Union Budget FY 2018-19

Union Budget FY 2018-19

The finance minister,  Arun Jaitley, will present the budget on 1st February 2018. It would be interesting to understand various concepts associated with budget so that one is able to grasp the budget better.

A budget is an annual statement of estimated revenue and expenditure in upcoming fiscal year. (April 1^st 2018 to March 31st 2019). The budget has several objectives such as reducing inequalities of income and wealth, reallocation of resources between government and private sector, attaining economic stability, managing public enterprises and achieving economic growth.

There are three important concepts in relation to Budget

1.      Receipts

2.      Expenditures

3.      Deficits

Receipts

Receipts refer to revenues collected by the government through various means. There are two kinds of Receipts:

1.      Revenue Receipts

2.      Capital Receipts

Capital Receipts are those receipts which create a liability or cause reduction in government assets.

Let us now explore various sources of Capital Receipts:

1.      Recovery of Loans
This reduces assets of government and hence must be classified as Capital Receipt. It should be remembered that a loan given is an asset in the book of accounts. And recovery of loans reduces this asset class. 

2.      Borrowings
Funds raised by government from borrowing are treated as capital receipts as these create liability for government. Amount borrowed is a liability since one has to repay the borrowing.

3.      Disinvestment Receipts
Funds raised by disinvestment are also capital receipts as these reduce assets of government. Disinvestment of public sector enterprise clearly reduces government ownership of these enterprises and thus reduces assets of government.

Revenue Receipts are those receipts (revenues) of government which do not create a liability or cause reduction in government assets. Examples of Revenue receipts are:

1.      Tax Revenues
Taxes are compulsory payments imposed by government on people. There are two kinds of taxes – direct tax and indirect tax.

Direct Tax is when the burden of tax and liability of tax falls on the same person. Examples of direct taxes are Income Tax, Corporation Tax, Wealth Tax and Gift Tax. You pay these personally.

In case the tax burden can be passed on to another person that kind of tax is called Indirect Tax – for instance – excise duty, custom duty, service tax, sales tax. These kinds of taxes are passed on by a person/organisation to another person/organisation i.e. you pay these taxes but recover them from the actual consumer.

2.      Non-Tax Revenue
These refer to those kinds of revenues other than taxes. Examples include: Profits and Dividends of Public Enterprises, Interest over loans granted, External Aid Received, Fees and Fines, etc.

Expenditures

Budget expenditure refers to estimated expenditures incurred by the government under different heads in a year. Just as there is classification in Receipts as revenue receipts and capital receipts, similarly budget expenditures are also classified as:

1.      Capital Expenditures

2.      Revenue Expenditures

Let us look at both of these types of expenditures one by one.

1.      Capital Expenditure refers to those expenditures which result in creation of asset or reduction in liability. Examples of Capital Expenditure include expenses on creation of roads, bridges, buildings etc. Clearly a road, a bridge or a building is an asset.

2.      Revenue Expenditures do not create assets and do not reduce liability. Examples include salaries, interest payments, pensions, subsidies etc. Capital expenditures can also be understood as developmental and revenue expenditures as non developmental.

NOTE: A capital expenditure can be distinguished from a revenue expenditure in that capital expenditures are a one-time expenditure, whereas revenue expenditures are recurring expenditures.

Deficits

Finally let us try to understand various kinds of deficits. A budget is said to be balanced when receipts equal expenditures.

Balanced Budget: Receipts = Expenditures

A budget is said to be in surplus when receipts are in excess of expenditures.

Surplus Budget: Receipts > Expenditures

A budget is said to be in deficit when receipts are short of expenditures.

Deficit Budget: Receipts < Expenditures

There are various kinds of deficits.

Revenue Deficit refers to excess of revenue expenditures over revenue receipts.

Revenue Deficit = Revenue Expenditures – Revenue Receipts

Capital Deficit on other hand refers to excess of capital expenditures over capital receipts

Capital Deficit = Capital Expenditures – Capital Receipts

Fiscal Deficit refers to excess of total expenditures over total receipt, excluding borrowings.

Fiscal Deficit = (Total Expenditures) – (Total Receipt – Borrowings)

Finally Primary Deficit means Fiscal deficit reduced by interest payments.

Primary Deficit = Fiscal Deficit – Interest Payments

Expectations form the Budget FY2018-19

As is expected every year, the general expectation this year too is that the budget will further boost economic growth, taxes will be reasonable and there will be some sops for the common man to cope with the rising cost of living. There are strong reasons that as the Finance Minister, Arun Jaitley presents the last full budget of the NDA government, the emphasis will be more towards social welfare and agriculture, the corporate sector too have their expectations.

·         The year 2017 was a year of significant structural changes, including GST and bank recapitalisation plan. While demonetisation and GST led to some market disruptions and subdued production sentiment, the economy has recently shown signs of recovery. There are strong reasons to believe that consumption sentiment and investment demand might see a turnaround.

·         While the country recorded a dramatic jump of 30 places to reach 100th rank in the World Bank's Ease of Doing Business, much remains to be done. Further action on infrastructural bottlenecks, swift implementation of investment projects and so on. 

·         Tax reforms and particularly reform in tax litigation should be the most critical priority now for the government. There Indian economy may be prone market uncertainty ahead of general elections, changes in the US and global economy, rise in crude oil prices which would be needed to be tackled well.

·         Corporate tax rate is expected to be cut from 30% to 25 % for all the companies.

·         Next is the expectation of a reduction in personal tax rate. The salaried class is expecting some announcement on Standard deduction to make their life  easier. One of the biggest expectations of the salaried class is change in the salary structure. The deductions under the salary slabs, like house rent and medical expenses too are outdated and requires changes.

·         More reforms in GST, M&A, Companies Act, FEMA etc. are also expected.

·         Assessment and appeal process is considered as the most critical reform in the tax administration, followed by certainty of interpretations/positions to bring down prolonged litigation. Speedy refunds along with more income-tax tribunals and courts are areas where ease is required.

·         Globally, Indian tax authorities are perceived as highly aggressive which has dented the image of the country and reduces the confidence of global investors to boost further investment in India.

·         Incentivising digital transactions will be a win-win for both citizens and the government and it will encourage people to digitise their financial transactions. Tax concessions on digital transactions such as reduced tax rates for direct as well as indirect taxes can also encourage high participation in digital economy. Overall this might lead to higher tax revenues by increasing the taxpayer base and help in further lowering of tax rates.

·         The government may increase income tax deductions on investments made by taxpayers in securities with a rider that the exemption will be available only on investments made in government infrastructure projects. Stock markets also expect that long-term capital gains tax does not come back.

Economic Survey

The Economic Survey sets the stage for Finance Minister Arun Jaitley's annual budget on February 1. It suggests that though the India's economy is set to grow between 7-7.5 % in the 2018-19 (April-March) with exports and private investment poised for a rebound, economic management will be challenging in the coming year. This year’s Economic Survey indicates the following:

·         There is large increase in registered indirect and direct taxpayers. There has been a 50%  increase in the number of indirect taxpayers. The growth in direct tax collections of the Centre has kept pace with the previous year and is expected to meet targets, with a growth of 13.7 % while indirect taxes grew by 18.3 % during April-November 2017.

·         States' prosperity is positively correlated with their international and inter-state trade. For the first time in India's history, data on the international exports of states has been dwelt in the Economic Survey. Such data indicates a strong correlation between export performance and states' standard of living.

·         India's firm export structure is substantially more egalitarian than in other large countries. The survey pointed out that after remaining in negative territory for a couple of years, growth of exports rebounded into positive one during 2016-17 and expected to grow faster in 2017-18. Clothing incentive package boosted exports of readymade garments. The rebate of state levies (ROSL) has increased exports of readymade garments (man-made fibers) by about 16 %.

·         Indian parents continue to have children until they get the desired number of sons. The survey highlighted that the Indian society exhibits a strong desire for a male child. Son preference giving rise to sex selective abortion and differential survival has led to skewed sex ratios at birth and beyond, leading to estimates of 63 million "missing" women.

·         Substantial avoidable litigation in tax arena which government action could reduce. Delays and pendency are caused due to the increase in overall workload of the judiciary, in turn due to expanding jurisdictions and use of injunctions and stays; in the case of tax litigation, this stems from government persisting with litigation despite high rates of failure at every stage of the appellate process.

·         To re-ignite growth, raising investment is more important than raising saving. The survey indicated that growth in savings did not bring economic growth but the growth in investment did.

·         Direct tax collections by the states and local governments are significantly lower than those of their counterparts in other federal countries. The survey stated that the country's direct tax collections are lower than that of Brazil and Germany.

·         Extreme weather adversely impacts agricultural yields. The survey cited extreme temperature increases and deficiency in rainfall as reasons for the changes in agricultural yields.