Budget and

Taxation Policy
Renuka Jain Gupta
17.01.14

Budget
Public Expenditure :
expenses incurred by Government on various

activities
natural consequence of economic growth
extensive and an intensive increase in the
functions of the government

Sources of income
Tax Revenues Income tax, Corporate Tax

etc
Non-Tax Revenue Dividend collected from
its share holding in PSUs , Money collected
through allocation of natural resources(within
its territories) e.g. Spectrum [ we are good at
it - pun intended]
Capital Receipts Market borrowings,
external debts, disinvestment of its PSUs etc.

Process and constitutional status

Article 112 of Constitution of India:

Government should lay before the Parliament

an Annual Financial Statement popularly
referred to as Budget.
Budget preparation in India : an iterative
process between the Ministry of Finance,
Planning Commission and the spending
Ministries.

Preparation of estimates of
expenditure
projecting to incur or has incurred in past
Article 112 Indian Constitution: parliamentary

approval in form of budget document.

Accounting Categories:

MAJOR EXPENSE
1. Interest Payments on Borrowings :Interest

payments are a form of committed expenditures, over

which the government has little discretion. Such
expenditure often arises as a legacy of the past, i.e.
Debts raised in the past, commit the government of the
day to pay interest. Restricting interest payments
requires a reduction in current account deficits so that
interest payments reduce in the future.
2. Subsidies Food, Petrol and Fertilizers - Ours is
a government committed to providing for the welfare of
the poor is compelled to spend on subsidies
3. Defence Services There are some expenditure
that must be incurred to provide protection to the
country.

Trend of Public Expenditure

Revenue Expenditure

Annual Financial Statement

What is fiscal deficit?

difference between total revenue and total

expenditure of the government

an indication of the total borrowings needed
by the government.
Caused by either revenue deficit or a major
hike in capital expenditure.

What is revenue
deficit?
A mismatch in the expected revenue and

expenditure
Revenue deficit arises when the government's
actual net receipts is lower than the projected
receipts.
if the actual receipts are higher than expected
one, it is termed as revenue surplus.
A revenue deficit does not mean actual
loss of revenue.

What is primary
deficit?
fiscal deficit without the interest payments

on borrowings component
always less than fiscal deficit.
How has it been financing its deficits ?
Well, by borrowing and more borrowing, year on
year !!

Sources of Deficit
Finances

Budgetary Process in
India
Budget System introduced in India on 7th April,

1860,
comprehensive socioeconomic development
through five year plans
sharing of resources with the States established
through the successive Finance Commissions

Budget Process:
Overview

Components Of Union
Budget

Stages of Budget Process

Outcome budget
to change the culture of measuring

performance in terms of the amount of money

spent against the budgeted allocations
measuring performance in terms of the
delivery of the outcomes using the outlays

Presentation of
Budget
presented to Lok Sabha in two parts
Railway Budget :pertaining to Railway Finance
General Budget : gives an overall picture of the

financial position of the Government of India,

excluding the Railways

Procedural Steps
Distribution of Budget Papers
Discussion on the Budget
Allotment of Time for Discussion
General Discussion on the Budget
Consideration of the Demands for Grants

by Departmentally Related Standing

Committees of Parliament
Discussion on Demands for Grants

Cut Motions
The motions to reduce the amounts of demands

for grants are called Cut Motions.

The object of a cut motion is to draw the
attention of the House to the matter specified
therein.
Cut Motions can be classified into three
categories:
(i) Disapproval of Policy Cut;
(ii) Economy Cut; and
(iii) Token Cut.

Vote on Account
Budget process begins with its presentation and
ends with discussion
voting of demands for grants and passing of
Appropriation Bill and Finance Bill
generally goes beyond the current financial year,
a provision in the Constitution empowering the Lok
Sabha to make any grant in advance through a vote
on account to enable the Government to carry on
until the voting of demands for grants and the
passing of the Appropriation Bill and Finance Bill.
Normally, the vote on account is taken for two
months for a sum equivalent to one sixth of the
estimated expenditure for the entire year under
various demands for grants.

Special Cases
During an election year, the vote on account

may be taken for a longer period say, 3 to 4

months if it is anticipated that the main demands
and the Appropriation Bill will take longer than
two months to be passed by the House.
As a convention vote on account is treated as a
formal matter and passed by Lok Sabha without
discussion.
Vote on account is passed by Lok Sabha after the
general discussion on the Budget (General and
Railway) is over and before the discussion on
demands for grants is taken up.

Taxation Policy

Tripod of Taxation policy

Architecture: design of the tax system to be achieved,

which is guided by the objectives of tax policy.

Engineering: the mechanics to achieve it, and these are

provided by the nature of institutions and systems

involved in tax collection.
Management : the implementation strategy and action,

which, among others things, depends on the political

support and vision and the nature of administrative
agencies and the information system.

Taxation policy: Framework

constitutional assignment of tax powers.
the tax assignment is the adoption of the

principle of separation in tax powers between

the central and state governments.
The central government has the power to levy
the major broad-based and mobile tax bases,
which include
taxes on non-agricultural incomes and wealth,
corporate income taxes,
customs duties,
excise duties on manufactured products.

States taxation :Power

agricultural incomes wealth, sales taxes, excises

on alcoholic products, taxes on motor vehicles

on transport of passengers and goods, stamp
duties and registration fees on transfers of
property, and taxes and duties on electricity.
to levy taxes on entertainment and on income
earned by engaging in a profession, trade or
employment; some states have retained these
powers for themselves, while others have
assigned them to local bodies

Principles of
taxation(3Es)
efficiency (minimising distortions in resource

allocation),
equity (progressiveness of effective tax rates)
effectiveness (of tax administration)
operational objectives:
1) Institution of a simple and transparent system.
2) Reduction of transactions costs of tax revenue
collection and compliance costs of taxpayers.
3) Alignment of incentives of taxpayers and the tax
administration
4) Widening of the tax base.

Guiding principles of tax

taxes on income and wealth, tariffs, and taxes on

domestic consumption.
reforms in administration and enforcement of
restructuring the tariff structure.
Based on structural adjustment of the economy,
the basic principles outlined are
broaden the tax base, lower marginal tax
rates, reduce rate differentiation,
simplify the tax structure, and undertake
measures to make the administration
enforcement of the tax system more
effective.

Tax policy : Objective

concerns of efficiency
objective of redistribution
highly progressive
personal income tax combined with a high

corporate income tax

Tax policy Ideals

enhances the ability of the tax system to raise

revenue while minimizing relative price distortions.

to broaden the tax base, lower the rates, and
reduce rate differentiation of both direct and
indirect taxes.
Adoption of uniform tax rates has been an
important feature of practical approaches to tax
reform.
A broader base requires lower rates to be levied to
generate a given amount of revenues. It also helps to
ensure horizontal equity, and it is desirable from the
political economy
elimination of exemptions and concessions reduces
administrative costs as well as the influence of
special interest groups on tax policy.

Tax policy :Constraints

The preference for broad-based and uniform rates of

taxation is thus guided by the need to eliminate an

arbitrary array of tax differentials determined
more by special interest group politics than
pursuit of economic efficiency.
limited infrastructure and capacity of tax
administrations in developing countries constrain
them from effectively administering complicated tax
regimes.
Broad-based systems of taxation applying
uniform rates are a mechanism for providing
stability and simplicity to the tax system .

Tax policy in India: Characteristics

an important component of fiscal policy that played a

central role in the planned development strategy.

the principal instrument for transferring private savings
to public consumption and investment.
Objective:
encourage savings and investment,
reduce inequalities of income and wealth
foster balanced regional development,
encourage small-scale industries (assumption that they
are employment intensive, and influence the volume
and direction of economic activities in the country).

Historical Perspective

1970 : ad hoc, dictated by the exigencies of bringing about a

socialistic pattern of society.

planning is selectivity and discretion both in designing the
structure and in implementing the tax system :led to erosion of the
tax base, created powerful special interest groups, and introduced
the concept of negotiated settlement into the tax system.
In a closed economy, inefficiencies did not matter and relative
price distortions and disincentives to work, save, and invest did not
warrant much consideration.
Income tax levels in India were very high during 1950-1980, in
1970-71 there were 11 tax slabs with highest tax rate being 93.5%
including surcharges. In 1973-74 highest rate was 97.75%. But to
reduce tax evasion tax rates were reduced later on, by "1992-93"
maximum tax rates were reduced to 40%.
Residential status, Scope of taxable income & Charge,
Heads of Income, Permissible deductions from Gross Total
Income

Changing Paradigms
highly progressive tax systems did little to reduce

inequality in developing countries as they were

neither progressive nor comprehensive.
a redistributive tax system can impose additional
costs on the economy, including
administrative costs, compliance costs, economic
efficiency costs, and political costs.
focus of equity in fiscal policy itself has shifted
from
reducing the incomes of the rich to
increasing the incomes of the poor

Suggested Reforms

Personal income tax reforms should involve further simplification of the tax

system by withdrawing tax exemptions and concessions on income from

specified activities.

It is also necessary to abolish the surcharge and to further simplify the tax by
reducing the number of tax brackets. In fact, there is considerable virtue in
having a single tax rate with an exemption limit, as many of the transitional
economies have found.
In any case, the ability of the income tax system to bring about
significant redistribution is limited, and if it is taken that equity in
fiscal policy should focus on increasing the incomes of the poor
rather than reducing the incomes of the rich, the objective is better
achieved by allocating and targeting adequate resources to human
development rather than creating disincentives to work, save, and
invest.

Moving toward a single tax rate may not be politically feasible at this
juncture,however, but it may be possible to reduce the number of tax rates
to two, with a small reduction in the marginal tax rate (say, 25 percent). On
the corporation tax, base broadening involves getting rid of the tax
concessions and preferences.

Suggested Reforms
In particular, the exemption for profits from exports, free trade zones,

and technology parks, as well as exemptions for area-based

development and for infrastructure should be phased out.
current depreciation allowance, even after the proposed reduction in
200506 is quite generous, and there is a case for reducing it to more
realistic levels
reducing the tax rate to align it with the marginal tax rate on personal
income tax. It is most important, however, to avoid flip-flop in tax
policy.
The history of dividend taxation , in particular, has been full of
contradictory policy stances from one year to another. The issue of
whether companies or individual shareholders should pay the dividend
tax must be settled. The most satisfactory solution is to have partial
integration of the tax with personal income tax. However, if for
administrative reasons, it is thought to be better to collect the tax from

on the basis of the difference between the

marginal tax rate of personal income tax and the

effective rate of the corporate tax.
The other important issue involving the corporate
income tax is the differential between the rates
applicable to domestic and foreign companies.
Part of the rationale for a differential is involves
the dividend tax, which is payable by domestic
companies alone.
The rationalization of these two aspects therefore
needs to go together.

Challenges
poor tax administration has led to low levels of

compliance and high compliance costs.

The virtual absence of data on both direct and indirect
taxes even at the central level has made it difficult not
only to enforce the tax laws but to gather the
analytical data necessary to make appropriate changes
in the tax structure.
The complexity of the tax structure and the poor
information system meant that the tax system often
acquired the character of negotiated paymentsa
situation that encouraged corruption and rent seeking.

poor state of the tax information system was

such that even as the coverage of TDS was

extended, there was virtually no way to check
whether those deducting the tax at source
filed the returns and actually paid the tax.

Recent initiatives
Outsourced the function of issuing permanent account numbers:

process has facilitated the compiling of information on all taxpayers

Tax Information Network, established by the National Securities
Depository Limited, has focused initially on ensuring that TDS assessees
do in fact file returns, and matching and cross-checking the information
from banking and financial institutions to ensure that the taxes paid
according to the returns are in fact credited into government accounts in
the banks.
The Online Tax Accounting System, implemented in July 2004, has
helped expedite the number of refunds processed
Large companies such as Infosys Ltd can now upload one disk for filing
the TDSs of their employees instead of filing large number of separate
TDS returns. In short, in the last four years, collections of direct taxes
have shown annual growth of over 20 percent a year, and the
contribution of the improved information system in this growth has not
been insignificant.

tax reform, including administrative reforms, is

a continuous exercise for improving revenue

productivity, minimizing distortions , and
improving equity.
Coordinated reforms should be undertaken at
the central, state, and local levels.
objective should be minimization of distortions
and compliance costs

Policy Summary
Broadening the base of taxes and
keeping the Tax structures simple within the

administrative capacity of the governments

Phasing out various exemptions
such as for
small-scale industry,
Minimizing exemptions and concessions to
industries in the services sector, and
Minimizing discretion and selectivity in tax policy
and administration are all important not only for
the soundness of the tax system but to enhance
its acceptability and credibility.

tax administration is tax policy.

Making the transition to information-based tax

administration,
online filing of tax returns, and compiling and
matching information are key to
administrative reform.
Tax administrators should also assist
taxpayers in a timely fashion and help them to
reduce their compliance costs.

Thank You