Do you get confused or stressed when you listen about the budget on business news channels or read about it in the newspapers? Do technical terms such as current account deficit, GDP, fiscal deficit, government expenditure, corporate tax, STT (securities transaction tax), abatement, etc sound intimidating to you? Listed below is a comprehensive picture of some of these technical terms.
The Union Budget is the annual report of India. It is an exhaustive display of the government of India’s finances. The Finance Minister puts down a report that contains Government of India’s revenue and expenditure for one fiscal year. The fiscal year runs from April 01 to March 31. It comprises the revenue budget and the capital budget. It also contains estimates for the next fiscal year.
Abatement is reduction of or exemption from taxes granted by a government for a specified period, usually to encourage certain activities such as investment in capital equipment. A tax incentive is a form of tax abatement.
These are the taxes that are levied on the income of individuals or organisations. Income tax, corporate tax, inheritance tax are some instances of direct taxation. Income tax is the tax levied on individual income from various sources like salaries, investments, interest etc. Corporate tax is the tax paid by companies or firms on the incomes they earn.
Indirect taxes are those paid by consumers 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. Usually, these charges are passed on to the consumer.
Revenues & expenditure
The government’s budget comprises largely about revenues and expenditure. Government revenue is the income a government receives, while government expenditure is the money it spends. Spending or expenditure is further divided into plan and non-plan.
Revenue receipt & expenditure
All revenues or receipts include taxes, while expenditure consists of salaries, subsidies and interest payments. These revenue receipts and expenditure—which generally do not lead to sale or creation of assets—come under the revenue account.
Capital receipt & expenditure
Capital receipt is the amount received from the sale of assets, shares and debentures. Capital account includes all receipts from liquidating (for instance selling shares in a public sector company), assets and spending to create assets (for example lending to receive interest).
The government has to prepare a revenue budget which outlines in detail revenue receipts & revenue expenditure. The revenue budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure.
The government also prepares capital budget which includes capital receipts and payments.
Capital receipts are government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity holding in public sector enterprises, securities against small savings, state provident funds, and special deposits.
Capital payments are capital expenditure on acquisition of assets like land, buildings, machinery, and equipment. Investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties.
Gross tax revenue
The total tax received by the government from which it has to pay the states their share as mandated by the relevant finance commission. The balance is available to the Union government.
The main receipts under the non-tax revenue are interest on loans given by the government, and dividends and profits received from PSUs. The government also earns from various services, including public services, it provides. Of this, only the Railways is a separate department, though all its receipts and expenditure are routed through the Consolidated Fund of India.
These include recoveries of loans and advances.
Gross budgetary support
Gross Budgetary Support is the government’s support to five-year plans, which includes state plans. The five-year plans are divided into five annual plans. The funding of the plan is split almost evenly between government support (from the budget) and internal and extra-budgetary resources of state-owned enterprises.
There are two components of expenditure—plan and non-plan. Planned expenditure is essentially the budget support to the annual plans. This is typically considered developmental spending (on health, education, infrastructure and social goals). Like all budget heads, it is also split into revenue and capital components.
This is in the nature of consumption expenditure, broadly corresponding to revenue expenditure: interest payments, subsidies, salaries, defence & pensions. Its ‘capital’ component is small, the largest chunk being defence.
Central plan outlay
It is the division of financial resources among the various sectors in the economy and the ministries of the government.
The government proposals for the levy of new taxes, changes in the present tax structure or continuance of the current tax structure beyond the period approved by Parliament, are laid down before Parliament in this Bill. The Parliament approves the Finance Bill for a period of one year at a time, which becomes the Finance Act.
Public debt or public borrowing is considered to be an important source of income to the government. If revenue collected through taxes & other sources is not adequate to cover government expenditure government may resort to borrowing. Such borrowings become necessary more in times of financial crises & emergencies like war, droughts, etc. Public debt may be raised internally or externally. Internal debt refers to public debt floated within the country; while external debt refers loans floated outside the country.
Fiscal policy is a change in government spending or taxing designed to influence economic activity. These changes are designed to control the level of aggregate demand in the economy. Governments usually bring about changes in taxation, volume of spending, and size of the budget deficit or surplus to affect public expenditure.
The fiscal deficit is the gap between expenditure and revenue receipt. Generally the government spends more than what it earns through various sources. This shortfall, which is met with borrowed funds, is called fiscal deficit.
It is the excess of revenue expenditure over revenue receipts. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero. In such a situation, the government borrowing will not be for consumption but for creation of assets.
Effective revenue deficit
This is an even tighter number than the revenue deficit. It is revenue deficit less grants for creation of capital assets.
It is the fiscal deficit less interest payments made by the government on its earlier borrowings.
Gross domestic product
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
It is the gap between expenditure and revenue receipt. Fiscal deficit is essentially the difference between what the government spends and what it earns. It is expressed as a percentage of GDP.
The Fiscal Responsibility and Budget Management Act was enacted in 2003 and required the elimination of revenue deficit and reduction of fiscal deficit to 3% of GDP. The financial crisis and the subsequent slowdown had forced the government to abandon the path of fiscal consolidation for a while. A new fiscal consolidation road map is likely to be announced this year.
Ways and means advances
A system whereby the Reserve Bank of India (the country's central bank) extends loans to the central and state governments to offset temporary cash flow problems they may have. Ways and means advances may be issued without collateral (normal WMAs) or they may be guaranteed by Indian government bonds (special WMAs).
Current account deficit
The CAD is the difference between a country’s total imports of goods, services and transfers and its total export of goods, services and transfers. In common terms, it means that India is a net debtor to the rest of the world.
Securities transaction tax
STT is levied on every purchase or sale of securities that are listed on the Indian stock exchanges. This would include shares, derivatives or equity-oriented mutual funds units. The rate of tax that is deducted is determined by the central government, and it varies with different types of transactions and securities. STT is deducted at source by the broker or AMC, at the time of the transaction itself, the net result is that it pushes up the cost of the transaction done.