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[Budget] Interim Budget 2014 (Part 1of4): Revenue reciepts, Direct taxes, Indirect
taxes, Gross vs Net taxes, shortfalls in collection
1. Prologue
2. Why Budget?
1. #1: Contingency fund of India (Art.267)
2. #2: Public Accounts of India (Art.266)
3. #3: Consolidated fund of India (Art.266)
4. Then what is Vote on Account?
5. Ok then what’s interim budget?
6. Vote on Account vs Interim budget
7. Interim budgets in the past
3. Parts of Budget
4. #1: Direct Taxes
1. Direct taxes under Interim Budget 2014
2. Income Tax
3. Shortfall in Direct tax collection = #EPICFAIL
4. But Why shortfall in Direct tax collection?
5. #2: Indirect taxes
1. Indirect Taxes in Interim Budget 2014
1. #I1: Service Tax
2. #I2: Excise Duty: Automobiles
3. #I3: Excise: Mobile handsets
4. #I4: Custom Duty: soap industry
5. #I5: Custom Duty: Bank note Mill
6. #I6: Counter Veiling Duty (CVD): Road machines
2. Indirect Tax collection = #EPICFAIL shortfall
3. Why shortfall in indirect tax collection?
6. MCQ Data for Tax collection: Ascending descending
1. Table1: Direct vs indirect
2. Table2: Ranking Among all taxes (2013-14)
3. Table3: Ranking Among all taxes (2014-15)
4. Table3: Tax collection highest to Lowest
7. Gross vs net Tax revenue
8. Appendix
1. #1: Direct taxes can be levied on Expenditure also
2. #2: Canons of taxation: why some taxes get abolished?
Prologue
Part 1: Interim Budget => Revenue Part=> Tax revenue (Direct vs indirect taxes):
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Why Budget?
typical sight of a middleclass household:
Daddy earns monthly salary, stores some of it in the bank, gives the rest to mommy.
Afterwards, whenever daddy needs money, he has two options
1. Take out from bank account, without informing mommy. No questions asked. (Unless
mommy checks the passbook/bank statement!)
2. Ask mommy to give the ca$h from bedroom cupboard. In this case 11/10 times he’ll
have to “Explain” to mommy why he needs money.
Same is the case government’s money. Government stores its money in three places:
Held by the President of India. (doesn’t mean Pranab carries the chequebook. This is
operated – by finance Secretary).
President can spend ca$h from this fund- for emergency/unforeseen circumstances
Without the authorization of parliament. (mommy’s permission not needed)
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Does government need parliament’s permission to spend money from here? Nope.
This is the largest of all three funds. And government needs parliament’s approval to spend
money from this fund. Why? Because Article 266 say so.
Overall, finance minister must put three files on the table of parliament:
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In an ordinary year,
February: Chindu put these files in parliament, Media Walla go crazy about it
February to April: Parliament and its Committees will study these files, find spelling
grammar mistakes and vote on the demands
April-end, parliament will pass:
Appropriation bill=> Chindu is now legally entitled to take out money from
consolidated fund of India and spend.
Finance bill=>Chindu is now legally entitled to collect taxes from junta.
Feb 2013: FM presents the budget related docs (this will apply from 1st April 2013 to
31st March 2014)
up to 31st March 2013: Chindu is entitled to spend money from consolidated fund of
India (because previous year’s appropriation Act (2012-13) is valid upto 31st March
2013)
But Parliament discussion still on going. Appropriation bill for 2013-14, is yet to be
passed.
so where to arrange money in the meantime?- for staff salary, lightbill, phone bill
everything?
Fund of India This fund barely has 500 crore rupees=not even sufficient to the
monthly salary and lightbill of army-navy-airforce!
Public No. Because its components have specific function. e.g. the cash
accounts of from National Calamity & contingency fund (NCCF) is meant only
India for disaster relief type work.
Congress hell no. If Chindu withdraws money from here, to run the government =>
party’s Swiss this “Robinhood-giri” will defeat the whole purpose of doing scams and
bank account taking bribes in the first place!
So, ultimately, we are back to square one: the consolidated fund of India. He must arrange cash
from here.
(to Lok Sabha) maai baap, please allow me to spend money from consolidated fund of
FM
India, until the budget is passed.
March 2013: Chindu puts the demand under “Vote on account”. Under Vote on account, the
government usually demands 1/6th of the total (Expected) expenditure for the given year.
Example
lakh crore
money sought under Vote on account 10,71,797
total expenditure 58,78,455
Duration: two months. (from 1st April 2013 to 31st May 2013)
Vote on account is passed by Lok Sabha (and not Rajya Sabha)
because only lok sabha has the power to grant such money under Article 116(A)
Feb 2014: (if) Chindu presents (full) general budget. = it’s valid from 1st April 2014 to
31st March 2015.
April/May 2014: General election, new party comes in power. But then they’ll have to
live with a budget not formed according to their manifesto/priorities= unhappiness.
Although they can simply frame a new budget to replace such budget by previous party=
but that means policy uncertainty = not conductive for investment and economy.
for example, just before election Chindu abolishes all the excise duty (to please the vote
bank), then suddenly new party comes in power, and re-starts the excise duty = policy
uncertainty, account keeping, saving/Expenditure habits change suddenly. harmful to
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economy.
Therefore, political parties have developed an unwritten convention, “Ruling party should
NOT to initiate major changes in the tax/expenditure during General election year.”
Such “Slim” version of Budget is called “interim budget”.
There is no legal/Constitutional obligation on the ruling party to launch an interim
budget during election year. This is only an unwritten convention.
So let’s compare/contrast:
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12
Yashwant04 Gave quite a few schemes and tax-benefits
page
18
Pranab09 Did not announce any new taxes or schemes.
page
Enough theory, let’s try a mock question from 2011’s CSAT paper
Statement B is correct. That eliminates option “D”. Now the final answer (B or C) depends on
whether “A” is right or not?
Term has expired In this case how can FM present the (interim/full) budget?
after PM/CM has In this case, entire council of minister is automatically gone. So,
resigned how can Finance minister “Exist” and present the (interim) budget
No-confidence
motion passed In this case, even if FM presents (interim) budget, it’ll be defeated.
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Parliament/assembly
Then where will FM place the “interim” budget?
is dissolved.
On 17/4/2014, Chindu presented interim budget for UPA-II. So, is UPA-II a caretaker
government? Nope. Not yet. its term (5 years) has not expired yet. They’ve still got ~90 days
to misrule the country. Therefore statement “A” is wrong. Interim budget is not used by a
caretaker government. Eliminate choices accordingly:
so far we learned:
Parts of Budget
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within that, make two columns each, for incoming money (receipt) and outgoing money
(Expenditure).
Ya, but what’s the need of this labour? Why can’t we just have a simple income vs expense type
of thing? We’ll come to that in third article.
Revenue column has two sub-columns: incoming money (Receipt) vs. Outgoing Money
(Expenditure).
The Incoming money (Revenue receipt) can come from two sources: from tax and non-
tax sources.
1. Direct taxes
2. Indirect Tax
Thus, we’ve come to the main topics of today’s article= direct and indirect taxes and
provisions of interim budget 2014 (related to these taxes).
Taxes marked in (*) have been abolished long time ago. I’ve mentioned them here, only
in case the nostalgic UPSC professor wants to ask classification type MCQs.
Income Tax
Taxable Income Income Tax
2 to 5 lakh 10%
5 to 10 20%
>10 30%
However, FM has done a slight tweaking in the tax deduction for corporates.
taxable income.
1. GAAR
2. Direct tax code (DTC)
3. Goods and services tax (GST)
Observe
Feb 2013: FM proposes taxes for year 2013-14. Along with this, he’d give estimate of
tax collection e.g. x crore from income tax, y crore from corporate tax and so on. Let’s
label this column as Budget estimate (BE) 2013.
1st April 2013: new tax rates would have become effective, people start paying taxes
accordingly….May, june, july, august, September, October, November, December,
….January 2014… So now FM gets new data. So, he’d correct (revise) his previous
“estimate”. We label this Revised Estimate (RE)2013.
And finally for the year 2014-15 (Starting from 1/4/14 to 31/3/15, FM would again
make budget estimates for next (interim budget) so let’s label it (BE)2014.
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Absolute numbers are not important but “interpretation” is. Let’s try a clichéd MCQ.
Which of the following direct tax, fetches maximum revenue to government of India
A. Wealth Tax
B. Securities Transaction Tax
C. Income Tax
D. Corporation Tax
Anyways, let’s enter into a deeper analysis. Observe the total collection from direct Tax (in
above table).
In Feb 2013, Chindu estimated ~6.68 lakh crore rupees would come from direct taxes
alone! (BE2013)
But he revised the data yesterday, we see barely 6.36 lakh crore have come from direct
taxes (RE2013).
So, what’s the “shortfall” in direct tax collection here? 6.68-6.36= 32,000 cores
A. Because IT officials are lazy and incompetent, hence lot of people managed to evade
tax? NOPE.
B. Because Chindu (Harward Graduate) and his finance Secretary (IAS) are weak in maths
and economics, hence they made wrong estimates in the first place? NOPE.
Then who is the main “villain” behind this shortfall? Ans. (1) inflation (2) policy paralysis.
1. Corporate tax= paid by Tata, Birla, Reliance, Samsung, LG, Motorola, Videocon etc.
They’ll pay less tax IF their profit is DOWN. Now, High food/fuel inflation=> people
spend less money on consumer durables– mobile, TV, fridge etc.=> sales down=>profit
down=> corporate tax goes down.
2. Less profit=> company cuts jobs, doesn’t give salary raise to existing staff= people pay
less income tax.
3. Less profit = less dividends to shareholders => mutual fund/sharemarket investment
declines= security transaction tax also goes down.
4. High inflation = real interest rates are negative (recall Urjit Patel) = people invest more
in gold and less in mutual funds/sharemarket etc.=> security transaction tax collection is
lower than expected.
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Run the same logic and you’ll see the connection. e.g.
ok enough of direct taxes. let’s move on. otherwise our remaining jawaani will be spent in
analyzing the direct tax only.
*Note: CST-Central sales tax- it belongs to Union but ca$h entirely given to States. So in
budget estimates, it’s collection is listed as “–” or “00″. But for MCQ purpose, know that it is
the “Indirect tax of the Union.”
The “Rate” of Service tax is not changed. It is same as last year (2013-14)
For past few months, Automobile sector was facing slowdown because
Automobile: SUV, Small cars, motor cycles, scooters and commercial vehicle
(rickshaw, bus etc)
This will be applicable only upto 30 June 2014.
Result: cheaper vehicles, (hopefully) more people will buy more, and automobile sector
will see boost in sales.
To decrease the imports of mobile phones, FM has reduced the excise duty on mobile
handsets as well. How does it help?
Foreign mobile Subjected to custom duty. (But FM did not reduce it)
Desi mobile Subjected to excise duty (FM reduced it)
Result? Price wise: Desi mobile cheaper than Foreign mobile. = more sales. Import of
foreign mobiles declined=> less CAD. (just like the gold logic.)
By the way, why did not FM raise the custom duty of Foreign mobiles instead -afterall, that’d
also make desi phones cheaper!
Reasons:
So it is better to reduce excise on desi phones, than raise custom on foreign phones.
Rationalized the import duty on non-edible oils, fatty acids, fatty alcohols.
This will reduce the cost of (imported) raw material used in soap industry and oleo-
chemicals industry (e.g. glycerin)
Results? Soaps will become cheap. (because that was the matter of life and death!)
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It may happen that, desi vehicle is expensive because high excise duty on its input
(chassis, engine, wiring, glass etc.)
Result: Foreign vehicle cheaper, juntaa more attracted to buying foreign vehicle than
Desi.
Consequence: domestic industry gets less sales. IIP declined, job loss, industrial
sickness.
Possible- Solutions:
Import of Road construction machinery will be subjected to CVD. (= it’ll help desi
manufactures, because now foreign machines will no longer be very cheap compared to desi.
So road contractors/companies are more likely to be buy desi items.)
Just like Direct tax collection, here also, Chindu failed to meet targets
Observe the columns of (original) budget estimate BE2013 VS Revised estimate RE2013.
Every duty collection is less than original target.
In the recent months, IIP has been going down for Consumer durables
Example of consumer durables: TVs, mobiles, cars, bikes, fans, ACs, refrigerators,
ceramic tiles and carpets. (all these subjected to excise duty)
High level of inflation =>people spend less on consumer durables. (because they’ve to
spend more on food and fuel.)
Inflation responsible. High level of food-fuel inflation => people spend less on luxuries
– hotels, spa, gym etc.
In fact, government knew in advance that service tax collection would be lower than
target, hence they had been running ads of “Voluntary Compliance Encouragement
Scheme (VCES) for service tax.” From July 2013 onwards. But still, barely ~6000 crore
recovered from people who had been evading service tax payment so far.
ya but What’s the wisdom here for MCQs? =that DIRECT tax brings MORE revenue to
government that INDIRECT tax.
So far, we’ve data for Direct taxes and indirect taxes. Now for MCQs, we need the overall
ranking (of which tax brings highest/lowest revenue.) Since we’ve revised estimates (RE
2013), so we can now ignore the ORIGINAL estimates of BE 2013.
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Observe the rank of top two (Corpo, IT) and bottom two (STT, wealth) are same for each year.
only difference is in the rank 3-4-5 because Chindu hopes Service tax will bring highest
collection among all indirect taxes in the year 2014-15. (will it? well, that remains to be
seen!)
At the moment, Tax Ranking of 2013 is more important. (Because it is near to reality –
based on actual data gathered from April 2013 to almost upto Feb 2014. this ranking is
unlikely to change.)
While tax ranking of 2014 is just projected revenue from interim budget. It’ll change
when new government makes new (full) budget (=tax rates changed= collection ranking
will be changed).
Then you’ll have to mugup the new updated ranking accordingly. (we’ll see when full
budget comes after election).
80th amendment 2000: 29% of total taxes of the Union need to be shared with states
#2: NCCF
It includes
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3. +Union territories without legislature (Diu, Daman etc.)=> their direct & indirect taxes
are also counted here.
This equals, Gross tax revenue MINUS [revenue shared with states + money sent to National
calamity contingency fund]
Because, from gross tax revenue, union has to give some money to States/UT and calamity
fund=> remaining money is the “actual” money left in the hands of Union government (that
they can spend as per their own wishes).
a. In union budget, gross tax revenue is always lower than net tax revenue
b. In the union budget, net tax revenue is calculated as the sum of [Gross tax revenue +
taxes shared by States + money unspent in calamity fund]
c. Both A and B
d. Neither A nor B
Approach: When in doubt about gross vs. net, just count the number of alphabets in their
spelling. Gross (5) and Net (3). So any formula that seems to go the other way = wrong. (e.g.
observe statement B, if it were true, then NET would be higher than GROSS. Because
everyhing is +…+) hence, B is definitely wrong. Same way, statement A is wrong because 5 >
3.
Side note:
So far,
Appendix
some allied topics that’d have broken the flow of the article, hence putting @bottom appendix.
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Hence it’s called “indirect” tax, because Called direct tax, because Salman directly
Salman paid the tax but government did not had to pay FBT to government (and not to
took it from his hand. But from that Gym the Gym owner, not to bodyguard Shera.)
owner.
this is also a tax on “expenditure” (on fringe
this is a tax on “expenditure” (on services)
benefits)
still levied as of 2014 discontinued from 2009
Most people managed to evade. Hence Gift tax used to fetch barely ~10 crores in revenue.
Thus, fourth canon missed. (Collection cost very high- staff salary and database Management.)
Finally, in the late 90s, government dropped this tax. Although it doesn’t mean there is no tax
on expensive gifts- they’re counted under Taxable income (of the person who receives the
gift)
Estate duty was charged during the “inheritance” of estate. (although this was a Union
tax- entirely cash was given to states.)
Problem: most people evaded, Estate duty Barely fetched ~15 crores = Again 4th canon
missed.
In the late 80s, we did not have service tax. But government imposed tax if you spent
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money on luxury hotels. (direct tax- because you had to pay this tax to government and
not via hotel owner)
problem: same as above. barely fetched a few crores.
introduced in 2005:
0.1% on cash withdrawals of more than Rs 50,000 (individuals) and Rs 1 lakh for others
in a single day from non-savings bank account.
Why? to track unaccounted money and trace its source and destination.
Abolished in 2009, when Chindu felt he had fetched enough information.
Although indirectly the canons were also responsible: #1, #3 and #4.
Compliance cost was very high (Because company would need to keep record and acount
of every little fringe benefit they gave to employees)
in other words, inconvenience to tax payer (company)=> it was even called “nuisance
tax”. Therefore, 3rd canon missed.
Besides, revenue collection was ~8k crore. and company would pay less salary to
employees in pretext of giving those fringe benefits= employee’s pay less income tax.
so indirectly, government was axing its own leg. (Recall our MCQ tables: income tax is
the second largest source of revenue for union government!)
Mock Questions
Visit Mrunal.org/Economy For more on Money, Banking, Finance, Budget, Taxation and
Economy.
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