Everything You Need to Know About Union Budget

UNION BUDGET 2016-17 @ EMPI Business School

UNION BUDGET 2016-17 or rather dryly defined by the Article 122 of the Constitution as Annual Financial Statement of the Government.

Budget making for a country as large and as complex as India is indeed a complicated matter. Things are not made easier for understanding it by the man on the street by the experts discussing it using so many jargons and technical details. To help you decipher the complex presentation and technical matters I intend to start giving you a series of inputs and explanations on the Budget process and contents starting with this. So here goes:

Work on Budget making for the subsequent year starts almost as early as Oct-Nov. in the current year Various arms of the Government start collecting relevant final figures on a variety of subjects and sectors .The Finance Ministry starts tapping the opinions of Economic think tanks, Industry Chambers etc. When I was in AUE(I)Ltd in the private sector, our spokesperson was the PHD Chambers. When in PSU we approached the SCOPE, DPE, Deptt of HI of Ministry of Industry etc in addition to informally getting through CII. These are for including in the Budget some provisions, concessions, exemptions etc related to various taxes, pograms, investments etc

And immediately after the Budget announcement it was my duty in Corp. Finance/BHEL  to ask for and collect from the 5 major manufacturing divisions and the three Business Divisions, as also the GMs dealing with Income Tax and Indirect Taxes the impact of the Budget on their operations in money terms. In addition the remarks of media/ Chambers other experts etc would be examined carefully to  compile a comprehensive report to be sent to the Deptt of HI/Ministry of Industries since it would affect the Government also as the major shareholder in the PSU.  Obviously similar operations would be happening across the country in all the Corporates, particularly the large groups.

During the 70’s and 80’s when there were no computers and advanced telecom. a bunch of officers would be locked up for almost a month in the North Block working on the Budget with adding machines. They would have no contacts even with their own families for the duration. This is to ensure secrecy of Budget proposals. With the advent of computing and communications this has become less time consuming and more comprehensive. The confidentiality of Budget making inherited from the British system still remains and the officers get locked in even now. With the technical advances the surveillance is stricter.

The Budget  week starts with the tabling of the Economic Survey prepared by the Department of Economic Affairs wing of the Ministry. This gives a broad sweep of the nation’s economy in various spheres and also go on to give the Govt’s view on the work to be done.

Then comes the Railway Budget by the Rail Minister. This again is a handover from the British era when the Railways constituted a huge part of Govt. operations. Still it does with a huge network, massive employee strength and substantial impact on the economy. Any changes in the tariffs and fares would impact every section of the society every industry and every consumer. Setting up of even a medium size railway workshop in any place can generate thousands of jobs directly and indirectly in that area have considerable economic boon for that area.

Then come the presentation of the Union Budget. Can you imagine the Budget was presented in the Parliament before 1991 at 5 PM IST!. Guess the reason why and check with my explanation given at the end of this dispatch. For the first time the Budget was presented in the morning in 1991 by Dr Manmohan Singh . In fact this budget had a lot of drama attached to it and scheduled to be presented at 10 am it could be finally read out only at 11 am after the Parliamentary hungama abated.

When the Budget is presented you might also see some amusing spectacle. When the FM comes with his proverbial brief case both the junior Ministers would also try to jostle for space on the first row at the photo session before the news camera persons . When the Budget is read out by the FM sudden comradeship sparks among the Treasury benches with every one trying to find a seat just behind the FM to be within the camera angle. Parliamentarians who are so casual in attending official Sessions turn up with alacrity and in their best attire well before time to capture vantage seats. Please do make an effort to see the Budget presentation in TV or on the networks. Try to follow the analysis given by the experts in various channels. Follow up with reading as many newspapers as possible in the next few days. You may not probably comprehend much but being confused at a higher level is better than being totally ignorant.

Different FMs also bring in their own individual styles. Dr. Manmohan sing would usually start with an Urdu couplet and his soft monotone speech would contain frequent Urdu shairs. With Mr Chidambaram you can be certain of a few quotations from SageThiruvalluvar in Tamil. Pranabda would have alluded to some classic quotations in his heavily accented Binglish. They sound so serious reading the verbose Budget Speech that even occasional jokes sound heavy. The only person in the Finance Ministry with a sense of humour was Mrs Tatakeshwari Sinha decades back, but she was only a Deputy Minister and hence could not present the Budget.

UNION BUDGET::

The Budget Documents come in several parts, about a dozen if my memory serves correct. The main ones are Part A which is the Budget Speech and Part B which consists of Taxation Proposals, both Direct (Income Tax) and Indirect (Customs and Excise duties)

Part A describes the macroeconomic aspects of the Indian economy detailing the broad outlay of funds for different sectors , introduction of new schemes, priorities of the Government and focus areas etc. Parliamentarians and TV viewers slowly start getting bored of this long winded preliminary part and suddenly jerk into attention when they hear the words “And now Mr Speaker, I present the ‘Ways and means of securing the necessary funds” For this Part B details the taxes for the forthcoming year.

The Budget would give a summary of the intended expenditure along with how these expenditures are going to be met. These could be from taxes, grants , borrowings etc.

In a household budget also you estimate the total receipts on one hand and list out the potential expenses on the other and pray that the receipt side is heavier. If you are lucky it would be so. If not you try to borrow and make do. A country’s budget is invariably in the red, meaning the receipts smaller than the planned expenses. Then how does the country run? It borrows. From the market, from other countries or from international institutions. (Remember our discussion in PACE-UP classes on the Fiscal Cliff Dilemma of US. wherein you saw that the US Govt has been incurring humongous amounts of debt). This is called a deficit budget. More on this later.

WHERE DOES THE MONEY COME FROM:

Mainly from Taxes. There are also some non-tax revenues Let us get to know them more in detail:

TAX RECEIPTS:

Taxes can be of two types : Direct Taxes and indirect Taxes.

Direct Taxes

Direct Taxes are levied on Individuals like you and me, Companies etc.
The present Tax rate on Companies is 30% on their net income. (This is a general statement . A lot of other things are to be worked out on the taxes that companies pay. How do you think all these Chartered Accountants, Tax consultants and lawyers earn their daily bread ;-).). For individuals taxes are on slab basis depending upon the net taxable income. Individuals have to start paying Income Tax only beyond a certain level of income . Hence the number of individual IT Payer in India is abysmally small compared to the population figure.

STT

There is another thing that has come up in recent years – Securities Transaction Tax. This is the tax that you have to pay on the profits on sale of shares and securities you held for more than one year. It is also known as long-term Capital Gains Tax.

Minimum Alternate Tax.

Companies are very intelligent. They rarely pay the stipulated 30% tax and the above gents find all kinds of legitimate loopholes to keep the tax paid low. If ultimately a company’s tax rate turns out to be lesst than 10% it has to pay MAT @15% on book profits.

INDIRECT TAXES:

Indirect Taxes apply upon  everybody. So almost the entire population is covered to some extent or other. These are taxes on things that we buy – goods and services. Since it is very widely spread the government prefers to take this route. more often than not.

Excise Duty:

This is the tax on any item manufactured in the country. Every time you buy a pack of matches a small part of the price has already been recovered at the factory itself as ED.

Customs Duty:

You cannot impose excise on imported goods. Plus certain other economic objectives like protecting local industries by tariff barriers are also involved. This is done through customs duty which is levied on imported goods. In addition there is also something called countervailing duty on certain goods for which exact replacement is available within the country.

Service Tax:

Services are also a type of good availed by us, only it is not manufactured but provided by human intervention. This also causes expense for the user and income for the provider. This expense is brought under the service tax. More than a hundred services which we avail  like telephoning, eating out,  etc are taxes this way.
There are also certain other taxes like Sales Tax, Octroi, local rates etc which are levied by the States and do not under the purview of the Central Government and Union Budget.

You should get to know some more minor technical terms to follow the Budget Speech:

Value Added Tax:

When something is manufactured the material input goes under modifications on different stages. For instance Let us take a fan. Initially steel sheets when bought by the fan company is already bearing some excise. these steel sheets are cut into slotted stampings . At that stage where it attains the shape of a salable product some additional ED is loaded When these stampings are wound with copper wire and get into a motor shape some more ED. finally when it emerges as a fan some more ED. In this  you would observe that at every stage the computed ED consists of a small amount of Tax upon Tax – what we call as ‘cascading effect’ . This cascading effect is logically wrong and can amount to something huge with products which contain very large number of components and undergo several stages. In order to set off this anomaly a concept called Value Added Tax whereby credit for the tax paid at the earlier stage is provided for on production of proof of tax deduction at each stage.

GOODS AND SERVICES TAX:

Hopefully the GST negotiations between the Centre and State would be complete and this adopted nationwide at least by 2017. Through the anomalies of state taxes, barriers, etc could be smoothened out enabling any good transferred and sold at any other state would attract uniform tax.

DIRECT TAXES CODE:

Indian Income Tax is one of the most complicated one in the world.. Efforts have been made to simplify it . Direct Taxes Code is one such which has been talked about for years. Possibly it may be implemented after the general election.

SOME MORE INCOME THROUGH NON-TAX ROUTES:

Railways is a separate Ministry and a Railway Budget is also presented on the previous day to Union Budget. But strange as it may seem the Railway revenues also get added to the Consolidated Fund which is the total revenues collected by the Govt.
There are a large number of Public Sector Undertakings. Central Govt is the owner of these to the extent of various degrees of disinvestment. Most of them get Govt loans. Interest on these loans are Non-Tax revenues. Several of them are profit making and the dividends are also another source. Interest on loans to the states is another major source (Recall the big complaint by Mamta Di , CM of Poshchimbonga State about the huge interest payments due on central government loans to the state taken during the previous regime). Government gets income from other services it provides to the public.

PUBLIC DEBT:

The general public lodges a huge amount of money with the government . This is a source of fund but has to be eventually paid back (with interest). The amount in store with the Govt through PPF, Post Office Savings, National Savings Certificate Kisan Vikas Patra, Provident Fund etc all come under this.
In addition the Govt. periodically sells Treasury Bills (T-Bills) with maturity dates less than one year to fund short term mismatches of receipts and payments. Long Term Loans  are raised  from the market  by issue of  Dated Securities .It can also borrow from the Reserve Bank of India for short duration needs. called Ways & Means Advances.

WHERE ARE THESE RECEIPTS ACCUMULATED:

CONSOLIDATED FUND

All the revenues mentioned above get into the Consolidated Fund . Expenses are made from this pool

CONTINGENCY FUND:

You read about something called Petty Cash Reserves in your Accounts lessons.  Just like that a small reserve of Rs 500 Crore is maintained separately for any urgent or unforeseen expenditure etc. Whatever amount is drawn from this has to be made good from the Consolidated Fund.


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About the Author

AVK Murthy
A.V.K Murthy is a professor at EMPI Business School, earlier he was with Planning Commission, Govt. of India and BHEL, New Delhi. He did his MBA from Indian Institute of Management Calcutta.
  • Lakshay Chutani

    Great, nice explanation.