March 1, 2016: Budget 2016-17 through discernible eyes

March 1, 2016: Budget 2016-17 through discernible eyes

General Studies: Daily Capsule

Curtain Raiser –News Update (March 1, 2016)

Understanding Budget 2016-17 from the eyes of experts:

“Fiscal deficit is essentially government expenditure minus its tax revenue. So, bringing it down means a fall in government expenditure and/or rise in tax revenue as a proportion of GDP.

“For 2016-17, the Finance Minister has promised to bring this ratio down to 3.5 per cent primarily through a 20 percent increase in indirect taxes and as much as 39 per cent in excise duties, even as the corporate taxes go down.

“A rise in indirect taxes as opposed to direct taxes is a clear case of regressive taxation because both the poor and the rich pay the same tax per unit of purchase of an item.”[1]

{Note: For the sake of clarity and completeness I am elaborating Taxes mentioned above.

Types of Taxes:

“Taxes are the basic source of revenue to the Government using which it provides various kinds of services to the tax payers. There are mainly two types of Taxes, direct tax and indirect tax which are governed by two different boards, Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC).

Direct Taxes

Direct taxes are the personal liability of tax payer. These are collected directly from the tax payers and they have to be paid by the persons on whom it is imposed. Important direct taxes are listed below:

---Income Tax

---Wealth Tax

---Property Tax/Capital Gains Tax

---Gift Tax/Inheritance Tax

---Corporate Tax

Indirect Tax

Impact and incidence of indirect Taxes fall on different persons as opposed to direct taxes where impact and incidence is on the same person. These taxes are recovered from different groups of people but the liability remains with the person who collects it. Tax payer recovers the indirect taxes paid from their consumers and clients and finally pays it to government.

For example, when we purchase any product we pay VAT, when we eat in restaurants we pay service tax which are ultimately deposited in government’s kitty by the service providers. Brief about various types of indirect taxes is given below:

Service Tax

Service providers in India are subject to service tax, which is charged on the aggregate amount received by the service provider. Services like leasing, internet/voice, transport, etc are subject to service tax.
 
Custom Duty

Custom duties are indirect taxes which are levied on goods imported to/exported from India. There are different rules for different types of goods and sectors. Government keeps on changing these rates so as to promote import/export of specific goods.
 
Excise Duty

Excise duties are indirect taxes which are levied on goods manufactured in India for domestic consumption. Like custom duty, there are a number of rules which keep on changing as per government discretion.

Sales Tax and VAT

Sales tax is levied by the government on sale and purchase of products in Indian market. As customers, whatever you buy from the market, you pay sales tax on it. Now, sales tax is supplemented with new Value Added Tax so as to make it uniform across country.

Security Transaction Tax (STT)

STT is levied on transactions (sale/purchase) done through the stock exchanges. STT is applicable on purchase or sale of various financial products like stocks, derivatives, mutual funds etc.”[2] 

 }

 

The Budget framed against Economic Background:

“Two strands dominate this year’s budget: First, a prominent tilt towards the rural and agricultural segment through an increase in allocation, and a host of new and strengthened old schemes. Second is the adherence to the fiscal consolidation path, which required a reduction in fiscal deficit to 3.5% of the gross domestic product (GDP) against 3.9% of the GDP in the current year. Between responding to rural distress and financial market concerns, the casualty seems to be growth.”[3]

A social economy budget

“The most important initiative that will radically change India’s political economy is the allocation of nearly Rs.3 trillion to gram panchayats.

There are 250,000 panchayats in the country that will now get almost Rs.1 crore every year. This is by far the most important measure for the democratization of public spending in India. Over the next five years, if the state governments understand the value of this move and supplement it, the entire public expenditure policy of the country will undergo a change for the better.

This direct statutory allocation from the centre to the gram panchayats, based on the recommendations of the 14th Finance Commission, strengthens the third tier of governance by giving it financial empowerment and autonomy. The statutory funding of gram panchayats will give the village democracy—galvanized by the passage of the 73rd constitutional amendment in 1993—a decisive transformative push.

Challenges from Macroeconomic perspective

From a macroeconomic perspective, Jaitley faced three key challenges: first, under-consumption in the rural sector; second, under-investment in the urban corporate sector, especially in a downbeat global economy; and third, leverage in the banking system, which is threatening to convert real side sluggishness into a banking and financial sector crisis.

While the issue of rural under-consumption has been adequately addressed directly, it is hoped that the under-investment crisis will be addressed indirectly through rural stimulation, which is contestable. By trying to build a consumerist rural economy without a corresponding investing “urban” sector is flawed. Rural demand may drive overall aggregate demand, but its structure and composition need not match the investment needs of the economy and that can derail this budget very easily.

The third challenge has been left unaddressed. The tough challenge of preventing macroeconomic sluggishness from becoming a banking sector crisis and from there on to a financial sector crisis and then a full blown macroeconomic crisis remains unaddressed.

The lack of additional capital infusions/road map on banking sector non-performing assets (NPAs) is a big disappointment. The finance minister has maintained status quo on the recapitalization limit for public sector banks atRs.25,000 crore, even while stating that the government remains committed towards easing off the stress in the banking system.”[4]

 References:

[1] Why the Budget numbers don’t add up by Rohit, March 1, 2016, The Hindu

[2] 10 taxes you should know about, April 11, 2014, Business Standard

http://www.business-standard.com/article/pf/10-taxes-you-should-know-about-114041100175_1.html

[3]    Budget 2016-17: Growth takes a backseat                         http://www.livemint.com/Opinion/3zGnz1IZoDIN6NX2tgotxI/Budget-201617-Growth-takes-a-backseat.html

[4] A social economy budget                        http://www.livemint.com/Opinion/vtNjX7sy31hqGBGX2hNmMK/A-social-economy-budget.html