Terms every tax payer must know.........

Revathi Jayachandran (CA Student ) (314 Points)

15 November 2012  

Terms every tax payer must know.........


All of us work really hard to earn our incomes. We individuals dream of building a beautiful home, buy our favorite gadgets or vehicles, travel to exotic destinations, save for our children and important of all – save for our old age. Similarly, companies and businessmen have their own specific goals to achieve.

Simply put, the annual Budget affects how much we can save (or our disposable income) – and that’s what make the Finance Minister’s words important. So here, we list out the terms that will help you clearly understand the impact of the Union Budget.

Just as students have a report card and employees have appraisal reports, the Union Budget is the annual report of India as a country.

It contains the government of India's revenue and expenditure for the end of a particular fiscal year (period from April 1 to March 31 of the next year).

The Budget contains and extensive account of the government's finances, wherein the revenues from all sources and expenses of all activities undertaken are aggregated.

The Budget consists of the revenue budget and the capital budget; in addition to estimates for the next fiscal year.

The revenue budget includes the government’s revenue receipts and its expenditure.

Revenue can be earned either through tax or other sources. Tax revenues could be income tax, corporate tax, excise, customs and other duties levied by the government.

Government can earn non-tax revenues through interest on loans and dividend on investments like PSUs, fees, and other receipts for services rendered.

Revenue expenditure refers to the routine payment incurred by the government for the day-to-day running of its department and various services; or any regular interest payments it has to make.

Revenue expenditure does not result in the creation of assets – so even grants offered by the government are clubbed as revenue expenditure.

Usually, the government spends more than it earns. This (negative) difference is known as ‘Revenue Deficit’.

Capital budget refers to receipts and expenditures of a long-term nature.

Capital receipts are loans that the government borrows from public, Reserve Bank (also treasury bills), foreign bodies and governments. It also includes divestment of equity holding in public sector enterprises (just as the ONGC in Feb 2012), securities against small savings, state provident funds, and special deposits.

Capital payments refer to money spent on buying assets such as land, buildings, machinery, and equipment. It also includes investment in shares; or loans and advances granted by the central government to state and union territory governments, government companies, corporations and others.

Direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. ‘Person’ here, would include individuals and organizations.

Income tax is levied on individual income from various sources like salaries, rent, investments, interest etc. (This is what most of us wait for in the Budget speech!)

Corporate tax is the tax paid by companies or firms on the incomes they earn.

Expenditure consists of two parts:

Plan expenditures are estimated after ‘planning’ with each of the ministries concerned and the Planning Commission.

Non-plan revenue expenditure includes: interest payments, subsidies, government employees’ wage and salary payments, grants to States and Union Territories, pensions, expenditure on police and other services (such as revenue and social services).

Non-plan capital expenditure includes spending on defense; and loans to public enterprises (PSUs), States, Union Territories and foreign governments.

Some other terms to know:

Fiscal policy refers to the use of the government budget to influence economic activity. Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and spending.

Fiscal deficit is the gap between the government's total spending and the sum of its revenue receipts and non-debt capital receipts. In simple words, it is the total amount of borrowed funds needed to completely meet the government’s expenditure. A fiscal deficit is often funded by issuing bonds, like treasury bills or consoles and gilt-edged securities. These pay interest, either for a fixed period or indefinitely. If the interest and capital requirements are too large, a nation may default on its debts, usually to foreign creditors. (The crisis situation in many European countries is a result of their massive fiscal deficit.)

The government’s proposals are laid down before the Parliament in the Finance Bill. The Parliament approves the Finance Bill for a period of one year at a time, which becomes the Finance Act.

If the country’s spending exceeds its income by a huge margin (deficit), the money supply gets affected. As a result, loan rates rise. This means lesser capital (affordability) for individuals and companies. Lesser spending power means lesser demand, which eventually hurts production. Company profits get hurt, and so do stocks. And if the FM raises taxes, say for example Indirect Taxes – then the costs will be passed on to consumers. All this impacts the overall growth of the country.

Budget Trivia

- The first Union budget of independent India was presented by R. K. Shanmukham Chetty on November 26, 1947.

- On February 29 in 1964 and 1968, Morarji Desai became the only finance minister to present the Union budget on his birthday.

- Until the year 2000, the Union Budget was announced at 5 pm on the last working day of the month of February. This practice was inherited from the Colonial Era, when the British Parliament would pass the budget in the noon followed by India in the evening of the day.

- Former Finance Minister Morarji Desai presented the budget eight times, the most by any.