Fiscal Policy and Budget India

Seema Sharma
DMS, IITD
 Budget India

Dr. Seema Sharma

Laffer Curve
 Budget
Annual Financial Statement of
Government of India
A statement of estimated receipts and
expenditure in respect of every financial year —
April 1 to March 31.
Interim Budget India 2019-20
https://www.indiabudget.gov.in/index.asp
MSME and Industry
Agriculture
Direct Tax Benefits
 Individual taxpayers having annual income up to Rs.5 lakhs will not be having
any tax burden. The tax for taxable income beyond 2.5 lakh has to be paid.
However, the tax rebate (refund) will be provided.
 Standard Deduction is raised from Rs.40,000 to Rs.50,000. Further benefit of
Upto one lakh, if invested in provident funds, insurance etc.
 Additional deductions such as interest on home loan up to Rs. 2 lakh, interest on
education loans, National Pension Scheme contributions, medical insurance and
medical expenditure on senior citizens etc, are also provided for in the Interim
Budget 2019-20.
 TDS threshold on interest earned on bank/post office deposits is being raised
from Rs. 10,000 to Rs.40,000.
 TDS threshold for deduction of tax on rent is proposed to be increased from Rs.
1,80,000 to Rs.2,40,000 for providing relief to small taxpayers.
 Exemption on levy of income tax on notional rent on a second self-occupied
house is also now proposed. Currently, income tax on notional rent is payable if
one has more than one self-occupied house.
Fiscal Measures
 Inflation
The Finance Minister said that the Government has been
successful in bringing down average inflation to 4.6% over
last five years, which is lower than the inflation during the
tenure of any other Government. In fact Inflation in December
2018 was down to 2.19% only. The average rate of inflation
during previous five years 2009-2014 was a backbreaking
10.1%, he pointed out.
 BUDGET

Receipts Expenditure

Revenue Capital Revenue Capital

Receipts receipts Expenditure Expenditure
 Revenue and Capital Account
• Revenue Account
All current receipts and expenditure that in general do not
entail sale or creation of assets are included under the
revenue account : taxes would be the most important
revenue receipt and salaries of civil servants would be the
eg. for revenue expenditure.

• Capital Accounts:
All receipts and expenditure that liquidate or create an
asset would in general be under capital account. For
instance, if the government sells shares (disinvests) in
public sector companies, it is selling an asset (capital
receipt) and any expenditure like a multipurpose dam,
bridge, road etc, is a capital expenditure
 Revenue Account : Revenue receipts

• Tax Revenue (Approx. 85% of revenue

receipts)
1. Direct Taxes
2. Indirect Taxes (In 2005, VAT replaced sales tax. We had VAT, CENVAT, Ex. Duty and service tax. In July 2017,
GST implemented which replaced all these taxes making India one market.

• Non Tax Revenue (Approx.15% of revenue

receipts)
1. Interest payments
2. Dividends and profits
3. Grants-in-aid and contributions
 Revenue receipts: Tax Receipts
• Direct Tax: Where the responsibility for
paying tax to the government is directly
that of the taxpayer’s, the taxes are called
direct taxes

Indirect Tax: The incidence of tax is not

on the person who pays the tax and is
shifted to the consumer
 Revenue Receipts: Non-tax revenue
• Profits and Dividends: Revenue from dividends and
profits from investments in public sector enterprises,
banks and financial institutions;
• Interest payments :Interest received against loans
given to states, PSUs and foreign governments;
• Grants-in-aid and contributions: received from
foreign countries.
• User charges: Receipts from user charges on
different public, economic and social services
rendered by the government
Non-tax revenue accounts for approximately 15% of
the central government’s TOTAL RECEIPTS.
 Capital Account: Receipts
Capital receipts are a source of funds for the
government mainly through the following 3
different sources:

1. Borrowings & other liabilities: public debt

(Internal and external debt both)

1. recoveries of loans and advances

2. miscellaneous receipts
 Capital receipts: Borrowings & other liabilities
Borrowings: When receipts of the central government are lower than its
TOTAL EXPENDITURE, it has to borrow money to meet the shortfall. It
does so from various domestic and foreign sources:

1. Reserve Bank of India (RBI) by issuing Treasury Bills and

other government securities which are auctioned on the
government’s behalf by RBI
2. From foreign governments and international financial
institutions such as IMF, World Bank, etc.

Other liabilities: In
addition to the above market borrowings, the
government incurs liabilities in encouraging people to save
through such avenues as for public provident fund (PPF), small
savings schemes such as post office savings deposits, Indira
Vikas Patra and Kisan Vikas Patra etc.

Borrowing and other liabilities is also the Centre’s FISCAL DEFICIT.

 Capital receipts: contd.
2. Recoveries of loans and advances: Granted by the
Centre to State governments and Union Territories
3. Miscellaneous Receipts:
These are primarily receipts from disinvestment in
public sector undertakings.

Of the 3 main sources listed above, BORROWINGS AND

OTHE LIABILITIES is the largest component of capital receipts.

capital receipts + revenue receipts = total receipts

 Expenditure: Revenue A/c & Capital A/c
Revenue Exp.: All expenses which the central government incurs
in running and administering all its multi-farious and far-flung
activities and public services. Interest payments, Subsidies,
Salaries, Pensions, Grants, Expenses on running commercial,
economic and social activities.

Capital expenditure:
• Creation of assets (i) purchase of land, buildings, machinery,
(b) loans by Central government to state government, foreign
governments and government companies, cash in hand and (c)
acquisition of valuables. This type of expenditure adds to the
capital stock of the economy and raises its capacity to produce
more in future.
• Repayment of loan as it reduces liability.
 Deficits
• Deficits, as the meaning of the word itself suggests, mean
shortfalls in government revenues vis-a-vis its expenditure.
Three most important and widely discussed deficits are:

• 1. Revenue Deficit
• 2. Fiscal Deficit
• 3. Primary Deficit
 Deficit Measures

A. Revenue Receipts B. Revenue Expenditure

a. Tax Revenue a. Interest Payments
b. Non-Tax Revenue b. Subsidies, salaries,
pensions etc.
c. Grants
C. Non-debt Capital Receipts D. Capital Expenditure
(recovery of loans, disinvestment)

Revenue Deficit = B – A
Fiscal Deficit = (B + D) – (A + C)
Primary Deficit = Fiscal Deficit – Interest Payments

Primary deficit is a measure for assessing the shortfall in the central government’s
current year’s revenue against its expenditure for the year ignoring the interest
payments for past borrowings.
 Structural Changes in Budget
• The budget for 2017-18 comes with
various structural changes to the budget
making exercise. This includes
• (i) Removal of distinction between 'plan'
and 'non-plan' expenditure
• (ii) Advancement of budget
presentation by a month and
• (iii) Merger of the railway budget with
the general budget.
Budget 2019
https://www.indiabudget.gov.in/index.asp
As we can see, external debt is negative in 2018-19. However the debt
servicing for the previous years continue.
Do economies need a fiscal deficit?
• Many economists, including Lord Keynes, had advocated the need for small fiscal
deficits to boost an economy, especially in times of crises. What it means is that
government should raise public investment by investing borrowed funds. This
exercise is also called pump-priming. The basic purpose of the whole exercise is to
accelerate the growth of an economy by public intervention. Hence, there is nothing
fundamentally wrong with a fiscal deficit, provided the cost of intervention does not
exceed the emanating benefits.

• The darker side of the story is that the borrowed funds, which always remain on
tap, have to be repayed. And pending repayment, these loans have to be serviced.
Ideally, the yield on investment on borrowed funds must be higher than the cost of
borrowing.

• For example, if the government borrows Rs 100 at 10%, it must earn more than
10% on investment of Rs 100. In that situation, fiscal deficit will not pose any
problem. However, the government spends money on projects, including social
sector schemes, where it is impossible to calculate the rate of return at least in
monetary terms. Borrowings are also used to make the interest payments.
 Fiscal Responsibility and Budget
Management (FRBM) Act 2003
• The FRBM Act provides rules for fiscal
responsibility of the Central Government. It
became effective from July 5, 2004.

Objectives of FRBM Act 2003:

• To reduce fiscal deficit
• To adopt prudent debt management.
• To generate revenue surplus
Revenue Deficit: Measures for reduction
• The government should reduce revenue deficit by an amount equivalent to
0.5 percent or more of the GDP at the end of each financial year, beginning
with 2004-2005.
• The revenue deficit should be reduced to zero within a period of five years
ending on March 31, 2009.
• Once revenue deficit becomes zero the central government should build up
surplus amount of revenue which it may utilised for discharging liabilities in
excess of assets.

Fiscal Deficit: Measures for reduction

• The government should reduce fiscal deficit by an amount
equivalent to 3.3% or more of the GDP at the end of each
financial year, beginning with 2004-2005.
• The central government should reduce Fiscal deficit to an
amount equivalent to 2% of GDP upto March 31, 2006.
• Later N K Singh committee recommended to bring it down to
3% by 2019. Govt pledged to achieve this by 2021.
The 20 countries with the highest public debt in 2017 in
relation to the gross domestic product (GDP)
India 61.8%
Goods and Services Tax
(GST)
http://www.gstcouncil.gov.in/
Indirect Tax
 Goods and Services Tax (GST)
 GST is the biggest tax reform in the history of India. Implemented in 2017, single GST subsumed several taxes and levies viz., VAT
(sales tax), central excise duty, services tax, Entertainment Tax and Octroi etc.

 In the previous scenario, a manufacturer had to pay tax when a finished product moves out from the factory (excise duty), and it is again
taxed at the retail outlet when sold (VAT).

 GST is imposed on value addition at each stage in the production process, but is meant to be refunded to all parties in the various stages
of production other than the final consumer. Supplier at each stage is permitted to setoff through a tax credit mechanism- Input Tax
Credit (ITC), which would eliminate the burden of all cascading effects of various taxes existing earlier. ITC (Input Tax Credit) is the
mainstay of the GST taxation system. Seamless and efficient ITC claim makes GST beneficial for businesses is because it will help them
manner than in the previous regime.
GST: All Subsumed in one in All the Ways

All Sectors, Manufacturing, services and

trading subsumed in One

GST
All Taxes subsumed in One

All States as One Market

 Previous Tax structure in India

Tax Structure

Direct Indirect
Tax Tax

Income Wealth Central State

Tax Tax Tax Tax

Entry Tax,
Service luxury tax,
Excise CST Custom VAT Lottery
Tax
Tax, etc.
 GST Tax Structure in India
Tax Structure

Indirect
Direct Tax Tax
(GST)

Income
Wealth Tax Intra- state Inter State
Tax

CGST SGST IGST

(Central) (State) (Central)

If a Product produced and sold in the same state then SGST and CGST both to be paid. Suppose GST is 10%, then
5% SGST and 5% CGST to be paid. If sold outside the state then, then IGST of 10% to be paid.
GST: Subsuming of the Previous
Taxes
•Central Excise
•Additional duties of Custom (CVD)
CGST •Service Tax
•Surcharges and all cesses

•VAT/sales tax
•Entertainment Tax
•Luxury Tax
•Lottery Tax
SGST •Entry Tax
•Purchase Tax
•Stamp Duty
•Goods and passenger Tax
•Tax on vehicle
•Electricity, banking, Real state

• Central sales Tax

IGST (Applicable on interstate
Sales)
Source: India Today
• GST is structured in a manner that the essential goods and services are kept in
the lower tax brackets, while luxury services and products have been placed in
the higher tax bracket.

• Of all, 7% goods & services are the exempt category. Regular consumption item
viz., include fresh fruits and vegetables, milk, butter milk, curd, natural honey,
flour, besan, bread, all kinds of salt, jaggery, hulled cereal grains, fresh meat,
fish, chicken, eggs, along with bindi, sindoor, kajal, bangles, drawing and coloring
books, stamps, judicial papers, printed books, newspapers, jute and handloom,
hotels and lodges with tariff below INR 1000 and so on.

• The GST council has fitted over 1300 goods and 500 services under four tax
slabs of 5%, 12%, 18% and 28% under GST. This is aside the tax on gold that is
kept at 3% and rough precious and semi-precious stones that are placed at a
special rate of 0.25% under GST.

• A total of 81% of all the goods and services are below or in the 18%
tax slab. This means 7 % of the items come under the exempted list, 14% of
the items attract a 5% tax, 17% of the items attract a 12% tax, and 43% of the
items attract an 18 % tax slab, while only 19% of the items fall under the highest
slab of 28% in the new regime. Below is a list of some of the products that will be
a part of the respective slabs:
 Imports and GST

• In addition to the Customs Duties, the import would also be subject to the
GST.
• As per GST Act, all import of goods will be deemed as inter-state goods
trade hence attracting GST. IGST will be imposed on Imports. GST Council
will decide the rates. For that.
• While, GST would be applied to imports in addition to the Basic Customs
Duty, GST Compensation Cess can also be levied on certain luxury and
demerit goods under the Goods and Services Tax (Compensation to States)
Cess Act, 2017
 Imports and GST
So if Value of Imported Good A = Rs. 100
Custom Duty (@10%) = Rs.10

Then IGST is applicable on Rs. 110. Now

suppose 5% of IGST is applicable for the
category of product A. Then IGST would be:

= 0.05 x 110

= Rs. 5.5 would be total ley on Product A.

The purpose behind IGST is to create level

playing field for domestic industry and the
imports.
GST is a “massive and transformational
reform,” which is bringing long-term gains to
the Indian economy, said Rakesh Bharti
Mittal, Confederation of Indian Industry
(CII) president and vice-president, Bharti
Enterprises. “GST represents a model of
cooperation, consensus and convergence
and is an exceptional and unique
achievement.”