 4% to 3%. And government has commitment to introduce Goods and Services Tax (GST). Provision of more than Rs. 5000 crores to states for compensating losses due to VAT.

Service Tax Service tax rate has been left untouched, New services included in service tax net: services outsourced for mining of minerals, oil or gas, asset management services and design services, development and supply of content for use in telecom and advertising purposes, and vi. renting immovable property for commercial purposes.  The Finance Minister raised the service tax exemption limit to small service providers from Rs.4 lakh to Rs.8 lakh. • All services provided by technology business incubators and clinical trial of new drugs have been exempted from service tax net. • The service tax to include resident welfare associations for services above Rs.3,000. Up to Rs. 3000 service tax exempted.   iii. iv. v.

• Widening the scope of fringe benefit tax, he brought employees stock options (ESOPs) into FBT net, • FBT exempted from expenditure on free samples & displays. • and levied an additional education cess of 1% on taxes to fund secondary and higher education. • The peak rate of customs duty on non-agricultural products has been slashed from 12.5 % to 10 %, • and on most chemicals and plastics from 12.5 % to 7.5 %. • Customs duty on polyester fibres and yarn has been slashed from 10 % to 7.5 % • Customs duty on gem and jewellery and cut and polished diamonds slashed from 5 to 3 %. • Duty on drip irrigation systems, agricultural sprinklers and food processing machinery has been reduced by 2.5 %. • additional countervailing duty of 4% completely lifted from crude and refined edible oils.

• duty on pet foods reduced from 30 to 20 % • and fully exempted from excise duty some category of biscuits and all kinds of food mixes including instant mixes. • Excise duty on umbrellas and part of footwear and plywood was halved from 16 to 8 %. • Bio-diesel has been completely exempted from excise duty. • As another anti-inflationary measure, Chidambaram brought down excise duty of Rs.400 to Rs.350 per metric tonne on cement sold at Rs.190 per bag to reward manufacturers who hold the price line. • On the contrary, the duty has been hiked to Rs.600 per metric tonne on cement sold at more than Rs.190 per bag in the retail market. • Specific excise duty on cigarettes has been raised by 5% and from Rs 7 to Rs.11 per thousand on non-machine-made bidis and from Rs.17 to Rs.24 per thousand on machine-made bidis. • tax concession to cross-country natural gas distribution Companies having gas pipeline and storage facilities . • Tax free bonds, to facilitate creation of urban infrastructure will be issued through State-pooled finance entities.

Budget Estimates • Maintaining high priority for eight flagship programmes of the UPA government, the Budget pegs the gross budgetary support (GBS) for the coming fiscal at Rs.2,05,100 crore, of which the Central plan will be Rs.1,54,939 crore. • Non-plan expenditure marks a rise of 6.5 % to Rs.4,35,421 crore. • The total revenue receipts of the Central Government is projected to be Rs.4,86,422 crore. • The revenue deficit has been pegged at 1.5 % of the GDP at Rs.71,478 crore while the fiscal deficit has been fixed at 3.3 per cent of the GDP for 2007-08. • Reiterating Government's commitment to economic reforms, fiscal prudence and monetary stability, Chidambaram said revenues are buoyant for the third year in succession. • Additional revenues have been generated and have been used to promote inclusive growth, equity and social justice, he said expressing confidence that the current average inflation 5.2 to 5.4 % can be moderated.

Major Programmes • • • • • • • •

One of the eight flagship programmes Bharat Nirman has been given Rs.24,603 crore, an increase of 31.6 per cent over the current year. While the allocation in education sector has been increased by 34.2 per cent to Rs.32,352 crore, the allocation for health and family welfare has been enhanced by 21.9 per cent to Rs.15,291 crore. Sarva Shiksha Abhiyan gets Rs.10,671 crore and the mid-day meal scheme will be extended to upper primary classes in 3,427 educationally-backward blocks. Chidambaram also proposed Rs.750 crore for means-cum-merit scholarships to reduce dropouts after class eight. The National Rural Employment Guarantee Scheme will be extended to 330 districts from the current level of 200 districts. The Budget allocated Rs.12,000 crore for the NREG scheme besides Rs.2,800 crore for Sampoorna Grameen Rozgar Yojana to augment rural employment. The allocation for Swarna Jayanti Swarozgar Yojana has been hiked by 50 per cent from Rs.1,200 crore to Rs.1,800 crore to promote self- employment among rural poor.

Cash Balance, 1.55

Government Receipts (%) 2006-07 RE customs, 11.63

Union excise , 16.67 State Provident Funds, 0.71 Other Receipts, 2.13 Securities against Small Savings, 0.43

Corporate Tax, 20.82 Income Tax, 11.73

Service Tax, 5.43

Short term Borrow ings, 0.43

External Assistance, 1.12 Market Loans, 15.27

Other Non-Tax , 3.35 Taxes of UTs, Other taxes , External Grants, 0.19 0.04 0.35 Interest receipts, Recoveries of Misc Capital 2.86 Loans & receipts, 0.08 Advances, 0.77 Dividends and Non-tax receipts Prof its, 4.33 of UTs, 0.10

Government Expenditure (%) 2006-07 RE Interest Payments, 18.57

Repayment of debt, 31.99

central assistance to state & UT Plans, 5.87

defence, 10.92

Subsidies, 6.79 Central Plan, 16.07 social services, 1.21 Loans to States & Uts, 0.01 Loans to PEs, 0.19

general services, 1.33

others, 1.72

economic services, 1.76

Grant to State & Uts, 4.59 Pensions, 2.82 calamity Assistance to states, 0.25 Police, 1.77

Tax Revenue (% of GDP) 11.5%

12

10%

10

9%

9%

10%

8 6 4 2 0

1991

1995

2000

2005

2006-07

Government Spending (% of GNP) 20

18%

16%

15%

14%

15

14%

10 5 0

1991

1995

2000

2005

2006-07

Total Expenditure/GDP

Revenue Expenditure/GDP

Capital expenditure/GDP