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
[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
