Budget Interim Budget 2014 Part 1of4

8/12/2019 Budget Interim Budget 2014 Part 1of4

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[Budget] Interim Budget 2014 (Part 1of4): Revenue reciepts, Direct taxes, Indirect

taxes, Gross vs Net taxes, shortfalls in collection

1. Prologue2. Why Budget?

1. #1: Contingency fund of India (Art.267)2. #2: Public Accounts of India (Art.266)3. #3: Consolidated fund of India (Art.266)4. Then what is Vote on Account?5. Ok then whats interim budget?6. Vote on Account vs Interim budget7. Interim budgets in the past

3. Parts of Budget4. #1: Direct Taxes

1. Direct taxes under Interim Budget 20142. Income Tax3. Shortfall in Direct tax collection = #EPICFAIL4. But Why shortfall in Direct tax collection?

5. #2: Indirect taxes1. Indirect Taxes in Interim Budget 2014

1. #I1: Service Tax2. #I2: Excise Duty: Automobiles3. #I3: Excise: Mobile handsets4. #I4: Custom Duty: soap industry

5. #I5: Custom Duty: Bank note Mill6. #I6: Counter Veiling Duty (CVD): Road machines

2. Indirect Tax collection = #EPICFAIL shortfall3. Why shortfall in indirect tax collection?

6. MCQ Data for Tax collection: Ascending descending1. Table1: Direct vs indirect2. Table2: Ranking Among all taxes (2013-14)3. Table3: Ranking Among all taxes (2014-15)4. Table3: Tax collection highest to Lowest

7. Gross vs net Tax revenue8. Appendix

1. #1: Direct taxes can be levied on Expenditure also2. #2: Canons of taxation: why some taxes get abolished?

Prologue

Total four parts in this [Budget] Article series.

Part 1: Interim Budget => Revenue Part=> Tax revenue (Direct vs indirect taxes):provisions and issues related to them.

Part 2: Interim Budget => Revenue Part=> Non-tax revenue: sources, issues. [+ Capitalpart]

Part 3: Interim Budget => Plan and non-plan Expenditure, subsides and deficits. Part 4: remaining filler points: funds, schemes, policies mentioned in Chindus budget

speech.

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Why Budget?

typical sight of a middleclass household:

Daddy earns monthly salary, stores some of it in the bank, gives the rest to mommy.Afterwards, whenever daddy needs money, he has two options

1. Take out from bank account, without informing mommy. No questions asked. (Unlessmommy checks the passbook/bank statement!)

2. Ask mommy to give the ca$h from bedroom cupboard. In this case 11/10 times hellhave to Explain to mommy why he needs money.

Same is the case governments money. Government stores its money in three places:

#1: Contingency fund of India (Art.267)

Held by the President of India. (doesnt mean Pranab carries the chequebook. This isoperated by finance Secretary).

President can spend ca$h from this fund- for emergency/unforeseen circumstances Without the authorization of parliament. (mommys permission not needed)

#2: Public Accounts of India (Art.266)

This is made up of:

1. bank savings account of the departments/ministries (for day to day transactions)2. National Investment fund (money earned from disinvestment, goes here)3. National Calamity & contingency fund (NCCF) (for disaster Management)4. National small savings fund, defense fund.5. Prarambhik Shiksha Kosh, MNREGA fund6. Provident fund, Postal insurance etc.7. and so on

Does government need parliaments permission to spend money from here? Nope.

#3: Consolidated fund of India (Art.266)




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This fund/basket is filled by

1. all the cash from direct and indirect taxes2. all the loans taken by government of India3. Whenever someone returns principle/interest of the loans given by Government of India.

This is the largest of all three funds. And government needs parliaments approval to spend

money from this fund. Why? Because Article 266 say so.

Overall, finance minister must put three files on the table of parliament:

1. Appropriation bill: to get permission of parliament, to take out cash from Consolidatedfund of India. Art 266.

2. Finance Bill: to get permission of parliament to collect taxes from Juntaa. Art 265.3. Annual financial statement: to show the parliament data about his incoming and

outgoing money. Art 1124. (+ Although not required by the Constitution) make a budget speech to tell the world,

Im totally awesome and my government is also totally awesome.5. (+ Although not required by the Constitution) present an Economic survey, and order

the UPSC aspirant, religiously mug up this data.

Then what is Vote on Account?

In an ordinary year,

February: Chindu put these files in parliament, Media Walla go crazy about it February to April: Parliament and its Committees will study these files, find spelling

grammar mistakes and vote on the demands April-end, parliament will pass:

Appropriation bill=> Chindu is now legally entitled to take out money fromconsolidated fund of India and spend.

Finance bill=>Chindu is now legally entitled to collect taxes from junta.

Now here comes the problem:

Consider budget for 2013:




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Feb 2013: FM presents the budget related docs (this will apply from 1st April 2013 to

31st March 2014)

up to 31st March 2013: Chindu is entitled to spend money from consolidated fund of

India (because previous years appropriation Act (2012-13) is valid upto 31st March2013)

But Parliament discussion still on going. Appropriation bill for 2013-14, is yet to bepassed.

so where to arrange money in the meantime?- for staff salary, lightbill, phone billeverything?

Fund Can FM arrange money from here until budget is passed?

Contingency Fund

of India

No. this is meant for emergency situation only. This fund barely has 500 crore rupees=not even sufficient to

the monthly salary and lightbill of army-navy-airforce!

Public accounts ofIndia

No. Because its components have specific function. e.g. thecash from National Calamity & contingency fund (NCCF) ismeant only for disaster relief type work.

Congress partys

Swiss bank account

hell no. If Chindu withdraws money from here, to run thegovernment => this Robinhood-giri will defeat the whole purposeof doing scams and taking bribes in the first place!

So, ultimately, we are back to square one: the consolidated fund of India. He must arrangecash from here.

FM(to Lok Sabha) maai baap, please allow me to spend money from consolidated fund of

India, until the budget is passed.

^that is vote on account.

Feb 2013: Chindu presents the (full) budget

March 2013: Chindu puts the demand under Vote on account. Under Vote on account, the

government usually demands 1/6th of the total (Expected) expenditure for the given year.Example

lakh crore

money sought under Vote on account 10,71,797

total expenditure 58,78,455

This is nearly 10 lakh cr. / 59 lakh crore = ~1/6th of the expenditure.

Duration: two months. (from 1st April 2013 to 31st May 2013) Vote on account is passed by Lok Sabha (and not Rajya Sabha) because only lok sabha has the power to grant such money under Article 116(A)

Ok then whats interim budget?

Consider the situation in 2014

Feb 2014: (if) Chindu presents (full) general budget. = its valid from 1st April 2014 to

31st March 2015.




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April/May 2014: General election, new party comes in power. But then theyll have tolive with a budget not formed according to their manifesto/priorities= unhappiness.

Although they can simply frame a new budget to replace such budget by previous party=but that means policy uncertainty = not conductive for investment and economy.

for example, just before election Chindu abolishes all the excise duty (to please the votebank), then suddenly new party comes in power, and re-starts the excise duty = policyuncertainty, account keeping, saving/Expenditure habits change suddenly. harmful to

economy. Therefore, political parties have developed an unwritten convention, Ruling party

should NOT to initiate major changes in the tax/expenditure during General electionyear.

Such Slim version of Budget is called interim budget. There is no legal/Constitutional obligation on the ruling party to launch an interim

budget during election year. This is only an unwritten convention.

So lets compare/contrast:

Vote on Account vs Interim budget

VOTE ON ACCOUNT INTERIM BUDGETonly presents demand forExpenditure part. (i.e. allowgovernment to spend moneyfrom CFI, until budget is

passed)

Deals with both income (taxation) part and Expenditurepart. + annual financial statement showing incoming andoutgoing money of the government.

only one article applicable:116(2)

many articles applicable

112: have to put annual financial statement 265: have to put finance bill (to get parliaments

permission to collect taxes) 266: have to put appropriation bill (to get parliaments

permission to spend money from consolidated fund ofIndia)

Only Lok Sabha has DecisionMaking power here. Becauseart 116(2) specifically saysHouse of people can grantsuch money.

Both houses involved. Because Art 112: Annual financialstatement has to be laid in both houses Lok Sabha andRajya Sabha.although Rajya Sabha doesnt really have anyDecision Making power here either, but they could stall itfor 14 days.

Asks parliament to grant 1/6th

of the total estimatedexpenditure

Asks parliament to grant entire money for total estimatedexpenditure.

Validity: 2 monthsIf the new Government doesnt give new (full) budget afterelection, then Interim budgets provision remain valid for

the whole financial year i.e. 1st April 2014 to 31st March2015.

done in non-election years andelection years.

only during election years/extreme situation.

Vote on account doesntcontain interim budget.

interim budget contains vote on account. (Because herealso, budget presented in Feb, while passed somewhere inlate April/May.) so government needs money in between.However, the vote on account will be of longer duration e.g.3-4 months. (than during normal full budget years.)

Interim budgets in the past




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Yashwant04 Gave quite a few schemes and tax-benefits12

page

Pranab09 Did not announce any new taxes or schemes.18

page

Chindu14

No changes in direct tax.

Few concessions in indirect tax

Few schemes/provisions related soldier pension, education

loans, skill development, Nirbhya fund etc.

14

pages

Enough theory, lets try a mock question from 2011s CSAT paper

. What is the difference between interim budget and vote on account?

1. The provision of a vote on account is used by a regular government, while an interim

budget is a provision used a caretaker government.

2. a vote on account only deals with the expenditure in government budget, while an

interim budget includes both expenditure and receipts

3. Both A and B

4. Neither A nor B

Statement B is correct. That eliminates option D. Now the final answer (B or C) depends on

whether A is right or not?

Observe the statement A

h e pr v is io n o f a v o t e o n ac c o u n t is u s ed by a reg u lar g o v er men t , h ile an in t erim bu d et

is a pr v is io n u s ed a caretaker g o v er men t .

Focus on the word Caretaker government. What do we understand by Caretaker

government?

Until new PM/CM takes charge, the earlier government continues to be in office, as in

caretaker position. This happens when:

Term has ex pired In this case how can FM present the (interim/full) budget?

after PM/ CM has

resigned

In this case, entire council of minister is automatically gone.

So, how can Finance minister Exist and present the (interim)

budget

No- confidence motion

passed

In this case, even if FM presents (interim) budget, itll be

defeated.

Parliament/ assembly is

dissolved.Then where will FM place the interim budget?

On 17/2/2014, Chindu presented interim budget for UPA-II. So, is UPA-II a caretakergovernment? Nope. Not yet. its term (5 years) has not expired yet. Theyve still got ~90 days

to misrule the country. Therefore statement A is wrong. Interim budget is not used by a

caretaker government. Eliminate choices accordingly:




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1. The provision of a vote on account is used by a regular government, while an interim

budget is a provision used a caretaker government.

2. a vote on account only deals with the expenditure in government budget, while an

interim budget includes both expenditure and receipts

3. Both A and B

4. Neither A nor B

Thus we are left with answer B.

so far we learned:

Why does government need to pass a budget?

What is vote on account, what is interim budget and whats the difference between them

two?

Remaining topics related to polity: money bill vs finance bill, Committees of parliament,

CAG , vote on grant etc. you prepare from (the great) M.Laxmikanth.

Now lets start the technical/financial aspects of budget.

Parts of Budget

Budget two parts.

revenue part (Current) capital part

within that, make two columns each, for incoming money (receipt) and outgoing money

(Expenditure).

REVENUE PART CAPITAL PART

Receipt Expenditure Receipt Expenditure

Ya, but whats the need of this labour? Why cant we just have a simple income vs expensetype of thing? Well come to that in third article.

For now, lets focus on




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Budget => Revenue part

Revenue column has two sub-columns: incoming money (Receipt) vs. Outgoing Money

(Expenditure).

The Incoming money (Revenue receipt) can come from two sources: from tax and non-

tax sources.



Tax Non Tax

1. Direct taxes

2. Indirect Tax

Thus, weve come to the main topics of todays article= direct and indirect taxes and

provisions of interim budget 2014 (related to these taxes).

#1: Direct Taxes

Have two subtypes

On Income/ Ex penditure on properties assets Capital transaction

1. Income tax

2. Corporate Tax (and MAT)

3. Interest tax (on banks)*

4. Fringe benefits tax *

5. Hotel receipt Tax*

1. Wealth Tax

2. Securities transaction Tax (STT)

3. Banking cash transaction tax*

4. Estate duty*

5. Gift tax*

Taxes marked in (*) have been abolished long time ago. Ive mentioned them here, only

in case the nostalgic UPSC professor wants to ask classification type MCQs.

We should also know the direct taxes of state government.

DIRECT TAX ES OF UNION DIRECT TA ES STATE

Tax es on Income

Income tax

Corporation Tax (and MAT)

Tax es on assets

Wealth Tax

STT

Tax es on income

Agriculture income tax

Professional tax

Tax es on properties

Land Revenue

Stamp duty/registration duty

Property tax in urban areas

Now lets check the provisions of:

Direct taxes under Interim Budget 2014

FM followed the Ethics(GS4) principles while making the interim budget, he did not make

any changes in the direct taxes. That means, direct tax system remains the same like Budget2013. Observe

Income Tax




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Tax able Income Income Tax

2 to 5 lakh 10%

5 to 10 20%

>10 30%

Other direct tax es

Corporate tax (desi company) ~34%

Corporate tax (foreign company) ~43%

MAT Minimum alternative tax ~21%

Wealth tax (for wealth >30 lakh rupees) 1%

STT Securities Transactions tax 0.1%-0.001%*

*Depending on nature of securities future, option, equity etc.

However, FM has done a slight tweaking in the tax deduction for corporates.

until now In interim budget

if company spent money on in-house

Research development = they can claim

tax benefits.

Chindu proposed to setup a new

organization called Research Funding

Organisation.

This org. will fund fund research projects

selected through a competitive process.

If company gives cash to this organization,

itll be deducted from taxable income.

Did not implement

1. GAAR2. Direct tax code (DTC)

3. Goods and services tax (GST)

Shortfall in Direct tax collection = #EPICFAIL




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Observe

Feb 2013: FM proposes taxes for year 2013-14. Along with this, hed give estimate of

tax collection e.g. x crore from income tax, y crore from corporate tax and so on. Lets

label this column as Budget estimate (BE) 2013.

1st April 2013: new tax rates would have become effective, people start paying taxesaccordingly.May, june, july, august, September, October, November, December,

.January 2014 So now FM gets new data. So, hed correct (revise) his previous

estimate. We label this Revised Estimate (RE)2013.

And finally for the year 2014-15 (Starting from 1/4/14 to 31/3/15, FM would again

make budget estimates for next (interim budget) so lets label it (BE)2014.

Thus total weve three estimates:

Direct tax BE 2013 RE 2013 BE 2014

Wealth Tax 950 950 950

Securities Transaction Tax 6720 5497 5992

Income Tax 240919 236194 300474

Corporation Tax 419520 393677 451005

Total from Direct tax 668109 636318 758421

Absolute numbers are not important but interpretation is. Lets try a clichd MCQ.

Which of the following direct tax , fetches ma imum revenue to government of India

A. Wealth Tax

B. Securities Transaction Tax

C. Income Tax

D. Corporation Tax

For all three columns, you can see: Corp>>IT>>STT>>Wealth tax .

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Anyways, lets enter into a deeper analysis. Observe the total collection from direct Tax (inabove table).

In Feb 2013, Chindu estimated ~6.68 lakh crore rupees would come from direct taxesalone! (BE2013)

But he revised the data yesterday, we see barely 6.36 lakh crore have come from directtaxes (RE2013).

So, whats the shortfall in direct tax collection here? 6.68-6.36= 32, 000 cores

But Why shortfall in Direct tax collection?

A. Because IT officials are lazy and incompetent, hence lot of people managed to evadetax? NOPE.

B. Because Chindu (Harward Graduate) and his finance Secretary (IAS) are weak in mathsand economics, hence they made wrong estimates in the first place? NOPE.

Then who is the main villain behind this shortfall? Ans. (1) inflation (2) policy paralysis.

Why high Inflation = Low collection of Direct taxes?

1. Corporate tax= paid by Tata, Birla, Reliance, Samsung, LG, Motorola, Videocon etc.Theyll pay less tax IF their profit is DOWN. Now, High food/fuel inflation=> peoplespend less money on consumer durables mobile, TV, fridge etc.=> sales down=>profitdown=> corporate tax goes down.

2. Less profit=> company cuts jobs, doesnt give salary raise to existing staff= people payless income tax .

3. Less profit = less dividends to shareholders => mutual fund/sharemarket investmentdeclines= security transaction ta also goes down.

4. H igh inflation = real interest rates are negative (recall Urjit Patel) = people invest morein gold and less in mutual funds/sharemarket etc.=> security transaction tax collection islower than expected.

Why Policy paralysis = Low collection of Direct taxes?

Run the same logic and youll see the connection. e.g.

1. Policy paralysis=corporates cannot open new factories=> less profit=>less corporate tax.2. Since corporates cannot open new factories=> less new jobs=>less people fall in the

income tax bracket (starting from Rs.2 lakh to 5 lakh).

ok enough of direct taxes. lets move on. otherwise our remaining a aan i will be spent inanalyzing the direct tax only.




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Tax Non Tax

1. Direct taxes (DONE)2. Indirect Tax now lets study this

#2: Indirect taxes

What are the indirect taxes of Union and States?

Indirect tax es ( Union) Indirect Tax es ( States)

i. Custom Duty (Import,Export)

ii. Excise Duty (CENVATsystem)

iii. Service Taxiv. Central sales tax (CST)*

i. Sales Tax/ VATii. Excise duty on DESI liquor and Narcotics

iii. Motor vehicle tax, Taxes on boats and animals.iv. Toll tax (opposed by MNS/Shiv Sena)v. Electricity tax.

vi. Luxury tax (on restaurant, spa etc.)

vii. Taxes on Betting and gambling (on whether Modiwill become PM or not)

viii. Advertisement tax (other than TV, Radio,Newspaper)

* Note: CST-Central sales tax- it belongs to Union but ca$h entirely given to States. So inbudget estimates, its collection is listed as or 00. But for MCQ purpose, know that it isthe Indirect tax of the Union.

Indirect Taxes in Interim Budget 2014

We saw that FM has not changed direct taxes. BUT for indirect taxes, he has made slightreductions/tweaking for certain items, to boost the economy. Lets check them one by one




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#I1: Service Tax

The Rate of Service tax is not changed. It is same as last year (2013-14)

Service tax 12.00%

2% educational cess. Meaning tax on tax = 2% of 12% +0.24

1% Senior & Higher Education Cess= 1% of 12% +0.12

Effective service tax =12.36%

Then what is new in interim budget?

Following items have been exempted from service tax payment

1. Rice: services related to loading, unloading, packing, storage and warehousing(Because)

a. Tamilandu CM Jayalalitha has wrote letter to Mohan, demanding the same.b. putting service tax on rice related services=raises the cost of implementing Food

security act.2. Cord Blood bank (they store umbilical cord for future stemcell therapy)

Make no mistake: theyre exempted, but not put in negative list.

Service tax negative list Ex empted list

Govt. cannot levy Service tax on the namesincluded in this list (total 17 items.)

Theoretically, these services are taxable underservice tax, BUT for the time being, FM gavethem exemption.

To modify this list, FM needs parliamentapproval (because he needs to amend theFinance Act.).

FM can modify this list by a simplenotification. He doesnt need parliamentsapproval.

Examples

a. Services by the Reserve bank ofIndia;

b. Betting and gambling. (because theyfall under State list.)

c. Funeral, burial

Examples

a. Rice loading-unloadingb. Cord blood bank

#I2: Excise Duty: Automobiles

For past few months, Automobile sector was facing slowdown because

1. High inflation =people postpone purchase of high value items2. High interest rates (because to combat inflation, RBI did not reduce monetary policy

rate i.e. repo rate)3. High Fuel prices.

Therefore, to go a boost to automobile sector, FM has reduced the excise duty on

Automobile: SUV, Small cars, motor cycles, scooters and commercial vehicle(rickshaw, bus etc)

This will be applicable only upto 30 June 2014. Result: cheaper vehicles, (hopefully) more people will buy more, and automobile sector

will see boost in sales.

#I3: Excise: Mobile handsets




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To decrease the imports of mobile phones, FM has reduced the excise duty on mobilehandsets as well. How does it help?

Foreign mobile Subjected to custom duty. (But FM did not reduce it)

Desi mobile Subjected to excise duty (FM reduced it)

Result? Price wise: Desi mobile cheaper than Foreign mobile. = more sales. Import of foreign

mobiles declined=> less CAD. (just like the gold logic.)

By the way, why did not FM raise the custom duty of Foreign mobiles instead -afterall, thatdalso make desi phones cheaper!

Reasons:

1. US/China may drag us to WTO2. Higher custom duty doesnt decrease consumption. It only increases smuggling. (lesson

learned from gold!)

So it is better to reduce excise on desi phones, than raise custom on foreign phones.

#I4: Custom Duty: soap industry

Rationalized the import duty on non-edible oils, fatty acids, fatty alcohols. This will reduce the cost of (imported) raw material used in soap industry and oleo-

chemicals industry (e.g. glycerin) Results? Soaps will become cheap. (because that was the matter of life and death!)

#I5: Custom Duty: Bank note Mill

Bank Note Paper Mill India ltd. (Bangalore) They make the special paper for producing currency notes

FM allowed them to import capital good (machines) @a very low duty (5%)

#I6: Counter Veiling Duty (CVD): Road machines

First, What is CVD and how does it affect sales?

Vehicle manufactured by Subjected to

Desi player Excise duty

Foreign company (and imported in India) Custom duty

It may happen that, desi vehicle is expensive because high excise duty on its input(chassis, engine, wiring, glass etc.)

Result: Foreign vehicle cheaper, juntaa more attracted to buying foreign vehicle thanDesi.

Conseq uence: domestic industry gets less sales. IIP declined, job loss, industrialsickness.

Possible Solutions:

1. Give subsidy to desi vehicle makers2. Reduce excise duty on desi vehicle (and its inputs)3. Increase custom duty on foreign vehicle.4. Put additional custom duty on foreign vehicle to such a level that, [taxes on foreign

vehicle] become of same level like [taxes on desi vehicle].. This solution is called

counter veiling duty ( CVD .

Interim budget & CVD




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Import of Road construction machinery will be subjected to CVD. (= itll help desimanufactures, because now foreign machines will no longer be very cheap compared to desi.So road contractors/companies are more likely to be buy desi items.)

Indirect Tax collection = #EPICFAIL shortfall

Just like Direct tax collection, here also, Chindu failed to meet targets

Indirect Tax BE 2013 RE 2013 BE 2014

Ex cise Duties 196804 178787 199831

Customs 187308 175056 201314

Service Tax 180141 164927 215478

Total from Indirect Tax 5.65 lakh cr. 5.19 lakh cr. 616623

Observe the columns of (original) budget estimate BE2013 VS Revised estimate RE2013.Every duty collection is less than original target.

What is the shortfall in the collection of indirect ta es?

5.65 MINUS 5.19 =~45000 Crore rupees.

Why shortfall in indirect tax collection?

# 1: Ex cise duty down

In the recent months, IIP has been going down for Consumer durables

Example of consumer durables: TVs, mobiles, cars, bikes, fans, ACs, refrigerators,ceramic tiles and carpets. (all these subjected to excise duty)

High level of inflation =>people spend less on consumer durables. (because theyve tospend more on food and fuel.)

# 2: Custom duty down

Duty on gold increased => smuggling => tax is evaded. Policy paralysis => Big projects file pending => businessman wont need to import any

raw material/ machines/construction-vehicles etc. (Even if he wants to!) thereforecustom duty declined.

# 3: Service ta

Inflation responsible. High level of food-fuel inflation => people spend less on luxuries hotels, spa, gym etc.

In fact, government knew in advance that service tax collection would be lower thantarget, hence they had been running ads of Voluntary Compliance EncouragementScheme (VCES) for service tax. From July 2013 onwards. But still, barely ~6000 crorerecovered from people who had been evading service tax payment so far.

MCQ Data for Tax collection: Ascending descending

enough of shortfalls in tax collection, we need to worry more about MCQs than abouteconomy. So lets update tables

Table1: Direct vs indirect

Tax BE 2013 RE 2013 shortfall BE 2014Direct 6.68 6.36 32k 7.58

Indirect 5.65 5.19 45k 6.2

Total ( lakh cr.) 12.35 11.58 77k 13.78




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ya but Whats the wisdom here for MC s? =that DIRECT tax brings MORE revenue to

government that INDIRECT tax.

So far, weve data for Direct taxes and indirect taxes. Now for MCQs, we need the overall

ranking (of which tax brings highest/lowest revenue.) Since weve revised estimates (RE

2013), so we can now ignore the ORIGINAL estimates of BE 2013.

Table2: Ranking Among all taxes (2013-14)Type Tax es RE 2013

direct Wealth Tax 950

direct Securities Transaction Tax 5497

indirect Service Tax 164927

indirect Customs 175056

indirect Excise 178787

direct Income Tax 236194

direct Corporation Tax 393677

Table3: Ranking Among all taxes (2014-15)

1 Corporation Tax Corporation Tax

2 Income Tax Income Tax

3 Excise Service Tax

4 Customs Customs

5 Service Tax Excise

6 STT STT

7 Wealth Tax Wealth Tax

Observe the rank of top two (Corpo, IT) and bottom two (STT, wealth) are same for each

year.

only difference is in the rank 3-4-5 because Chindu hopes Service tax will bring highest

collection among all indirect taxes in the year 2014-15. (will it? well, that remains to be seen!)

From ex am point of view

At the moment, Tax Ranking of 2013 is more important. (Because it is near to reality

based on actual data gathered from April 2013 to almost upto Feb 2014. this ranking is

unlikely to change.)

While tax ranking of 2014 is just projected revenue from interim budget. Itll change

when new government makes new (full) budget (=tax rates changed= collection ranking

will be changed).

Then youll have to mugup the new updated ranking accordingly. (well see when full

budget comes after election).

Gross vs net Tax revenue

Before going into gross vs net, lets take two quick bites:

#1: Tax sharing

8 0th amendment 2000: 29% of total taxes of the Union need to be shared with states

13th

FC ( K elkar) = Union to share 32% with states.

14th

FC ( Y V Reddy) : yet to give recommendation.

#2: NCCF

National Calamity Contingency Fund (NCCF)

Under Home ministry

Part of Public account (hence parliament approval not necessary.)

Now coming to the main point:

Gross Tax revenue

It includes

1. Total direct taxes of union (we already saw)

2. Total indirect taxes of union (we already saw)

3. +Union territories without legislature (Diu, Daman etc.)=> their direct & indirect taxes

are also counted here.

Net Tax revenue




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This equals, Gross tax revenue MINUS [revenue shared with states + money sent to National

calamity contingency fund]

Lets observe the data (numbers not important.)

crores RE 2013 BE 2014

A.(Gross) Tax Revenue [=direct + indirect + UT w/o legislature] 1158906 1379199

B.MINUS tax revenue shared with States/UT 318230 387732C.MINUS money transferred to calamity fund (NCCF) 4650 5050

NET Tax revenue=A-(B+C) 836026 986417

Ok, but why do we need to find Net tax revenue?

Because, from gross tax revenue, union has to give some money to States/UT and calamity

fund=> remaining money is the actual money left in the hands of Union government (that

they can spend as per their own wishes).

Lets try a very cheap MC

Which of the following statements is/are correct

a. In union budget, gross tax revenue is always lower than net tax revenue

b. In the union budget, net tax revenue is calculated as the sum of [Gross tax revenue +

taxes shared by States + money unspent in calamity fund]

c. Both A and B

d. Neither A nor B

Approach: When in doubt about gross vs. net, just count the number of alphabets in their

spelling. Gross (5) and Net (3). So any formula that seems to go the other way = wrong. (e.g.

observe statement B, if it were true, then NET would be higher than GROSS. Because

everyhing is ++) hence, B is definitely wrong. Same way, statement A is wrong because 5 >

3.

Side note:

Net GDP = Gross GDP MINUS depreciation.

Here also, Net (3 letters) is lower than Gross (5 letters).

So far,



Tax Non Tax

1. Direct taxes (DONE)

2. Indirect Tax (DONE)




18/20

Remaining columns and topics, in next articles, one by one.

Appendix

some allied topics thatd have broken the flow of the article, hence putting @bottom appendix.

#1: Direct taxes can be levied on Expenditure also

Observe the case of Service tax vs FBT:

SERVICE TAX FBT

service sector= self-explanatory- doctor, spa,

hotel etc.

Fringe benefit=when boss gives some

facility to worker, Apart from his usual

salary.

Salman himself joins a posh Gymnasium,

Annual fees Rs.1 lakh (+12% service tax)

Salman buys membership to a posh gym, for

his bodyguard Shera. = 1 Lakh + 12%

service tax + 30% FBT on.

paid 1,12,000 to Gym Owner. Gym owner

pays 12k to government as service tax.

Pay Rs. 1,12,000 to Gym owner (fees

+ service tax)

Pay Rs. 30000 to government (FBT)

Hence its called indirect tax, because

Salman paid the tax but government did not

took it from his hand. But from that Gym

owner.

Called direct tax, because Salman directly

had to pay FBT to government (and not to

the Gym owner, not to bodyguard Shera.)

this is a tax on expenditure (on services)this is also a tax on expenditure (on fringe

benefits)

still levied as of 2014 discontinued from 2009

lets try a very cheap MCQ:

1. A Direct tax can be levied only on the income OR property of a person

2. Fringe Benefit tax is an example of Indirect tax.

3. Both A & B




19/20

4. Neither A nor B

#2: Canons of taxation: why some taxes get abolished?

Mind the spelling: a o n (rules/principles) and not c a n o n (used for bombing).

Adam Smith gave four canons of good taxation system.

1. Canon of Eq uality: taxes should be Proportionate to income.2. Canon of Certainty: about deadline and rates.

3. Canon of Convenience: to the tax payer.

4. Canon of Economy: tax collection cost should be minimum. (i.e. staff salary, Database

Management)

+ Misc. principles: transparency, simplicity, elasticity (to economic fluctuation) etc.

ya but where is it relevant? Recall that government abolished certain direct taxes (estate duty,

gift tax etc.) in past. Why? Because, they were not following some of these canons. for

example

Gift tax (abolished)

Most people managed to evade. Hence Gift tax used to fetch barely ~10 crores in revenue.

Thus, fourth canon missed. (Collection cost very high- staff salary and database

Management.)

Finally, in the late 90s, government dropped this tax. Although it doesnt mean there is no tax

on expensive gifts- theyre counted under Taxable income (of the person who receives the

gift)

Estate duty (abolished)

Estate duty was charged during the inheritance of estate. (although this was a Union

tax- entirely cash was given to states.)

Problem: most people evaded, Estate duty Barely fetched ~15 crores = Again 4th canon

missed.

Hotel Receipt Tax (abolished)

In the late 80s, we did not have service tax. But government imposed tax if you spent

money on luxury hotels. (direct tax- because you had to pay this tax to government and

not via hotel owner)

problem: same as above. barely fetched a few crores.

Banking cash transaction tax (Abolished)

introduced in 2005:

0.1% on cash withdrawals of more than Rs 50,000 (individuals) and Rs 1 lakh for others

in a single day from non-savings bank account.

Why? to track unaccounted money and trace its source and destination.

Abolished in 2009, when Chindu felt he had fetched enough information.

Although indirectly the canons were also responsible: #1, #3 and #4.

Fringe Benefit tax (Abolished)

2005 Chindu started FBT

2009 Pranab abolished FBT

Compliance cost was very high (Because company would need to keep record andacount of every little fringe benefit they gave to employees)




20/20

in other words, inconvenience to tax payer (company)=> it was even called nuisance

tax. Therefore, 3rd

canon missed.

Besides, revenue collection was ~8k crore. and company would pay less salary to

employees in pretext of giving those fringe benefits= employees pay less income tax.

so indirectly, government was axing its own leg. (Recall our MCQ tables: income tax is

the second largest source of revenue for union government!)

Mock uestions

After the article series is complete.

Visit Mrunal.org/Economy For more on Money, Banking, Finance, Budget, Taxation and

Economy.

URL to article: -revenue1of4part2014budgetinterimhttp:/ / mrunal.org/ 2014/ 02/ budget

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Posted By Mrunal On 19/02/2014 @ 10:19 In the category Economy


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