Union Budget in the Classroom

Posted By: Team HDFC securitiesPosted date: July 01, 2014in: ABCs of the Budget, Budget and You
The final countdown to Union Budget 2014-15 has begun. The build up and the expectations are big.
Right from investors to the companies, consumers to entrepreneurs have their hopes pinned on the
budget to put the countrys economy back on track.
Decoding the jargons and the sheer volume of the Budget Document can be a daunting task for an
investor, consumer or an entrepreneur. We explain some key components of the Union Budget right
here.
What is Union Budget?
It is an account of the governments finances for the fiscal year that runs from 1st April to 31st
March. The Union Budget is announced in February year after year. However, since 2014 was the
year of General Elections, we only had an interim budget in the month of February.
The Union Budget is slated for 10
th
July 2014. Union Budget is classified into Revenue Budget and
Capital Budget.
What is Revenue Budget?
Revenue budget comprises governments revenue receipts and expenditure. Revenue receipts are
classified into- tax and non-tax revenue.
Revenue expenditure is incurred by the government on the various services offered to people and
day to day functioning of the government. If revenue expenditure exceeds revenue receipts, the
government incurs a revenue deficit.
What is Capital Budget?
Capital Budget includes capital receipts and payments of the government. Capital receipts include
loans from public, foreign governments and RBI. Capital expenditure is incurred by the government
on on development of machinery, equipment, building, health facilities, education etc. If
governments total expenditure exceeds its total revenue, the government incurs a fiscal deficit.
Annual Financial Statement
As per the Article 112 of the Indian Constitution, the Union Budget of a year is also referred to as the
annual financial statement. It is a statement of the estimated receipts and expenditure of the
government for that particular year. This 10-page document is divided into three components,
consolidated fund, contingency fund and public account. For each of these funds, the government
presents a statement of receipts and expenditure.
Consolidated Fund
As the name suggests, this fund consolidates all revenues raised and the money borrowed by the
government. All the expenses are met from this fund subject to the Parliaments approval. However,
there are some exceptional expenses, which are met from the Contingency Fund or the Public
Account.
Contingency Fund
This fund is used for any urgent or unforeseen expenditure. This fund is at the disposal of the
President and the government requires a subsequent approval from Parliament before withdrawing
any money from this fund. Subsequently, the amount has to be returned to the fund from the
consolidated fund.
Public Account
Provident funds, small savings are examples of public account, in which the Government is mere
acting as a banker. These funds are now owned by the government. Hence they are paid back to the
rightful owners at some point in time.
What are direct taxes?
These are taxes levied by the government on the incomes of individuals and companies. Income
Tax and Corporate Tax are some examples of direct taxes.
Individuals pay taxes on income, investments, interest income etc. Companies pay corporate tax on
their earnings.
What are indirect taxes?
Consumers are subjected to indirect taxes when they buy goods and services. These include excise
and customs duties.
Customs duty is the charge levied when goods are imported into the country, and is paid by the
importer or exporter. Excise duty is a levy paid by the manufacturer on items manufactured within
the country. These charges are passed on to the consumer.
Corporation Tax: Tax on profits of companies.
Fringe benefit tax (FBT):
Any perquisites or fringe benefits provided by an employer to his employees, in addition to the
cash salary or wages paid, is taxable. Employers have to now pay FBT on a percentage of the
expense incurred on such perquisites.
Securities transaction tax (STT):
Sale of any asset (shares, property) results in loss or profit, which was subjected to capital gains tax.
However, long-term capital gains tax on shares was abolished in the Union Budget 2004-05 This
was replaced with STT, so as to avoid circumventing the avoidance to pay tax.
This tax is payable whether you buy or sell a share and gets added to the price during the
transaction itself.
Customs:
Taxes imposed on imports.
Excise Duty: Duties imposed on goods made in India.
Service Tax: It is a tax on services rendered. Telephone bill, for instance, attracts a service tax.
CESS
This is an additional levy on the basic tax liability, which applies to specific expenditure. If you look at
your salary slip, you will see that your income is subject to an education cess of 2%. The same logic
applies for corporate income.
EXPORT DUTY:
As the name suggests this tax levied is on exports. More than revenue , the objective behind this
measure is to discourage exports of certain items.
Value-Added Tax (VAT) and GST:
A product passes through different stages of production commonly called the value addition. Value
added tax is levied on the amount by which the value of an article increases at each stage of its
production or distribution. Thus it brings in transparency. This tax is based on the difference between
the value of the output and inputs used to produce it.
FINANCE BILL:
This bill consists of all the government proposals on levy of new taxes, continuance of existing tax
structure beyond a specific period of time or modification of the existing tax structure. This bill is
submitted to the Parliament for approval. It is the key document as far as taxes are concerned.
SURCHARGE:
A surcharge is typically added tax to an existing tax structure, and may not be included in the stated
price of a good or service. It may be a temporary measure to defray the cost of increased commodity
pricing. Thus this is an additional charge of tax.
For instance, a surcharge of 10% on a tax rate of 30% effectively raises the combined tax burden to
33%. For example, if an individual earns a taxable salary of more than Rs 1 Crore, a surcharge of
10% is levied on income in excess of Rs 100 lakh. Corporate income is levied a flat surcharge of
10%.