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Understanding the Basics

In layman's term, the union budget presents an estimate of revenue and expenditure of the country in the forthcoming financial year that begins on the 1st of April and ends at 31st March.

In the constitution of India, the term union budget does not exist; the term used in the constitution is financial statement.

Article 112 of the Constitution of India defines financial statements, as the statement of estimated receipts and expenditure of the government for that particular year.

It is not as if the Government can tax, borrow and spend money the way it likes. Since there is a limit to the resources, the need for proper budgeting arises to allocate scarce resources to various Governmental activities.

Every item of expenditure has to be well thought out and total outlay worked out for a specific period. Prudent spending is essential for the stability of a Government and proper earnings are a pre-requisite to wise spending. Hence, planned expenditure and accurate foresight of earnings are sine-qua-non of sound Governmental finance.

Parliamentary Control over Finance

Ours is a Parliamentary system of Government based on Westminster model. The Constitution has, therefore, vested the power over the purse in the hands of chosen representatives of the people thus sanctifying the principle 'no taxation without representation'.

Preparation of Budget for the approval of the Legislature is a Constitutional obligation of the Government both at the Centre and the State levels. Legislative prerogative over taxation, legislative control over expenditure and executive initiative in financial matters are some of the fundamental principles of the system of Parliamentary financial control.

There are specific provisions in the Constitution of India incorporating these tenets. For example, article 265 provides that 'no tax shall be levied or collected except by authority of law'; no expenditure can be incurred except with the authorisation of the Legislature (article 266); and President shall, in respect of every financial year, cause to be laid before Parliament, Annual Financial Statement (article 112). These provisions of our Constitution make the Government accountable to Parliament.

The Budget

The 'Annual Financial Statement', laid before both the Houses of Parliament constitutes the Budget of the Union Government. This statement takes into account a period of one financial year. The financial year commences in India on 1st April each year. The statement embodies the estimated receipts and expenditure of the Government of India for the financial year.

The union budget has two parts:-

Revenue Budget

Capital Budget

It includes government revenue receipts and expenditure. There are two kinds of revenue receipts i.e."
i)  Tax revenue and

ii) Non-tax revenue.

Revenue expenditure mainly includes

i) Expenditure incurred on day to day functioning of the government and

ii) Expenditure incurred on various services provided to the citizens of India.

When the revenue expenditure exceeds the revenue receipts, it results into to revenue deficit.

It includes capital receipts and capital payments by government.

 Loans taken from the public, foreign countries, RBI etc form a major part of government capital receipts.

Capital expenditure includes expenditure on infrastructures, building health facilities etc.

Fiscal deficit is incurred when the total capital expenditure exceeds the capital receipts.


Highlights of the budget for fiscal year 2016-17

The speech of Union Finance Minister Shri Arun Jaitley highlighted that in year 2015-16, the Gross Domestic Product (GDP) of India grew by 7.6%.

He emphasized that this robust growth was achieved, despite of the unfavorable global conditions and a gross shortfall in the monsoon during the year 2015-16.

The Foreign Exchange Reserves also touched the highest ever level, of about 350 billion US Dollars.

Captivator of the budget 2016

The captivating feature of the 2016 Union Budget was the road map and priorities of the central government in the years before it.

The finance minister, in his speech specifically quoted the term "transform India". He mentioned that his budget was built around the transformative agenda with nine, following distinct pillars,:-

  1. Agriculture and Farmers' Welfare with focus on doubling farmers' income in five years;
  2. Rural Sector: with emphasis on rural employment and infrastructure;
  3. Social Sector including Healthcare: to cover all under welfare and health services;
  4. Education, Skills and Job Creation: to make India a knowledge based and productive society;
  5. Infrastructure and Investment: to enhance efficiency and quality of life;
  6. Financial Sector Reforms: to bring transparency and stability;
  7. Governance and Ease of Doing Business: to enable the people to realize their full potential;
  8. Fiscal Discipline: prudent management of Government finances and delivery of benefits to the needy; and
  9. Tax Reforms: to reduce compliance burden with faith in the citizen.

Finance minister also disclosed the agenda of focus of the government for the upcoming years. Macro-economic stability, boosting domestic demands, continuing with the pace of economic reforms and policy initiative to change the lives of the people, were some of the focus areas for the government for its future policies.

On this the finance minister also added that farmers, rural sector, social sector, infrastructure sector employment generation and recapitalization of banks will be the priority areas to enhancing the national expenditure.

Based on the nine pillars of his transformative agenda, the finance minister introduced the following schemes during the year 2016-17:-

"Pradhan Mantri Fasal Bima Yogaana":- A very ambitious scheme to protect the farmers of India. Due to non-uniform behavior of the monsoon, farmers get vulnerable and a scheme was needed to protect their interest. Rs 5,500 Cr was allocated to this scheme. After launch of this scheme, within 3 months more-than 3.15 crore farmers' crops have been insured. The total sum insured has increased to 1.18 lakh crore till date.

"Pradhan Mantri Suraksha Bima Yogaana":- Another scheme for the common man was introduced where in with just a meager payment of annual premium of  Rs. 12/- a person would get a cover of 2 lakh incase of accidental death or full disability. Over 10 crore people have enrolled into this scheme till date.

"Pradhan Mantri Ujjwala Yogaana":- Facility of cooking gas connection for below poverty line families were introduced. The scheme is followed by the success of "Give it Up" campaign launched by the ministry of Petroleum and natural gas.  After launch of this scheme 105 lakh people have given up their LPG subsidy and 7.8 lakh of below poverty line families have been given connection under this scheme.

Tax Reforms 2016

Generally reforms are introduced by the government in problems areas. The Finance minister in his speech quoted that two types of problems were being faced in the taxation system:-

  1. Problem to provide certainty in taxation and
  2. Problem of simplification and realization of taxes.

It is very pertinent to note that reform in simplification of taxation structure is quite a challenge for any government, but the simplification is the need of the hour in order to reduce the burden of compliance by the tax payer.

Tax initiatives by the government in 2016.

Income Declaration Scheme:- Government introduced "Income Disclosure Scheme" in October 2016. After this declaration the tax payer would be granted immunity from any prosecution under the Income Tax Act. This scheme yielded government with Rs. 29,362 crore in tax revenue.

Dispute Resolution Scheme for Direct and Indirect taxes:- In order to reduce the prolonged litigations faced by the tax payers and also in order to unlock the government money blocked in disputed tax demands government introduced this scheme.

Initiative of  "Make In India"

Research is the directive of innovation, and innovation provides thrust to the economy. The Prime Minister knew that Indian economy needed a thrust.

PM in February 2016, introduced the global communities with "Make in India" Campaign. It is a major national initiative which facilitates

  1. Investments;
  2. Foster innovation;
  3. Enhances the skills development and
  4. Built best in class manufacturing facility.

With a total population of 1.31 billion, out of which 767 million falls in the age group of 15-64 years and an average age of an Indian being 29 years, new initiatives can be taken easily. 

With the view to promote Make in India various fiscal amendments were introduced in the budget of 2016, major ones were:-

  1. Reduction of rate of excise duty and custom duty in information technology hardware, maintenance repair and overhauling of aircrafts and ships;
  2. Automatic approved route of 100% Foreign Direct investment were allowed in manufacturing of food products in India;
  3. 100% exemptions of profits for 3years out of 5years starting from April 2016  to business start-ups taking initiatives under the "Make in India" program were allowed

Expectations from Budget 2017

Changes to Traditions: -

Union Budgets were presented on the last working day of February, but this year it will be presented on 1st February 2016.

Up to 2016 the railway budget and the union budget were presented on different dates that to railway budget before union budget, but post 2016 the Railway budget and the union budget would be presented on the same day.

Demonetization and its repercussions

For all the notes issued by the RBI, the promissory clause printed on the banknotes i.e., "I promise to pay the bearer the sum of Rupees." is a statement which means that the banknote is a legal tender for the specified amount. The obligation on the part of the Bank is to exchange a banknote with bank notes of lower value or other coins, which are legal tender under the Indian Coinage Act, 2011, of an equivalent amount.

This means that all the notes issued by RBI are a liability for it and when the old notes are not exchanged for new notes, within the time specified by RBI, its liability will decrease, as the original note will become useless.

The RBI is expected to collect 12 lakh crore out of 14 lakh crore of 500 and 1000 notes in circulation. Hence the RBI will cancel its liability of 2 lakh crore and extend this profit to government of India by the way of dividend. Hence, the government will get its spending power increased by 2 lakh crore. The government can use such money in priority sectors like Infrastructure sector or Recapitalization of banks, etc.

Demonetization has also resulted in lowering the purchasing power of the public, causing the total amount of goods (and services) sold to shrink. That reduced consumption will mean less service tax and excise duty collections for the central exchequer. If tax receipts begin to shrink, expect the finance ministry to become more hawkish on tax collections. Hence tax cuts may not come in that easily.

Post demonetization, many businesses have suffered a cash crunch. It is expected that this cash crunch will lead to a decrease in GDP of India by 0.5%. The government is also expected to introduce any scheme or plan for these businessmen to counter the effect of this shortfall.

The government should also formulate schemes that will remonetize the economy

Slab Rates for taxation purposes: -

When the present Income Tax Act was enacted way back in 1961, the per capita income of this country was extremely low. During the course of five decades of the working of the Income Tax Act, the national per capita income has increased multifold, widening the scope for taxing various incomes. At the same time, the absolute number of poor has also increased manifold, warranting much larger government outlays.

The aspirations of the people for better living standards and their expectation from government to deliver the same have also simultaneously increased. It is therefore, necessary that these challenges in a growing economy and a developing society are kept in mind, while formulating changes in Direct Tax Laws.

The tax rates and structure should therefore be tailored in such, a way that will ensure sufficient buoyancy and vigor. As the economy expands and diversifies, the tax policies cannot remain caught in a time-warp.

Ways and means of augmenting revenue would have to be found not merely by widening the base but also by deepening the trunk to tap both potential as well as concealed incomes and wealth.

In this regard the income that needs to be tapped are:- untaxed income, potential income and concealed income.

The data of Standing Committee on Direct Taxes Code reveals the following:

Slabs

Tax Collected

No. of assesse

0-10 lakh

Rs. 21,094 crore

2.76 crore

10-20 lakh

Rs. 10,185 crore

3.35 lakh

more than 20 lakh

Rs. 53,170 crore

1.85 lakh


With regard to pattern of percentage of tax payers, it is as follows:-

Slabs

Percentage

0-5 lakh

89%

5-10 lakh

5.5%

10-20 lakh

4.3%

Above 20 lakh

1.3%


It can be clearly observed  from the data of released by this committee, that there is an inverse relationship between the tax collected and slab rates, as the slab rates increases the amount of tax collected decreases.

It is very absurd to note that the Income tax department utilizes a majority of its resources on the taxpayer, who have lower tax potentials. With the proposed slab rates mentioned here under more assesses can be brought within the tax base.        

Hence, to remove hardships on the small individual assesses and equip a progressive nature of the taxation polices; existing slabs need to be revised.

Incentivizing investment in respect of Agricultural Infrastructure

The Finance minister in 2016 Union Budget specified that under his nine pillars of transformative agenda, agricultural development and farmer's welfare is one of the governments top most priority.

More than 50% of the population is engaged in this primary sector, therefore reforms and innovation is much needed in this sector.

With the Prime Ministers aim of digital India special incentive should be offered for investment in the infrastructure for digitization of farming and agricultural activities.

Following are some of the proposed activities: -

  • Setting up of village kiosks housing Information Technology Infrastructure such as Computers, VSATs, Modems, Smart Cards, Projectors etc.
  • Support infrastructure like solar-panels, UPS, Batteries etc.
  • Water harvesting facilities like check dams, wells, ponds and other rain harvesting structures.
  • Setting up Green houses and poly houses for advanced agriculture.

This infrastructural development will lead to modernization of the agriculture sector.

Tax incentives for capital investment.

While charging income tax, revenue expenses are deducted from the income and tax is charged on the remainder.

As an incentive to certain businesses, income tax law allows capital investment to be deducted from the income.

The said deduction for capital investment is available for nine types of businesses such as, setting up of cold storage, setting up of hospital, setting up of two star and above category hotels etc; these businesses are considered necessary for the diversified economic growth of the country.

It is proposed that this deduction be extended to other sectors of the economy. Priority sectors like Infrastructure sector and steel-manufacturing sector should be added to this list.

Profit Linked tax holiday to Start-ups:-

Under the Make in India Program, in the budget of 2016 the start-ups were given a profit linked tax holiday. These start-ups were allowed 100% tax exemptions to profits for 3 years out of 5 years starting from April 2016, and the initial year in which they setup the business.

But it is observed that this was not encouraging, the early stage start-up businesses to set up new companies.

Profit linked holiday for start-ups did not provide any meaningful benefit to start ups since most of them do not make profits in the initial years. There could be loss incurred in the initial period.

Following proposals are suggested: -

  • In order to encourage start-ups, it is suggested that no threshold turnover limit be prescribed.
  • Instead of profit linked deduction, start-ups may also be provided concessions in other areas, illustratively, longer period for carry forward of loss, removing restriction for, annual advance tax, annual compliance of TDS statements etc.
  • Start-ups could be given concessions in excise duty, service tax and other state government's indirect tax levies.

Conclusions

The budget provides a direction to the economy of the country and a budget of a particular year reflects the mood of the government, the direction in which government wants to steer the health of the economy and wellbeing of the countrymen.

In Budget 2016, the finance minister gave a way forward for the future government legislature by introducing the transformative agenda and nine pillars. The Union Budget of 2017 is important than any budget before it, because the demonetization policy of the government has changed the economic scenarios of the country and some major steps are needed to adjust it.

The author can also be reached at manugawri92@gmail.com


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